Breaking-up Is Hard To Do: CSH Theatres, LLC v. Nederlander of San Francisco Associates

By:  Christopher J. Voss and Jeremiah W. Schwarz

CSH Theatres, LLC v. Nederlander of San Francisco Associates, CA No. 9830-VCMR (Del. Ch. July 31, 2018) concerns the dramatic break-up of a prominent theater company partnership in San Francisco involving claims and counterclaims alleging violations of contractual and fiduciary duties and charges of self-dealing and bad faith conduct.  The Delaware Court of Chancery found that no enforceable contract to renew the lease to San Francisco’s Curran Theater existed but the Court did grant the theater operator a declaratory judgment that the principals of the owner had breached their common law fiduciary duties while they were also serving as managers of the theater operator.

The proceeding involved a complicated and inter-related cast of characters: Shorenstein Hays-Nederlander Theatres LLC, the lessor of the Curran Theater (the “Operator”); CSH Theatres LLC, the owner of the Curran Theatre and a member of the Operator (the “Owner”); and Jeff and Carole Hays (the “Hayses”), who acted as both managers of the Operator and as controllers of the Owner at different points during the period of contested behavior.

This proceeding had three acts: (1) the first concerned the lease of the Curran Theatre; (2) the second concerned breaches of the Owner’s contractual duties (as controllers of a member of the Operator) under the Operator’s LLC Agreement; and (3) the third concerned breaches of the Hayses’ common law fiduciary duties as managers of the Operator.

In an exhaustive review of the applicable law, the court held that testimony concerning a “conversation” between the principals of the Owner and the Operator regarding the Owner’s alleged promise to renew a lease, in the absence of a contemporaneous writing to evidence the conversation or the promise, was insufficient to establish an enforceable contract. The court also found that even assuming the alleged promise had been made, no enforceable contract existed due to lack of consideration and because the parties did not intend to be bound by discussions that lacked the essential terms of an agreement.  In addition, the court held that even if the parties had agreed to an oral lease, the Operator had not shown that an exception to the Statute of Frauds – either part performance or promissory estoppel – applied.

With respect to the Operator’s breach of duty claims, the court found that the LLC Agreement of the Operator limited but did not disclaim all of the managers’ fiduciary duties. Because the Hayses were managers of the Operator, any actions that they took in their capacity as managers were subject to their common law fiduciary duties, as limited by the LLC Agreement.  Additionally, any actions they took in their capacities as controllers of the Owner – which was a member of the Operator – were subject to the LLC Agreement.  In order to determine if any fiduciary or contractual duties were breached, the court had to determine in what capacity the Hayses were acting at the times of their alleged misconduct.

The court engaged in a detailed analysis of the alleged conduct by the Hayses, ultimately determining that they had breached their fiduciary duty of loyalty as managers of the Operator, although they had not breached their contractual duties as controllers of a member under the Operator’s LLC Agreement. The court found, however, that any attempt to determine the harm caused by the breach of fiduciary duty would be subjective conjecture, and therefore awarded only nominal damages for the breach.  The court also awarded the Operator its attorneys’ fees and costs after finding that Mrs. Hays had willfully engaged in bad faith litigation tactics that unnecessarily increased the cost of the litigation. All other petitions for relief were denied.

7-31-18 9380-vcmr – csh theatres llc v. nederlander of san francisco assoc. – post-trial memorandum opinion

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