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In re GR Burgr, LLC

Court of Chancery of Delaware

August 25, 2017

IN RE: GR BURGR, LLC GR U.S. LICENSING, LP, Petitioner,
v.
ROWEN SEIBEL, Respondent. ROWEN SEIBEL, Respondent and Counterclaim Plaintiff,
v.
GR U.S. LICENSING, LP, Petitioner and Counterclaim Defendant, and GR BURGR, LLC, Nominal Defendant.

          Date Submitted: June 20, 2017

          Paul D. Brown, Esquire, Joseph B. Cicero, Esquire and Stephanie S. Habelow, Esquire of Chipman Brown Cicero & Cole LLP, Wilmington, Delaware, and Paul B. Sweeney, Esquire of Certilman Balin Adler & Hyman, LLP, East Meadow, New York, Attorneys for Respondent/Counterclaim Plaintiff Rowen Seibel.

          Donald J. Wolfe, Jr., Esquire, Timothy R. Dudderar, Esquire and Jacqueline A. Rogers, Esquire of Potter, Anderson & Corroon LLP, Wilmington, Delaware, and Paul D. Montclare, Esquire and Jacob Albertson, Esquire of Mitchell Silbergerg & Knupp LLC, New York, New York, Attorneys for Petitioner/Counterclaim Defendant GR U.S. Licensing LP.

          MEMORANDUM OPINION

          SLIGHTS, Vice Chancellor.

         Petitioner, GR U.S. Licensing, LP ("GRUS"), has petitioned for judicial dissolution of GR BURGR, LLC ("GRB" or the "Company") pursuant to 6 Del. C. § 18-802 ("Section 18-802"). In 2012, GRUS, an entity affiliated with celebrity chef Gordon Ramsay, partnered with Respondent, Rowen Seibel, to form GRB for the purpose of developing and operating first-class burger-themed restaurants. The only revenue-generating business GRB has launched since its formation is reflected in a Development, Operation and License Agreement (the "Caesars Agreement") between GRB and an affiliate of Caesars Entertainment Corporation ("Caesars"), pursuant to which GRB licensed and sublicensed certain trademarks and other intellectual property for Caesars's use in a burger-themed restaurant in the Planet Hollywood Resort & Casino in Las Vegas, Nevada ("Planet Hollywood").

         In 2016, Seibel was convicted of a felony tax-related offense. Upon learning of this conviction, Caesars terminated the Caesars Agreement. According to Caesars, any further business relationship with Seibel, or any business with which he is affiliated, would place Caesars in violation of Nevada gaming regulations. In part based on this development, GRUS (and Ramsay) now seek to dissolve GRB and to disassociate from Seibel in order to avoid any further reputational or other harm he might bring to them.

         GRUS has moved for judgment on the pleadings. According to GRUS, the facts as admitted by Seibel demonstrate, as a matter of law, that it is no longer "reasonably practicable" for GRB to carry on its business in conformity with its operating agreement and, therefore, dissolution of the entity is appropriate under Section 18-802. For the reasons explained below, I agree. The motion for judgment on the pleadings is GRANTED.

         I. BACKGROUND

         I draw the facts from GRUS's Verified Petition for Judicial Dissolution and Declaratory Judgment (the "Petition"), Seibel's Answer to the Petition (the "Answer"), the documents incorporated in these pleadings by reference and facts of which I may take judicial notice.[1]

         A. The Creation, Governance and Business of GRB

         GRB is a Delaware limited liability company formed in December 2012 by Ramsay (through his entity GRUS) and Seibel.[2] GRUS and Seibel each own a 50% membership interest in GRB.[3] Each is entitled to designate one manager of GRB; GRUS appointed non-party Stuart Gillies and Seibel designated himself.[4] The LLC Agreement gives the managers the "full and exclusive right, power and authority to manage all of the business and affairs of the Company."[5] All decisions made by the managers require a majority vote-meaning the two managers must act unanimously.[6] If the two managers cannot reach unanimous agreement, the LLC Agreement offers no mechanism by which to break that deadlock.[7] The LLC Agreement provides that GRB will be dissolved upon or under the following events or circumstances: "(a) the LLC ceases its business operations on a permanent basis; (b) the sale or transfer of all or substantially all of the assets of the LLC; (a) [sic] the entry of a decree of judicial dissolution; or (b) [sic] as otherwise determined by the Managers."[8]

         GRB's stated business purpose is to own, develop, operate, and license the development of first-class burger-themed restaurants.[9] Along with the execution of the LLC Agreement, GRB and GRUS executed an agreement whereby GRUS licensed to GRB the trademark "BURGR Gordon Ramsay" (the "License Agreement").[10] Soon after its formation, GRB developed and is now the sole owner of the trademarks "BURGR" and "GR BURGR."[11] It also developed the burger restaurant concept, menu and recipes, which along with the trademarks, the LLC Agreement defines as "Company Rights."[12]

         On December 13, 2012, GRB entered into the Caesars Agreement with Caesars, pursuant to which GRB provided to Caesars a sublicense to use the name "BURGR Gordon Ramsay, " and a license to use certain recipes, menus and other trade property developed by GRB, for use in the "BURGR Gordon Ramsay" restaurant in Planet Hollywood.[13] In exchange for the sublicense and license, Caesars agreed to pay GRB license fees based on a percentage of gross restaurant sales and gross retail sales.[14] Since its formation, GRB has engaged in no other revenue-generating business aside from the Caesars Agreement and the corresponding BURGR Gordon Ramsay restaurant in Planet Hollywood.[15]According to Seibel, Ramsay and Caesars have colluded to oust Seibel from GRB and, as a part of this scheme, GRUS has prevented GRB from entering into any other revenue-generating business.[16]

         Caesars's businesses are subject to "privileged licenses, " including those issued by the Nevada Gaming Commission.[17] Due to certain requirements associated with these licenses, Caesars conditioned the rights and obligations of each party under the Caesars Agreement upon Caesars's satisfaction that GRB and its members, managers and affiliates are not (and do not become) "Unsuitable Person[s]."[18] As defined in the Caesars Agreement, "Unsuitable Person" includes any person "whose affiliation with [Caesars] or its [a]ffiliates could be anticipated to result in a disciplinary action relating to, or the loss of, inability to reinstate or failure to obtain" the gaming and alcohol licenses held by Caesars or "who is or might be engaged or about to be engaged in any activity which could adversely impact the business or reputation of [Caesars] or its [a]ffiliates."[19] The Caesars Agreement further provides that Caesars may make the determination that any person associated with GRB, its members, managers and affiliates is an "Unsuitable Person" in its "sole and exclusive judgment."[20] Upon a determination of unsuitability,

(a) Gordon Ramsay and/or GRB shall terminate any relationship with the [p]erson who is the source of such issue, (b) Gordon Ramsay and/or GRB shall cease the activity or relationship creating the issue to [Caesars's] satisfaction, in [Caesars's] sole judgment, or (c) if such activity or relationship is not subject to cure as set forth in the foregoing clauses (a) and (b), as determined by [Caesars] in its sole discretion, [Caesars] shall, without prejudice to any other rights or remedies of [Caesars] including at law or in equity, have the right to terminate [the Caesars Agreement] and its relationship with Gordon Ramsay and GRB.[21]

         B. Seibel is Convicted of Impeding the Administration of the Internal Revenue Code, Causing Caesars to Terminate the Caesars Agreement

         As noted, Seibel pled guilty on April 18, 2016, to a one-count felony criminal information charging him with impeding the administration of the Internal Revenue Code (26 U.S.C. § 7212) after employing an undeclared Swiss bank account and Panamanian shell company to hide taxable income.[22] He was sentenced on August 19, 2016, to one month of imprisonment, six months of home detention and 300 hours of community service in addition to restitution.[23]

         Following the sentencing, on September 2, 2016, Caesars sent a letter to GRB, Seibel and Ramsay stating that Seibel's felony conviction rendered him an "Unsuitable Person, " and demanding, therefore, that "GRB, [] within 10 business days of the receipt of this letter, terminate any relationship with Mr. Seibel and provide Caesars with written evidence of such terminated relationship."[24] The letter went on to state that "[i]f GRB fails to terminate the relationship with Mr. Seibel, Caesars will be required to terminate the [Caesars] Agreement pursuant to Section 4.2.5 of the [Caesars] Agreement."[25]

         Following receipt of the September 2 letter from Caesars, on September 6, 2016, GRUS sent a letter to Seibel's attorney requesting that Seibel "terminate any relationship" with GRB and "sign all necessary documents to confirm such termination."[26] In response, Seibel proposed to transfer his interest in GRB to a family trust. Caesars, however, rejected the proposal on September 12, 2016, after it "determined that because the proposed assignees have direct and/or indirect relationships with Mr. Seibel, the proposed assignees are Unsuitable Persons, " as defined in the Caesars Agreement.[27] In a letter dated September 12, 2016, GRUS renewed its demand that Seibel completely disassociate from GRB and "fully comply with Caesars' requirements within their timeline."[28] Seibel did not do so.[29]

         By letter dated September 21, 2016, Caesars terminated the Caesars Agreement because "[a]s of 11:59 p.m. on September 20, 2016, Caesars had not received any evidence that GRB had disassociated with Rowen Seibel, an individual who is an Unsuitable Person, pursuant to the [Caesars] Agreement."[30] Based on the termination of the Caesars Agreement, GRUS sent GRB notice of its termination of the License Agreement on September 22, 2016.[31]

         C. Procedural Posture

         GRUS filed its Petition on October 13, 2016, seeking the judicial dissolution and winding up of GRB pursuant to the terms of the LLC Agreement and Section 18-802. On November 23, 2016, Seibel filed his Answer and Verified Counterclaims of Respondent Rowen Seibel Against Petitioner GR U.S. Licensing, LP (the "Counterclaims") in which he asserts: (1) breach of the License Agreement, brought derivatively on behalf of GRB against GRUS; (2) misappropriation and unjust enrichment, brought derivatively on behalf of GRB against GRUS; (3) breach of fiduciary duty, brought directly by Seibel against GRUS; and (4) breach of fiduciary duty, brought derivatively on behalf of GRB against GRUS. These Counterclaims largely center on Seibel's allegations that Ramsay, through GRUS, has sought to usurp corporate opportunities from GRB and Seibel, primarily via a collusive plot with Caesars to terminate the Caesars Agreement based on the "fiction" that Seibel's conviction renders him an "Unsuitable Person."[32]

         On December 13, 2016, GRUS moved for judgment on the pleadings on its Petition (the "Motion"). At the same time, GRUS moved to dismiss, or in the alternative, stay or sever Seibel's Counterclaims. In a telephonic scheduling conference on January 3, 2017, the Court ruled that it would decide GRUS's Motion on the dissolution claims before addressing GRUS's motion to dismiss the Counterclaims. The Court also entered an order staying discovery.

         On January 17, 2017, GRUS moved to expedite the proceeding with respect to the motion sub judice due to the filing of derivative claims by Seibel on behalf of GRB in Nevada (the "Nevada Action") in which Seibel, inter alia, challenges the termination of the Caesars Agreement and seeks specific performance of that agreement. The motion to expedite was denied in a telephonic hearing on January 23, 2017. Thereafter, Seibel moved for a preliminary injunction in Nevada to prevent Caesars from taking any action in furtherance of its decision to terminate the Caesars Agreement. That motion was denied without prejudice on March 22, 2017.[33] The Nevada court granted a partial motion to dismiss Seibel's claims without prejudice on May 17, 2017, [34] and Seibel filed an amended complaint in that action shortly after.[35] On June 20, 2017, the parties supplemented the record in connection with the motion sub judice, at the Court's request, by submitting orders and transcripts of certain court rulings in the Nevada litigation.

         II. ANALYSIS

         GRUS's motion for judgment on the pleadings requires the Court to determine whether the uncontested facts as admitted by Seibel in his Answer entitle GRUS to judicial dissolution of GRB as a matter of law. For the reasons that follow, I find that the deadlock between the parties, as evidenced by the undisputed facts, has rendered it no longer reasonably practicable for GRB to operate in accordance with its LLC Agreement. I also find no basis in equity to deny dissolution. I explain these findings below after addressing the standard of review.

         A. Standard of Review for Judgment on the Pleadings

         Under Court of Chancery Rule 12(c), the Court may grant a motion for judgment on the pleadings if, when viewing the claims in the light most favorable to the nonmoving party, there are no material issues of fact and the movant is entitled to judgment as a matter of law.[36] As the Motion was brought by Petitioner, facts admitted in the Answer are deemed true.[37]

         B. Judicial Dissolution of an LLC Pursuant to 6 Del. C. § 18-802

         GRB's LLC Agreement allows for dissolution of the Company pursuant to a judicial decree of dissolution under Section 18-802 which, in turn, provides that "[o]n application by or for a member or manager the Court of Chancery may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement."[38] The "not reasonably practicable" standard does not require a petitioner to "show that the purpose of the limited liability company has been 'completely frustrated.'"[39]Rather, "[t]he standard is whether it is reasonably practicable for [the company] to continue to operate its business in conformity with its LLC Agreement."[40] Our law provides no blueprint for determining whether it is "not reasonably practicable" for an LLC to continue, but "several convincing factual circumstances have pervaded the case law: (1) the members' vote is deadlocked at the Board level; (2) the operating agreement gives no means of navigating around the deadlock; and (3) due to the financial condition of the company, there is effectively no business to operate."[41] None of these factors are "individually dispositive; nor must they all exist for a court to find it no longer reasonably practicable for a business to continue operating."[42] While judicial dissolution of an LLC is a "discretionary remedy" that is "granted sparingly, " "it has been granted 'in situations where there was 'deadlock' that prevented the [entity] from operating and where the defined purpose of the entity was . . . impossible to carry out.'"[43]

         In setting up his argument that dissolution should not be ordered in this case, Seibel relies on this court's opinion in In re Arrow Investment Advisors, LLC, [44] and argues that "[i]n applying only the undisputed facts to the law, the Court should also bear in mind that dissolution is an 'extreme' remedy of 'last resort' and that the Court's statutory power to order dissolution is 'limited.'"[45] In doing so, he has only partially set the table because, while he quotes Arrow Investment correctly, he has not quoted it completely. After discussing the "limited" nature of the court's power to dissolve a Delaware entity, the court went on to explain the impact of management dysfunction and deadlock on the dissolution analysis:

The court will not dissolve an LLC merely because the LLC has not experienced a smooth glide to profitability or because events have not turned out exactly as the LLC's owners originally envisioned; such events are, of course, common in the risk-laden process of birthing new entities in the hope that they will become mature, profitable ventures. In part because a hair-trigger dissolution standard would ignore this market reality and thwart the expectations of reasonable investors that entities will not be judicially terminated simply because of some market turbulence, dissolution is reserved for situations in which the LLC's management has become so dysfunctional or its business purpose so thwarted that it is no longer practicable to operate the business, such as in the case of a voting deadlock or where the defined purpose of the entity has become impossible to fulfill.[46]

         As discussed below, Seibel has failed to account for the fact that he and Ramsay no longer speak and no longer make decisions for GRB. This dysfunction and voting deadlock has left the Company in a petrified state with no means in the LLC Agreement to break free.

         Seibel also argues that equity should step in to prevent the dissolution of GRB even if the Court finds that it is "not reasonably practicable" for the Company to carry on its business in conformity with the LLC Agreement because "where one LLC member pursues dissolution to usurp a business opportunity or where he seeks to disenfranchise other LLC members for his personal and sole benefit, the requested dissolution should be denied."[47] Seibel's appeal to equity to prevent a dissolution of GRB rings hollow, however, because the circumstance that has created the deadlock and the resulting need for dissolution is of his own making.

         C. Insurmountable Deadlock at GRB Justifies Judicial Dissolution

         GRUS's "primary legal argument supporting [its] request for judicial dissolution of GRB . . . is that the two 50% owners of GRB-GRUS and Seibel- are deadlocked as to the management of the Company and the Company's LLC Agreement provides no means for resolving that deadlock."[48] In the context of judicial dissolution, "[d]eadlock refers to the inability to make decisions and take action, such as when an LLC agreement requires an unattainable voting threshold."[49]

         Where there are two 50% owners of a company, an unbreakable deadlock can form a basis for dissolution even if the company is still engaged in marginal operations.[50] In this regard, the decision in Haley v. Talcott[51] is instructive. There, on a motion for summary judgment, the court ordered judicial dissolution of a LLC pursuant to Section 18-802 upon concluding that there was "deadlock between the parties about the business strategy and future of the LLC"[52] with no reasonable exit mechanism, rendering the LLC unable to "function[] as provided for in the LLC Agreement."[53] The company's only asset was a piece of real estate leased to a restaurant, and the parties could not agree about what to do with that land-one wanted to continue the lease with the restaurant and the other wanted to end the lease and sell the property.[54] The two members had not interacted since a falling out and were engaged in other litigation relating to the LLC.[55]

         In analyzing the dispute, the court drew parallels between Section 18-802 and 8 Del. C. § 273 ("Section 273"), which governs the dissolution of joint venture corporations with two 50% owners.[56] Section 273 "sets forth three pre-requisites for a judicial order of dissolution: 1) the corporation must have two 50% stockholders, 2) those stockholders must be engaged in a joint venture, and 3) they must be unable to agree upon whether to discontinue the business or how to dispose of its assets."[57]The court found, by analogy, that all three of these pre-requisites were met where the parties were 50% members of the LLC, the parties intended to be and were engaged in a joint venture and the parties were at an impasse regarding how best to manage the LLC's lone asset.[58] In so holding, the court noted that while the business was "technically functioning, this operation is purely a residual inertial status quo, " and further noted that it was "not credible that the LLC could, if necessary, take any important action that required a vote of the members."[59] Therefore, after determining that the exit provision in the LLC agreement was not an adequate remedy in lieu of judicial dissolution, the court granted dissolution pursuant to Section 18-802 because it was "not reasonably practicable for the LLC to continue to carry on business in conformity with the LLC Agreement."[60]

         Here, GRUS and Seibel are both 50% owners of GRB, [61] each is entitled to appoint one manager, [62] all decisions of the managers must be unanimous besides those relating to the License Agreement, [63] and the LLC Agreement does not provide any mechanism to break a voting deadlock. The undisputed facts reveal that the relationship between GRUS and Seibel is, at best, acrimonious, as evidenced by the Counterclaims here, the Nevada Action and the litigation proceedings in New York stemming back to 2014.[64] While the working relationship between the parties arguably had broken down prior to Seibel's felony conviction in 2016, the facts as admitted in the pleadings show clearly that whatever deadlock may have arisen prior to Seibel's conviction solidified to igneous rock thereafter.

         Seibel was convicted and sentenced for impeding the administration of the Internal Revenue Code. Then, Caesars declared Seibel an "Unsuitable Person" and ordered GRB and GRUS to disassociate from him. When GRUS sought to comply with Caesars's direction by having Seibel voluntarily separate from GRB, Seibel refused. When Seibel proposed, as a compromise, that he would transfer his interest in GRB to a family trust, GRUS and Caesars both indicated that this was inadequate to cure the "Unsuitable Person" problem. When Caesars learned that Seibel remained at GRB after its disassociation deadline passed, it terminated the Caesars Agreement. It is difficult to imagine how GRB could be any more dysfunctional or deadlocked.[65]

         Given these undisputed facts, the notion that the deadlock might somehow be broken in the future is simply not reasonably conceivable. Ramsay, and his entity GRUS, no longer want to be associated with Seibel due to his felony tax-related conviction and the reputational damage that will flow from their continued connection with him. This circumstance will not change as future events unfold. It also distinguishes this case from the legion Delaware authority cited by Seibel to the effect that a party cannot seek dissolution simply to extricate himself from what he considers to a "bad deal."[66] Here, GRUS and Seibel elected to do business together in the form of GRB, each presuming that the other was an honorable actor. This presumption was shattered when Seibel was convicted of a felony, especially one involving dishonesty. Tax fraud is not a Las Vegas moment.[67] It should come as no surprise to Seibel that his conduct leading to that conviction will have consequences (here, as relates to GRB) that extend beyond his conviction and sentencing. This is especially so given that GRB's only revenue-generating business was in a casino, an enterprise that GRUS, Seibel and GRB knew was highly regulated.[68]

         Whether right or wrong, Caesars has determined in its "sole judgment" that Seibel is an "Unsuitable Person, " a consequence from GRUS and GRB's perspective that is entirely of Seibel's own doing. GRUS finds itself in a lifeless joint venture that does not resemble the one it bargained for.[69] The undisputed facts reveal that the parties will remain deadlocked without a mechanism in the LLC Agreement to break through.[70] It is, therefore, "not reasonably practicable" for GRUS and Seibel to carry on GRB "in conformity with [the] limited liability company agreement."[71]

         D. Equitable Principles do not Override the fact that Judicial Dissolution is Warranted

         Seibel argues that even if GRUS has satisfied the "not reasonably practicable" standard for dissolution, the Court should decline to order dissolution at this pleadings stage as a matter of equity. He correctly points out that Section 18-802 provides that the court "may" grant dissolution where it is no longer reasonably practicable for the company to continue to operate in accordance with its operating agreement; the General Assembly appears deliberately to have chosen not to mandate that result.[72] According to Seibel, the Court should invoke equity to deny the Petition because the dissolution is "being exploited tactically for an ulterior and inequitable purpose . . . [because GRUS is] pursu[ing] dissolution to usurp a ...


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