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Standard General L.P. v. Charney

Court of Chancery of Delaware

December 19, 2017

STANDARD GENERAL L.P., STANDARD GENERAL MASTER FUND L.P., P STANDARD GENERAL LTD., Plaintiffs,
v.
DOV CHARNEY, Defendant.

          Date Submitted: September 19, 2017

          Raymond J. DiCamillo & Matthew D. Perri, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Shannon Rose Selden, Derek Wikstrom & Justin Horton, DEBEVOISE & PLIMPTON LLP, New York, New York; Attorneys for Plaintiffs.

          Mark M. Billion, BILLION LAW, Wilmington, Delaware; Attorney for Defendant.

          MEMORANDUM OPINION

          BOUCHARD, C.

         In June 2014, the board of directors of American Apparel, Inc. suspended its founder, Dov Charney, from his position as Chief Executive Officer for alleged misconduct. Hoping to take control of the Company, Charney teamed up with Standard General, L.P., an investment firm. Charney borrowed approximately $20 million from Standard General to increase his holdings to close to 43% of the Company's outstanding shares in contemplation of running a proxy contest to replace the board that suspended him.

         In July 2014, after the Company fought back, Charney, Standard General, and American Apparel entered into a "Standstill Agreement." The Standstill Agreement reconstituted the board of American Apparel, established a process for a committee of the new board called the Suitability Committee to investigate Charney's alleged misconduct and decide whether he would return as CEO, and documented Standard General's commitment to invest up to $25 million in the Company. Charney and Standard General entered into a series of other agreements that, together with the Standstill Agreement, define the terms of their relationship (the "Agreements").

         In December 2014, the Suitability Committee voted against reinstating Charney, and its new board terminated his employment for cause. Over the course of the next year, the parties became embroiled in litigation in multiple forums and American Apparel filed for bankruptcy. Standard General filed this action in July 2015, a few weeks after Charney filed suit in California asserting that the Agreements were invalid and unenforceable.

         Before the Court is Standard General's motion for judgment on the pleadings for (1) a declaration that the Agreements were valid and enforceable when entered into, and (2) an award of damages for amounts due under the loan it made to Charney. In defending this action, Charney made a deliberate choice not to assert any counterclaims but has asserted a kitchen sink of eleven affirmative defenses. Charney's primary defense is that Standard General made certain oral promises to him that were false, which fraudulently induced him to enter into the Agreements.

         For the reasons explained below, I conclude that Charney could not have reasonably relied on any of these alleged false promises because they directly conflict with the terms of the eight written Agreements he signed, and that his other affirmative defenses fail as a matter of law and undisputed fact. Accordingly, Standard General is entitled to entry of judgment on the pleadings.

         I. BACKGROUND

         Unless noted otherwise, the facts recited in this opinion are based on the allegations in the Verified Complaint that are admitted in defendant's answer, [1] and documents incorporated therein.[2] Any additional facts are either not subject to reasonable dispute or subject to judicial notice.[3]

         A. The Parties

         Plaintiff Standard General L.P. is an investment firm. Plaintiffs Standard General Master Fund L.P. and P Standard General Ltd. are two of its private investment vehicles that each hold one of the two notes at issue in this case. I refer to these three entities together in this decision as "Standard General."

         Defendant Dov Charney is the founder and former Chief Executive Officer of American Apparel Inc. ("American Apparel" or "the Company"), a Delaware corporation. American Apparel is a clothing manufacturer, retailer, and wholesaler.

         B. Charney Enters into an Agreement with Standard General After Being Suspended from American Apparel

         In the late 1980s, Charney founded American Apparel from his college dorm room. He served as the CEO from its inception until his termination in June 2014.[4]American Apparel initially grew rapidly but ran into financial difficulties in 2009, which continued through 2014. In March 2014, American Apparel held a secondary equity offering to raise capital, which diluted Charney's stake in the Company from approximately 43% to 27%.[5]

         On June 18, 2014, the American Apparel board of directors suspended Charney from his position as CEO immediately after the Company's 2014 annual stockholders' meeting due to concerns that he had "allegedly violated various company policies" and breached his fiduciary duties in his management of the Company.[6] Charney maintains that those concerns were fabricated.

         After his termination as CEO, Charney entered into discussions with a number of investors and sought funding to increase his stake in American Apparel in an effort to run a proxy contest to challenge the incumbent board that suspended him and take control of the Company.[7] One of the firms Charney spoke with about a potential investment was Standard General, which had previously approached both Charney and American Apparel about investing in the Company.[8]

         On June 23, 2014, Standard General made a presentation to Charney and sent him a term sheet contemplating the purchase of approximately $20 million of American Apparel shares. According to Charney, an introductory e-mail from Standard General stated that the loan was being offered "as part of [Charney's] effort to gain control of the company."[9] Charney forwarded the term sheet to a former Chief Financial Officer of American Apparel to review.[10]

         Over the next two days, Charney, Standard General, and their respective counsel began to negotiate a transaction. During these negotiations, Charney agreed to a voting arrangement in which the parties would share voting control of both his existing and any newly purchased American Apparel shares, subject to certain exceptions.[11] Charney also told Standard General he was fit to return to control of American Apparel and that the Company's allegations against him were meritless.[12]On June 25, after working through the night on its terms, Charney and Standard General signed a letter agreement (the "Letter Agreement").[13] As discussed later, Charney alleges that Standard General made a number of oral misrepresentations to him that induced him to enter into the Letter Agreement, as well as other agreements with Standard General that he entered into over the next two months.[14]

         C. Charney Increases His Stake in American Apparel After Entering into the Letter Agreement with Standard General

         The Letter Agreement contemplates that Standard General would attempt to purchase, on Charney's behalf, at least 10% of the outstanding shares of American Apparel using funds that Standard General would loan to Charney, with the newly acquired shares serving as collateral for the loan along with Charney's existing shares.[15] The Letter Agreement also describes some of the terms of other agreements Standard General and Charney would enter into later as part of the transaction if Standard General was able to purchase the requisite number of shares, including:

• A warrant agreement "in form and substance satisfactory to" Standard General providing for the issuance of warrants to Standard General that "expire July 15, 2017 and may be cash settled" (the "Warrant Agreement");[16] and
• A cooperation agreement that would be "in form and substance reasonably satisfactory to" Standard General and require that all of Charney's American Apparel shares be " voted only as agreed among [Standard General] and Charney" but for two exceptions (the "Cooperation Agreement"). Charney would be permitted to vote approximately 47.2 million shares that he already held "(i) in favor of his election as director and (ii) pursuant to the Investment Voting Agreement" that Charney had with Lion Capital.[17]

         Lion Capital, referred to above, had provided an approximately $10 million loan to American Apparel and had a voting agreement with Charney.

         Upon signing the Letter Agreement, Standard General began purchasing American Apparel common stock on the market. Standard General purchased approximately 16% of American Apparel's outstanding shares over a two-day period for almost $20 million.[18] On June 27, 2014, Standard General loaned Charney the aggregate principal amount of $19, 556, 256 so that he could purchase the new block of shares in accordance with the Letter Agreement.[19]

         D. American Apparel Adopts a Shareholder Rights Plan in Response to Charney's Increased Holdings

         On June 27, 2014, Charney filed a Schedule 13D with the Securities and Exchange Commission announcing his increased stake in the Company.[20] The next day, American Apparel adopted a shareholder rights plan that "purported to retroactively block consummation of the transaction contemplated by the Letter Agreement."[21]

         In late June, Lion Capital called an event of default on its $10 million loan to the Company, which had the potential to trigger a cross-default on the Company's credit facility according to Standard General.[22] Charney alleges that Standard General's CEO told him during this period that Standard General was being pressured by its investors, who were unhappy with its arrangement with Charney.[23]

         In the context of these events, Standard General proposed to Charney that they negotiate a settlement with American Apparel in lieu of running a proxy contest.[24]Charney alleges he was uncomfortable with the idea of settling and "felt trapped, " but he nevertheless "committed himself to a course of action where he was hitched to Standard General's star."[25]

         E. The Cooperation and Standstill Agreements

         On July 9, 2014, Charney and Standard General entered into two agreements. The first is the Cooperation Agreement, which was contemplated under the Letter Agreement. It governs the voting of Charney's original and newly acquired American Apparel shares. The second is a Nomination, Standstill, and Support Agreement (the "Standstill Agreement"). The Standstill Agreement was an agreement among American Apparel, Charney, and Standard General.

         The Standstill Agreement reflects the parties' attempt to reach a settlement. It provides for a reconstitution of the American Apparel board by requiring that most of the then-current directors (including Charney) resign and by having the two continuing directors appoint five new directors to the board.[26] Three of the new directors would be designated by Standard General and two would be designated by the mutual agreement of Standard General and American Apparel. Charney was not permitted to be reappointed. The Standstill Agreement further provides that the newly-constituted board of American Apparel would establish a committee (the "Suitability Committee") charged with investigating Charney's alleged misconduct and determining whether he should be "reinstated as CEO of the Company or serve as an officer or employee."[27]

         The Standstill Agreement generally prohibits Charney and Standard General from attempting to impact the corporate governance of American Apparel, including by running a proxy contest or consent solicitation against the board, until the completion of the Company's 2015 annual meeting.[28] It also calls for Standard General to "timely provide" up to $25 million to buy out Lion Capital's loan and "for any other purposes as the Board, following the Director Appointments, may determine are appropriate."[29]

         On July 16, 2014, Standard General purchased Lion Capital's loan for approximately $9.5 million.[30] It is not disputed that Standard General invested an additional $15 million in American Apparel, although Charney asserts that this additional investment should have been made a few months earlier than it was.[31]

         After the Standstill Agreement was executed, Charney and other American Apparel board members resigned, and five new members were appointed to the board of American Apparel in accordance with its terms.[32]

         F. Charney and Standard General Enter into Additional Agreements Documenting the Terms of the Loan and the Warrant

         On August 25, 2014, Standard General and Charney executed the remaining five agreements contemplated by the Letter Agreement. They included: two Notes and a related Credit Agreement setting forth the terms of Standard General's loan to Charney; a Pledge Agreement documenting the allocation of Charney's previously-owned and newly-purchased American Apparel shares as collateral for the loan; and a Warrant Agreement permitting Standard General to purchase a portion of the jointly-controlled American Apparel shares at a designated price.[33] I refer hereafter to the Notes, the Credit Agreement, and the Pledge Agreement as the "Loan Agreements."

         The Notes, which are essentially identical other than their principal amount and the identity of the lending entity, [34] provide that the principal and accrued interest of the loan are due on June 26, 2019, except in the event of a default.[35]

         G. Suitability Committee Does Not Make a Clearance Determination

         In accordance with the Standstill Agreement, the American Apparel board appointed three directors to the Suitability Committee to conduct the contemplated investigation of Charney's conduct.[36] The Standstill Agreement provides that the Suitability Committee would "use its reasonable best efforts to conclude the Investigation as promptly as practicable but no later than 30 days after the date" of the agreement, "subject to any extensions that the Suitability Committee, by majority vote, determines in good faith are reasonably required to satisfy its members' fiduciary duties."[37] The investigation ultimately concluded in December 2014.[38]

         In the latter part of 2014, Charney become disillusioned with the Suitability Committee's investigation and Standard General's role in American Apparel.[39]Charney viewed the management team in place as ill-equipped and thought Standard General was "dominating and entrenching itself in the company" and had deceived him by making representations it had no intention of keeping.[40] Charney alleges that the investigation was flawed and that Standard General rigged the investigation against him, [41] or failed to rig it in his favor.[42] Charney also alleges that he was not afforded a preliminary hearing or provided with access to his e-mail account as required under the Standstill Agreement.[43]

         In September 2014, Charney allegedly offered to buy out Standard General's interests in American Apparel.[44] In or around November 2014, Charney allegedly approached American Apparel with an indication of interest from a private equity firm interested in buying the Company.[45] Standard General and American Apparel did not pursue these or other overtures according to Charney.[46]

         In December 2014, after it completed its investigation, the Suitability Committee voted against reinstating Charney as CEO. On December 15, 2014, the American Apparel board voted to terminate Charney's employment for cause.[47]Although it has no bearing on Standard General's motion for judgment on the pleadings, the parties disagree about whether Charney was properly terminated.[48]

         H. Litigation Ensues and American Apparel Files for Bankruptcy

         On May 15, 2015, American Apparel filed an action against Charney in this Court asserting that he had breached the Standstill Agreement by, among other things, seeking the removal of members of the Company's board.[49] On June 1, 2015, this Court entered a temporary restraining order against Charney enjoining him from, among other things, "directly or indirectly seeking the removal of any member of American Apparel's board of directors."[50]

         On June 24, 2015, Charney filed a complaint in California state court against Standard General, American Apparel, and its directors, seeking, among other things, to invalidate the Agreements (the "California action").[51] On July 11, 2015, Standard General filed this action asserting four claims for relief, which are described below.

         On October 5, 2015, American Apparel filed a Chapter 11 petition in the United States Bankruptcy Court for the District of Delaware.[52] Charney appeared in the bankruptcy proceeding and objected to American Apparel's reorganization plan, but his objection was overruled.[53] In the confirmation order, Chief Judge Shannon found that "all documents and agreements necessary to implement the Plan . . . have been negotiated in good faith and at arm's-length with the [various committees], Standard General, [and other relevant parties], " that American Apparel "exercised reasonable business judgment in determining which agreements to enter into, " and that the issuance of "reorganized equity interests was an essential element of the Plan and is in the best interests of [American Apparel], [its] Estates and their creditors."[54]

         On December 22, 2015, the California Superior Court granted Standard General's motion to stay the California action pending the outcome of this case. Discussing the Delaware exclusive forum selection clauses in the Standstill, Cooperation, and Warrant Agreements, the California Superior Court held that:

The parties clearly intended for disputes that relate to the Agreements to be adjudicated in Delaware and under Delaware law . . . . Delaware is capable of handling the litigation, and is currently doing so. It would not only be contrary to the Agreements, but also unduly inefficient and burdensome on the courts and the parties to allow the case to proceed on a different schedule in California.[55]

         II. PROCEDURAL POSTURE

         Standard General's complaint in this action asserts four claims. Count I seeks a declaratory judgment that the Agreements are valid and enforceable against Charney and that an event of default has occurred under the Notes, making them due and payable. Count II seeks damages and other relief for Charney's alleged breaches of various provisions of the Agreements. Count III seeks an injunction to enjoin Charney from taking certain actions to impair the Notes' collateral on the theory that Charney breached the implied covenant of good faith and fair dealing inherent in the Agreements. Count IV seeks damages and injunctive relief for impairment of the collateral for the Notes.

         Charney was represented by counsel at the outset of this case but proceeded pro se for much of this litigation after his initial counsel sought and was granted leave to withdraw in November 2015.[56] On April 29, 2016, the Court denied Charney's motion to dismiss this action under Court of Chancery Rules 12(b)(3) and 12(b)(6), noting, among other things, that courts "in Delaware will enforce valid forum selection clauses."[57]

         On June 22, 2016, Charney filed his answer, which asserts eleven putative "affirmative defenses": fraudulent inducement, promissory estoppel, breach of fiduciary duty, aiding and abetting, coercion, duress, breach of contract, failure to mitigate, unclean hands, unconscionability, and breach of the implied covenant of good faith and fair dealing.[58] Charney consistently has maintained throughout this litigation that he is advancing these issues solely as affirmative defenses and that he deliberately chose not to file any counterclaims in this action because he wishes to press his putative claims in the California action.[59] The Court has cautioned Charney on more than one occasion that his decision to proceed in this manner could impact his legal rights and that he would be well-advised to seek the assistance of counsel.[60]

         On February 28, 2017, Standard General filed the present motion seeking entry of a "judgment confirming that the written Agreements between the parties are valid and enforceable, that the loan Standard General made to Charney is due, payable, and owing, and . . . judgment at law in the amount of the loan, plus interest and attorneys' fees as provided by the Agreement."[61] On April 27, 2017, Charney filed his opposition papers. Although Charney was still pro se at the time, the opposition papers appear to have been prepared with the assistance of legal counsel as evidenced by their reference to pertinent legal authorities and the inclusion of an analysis from his bankruptcy counsel as an exhibit to his opposition papers.[62]

         On July 10, 2017, new counsel entered an appearance to represent Charney in this action.[63] On July 11, 2017, the Court rescheduled the oral argument on Standard General's motion for judgment on the pleadings from July 18 to September 19 to afford Charney's new counsel additional time to prepare for the hearing and granted Charney leave to file a supplemental opposition brief by August 18.[64] Charney elected not to do so. Oral argument proceeded on September 19, 2017.

         Although Standard General contends its motion covers all four of its claims, it made no genuine effort in its briefs or at oral argument to explain a basis for entry of judgment in its favor with respect to Counts III and IV. Those counts appear moot in any event because the collateral for the Notes (Charney's shares of American Apparel) was wiped out by virtue of American Apparel's bankruptcy reorganization.[65] Accordingly, this decision considers whether judgment in Standard General's favor is warranted only under Counts I and II of its complaint.

         III. ANALYSIS

         In Count I of its complaint, Standard General seeks two declarations: (1) that the Agreements are valid and enforceable and (2) that the loan it made to Charney is due, payable, and owing. In Count II, Standard General seeks a monetary judgment for the amounts due under the loan. The resolution of Count II necessarily overlaps with the declaratory relief Standard General seeks.

         In his answer, Charney asserts eleven affirmative defenses, which are recited above.[66] Two of these putative defenses are irrelevant to the resolution of either Count I or Count II and can be addressed in short order: breach of fiduciary duty and aiding and abetting.

         Charney asserts that Standard General breached fiduciary duties that it owed to him and aided and abetted a breach of fiduciary duties by American Apparel.[67] As an initial matter, Charney made no effort to explain in his opposition papers the basis for his assertion that Standard General-his contractual counterparty-owed a fiduciary duty to him, [68] or how Standard General could have aided and abetted American Apparel-as opposed to its directors-in breaching a fiduciary duty.[69] Putting those issues aside, Charney has not offered any authority, and I am aware of none, to suggest that a breach of fiduciary duty or the aiding and abetting of a breach of fiduciary duty could form the basis of an affirmative defense as opposed to a claim or counterclaim. As such, these putative defenses fail as a matter of law.[70]

         The remaining nine affirmative defenses can be grouped into two categories. The first category concerns those affirmative defenses that focus on events or circumstances that predate the execution of the Agreements and potentially could be relevant to determining their legal validity or enforceability at the time they were executed. This category consists of Charney's affirmative defenses for fraudulent inducement, coercion and duress, and unconscionability. I consider these defenses in Section III.C when addressing Standard General's request under Count I for a declaration that the Agreements are valid and enforceable, which I construe as a request for a declaration of validity and enforceability as of the time the Agreements were executed.

         The second category concerns those affirmative defenses that focus on events or circumstances post-dating execution of the Agreements that potentially could be relevant to determining whether Standard General is entitled to relief under Count II for Charney's alleged breach of the Notes. This category consists of Charney's affirmative defenses for breach of contract, breach of the implied covenant of good faith and fair dealing, failure to mitigate, promissory estoppel, and unclean hands. I consider these defenses in Section III.D. when addressing Standard General's request under Count II for entry of judgment on the amount due under the Notes.

         A. Applicable Law

         Before considering Counts I and II specifically, I address a preliminary issue to which the parties devoted little attention, namely what law governs Standard General's claims and Charney's affirmative defenses.[71] This issue implicates essentially two questions: first, whether the parties made an election as to the law governing the Agreements, which logically would apply to affirmative defenses sounding in contract; and second, whether the choice of law provisions in the Agreements are sufficiently broad to encompass Charney's affirmative defenses that sound in tort. The answer to both of these questions is yes in my view.

         Three of the Agreements contain Delaware choice of law provisions: the Standstill, Cooperation, and Warrant Agreements.[72] The other five Agreements contain New York choice of law provisions: the Letter Agreement and the four Loan Agreements.[73]

         Under Delaware law, the first step in a choice of law analysis is to ask whether the parties made an effective choice of law in their contracts.[74] Under New York law, where there is a New York choice of law clause, a court may apply New York law without conducting a choice of law analysis.[75] The Agreements here clearly manifest an intention to have either Delaware or New York law apply by including express choice of law language.[76] Thus, the next step is to analyze whether the language in the Agreements is sufficiently broad to cover affirmative defenses incident to the contract that sound in tort.

         "Under New York law, in order for a choice-of-law provision to apply to claims for tort arising incident to the contract, the express language of the provision must be 'sufficiently broad' as to encompass the entire relationship between the contracting parties."[77] "A basic precept of contract interpretation is that agreements should be construed to effectuate the parties' intent."[78] In determining whether parties intended to have an agreement govern all related claims, New York courts "have interpreted [broad] . . . choice-of-law-cum-forum-selection clauses to mandate application of New York law to all claims, including fraud claims, arising out of a transaction."[79]

         Delaware law similarly stresses the importance of honoring the parties' intention in selecting the law that governs a contract and related claims. In Abry Partners V, L.P. v. F & W Acquisition LLC, then-Vice Chancellor Strine discussed the importance of providing certainty to parties when they elect to choose law to govern their contract, and how the parties' choice of law clause also should determine the relevant law for fraud and related tort claims:

Parties operating in interstate and international commerce seek, by a choice of law provision, certainty as to the rules that govern their relationship. To hold that their choice is only effective as to the determination of contract claims, but not as to tort claims seeking to rescind the contract on grounds of misrepresentation, would create uncertainty of precisely the kind that the parties' choice of law provision sought to avoid. . . . .
To layer the tort law of one state on the contract law of another state compounds that complexity and makes the outcome of disputes less predictable, the type of eventuality that a sound commercial law should not seek to promote.[80]

         Here, all the Agreements either have language that the choice of law covers "all" disputes relating to the Agreements or have an express choice of law provision accompanied by a consent to jurisdiction (by Charney) in the same forum as the chosen law.[81] I thus find that the language of the Agreements reflects an intention to have the chosen law govern the contractual claims as well as affirmative defenses incident to those claims.

         This result is compelled by two additional factors. First, under the logic of Abry, the application of a contract's chosen law is particularly compelling where Charney, as the defendant, is not asserting any tort claims but merely bringing affirmative defenses that seek to preclude an award of relief in Standard General's favor. Second, the Agreements are interlocking and include integration clauses demonstrating the parties' clear intention to have the Agreements read together to encompass their entire relationship.[82]

         For the reasons stated above, I will apply Delaware law to all claims and affirmative defenses concerning or incident to the three Agreements containing Delaware choice of law provisions and will apply New York law to all claims and affirmative defenses concerning or incident to the five Agreements containing New York choice of law provisions.[83]

         B. Motion for Judgment on Pleadings Standard

         Court of Chancery Rule 12(c) provides that "[a]fter the pleadings are closed but within such time as not to delay the trial, any party may move for judgment on the pleadings"[84] where there are no material issues of fact. "[U]nder Court of Chancery Rule 12(c) for judgment on the pleadings, a trial court is required to view the facts pleaded and the inferences to be drawn from such facts in a light most favorable to the non-moving party."[85] In determining the relevant facts, this Court may consider "document[s] attached to the complaint when the document is integral to a plaintiff's claim."[86]

         Under Delaware law, which governs three of the Agreements, the "proper interpretation of language in a contract, while analytically a question of fact, is treated as a question of law, "[87] and "judgment on the pleadings . . . is a proper framework for enforcing unambiguous contracts."[88] Similarly, under New York law, which governs the other five Agreements, "[t]he interpretation of an unambiguous contract is a question of law for the court, and the provisions of a contract addressing the rights of the parties will prevail over the allegations in the [pleadings]."[89]

         C. Standard General is Entitled to a Declaration Under Count I that the Agreements were Valid and Enforceable when Entered

         In this section, I consider whether Standard General is entitled to a declaration that the Agreements were valid and enforceable when they were entered. A necessary predicate to affording a declaratory judgment under 10 Del. C. § 6501 is the existence of an "actual controversy."[90] Our Supreme Court has described the criteria for there to be an actual controversy as follows:

(1) It must be a controversy involving the rights or other legal relations of the party seeking declaratory relief; (2) it must be a controversy in which the claim of right or other legal interest is asserted against one who has an interest in contesting the claim; (3) the controversy must be between parties whose interests are real and adverse; (4) the issue involved in the controversy must be ripe for judicial determination.[91]

         Each of these criteria is easily met here. Charney does not argue otherwise.

         The first element is satisfied because Standard General seeks declaratory relief concerning contracts to which it and Charney are both parties. The second element is satisfied because Standard General seeks declarations relating to rights under the Agreements-declarations Charney has a clear interest in contesting. The third and fourth elements are satisfied because the parties' interests are real and adverse and the controversy is ripe for judicial determination, as evidenced by the fact that Charney asserts both in this action and in the California action that the Agreements are invalid and may not be enforced against him.

         It is not disputed that the Agreements are facially valid and enforceable. Rather, Charney challenges their validity and enforceability as of the time they were signed based on three affirmative defenses (fraudulent inducement, coercion or duress, and unconscionability) that focus on events or circumstances predating their execution. I now turn to those affirmative defenses.

         1. Fraudulent Inducement

         Charney's primary challenge to the validity and enforceability of the Agreements is his fraudulent inducement affirmative defense, which alleges that Standard General made false statements to induce him to enter into the Agreements. As explained below, this defense fails under both New York and Delaware law because the oral misrepresentations Charney purports to have relied on directly conflict with the express written terms of the Agreements, making any purported reliance by Charney unreasonable.[92]

         Under New York law, in order to prove fraudulent inducement, a party must establish that there was a "misrepresentation of a material fact, which was known by [the adversary] to be false and intended to be relied on when made, and that there was justifiable reliance and resulting injury."[93] New York courts find it unreasonable as a matter of law to rely on oral representations that conflict "directly"[94] or "meaningful[ly]" [95] with a written agreement.

         To prove fraud under Delaware law, a party must show, among other things, reasonable reliance on a false representation:

1) a false representation, usually one of fact, made by the defendant; 2) the defendant's knowledge or belief that the representation was false, or was made with reckless indifference to the truth; 3) an intent to induce the plaintiff to act or to refrain from acting; 4) the plaintiff's action or inaction taken in justifiable reliance upon the representation; and 5) damage to the plaintiff as a result of such reliance.[96]

         Like New York law, Delaware law finds it "unreasonable to rely on oral representations when they are expressly contradicted by the parties' written agreement. 'Fraudulent inducement is not available as a defense when one had the opportunity to read the contract and by doing so could have discovered the misrepresentation.'"[97]

         Although Charney spends fourteen pages in his answer explaining why he believes he was fraudulently induced to enter into the Agreements, Charney's case appears to boil down to essentially three false promises that Standard General allegedly made to him orally before he signed the various Agreements: (1) that Standard General would ensure that Charney would retake control of the Company;[98](2) that Standard General would ensure that the investigation would come out in Charney's favor and that he quickly would return as CEO of the Company;[99] and (3) that Charney could cancel all of the Agreements at any time by repaying Standard General's loan.[100] I address these alleged misrepresentations in that order.

         a. Representations About Retaking Control

         Charney first contends that Standard General represented it would ensure that he would retake control of the Company. Charney could not have reasonably relied on any representation to this effect, however, given that the plain terms of the Agreements he signed were to the contrary, both at the outset of his contractual relationship with Standard General and as that relationship evolved.

         The first of the Agreements that Charney signed was the Letter Agreement. Contrary to the notion that Standard General made an unequivocal commitment to ensure that Charney could retake control of the Company, the Letter Agreement instead makes clear that Standard General had only agreed to vote the shares in limited ways. It provides that, if Standard General were able to purchase at least ten percent of the Company's outstanding shares, then Standard General and Charney "shall enter into a cooperation agreement" with respect to both Charney's original shares and the newly purchased shares of American Apparel "in form and substance reasonably satisfactory to [Standard General] providing that the Additional Shares and the Original Shares shall be voted only as agreed among [Standard General] and Charney."[101] The Letter Agreement contained only two carveouts to this voting arrangement: Charney was "entitled to vote the Original Shares (i) in favor of his election as director and (ii) pursuant to the Investment Voting Agreement [with Lion Capital]."[102]

         The express language of the Letter Agreement undercuts any alleged promise by Standard General to fully support Charney in returning to control because it provides for a negative voting arrangement where neither party can compel the shares to be voted in a particular way. Further, by expressly permitting Charney to vote his "Original Shares" but not the newly acquired shares in favor of his election as director, the clear implication is that the parties had not agreed to vote the new shares even in favor of Charney's election as a director.

         The Standstill Agreement similarly undercuts such a promise by expressly limiting Standard General's ability to return Charney to control. To start, the Standstill Agreement explicitly provides for Charney and certain other individuals to resign from the board shortly after the Standstill Agreement went into effect, for the board to immediately be restructured by having the continuing directors appoint new directors designated by Standard General and by the mutual agreement of Standard General and American Apparel (but in no case Charney), and for the members of the newly-constituted board to serve as directors until their "successors are duly elected and qualified."[103] The Standstill Agreement also specifically barred Standard General and Charney from soliciting proxies or consents to elect directors or taking any action to "seek the removal of any member of the Board or propose any nominee for election to the Board" until after the completion of the 2015 annual meeting.[104]

         The Standstill Agreement further provides that Charney could not seek representation on the board until after the completion of American Apparel's 2015 annual meeting, [105] and that any shares held by Charney and Standard General exceeding one-third of the Company's outstanding shares be voted at meetings prior to and including the 2015 annual meeting in proportion to the votes cast by the Company's other stockholders.[106] Thus, contrary to Charney's allegation that Standard General promised to help Charney take control of the Company "immediately, "[107] Standard General could only have done so by materially breaching express terms of the Standstill Agreement.

         The Cooperation Agreement formalizes the voting provisions set forth in the Letter Agreement, namely that Charney's original shares and the newly purchased shares of American Apparel be voted "in such manner as has been agreed in writing" by Standard General and Charney, with the same two carveouts set forth in the Letter Agreement.[108] The Cooperation Agreement also contains a provision stating that "the Parties have not entered into any agreement or arrangement relating to the voting of the [American Apparel Shares] with respect to any matters or items of business except as set forth" in the Letter Agreement, Standstill Agreement, and Cooperation Agreement-expressly negating the existence of any unwritten understanding to ensure that Charney would retake control of the Company.[109]

         In sum, given that the plain terms of the contracts expressly prevented both Charney and Standard General from seeking to retake control of the Company before the 2015 annual meeting, limited their ability to vote Charney's shares during this period, and required Standard General's agreement with respect to the voting of those shares thereafter (with certain exceptions), Charney could not have reasonably relied on any alleged promise that Standard General would ensure that he would be able to retake control of the Company.

         b. Representations About Returning as CEO

         Charney next contends that Standard General assured him that the investigation would come out in his favor and that he quickly would return as CEO of the Company. Any such representation cannot be squared with the investigation process outlined in the Standstill Agreement.

         Specifically, the Standstill Agreement provides that the Suitability Committee "shall oversee the investigation . . . of alleged misconduct by Charney, "[110] and that American Apparel-not Standard General-would be responsible for forming the Suitability Committee. Further, the Standstill Agreement recites that any clearance determination to permit Charney to be reinstated as CEO would be the responsibility of the members of the Suitability Committee, acting "by majority vote and in good faith and consistent with its members' fiduciary duties."[111] Given the express language of these provisions, Charney could not have reasonably relied on any alleged representation that Standard General would be able to control the investigation and guarantee his return as CEO. To the contrary, that determination would be made by the members of the Suitability Committee who were obligated to comply with their fiduciary duties as directors of a Delaware corporation.

         Even in the absence of an express provision acknowledging that the members of the Suitability Committee were required to act "in good faith and consistent with [their] fiduciary duties, "[112] it simply is not credible for Charney to suggest he could reasonably rely on a representation that guaranteed his return as CEO. The fact that the directors serving on the Suitability Committee would be required to act independently and in good faith in conducting the investigation into Charney's alleged misconduct, and could not just be a rubber stamp for Standard General or Charney, should have been palpably obvious to Charney-himself a longtime director and fiduciary of a Delaware corporation-even if Standard General had designated (which it did not) every director for appointment to the Company's board in the first place.[113]

         c. Representation About Buying Out Standard General

         Charney alleges Standard General assured him that "Charney could 'tap Standard General out' at any time by repaying the Loan, and Charney would be able to cancel all of the agreements in connection with the American Apparel 'settlement.'"[114] Once again, it would have been unreasonable to rely on such a representation given the directly conflicting terms of the Agreements.

         In particular, Charney could not reasonably rely on a representation that he and Standard General could cancel all of the Agreements by themselves because American Apparel was a party to the Standstill Agreement and its consent would be necessary to unwind the "settlement." Significantly, the Standstill Agreement included a number of provisions for American Apparel's specific benefit, including Standard General's commitment to provide the Company with up to $25 million in additional capital or financial support, governance provisions that lasted until the completion of the 2015 annual meeting, and a process for addressing Charney's alleged misconduct and whether he should be reinstated as CEO. None of these provisions-or any other provision in the Standstill Agreement-could be amended unless "approved by a majority of the members of the [American Apparel] Board who are not Standard General Designees."[115]

         Reinforcing the need for American Apparel's consent to cancel all of the Agreements, (1) the Standstill Agreement provides that the "Cooperation Agreement shall not be amended in any manner, terminated or suspended, directly or indirectly" to get around the terms of the Standstill Agreement, [116] and (2) the Warrant Agreement provides that "any term [thereof] may be amended, altered, modified or waived only by an instrument in writing signed by" American Apparel.[117] These provisions further demonstrate that Standard General and Charney alone could not cancel all of the Agreements and unwind the settlement even if they wanted to, and negate any notion that Charney could have reasonably relied on a contrary representation.[118]

         2. Coercion/Duress

         Charney's next affirmative defense is that he "was under duress between the time [he] signed the Letter Agreement and the Standstill Agreement."[119] Charney provides no details in his opposition to support this contention, stating only that he "received almost no consideration let alone fair consideration from the Standstill Agreement" and that "his consent was obtained by duress, fraud and coercion."[120]

         Under Delaware law, which governs the Standstill Agreement that is the focus of Charney's coercion/duress defense, "[t]here are three basic elements of a claim that coercion or duress taints the enforceability of a contract: (1) a 'wrongful' act, (2) which overcomes the will of the aggrieved party, (3) who has no adequate legal remedy to protect himself" and thereby assents to an agreement.[121] The "wrongful act" can include economic duress by the counterparty.[122] "Economic duress exists where a person is deprived of the free exercise of his will through wrongful threats or acts directed against the person's business interests."[123] Delaware Courts have noted that a party may ratify a contract it agreed to in duress by accepting the benefits flowing from it or failing to challenge it for any considerable length of time.[124]

         Charney's coercion/duress defense suffers from two fatal flaws. First, Charney has failed to identify any wrongful act of Standard General that could be said to rise to the level of overcoming his free will. He does not, for example, identify any threats that Standard General made against his personal safety or his business interests of such a serious nature as to deprive him of the ability to say no to entering into the Standstill Agreement, or any of the other Agreements. Instead, Charney contends his coercion/duress defense requires "additional fact-finding."[125]This is illogical. If Charney truly believed he had been coerced into entering into the Standstill Agreement, he should be able to explain the reason why, particularly since the test "is a subjective one that focuses on the state of mind of the 'victim' of the duress."[126]

         The most Charney musters as grounds for his coercion/duress defense is an allegation that he "received almost no consideration let alone fair consideration from the Standstill Agreement."[127] This allegation has nothing to do with a threat that was made against Charney to overcome his exercise of free will, but simply reflects buyer's remorse. Charney is a sophisticated businessperson who founded and served as the CEO of a public company, and who was represented by separate counsel when he entered into the Standstill Agreement. Undoubtedly, he was disappointed when American Apparel adopted a shareholder rights plan in response to his increased shareholdings in the Company, which complicated his hope to return as the Company's CEO. He has not, however, come close to identifying a wrongful act that could be said to have overcome his free will in deciding to enter into the Agreements.

         Second, Charney's coercion/duress defense fails for the independent reason that Charney did not repudiate the terms of the Standstill Agreement in a timely manner but instead treated it as valid, performed under it, and enjoyed its benefits for a considerable period until litigation ensued. The retention of benefits defeats a claim of duress or undue influence as it is "axiomatic that a party cannot both accept the benefits which accrue under a contract on the one hand and shirk its disadvantages on the other."[128] The pleadings reflect that after entering into the Standstill Agreement, Charney resigned as a member of the American Apparel board and engaged in the investigation process in an effort to vindicate himself to facilitate his return as CEO. Even when Charney's counsel wrote a letter to the Suitability Committee's counsel on December 12, 2014-just a few days before the investigation concluded-to object to how it was being conducted, Charney did not repudiate the Standstill Agreement.[129] Under Delaware law, Charney's acceptance of the benefits and protracted silence precludes a finding of duress or coercion.[130]

         3. Unconscionability

         Citing Section 2-302 of the Uniform Commercial Code, Charney advances the affirmative defense of unconscionability in his answer.[131] The basis for his invocation of that defense, however, is obscure and plainly insufficient to sustain a viable defense to the validity of any of the Agreements when they were signed.

         Under Delaware law, the doctrine of unconscionability is "a limited exception to Delaware law's broad support for freedom of contract."[132] "When parties have ordered their affairs voluntarily through a binding contract, Delaware law is strongly inclined to respect their agreement, and will only interfere upon a strong showing that dishonoring the contract is required to vindicate a public policy interest even stronger than freedom of contract."[133] In order to find an agreement unconscionable, Delaware courts must find what amounts to both substantive and procedural unconscionability[134]-"that the party with superior ...


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