In AM General Holdings v. The Renco Group, C.A. No. 7639-VCS (Del. Ch. Aug. 22, 2016), the Court of Chancery held that Delaware’s three-year statute of limitations barred contract claims brought by one party in a joint venture to produce Humvee automobiles against its joint venture partner.
AM General LLC (“AM General”) manufactured and sold specialized vehicles including the Humvee. Prior to 2004, its sole member was The Renco Group, Inc. (“Renco”). In August 2004, Renco and MacAndrews & Forbes Holdings Inc. (“M&F”) entered into a joint venture with Renco whereby they formed AM General Holdings LLC (“Holdco”). Renco contributed AM General to Holdco and M&F contributed cash. An M&F subsidiary became the managing member of Holdco. A Holdco Agreement set forth the mechanisms for distribution of profits between Renco and M&F and provided for certain contractual protections for Renco, restricting certain related party transactions, management fees, distributions and the like and giving Renco access to books and records of Holdco.
This case arises out of Renco’s claims that M&F engaged in a scheme to unfairly enrich itself by leveraging its position as managing member to drive down certain profits resulting in diminished distributions to the Renco capital account. The complaint was filed in 2012 and this opinion relates to M&F’s motion for partial summary judgment contending that certain of Renco’s claims are barred by Delaware’s three-year statute of limitations for breach of contract claims. The claims at issue involved allegations of (1) unauthorized management fees and expenses, (2) charging unrelated and improper engineering, research and development costs, and (3) charging unjustifiably low prices to a related party (“transfer pricing”). The transfer pricing claim was first raised in an amended complaint in 2014.
These claims had become the subject of dispute between the parties as early as July 2005, when Renco’s outside counsel sent a letter to M&F alleging inappropriate royalty and management fee arrangements. A few months later, in December 2005, an independent auditor hired by Renco inquired as to the transfer pricing and indicated in its report to Renco that this pricing was lower than was charged to other customers. The engineering, research and development costs were reported to Renco in 2006 and 2009.
Renco advanced several theories for why the claims should not be barred even though the facts giving rise to the claims at issue occurred outside of the three-year period prior to the filing of the complaint in June 2012. First, it argued that its capital account is a “mutual running account.” 10 Del. C. § 8108 provides that “[i]n the case of a mutual, running account between the parties, [the statute of limitations] shall not begin to run while such account continues open and current.” The Court held that in this case, the capital accounts of an LLC were not a “mutual, running account” because such an account must have a single balance that fluctuates as offsetting debits and credits occur, while the parties’ capital accounts are two separate accounts that are not reducible to a single balance. Furthermore, unauthorized allocations in capital accounts create immediate and actionable losses while those in true mutual accounts remaining unsettled until the mutual account is finally closed.
Next, Renco contended that its claim had not yet accrued because M&F is engaged in a single, ongoing breach by continuously diverting profits. The Court explained that the continuing breach doctrine does not apply when confronted with numerous repeated wrongs of similar, if not same, character over an extended period if they are not so “inexorably entertwined” that there is but one wrong. Here, each charging of unauthorized fees, costs or pricing constituted a separate alleged breach that had a separate effect on Renco’s capital account that was determinable at the moment of the alleged breach. Thus the Court held that the continuing breach doctrine did not apply.
Next, Renco argued that the time of discovery rule tolled the statute of limitations. The time of discovery rule delays the start of the statute of limitations period if (1) the defendant has fraudulently concealed key facts, (2) the injury was “inherently unknowable” such that discover of its existence is a practical impossibility, or (3) a plaintiff reasonably relies on the good faith of a fiduciary (also referred to as “equitable tolling”). Renco did not allege that any facts were fraudulently concealed. The Court held that the facts giving rise to the claims were not inherently unknowable because Renco was a sophisticated party that was closely monitoring the situation and had a contractual right to the books and records of Holdco. Even though M&F did deny some of Renco’s requests for information, Renco had the recourse of enforcing its contractual rights to obtain that information, so it was not inherently unknowable. The Court further held that equitable tolling did not apply because the Holdco Agreement contractually altered the normal fiduciary duties of the parties such that Renco could not rely on the good faith of Renco as a fiduciary.
Finally, Renco argued that the transfer pricing claim first raised in an amended complaint should relate back to the date of the original complaint. Court of Chancery Rule 15(c)(2) provides that an amendment of a pleading relates back when the claim or defense asserted in the amended pleading arose out of the conduct, transaction or occurrence set forth or attempted to be set forth in the original pleading. The Court held that in this case the transfer pricing was not in any way mentioned in the first complaint so it was a separate, independent violation of the same contract provision and did not arise out of the same conduct, transaction or occurrence as did the other violations. Thus all of the theories offered by Renco failed and the Court held that the claims at issue were barred by the statute of limitations to the extent they alleged conduct occurring more than three years prior to the complaint.