December 31, 2013
CHARLES B. GRACE, JR., Plaintiff,
ASHBRIDGE LLC, a Delaware limited liability company, Defendant.
Submitted Date: September 5, 2013
R. Montgomery Donaldson, Esquire and Lisa Zwally Brown, Esquire of Montgomery, McCracken, Walker & Rhoads, LLP, Wilmington, Delaware, and Gregory M. Harvey, Esquire of Montgomery, McCracken, Walker & Rhoads, LLP, Philadelphia, Pennsylvania, Attorneys for Plaintiff.
Christopher J. Curtin, Esquire of MacElree Harvey, Ltd., Wilmington, Delaware, and Alfred A. Gollatz, Esquire of MacElree Harvey, Ltd., West Chester, Pennsylvania, Attorneys for Defendant.
NOBLE, Vice Chancellor
Plaintiff is the co-trustee of a family trust that held, among other assets, the shares of a Delaware corporation that was later converted into the Defendant, a Delaware limited liability company. Plaintiff also is, and was, the chairman, a member of the governing boards, and a member or shareholder of the limited liability company and its predecessor corporation. When the trustees of the family trust filed two accountings in a Pennsylvania court, family member beneficiaries of the trust filed objections that in part alleged breaches of fiduciary duty by the trustees and diminution in value of the trust's interest in the corporation due to imprudent investments, improper loans, and self-dealing transactions by Plaintiff. Because of the offices Plaintiff held in the Defendant and its predecessor corporation, Plaintiff asserts he is entitled to advancement and indemnification from the Defendant for his defense to the objections, a failed mediation, and the present action.
Plaintiffs amended complaint is a patchwork of facts and allegations that provides an outline of what transpired but omits certain key details. In response to Plaintiffs initial complaint, which was even scarcer in detail, the Defendant moved for a more definite statement to understand better the grounds upon which Plaintiff claimed his rights to advancement and indemnification. Although Plaintiff clarified certain allegations, the Court cannot, as a matter of law, grant relief upon those grounds as set forth in his amended complaint. Because Plaintiff sought relief only under the operating agreement of the successor entity limited liability company even though the sole allegations in the objections involve the predecessor corporation and a related entity, the Court cannot order the limited liability company to make advancement and to indemnify based upon the alleged wrongs relating to those distinct entities. Plaintiffs complaint is dismissed for the reasons that follow.
Charles B. Grace, Jr. ("Grace" or the "Plaintiff) became one of several cotrustees of a family trust (the "Residuary Trust") settled upon the death of his father, Charles B. Grace, in 1969. The Residuary Trust included cash, real property, and preferred and common shares of the family-owned Heintz Investment Company. Heintz Investment Company was renamed the Ashbridge Corporation in 1981. Ashbridge Corporation, a Pennsylvania corporation, merged with and into Ashbridge Partners, LLC, a Delaware limited liability company, on December 31, 2008. On that same day, it changed its name to Ashbridge LLC (the "Defendant").
Grace is a member of Defendant and was a shareholder of Ashbridge Corporation before its merger into Defendant. Grace also serves on the Board of Managers and as chairman of Defendant; he likewise was the chairman and a member of the governing board of the predecessor entity, Ashbridge Corporation.The trustees of the Residuary Trust filed two accountings to which its beneficiaries, Eugene G. Grace, III, Eugene G. Grace, IV, Andrea Grace, and Alexandra Grace (the "Beneficiary Objectors"), filed objections on September 4, 2012 (the "Objections") in the Court of Common Pleas of Chester County, Pennsylvania, Orphans' Court Division (the "Orphans' Court Proceeding"). The Objections asserted
1. As set forth above, the trustees breached their fiduciary duty in directing, approving, consenting to and/or acquiescing in the formation and operation of AIM;
2. Objectants object to the diminution in value of the trust's ownership interest in Ashbridge Corporation as reflected in the Accounting as a result of trustee Charles Grace's imprudent investments, improper loans and/or reckless and wanton self-dealing transactions, all of which were made in complete disregard to the rights and interests of the trust's beneficiaries, and all of which the remaining trustees failed to prevent, monitor, and/or remedy.
3. Objectants object to BNY Mellon's fees and commissions in the amount of $154, 826.99 in regard to BNY Mellon's breaches of fiduciary duty concerning trustee Charles Grace's imprudent investments, improper loans and reckless and wanton self-dealing transactions to the substantial detriment of the assets of the trust.
The Objections also describe various background transactions, including that AIM was founded in 1992; that in or about 2001, Ashbridge Corporation was induced to make cash transfers to AIM in a variety of ways; and that in or about April 2010, a private wealth management and family services company acquired the assets of AIM with consideration to have been delivered around April 2013 based on the performance of the AIM assets. The Objections only refer to the actions of Grace, Ashbridge Corporation, and AIM. Ashbridge Corporation's successor entity, the Defendant, is not mentioned even once.
Although the dispute primarily concerns the Objections, Grace also sought reimbursement of expenses from the Defendant before the Objections were filed. On June 8, 2011, Grace purportedly provided an undertaking to the Defendant as required by Section 10.4 of its operating agreement; however, Grace does not explain why or upon what grounds he sought advancement and indemnification on that occasion. On December 23, 2011, counsel to Defendant's Board of Managers (the "Board") wrote to Defendant's long-time outside counsel ("Reed Smith") stating the Board would not pay Reed Smith for legal services performed after June 15, 2011, and that Reed Smith had represented both Defendant and Grace without obtaining the informed consent of the Board.
After retaining new counsel, Grace contacted the Board's counsel again in November 2012 regarding advancement and indemnification. On December 6, 2012, the Board's counsel advised the Board that it was not obligated to authorize advancement and indemnification to Grace. At the December 19, 2012 meeting of the Board, it declined to consider Grace's request for advancement and indemnification.
On February 22, 2013, Grace filed a laconic initial complaint in this Court seeking advancement and indemnification under Ashbridge LLC's operating agreement. In response, the Defendant sought a more definite statement which might clarify the theory under which Grace claimed his entitlement to advancement and indemnification. Grace filed a Verified Amended Complaint on April 12, 2013 (the "Amended Complaint") and on that same day provided a hand-delivered undertaking for expenses in the Orphans' Court Proceeding, this current action, a failed mediation, and "any other litigation claims asserted against [Grace] by [the Beneficiary Objectors]."
Defendant Ashbridge LLC moved to dismiss the Amended Complaint for failure to state a claim upon which relief can be granted. Earlier this month, Grace moved for leave to file a verified amended and supplemented complaint (the "Motion to Supplement") based upon additional developments in the Orphan's Court Proceeding.
Grace argues he is entitled to advancement and indemnification under Section 10.4 of Ashbridge LLC's operating agreement for attorneys' fees and other costs in this Delaware action and in the Orphans' Court Proceeding. Grace further asserts he is entitled to indemnification for "other expenses in a mediation that was conducted pursuant to leave granted by the Judge of the Orphans' Court Division" and that his "substantive rights" to advancement and indemnification "are supported by" the bylaws of Ashbridge Corporation.
The Defendant argues that Grace has failed to state a claim for advancement or indemnification because he was made a party to the Orphans' Court Proceeding "by reason of the fact" that Grace is a co-trustee of the Residuary Trust and that Defendant's operating agreement does not extend advancement or indemnification rights to predecessor entities or affiliates. The Defendant further argues that Grace cannot seek indemnification or advancement for certain actions taken in his "personal, " as opposed to his "official, " capacity and that certain expenses Grace claims have not been identified or described in the Amended Complaint.
The Defendant has moved to dismiss Grace's Amended Complaint pursuant to Court of Chancery Rule 12(b)(6). In assessing such a motion, the Court
should accept all well-pleaded factual allegations in the Complaint as true, accept even vague allegations in the Complaint as "well pleaded" if they provide the defendant notice of the claim, draw all reasonable inferences in favor of the plaintiff, and deny the motion unless the plaintiff could not recover under any reasonably conceivable set of circumstances susceptible of proof.
The reasonable conceivability standard asks whether there is a "possibility" of recovery. However, the Court need not "accept conclusory allegations unsupported by specific facts or . . . draw unreasonable inferences in favor of the non-moving party." Failure to plead facts supporting an element of a claim precludes entitlement to recovery and constitutes grounds to dismiss that claim. Furthermore, "a claim may be dismissed if allegations in the complaint or in the exhibits incorporated into the complaint effectively negate the claim as a matter of law."
Limited liability companies are broadly authorized under 6 Del. C. § 18-108 to grant indemnification rights through their operating agreements. Similarly, the Delaware Limited Liability Company Act confers upon contracting parties "nearly unfettered contractual discretion in determining whether to grant advancement."When interpreting advancement and indemnification provisions in a limited liability company agreement, a Delaware court will follow ordinary contract interpretation principles. Thus, "[w]hen the language of a . . . contract is clear and unequivocal, a party will be bound by its plain meaning, because creating an ambiguity where none exists could, in effect, create a new contract with rights, liabilities and duties to which the parties had not assented . . ., "
A. Does Ashbridge LLC's Operating Agreement Require Advancement and Indemnification for Ashbridge Corporation or AIM?
Because the advancement and indemnification obligations of a limited liability company are determined by its operating agreement, the Court must evaluate Section 10.4 of the Defendant's operating agreement upon which Grace bases his claim. The Defendant argues Section 10.4 does not require indemnification for the Orphans' Court Proceeding because Grace requests advancement and indemnification for acts taken on behalf of predecessor and affiliate organizations, rather than for acts taken on behalf of Ashbridge LLC.
Because the Objections make allegations involving only Ashbridge Corporation and AIM, Grace must demonstrate that the Defendant's advancement and indemnification provision retroactively applies to predecessor entities or affiliates in order to prevail on his claims under Defendant's operating agreement. The plain language of the agreement prevents Grace from doing so. The pertinent terms of the operating agreement provide:
10.4 Indemnification. Any Person made, or threatened to be made, a party to any action or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such Person is or was (i) a Member or Manager, or (ii) an employee, officer, director, manager, shareholder or partner of the Company or any Member or Manager (collectively, the "Indemnified Persons"), shall be indemnified by the Company for any losses or damage sustained with respect to such action or proceeding, and the Company shall advance such Indemnified Person's reasonably related expenses to the fullest extent permitted by law. . . . The Company may indemnify other Persons of the Company. . . . The Company shall pay the expenses (including attorneys' fees and disbursements) incurred in good faith by an Indemnified Person in advance of the final disposition of any action or proceeding, upon receipt of an undertaking by or on behalf of the Indemnified Person to repay the amount if it is ultimately determined that such person is not entitled to be indemnified by the Company pursuant to this Section 10.4. . ., 
The operating agreement defines "the Company" to encompass only Ashbridge LLC,  and such definition does not include predecessor entities. Thus, under the plain terms of the agreement, Grace must plead that he held a specific office or otherwise had a relationship with Ashbridge LLC or with one of its managers or members. The Objections for which Grace claims he is entitled to advancement and indemnification do not mention Ashbridge LLC, but instead assert various acts of mismanagement related to Ashbridge Corporation and AIM.
The plain language of Defendant's operating agreement requires a party seeking advancement or indemnification from Ashbridge LLC to demonstrate some relationship to the limited liability company. The allegations in the Objections do not even mention the Defendant, and thus the plain language of Section 10.4 does not require advancement or indemnification for the Orphans' Court Proceeding.
Case law supports this result. Successor corporate entities are generally not liable for the actions of the corporate officers of predecessor entities or affiliates, when a fundamental change in identity has occurred. For the purposes of advancement and indemnification, Delaware law considers a conversion from a limited liability company to a corporation to be a "fundamental change in identity." Underpinning this conclusion is the logic that "[l]imited liability companies and corporations differ in important ways, most pertinently in regard to indemnification: mandating it in the case of corporate directors and officers who successfully defend themselves, but leaving the indemnification of managers or officers of limited liability companies to private contract." Thus, the Bernstein court held that a party seeking advancement, who was a former manager of the limited liability company and current director of the corporation, was only entitled to advancement under the terms of the corporation's bylaws. The bylaws did not retroactively create such a right for that person during his tenure as a member of the predecessor limited liability company.
The logic motivating Bernstein is dispositive here as well. The change of the entity from Ashbridge Corporation to Ashbridge LLC was a fundamental change in identity. The advancement and indemnification scheme of Ashbridge Corporation's bylaws was re-written into contractual terms in Ashbridge LLC's operating agreement in a manner that substantially altered the rights and obligations of the parties. Thus, the same result reached in Bernstein applies here, and "[t]his court will not rewrite a contract by reading words into it that the parties clearly did not intend." The Court will therefore not impose retroactive obligations on a limited liability company when the plain language of its operating agreement would not permit predecessor or affiliate liability and when the indemnification schemes of the predecessor corporation and successor limited liability company differ.
B. Grace's Additional Arguments Are Unpersuasive
Grace makes additional arguments that do not salvage his claims. Grace first explains that the series of cases including Homestore Reddy and Percontf articulates the broad nature and outer limits of the phrase "by reason of the fact" as used in Delaware advancement and indemnification claims. He then argues that because Ashbridge LLC uses the same term of art, it follows that Grace is entitled to indemnification. Unfortunately, Grace's accurate recitation of Delaware law fails to acknowledge the important counterpoint to these broad rights: that Delaware law allows entities to limit the scope of advancement and indemnification rights as well. Grace's argument fails because he only describes the state of the law if an entity does not tailor its advancement or indemnification provision. He does not explain how Section 10.4 entitles him to a remedy when Defendant's operating agreement is narrower than the outer boundaries of the law.
Grace also argues that his substantive rights to advancement and indemnification are "supported by" the bylaws of Ashbridge Corporation and the operating agreements of Ashbridge Partners, LLC and Ashbridge LLC. This "supported by" language is not an allegation which pleads a sufficient basis for recovery under the predecessor corporation's bylaws. The Amended Complaint does not explain to the Court what it means to have rights of advancement and indemnification "supported by" a corporation's bylaws, and Grace fails to explain how those documents entitle him to relief under such provisions. The Defendant, when it moved for a more definite statement of facts, clearly identified the deficiencies in Grace's initial complaint. Grace, in amending his complaint, was given a full opportunity to plead his case completely. Grace did not avail himself of this opportunity, except to add a phrase to the Amended Complaint stating the rights of advancement and indemnification of the bylaws of Ashbridge Corporation are "virtually identical to the rights provided in Section 10.4" of Defendant's operating agreement.
Under Delaware's well-pleaded complaint standard, though a complaint need only provide "general notice of the claim asserted, " it is nonetheless true that "[conclusions . . . will not be accepted as true without specific allegations of fact to support them." Grace's argument that certain rights are "supported by" Ashbridge Corporation's bylaws is likely deficient because it fails to provide general notice of the claim asserted, though the Court's conclusion does not depend on this analysis. Grace's "supported by" language is conclusory and is not supported by specific allegations of fact explaining how Grace complied with the advancement and indemnification provisions of the Ashbridge Corporation bylaws.
Plaintiffs "virtually identical" language in the Amended Complaint also fails to state a claim. The exhibit incorporated into the complaint negates Grace's claim that Ashbridge Corporation's bylaws are "virtually identical" because even a cursory comparison of the two texts reveals that they are different in a number of respects. Thus, the Court must dismiss Grace's claim based upon the predecessor entity's bylaws.
Plaintiffs "supported by" statements are best understood as Grace's attempt to "have it both ways." His submissions to the Court appear to reflect a desire to avoid providing the substance of Ashbridge Corporation's bylaws, while seeking to preserve some opportunity to argue the point in subsequent briefings should Grace later find it to be expedient.
Finally, in a supplemental brief submitted to the Court, Grace asserts that two of the objections were stayed in the Orphans' Court Proceeding because the court there lacked jurisdiction over issues which would determine the internal affairs of business entities. Grace therefore argues that he could not have been made party to the Orphans' Court Proceeding as a result of his role as one of the trustees of the Residuary Trust. This argument is also unavailing. Although the Court does not necessarily agree with Grace's conclusions, even if Grace's characterization is correct, it does nothing to contradict the clear language of Ashbridge LLC's operating agreement requiring a claim related to Defendant rather than its predecessor entity or affiliates.
The Court may grant a motion to dismiss where the exhibits incorporated into the complaint effectively negate the claim as a matter of law. Because the operating agreement under which Grace claims advancement and indemnification does not, by its unambiguous language, grant him the relief he seeks, the Court grants Ashbridge LLC's motion to dismiss all claims arising out of the Orphans' Court Proceeding.
C. Must Ashbridge LLC Indemnify Grace for the Mediation?
Grace claims he is also entitled to indemnification under Defendant's operating agreement for a mediation that he has not described. Grace is not entitled to relief on this claim because he has not pleaded any facts explaining his entitlement to relief or provided notice of his claims to Defendant. His Amended Complaint fails to describe the mediation or to make the vaguest of allegations about the factual circumstances underlying it. The first time Grace even mentions the undescribed mediation is in Count I in which he states in a conclusory manner that he is entitled to expenses for the mediation. The Court need not accept these conclusory allegations unsupported by specific facts and thus dismisses this claim as well.
D. Must Ashbridge LLC Pay Costs Related to the Delaware Action?
Because Grace is, as a matter of law, not entitled to advancement and indemnification under the unambiguous terms of the operating agreement and because his allegations surrounding the mediation fail to state a claim, he cannot recover for the costs incurred in pursuing this action.
E. Grace's Amended and Supplemented Complaint Fails to State a Claim
On December 12, 2013, Grace moved to amend and supplement his Amended Complaint. Court of Chancery Rule 15(d) permits the Court to allow a "party to serve a supplemental pleading setting forth transactions or occurrences or events which have happened since the date of the pleading sought to be supplemented, " if such supplemental claims "relate to the original claims." Because leave to supplement or amend "[a]s a general rule, ... is freely given, "and because the Defendant does not oppose the motion,  the Court grants Grace's motion. However, for the reasons that follow, his amended and supplemented complaint also fails to state a claim.
This is so because the additional information he seeks to submit does not alter the Court's analysis or conclusions set forth above. In the Motion to Supplement, Grace argues that the petition to lift stay and for leave to file amended objections filed by the Beneficiary Objectors on October 2, 2013 in the Orphan's Court Proceeding is material to the instant litigation. This is so because, "although [the petition] disingenuously denies that the claims asserted against the Plaintiff concern 'the internal affairs of Ashbridge LLC, ' [it] impliedly concedes that the claims stated by the [Beneficiary Objectors] against the Plaintiff would ordinarily be the subject of a shareholders [sic] derivative action . . ., " Grace also attaches proposed Exhibits H-K to be submitted with his proposed amended and supplemented complaint. Grace does not request any modification to Count I or Count II of the Amended Complaint.
Grace's Motion to Supplement has two primary shortcomings. First, Grace has only directed the Court to proposed amendments to the Objections, which were denied by the Pennsylvania court. Thus, the Objections to which Grace initially directed the Court remain the Objections for which advancement and indemnification are sought. The Court need not rely on this particular issue to determine that Grace's amended and supplemented complaint fails to state a claim. The second, dispositive problem with Grace's updated complaint is that nothing within the Beneficiary Objectors' proposed objections mentions Ashbridge LLC.The proposed objections are limited to issues related to Ashbridge Corporation and AIM. Thus, even if they were accepted in the Pennsylvania proceeding, Grace's modified complaint fails to state a claim. He again has not demonstrated some connection between the proposed objections and the Defendant. Grace also declined to plead a theory of successor liability based on a connection to Ashbridge Corporation.
Because the exhibits and additional allegations of fact attached to or contained within Grace's proposed amended and supplemented complaint fail to state a claim under a reasonable conceivability standard, though Grace's motion to supplement is granted, his modified complaint is nonetheless dismissed.
For the reasons set forth above, the Court grants Grace's motion to supplement and grants Ashbridge LLC's motion to dismiss. An implementing order will be entered.