Kuroda v. SPJS Holdings, L.L.C., Del. Ch., No. 4030-CC (April 15, 2009), read opinion here.
This case involves the following claims among members of an LLC, arising out of an LLC Agreement: (i) breach of contract; (ii) tortious interference with contract; (iii) tortious interference with prospective economic advantage; (iv) breach of the implied covenant of good faith and fair dealing; (v) conversion; (vi) unjust enrichment; and (vii) civil conspiracy. The court dismissed the foregoing claims against most of the defendants based on a motion to dismiss under Rule 12(b)(6). The discussion of this smorgasbord of claims serves as a useful reference to include in the toolbox of the business litigation lawyer.
The factual background involves an intricate web of overlapping entities. The central fact that is key to this dispute is that a few investment management professionals formed several entities for the primary purpose of investing in Japanese companies. The plaintiff was the main "point man" in Japan. Eventually, the plaintiff and the other members of the LLC had disagreements that caused the plaintiff to want to leave. This litigation started when the negotiations for an amicable departure were unsuccessful. Among the problems that gave rise to the suit included the alleged failure of the defendants to provide full payment that the plaintiff thought he was owed, and the issuance to the plaintiff of a K-1 purporting to assign him $10 million in income that he apparently did not receive.
Breach of Contract Claim
Regarding the breach of contract claims relating to the LLC Agreement, the court denied the motion to dismiss against two of the defendants based on the familiar test for a Rule 12(b)(6) motion that the court cannot choose at such a preliminary stage the movant’s view of the contract if it is "not the only reasonable interpretation". FN 9.
The opinion also includes discussion about whether the LLC members could be held liable "as members, solely by reason of them being members". Reference was made to Section 18-303(a) of the Delaware LLC Act, which addresses the liability of members to third-parties, but, the court explained, it "has no bearing on the liability between members." FN 13.
The court discussed the elements of a breach of contract claim (FN 15). The plaintiff, Kuroda, alleged that issuing him a K-1 that purported to assign him income that he never received. However, he still failed to allege the element of damages because as a Japanese citizen it was not clear that he would owe taxes in the U.S., or suffer other damages as a result of an inaccurate K-1, though the court did allow the plaintiff to amend his complaint. [This conclusion should be compared with a decision from the Chancery Court of many years ago in an unaffiliated case that reached a different result on different facts but involved an arguably analogous issue. See Litle v. Waters, 1992 WL 25758 at *8 (Del. Ch., Feb. 11, 1992)(finding that the plaintiff in that case stated a claim for oppression of a minority shareholder by failing to declare dividends in a subchapter S corporation where the plaintiff minority shareholder was incurring tax liability but receiving no income to pay the liability, while the Defendant was receiving loan repayments which he could use to pay his tax liability.)]
Tortious Interference with Contract
It was explained by the court as "well-settled that a party to a contract cannot be held liable for both breaching a contract and tortiously interfering with the same contract." FN 18. Moreover, the individual defendants were in control of the member entities, thus, as long as they were acting within the scope of their respective roles as managers of the member entities, they cannot be held liable for tortious interference with contract, based on the reasoning that they are the agents of the signatories to the contract. FN 20.
Tortious Interference with Prospective Economic Advantage
The elements of a claim for tortious interference with prospective economic advantage were recited (FN 31), but preliminarily, the court found that those claims were not direct claims that could be brought by the plaintiff, but rather were derivative claims that needed to be brought on behalf of the LLC through which he did business. See 6 Del. C. Section 18-1001 and FN 32.
Implied Covenant of Good Faith and Fair Dealing
An explanation of this cause of action and a nuanced amplification of its limited scope in the opinion is the best way to understand why this claim was dismissed, so I quote from page 24 of the slip opinion:
The implied covenant of good faith and fair dealing inheres in every contract and requires ‘a party in a contractual relationship to refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits’ of the bargain.”38 The implied covenant cannot be invoked to override the express terms of the contract.39 Moreover, rather than constituting a free floating duty imposed on a contracting party, the implied covenant can only be used conservatively “to ensure the parties’ ‘reasonable expectations’ are fulfilled.”40 Thus, to state a claim for breach of the implied covenant, Kuroda “must allege a specific implied contractual obligation, a breach of that obligation by the defendant, and resulting damage to the plaintiff.”41 General allegations of bad faith conduct are not sufficient. Rather, the plaintiff must allege a specific implied contractual obligation and allege how the violation of that obligation denied the plaintiff the fruits of the contract. Consistent with its narrow purpose, the implied covenant is only rarely invoked successfully.42
In connection with defining the elements of this claim (FN 49), the court explains that when a claim arises out of a contract, such a cause of action cannot be bootstrapped into a tort claim (FN 50). Moreover, the Court emphasized that there is a very narrow exception to the general prohibition against claims for the conversion of money. That is, the plaintiff, Kuroda, would have to establish a right to the money, separate from a contract right, that he asserts is being withheld improperly by the defendants. This he cannot do. FN 54.
After reciting the elements of this claim (FN 61), the reason given for why it was dismissed is as follows: such a claim is not available where, as here, there is a contract that governs the relationship between the parties. Thus, "when the complaint alleges an express, enforceable contract that controls the parties’ relationship … a claim for unjust enrichment will be dismissed." FN 63. But cf. FN 65 that cites a case that refers to the limited circumstances in which the concept of "alternative pleading" will allow both such claims to be pled in the same complaint.
The plaintiff failed to adequately allege the elements of an underlying claim, and thus this count in the complaint was dismissed because, as the court noted, civil conspiracy is not an independent claim. FNs 70 and 71. Moreover, the opinion cites to authority in footnote 74 for the position that unless a breach of contract constitutes an independent tort (which the excerpt above shows is hard to do), a breach of contract cannot constitute an underlying wrong on which a claim for civil conspiracy can be based.