Topic: LLC Agreement

CONTRACTUAL AMBIGUITIES FAVOR THE NON-MOVING PARTY AT MOTION TO DISMISS STAGE

By: Scott Waxman and Rich Minice

In Coyne v. Fusion Healthworks, LLC Civil Action No. 2018-0011-MTZ (Del. Ch. April 30, 2019), the Delaware Court of Chancery denied a motion to dismiss for failure to state a claim (the “Motion”) filed by Fusion Healthworks, LLC (the “LLC”), James Sheehan with his personal medical practice, and Andrew Lietzke, with his personal medical practice (collectively, the “Defendants”). In denying the Motion, the court reiterated the standing principal that, when presented with a contractual ambiguity, dismissal at the motion to dismiss stage is only appropriate “if the defendants’ interpretation [of the ambiguity] is the only reasonable construction as a matter of law.” Coyne highlights the critical nature of competent drafting of LLC Agreements.

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WHEN SOMEONE SHOWS YOU WHO THEY ARE, BELIEVE THEM THE FIRST TIME, OR RISK YOUR CLAIMS BEING TIME BARRED

By Scott Waxman and Adrienne Wimberly

In Winklevoss Capital Fund, LLC et al. v. Stephen Shaw, et al., C.A. No. 2018-0398-JRS, the Delaware Court of Chancery, in a Memorandum Opinion, granted a Motion to Dismiss counterclaims against individual Plaintiffs Tyler and Cameron Winklevoss and their investment firm (altogether “Plaintiffs”) because the claims were barred by laches. In an attempt to capitalize on the publicity from their depiction in the movie The Social Network, the Winklevoss twins, Tyler and Cameron, launched an investment firm, Winklevoss Capital Fund, LLC (WCF). The twins selected Treats! LLC, founded by Stephen Shaw, to be one of their first investments. Treats! LLC owns and operates Treats! magazine, a print and digital magazine depicting nude and semi-nude photographs of models and celebrities. In August 2012, WCF invested $1,310,000 in Treats! in exchange for 1,310,000 series A preferred units under a written Purchase Agreement and Amended LLC Agreement. WCF also loaned Treats! $20,000 as evidenced by a promissory note delivered in October 2012. However, the business relationship between the parties quickly soured as the twins refused to allow Shaw to publicly announce their investment in Treats! and the twins believed Shaw was mismanaging the company.

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Purported Assignment of Limited Liability Company Interest Impacts Jurisdiction Under Conspiracy Theory of Jurisdiction

By: Scott Waxman and Zack Sager

In Perry v. Neupert, the Delaware Court of Chancery found that it could exercise personal jurisdiction over a Liechtenstein entity under the conspiracy theory of jurisdiction.  In reaching this conclusion, the Court analyzed the effects of an assignment by a sole member of a Delaware limited liability company of its entire limited liability company interest to a single assignee under the Delaware Limited Liability Company Act currently in effect and in effect prior to the 2016 amendments thereto.

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FOR CAUSE REMOVAL MUST BE FOR CAUSE

By Scott E. Waxman and Annamarie C. Larson

In A&J Capital, Inc. v. Law Office of Krug, Civil Action No. 2018-0240-JRS (Del. Ch. January 29, 2019), the Delaware Court of Chancery granted an LLC manager a final declaratory judgment that the manager had been improperly removed, and the Court ordered immediate reinstatement of the manager.  In short, if a Delaware LLC’s operating documents only allow “for cause” removal of the manager, then the manager cannot be removed “on a whimsy” by the members who then manufacture cause after-the-fact to justify the removal.

Plaintiff A&J Capital, Inc. (“A&J”) was selected as the manager of LA Metropolis Condo I, LLC, a Delaware limited liability company (the “Company”). The Company was organized to raise $100 million from 200 Chinese nationals so they could become United States lawful permanent residents through the EB-5 program. The capital was invested in a construction loan for the development of real estate in downtown Los Angeles, and the loan was extended to Greenland LA Metropolis Development I, LLC (“Greenland”).

When the real estate project was substantially completed, funds from the sale of the condominium units were released to a pledge account in Greenland’s name for the benefit of the Company. Greenland approached A&J with an offer to repay the loan before its maturity date in order to free up capital to redeploy for other projects. Also, the amount in the pledge account could foreseeably exceed the principal of the loan, potentially violating the members’ EB-5 requirements. Greenland and A&J negotiated a prepayment plan and a $1 million prepayment fee for A&J, in exchange for A&J foregoing $1.6 million in management fees that it would otherwise receive at maturity of the loan.

A&J notified the members of the prepayment plan and the prepayment fee and requested the members’ approval. Any member’s abstention from voting was counted as a vote in favor of the plan. The members ultimately rejected the plan, as Greenland had a change of heart and became concerned that A&J would not commit the redeployed funds to Greenland on favorable terms.

Pursuant to the Management Agreement between A&J, the Company, and its members, the manager may be removed only by a majority vote of the members for gross negligence, intentional misconduct, fraud, or deceit. Other documents such as the Private Placement Memorandum support this standard.

James Krug, attorney for some of the members and defendant in this case, sent a removal ballot to the members, asking them to vote for (1) removal of A&J as manager and (2) election of Mr. Krug as the new manager. Importantly, the removal ballot did not state the basis for removal. Out of 200 members, 105 members voted to remove A&J; however, the authenticity of the ballots was questionable. A&J brought this suit to request that it be reinstated as manager.

Mr. Krug made two arguments that A&J violated the required standard of conduct. First, he argued that A&J’s request for a prepayment fee plus the structure of the first vote revealed fraudulent intent. The Court rejected this argument, because A&J unabashedly disclosed to the members the reasons for the prepayment plan and fee and made clear that it was up to the members to decide whether to approve the proposal. Ultimately, the members voted to reject the proposal.

Second, Mr. Krug argued that A&J made improper payments to its strategic partner, Henry Global. The Court quoted language from the Operating Agreement allowing the manager to enter into agreements it reasonably deems appropriate for any purpose beneficial to the Company. The Court found that Henry Global provided significant services to the Company, including organizing conferences with potential investors, translating loan documents, assisting investors with their immigration applications, traveling with investors outside of China to open escrow accounts, and assisting with currency transfers. The Court emphasized that Henry Global was not paid out of the members’ initial $100 million investments, rather out of the interest income, and that the members themselves were not able to receive a high amount of interest due to the structured purpose of the EB-5 investment program. Finally, the Court noted that A&J ordered an independent accounting firm to review the Company’s financial statements, including payments to Henry Global, and A&J later distributed such statements to the members.

The Court held that a “for cause” removal was not warranted and therefore reinstated A&J as manager of the company. One footnote explains, “a holding that would allow removal for any reason unearthed after the fact of removal would circumvent the for-cause contractual predicate for which A&J bargained. And it would deny the Members of the opportunity meaningfully to participate in the removal process because, by definition, their removal votes would not have been informed by the after-acquired evidence.”

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.

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Court of Chancery Declares LLC Agreement Unenforceable, Rescinds Employment Agreement, and Issues Sanctions Due to Member’s Fraud

By: Scott Waxman and Shane T. Devins

In Trascent Management Consulting, LLC v. George Bouri, C.A. No. 10915-VCMR (Del. Ch. Sept. 10, 2018), the Court of Chancery declared a limited liability company agreement unenforceable and rescinded a related employment agreement with the defendant, George Bouri, due to Bouri’s fraudulent and false statements that induced the plaintiff’s principal, Rakesh Kishan, to form Trascent Management Consulting, LLC (“Trascent”), and for Kishan and Trascent to enter into the LLC agreement and the employment agreement with Bouri. In addition, the Court awarded certain attorneys’ fees and costs to Trascent as sanctions for defendant’s continued fraudulent and false statements during the litigation proceedings. Read More

Chancery Court Enforces LLC Agreement, Further Demonstrating that LLCs are Creatures of Contract

By Scott E. Waxman and Priya Chadha

In A&J Capital, Inc. v. Law Office of Krug, C.A. No. 2018-0240-JRS (July 18, 2018), A&J Capital, Inc. (“A&J”) sought a declaratory judgment that it was improperly removed from its position as manager of LA Metropolis Condo, I LLC (the “Company”) because it was not given notice or an opportunity to be heard prior to removal.  Vice Chancellor Slights denied A&J’s motion for summary judgment, holding that A&J’s removal was proper under both the Company’s governing documents and common law.

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Court of Chancery Dismisses Breach of Fiduciary Duty Claim as Duplicative of Breach of Contract Claim

By: Scott Waxman and Zack Sager

In MHS Capital LLC v. Goggin, the Delaware Court of Chancery granted a motion to dismiss a breach of fiduciary duty claim against the manager of a Delaware limited liability company because all of the manager’s conduct that could have formed the basis of such claim was covered by the duties of the manager delineated in the limited liability company agreement.  The Court also analyzed and dismissed claims for, among other things, fraud, breach of the implied contractual covenant of good faith and fair dealing, unjust enrichment, and misappropriation of trade secrets.

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Too Many Cooks in the Kitchen – Deadlocked Management Leads to LLC Dissolution

By Scott E. Waxman and Reese Brammell

In In re GR BURGR, LLC, C.A. No. 12825-VCS (Aug. 25, 2017), the Delaware Court of Chancery exercised its power under Section 18-802 of the Delaware Limited Liability Company Act to effect the judicial dissolution of GR BURGR, LLC (“GRB”). GRB was a Delaware limited liability company formed by an entity affiliated with celebrity chef Gordon Ramsay (“GRUS”) and Rowan Siebel, each owning a 50% membership interest. This structure, along with the LLC Agreement’s lack of a tiebreaker, effectively turned any action requiring a majority vote of the managers into a unanimous vote. The relationship between the members eventually deteriorated, and the company, formed for the purpose of developing and operating burger restaurants, became locked in a stalemate regarding its future operations. GRUS petitioned for dissolution Section 18-802. The Court found that the undisputed facts entitled GRUS to such relief and, rejecting Siebel’s claims that dissolution was not equitable, granted the same.

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Court of Chancery finds personal jurisdiction over out-of-state trust due to trustor’s involvement in the formation of Delaware LLC

By:  Scott E. Waxman and J. Tyler Moser

In Terramar Retail Centers, LLC v. Marion #2-Seaport Trust U/A/D/ June 21, 2002, Civil Action No. 12875-VCL (Del. Ch. August 18, 2017), the Delaware Court of Chancery denied an out-of-state defendant’s motion to dismiss for lack of personal jurisdiction, finding that defendant’s trustor was actively involved in negotiating both the underlying business deal and the terms of the operating agreement of the Delaware limited liability company at issue. Read More

Chancery Court Rules Against Enforcement of a Call Right Due to Failure to Tender the Contractual Consideration

By: Jill B. Louis and Gilbert A. Perales

In Simon-Mills II, LLC, et al., v. KanAm USA XVI Limited Partnership, et al., C.A. No. 8520-VCG (Del. Ch. March 30, 2017), the Court of Chancery denied Plaintiffs’ request to enforce its call right and granted Defendants’ request for declaratory judgment when the contracted consideration for the call right could not be tendered.

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Failure to Make Demand to the Board of Directors Dooms 50% Owner’s Breach of Fiduciary Duty Claims Against Co-Owner

By: Michelle McCreery Repp and Benjamin Kendall

In Dietrichson v. Knott, C.A. No. 11965-VCMR (Del. Ch. Apr. 19, 2017), the Chancery Court dismissed the entire complaint brought by  one member of a limited liability company against another member for paying himself an unauthorized salary and misappropriating the proceeds of a sale of the company’s assets, concluding that the claims made were derivative rather than direct stockholder claims.  The Court also held that plaintiff’s claims were not “dual-natured” (i.e., having both direct and derivative aspects), because the plaintiff failed to plead that the transaction resulted in both an improper transfer of economic value and voting power from the minority equity holders to the controlling equity holder.

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