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CSH Theatres, LLC v. Nederlander of San Francisco Associates

Court of Chancery of Delaware

April 21, 2015

CSH THEATRES, LLC, Plaintiff/Counterclaim Defendant,
v.
NEDERLANDER OF SAN FRANCISCO ASSOCIATES, Defendant/Counterclaim Plaintiff. NEDERLANDER OF SAN FRANCISCO ASSOCIATES, Third Party Plaintiff,
v.
CSH CURRAN, LLC, CAROLE SHORENSTEIN HAYS and JEFF HAYS, Third Party Defendants, and SHORENSTEIN HAYS-NEDERLANDER THEATRES, LLC, Nominal Defendant.

Submitted: December 3, 2014

Raymond DiCamillo, Esq., Blake K. Rohrbacher, Esq., Susan M. Hannigan, Esq., Rachel E. Horn, Esq., RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; David B. Tulchin, Esq., Brian T. Frawley, Esq., Lauren R. Mendolera, Esq., SULLIVAN & CROMWELL LLP, New York, New York; Attorneys for Plaintiff/Counterclaim

Bruce L. Silverstein, Esq., Tammy L. Mercer, Esq., Matthew C. Bloom, Esq., YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; Matthew L. Larrabee, Esq., Michael H. Park, Esq. Benjamin M. Rose, Esq., DECHERT LLP, New York, New York; Attorneys for Defendant/Counterclaim Plaintiff and Third Party Plaintiff Nederlander of San Francisco Associates.

Elizabeth Wilburn Joyce, Esq., Gregory T. Donilon, Esq., Seton C. Mangine, Esq., PINCKNEY, WEIDINGER, URBAN & JOYCE LLC, Wilmington, Delaware; Attorneys for Nominal Defendant Shorenstein Hays-Nederlander Theatres, LLC.

MEMORANDUM OPINION

PARSONS, Vice Chancellor.

In this case, the counterclaim plaintiff asks the Court to order specific performance of an alleged oral agreement to renew a long-running lease of a theater to a limited liability company ("LLC"). Breaches of fiduciary duty and the company's LLC agreement also are alleged, along with alternatively pled promissory estoppel and fraudulent inducement counts. The counterclaim and third-party defendants have moved to dismiss, arguing that the claims suffer from a host of legal shortcomings.

After rejecting the defendants' laches argument, this Memorandum Opinion analyzes the company's LLC agreement and considers whether certain of the defendants conceivably breached their fiduciary duties. In that regard, the LLC agreement appears to be ambiguous. Based on that conclusion and in light of the facts alleged, I decline to dismiss the breach of fiduciary duty claims, with the exception of a conclusorily pled waste claim. Next, I turn to the claims relating to an alleged oral agreement between the parties. The defendants contend that the purported lease renewal agreement is too indefinite to be enforced and is missing material terms. Based on the facts alleged, however, I conclude that it is reasonably conceivable that the counterclaim plaintiff could prove the existence and terms of the lease renewal agreement. The Memorandum Opinion then addresses a statute of frauds defense, but concludes that the part performance doctrine saves the breach of contract claim from dismissal.

Finally, I examine the alternatively pled promissory estoppel and fraudulent inducement counts. The promissory estoppel claim survives largely for the same reasons the breach of contract claim survives, but I dismiss the promissory estoppel claim against one of the defendants who is not alleged to have played any role in the alleged promise. Last, this Memorandum Opinion considers the fraudulent inducement count. This claim is an impermissible bootstrap on the counterclaim plaintiff's breach of contract claim and, in any event, is pled in an entirely conclusory fashion. Accordingly, I dismiss that Count.

In sum, the motion to dismiss is granted in part and denied in part. Specifically, Counts I and V are dismissed in part, and Count III is dismissed entirely. In all other respects, the motion to dismiss is denied.

I. BACKGROUND[1]

A. The Parties and Other Actors

Nominal Defendant Shorenstein Hays-Nederlander Theatres LLC, a Delaware LLC ("SHN" or the "Company"), is a theater company in the business of providing venues for plays and other live performances in San Francisco. The Company began as, and continues to be, a collaboration between two families: the Nederlanders and the Shorensteins. Walter Shorenstein ("Mr. Shorenstein") and James Nederlander founded SHN's predecessor, a general partnership, in the mid-1970s. Mr. Shorenstein, a real estate developer, managed the brick-and-mortar aspects of the business, while James Nederlander and his brother Robert handled the scheduling and booking of shows, as well as other aspects of theater management. Using this division of labor, the Company operated quite successfully, at least until the events giving rise to this lawsuit.

The Shorenstein-Nederlander partnership was converted into SHN through a Plan of Conversion and Operating Agreement signed on November 6, 2000 (the "LLC Agreement"). Each family's fifty percent interest is owned by a business entity member of SHN: Nederlander of San Francisco Associates ("Nederlander") represents the Nederlanders and CSH Theatres LLC ("CSH") is the member on the Shorenstein side. The LLC Agreement contemplates a four-member board of directors to govern SHN, with each entity able to appoint two directors. CSH's representatives at all times relevant to this lawsuit have been Carole Shorenstein Hays ("Mrs. Hays") and her husband Jeff Hays ("Dr. Hays"). Mrs. Hays, who is Mr. Shorenstein's daughter, indirectly owns CSH as a trust beneficiary. Nederlander's appointees during the relevant period have been Robert E. Nederlander, Sr. ("Mr. Nederlander") and Raymond S. Harris. Dr. Hays, Mrs. Hays, Mr. Nederlander, and Harris together comprise the "Board."

The dispute in this case centers mainly on the Curran Theatre (the "Curran"), one of three San Francisco theaters that has been operated by SHN.[2] SHN and its predecessor have leased the Curran since the inception of the original Shorenstein-Nederlander partnership in the mid-1970s. As discussed infra, Mrs. Hays eventually purchased the Curran through a new corporate entity, CSH Curran, LLC ("CSH Curran").

In terms of party alignment, CSH originally filed this suit against Nederlander seeking a declaratory judgment. Nederlander counterclaimed against CSH and asserted third-party claims against CSH Curran, Mrs. Hays, and Dr. Hays. The pending motion to dismiss is directed against the Counterclaim and Third Party Complaint. For brevity and convenience, in this Memorandum Opinion, I will refer to CSH, CSH Curran, Mrs. Hays, and Dr. Hays collectively as "Defendants."

B. The Facts

1. The Nederlanders and the Shorensteins

The Counterclaim and Third Party Complaint characterizes the relationship between the now-adversary families as one of near-total trust. Each family had an expertise, and each side "essentially exercised free rein over their respective responsibilities."[3] In fact, the original "partnership was operated under a single-page letter agreement for many years" before it was converted to an LLC.[4] For most of its existence, SHN apparently took a fairly lax approach toward business formalities and operated largely under a sort of gentleman's agreement with deals formalized by handshake rather than contract. In June 2010, however, Mr. Shorenstein passed away. Mrs. Hays then assumed management and control of CSH, including its interests in SHN. Around this time, she appointed herself and her husband as directors of SHN.

The Counterclaim and Third Party Complaint characterizes Mrs. Hays as lacking her father's business acumen. Indeed, that pleading alleges that Mrs. Hays viewed her participation in SHN more as "an artistic hobby and as a means to promote her social status" than as a business endeavor.[5] The Counterclaim and Third Party Complaint describes Mr. Nederlander as having naively trusted his former business associate's daughter, only to have the rug pulled out from under him. The accuracy of these characterizations aside, the Counterclaim and Third Party Complaint makes clear that the relationship Mrs. Hays now has with Mr. Nederlander is far different from the essentially seamless cooperation her father had achieved with the Nederlander family.

2. The Curran controversy

The events giving rise to this lawsuit began in 2010. Sometime in late 2009 or early 2010, the owner of the Curran sought to sell that theater. Mr. Shorenstein entered into negotiations to purchase it, but that effort bore no fruit. Mr. Nederlander assumed the negotiating lead in January 2010 and successfully reduced the asking price from $30 million to under $20 million. Mr. Nederlander, however, still considered the price too high. At the same time, he did not want a competing interest to acquire and operate the theater. In that regard, Mr. Nederlander believed that "outside investors were readily available to purchase the Curran for the revised sale price and lease the theatre back to SHN for a percentage of the revenue."[6]

Mr. Nederlander spoke with Mrs. Hays about the status of the Curran by telephone during the third quarter of 2010. One of these telephone calls forms the crux of several of Nederlander's claims.[7] Nederlander alleges that Mrs. Hays rejected the idea of having third-party investors acquire the Curran and wanted to buy the theater herself. During the key call, Mrs. Hays allegedly asked Mr. Nederlander's permission to purchase the Curran. He consented on the alleged condition that the "Hays Group"[8] "agreed to continue SHN's lease of the Curran for the life of the Company."[9] Mrs. Hays allegedly accepted this condition, and Mr. Nederlander consented to her purchasing the Curran predicated on the lease-renewal promise.

According to the Counterclaim and Third Party Complaint, Mr. Nederlander never would have given permission to Mrs. Hays to purchase the Curran absent this agreement. With respect to the alleged promise to renew the lease, Nederlander alleges that "Nederlander and the Hays Group understood that the essential terms and framework for the lease continuation would be based on the terms of the existing lease, with price terms to be finalized as the years progressed, reflecting normal, gradual increases through the years."[10] The Counterclaim and Third Party Complaint did not identify or include as attachments any contemporaneous documentary evidence supporting the existence of Mrs. Hays's alleged promise to renew the lease.

Mrs. Hays ultimately did acquire the Curran through a new business entity, CSH Curran. One of her trusts, the CSH Doule Trust, created CSH-Doule, LLC, which is the sole member of CSH Curran. Mrs. Hays and Tom Hart, a business associate of hers, co-manage CSH Curran. CSH Curran executed the agreement to purchase the Curran on November 30, 2010, for $16.6 million. On December 17, 2010, the Curran's former owner informed SHN that CSH Curran was the new owner and, therefore, would be SHN's new landlord. This arrangement produced no problems initially. CSH Curran and SHN continued to operate under the existing lease of the Curran, which had a term ending December 31, 2014. The parties, however, never were able to reduce the terms of a renewal of that lease to a final written contract.

According to Nederlander, the subject of the lease renewal was discussed at every SHN Board meeting after Mrs. Hays purchased the Curran at the end of 2010. The Board appears to have kept no minutes of those meetings.[11] The Hayses, however, allegedly "always put off renewal and told Nederlander not to worry about the matter." [12] At a January 2012 Board meeting, the Hayses stated that they would propose terms for the new lease soon, but failed to do so until August 2012.[13] On August 29, 2012, an unidentified member of the Hays Group delivered to Nederlander an initial high-rent offer. The Hays Group allegedly had prepared a high-rent offer, as well as a secondary low-rent proposal to be deployed after Nederlander's anticipated counteroffer.[14]Nederlander counteroffered on October 19, 2012, but thereafter the Hays Group did not engage in any meaningful further negotiations.

During this same period, Mrs. Hays allegedly mismanaged SHN's operations. More specifically, the Counterclaim and Third Party Complaint alleges that, from September 2012 onward, Mrs. Hays blocked lucrative business opportunities, such as sponsorships from Lexus, because they purportedly would detract from SHN's reputation. According to Nederlander, Mrs. Hays in fact was more concerned with her own reputation. At a January 2013 Board meeting, Mrs. Hays requested the opportunity to act as sole president of SHN, as opposed to continuing the usual co-presidency arrangement with one co-president from each of the Nederlander and Shorenstein families. Nederlander agreed to a 60-day trial run. The Counterclaim and Third Party Complaint described this period as an "unmitigated disaster" for the Company, during which SHN experienced "increased, frivolous spending with no corresponding benefit to the Company."[15] Nederlander opposed an extension of Mrs. Hays's sole presidency.

3. Mrs. Hays's "secret motives" revealed

On December 20, 2013-over a year after its initial lease counteroffer- Nederlander again sent the Hays Group its lease terms. The Hays Group did not respond. Instead, on January 28, 2014, the SHN Board met to discuss the lease renewal. At that meeting, Dr. Hays requested an executive session of the Board in which he asserted that CSH no longer could continue under the LLC Agreement and that "unless Nederlander agreed to give control of SHN to Mrs. Hays, the Curran lease renewal was off the table."[16] Despite having been unable for two years to finalize the new lease or cause Mrs. Hays to engage in serious discussion of the disputed lease terms, Nederlander alleges that it was "blindsided" by this "change of position and demands."[17] The Counterclaim and Third Party Complaint asserts that the January 28, 2014 meeting was the first time Nederlander "learned that Mrs. Hays had lied about her intention to continue leasing the Curran to SHN or, alternatively, that she had changed her mind and no longer intended to abide by the purchase-lease agreement" with Nederlander.[18]

According to Nederlander, the Hays Group's refusal to renew the lease did not result from an inability to finalize terms, because "all that needed to be finalized . . . were the rent schedules."[19] Instead, Nederlander alleges that the refusal revealed Mrs. Hays's desire to seize control of SHN. Nederlander rejected her demands and insisted on compliance with the oral agreement to renew the lease. On February 13, 2014, Harris spoke with Hart, who confirmed that the Hays Group would not renew the Curran lease. Hart also represented that the Hays Group had no current plans for the Curran. Nederlander sent a letter to the Hays Group on February 18, 2014, in which it "memorialized the history of the Curran purchase, " detailed the harm to SHN, and accused the Hayses of breaching the LLC Agreement and their fiduciary duties.[20] In response, on February 21, 2014, CSH filed a Verified Complaint in this Court seeking a declaratory judgment that CSH would not be in violation of the LLC Agreement if the lease was not renewed (the "CSH Complaint"). Nederlander filed its initial Answer, Verified Counterclaims and Verified Third-Party Complaint on April 28, 2014.

4. Competing for shows in San Francisco

Nederlander always had expected to conclude a new lease and had booked shows at the Curran beyond the December 31, 2014 expiration date of the then-existing lease. Once Nederlander realized that the Curran would not be an SHN venue after December 31, SHN needed to relocate those shows that it already had booked at the Curran to its other venues. With little leverage, SHN "was forced to accept less favorable terms in the revised agreement" for those shows.[21] Overall, SHN expects to lose more than a million dollars in profits as a result of the loss of the Curran lease. In addition, the Hayses allegedly have blocked lucrative theater sponsorships for SHN.

The Curran, however, was not destined to sit idle. On June 2, 2014, CSH revoked Mrs. Hays's appointment to the SHN Board. Notably, however, Dr. Hays remained on the Board. Days later, Mrs. Hays allegedly "began soliciting shows for the Curran and attempting to poach shows from SHN in direct competition with SHN."[22] According to the Counterclaim and Third Party Complaint, Mrs. Hays met with the producer of A Gentleman's Guide to Love & Murder on or about June 6. That show had never played at an SHN venue or been rejected by SHN. Additionally, at some later date, Mrs. Hays also met with Charlotte Wilcox, the producer of Beautiful, in an effort to attract that show to the Curran as well. The current post-Broadway production of Beautiful has neither run at an SHN venue nor been rejected by SHN. Moreover, the Counterclaim and Third Party Complaint alleges that during this same time period SHN was in negotiations with the same producers as Mrs. Hays to show their plays. Dr. Hays, as a Board member, received regular updates regarding SHN's operations, including show bookings. Similarly, Mrs. Hays allegedly had knowledge as to which shows SHN was attempting to book because of her service on the Board before June 2, 2014.

C. Procedural History

On July 29, 2014, Nederlander amended and filed the operative Counterclaim and Third Party Complaint. Defendants moved to dismiss on August 12 and, after full briefing, I heard argument on that motion, as well as co-pending motions to compel and to strike, on December 3, 2014 (the "Argument"). At the Argument, I granted the motion to strike. I also granted the motion to compel by oral decision on December 5, but reserved judgment on the motion to dismiss.

In its Counterclaim and Third Party Complaint, Nederlander alleges six counts against the various counterclaim and third-party defendants as follows:

• Count I for breach of fiduciary duty against Dr. Hays and Mrs. Hays;
• Count II for breach of LLC Agreement against CSH;
• Count III for fraudulent inducement against CSH and Mrs. Hays;
• Count IV for breach of contract against CSH and Mrs. Hays;
• Count V for promissory estoppel against CSH, CSH Curran, and the Hayses; and
• Count VI for declaratory judgment with respect to the LLC Agreement.

Defendants assert that these claims[23] suffer from numerous legal shortcomings and that they all should be dismissed. Among their most powerful arguments are those averring that the statute of frauds bars any purported oral agreement and that any contract between the parties lacks essential terms and is insufficiently definite to be enforced. Defendants also contend that there was no reasonable reliance on Mrs. Hays's alleged promise, that Nederlander's interpretation of the LLC Agreement is flawed, and that laches bars many of the claims in the Counterclaim and Third Party Complaint.

II. STANDARD OF REVIEW

Pursuant to Rule 12(b)(6), this Court may grant a motion to dismiss for failure to state a claim if a complaint does not assert sufficient facts that, if proven, would entitle the plaintiff to relief. As recently reaffirmed by the Supreme Court, "the governing pleading standard in Delaware to survive a motion to dismiss is reasonable 'conceivability.'"[24] That is, when considering such a motion, a court must "accept all well-pleaded factual allegations in the Complaint as true . . . 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."[25]This reasonable "conceivability" standard asks whether there is a "possibility" of recovery.[26] The court, however, need not "accept conclusory allegations unsupported by ...


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