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2009 Caiola Family Trust v. PWA, LLC

Court of Chancery of Delaware

April 30, 2014

2009 CAIOLA FAMILY TRUST, a New Jersey trust, and LOUIS CORTESE, Plaintiffs,
v.
PWA, LLC, a Kansas limited liability company, and WARD KATZ, Defendants, and DUNES POINT WEST ASSOCIATES, LLC, a Delaware limited liability company, Nominal Defendant.

Date Submitted: January 10, 2014

Kurt M. Heyman, Esq., Patricia L. Enerio, Esq., Dawn Kurtz Crompton, Esq., PROCTOR HEYMAN LLP, Wilmington, Delaware; Gary M. Fellner, Esq., Michael J. Naporano, Esq., PORZIO BROMBERG & NEWMAN P.C., New York, New York; Attorneys for Plaintiffs.

Thomas E. Hanson, Jr., Esq., Patricia A. Winston, Esq., MORRIS JAMES LLP, Wilmington, Delaware; Attorneys for Defendants.

MEMORANDUM OPINION

PARSONS, Vice Chancellor.

This case involves a dispute over the management and control of a limited liability company created to own and operate a multifamily apartment complex in Kansas. The plaintiffs are the non-managing members of the LLC and own a 90% interest in the company. The defendants are an entity that is the managing member of the LLC, with a 10% interest in the company, and that entity's own managing member, an individual residing in Kansas. An affiliate of the LLC's managing member began serving as property manager of the apartment complex shortly after the LLC's formation. The plaintiffs attempted to replace the affiliate as property manager through a majority vote of the non-managing members, but the managing member refused to comply with the outcome of that vote on the grounds that the non-managing members lacked the requisite authority.

The LLC's operating agreement grants primary managerial authority to the managing member but grants certain other rights to the non-managing members, the full scope of which is contested by the parties. The parties have cross-moved for summary judgment as to the proper interpretation of a key provision of the LLC's operating agreement. The plaintiffs argue that provision gives the LLC's non-managing members the indirect authority to mandate that certain actions be taken—including terminating and replacing the property manager—through a majority vote of the non-managing members. Based on that interpretation, the plaintiffs contend that the managing member's failure to comply with the non-managing members' vote to terminate the property manager constituted a breach of the operating agreement and provided grounds for removing the managing member for cause under the agreement. The defendants vehemently oppose the plaintiffs' proposed interpretation and argue that the relevant provision only grants the non-managing members a limited veto power and that the managing member's decision not to terminate the property manager is not grounds for the managing member's removal. For the following reasons, I conclude that the defendants' interpretation of the disputed provision is correct and grant summary judgment in their favor on that specific issue.

I. BACKGROUND

A. The Parties

Nominal Defendant, Dunes Point West Associates, LLC ("Dunes Point" or the "Company"), is a Delaware limited liability company formed on August 9, 2006. Dunes Point owns and operates the Point West Apartments (sometimes referred to as the "Project")—a 172-unit multifamily apartment complex in Lenexa, Kansas.

Plaintiff 2009 Caiola Family Trust ("CFT") is a New Jersey trust. Plaintiff Louis Cortese is an individual residing in New York and the trustee of CFT. CFT and Cortese (collectively, "Plaintiffs" or the "Caiola Group") are the sole non-managing members of Dunes Point and, together, own 90% of the total member interests in Dunes Point.[1]

Defendant PWA, LLC ("PWA") is a limited liability company organized under the laws of Kansas. PWA is the sole managing member of Dunes Point and holds the remaining 10% interest in the Company.

Defendant Ward Katz is an individual residing in Kansas and is the managing member of PWA. Katz is also the sole owner of nonparty Dunes Residential Services, Inc. ("DRS"), a Texas company and affiliate of PWA. DRS was the property manager of Point West Apartments from August 14, 2006 through August 31, 2013.

B. Facts[2]

1. Dunes Point's formation and structure

Dunes Point was formed on August 9, 2006 for the purpose of acquiring and operating the Point West Apartments. Dunes Point had three initial members: (1) PWA; (2) NDC Point West LLC ("NDC"); and (3) Block Investment Group Point West LLC ("Block Investment"). PWA owned a 10% interest in Dunes Point, NDC owned a 12% interest, and Block Investment owned the remaining 78% interest. These members entered into an initial operating agreement in August 2006.

On November 28, 2006, Block Investment assigned all of its interest in Dunes Point to Cortese and nonparty Louis S. Caiola, who then both became members of the Company. On the same day, the Amended and Restated Operating Agreement of Dunes Point (the "Operating Agreement" or the "Agreement") was executed. The Agreement sets forth the rights, duties, and obligations of Dunes Point's members and governs the structure and operation of the Company.

2. Management of the Company

The Operating Agreement designates PWA as the "Managing Member." [3] Article 6 of the Operating Agreement governs control and management of Dunes Point. Section 6.1 grants the Managing Member primary managerial control over the Company. In relevant part, that section states:

Except as otherwise provided in this Agreement and subject to Section 8.4, the Managing Member shall have sole and exclusive control over the Company and the power and authority to take such actions from time to time as the Managing Member may deem to be necessary, appropriate or convenient in connection with the management and conduct of the business and affairs of the Company.

Section 6.1 also grants the Managing Member the authority to execute all agreements, contracts, and other instruments on behalf of the Company. Section 8.2 further specifies that "[e]xcept as otherwise provided in this agreement, the Managing Member shall have all of the rights and powers granted to a manager under the Act, " which is defined in the recitals to the Agreement as the Delaware Limited Liability Company Act.[4]

All members of Dunes Point other than PWA qualify as "Non-Managing Members." [5] The Operating Agreement also designates Caiola and Cortese as "Investment Members." [6] Section 6.2 of the Operating Agreement prohibits Non" Managing Members from participating in the management of the Company. Specifically, that section states:

Except as otherwise provided in this Agreement or under the Act, the Non-Managing Members shall not have the obligation or the right to take part, directly or indirectly, in the active management or control of the business of the Company, and the Non-Managing Members shall not have the right or authority to act for or bind the Company.

Section 3.8 reiterates the restrictions set forth in Section 6.2, stating that "[e]xcept as otherwise expressly provided in this Agreement, the Non-Managing Members . . . shall not participate in making the decisions of the Company or have the power to manage or transact any Company business or act for or in the name of, or otherwise bind, the Company." Section 3.8 further specifies that "[i]t is the intent of this Agreement that in no event shall any Non-Managing Member be exposed to liability as a manager under the Act." In that regard, Section 3.8 provides that "to the extent that any provision of this Agreement would create any such exposure such provision shall be deemed to be stricken from this Agreement."

Although the Agreement grants broad authority to the Managing Member and expressly limits the authority of the Non-Managing Members, it also provides the Non-Managing Members with some important rights. Section 8.4(a) of the Operating Agreement states in relevant part:

The prior written approval of a Majority Vote of the Non-Managing Members shall be required for the Company to take, or enter into any agreement to take, any of the following actions, and the Managing Member will use all commercially reasonable efforts to carry out and implement any of the following decisions approved by a Majority Vote of the Non-Managing Members . . . .

The items constituting the "following actions" include various significant actions the Company might take, such as approving, modifying, or cancelling the Company's annual business plan, borrowing or investing significant sums outside of the ordinary course of business, selling all or substantially all of the assets of the Company, and suspending or terminating the operation of the Project.[7]

The Agreement defines "Majority Vote of the Non-Managing Members" as "the affirmative vote of Non-Managing Members then entitled to vote whose aggregate Percentage Interests . . . are greater than fifty percent (50%) of the total Percentage Interests of all Non-Managing Members then entitled to vote." [8] That definition also states that a "Majority Vote of the Non-Managing Members" may be called by the Managing Member, NDC, or a majority vote of the Investment Members. Section 8.4(f) of the Operating Agreement further provides that, at any time, "NDC or the Investment Members [by majority vote] shall have the right to call for either a meeting of the Members or a vote by the ...


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