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NewYork.Com Internet Holdings Inc. v. Entertainment Benefits Group, LLC

Court of Chancery of Delaware

July 8, 2015

NEWYORK.COM INTERNET HOLDINGS, INC., individually and derivatively on behalf of NewYork.com Entertainment Group, LLC Plaintiff,
v.
ENTERTAINMENT BENEFITS GROUP, LLC; BRETT D. REIZEN; TICKETSATWORK - PLUM BENEFITS, LLC; ENTERTAINMENT BENEFITS GROUP, INC.; and JOHN DOES 1-10 Defendants, and NEWYORK.COM ENTERTAINMENT GROUP, LLC, Nominal Defendants. ENTERTAINMENT BENEFITS GROUP, LLC, Counterclaim Plaintiff, Defendant
v.
NEWYORK.COM INTERNET HOLDINGS, INC. Counterclaim Defendant, Plaintiff.

Johnna M. Darby, Esq., HILLER & ARBAN, LLC, Wilmington, Delaware; Brett E. Lewis, Esq., David D. Lin, Esq., Justin Mercer, Esq., LEWIS & LIN, LLC, Brooklyn, New York; Attorneys for Plaintiff NewYork.com Internet Holdings, Inc.

Michael F. Bonkowski, Esq., COLE SCHOTZ P.C., Wilmington, Delaware; Beth I.Z. Boland, Esq., Courtney Worcester, Esq., FOLEY & LARDNER LLP, Boston, Massachusetts; Angelica L. Boutwell, Esq., FOLEY & LARDNER LLP, Miami, Florida; Attorneys for Defendants Entertainment Benefits Group, LLC, Brett Reizen, Ticketsatwork-Plum Benefits, LLC, and Entertainment Benefits Group, Inc.

MEMORANDUM OPINION

PARSONS, Vice Chancellor.

This is a dispute between the two members of a single-asset limited liability company that owns the domain name NewYork.com. Each owner has a fifty percent interest in the company. The plaintiff alleges that the board is deadlocked and seeks dissolution. The defendant, in response, counterclaims for a declaratory judgment that it is entitled to purchase the plaintiff's units in the LLC and for breach of the company's operating agreement. The plaintiff has moved to strike portions of the defendant's counterclaim, or, in the alternative, to dismiss the counterclaim in its entirety. For the reasons that follow, the motion to strike is granted in part and denied in part. The motion to dismiss is denied.

I. BACKGROUND[1]

A. The Parties

Plaintiff, NewYork.com Internet Holdings, Inc. ("NYIH"), is a Delaware corporation whose principals are the original registrants of the domain name <NewYork.com>. NYIH owns a fifty-percent interest in NewYork.com Entertainment Group, LLC ("NYEG" or the "Company"), which is the current holder of all rights and title to NewYork.com.

Defendant Entertainment Benefits Group, LLC ("EBG") is a Delaware limited liability company in the business of selling and marketing tickets for travel and entertainment events. EBG owns the remaining fifty-percent interest in the Company.

B. Facts

1. The sale and formation of the new entity NYEG

NewYork.com is a website for the sale and marketing of tickets for travel and entertainment events in New York. The original registrants of this domain name are principals of Plaintiff, NYIH, which was founded in 2009. Defendant EBG alleges that, even though NewYork.com is a highly valuable domain name, NYIH struggled to make the site a success.

In 2011, NYIH was introduced to EBG and its president, Brett Reizen. EBG, at the time, allegedly was one of the largest privately held travel and entertainment providers in the United States and had a proven track record of developing successful and innovative entertainment destination websites and sales channels. After negotiations, NYIH agreed to sell a fifty-percent interest in NewYork.com to EBG for approximately $1, 750, 000.

On January 11, 2012, NYIH and EBG entered into an Asset Purchase Agreement.[2]Pursuant to this agreement, NYIH and EBG formed a third entity, NYEG, which acquired one-hundred percent of NewYork.com, including the website, the trade name, and all intellectual property rights.

2. The Operating Agreement

On the same day, the parties also executed a Limited Liability Company Agreement (the "Operating Agreement").[3] Pursuant to the Operating Agreement, NYIH and EBG each own fifty percent of the membership interests of the Company. The Board of Managers (the "Board") is comprised of two members: Tom Stafford of NYIH and Brett Reizen of EBG.

The Operating Agreement provides EBG with the "exclusive authority to manage the routine day to day operations and affairs of the Company and to make all decisions regarding the business of the Company, except as otherwise expressly provided."[4] NYIH asserts that the Board is authorized to, among other things, supervise the preparation of and approve an annual business plan, including a description of the strategy and operations of the Company, determine the location of the principal office, make hiring decisions of officers and key employees, request additional financing for the Company, determine the method of accounting by which the Company's books of account shall be kept, and select an independent public accounting firm to be the Company's independent auditor.

The Operating Agreement also defines a set of so-called "Triggering Events." If NYIH commits such an event, NYIH is deemed to have offered its fifty-percent interests in the Company to EBG at a price calculated based on a specific formula provided in the Operating Agreement.[5] Section 10.1 of the Operating Agreement provides a list of eight different categories of Triggering Events, two of which are relevant here. First, under Section 10.1.5, NYIH commits a Triggering Event if NYIH or Stafford "engage[s] in any activities, events or conduct which, in EBG's reasonable opinion, reflects unfavorably on the good name, goodwill or reputation of the Company or EBG or any of their respective Affiliates."[6] Second, under Section 10.1.4, NYIH is deemed to have committed a Triggering Event if NYIH breaches any of its obligations under the Operating Agreement.

3. EBG relaunches NewYork.com and freezes out NYIH

According to the Counterclaim, after execution of the Operating Agreement, EBG completely redesigned and rebuilt NewYork.com, and implemented a brand new and customized content management system to improve and expand the content of the website. The redesigned website allegedly made it possible for users to purchase tickets directly on the site rather than linking to the site of an affiliate where the purchase would occur. Relaunch of the website occurred in October 2012 and significantly increased the website traffic and revenues. EBG avers that the transactional net revenue grew by over 700% to approximately $111, 000 per month in 2013 as compared to 2012.

Although the relaunched website generated higher revenues, NYIH alleges that the Company's operating costs far exceeded revenues, resulting in the loss of millions of dollars. For example, EBG posted a loss of approximately $1, 500, 000 for calendar year 2013. NYIH further asserts that it was unable to verify these figures because EBG denied it access to the full books and records of the Company.

NYIH served EBG with a written demand for books and records on August 8, 2014, and again on August 26. Both demands were denied, despite the fact that the Operating Agreement expressly provides that "holders of the Units and their respective duly authorized representatives shall have the right to examine the Company books, records and documents."[7] Based on EBG's refusal to provide financial records, NYIH avers that EBG may have engaged in financial improprieties to create artificial losses and loan obligations.

In addition to its refusal to provide financial records, EBG allegedly excluded NYIH from all decisions of the Company. NYIH asserts that even though Stafford, as NYIH's designee to NYEG's Board, has the authority under the Operating Agreement to make decisions on matters such as hiring or firing officers and key employees, approving annual business plans, and obtaining additional financing for the Company, he never was consulted or allowed to provide any input on such decisions and even has been denied access to the Company's office. ...


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