Delaware Court Interprets “Including”

Delaware Court Interprets “Including”

      In a decision rendered last week by the Delaware Superior Court (the Superior Court is the court of general jurisdiction in Delaware) interpreted the phrase “including”. Triumph Arrow Structures-Tulsa, LLC v. Spirit Aero Systems, Inc., C.A. No. N17C-11-262 MMJ CCLD (Del. Sup. Ct. Aug. 8, 2018).

      Triumph, pursuant to an asset purchase agreement (the “APA”) acquired from Sprint two wing supply programs for Gulfstream. Spirit, as the seller, retained responsibility for the Excluded Liabilities as defined under the APA. The dispute would term on what constitutes a Excluded Liability. Triumph, the purchaser argued that “any matter set forth in schedule 3.19(b) in the definition of Excluded Liabilities, enlarges, and does not limit, what falls within the definition. That schedule 3.19(b) in turn incorporated Attachment 3.19(b), it setting forth the warranty claims that are at the core of this dispute.

      In response, Spirit argued that a separate provision of the agreement required that Triumph, as purchaser, assume all warranty liabilities, and that those claims listed on Schedule 3.19(b) should be treated as an exclusive list of those known claims for which it retained exposure.

      The court would ultimately find that the subject provisions are clear and unambiguous, and that the “includes” should be treated as expanding, and not limiting, the items described on the schedule. Rather:

Triumph agreed to assume “all Warranty Liabilities.” That assumption explicitly excludes Known Claims. Spirit agreed to retain Excluded Liabilities. Excluded Liabilities include Liabilities arising from Known Claims. Excluded Liabilities include any matter set forth on Schedule 3.19(b), which is a Liability arising out of any lawsuit, proceeding, claim, arbitration, mediation, governmental inquiry, or investigation pending as of the closing.

* * *

Spirit is required to “pay, perform, discharge or otherwise satisfy” all Liabilities arising from Known Claims. Liabilities include matters set forth in schedule 3.19(b), which incorporates Attachment 3.19(b). The Court cannot determine at this juncture whether every single matter on Attachment 3.19(b) is a “Liability arising out of any lawsuit, proceeding, claim, arbitration, mediation, governmental inquiry, or investigation pending as of the closing …” Slip op at 8-9, footnotes omitted.

Sixth Circuit Court of Appeals, Applying Ohio Law, Finds No Contract and No Partnership

Sixth Circuit Court of Appeals, Applying Ohio Law, Finds No Contract and No Partnership

      In a recent decision from the Sixth Circuit Court of Appeals, it applying Ohio law, it found that a letter of intent was so indefinite as to material terms that no enforceable contract arose. In addition, the Court found that an alleged partnership between the contract parties likewise did not exist. Capital Equity Group v. Ripken Sports Inc., No. 17-4006, 2018 WL 3620739 (6^th Cir. July 30, 2018).

      Capital Equity Group and Ripken Sports entered into a pair of letters of intent indicating that they “intend[ed] to work together to help develop a sports complex in Erie County, OH.” Although the LOI stated it shall be “treated as a binding contract,” it was also described as being “open-ended”. As noted by the Court, it did not specify how any profits would be distributed or how to measure any parties performance. After the involvement of Cedar Point Park in Erie County were accomplished, the defendant ceased communicating with Capital Equity. In turn, Capital Equity filed suit alleging various claim for damages. The defendants moved to dismiss on the basis that there was no enforceable contract. The trial court dismissed the complaint, and this appeal was taken to the Sixth Circuit.

      Applying Ohio law to the effect that in order to be binding “a contract must be definite and certain,” and that they must agree as to the contract’s “essential terms,” the Sixth Circuit found that the LOI here at question was insufficient to create an enforceable agreement.  Rather,

“nowhere within the agreement does it contemplate how any party would be compensated or how they would deal with a breach. Without any guidance on the parties’ understanding of the value of plaintiff’s services, this Court is wholly unable to craft a remedy for plaintiff’s breach of contract claim. Therefore, the district court correctly determined that the 2014 LOI did not constitute a valid contract under Ohio law.”

      As to the assertion that, consequent to the letter of intent, the parties had entered into a partnership, the court found that numerous of the elements of a partnership were here missing. It further found that the use of the term “partnership” twice in the LOI did not give rise to a partnership.

      There being no enforceable contract, the court as well set aside a claim for violation of the implied covenant of good faith and fair dealing.

New York Court Addresses to Whom Cooperative Board Owes its Fiduciary Duty

New York Court Addresses to Whom Cooperative Board Owes its Fiduciary Duty

      In a recent decision from the New York intermediate appellate Court, it was held that the directors of the board of a cooperative owe their fiduciary duties to the entity, and not to the individual shareholders. Further, the corporation does not itself owe a fiduciary duty to the members. Hersh v. One Fifth Avenue Apartment Corp., Index 157593/14, 2018 WL 3578714 (N.Y. App. Div. 1^st Div. July 26, 2018).

      When her apartment sustained extensive water damage consequent to a greenhouse located on an upper roof terrace, the plaintiff sued the owners of the greenhouse, the cooperative corporation itself and the individual board members. In this decision, only the claim for breach of fiduciary duty against the individual board members was at issue.

      In rejecting this claim, the Court began by reciting the rule that there is no individual claim for breach of fiduciary duty against an individual board member absent individual wrongdoing:

It is well-settled that a breach of fiduciary duty claim does not lie against individual cooperative board members where there is no allegation of “individual wrongdoing by the members … separate and apart from their collective actions taken on behalf of the cooperative.” Here, the complaint does not allege that any of the individual board members committed an independent wrong that was distinct from the actions taken as a board collectively. Thus, the breach of fiduciary duty claim is not viable. Because the proposed amended complaint fails to cure this deficiency, plaintiff’s motion seeking to amend the plates was properly denied. 2018 WL 3578714, *1 (citations omitted).

      The court went on to cite the rule that the corporation itself owes no fiduciary duty to its shareholders.

Answers That Are Simple, Obvious and Wrong – The Risk Inherent in a Common Business Structure

Answers That Are Simple, Obvious and Wrong – The Risk Inherent in a Common Business Structure

     In many closely held business ventures, the real estate from which the business operates is held in a separate LLC owned by some or all of the owners of the operating company. The rationale for this structure is that the operating company will each year pay to the real estate company lease payments, generating for the operating company a tax deduction. In turn, the real estate company will have a deduction for any mortgage interest (if any) it pays and will in turn distribute net earnings exempt from Social Security and Medicare taxes. Mot oft recognized is that this structure exposes the real estate company to employee injury claims for which the operating company enjoys the benefit of worker’s compensation exclusivity.

       This issue was identified in a recent decision from Maine, Clark v. Benton LLC, 2018 ME 99, __ A.3d __, 2018 WL 3432039 (Ma. July 17, 2018). Therein, the facilities from which a number of lumber company operations, Hammond Lumber Company, operated from realty owned by separate LLC's owned by one or more of the shareholders of Hammond Lumber. In February, 2015, Clark, a Hammond Lumber employee since 2009, visited the facility located in Fairfield, that property being owned by Benton LLC. Clark’s manager identified rooftops from which Clark was to remove the accumulated snow. In the course of doing so, he fell through a skylight, suffering significant injuries. In accordance with the worker’s compensation insurance policy maintained by Hammond Lumber, Clark’s claim for workers compensation was satisfied.

      That was not, however, the end of the story, Clark then brought suit against Benton LLC on a variety of claims, specifically its:

Failure to (1) properly maintain the property; (2) provide premises reasonably safe for his work; and (3) warn him of dangerous conditions that Benton LLC, knew or should have known existed. 2018 WL 3432039, *2.

      When Benton LLC moved for summary judgment on the ground that Clark had already been compensated in accordance with the worker’s compensation law and therefore Benton LLC was immune from suit, Clark objected, and Benton, LLC appealed.

      The Maine Supreme Court, considered its prior law that, in certain instances, the worker’s compensation exclusivity could extend to a landlord closely affiliated with the employer. Focusing on the particular facts here presented, the Maine Supreme Court wrote “We know that a property-owning entity is not afforded immunity by the [Worker’s Compensation] Act by the simple facts that one of its officers is also an officer of the entity that employs the injured person, the employer has secured compensation according to the Act for the injured person, and the property-owning entity allows the employer to use its premises for its business purposes.” Id., *3.

      From there, the Maine Supreme Court explored the “dual persona doctrine.” The court was clear that the effort by Benton LLC to utilize this doctrine was inapposite its intention, namely “as an exception to the employer immunity provisions of the workers’ compensation statutes.” Id., *4.

      Distinguishing prior law, the Maine Supreme Court noted that:

“There is no employment relationship between Benton, LLC and Clark. Rather, Benton, LLC, is a legally separate entity from Hammond Lumber Company, with separate duties as a property owner.” Id.

      Further, the Court indicated that this case may be more similar to that of Labelle v. Crepeau, 593 A.2d 653 (Me. 1991), wherein it was held that

“The land owner was not afforded immunity by the [Worker's Compensation] Act because he ‘was not sued in his capacity as an employee or corporate officer. Rather, he was sued individually as the owner of premises he leased to a separate corporate entity,’ and for his alleged breach of the duty to ensure that those premises were safe.” Id.

      For that reason, the denial of summary judgment to Benton LLC was not improper, and Benton LLC is not immune from suit.

      In a footnote, it was observed that “Benton, LLC, essentially argues that we should disregard its and Hammond Lumber’s separate corporate forms.” Id., n. 4. In rejecting those efforts, the court cited the Labelle decision for the principle that “[w]e do not ignore the corporate entity in order to allow a shareholder to avoid the burdens of incorporation.”

      It should be recognized that this case is in no manner an outlier. Rather, there are a number of decisions from across the country that in effect call into question the operating company/realty company format. For example, in Howsden v. Roper’s Real Estate Company, 2011 WL 5105810 (Neb. Oct. 28, 2011), the real estate holding company affiliated with an operating company defended a claim brought by an employee who fell down a seldom-used elevator shaft.  It was held that the suit against the realty company could proceed because it was not the plaintiff’s employer entitled to the exclusivity protections of the worker’s compensation statute. A similar decision from Kentucky, Jessie v. Dermitt, No. 2005-CA-0011961-MR (Ky. App. Dec 8, 2016), likewise held that the real estate holding company did not enjoy the exclusivity of the worker’s compensation coverage when an employee of the operating company fell through a hole cut in the floor as part of a remodeling effort and then covered with a tarp. Curiously, both the Nebraska Howsden and Kentucky Jessie decisions involve funeral homes.

      Companies utilizing the dual operating company/realty company structure may be doing so for well reasoned, entirely legitimate reasons. The caution of these cases should be simply another component of that analysis, one that is recognized when insurance coverage is being sought.

Death, Dissolution and Dissociation: Louisiana Court Considers the Effect of Seriatim Deaths

Death, Dissolution and Dissociation: Louisiana Court Considers the Effect of Seriatim Deaths

      In a recent decision from the Louisiana Court of Appeals considered the effect of the seriatim deaths of several members of an LLC and, ultimately, whether an action for judicial dissolution initiated by a member who subsequently passed away could continue. In this instance, the court found that the action for judicial dissolution of the LLC could continue.  Schauf v Schauf, No. 51, 919-CA, __ So.3d __, 2018 WL 1937068 (La. App. 2 Cir. April 25, 2018).

      Angela Schauf organized the Schauf Family LLC in 2001, keeping 50% of the ownership for herself and distributing to each of her four children a 12.5% interest. Those four children were Peter, Paul, Mary and Kathryn. Angela and all of the children executed an operating agreement; the LLC’s only asset was farmland that was leased out. Angela passed away, and her interest in the LLC was divided amongst the four children, resulting in each of them becoming a 25% member. Then, each of Peter and Kathryn passed away, leaving their interests in the LLC to their respective spouses, Jo Ann and Michael.

      Thereafter, there arose disagreements with respect to the LLC and each of Jo Ann (assignee of Peter) and Michael (assignee of Kathryn) as well as Mary, an original member, sought to dissolve the LLC, sell its assets and distribute the proceeds. Paul objected to any dissolution, and as well rejected the proposal that he buy out the other members. Nonetheless, everyone except Paul did vote to dissolve the LLC and appoint Jo Ann as its liquidator.

      Paul filed suit, asking for a ruling that the appointment of the liquidator and vote to dissolve the LLC was null and void. Then, Mary passed away, and a motion was filed to substitute Jo Ann, Mary’s executrix, in the lawsuit. In turn, the trial court granted Paul’s application for summary judgment, in which there was declared void the vote to liquidate and the appointment of Jo Ann as the LLC’s liquidator. Conversely, the defendant’s motion for summary judgment was denied on the basis that they had no authority to dissolve the LLC and liquidate its assets. The defendants filed this appeal.

      The court’s opinion begins with a review of the status of the estate of a deceased member under the Louisiana LLC Act. Specifically, the estate does not become a member (absent a contrary provision in either the articles or operating agreement).

“Thus, an LLC’s articles of organization or a written operating agreement could, but have not in this case, provide that a person who inherits a decedent member’s interest in the LLC would become a member of the LLC or would have certain rights that are provided only to members.”

      From there the court offered some observations as to the status of a decedent member’s estate vis-a-vie the LLC, namely:

The rule treating a decedent member’s legal representative as an assignee of the decedent’s interest may be problematic. As an assignee of the decedent member’s interest, the decedent’s legal representative is entitled only to receive distributions from the LLC as authorized by the LLC’s operating agreement or by the members, to share in the LLC’s profits and losses, and to receive allocations of the LLC’s items of income, gain, loss, deduction, and credit. A decedent member’s legal representative may not become a member of the LLC or exercise any of the rights or powers of a member unless the LLC’s articles of organization or a written operating agreement provides otherwise or the legal representative is admitted as a member of the LLC. Thus, the legal representative of a decedent member may not participate in the management of the LLC, vote on the LLC’s affairs, or inspect the LLC’s records unless the LLC’s articles of organization or an operating agreement specifically accords such management rights to the decedent’s legal representative or the legal representative is admitted as a member of the LLC. Without the right to vote or inspect records, a decedent member’s legal representative will have little ability to protect the interests of the decedent’s estate or heirs with respect to the decedent’s interest in the LLC. Id at *6-7.

      Still, the court noted that an action for judicial dissolution may be brought by any member on the grounds that it “is not reasonably practicable to carry on the business of the LLC in conformity with its articles of organization and operating agreement.” La. R. S. 12:1335. The court went on to find that Mary had been a member of the LLC at the time the petition for judicial dissolution was filed, that “[h]er death did not terminate the dissolution process once it had been initiated.” and that JoAnn, as Mary’s executrix, could continue the dissolution action. Id., *8.

      Almost in passing, the court rejected the suggestion that, consequent to the articles of organization providing that the LLC would dissolve after 25 years, it could not be dissolved prior to that time.

      If this decision is restricted to its facts, namely an action for judicial dissolution, it is an entirely reasonable outcome. At the time the action for judicial dissolution was filed, three of the four persons having a derivative economic interest in the LLC’s assets no longer wish to be in business together. Likewise, one half of the members did not want to be in business with the other half. It would be dangerous, however, to extend this decision beyond the context of an action for judicial dissolution. If, in contrast, the suit were to have involved a derivative action or a request to inspect documents by a member who then passes away, different policy concerns, they being focused upon the LLC’s internal management, would arise.

Delaware Court Reviews Fundamental Contract Law

Delaware Court Reviews Fundamental Contract Law

      In a trio of recent decisions, Delaware courts have reviewed some fundamental principles of contract law.

      In Chyronhego Corp. v. Wight, C.A. No. 2017-0548-SG (Del. Ch. July 31, 2018), the court reviewed anti-reliance clauses, explaining what is necessary for one to be effective and applying the one at in the contract at issue. HEREIS A LINK to that decision.

      Another decision, Flowshare, LLC v. Georesults Inc., C.A. N17C-07-227 EMD-CCLD (July 25, 2018), addresses whether an integration clause bars enforcement of promises made with respect to future performance and a fraudulent inducement claim. HERE IS A LINK to that decision.

      Last, CSH Theaters L.L.C. v. Nederlander of San Francisco Associates, C.A. No. 9380-VCMR (Del. Ch. July 31, 2018), decided in the context of the question of whether alleged conversations were enough to create an enforceable contract, provides an exhaustive review of the Delaware law on what is required to create an enforceable agreement. HERE IS A LINK to that decision.

The Executrix of a Member Is Not An Member

The Executrix of a Member Is Not An Member

      In a decision earlier this year from Connecticut, there was examined the status of the executrix of a member vis-a-vis the LLC, a question considered in the context of whether the executrix may or may not seek the judicial dissolution of the LLC. In this instance, it was found there was not standing to bring that action. Faienza v. T-N-B Marble-N-Granite, LLC, HHDCV176082028S, 66 Conn. L. Rptr. 213, 2018 WL 1882686 (Conn. Sup. Ct. March 26, 2018).

       It was explained that under Connecticut’s prior LLC Act, upon the death of a member, most of the member’s rights, including the right to move for dissolution, passed to the member’s legal successor, the court citing in support thereof Warren v. Cuseo Family, LLC, 138 A.3d 1099 (Conn. App. 2016). However, effective July 1, 2017, Connecticut adopted the Revised Uniform LLC Act under which, absent a written operating agreement providing to the contrary, the law “strips the legal successor of some of those membership rights, giving the successor the status of a ‘transferee’ rather than a member.”, citing C. G. S. § 34-259(c).

      Finding that the right to bring an action for dissolution of the LLC is restricted to a member, and as the plaintiff executrix was a transferee, rather than a member, it was held that there was no standing to bring the action for dissolution.