JOSEPH M. CAPANO and AAMM TRUST, Plaintiffs,
LOUIS J. CAPANO, JR., LOUIS J. CAPANO, JR. INVESTMENTS, L.P. II, CAPANO INVESTMENTS, LLC, LOUIS J. CAPANO, III, MIDWAYCAP, LLC and CI TRUST, Defendants. GERARD J. CAPANO, Plaintiff,
LOUIS J. CAPANO, JR., CAPANO INVESTMENTS, LLC, CI TRUST and MIDWAYCAP, LLC, Defendants.
Date Submitted: January 14, 2014
Jeffrey L. Eichen, Esquire of Drinker Biddle & Reath LLP, Wilmington, Delaware, and Alan S. Fellheimer, Esquire of Fellheimer & Eichen LLP, Philadelphia, Pennsylvania, Attorneys for Plaintiffs.
Michael A. Weidinger, Esquire, Elizabeth Wilburn Joyce, Esquire, and Seton C. Mangine, Esquire of Pinckney, Weidinger, Urban & Joyce LLC, Wilmington, Delaware, Attorneys for Defendants.
NOBLE, Vice Chancellor
Two brothers, Louis and Joseph, owned (or effectively controlled) identical minority interests in a family limited liability company which held three real estate assets. Their mother transferred a portion of an interest in the company to a business trust for the benefit of a third brother, Gerry. Gerry had voting control over the trust, which granted him a tie-breaking vote and prevented either brother from obtaining unilateral control over the company. In 2000 and 2001, Louis and Gerry executed several documents purporting to grant Louis a voting proxy and an option to purchase Gerry's interest, and then to transfer Gerry's interest in the trust to Louis.
After the mother's recent death, Louis exercised the rights purportedly transferred to him by Gerry to complete a merger between the family company and an entity he controls and thereby cash Joseph out of the company. In separate complaints, collectively asserting twenty-seven counts, both Joseph and Gerry challenge the underlying transfers of Gerry's interests (voting and economic) in the company from the trust to Louis and in other ways attempt to disrupt the merger. Louis seeks the dismissal of all claims other than Joseph's challenge to the fairness of the merger.
The Court heard both motions to dismiss at the same time, and it determined that if any of Gerry's claims survived, the cases would be consolidated. Although many of Gerry's and Joseph's claims survive, certain claims for fraud are not averred with particularity and are dismissed. A few claims are barred by laches, Joseph lacks standing to challenge the conveyances made by Gerry to Louis, and Joseph has no claim to inspect books and records. Furthermore, Joseph abandoned several claims by ignoring them throughout briefing and oral argument, and they are therefore dismissed.
A. The Parties and the Events Leading to Louis's and Joseph's Divided Interest in the Family Company
Brothers Louis J. Capano, Jr. ("Louis"), Joseph M. Capano ("Joseph"), and Gerard J. Capano ("Gerry") are sons of Louis J. Capano, Sr. ("Louis Sr."). Louis Sr., Louis, and Joseph were equal partners in a Delaware partnership, "Capano Investments, " which acquired, improved, operated, and leased property in New Castle County, Delaware. The partnership acquired the Midway Shopping Center near Wilmington, Delaware on May 3, 1979. On February 28, 1980, Louis Sr. passed away and his partnership interest became part of his estate. Louis Sr.'s wife, Marguerite A. Capano ("Marguerite"), was the executrix of his estate and formed a trust, which held Louis Sr.'s partnership interest.
Joseph alleges that he and Louis had a strained relationship as far back as 1992 and thus they hired an intermediary to assist in a fair and equal allocation of certain Capano family assets between them. Joseph claims they reached agreement on a plan to divide the assets, which included those assets owned by Capano Investments. Joseph contends he only learned in 2013 that Louis did not intend to comply with this agreement.
Marguerite, as trustee of the trust holding Louis Sr.'s interest, through sale and assignment agreements, divided Louis Sr.'s interest among Louis Capano III ("Louis III"), Louis's son; AAMM Trust, a trust which has Anthony Capano ("Anthony"), Joseph's son, as its trustee; and a business trust ("CI Trust")created with Gerry as its beneficiary and with Daniel P. McCollom ("McCollom") serving as its trustee. CI Trust received a three percent interest in Capano Investments. Louis III and AAMM Trust each received half of Louis Sr.'s remaining interest of 30.3% of Capano Investments. After these transactions, Louis and Joseph each owned 33.33% of Capano Investments, Louis III and AAMM each owned 15.17%, and CI Trust owned 3%. In effect, Louis and Louis III thus controlled 48.5% of the partnership and Joseph and his son Anthony also controlled 48.5%. Gerry alleges CI Trust's 3% interest was to function as a "swing vote" if Louis and Joseph were deadlocked in some matter concerning Capano Investments.
On June 16, 2000, Capano Investments' partners converted the partnership to a Delaware limited liability company, Capano Investments, LLC ("CI-LLC" or the "Company"). The members and their respective ownership interests in CI-LLC were the same as those in Capano Investments.
B. The Documents Purporting to Grant Louis Control of CI Trust and Other Events Preceding the Merger
In 2000 and 2001, Gerry and Louis executed three different documents granting Louis an interest in CI Trust. Gerry and Louis executed two documents in 2000 granting Louis certain rights in CI Trust, although they are undated and the specific dates of execution have not been alleged. First, Gerry and Louis executed a document titled "Grant, " through which Gerry granted Louis an irrevocable proxy to direct CI Trust's trustee to vote its interest in CI-LLC (the "Power to Direct"). Second, they executed a document titled "Agreement, " through which Gerry granted Louis an option to purchase Gerry's interest in CI Trust if Gerry dies, if Louis is unable to exercise the Power to Direct as he wishes, or upon 60 days written notice to Gerry (the "Option").
In the Option, Louis acknowledged that no transfer could occur without the consent of CI Trust's trustee. The Option states that the purchase price for the interest in CI Trust was $100, 000 plus forgiveness of a $100, 000 advance made to Gerry by Louis to be paid upon closing, which would occur within 30 days of the date the Option was exercised. An additional hand-written provision providing for Louis to pay certain taxes was also added to the Option below its printed terms.Both the Power to Direct and the Option have "(SEAL)" printed next to the signature lines on which Gerry and Louis signed. The Power to Direct is also witnessed.
Gerry challenges the validity of both the Power to Direct and the Option for several reasons. One of these challenges relates to settlement payments owed to the family of Anne Marie Fahey ("Fahey"), based upon a wrongful death suit her family filed against all of the Capano brothers and certain of their companies.Fahey's family alleged that the Capanos conspired to thwart the investigation into Fahey's disappearance and death.
The suit was scheduled to go to trial in January 2001, but settled for an undisclosed amount. Gerry claims that Louis told him that Gerry's personal liability in the Fahey suit would require Gerry to come up with a few hundred thousand dollars, his share of the settlement. Gerry could not pay his share and already owed Louis $100, 000. Louis thus allegedly offered to forgive Gerry the $100, 000 he owed and to pay him an additional $100, 000 in exchange for an assignment of all right, title, and interest in and to CI Trust. Gerry apparently rejected the offer, but Louis made a counteroffer to supply the same consideration in exchange for only Gerry's leasing rights held through CI Trust. Louis apparently told Gerry that he wanted control over the Company's leases because he was concerned that Joseph would lease Company property to undesirable tenants, which would devalue the property and harm the Company.
Gerry asserts that in 2000, while the Fahey suit was still ongoing and had not yet settled, Louis preyed on Gerry's fears that he could not pay the settlement costs. Gerry does not recall signing the document,  especially not in the presence of a witness. He also says he relied on Louis's misrepresentation that he was only transferring leasing rights.
Gerry and Joseph further claim that the Option was never exercised. Even if it was, they assert that the Option and the Power to Direct are null and void because Gerry was not CI Trust's trustee in 2000 and its trustee was not a party to the agreements. Louis also never used the Power to Direct to direct the trustee to vote the interest. Additionally, Gerry alleges that Louis never paid a lump sum of $100, 000 for the Power to Direct and the Option and that Louis never used the Power to Direct in connection with leasing any Company property.
Joseph also wrote to Gerry at least twice during this time period; his letters demonstrate that strains existed among the three brothers. Joseph's first letter, dated September 15, 2000, hinted that Gerry seemed likely to go along with Louis on an unspecified "maneuver." Joseph wrote, "I have asked for nothing more than what was to happen five years ago" and also referenced past complaints Gerry had about Louis's lifestyle and behavior.
Joseph's second letter to Gerry, dated June 11, 2001, appears to have enclosed his first letter from September 2000, and stated "it was obvious Louis was buying you then and you took offense to my statement." Joseph continued, "[i]t's a shame that a couple hundred thousand dollars could sway you." He then proposed a "solution" to split two shopping centers and four office buildings equally between Joseph and Louis and asked Gerry to "split everything equally."
Several documents purporting to transfer Gerry's interest in CI Trust to Louis bear dates from December 2001. First, a document signed by Gerry and McCollom, dated December 1, 2001, evidences McCollom's resignation as CI Trust's trustee and appointment of Gerry to replace him. The next document is an almost identical agreement, but was signed by Gerry and Louis, through which Gerry resigned as CI Trust's trustee and Louis was appointed. The third document, signed only by Gerry, as trustee and beneficiary, purports to assign all of his right, title, and interest in CI Trust to Louis (the "Assignment of Interest").These last two documents are both dated December 25, 2001.
Plaintiffs allege a torrent of problems with these assignment documents in their complaints. First, they claim that Gerry signed the documents while inebriated at a Christmas party and that Louis took advantage of Gerry's intoxicated state to convince him to sign "some papers." Second, Gerry asserts "the documents appear not to have been dated at the time they were purportedly executed, " and both Gerry and Joseph claim the dates were later hand-written by Louis. Third, Gerry alleges Louis never paid any consideration for the assignment. Finally, Gerry and Joseph claim that the assignment was also invalid because it violated Delaware's law concerning spendthrift trusts and public policy, Marguerite's intent as a settler, and the terms of the trust itself.
Written consents executed in support of the merger indicate that Louis attempted to assign his interest to a Delaware limited partnership named Louis J. Capano, Jr. Investments L.P. II ("Louis L.P."). These consents purport to ratify the admission of Louis L.P. as a member of CI-LLC. Joseph asserts that no documents exist through which the Company's members consented to admit Louis L.P. as a member.
CI-LLC's operating agreement also contains a transfer restriction provision:
Except as provided below, no Member shall sell, assign, transfer, hypothecate, pledge, grant any security interest in, encumber or otherwise dispose of (hereinafter referred to collectively as "Transfer") all or any portion of his LLC Interest unless the Members by Majority Vote have consented thereto in writing. In the event of any Transfer of any LLC Interests in any manner, the transferee shall be deemed and shall be admitted as substitute Member only upon (i) the consent of Members by Majority Vote [and] (ii) the transferee's written agreement to be bound by this Agreement . . . . No transfer in violation of this Article VI shall be valid or effective . . . .
Joseph states that Louis must prove he complied with this provision when accepting CI Trust's interest and when he transferred his interest to Louis L.P.
C. The Merger
On February 4, 2013, Marguerite passed away, which precipitated an escalating series of events leading to the merger of CI-LLC into an entity Louis owned. On February 11, 2013, Joseph emailed a Company representative to ask for information on its properties, which included the Midway Shopping Center.The representative agreed to keep Joseph informed on future deals, but ...