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Barton v. Club Ventures Investments LLC

Court of Chancery of Delaware

November 19, 2013

Club Ventures Investments LLC

Submitted: November 7, 2013

Dear Counsel:

Plaintiff David Barton ("Barton") is the founder of the eponymous DavidBartonGym, a health club designed to "reflect [his] unique brand of personal health and fitness."[1] In 2004, after DavidBartonGym had existed for more than a decade, Barton and John Howard ("Howard") formed Club Ventures Investments LLC ("CVI" or the "Company"), a Delaware limited liability company, to facilitate the investment of "additional capital to grow the business."[2] CVI is a holding company that "establishes, operates and manages DavidBartonGym facilities and conducts related activities."[3]

Praesidian Capital Investors, L.P. ("Praesidian") invested in CVI in 2004. Since that investment, Barton, Howard, and various Praesidian affiliates, such as Praesidian Capital Corp., Praesidian II Corp., and Praesidian II-A Corp. (collectively, the "Praesidian Equity Group"), have held member interests in CVI.[4]Barton, Howard, and Jason D. Drattell ("Drattell") are Managers of CVI.[5]Currently, CVI owns six and operates nine DavidBartonGym health clubs in major metropolitan areas across the country.[6]

Barton was the Chief Executive Officer ("CEO") of CVI when, in 2011, it filed for Chapter 11 bankruptcy.[7] Upon CVI's exit from bankruptcy, Barton became President, and Charles H. Grieve II ("Grieve") took over as CEO.[8]Approximately two years later, on September 4, 2013, Barton, claiming he was "constructively discharged" by Howard and Drattell, [9] left CVI.[10] That same day, Barton initiated this lawsuit, alleging that he would like to start a new health club, separate and distinct from DavidBartonGym.[11] But, he claims that prospective investors have been concerned that he may be subject to a covenant restricting his future employment.[12] With this lawsuit, Barton seeks to remove this "cloud of uncertainty."[13]

Barton has asserted eight claims against Defendants CVI, the Praesidian Equity Group, LBN Holdings LLC ("LBN"), Drattell, and Howard. He sought expedited review of Counts I and II against CVI.[14] In Count I, Barton seeks a declaratory judgment that he is not subject to any non-compete agreement with CVI.[15] In Count II, were the Court to find that he is subject to a non-compete agreement with CVI, Barton requests a declaratory judgment that the terms of any such agreement violate public policy and are therefore unenforceable.[16]

CVI moved to dismiss Counts I and II and certain other claims, and it filed an answer to the remaining claims. The other defendants moved to dismiss all claims. On October 8, 2013, Barton and CVI agreed to submit to the Court, by a motion for partial summary judgment, threshold legal questions related to Counts I and II.[17] Barton presented two issues: first, whether the CVI Amended and Restated Limited Liability Company Agreement (the "LLC Agreement"), [18] which does not include a non-compete provision that CVI intends to enforce, [19] supersedes the Confidentiality, Non-Competition and Intellectual Property Agreement (the "Non-Compete Agreement"), [20] which may include a non-compete provision; and second, whether CVI assumed and retained the Non-Compete Agreement upon its exit from bankruptcy.

Barton moved for partial summary judgment on these legal questions (the "Motion").[21] This opinion is the Court's disposition of the Motion. For the following reasons, the Court concludes that the LLC Agreement does not supersede the Non-Compete Agreement and that CVI retained the Non-Compete Agreement after bankruptcy.


A. The Non-Compete Agreement

CVI and Barton entered into the Non-Compete Agreement in 2005.[22]Barton alleges that the Non-Compete Agreement includes a provision that purports to restrict his ability to work in the industry and geographic area in which CVI operates for eighteen months after the termination of his employment with CVI.[23]Barton executed the Non-Compete Agreement, which he asserts he had no role in negotiating or drafting, [24] both individually and on behalf of CVI.[25] The Non-Compete Agreement mandates that "if any party shall institute legal action to enforce or interpret the terms and conditions of this Agreement[, ] . . . venue for any such action shall be in New York County, New York" (the "Non-Compete Venue Clause").[26]

B. CVI Files for Bankruptcy

In 2011, CVI filed for Chapter 11 bankruptcy in New York.[27] CVI was reorganized pursuant to the court-approved Debtor's Second Amended Joint Plan of Reorganization (the "Plan").[28] Under Section 7.1 of the Plan, when CVI emerged from bankruptcy, it assumed and was vested with all executory contracts that were not expressly rejected.[29] The Non-Compete Agreement was not expressly identified as either an assumed or rejected executory contract.[30] Under Sections 5.1 and 9.2 of the Plan, CVI also assumed and was vested with all non-executory contracts.[31] Whether the Non-Compete Agreement was assumed by and revested in CVI under the Plan is in dispute.

C. The LLC Agreement

As part of the Plan, CVI was reorganized under the LLC Agreement, effective as of November 22, 2011.[32] The LLC Agreement, entered into "by and among" CVI, LBN, the Praesidian Equity Group, Barton, and Grieve, [33]"constitutes the operating agreement and sets forth the agreement of the Members as to their relative rights and obligations as well as the manner in which the Members have agreed to operate the Company."[34] A "Member" is defined, in relevant part, as "any Person executing this Agreement as of the date of this Agreement as a member or hereafter admitted to the Company as a Member as provided in this Agreement."[35] The Praesidian Equity Group, LBN, Barton, and Grieve executed the LLC Agreement on the signature page under the heading "members"; CVI executed the LLC Agreement under the heading "Company."[36]

"Except as may be provided otherwise in a separate agreement, subject to Section 8.3" of the LLC Agreement, the Members are generally permitted to "engage in and own interests in other business ventures of any and every type and description."[37 ...

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