Cline v. Grelock, C.A. No. 4046-VCN (Del. Ch. March 2, 2010), read letter decision here. This relatively short ruling from the Court of Chancery involves comparatively small amounts in dispute but is noteworthy for general principles that are applicable to larger fights. This case is also an indication of the smaller business lawsuits handled by Chancery and the challenge confronted by counsel and the Court to limit the hugely expensive cost of litigation and trial, based on the minimum work that needs to be done in any case, in proportion to the amount at stake in the case.
The most efficient manner to approach this short decision is to highlight in bullet points a few key legal concepts addressed and refer those interested to the whole ruling at the above link.
- Two former co-owners (and former life-long friends) dispute their respective ownership interests in a failed business that one of the co-owners dissolved without authorization of the plaintiff, and started a new business that did not include the plaintiff.
- Despite being listed on the company’s tax returns as a 50% owner, the Court did not credit plaintiff with that interest because plaintiff failed to make his capital contribution in that (or any) amount. The form of entity was an LLC.
- Generally, a partner is accountable for profits earned using partnership assets to start a new business which excluded a former partner. However, if no capital contribution was made to the former partnership, there is no claim to the new business.
- In this case, the amount of capital the former partner would have contributed, far exceeded the value of any purported interest he may have had in the new business. Thus, no damages could be proven on that claim.
- The improper dissolution by one partner was a breach of fiduciary duty that prevented him from seeking damages against his former partner who failed to make a capital contribution (presumably based on unclean hands.)
- Damages do not need to be proven with precision and the difficulty of proof does not equate with no relief.
- The former partner was still a guarantor on assets he no longer had an interest in, thus the Court required that the parties work in good faith with the bank to have him removed as a guarantor, but failing that, the Court required the party using the asset to indemnify the former partner, including the provision for attorneys’ fees and costs in the event it became necessary to enforce the indemnity.
- Costs were assessed against the partner who dissolved the former business without authority, which the Court determined was a breach of fiduciary duty