Chancery Court Enters Declaratory Judgments in Favor of Plaintiff and Finds that Defendant’s Actions Justify Sanctions
By: Scott E. Waxman and Stephanie S. Liu
In Ensing v. Ensing, C.A. No. 12591-VCS (March. 6, 2017), Vice Chancellor Slights entered declaratory judgments in favor of the plaintiff, concluding that the defendant’s actions were null and void as a matter of law. A husband and wife, Dr. Hans Ensing (“Hans”) and Sara Ensing (“Sara”) own and operate a winery and boutique hotel in Italy. The businesses operate indirectly through two Delaware limited liability companies. Prior to the events leading up to this litigation, Sara was a manager and member of one of the entities and, through that entity, was manager of the other. Hans was neither a member nor manager of either entity. When Hans purported to remove Sara and appoint himself as manager of one of the two entities and then engaged in a series of transactions to divest Sara of her interests in the winery and hotel, Sara initiated this action.
Sara and Hans legally separated in 2015 and are engaged in divorce proceedings in Italy. They have two sons from the marriage (together, the “Minor Children”). In 2012, Hans and Sara moved to Italy to operate a vineyard and winery named Villa Loggio. They later opened a boutique hotel co-located with the winery. International Wine Capital Partners, LLC (“IWCP”) was formed in April 2012 as a manager-managed Delaware limited liability company. The three members of IWCP are Sara and the two Minor Children (collectively, the “Members”). Pursuant to the Operating Agreement, Sara is designated as guardian of the Minor Children for purposes of representing their interests in IWCP. At its formation, IWCP owned 100% of the shares of Societa Agricola Villa Loggio srl (“S.A. Villa Loggio”), an Italian entity that owns the winery, vineyard, and other related assets.
Loggio Finance LLC (“Loggio”) was formed in May 2012 with IWCP as its sole member. In July 2012, IWCP pledged 70% of its interest in S.A. Villa Loggio to Loggio, leaving IWCP with a 30% unencumbered interest in S.A. Villa Loggio. In December 2013, the members of IWCP appointed Sara as Manager of IWCP. In accordance with Loggio’s Operating Agreement, on December 9, 2013, IWCP appointed Sara as manager of Loggio. Thus, as of the end of 2013, Sara served as manager of both IWCP and Loggio. Hans was neither manager nor member of either entity.
After Sara and Hans separated in April of 2015, Hans attempted to remove Sara as manager of IWCP and Loggio and appoint himself as manager of both entities by written consent. Hans also purported to authorize a sale of Loggio’s 70% interest in Villa Loggio to Oiggol Holdings, LLC (“Oiggol”), a Delaware limited liability company of which Hans is the manager and his girlfriend is the sole member. Hans further attempted to transfer voting control from IWCP to Oiggol by authorizing, issuing, and then transferring new membership units in IWCP to Oiggol.
Pursuant to 6 Del. C. § 18-110, upon application of any member or manager, the Court of Chancery may hear and determine the validity of a removal of a manager of a limited liability company, the right of any person to become or continue to be a manager of a limited liability company, the person or persons entitled to serve as managers if more than one person claims the right to serve as a manager. In this case, Sara sought a declaration under Section 18-110 that the actions taken by Hans were void as a matter of law. After reviewing the evidence, Vice Chancellor Slights concluded that Sara carried her burden of proving that Hans had no authority to remove her as manager of the entities, to appoint himself as manager of the entities, or to transfer membership units to an entity under his control.
First, the court found that the IWCP Operating Agreement is clear and unambiguous and that Hans had failed to offer any basis in law whereby the Court could afford him more rights in the management or operation of IWCP or Loggio than are provided in the unambiguous provisions of the IWCP Operating Agreement. Further, based on the plain language of the IWCP Operating Agreement, Sara, alone, was authorized to act on behalf of the Minor Children with respect to IWCP. When Hans purported to act on their behalf to call a special members meeting to remove Sara as manager, to appoint himself as manager and to transfer IWCP interests without consideration, he did so without authority under the Operating Agreement, and the actions therefore are void as a matter of law.
Second, the court also found that Hans’ attempted transfer of Loggio’s interest in the winery to Oiggol was ineffective because he lacked authority to act on behalf of IWCP or Loggio and lacked authority to transfer Loggio’s interest in Villa Loggio to any entity, much less an entity controlled by himself and his girlfriend. The court also found the transfer troubling since Hans purported to authorize a self-interested transaction whereby the Minor Children’s interests in Villa Loggio would be transferred for no consideration.
Finally, the court found that Hans’ attempt to transfer voting control from IWCP to Oiggol was ineffective. The Operating Agreement requires that any new member must enter into a written instrument in form and content satisfactory to the members whereby such person or entity joins in and becomes a party to the agreement. The record contained no evidence that Oiggol ever executed any such written instrument. Additionally, the court found nothing in the Operating Agreement that allowed the Manager of IWCP to authorize and then issue new units of IWCP in the first place and found that this transfer was void as a matter of law.
Vice Chancellor Slights also found that a partial shifting of fees in this case was warranted. “The court has the discretion to shift litigation expenses, in whole or in part, when a party to the litigation has engaged in bad faith litigation conduct.” The court may invoke the bad faith exception to the American Rule (whereby each party must bear its own litigation expenses, including counsel fees) only when the party seeking fee shifting has demonstrated by “clear evidence” that the party against whom the sanction is sought has acted in subjective bad faith. Here, the court concluded that Hans refused to comply with discovery orders, presented sham documentation, and delayed proceedings by taking frivolous and inconsistent litigation positions. Using its “broad discretion in fixing the amount of attorneys’ fees to be awarded,” the court ordered Hans to pay two-thirds of Sara’s counsel’s fees and expenses.