Julian v. Julian, No. 4137-VCP (Del. Ch. Sept. 9, 2009), read opinion here. Two of the prior opinions in this case by the Chancery Court were highlighted on this blog here and here.
The Court referred to other proceedings among these parties, including the following separate cases pending in the Delaware Chancery Court in what the Court described as this “unending tale of internecine strife”: Julian v. Eastern States Constr. Serv., Inc., No. 1892-VCP (Del. Ch. filed Jan. 18, 2006) and Julian v. Julian, No. 4099-VCP (Del. Ch. filed Oct. 16, 2008).
This opinion dealt with the following issues: (1) Aiding and abetting the breach of a LLC manager’s fiduciary duty by either not objecting to or enjoying the benefit of actions taken by the manager; (2) The statutory requirements under the Delaware LLC Act applicable to the resignation of an LLC member; (3) Issues of substantive arbitrability; and the standards applicable to a motion to dismiss and a motion to stay litigation.
The sum and substance of the factual background involved three brothers whose family controlled a multitude of companies. One of the brothers resigned from seven of the LLCs and alleged breaches of fiduciary duty at two other LLCs from which he did not resign. Some of the LLCs had arbitration clauses and some of them did not. Arbitration proceedings among the brothers have been instituted contemporaneously with the several pending cases in Chancery Court and among the issues addressed was which claims are subject to arbitration.
Right to Resign as LLC Member
Two different versions of 6 Del. C. Section 18-603 of the Delaware LLC Act applied to the seven LLCs from which one of the brothers purportedly resigned. The first version of Section 18-603 applied to those LLCs that filed a Certificate of Formation that was effective on or before July 31, 1996. That version allowed a member of an LLC the right to resign upon not less than six months prior written notice.
Those LLCs formed after July 31, 1996 were governed by the current version of Section 18-603 which “prohibits members from resigning prior to the dissolution and winding up of the company unless such resignation is allowed by the LLC Agreement.” See footnote 6. Generally, the right of a member to resign from an LLC is governed by the terms of the LLC Agreement unless, as here, the agreement is silent in which case the right is governed by Section 18-603.
Standards Applicable to Various Motions
The Court discussed the different standards applied to a motion to dismiss under both Rule 12(b)(1) for lack of subject matter jurisdiction when the claims involved are governed by an arbitration clause–as compared to a motion under Rule 12(c) [which is similar but not identical to a Rule 12(b)(6) motion], and is known as a motion for judgment on the pleadings.
In addition, the Court discussed the standards applicable to a motion to stay litigation, which is governed by the Court’s inherent power to manage its own docket. This power allows the Court to issue a stay pending the resolution of an arbitration, on the basis of comity, “efficiency or common sense.” When considering a stay of claims that are not subject to arbitration, the Court “looks to the preclusive effects of a pending arbitration elsewhere on the action before the Court and vice-versa, as well as the burden imposed by litigating actions in different fora (citing Salzman v. Canaan Capital Partners, L.P., 1996 WL 422341, at * 4-5 (Del. Ch. July 23, 1996)). The Court found an insufficient basis to stay the litigation.
A substantial portion of the 28-page opinion was devoted to the issue of substantive arbitrability. By contrast, procedural arbitrability addresses issues such as whether the proper notice was given to initiate the arbitration, and that ruling is generally made by the arbitrator. Substantive arbitrability is generally addressed in two parts, the first being whether the issue at hand comes within the scope of the arbitration clause. The second part of substantive arbitrability is whether the Court or the arbitrator shall decide whether the issue at hand is within the scope of the arbitration clause. The controlling Delaware law that decides that issue is based on the seminal Delaware Supreme Court decision in James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76, 79 (Del. 2006). See a summary of that decision on this blog here.
Although a determination of the substantive arbitrability issue can be quite involved and the Court devotes many pages to the analysis as applied to the facts of this case, the general rule is that unless the parties unequivocally provide for the arbitrator to make that decision, such as referring to the American Arbitration Rules which so provide, the presumption is that the Court will determine whether the issue at hand is within the scope of the arbitration clause. See footnotes 35 to 38.
Aiding and Abetting Breach of Fiduciary Duty
The Court addressed a motion to dismiss for failure to state a claim for breach of fiduciary duty. In response, instead of establishing a breach of fiduciary duty, the plaintiff argued that there was a claim for aiding and abetting breach of fiduciary duty. Thus, analyzing that different claim, the Court described the necessary elements for a claim of aiding and abetting a breach of fiduciary duty as follows: (1) Knowledge of the breach of the duty; and (2) Participation in the wrongful conduct. The complaint alleged that the manager of the LLC increased management fees by 400% with the “consent of” the defendant charged with aiding and abetting the breach. The Court’s reasoning for allowing the claim to go forward deserves to be quoted. The Court explained that:
“Under the plaintiff-friendly motion to dismiss standard, the allegations that Richard [the member of the LLC alleged to have aided and abetted the breach] consented to the increase in fees, which benefited a company controlled by Richard and Francis [the manager of the LLC], are sufficient to support a reasonable inference that Richard participated in the alleged wrongdoing. The fact that Francis could have taken that action on his own as a manager does not negate a reasonable inference that Richard may have been involved in the decision. The evidence conceivably could show that Richard knew about the increase and supported it, even though he also knew that fee increase of 400% would have been suspect, especially in light of the family feud he and Francis had with Gene [the plaintiff brother] and the fact that he and Francis stood to benefit from the increased fees.”
In footnote 69, the Court addressed the argument that the LLC Agreement gave Francis “wide discretion to make decisions.” The Court cited to Section 18-1101(c) of the Delaware LLC Act for the provision that an LLC Agreement cannot eliminate the implied contractual covenant of good faith and fair dealing.
Concluding Remarks with Equitable Flavor
Finally, as an example of its exercise of equitable principles as opposed to strict compliance with procedural rules, the Court rejected an argument that the claim for aiding and abetting was not specifically pleaded in the complaint and should thus be dismissed based on Chancery Court Rule 15(aaa) [which provides for dismissal if a complaint is not amended in response to a motion to dismiss]. The Court reasoned in footnote 69 that “the argument lacks merit for the facts alleged in the Complaint suffice to support an aiding and abetting claim. To the extent a formal amendment to the Complaint in that regard might be considered necessary, I find that a dismissal with prejudice would not be just under all the circumstances. The most that would be warranted in terms of relief is a dismissal without prejudice, and I find that unnecessary.”