Archive: July 2014

Kostyszyn v. Martuscelli, et al., C.A. No. 8828-MA (July 14, 2014)

By Annette Becker and Lauren Garraux

On July 14, 2014, Master in Chancery Kim E. Ayvazian issued her draft report in Kostyszn v. Martuscelli, a dispute between the purchasers (“Plaintiffs”) and sellers (“Defendants”) of Paciugo Gelato and Café (the “Business”), an ongoing business which Plaintiffs purchased in December 2011 for a purchase price of $272,500.00.  According to Plaintiffs, their decision to purchase the Business and the purchase price were based on sales information provided to them by Defendants, as well as subsequent statements made by Defendants regarding, among other things, business earnings, on-site sales, catering sales and profits.

In August 2013, Plaintiffs commenced a lawsuit against Defendants in the Delaware Chancery Court alleging that this information and Defendants’ statements were false and misleading, and directly resulted in Plaintiffs both calculating a purchase price that was more than they otherwise would have been willing to pay for the Business and entering into a long-term lease exposing the assets of the Business to risk and the Plaintiffs to personal liability if the Business ultimately failed.  In their amended complaint (the “Amended Complaint”), Plaintiffs asserted claims against Defendants for breach of contract, breach of warranty, indemnification, equitable fraud, fraud, negligent misrepresentation, intentional misrepresentation and breach of the covenant of good faith and fair dealing, and sought indemnification and monetary damages from Defendants, as well as cancellation of the agreement to purchase the Business.  Defendants moved to dismiss the Amended Complaint on grounds that the Chancery Court lacked subject matter jurisdiction over Plaintiffs’ claims.  In her draft report, Master Ayvazian recommended that the Court dismiss Plaintiffs’ equitable claim (for equitable fraud) with prejudice, decline to apply the “clean up” doctrine to address Plaintiffs’ remaining legal claims and to allow Plaintiffs to transfer those remaining legal claims to a court of law.

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Capano v. Capano, C.A. No. 8721-VCN (June 30, 2014)

By Eric Feldman and Sophia Lee Shin

Capano, et al. v. Capano, et al. is a consolidated case involving three brothers that came before the Delaware Court of Chancery, in which Joseph and Gerry Capano each filed a complaint against Louis Capano.

Facts

Louis, Joseph and their father, Louis Sr., were equal partners in a Delaware partnership, Capano Investments. Upon Louis Sr.’s death, the partnership structure changed such that Louis and his son controlled 48.5% of the partnership, Joseph and his son controlled 48.5%, and Gerry (as the beneficiary with voting control of CI Trust) controlled 3%. In 2000, the partnership was subsequently converted into a Delaware limited liability company, Capano Investments, LLC (“CI-LLC”), with the same membership and respective ownership interests as those of the partnership

In 2000, Louis and Gerry executed two documents that purportedly granted Louis an interest in CI Trust: (1) Gerry granted Louis the “Power to Direct”, an irrevocable proxy to direct CI Trust’s trustee (at the time, Daniel McCollom) to vote its interest in CI-LLC; and (2) Gerry granted Louis the “Option” to purchase Gerry’s interest in CI Trust, but only with the consent of CI Trust’s trustee, and at a purchase price of $100,000 and the forgiveness of a $100,000 advance. Both the Power to Direct and the Option were signed by Louis and Gerry and had “(SEAL)” printed next their signatures.

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Lucas v. Hanson, C.A. No. 9424-ML (July 1, 2014)

By Eric Feldman and Claire White

Lucas v. Hanson involves two procedural questions – standing and personal jurisdiction – with respect to the plaintiff’s claims for declaratory and injunction relief against the forced distribution of assets of a limited partnership, Covenant Investment Fund LP (“Covenant”), to its limited partners. Prosapia Capital Management LLC (“Prosapia Capital”) is the general partner and limited partner of Covenant, and a wholly owned subsidiary of Prosapia Financial LLC (“Prosapia Financial”). The plaintiff, Alan Lucas, is a member of Prosapia Financial and the manager of both Prosapia Capital and Prosapia Financial. The defendants are limited partners of Covenant, none of whom are residents of Delaware or involved in the management of Covenant. Following Mr. Lucas’ criminal conviction in Iowa for theft involving expenditures and the liquidation of Covenant’s funds and assets, the Iowa courts declared that the cash held in Covenant’s accounts was the property of its limited partners and should have been distributed to the defendants.

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Branin v. Stein Roe Investment Counsel, LLC, et. al, C.A. No 8481 (June 30, 2014) (Noble, V.C.)

By Eric Taylor and Jamie Bruce

This is a case dealing primarily with two issues: 1) when does an employee’s claim for indemnification from a Delaware LLC irrevocably accrue?; and 2) if a party has a viable claim for indemnification but is on notice that the agreement providing for indemnification may be modified, could a later amendment to such agreement defeat the claim? The Court held that it must look to the operating agreement in place when the events giving rise to the employee’s claim for indemnification accrued or when the lawsuit involving the claim was filed and that if such employee was entitled to indemnification under that agreement, the employee’s claim is vested. The Court further held that, once vested, the contractual right to indemnification could not be eliminated by a subsequent amendment to the agreement.

The plaintiff in this case, Francis Branin, Jr. (“Branin”), was a principal/owner and the CEO of an investment management firm that was sold in October 2000 to a larger investment management firm, Bessemer Trust, N.A. (“Bessemer”), at which time Branin became an employee of Bessemer. Branin later began meeting with Stein Roe Investment Counsel, LLC (“SRIC”) to discuss possible employment. During those discussions, Branin explained to SRIC that the sale of his prior investment firm was governed by an implied covenant in New York restricting the seller of a business from approaching former customers to regain their patronage after he has purported to transfer their “goodwill” to the purchaser. Under this “Mohawk doctrine”, Branin could not solicit his former clients, but he would be entitled to accept the business of his former clients if they approached him. With that knowledge, SRIC decided to hire Branin in July 2002. Branin claims that he did not solicit his former clients, but less than a year after he joined SRIC he was managing 30 client accounts that he had previously managed. Branin was sued by Bessemer alleging improper solicitation of clients. After nearly ten years of litigation, Bessemer unconditionally dismissed its suit and all claims against Branin. Branin is seeking indemnification from SRIC for more than $3 million in legal fees incurred in the litigation.

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In re: El Paso Pipeline Partners L.P. Derivative Litigation, C.A. No. 7141-VCL (June 12, 2014)

By Eric Feldman and Porter Sesnon

In In re: El Paso Pipeline Partners L.P. Derivative Litigation, the Delaware Court of Chancery granted summary judgment in favor of the defendants on claims for breach of contract and breach of the implied contractual covenant of good faith and fair dealing in connection with a conflicted transaction.

In March 2010, El Paso Pipeline Partners, L.P., a Delaware limited partnership that operates as a publicly traded master limited partnership (the “MLP”), purchased a 51% interest in two entities that owned certain liquid natural gas (“LNG”) assets (the “Drop-down”) from its parent corporation that “sponsored” the MLP, El Paso Corporation (the “Parent”). Parent also indirectly owned the general partner of the MLP, El Paso Pipeline GP, L.L.C. (the “General Partner”), giving it control over and an economic interest in the MLP. As a result, the proposed Drop-down created a conflict of interest for the General Partner.

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