February 26, 2015
3850 & 3860 Colonial Blvd., LLC
Date Submitted: October 3, 2014.
Joel Friedlander, Esquire Christopher M. Foulds, Esquire Friedlander & Gorris, P.A.
R. Montgomery Donaldson, Esquire Polsinelli PC.
Plaintiff was a seed investor in a limited liability company ("LLC"). The company's sole director pursued a recapitalization that reduced Plaintiff's economic interest. Later, the director oversaw the company's conversion into a corporation. Plaintiff brings fiduciary duty and contractual claims against the director and the corporate successor to the company. Before the parties can reach the merits of their dispute, the proper forum for resolving the claims must be established. The company's operating agreement provides for arbitration (following mediation); the successor corporation's charter calls for litigation in this Court. Defendants have moved to dismiss this action for lack of subject matter jurisdiction under Court of Chancery Rule 12(b)(1) because arbitration is required and provides an adequate remedy.
Defendant Christopher E. Griffin ("Griffin") formed Rubicon Media, LLC ("Rubicon LLC") in 2007 as part of a plan to build a business combining social networking and online betting in international markets. Plaintiff 3850 & 3860 Colonial Blvd., LLC ("Colonial" or the "Plaintiff") contributed to that effort.Griffin, the sole director and managing member of Rubicon LLC, later arranged for its conversion into a corporation, Defendant Rubicon Media, Inc. ("Rubicon Inc., " and collectively with Griffin, the "Defendants"), in March 2013.
Griffin planned to use funds raised by Rubicon LLC to acquire a majority interest in Collisse Group Limited ("Collisse") and operate through a Collisse subsidiary named Betable, Ltd. ("Betable"). Colonial invested $500, 000 in July 2008 and obtained a 7% interest in the Class A units of Rubicon LLC. The initial seed round left Griffin with 76.9% of the Class A units of Rubicon LLC, corresponding to a 76.1% economic interest in Collisse. In 2011, Griffin decided to pursue a different business strategy.
In connection with this new strategy, Griffin made changes to Rubicon LLC's capital structure. At some point in 2011, Betable (or Collisse) returned a $3 million investment to a venture capital firm. Later, on November 30, 2011, Griffin effected a recapitalization, creating Recap A Common Units and Recap B Common Units ("Recap A" and "Recap B, " respectively). The Recap A had an aggregate liquidation preference of $200, 000 and no part of any other distributions. The Recap B shared "operating distributions and any distributions from any sale, liquidation, merger or other capital transactions" exceeding the $200, 000. Griffin received 96% of the Recap B, and the other shareholders received a combination of 100% of the Recap A and 4% of the Recap B. Griffin also approved the Second Amended and Restated Limited Liability Company Agreement of Rubicon Media LLC, dated November 30, 2011 (the "New LLC Agreement"). Despite language in the Amended and Restated Limited Liability Company Agreement of Rubicon Media LLC (the "Old LLC Agreement"), Colonial was not given the option to consent to these changes.
Colonial received notice of the recapitalization through a November 5, 2012, letter from Griffin. The letter claimed that "Betable was not a viable business model" and that the $200, 000 liquidation preference had origins in an "independent 3rd party valuation" of Collisse's remaining assets, conducted in connection with the redemption of the venture capital firm's shares. Griffin claimed to have conducted the recapitalization "in lieu of liquidating the remaining assets and dissolving the company." He did not mention significant business developments postdating the recapitalization.
Griffin sent another letter to investors in October 2013 to inform them of an initial closing of a "[f]inancing in March 2013, [in which] the new Series A investors required Rubicon Media LLC to convert from a limited liability company into a corporation." The letter also made several claims relating to the earlier recapitalization, including that (1) an independent valuation "valued the entire company at approximately $100, 000 to $150, 000" and (2) "[f]rom the time of the reorganization forward, Rubicon Media began a completely new business with a new business model, new employees, new licenses and new technology." Griffin also provided a copy of the Amended and Restated Certificate of Incorporation of Rubicon Inc., dated July 3, 2013 (the "Certificate of Incorporation"), and stock certificates.
The incorporation changed certain rights of investors. In particular, Rubicon LLC had adopted a dispute resolution process of arbitration preceded by mediation; Rubicon Inc. implemented a litigation-only approach. Article Twelfth of the Certificate of Incorporation designates this Court as the exclusive forum for dispute resolution (the "Charter Provision"):
Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery in the state of Delaware will be the sole and exclusive forum for any stockholder . . . to bring . . . any action asserting a claim of breach of fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation's stockholders . . . or . . . any action asserting a claim against the Corporation, its directors, officers or employees governed by the internal affairs doctrine, except for . . . which the Court of Chancery does not have subject matter jurisdiction.
The corresponding provision in the LLC Agreements (the "LLC Provision") calls for mediation, followed by arbitration:
11.10.1 Mediation/Arbitration. In the event of any dispute arising under or relating to this Agreement, the parties hereby agree to mediate any such dispute before a mediator from Judicial Dispute Resolution, LLC or Judicial Arbitration and Mediation Services [("JAMS")] in New York, New York. If the dispute is not resolved within sixty (60) days from the request for mediation, such dispute shall be submitted to arbitration under the Commercial Arbitration Rules before an arbitrator appointed by the American Arbitration Association [(the "AAA")] in New York, New York.
11.10.2 Jurisdiction and Venue. Any mediation, arbitration or lawsuit involving any dispute or matter arising under this Agreement may only be brought before the appropriate tribunal or court in Sussex County, Delaware.
Plaintiff commenced litigation, and not mediation or arbitration, by filing its Complaint in this Court. Plaintiff seeks reformation of Rubicon Inc.'s capital structure to restore it to its position before the recapitalization, as well as rescissory damages against Griffin. Defendants have moved to dismiss the Complaint for lack of subject matter jurisdiction.
In the Complaint, Plaintiff alleges that Griffin (1) breached his fiduciary duties of loyalty and care as a director and manager of Rubicon LLC by effecting the recapitalization; (2) breached the Old LLC Agreement through "conferr[ing] upon himself equity interests to which he was not entitled" and amending the Old LLC Agreement to reduce distributions to Colonial without its consent; and (3) breached his fiduciary duties of loyalty, care, and candor as an officer and director of Rubicon Inc. through the October 2013 letter making "false and misleading statements in bad faith to effectuate his scheme of seizing the upside of the seed investors' investment." Rubicon Inc. presumably has been made a party because Plaintiff seeks reformation of its capital structure.
Defendants contend that the Court must dismiss the Complaint for lack of subject matter jurisdiction because the parties agreed to arbitrate, including arbitration of issues of substantive arbitrability. They submit that the LLC Provision "potentially" applies as the dispute is "based entirely around a single transaction entered into by Rubicon LLC." They also highlight the LLC Provision's broad language on arbitration and its specific reference to the AAA rules.
Plaintiff, in contrast, asserts that this Court is the sole and proper forum for its Complaint. Plaintiff emphasizes that there is no presumption in favor of arbitration when, as an initial matter, it is unclear that the parties have agreed to arbitrate. To that end, Plaintiff highlights the Charter Provision because "[t]he relief sought for all counts is 'against the Corporation' and all counts are 'governed by the internal affairs doctrine.'" According to Plaintiff, the forum selection clause that Griffin "caused Rubicon Inc. to adopt" serves to "ensur[e] that all claims affecting the current stockholders of Rubicon Inc. are litigated in the Court of Chancery, regardless of when the claims arose." Plaintiff also argues that the Charter Provision superseded the earlier adopted, conflicting LLC Provision "[a]s a matter of contract law." Finally, Plaintiff claims that the Court must resolve any substantive arbitrability dispute because the LLC Provision has been superseded, is "internally inconsistent" regarding venue, and does not specify rules guiding a mediator. * * * * *
A. The Motion to Dismiss Standard
Pursuant to Court of Chancery Rule 12(b)(1), this Court will dismiss a complaint if it lacks subject matter jurisdiction based on the record. "The party seeking a court's intervention bears the burden of establishing the court's subject matter jurisdiction, and the court may consider evidence outside the pleadings in resolving that issue." One reason why the Court might lack subject matter jurisdiction is that the parties have agreed to arbitrate the dispute."[A] Rule 12(b)(1) motion will be granted if the parties contracted to arbitrate the claims asserted in the complaint."
B. Does the Court Have Jurisdiction Over Plaintiff's Claims?
1. The Standard for Determining Substantive Arbitrability
Arbitration rights are created by contract, and where there is a dispute about whether the parties have an agreement to arbitrate, it is generally a decision for a court. There is a presumption "that the parties intended issues of substantive arbitrability to be decided by a court." One can rebut the presumption, however, with "evidence that the parties 'clearly and unmistakably' intended otherwise."Under the test established in Willie Gary, this evidence is found "where the arbitration clause generally provides for arbitration of all disputes and also incorporates a set of arbitration rules that empower arbitrators to decide arbitrability." Yet even if these two elements are met, the Court must resolve issues of substantive arbitrability if the party seeking to avoid arbitration makes "a clear showing that its adversary has made essentially no non-frivolous argument about substantive arbitrability." The Court's analysis of whether there is any non-frivolous argument is limited-"a court must not delve into the scope of the arbitration clause and the details of the contract and pending lawsuit." Once the Court has found an agreement to arbitrate, "Delaware courts generally favor arbitration of particular disputes and 'ordinarily resolve any doubts in favor of arbitration.'"
2. Is There an Enforceable Agreement to Arbitrate?
Plaintiff contends that the Charter Provision is the operative agreement and that there is no agreement to arbitrate its claims. Defendants argue that the LLC Provision embodies the agreement to arbitrate issues of substantive arbitrability (not to mention the entire dispute). As with standard contract analysis, the Court looks for guidance in the text of the organizational documents offered by the parties. If a contract is not ambiguous, the Court gives effect to its plain meaning. "[A] new contract, as a general matter, will control over [an] old contract with respect to the same subject matter to the extent that the new contract is inconsistent with the old contract or if the parties expressly agreed that the new contract would supersede the old one." Courts, however, have found that arbitration provisions can continue to apply to actions taken while the original contract was effective, even if the original contract has since been replaced by another. Furthermore, there may be circumstances when a prior entity agreement continues to govern the rights and obligations of a signatory and a successor entity despite the existence of a new entity agreement.
Here, the LLC Agreement and the Certificate of Incorporation are the critical documents. Based on a plain reading of the agreements, the Court cannot find that the Charter Provision supersedes the LLC Provision with respect to the resolution of disputes related to the recapitalization. First, there is no language explicitly replacing the LLC Provision with the Charter Provision. Second, although they use broad mandatory language and might have some overlap, the LLC Provision and the Charter Provision maintain independent existence to the extent that (generally speaking) they relate to the LLC Agreement and corporate governance, respectively. Of course, the internal affairs of an LLC can be governed by Delaware law, and Colonial, a shareholder, is filing suit against both Rubicon Inc. and an individual who happens to be Rubicon Inc.'s fiduciary. These observations, however, do not mean that the Charter Provision applies to claims about the internal affairs of Rubicon LLC or the duties its fiduciaries owed during the recapitalization. Thus, the parties have an enforceable agreement to arbitrate for purposes of the pending motion.
3. Does the LLC Provision Meet the Willie Gary Test?
Given the agreement, the next question is whether issues of substantive arbitrability are for the Court or an arbitrator to decide. Defendants submit that the LLC Provision offers clear evidence that the parties agreed to arbitrate the arbitrability of Plaintiff's claims. The arbitration test in Willie Gary, mentioned above, finds this clear and unmistakable evidence when the parties have an agreement that "generally provides for arbitration of all disputes" and refers to arbitration rules empowering the arbitrator to decide arbitrability. The LLC Provision directs the parties to arbitrate "any dispute arising under or relating to this [LLC] Agreement" and specifies that arbitration will be governed by "the Commercial Arbitration Rules" of the AAA. This Court has found "arising out of or relating to" language sufficiently broad to meet Willie Gary's first prong,  and the AAA's Commercial Arbitration Rules empower an arbitrator to rule on jurisdiction. On its face, the LLC Provision meets the preliminary test for arbitration, which would take the substantive arbitrability analysis from the Court.
Plaintiff maintains that the LLC Provision does not "clearly and unmistakably" show an agreement to arbitrate arbitrability because of facially conflicting language about venue and a requirement to pursue mediation before arbitration. More specifically, Section 11.10.1 of the LLC Agreement provides for "arbitration . . . before an arbitrator appointed by the [AAA] in New York, New York" and Section 11.10.2 mandates an "appropriate tribunal or court in Sussex County, Delaware." However, this is not a situation "where there are various dispute resolution clauses in play in various contracts, [and] it is impossible to select one and say it applies generally to all disputes." Some confusion about geographical location in this matter does not compel the Court to ignore an otherwise clear agreement that provides for arbitration generally, including the arbitration of arbitrability. In Riley v. Brocade Communications Systems, Inc., for example, this Court confronted the question of whether its finding that the parties must submit their debate over arbitrability to JAMS required the parties to proceed in the location named by the relevant agreement-as opposed to another location where JAMS had an office. The Court left the decision to the arbitrator.
Additionally, simply because the agreement calls for mediation before arbitration (and there are no rules for how a mediator will determine her jurisdiction) does not preclude a finding of an agreement to arbitrate arbitrability.Plaintiff has not offered authority suggesting otherwise. Perhaps the parties must wait sixty days before arbitrating arbitrability. Regardless, the Court is not persuaded that a commitment to mediate first nullifies the arbitration language in the LLC Provision.
Although the LLC Provision facially satisfies the elements discussed in Willie Gary, the Court still must determine whether Plaintiff has shown that "its adversary has made essentially no non-frivolous argument about substantive arbitrability." It would not make sense, for example, to require arbitration on arbitrability "if Company A and Company B entered an emergency-vehicle purchase agreement containing a broad arbitration clause that referenced the AAA Rules" and later disagreed about "a business tort claim stemming from a different nucleus of operative facts." Nonetheless, the Court must be careful not to conflate this analysis with the ultimate question of "whether the underlying claims relate to or arise out of the agreement."
At oral argument, Plaintiff suggested that Defendants lack a non-frivolous argument for arbitration because Plaintiff's claims fall within the plain language of the Charter Provision. However, the lines are not that clear-cut. Counts I and II allege Griffin's breach of fiduciary duties and breach of contract as a manager and director of Rubicon LLC. It is at least colorable that these claims against Griffin relate to the agreement memorialized in the LLC Provision. It is tempting to differentiate the claims against Griffin in Count III because the October 2013 letter postdates incorporation. Nevertheless, Defendants argue that the LLC Provision governs because Count III is better viewed as a dispute about the "efficacy of the Recapitalization" than as "a single incident of alleged post-Conversion conduct."At this point, it is unclear whether the alleged cover-up was a continuation of the pre-incorporation conduct or a separate act,  and there is no liability for Count III unless Griffin's conduct in the recapitalization was wrongful. Plaintiff has not established that there is no non-frivolous argument about substantive arbitrability as against Griffin; thus, an arbitrator must decide whether Plaintiff's claims are arbitrable.
4. Does Rubicon Inc. Have a Duty to Arbitrate?
The argument for requiring Rubicon Inc. to arbitrate the dispute generally or to arbitrate arbitrability is more complex. Rubicon Inc. never signed an agreement to arbitrate. It is a defendant primarily because of Griffin's conduct before incorporation; it was not in existence when the offending recapitalization occurred. On the other hand, no liability could be imposed (even for the post-incorporation letter) unless the recapitalization (implemented during the time of Rubicon LLC) was improperly carried out.
As the Court noted in Bernstein v. TractManager, Inc., "rights created by the LLC's operating agreement may be enforced against the corporation into which the LLC was converted." Invoking 6 Del. C. § 18-216(h), the Court did not have difficulty finding that indemnification rights in an LLC agreement survived a conversion (although that was not the primary issue in contention). In Dasher v. RBC Bank (USA), the Eleventh Circuit observed "that where terms have been applied retroactively, contractual language explicitly authorized that result."Before distinguishing the contractual language relevant to the case before it, the Eleventh Circuit entertained the possibility that an arbitration clause in an agreement between defendant bank and plaintiff customer, effective when the alleged breaches occurred, continued to govern dispute resolution despite a superseding agreement between the bank's acquirer and the customer.Furthermore, this Court has reasoned that "Willie Gary requires that a signatory to an agreement vesting questions of substantive arbitrability to the arbitrator must resolve disputes about arbitrability against a non-signatory before the arbitrator, unless the signatory can show that the non-signatory's contention that the underlying dispute is arbitrable is wholly groundless." Decisions requiring arbitration of claims involving "affiliates of signatories" are "not unusual." It can be appropriate to require a non-signatory to comply with an agreement to arbitrate "'if so dictated by the ordinary principles of contract and agency.'"
Rubicon Inc. is (1) the principal of corporate director and officer Griffin and (2) the successor to Rubicon LLC, the principal of LLC director and manager Griffin. Requiring Rubicon Inc. to arbitrate the arbitrability of the claims brought against Griffin (and, technically, itself) for conduct that preceded incorporation is not inequitable or impermissible. Defendants have a colorable claim for arbitrating the arbitrability of these claims.
Perhaps Count III could be treated separately because Plaintiff is bringing suit against Rubicon Inc. for acts of its fiduciary occurring after the Charter Provision designated this Court as the exclusive forum for certain disputes.
Nonetheless, there is at least a colorable argument that Griffin's October letter was a part of his continuing scheme to take the value of Plaintiff's investment, a scheme that the LLC Provision possibly covers. Upon reaching this preliminary conclusion, the Court must cede to an arbitrator the question of whether Plaintiff must arbitrate its case against Rubicon Inc. The Court may not engage in a searching analysis of the scope of the arbitration agreement that it has found to be a binding contract.
Plaintiff has not persuaded the Court that Defendants' arguments in favor of substantive arbitration are frivolous; the Court should not delve into an analysis "[t]hat would turn Willie Gary on its head." The LLC Provision requires an arbitrator to decide issues of substantive arbitrability. The Court therefore stays proceedings on all counts pending a decision by the arbitrator on substantive arbitrability (and perhaps the merits of the dispute).
For the reasons above, Defendants' motion to dismiss is denied and proceedings in this Court are stayed pending arbitration.
IT IS SO ORDERED.
Very truly yours,
John W. Noble, Vice Chancellor.