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US HF Cellular Communications, LLC v. Stiegler

Court of Chancery of Delaware

October 12, 2017


          Date Submitted: July 25, 2017

          Michael W. McDermott, Esquire and David B. Anthony, Esquire of Berger Harris LLP, Wilmington, Delaware; William M. "B.J." Lyon, Jr., Esquire of Lyon Law Firm, P.C., Mobile, Alabama; and Patricia Clotfelter, Esquire of Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, Birmingham, Alabama, Attorneys for Plaintiff.

          Geoffrey G. Grivner, Esquire of Buchanan, Ingersoll & Rooney, P.C., Wilmington, Delaware, Attorney for Defendants.


          SLIGHTS, Vice Chancellor.

         Defendants, Robert Block[1] and Rene Stiegler, III, are the co-founders of ShipCom LLC, a company that specialized in maritime communications. In early 2012, Plaintiff, U.S. HF Cellular Communications, LLC ("Cellular"), acquired an 80% interest in ShipCom LLC. The parties documented the acquisition and related agreements with respect to ShipCom in a Membership Interest Purchase Agreement dated February 23, 2012 (the "MIPA"). The undisputed record reflects that Cellular was prompted to invest in ShipCom in order to capture value inherent in a waiver ShipCom had recently obtained from the Federal Communications Commission (the "Waiver"), which allowed ShipCom to use a particular maritime frequency spectrum, typically restricted to maritime use, for emergency land-based communications.[2] The Waiver was granted exclusively to ShipCom and, by all accounts, it is quite valuable.

         All was well at ShipCom until May 2015, when Block and Stiegler discovered that Cellular was making plans to exploit the Waiver outside of ShipCom and to exclude them from the potential profits. They filed suit in Alabama alleging various tort theories. Cellular followed by filing suit in this Court where it seeks various declarations that Cellular breached the MIPA and related agreements.[3] Block and Stiegler then cross-claimed for counter declarations.

         This Opinion resolves the parties' cross-motions for summary judgment.[4] The motions concern two aspects of the MIPA and other related agreements. First, the parties present differing constructions of the term "Maritime Business" within the MIPA. Specifically, the parties dispute whether the Waiver is included within the term "Maritime Business." If it is, then the MIPA provides that only ShipCom may exploit the Waiver. If it is not, then Cellular may utilize the Waiver in its businesses outside of ShipCom. Second, the parties dispute the viability of certain provisions of the MIPA and related agreements that grant options to Block and Stiegler to convert their ShipCom equity into Cellular equity. Block and Stiegler maintain that the options are still exercisable; Cellular argues that the options have expired.

         For the reasons I explain below, Block and Stiegler's motion for summary judgment on the Maritime Business issue is GRANTED. The MIPA clearly and unambiguously provides that the Waiver is included in the definition of Maritime Business and that it cannot, therefore, be exploited outside of ShipCom. As to the option issue, Cellular's motion for summary judgment is GRANTED. Block and Stiegler failed to exercise the option in the time allowed by the relevant contracts.


         I have drawn the facts from the admissions in the pleadings, uncontested facts presented in the motions, the Stipulation and Order of Declaratory Judgment and those matters of which the Court may take judicial notice. Unless otherwise indicated, I have determined that these facts are undisputed.

         A. The FCC Grants the Waiver and Cellular Makes its Investment

         Before 2012, Block and Stiegler owned 100% of ShipCom. ShipCom's business focused initially on operating a network that facilitated ship-to-ship and ship-to-shore communications using a spectrum of high frequency ("HF") radio waves. The FCC license that permitted ShipCom to utilize this spectrum of HF radio waves limited its use to maritime communications; the license did not permit ShipCom to use the radio waves terrestrially. That changed after Hurricane Katrina hit the Gulf Coast in 2005. Katrina knocked out much of the terrestrial communication infrastructure, so first responders turned to ShipCom's HF spectrum to coordinate their rescue efforts. The FCC temporarily authorized ShipCom to use its HF spectrum terrestrially given the exigent circumstances.

         After the FCC saw the benefits of ShipCom's HF spectrum in terrestrial applications, it granted ShipCom the Waiver in 2010.[5] The Waiver allows ShipCom to use its HF spectrum terrestrially "in the event of a disaster that renders normal communications unavailable."[6] With the resulting expansion of its operations, ShipCom was suddenly an attractive investment target. Enter Cellular and its agent, Edward Bayuk. They saw the Waiver's value (later appraised at $2 billion), [7] pursued an investment in ShipCom and ultimately entered into the MIPA with Block and Stiegler. The MIPA required Cellular to pay Block and Stiegler $5 million in exchange for an 80% ownership interest in ShipCom.[8] The parties later executed the First Amended Membership Interest Purchase Agreement ("FAMIPA")[9] and a Note Payoff Letter Agreement ("Letter Agreement").[10]

         B. The Relevant Contract Provisions

         As noted, the cross-motions for summary judgment involve only two aspects of the parties' various agreements. The first is the meaning of "Maritime Business" as defined in the MIPA. The specific issue is whether the Waiver is included in the definition of "Maritime Business." The second relates to Block and Stiegler's contractual right to options to convert their 20% interest in ShipCom into a 10% interest in Cellular (the "Option"). I address the relevant contractual provisions below.

         1. Maritime Business

         The MIPA delineated the parties' intent with regard to ShipCom's anticipated operations and Cellular's permitted operations outside of ShipCom. ShipCom retained all operations related to its "Maritime Business."[11] Cellular retained the right to pursue business opportunities in the communications space outside of ShipCom's Maritime Business.[12] Specifically, the MIPA provides:

Simultaneous with the Closing, the Company [ShipCom] shall form an operating subsidiary with the name ShipCom Maritime, LLC in the State of Delaware, with the Chief Operating Officer to be Stiegler, to operate the portion of the business of the Company that is currently engaged in the operation of the maritime FCC licenses and Waiver, and to expand the maritime business surrounding the maritime FCC licenses and Waiver (the "Maritime Business"). The Purchaser [Cellular] intends to commence business operations in other communications related markets unrelated to the current Maritime Business by use of the new wholly-owned subsidiaries of Purchaser, and it is further the intent of the parties hereto that [Block and Stiegler] may only participate in those other entities by [] exercising their Option . . . .[13]

         As stated in this clear and unambiguous Recital, the parties agreed that ShipCom (through a newly created subsidiary) would continue to operate and expand "the maritime business surrounding the maritime FCC licenses and Waiver (the 'Maritime Business')."[14] The MIPA defines "Waiver" as the waiver the FCC granted to ShipCom in 2010.[15] The MIPA's definition section provides that "'Maritime Business' shall have the meaning ascribed to such term in the Recitals hereof."[16]

         2. The Options

         The MIPA originally provided that Block and Stiegler had 60 days from the date of closing to exercise the Option.[17] The parties amended this aspect of the MIPA when they executed the FAMIPA.[18] The FAMIPA reflects the parties' agreement that Cellular would not pay its $5 million investment at closing, but instead would deliver a secured note for the purchase price (the "Note") following closing.[19] Given this deferred payment, the FAMIPA also provided that the Option would remain open for 60 days after two conditions are satisfied: (i) Cellular has paid the Note in full; and (ii) Cellular has delivered its operating agreement to the Option holders (Stiegler and Block). Specifically, the applicable provision of the FAMIPA reads:

Exercise of Option. Subsection 5.11 (a) of the [MIPA] is hereby amended to provide that the time period during which the Option shall be exercisable shall commence on the date that the Note is paid in full by Purchaser and shall continue thereafter until 11:59 PST on the 60thday following the date that the Note is paid in full by Purchaser. Additionally, the provisions of (i) Section 5.11 (e) of the [MIPA] are hereby amended to require that the Purchaser deliver the USHFCC Operating Agreement to Sellers on or before the Purchaser's payment of the Note in full, and (ii) the provisions of Subsection 5.11(f) of the [MIPA] are hereby amended, such that from and after the Closing and continuing until the Note paid in full, the Company shall not become a subsidiary of any other entity other than the Purchaser, and the domicile of the Company's organization shall not be moved from the State of Alabama.[20]

         On May 29, 2013, Cellular delivered the Letter Agreement to Block and Stiegler. Here, the parties state that they "entered into" the Letter Agreement "in connection with the payoff in full of the Note" delivered by Cellular to Block and Stiegler at closing.[21] They further agree that "[t]he final payment under the Note" would be wired to Block's and Stiegler's attorneys into a specified account.[22]Paragraph 1 of the Letter Agreement makes clear that "payment in full" of the Note means the $5 million acquisition price less certain offsets as set forth in Section 7.07 of the MIPA.[23]

         Block and Stiegler agreed in the Letter Agreement that Cellular had not breached or defaulted under the MIPA, Note or other related agreements.[24] They also agreed that there were no existing conditions that would lead to default.[25]

No Default. The Holders [Block and Stiegler] and ShipCom Nevada, LLC a Nevada limited liability company, on behalf of themselves and each of their heirs or assigns, hereby agrees and acknowledges that except as set forth in Section 4 below (the "Exclusion Items"), as of the date hereof there are no existing events of default by USHF or ShipCom nor are there any events, conditions or acts which may result in a breach of, conflict with, constitute (with or without due notice or lapse of time or both) a default (collectively an "Event of Default"), under, or give rise to any right of termination, cancellation, or acceleration under the Agreement, Note, Pledge Agreement, Escrow Agreement, or that certain Commercial Lease between ShipCom Nevada LLC and ShipCom dated as of May 21, 2012. [26]

         And, importantly, they "acknowledge[d] and agree[d] that they ha[d] . . . received a copy of the [Cellular LLC] Agreement in satisfaction of the covenants of [Cellular] in Section 5.11(e) of the [MIPA] and Section 9 of the [FAMIPA]."[27]

         C. The Alleged Breaches

         After the deal closed, Cellular began to market its acquisition of the Waiver and its potential uses outside of ShipCom. For instance, Cellular stated in a private offering memorandum that it was "authorized by a FCC Waiver to operate on land when all existing forms of communication fail."[28] Cellular also admits that it entered into two agreements outside of ShipCom pursuant to which it intended to use "the FCC licenses and Waiver."[29] Block and Stiegler allege that the MIPA prohibits Cellular from pursuing these business opportunities outside of ShipCom and they seek a declaration from the Court to that effect.

         As for the Option issue, Block and Stiegler allege that the Option remains open because Cellular failed to deliver an operating agreement that complied with Section 5.11 of the MIPA. Specifically, they argue that the operating agreement tendered by Cellular lacked the capital structure referenced in Section 5.11(b) and lacked specific rights referenced in Section 5.11(e) of the MIPA. Since the delivery of a proper operating agreement is a condition to the running of the Option's 60-day expiration period, they seek a declaration that Cellular must honor their Options.

         D. Procedural History

         On May 29, 2015, two years after the parties finalized their deal, Block and Stiegler sued Cellular in Alabama. They alleged that Cellular planned to exploit the Waiver for its purposes without ShipCom's permission. They also alleged that Cellular was not allowing ShipCom (and thus Block and Stiegler) to share in any potential profits related to the Waiver.

         The conflict spilled into Delaware on August 3, 2015, when Cellular filed its complaint in this Court. In that complaint, Cellular sought declaratory and injunctive relief relating to the MIPA's substantive provisions and its Delaware forum selection clause. Block and Stiegler fired back in their answer and counterclaims, asserting claims for declaratory relief on the Maritime Business and Option issues. Various motions and amended pleadings followed. I need not review this history, or the full scope of the claims and counterclaims because, as noted, the parties have now stipulated to resolve all of the MIPA-related issues in dispute, except for those raised in their cross-motions for summary judgment. Thus, this decision will mark an end to their conflict, at least in the Chancery theater.

         II. ANALYSIS

         I first address the standard of review applicable to these cross-motions for summary judgment. I then address the two requests for declaratory judgment that remain in dispute.

         A. Summary Judgment Standard

         "There is no 'right' to a summary judgment."[30] Rather, summary judgment is only appropriate when "there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law."[31] "When the issue before the Court involves the interpretation of a contract, summary judgment is appropriate only if the contract in question is unambiguous."[32] In the procedural context of cross-motions for summary judgment, in order to prevail, one of the parties "must establish that [its] construction is the only reasonable interpretation."[33]

         Delaware "is more contractarian than many other states."[34] Our courts first and foremost look "to the four corners of the contract to conclude whether the intent of the parties can be determined from its express language."[35] "[T]he presumption that the parties are bound by the language of the agreement they negotiated applies with even greater force when the parties are ...

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