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Meyer Natural Foods LLC v. Duff

Court of Chancery of Delaware

June 4, 2015

Meyer Natural Foods LLC

Submitted: February 3, 2015

David J. Teklits, Esquire Brendan W. Sullivan, Esquire Morris, Nichols, Arsht & Tunnell LLP

Robert A. Penza, Esquire Christopher M. Coggins, Esquire Polsinelli P.C.

Dear Counsel:

Petitioner, citing an inability to continue the business "in conformity with the parties' original agreement, "[1] seeks judicial dissolution of a Delaware limited liability company ("LLC") it owns with Respondents. Respondents oppose dissolution because of concerns about prejudice in litigation ongoing in another forum and assert that the business, measured by the LLC Agreement's stated purpose, remains reasonably practicable.

Petitioner Meyer Natural Foods LLC ("Meyer") is managing member and owner of a 51% capital interest of Premium Natural Beef LLC ("PNB" or the "Company"). Respondents Kirk Duff, Todd Duff (collectively, the "Duffs"), and C.R. Freeman ("Freeman") own 12%, 12%, and 25% capital interests, respectively, of PNB.[2] Meyer asks for judicial dissolution of PNB pursuant to Section 18-802 of the Delaware Limited Liability Company Act (the "LLC Act")[3] and Section 10.1(a) of PNB's operating agreement.

Respondents formed PNB in 2008 and began discussions with Meyer in 2010 to join efforts to sell all-natural beef to a certain national grocery chain. The parties formalized their business relationship on May 19, 2011, through three agreements: the Purchase Agreement by and among Meyer Natural Foods LLC, Premium Natural Beef LLC, and the Members of Premium Natural Beef LLC (the "Purchase Agreement");[4] the Amended and Restated Limited Liability Company Agreement of Premium Natural Beef LLC (the "LLC Agreement");[5] and the Output and Supply Agreement.[6] The Purchase Agreement focused on the

Respondents' sale of PNB's units to Meyer. The LLC Agreement set out the details of PNB's business, with Meyer as the managing member. Finally, under the Output and Supply Agreement, Power Plus Feeders, LLC ("PPF"), owned by the Duffs, and Premium Beef Feeders, LLC ("PBF"), owned by Freeman, were to supply qualifying cattle to Meyer and its subsidiaries to sell.

Relevant to this dispute are clauses dealing with PNB's purpose, PNB's dissolution, and the various non-compete obligations of the parties. Specifically, the LLC Agreement stated that "[t]he purpose and business of the Company shall be limited to engaging in the PNB Business and related activities, "[7] which in turn "mean[t] the business of marketing, distributing and selling natural Angus beef and beef products under the 'Premium Natural Beef' brand name to the Existing PNB Customers . . . and to new customers of the Company from time to time."[8] Meyer, as managing member, was required to "manage[] exclusively" the business, property, and affairs of PNB.[9] However, some actions were constrained-absent prior written consent of a majority of the interests held by the other members, the managing member could not "cause the Company to undertake or engage in . . . the dissolution of the Company."[10] Section 10.1 clarified that dissolution is mandatory upon "(a) the entry of a decree of judicial dissolution pursuant to the [LLC] Act; (b) the determination of the Managing Member and a Majority in Interest of the other Members at any time to dissolve the Company; or (c) the Sale of the Company."[11] The LLC Agreement contained an integration clause, [12] but the Output and Supply Agreement stated that it was "being made and entered into in connection with, and as a condition to, that certain Purchase Agreement . . . and the Amended and Restated Limited Liability Company Agreement."[13]

All three agreements addressed competitive activities. The Purchase Agreement specified, among other things, that Respondents could not own or operate a competing business.[14] The Purchase Agreement's restrictive covenants were identified as "essential to protect the Business and the goodwill of [the] Company."[15] The restrictive covenants in that agreement were to terminate immediately, however, if Respondents terminated the Output and Supply Agreement or the LLC Agreement.[16] The Output and Supply Agreement secured exclusive rights for Meyer and its subsidiaries to purchase qualifying cattle from PPF and PBF.[17] Its non-solicitation provision was written to terminate with that overall agreement.[18] Finally, the LLC Agreement required Meyer, generally speaking, "to use commercially reasonable efforts to promote and expand the PNB Business in the [four relevant states] for the benefit of t[h]e Company and in the mutual best interests of all the Members."[19] It also subjected the parties' rights to engage in other activities to the restrictive covenants in the Purchase Agreement.[20]

Respondents and their entities purported to terminate the Output and Supply Agreement in July 2012 and filed suits against Meyer and PNB in an Oklahoma state court on August 3, 2012 (the "Oklahoma Litigation"). They alleged, among other claims, breaches of contractual and fiduciary duties. The Oklahoma Litigation sought remedies such as rescission of the Purchase Agreement and the LLC Agreement, a declaratory judgment about restrictive covenants, and damages. The Oklahoma court has ordered termination of the exclusive supply and purchase obligations of the parties under the Output and Supply Agreement as of March 31, 2013.[21] The order states that it "does not affect any rights which [the parties] may thereafter have against each other based on any non-compete or similar provisions in the [Output and Supply] Agreement or other contracts . . . as to any live cattle other than the second quarter cattle or hold over cattle in the third quarter of 2013."[22] Respondents, relatedly, submit that they are no longer bound by restrictive covenants in the Output and Supply Agreement and the Purchase Agreement.[23] In late 2014, the Oklahoma court granted partial summary judgment in one suit in favor of Respondents' Interpretation of Offal Items, Bones, and Fat.[24]Meyer filed its Verified Petition for Judicial Dissolution in this Court on May 28, 2014, primarily seeking judicial dissolution of PNB. Meyer has now moved for partial summary judgment on the issue of dissolution pursuant to 6 Del. C. § 18-802 and LLC Agreement § 10.1(a).

Meyer argues that there are two grounds supporting its motion for partial summary judgment: that continued operation is not reasonably practicable and that Respondents have sought rescission, effectively consenting to dissolution.[25] In support of the first ground, Meyer reads the parties' agreements together to conclude that PNB's purpose was not only to sell natural beef but also to partner exclusively with Respondents in a "joint venture business"[26] to do so. Because the Output and Supply Agreement is no longer effective and Respondents believe that they are free to compete against Meyer, it would follow that PNB's business is no longer practicable. Meyer emphasizes the unfairness of requiring it to serve as managing member of a business that the parties no longer want to continue and to which Respondents no longer have critical obligations. Dissolution is argued to be the first step of an orderly process that will not have material consequences for Respondents' ultimate recovery, if any, in Oklahoma.

Respondents, on the other hand, submit that dissolution at this stage is inappropriate because of material factual disputes, PNB's continued operations, and the possibility of inequitable conduct. Cited among the facts in dispute are PNB's purpose, whether PNB is profitable, whether non-compete provisions remain viable, and whether Meyer has been fulfilling its duties as managing member.[27] Respondents point to authority that judicial dissolution of PNB is only proper if it is no longer reasonably practicable to operate according to its original purpose, which they take from the broad language in the LLC Agreement. They agree that the parties no longer want to be business partners but disagree that they support dissolution, pointing to a contractual mechanism they could have used if they had wanted dissolution. Finally, they raise equitable factors that could counsel against the discretionary remedy of dissolution. They caution against prejudicing recovery in the Oklahoma Litigation and awarding an equitable remedy to one who allegedly has engaged (or is engaging) in inequitable conduct.

Meyer, in reply, emphasizes the narrowness of the pending motion and the lack of material disputes. It notes that Respondents' attempt to distinguish rescission is unavailing because the outcome would not differ substantively and the contractual option for dissolution is meaningless because Respondents continue to block it. Meyer stands by its interpretation of PNB's business purpose and points out ...

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