CANCAN DEVELOPMENT, LLC, ROBERT A. GRANIERI, ROBERT J. GRANIERI and GEORGE TOTH, Plaintiffs,
SANDRA MANNO and MANNO ENTERPRISES, LLC, Defendants.
Submitted: March 30, 2015
Stephen E. Jenkins, Catherine A. Gaul, ASHBY & GEDDES, P.A., Wilmington, Delaware, Counsel for Cancan Development, LLC, Robert A. Granieri, Robert J. Granieri, and George Toth.
James S. Green, Sr., Jared T. Green, SEITZ, VAN OGTROP & GREEN, P.A., Wilmington, Delaware, Counsel for Defendants Sandra Manno and Manno Enterprises, LLC.
LASTER, VICE CHANCELLOR
Sandra Manno has excelled at coming up with concepts for new casinos. She also has a talent for convincing early-stage investors to back her ideas. But she has failed at moving her ventures beyond the concept stage. In addition to lacking the requisite management skills, Manno loves living large. It may be that some degree of flash and pizzazz is necessary to succeed in the casino business, but Manno's ventures have misallocated their seed capital to expensive meals, luxury hotels, first-class travel, and premature marketing activities.
This litigation arises out of Manno's third attempt at a new casino: the French-themed CanCan Casino in D'Iberville, Mississippi. Manno envisioned an adjacent retail complex, also French-themed, called the French Market. This decision refers to them together as the Project.
Robert J. Granieri and his son, Robert A. Granieri, invested in the Project. RG Junior took the lead and supplied the vast majority of the capital. The Granieris initially committed to invest $2, 030, 000 in CanCan Development, LLC, a newly formed entity. The Granieris understood that their investment would fund an option on land and pay for professional services that CanCan needed before seeking third-party financing. They understood that financing was available, largely because CanCan could raise money using Gulf Opportunity Zone bonds ("GO Zone" bonds), a government-subsidized program to encourage redevelopment after Hurricane Katrina.
Instead, Manno and her partner, Joseph Py, repeatedly asked for more capital. At first the amounts were relatively small, at least compared to RG Junior's considerable net worth, so he went along. But eventually RG Junior felt the need to cut his losses or take a more active role. After conducting the due diligence that he admitted he should have conducted initially, RG Junior realized that Manno was bad news.
After first seeking to be bought out, RG Junior asserted control over CanCan, fired Manno, and reached an amicable separation with Py. Manno disputed whether she had been removed as a manager, leading to an initial round of litigation in this court. See CanCan Dev., LLC v. Manno, 2011 WL 4379064 (Del. Ch. Sept. 21, 2011).
Through the earlier litigation, RG Junior established his control over CanCan. He and George Toth, who took over managing the Project from Manno, uncovered evidence that Manno had used the Project to enrich herself, her family, and their friends through generous compensation, frequent cash withdrawals, and lavish living, as well as by using CanCan's resources to fund unrelated ventures.
Although Manno no longer had an active role in the Project, she still owned equity in CanCan. She also claimed to own personally the Project's intellectual property and, through a different entity, an option on critical real estate. This decision rejects Manno's ownership claims, but at the time, they caused problems for CanCan.
Toth and RG Junior determined that CanCan needed at least $25 million in additional funding before it could hope to access the capital markets. That estimate proved conservative. RG Junior understandably did not want to invest that kind of money given Manno's claims. To move forward, he mapped out a transaction that would give Manno an opportunity to put up her proportionate share (approximately $1.6 million). If Manno agreed, then RG Junior would invest the balance. If Manno declined, then RG Junior would dissolve CanCan.
Despite having a financial backer who claimed to want a piece of the Project, Manno did not put up her share. RG Junior dissolved CanCan, purchased its assets, and went forward on his own. Manno asserts that by doing so, RG Junior breached his fiduciary duties to CanCan, and that RG Senior and Toth aided and abetted his breaches of duty. She also challenges various transactions preceding the dissolution.
This post-trial decision holds that Manno breached her duty of loyalty by extracting undeserved compensation from CanCan and through other forms of disloyal and wasteful spending. She is personally liable to CanCan for $970, 123. This decision finds that RG Junior did not breach his fiduciary duties to CanCan, which moots the claims for aiding and abetting against RG Senior and Toth. But as RG Junior responsibly conceded, he still owes $130, 000 to Manno Enterprises, LLC, for a 2.5% member in CanCan that he purchased. For their part, Manno and Manno Enterprises owe CanCan $30, 000 under a settlement agreement that Manno breached.
I. FACTUAL BACKGROUND
Trial took place on January 12-15, 2015. The following facts were proven by a preponderance of the evidence.
A. Manno's Background
Manno has an interesting life story. She grew up in New Jersey and attended Rosemont College, where she received degrees in business and theology. After college, she became a Jesuit nun. When testifying, Manno often mentioned her time in the convent and her devotion to her faith.
After four years as a nun, Manno went into business with her father and her uncle. The details are sketchy, but the business seems to have involved media consulting. Manno's next stop was local government, and in the late 1970s she served as mayor of Marlton, New Jersey. While mayor, she became involved in the successful effort to legalize gambling in Atlantic City. That experience led to her becoming an assistant to James Crosby, the chairman of Resorts International, one of Atlantic City's gaming pioneers. Manno testified about a number of memorable incidents during her ten years at Resorts, including an occasion when she helped Crosby purchase a whale. After leaving Resorts, she held other unidentified positions in the casino industry.
During the 1990s, Manno developed cancer. After successful treatment, she enrolled in law school. While there, she unfortunately developed a second form of cancer, which cut short her legal education. Fortunately, her treatment was again successful. Sadly, during this litigation, Manno had another relapse.
After her second bout with cancer, Manno became a promoter of casino startups and related projects. From 2002 to 2004, she and Py pursued a partnership with the Keetoowah Economic Development Authority to build a casino in Oklahoma (the "Keetoowah Venture"). She generated interest and raised some seed capital, but the project ended badly. David Flaum, one of her business partners, sued Manno for mismanagement, self-dealing, and waste.
In 2004, Manno shifted her efforts to the Gulf Coast. She pursued a plan to build a Cuban-themed casino in Biloxi, Mississippi, but Hurricane Katrina disrupted that effort. Her third venture-the Project-led to this litigation.
B. Manno's Initial Efforts In D'Iberville
In 2008, Manno conceived of the Project to capitalize on D'Iberville's French heritage. For seed money, she turned to Py. He arranged for David Khawam, an attorney and mutual friend, to fund an initial reconnaissance trip. Khawam formed an entity, DK Suites Development, LLC ("DK Suites"), to undertake the venture. Manno received an interest in DK Suites.
In spring 2009, Manno and Khawam traveled to D'Iberville. They met with the mayor and investigated sites. The trip was successful, resulting in a development agreement between the city and DK Suites dated April 29, 2009.
Manno and Khawam preferred a site centered on a five-acre parcel owned by the Sacred Heart Parish of the Catholic Diocese of Biloxi (the "Church Property"). It was a prime location for a new casino. As customers traveled on Interstate 10 to the existing casinos in Biloxi, they would encounter CanCan first.
In summer 2009, Manno discussed buying the Church Property with Bishop Roger P. Morin and the Sacred Heart Parish Council. Manno contemporaneously sought investors for the Project, but without success. In August, Py arranged for a friend of his, Margaret McCulley, to loan Manno $25, 000, collateralized by her interest in DK Suites.
Over the summer, Manno and Khawam had a falling out. On September 1, 2009, Khawam wrote to the mayor describing various grievances against Manno and stating that he wanted to continue the Project without her. Manno convinced the city officials to cancel the contract with DK Suites and execute a new contract with a new entity, CanCan Casino Resort & Spa, LLC. The new development agreement was backdated to April 29, the date of the original agreement with DK Suites. Because the CanCan Casino entity later became a wholly owned subsidiary of CanCan, this decision calls it Casino Sub.
Manno also reached an agreement in principle with the Sacred Heart Parish. For a payment of $125, 000, which would be credited towards the purchase price, Casino Sub would receive an option to acquire the Church Property for $6 million at any point in the next ninety days. Casino Sub could extend the option for an additional sixty days by paying another $125, 000, which also would be credited towards the purchase price.
C. The Granieris' Initial Investment
Manno needed a financial backer to fund the option. Py approached his friends the Granieris. Py knew that RG Senior ran a hospitality company and that RG Junior was a principal in an London-based financial firm. Py estimated RG Junior's net worth at $400 million.
In June 2009, Py asked the Granieris to provide short-term financing for the option and other near-term expenses. Py told the Granieris that, with the option in-hand, the Project could secure long-term financing that would include GO Zone bonds. Part of the financing would be used to repay the Granieris. After several discussions with Py, the Granieris agreed to invest. They did not conduct due diligence because they trusted Py.
As the vehicle for the Project, the parties formed CanCan. In return for a 42% member interest, the Granieris committed $2, 030, 000. They allocated their member interest disproportionately, with RG Junior committing $2, 000, 000 and taking 32%, while RG Senior committed $30, 000 and received 10%. In return for the remaining 58% member interest, Manno and Py contributed their ownership interest in the two limited liability companies that comprised the Project: (i) Casino Sub, which was a party to the development agreement and would carry out the casino side of the Project, and (ii) French Market Enterprises, LLC ("Market Sub"), which would acquire the land for the retail portion and carry out that side of the Project. Casino Sub and Market Sub became subsidiaries of CanCan. Py and Manno divided their 58% interest equally, with each owning 29%. Manno held her interest through Manno Enterprises, a pre-existing entity.
Although the evidence at trial established that these were the terms of the deal, the parties did not reduce their agreement to writing. They did not execute an operating agreement for CanCan until December 2010. The lack of formal documentation allowed Manno to claim, falsely, after disputes arose, that she separately owned Casino Sub and the Project's intellectual property. She did not. Manno and Py contributed all of their ownership rights in the Project, including its intellectual property, to CanCan as part of the transaction with the Granieris. Casino Sub became a subsidiary of CanCan.
D. CanCan Spends The Granieris' Investment.
As the Granieris expected, Manno and Py used the funds from the Granieris to pay Sacred Heart Parish for the option. With the balance of the money, Manno secured office space in D'Iberville for $2, 000 per month and began building up her team.
Manno brought on her younger brother, Joseph "Joey" Manno, as President of Casino Sub. Joey's job was to manage the casino side of the Project. He had relevant experience, having managed casinos Atlantic City and Las Vegas. The record does not suggest that Joey had experience in casino development or construction management, which were critical skills at the startup stage. Manno paid Joey $30, 000 a month starting in November 2009. The evidence suggests that Joey's salary was generous.
Manno also used Joey to avoid regulatory scrutiny. She listed him as the owner of her equity interest in CanCan on filings with the Mississippi Gaming Commission to conceal her involvement in the Project until after she had cleaned up various outstanding judgments and unfiled taxes. Joey was a front. Manno always owned the equity, and her representation to the Mississippi Gaming Commission was false. As an aside, there is no evidence that the Granieris or Toth knew about or were involved in misleading the gaming authorities.
Manno hired Tim Alamsha to as President of Market Sub. His job was to manage the retail side of the Project. Alamsha was a former Disney executive. No one has challenged his qualifications or compensation. He left the Project in fall 2009.
Manno hired Darrel Rholdon as her full-time personal assistant, Ed LePolma as her full-time driver, and Stacey Brunson as her full-time administrative assistant. Rholdon and LePolma were paid $40, 000 per year. Brunson was paid $75, 000 per year.
In addition to employees, Manno hired consultants. Manno retained two public relations firms. She also contracted with Frank DuMont, an architect friend who was involved with the Keetoowah Venture, to handle all of the architectural work for the Project for $10.5 million. That figure proved excessive. After Manno was fired, Toth secured a comparable contract for $3 million.
Manno also began paying herself. Before the Granieris invested, Manno had not received any compensation. Afterwards, Manno began paying herself $10, 000 per month. Py had told RG Junior that this was Manno's compensation, and he did not object to the amount. Manno also billed her living expenses to CanCan. She contended that an apartment and car were part of her compensation package, and she treated all of her meals and entertainment as business expenses. The only expenses she did not charge to CanCan were obvious personal items like hair care products and toothpaste.
Although Manno spent the money, Py signed the checks. Manno did not have check-signing authority, so she sent Py requests for payment. Py wrote whatever checks Manno asked for without any meaningful review or oversight. Complicating matters further, Manno and Py did not distinguish between her consulting fee and the reimbursement of her expenses. When asked during this litigation to review checks from Py, Manno could not explain which payments represented which.
E. CanCan Needs More Capital.
With Manno spending freely, CanCan soon needed money. The Granieris were the logical source, and in February 2010, Py organized a dinner in New York to pitch them on additional investments. Manno, Joey, and DuMont attended. So did Py and his lawyer. RG Junior spent most of the meeting talking with Joey, and the Granieris came away with a favorable impression of him.
On April 30, 2010, RG Junior traveled to D'Iberville. He visited the Church Property, toured CanCan's office, and met the staff. Manno discussed the Project with him over lunch and introduced him to some city officials.
RG Junior decided to invest more. He still believed it was a short-term investment and that he would be taken out via a refinancing package that included GO Zone bonds.
F. RG Junior's Additional Investments
In the spring and summer of 2010, RG Junior made three additional investments: $2 million on April 12, $1 million on June 8, and $1.5 million on August 23. Neither side focused on these transactions at trial.
Although no one objected to them, the transactions were odd. Each time, Py transferred a portion of Manno's and his interests in CanCan to RG Junior. For example, in return for the $2 million in April 2010, Py decreased Manno's and his ownership percentages by 4% and increased RG Junior's by 8%. If Py had accounted for the investment properly, he would have determined a price for CanCan's member units and caused CanCan to issue the appropriate number to RG Junior. The other members-Py, Manno, and RG Senior-would have been diluted proportionately. Instead, Py and Manno viewed CanCan as a bilateral relationship between operators (Manno and Py) and financiers (the Granieris). To keep things simple, Py treated the investments as transferring interests from the operator side to the financier side.
In the June 2010 transaction, in return for $1 million, RG Junior's percentage ownership interest increased by 5%. Py decreased his own interest by 1.5%, Manno's interest by 1.5%, and RG Senior's by 2%. The reallocation of interests between the Granieris did not matter to Manno and Py because it happened on the financiers' side of the ledger. Effectively the financiers purchased 3% from the operators.
In the August 2010 transaction, in return for $1.5 million, RG Junior's percentage ownership increased by 5%. Py decreased his own interest by 2%, Manno's interest by 2%, and RG Senior's by 1%. Again, the reallocation between the Granieris was not relevant to Manno and Py. Effectively the financiers purchased 4% from the operators.
During this period, the Granieris still believed that that they would be taken out promptly through a financing that included GO Zone bonds. As late as October 2010, RG Junior thought CanCan could obtain financing and repay two-thirds of his investment.
At trial, Manno denied knowing about the 2010 investments, but that was not true. She attended the February meeting to obtain more money from the Granieris, and she brought RG Junior down to D'Iberville to close the deal. She was running CanCan's day-to-day operations and had spent $6.5 million by August. She could not have believed that CanCan was still operating on the Granieri's initial investment of $2 million.
Manno subsequently saw and approved the allocation of percentage interests that resulted from RG Junior's investments. In June 2010, her counsel sent her two emails that listed Manno's ownership interest at 23%, Py's at 24%, RG Junior's at 45%, and RG Senior's at 8%. Her counsel's emails stated that he planned to use the information for government filings and she did not object. At the time, Joey was listed as the owner, but that was to mislead the gaming authorities. Manno actually owned the equity. Once again, there is no evidence that the Granieris or Toth knew about or were involved in misleading the gaming authorities.
G. RG Junior Purchases 2.5% Each From Py And Manno.
In the summer of 2010, Py and Manno needed money to settle debts unrelated to CanCan. They offered to sell RG Junior some of their interests, and RG Junior agreed to pay each of them $300, 000 for a 2.5% interest. Unlike RG Junior's prior investments, these transactions were true member-level transfers.
RG Junior paid Manno $170, 000 of the agreed-upon $300, 000. At trial, Manno claimed it was a gift. It was not. RG Junior later acknowledged that he still owed Manno $130, 000. That amount remains outstanding.
H. Manno Spends More Money.
After the dinner meeting in February 2010, when it appeared the Granieris would invest, Manno hired her sister, upped her own salary, and hired various friends. She began spending even more freely.
In March 2010, Manno added her sister, Patty Manno, to the payroll at $5, 000 per month. Patty did not start work until months later. Like Joey, Patty had managed casinos and was a licensed casino operator in New Jersey. But Patty did not actually do anything for the Project, likely because it never reached the operating stage. Patty was only in CanCan's office once or twice every six weeks, and she never generated any work product. She spent most of her time writing a children's novel and visiting with her sister.
Manno wrote Patty paychecks totaling $40, 000 through November 2010. At that point, CanCan implemented a direct deposit payroll system. Strangely, Manno routed Patty's pay to her own personal bank account. In January 2011, Manno increased Patty's pay to $7, 500 per month while continuing to route it to her own account. Shortly after each deposit hit her account, Manno made large cash withdrawals. Manno claimed (not credibly) that she gave the money to Patty.
In April 2010, Manno increased her consulting fee to $15, 000 per month. In September, Manno increased her consulting fee to $30, 000 per month. With Joey and Patty also on the payroll, CanCan was paying the Manno family $70, 000 per month.
Manno also hired her longtime friend Lisa Marie Ponzio, who was working as a part-time hairdresser. Although Manno said Ponzio had "B-B"writing skills, Manno added her to the payroll in October 2010, ostensibly to draft press releases and prepare sales and marketing kits. CanCan already had two public relations firms working on these and other projects. Other CanCan employees testified that Ponzio did not actually work on press releases or marketing. She spent her time visiting with Manno and working on a screenplay about Manno's life. Ponzio also helped Manno pitch a reality TV show based on her life. Manno fired Ponzio in December 2010 for inappropriate behavior at a holiday party. CanCan paid Ponzio $8, 750 in consulting fees, for first-class airfare, and for her transportation and meals while in Mississippi.
Another hire was Rita Sulprizio, an old friend of Patty's. In an email to Manno, Sulprizio proposed to help with the human resources function by reviewing the employee handbook, revising job descriptions, and implementing a reporting system in which each employee would provide a weekly summary of their work. She did some work, but not much. CanCan's human resources function was primarily handled by Stacey Brunson. CanCan paid Sulprizio a total of $13, 516.51 in salary and severance.
Manno's most colorful hire was Frank Barbera, aka "Frankie the Fish." He was a convicted felon who pled guilty after being arrested by the FBI in October 2008 for paying cash bribes to the president of the Atlantic City Council. He worked as a real estate broker in Atlantic City, and Manno hired him as a real estate consultant to advise her about the French Market. Manno claimed to have perceived the risk that the Mississippi gaming authorities might react negatively to Barbera's involvement. She said she received advice that it was not an issue. CanCan paid Barbera $6, 000 for two months of consulting services.
Manno's personal spending increased as well. She withdrew significant amounts of cash and spent liberally on meals, travel, and entertainment.
1. Cash Withdrawals
Between September 2009 and March 2011, Manno used the CanCan debit card to withdraw $97, 999.50 from ATMs. She regularly made withdrawals of $500 and $600 and typically withdrew over $1, 100 per week. Many withdrawals came from ATMs at the Beau Rivage Resort & Casino and other locations in the Biloxi area; a smaller number came from ATMs in New York, New Jersey, and other areas Manno visited. Manno had the only copy of CanCan's debit card and made most of the withdrawals personally. Sometimes, however, she sent employees to get her cash.
During this same period, Manno made frequent cash withdrawals from her personal accounts. She withdrew over $132, 000 from her Manno Enterprises account and $62, 000 from her Peoples Bank account.
In total, Manno withdrew over $285, 000 in cash while managing the Project. Her attempts to explain how she used the cash only damaged her credibility. She testified that she used cash to pay the office rent, but CanCan always paid by check or wire transfer. She testified that she used the cash for meals, but CanCan's documented expenditures for meals exceeded $142, 000 during Manno's tenure, including receipts for meals in excess of $100, 000 that lacked a properly documented business purpose. She testified that she used the cash for gifts, but the example she used was inaccurate. She claimed that she spent $300 in cash for a gift for Bishop Morin, but the gift actually cost $99.90, including shipping and handling, and was charged to CanCan's debit card.
Manno also testified that she used cash to pay for gasoline, but she submitted receipts for an impressive number of gasoline purchases. For example, during the eighty-two days between May 10 and July 31, 2010, CanCan paid for sixty-six purchases of gasoline at a total cost of $1, 965.86. To put those amounts into perspective, a gallon of regular gas cost roughly $2.50 in Mississippi at that time, so CanCan paid for around 785 gallons of gas. Favoring Manno by assuming a rate of 17.2 miles per gallon,  that equates to 13, 500 miles traveled in those eighty-two days. Manno did make occasional trips to Jackson, Mississippi, and more frequent trips to New Orleans, but when she made those trips, her restaurant charges usually showed where she. During May, June, and July 2010, she spent the vast majority of her time in the Biloxi area. Cancan could not have legitimately incurred this amount of mileage on business trips. And given that CanCan spent so much on gas, Manno could not have been using her cash for that purpose.
Internal emails revealed what most likely happened to the cash. Manno worried about her financial security, and she wrote that she needed "to arrange for some cash . . . [to] put away in a lock box here to feel secure."JX53. She expressed similar sentiments when asked to sign an operating agreement for CanCan, telling Py that "I cannot agree to sign this agreement unless I get a clump of money to hold in reserve and put towards a house at the shore . . . ."JX 137. Manno tried to achieve her goal.
2. Meals And Entertainment
Through April 2011, CanCan spent approximately $142, 411.69 on meals and entertainment. The spending was poorly documented. Only $7, 083.71 was supported with properly documented business purposes. CanCan staff retrospectively identified proper business purposes for another $34, 583.65. That left $100, 744.33 in meals and entertainment without a proper business purpose.
Some examples illustrate how CanCan incurred expenses of this magnitude. On September 7, 2010, Manno spent $401.85 on brunch with Patty while taking her to the airport. In October, Manno charged CanCan $640 and $320 for two meals at the same restaurant. Other meals charged to CanCan with no documented business purpose included $576.69 at the restaurant Thirty-Two, $1, 359.33 at the Beau Rivage, another $1, 215.41 at Thirty-Two, and $1, 276.96 at the BR Prime Steakhouse.
3. Transportation and Hotels
Manno caused CanCan to pay for airline tickets, usually first class, for Patty, Ponzio, Sulprizio, and Barbera whenever they traveled to and from Mississippi. CanCan paid for Ponzio's airfare in May 2010, months before she was hired, and again months after she was fired when she returned to help Manno pack for her move back to New Jersey. Manno also caused CanCan to pay for limousines to transport individuals to and from the airport with an additional $50 tip for the driver each way. While a car service might sometimes be reasonable, CanCan already ...