Author: feldman

The Court of Chancery Orders Dissolution of a Limited Liability Company Solely on Equitable Grounds

By Eric Feldman and B. Ashby Hardesty, Jr.

The Delaware Chancery Court held that the assignor of a limited liability company interest and its assignee, neither of which was a member or manager of the limited liability company, both lacked standing to petition for judicial dissolution of the limited liability company under Section 18-802 of the Delaware Limited Liability Company Act (the “LLC Act”). However, the Court went on to further hold that the assignee nonetheless had standing to seek judicial dissolution of the limited liability company in equity. Subsequent to such decision, the Court later issued an order granting the petitioners’ motion for summary judgment seeking judicial dissolution, representing the first time that a Delaware court has dissolved a limited liability company entirely on equitable grounds.

In In re Carlisle Etcetera, Well Union Capital Limited (“WU Parent”) and Tom James Company (“Tom James”) formed a two member Delaware limited liability company (the “LLC”), adopting a very basic operating agreement, with the intent to later amend and restate the operating agreement. The LLC was managed by a four member board, with each member entitled to appoint two of the board managers, and the entire board designated as the “manager” of the LLC. Additionally, a Tom James executive was appointed by the board as the CEO of the LLC.  After formation, WU Parent transferred all of its limited liability company interest in the LLC to its wholly-owned subsidiary (“WU Sub”), of which Tom James was aware, and to which it did not object. The parties later began to negotiate an amended and restated operating agreement, which reflected Tom James and WU Sub as the members of the LLC.

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Chancery Court Denies Motion to Dismiss in Case Seeking Removal of Trustees for Misconduct

By Eric Feldman and Patrick Jamieson

In response to demands by trust beneficiaries seeking removal of two trustees pursuant to Delaware law governing fiduciary relationships generally as well as a declaratory judgment that one trustee acted with gross negligence or willful misconduct, the Delaware Court of Chancery denied the trustees’ motion to dismiss, finding it was reasonably conceivable that both trustees were unfit to serve and that the one trustee could have acted with willful misconduct.

Petitioners in United Brotherhood of Carpenters Pension Plan v. Fellner, C.A. No. 9475-VCN (Del. Ch. February 26, 2015) (Noble, V.C.) are trust beneficiaries who collectively hold a 78.61% beneficial interest in three trusts (the “Trusts”).  Their interests stem from their 2008 purchase of limited partnership interests in a Delaware limited partnership whose general partner, BSF-TDC GP, LLC (“BSF-TSC”), was controlled by Michael Baumann.  In 2012, Baumann converted the limited partnership into a publicly traded Real Estate Investment Trust (“REIT”).  The limited partnership exchanged its ownership interests in various entities for 2,904,910 REIT common shares, then valued at $18.  Following the conversion, the limited partnership held only the REIT shares and two adjoining parcels of land and consequently determined to transfer its assets into a liquidating trust (the “Master Trust”) pursuant to a Plan of Liquidation and Liquidating Trust Agreement.  BSF-TDC was named as trustee of the Master Trust and the limited partners were designated as beneficiaries.

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Lake Treasure Holdings, Ltd., et al v. Foundry Hill GP, LLC, et al and Foundry Hill Holdings, LP and CP-1 LLC, C.A. No. 6546-VCL (October 10, 2014) (Laster, V.C.)

By Eric Feldman and Porter Sesnon

In Lake Treasure Holdings, Ltd., the plaintiffs, investors in a now-defunct start-up, Foundry Hill Holdings LP (the “Partnership”), sued the Partnership, one of its founders (Ulric Taylor (“Taylor”)),  one of Taylor’s subsequent business partners (Christopher Klee (“Klee”)), and various other Partnership-related entities and operating subsidiaries for breach of fiduciary duty and aiding and abetting the breach of fiduciary duty, as well as under the Delaware Uniform Fraudulent Transfer Act (“DUFTA”) and Delaware Uniform Trade Secrets Act (“DUTSA”), in connection with a series of transactions whereby all of the assets of the Partnership were ultimately transferred to entities owned and/or controlled by Taylor and Klee. 

Taylor controlled the Partnership through his control of the Partnership’s general partner.  As a result, the Court initially found that Taylor owed fiduciary duties, including the duty of loyalty, to the Partnership and its limited partners.  In analyzing the transactions at issue, the Court further found that Taylor stood on both sides of such transactions and that therefore the entire fairness standard applied in analyzing such transactions.  In applying the entire fairness test, the Court held that Taylor had breached his duty of loyalty when he granted a security interest in all of the assets of the Partnership, including its primary asset, high frequency trading software, to Klee in exchange for a $28,000 loan from Klee to the Partnership.  Prior to the $28,000 loan by Klee, Taylor and Klee had previously contemplated Klee purchasing the software for $500,000 with an enterprise valuation of $3 million. 3 months following the granting of the security interest, as foreseen by Taylor and Klee at the time the loan was made, the Partnership defaulted on the loan, Klee foreclosed on the security interest, and Taylor amicably surrendered all of the assets of the Partnership, including all interest in the software, to an entity controlled by Klee.  The Court determined that Taylor and Klee “acted in concert to move the Partnership’s high frequency trading software out of the Partnership and into an entity where Taylor and Klee could enjoy its benefits.”  Upon finding the fiduciary duty breach by Taylor, the Court then also found that Klee had aided and abetted such breach of fiduciary duty.

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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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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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Crothall, et al. v. Zimmerman, et al., Del. No. 608, 2013 (May 28, 2014)

By Eric Feldman and Naomi Ogan

In Crothall, et al. v. Zimmerman, et al., the defendants in a derivative suit sought to reverse the Delaware Court of Chancery’s decision awarding attorneys’ fees to counsel for Robert Zimmerman, the plaintiff in the underlying action. Zimmerman, a common unitholder of Adhezion Biomedical, LLC (“Adhezion”), originally brought a derivative suit against the directors and certain investors of Adhezion, claiming that (i) certain financing transactions involving the sale of Adhezion units were substantively unfair, and (ii) the units issued in those transactions were not properly authorized in accordance with Adhezion’s operating agreement. The Chancery Court’s opinion rejected Zimmerman’s claim of substantive unfairness, but agreed that Adhezion’s operating agreement had been violated because the units issued in the financing transactions had been issued without an amendment approved by a separate vote of the common unitholders.

The Chancery Court, however, awarded only nominal damages for the breach of the operating agreement, and, before a final judgment was entered, Zimmerman decided to sell his Adhezion units and abandon the lawsuit, thus rendering his claims moot.  As a result, the Chancery Court granted the defendants’ motion to dismiss Zimmerman’s claims. Nevertheless, Zimmerman’s counsel was allowed to intervene in the case, and was ultimately awarded $300,000 in attorneys’ fees, on the theory that Adhezion had realized a corporate benefit from the Chancery Court’s decision that a vote of the common unitholders was required to authorize additional units under the operating agreement.

The defendants, while unable to appeal the Chancery Court’s ruling directly due to the absence of a final judgment, asked the Delaware Supreme Court to re-consider the merits of the Chancery Court’s  finding that attorneys’ fees were warranted on the basis of a corporate benefit to Adhezion. The Supreme Court reversed the Chancery Court’s ruling, finding that Zimmerman’s counsel had not created a corporate benefit, and therefore was not entitled to the $300,000 in attorneys’ fees originally awarded by the Chancery Court. Without evaluating the Chancery Court’s substantive reading of the Adhezion operating agreement, the Supreme Court held that when a plaintiff takes action to moot his own claim, as Zimmerman did by selling his units and abandoning his claims before entry of a final judgment after trial, no corporate benefit can be created and therefore no attorneys’ fees should be awarded on that basis. The Supreme Court noted that, while attorneys’ fees have previously been awarded on the basis of mooted claims, those claims were rendered moot by the actions of the defendant, not the plaintiff. In contrast, in this case the Supreme Court refused to award fees on the basis of a claim that even the plaintiff himself had chosen not to pursue.

Durham v. Grapetree, LLC, C.A. No. 7325-VCG (May 16, 2014)

By Eric Feldman and Eric Taylor

This is a case dealing with the interpretation of a Limited Liability Company Agreement for a family-owned Delaware Limited Liability Company, Grapetree, LLC (“Grapetree”), set up to manage inherited resort rental properties. The plaintiff in the suit, Andrew Durham (“Andrew”) is one of five members of Grapetree, all siblings, and the only non-managing member (under the 2008 OperatingAgreement of Grapetree, which governed during the time of the actions in dispute). Andrew is a self-employed landscape architect who made several expenditures over the years to maintain and improve the managed properties and seeks reimbursement for those expenses. The 2008 OperatingAgreement contains certain limitations on authority, namely that expenditures over $2,000 are subject to the majority vote of the members and all routine operational issues are subject to the majority vote of the managing members. (It should be noted that the limitation contained an apparent error requiring a majority “3/5” vote of the managing members, despite the fact that there were only four managing members.)

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Touch of Italy Salumeria & Pasticceria, LLC, et al. v. Louis Bascio, et al., C.A. No 8602 (January 13, 2014) (Glasscock, V.C.)

By Eric Feldman and Eric Taylor

Touch of Italy Salumeria & Pasticceria, LLC, et al. v. Louis Bascio, et al. is about the members of a Delaware limited liability company, Touch of Italy Salumeria & Pasticceria, LLC (the “Company”), suing a former member of the Company seeking injunctive and monetary relief after the former member withdrew from the Company in accordance with the terms of its limited liability company agreement (the “LLC Agreement”) and opened a competing business on the same street as the Company a mere ten weeks later. Emphasizing that limited liability companies are explicitly contractual relationships, the Court of Chancery dismissed the action because the LLC Agreement permitted any member to withdraw from the Company by giving written notice of the decision to withdraw to the other members, at which time the remaining members would have 60 days to elect to purchase the withdrawing member’s interest in the Company. The LLC Agreement did not contain a covenant not to compete following withdrawal. Adding to the plaintiffs’ ire was the fact that the withdrawing member allegedly lied about his intentions after withdrawal, saying that he was planning to move to Pennsylvania and perhaps open a new business there. The remaining members of the Company said that, had they known of his true intentions, they would have objected. However, the Court of Chancery noted that the plaintiffs’ lacked the means to object in any legally effective way and interpreted the complaint as “an attempt to achieve a result–restraint on post-withdrawal competition–that the members could have but chose not to forestall by contract.” The Court of Chancery emphasized that it must enforce LLC agreements as written, in this case allowing a member of the Company to withdraw and open a competing business because the LLC Agreement contained no restriction on doing so.

Touch of Italy v. Louis Bascio

Touch of Italy Salumeria & Pasticceria, LLC, et al. v. Louis Bascio, et al., C.A. No 8602 (January 13, 2014) (Glasscock, V.C.)

By Eric Feldman and Eric Taylor

Touch of Italy Salumeria & Pasticceria, LLC, et al. v. Louis Bascio, et al. is about the members of a Delaware limited liability company, Touch of Italy Salumeria & Pasticceria, LLC (the “Company”), suing a former member of the Company seeking injunctive and monetary relief after the former member withdrew from the Company in accordance with the terms of its limited liability company agreement (the “LLC Agreement”) and opened a competing business on the same street as the Company a mere ten weeks later. Emphasizing that limited liability companies are explicitly contractual relationships, the Court of Chancery dismissed the action because the LLC Agreement permitted any member to withdraw from the Company by giving written notice of the decision to withdraw to the other members, at which time the remaining members would have 60 days to elect to purchase the withdrawing member’s interest in the Company. The LLC Agreement did not contain a covenant not to compete following withdrawal. Adding to the plaintiffs’ ire was the fact that the withdrawing member allegedly lied about his intentions after withdrawal, saying that he was planning to move to Pennsylvania and perhaps open a new business there. The remaining members of the Company said that, had they known of his true intentions, they would have objected. However, the Court of Chancery noted that the plaintiffs’ lacked the means to object in any legally effective way and interpreted the complaint as “an attempt to achieve a result–restraint on post-withdrawal competition–that the members could have but chose not to forestall by contract.” The Court of Chancery emphasized that it must enforce LLC agreements as written, in this case allowing a member of the Company to withdraw and open a competing business because the LLC Agreement contained no restriction on doing so.

Touch of Italy v. Louis Bascio

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