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A&J Capital, Inc. v. Law Office of Krug

Court of Chancery of Delaware

July 18, 2018

A&J Capital, Inc.
v.
Law Office of Krug

          Date Submitted: July 12, 2018

          Kurt M. Heyman, Esquire Heyman Enerio Gattuso & Hirzel LLP

          Stephen B. Brauerman, Esquire Bayard, P.A.

         Dear Counsel:

         This letter opinion addresses Plaintiff, A&J Capital, Inc.'s ("A&J"), motion for summary judgment in which A&J seeks a declaratory judgment that it was improperly removed as manager of LA Metropolis Condo I, LLC ("LAMC" or the "Company"). A majority of the Company's members purported to remove A&J as manager "for cause." A&J's motion for summary judgment posits that, as a matter of contract or as a matter of Delaware common law, prior to removal, the members were required to provide A&J with: (1) a notice of their intent to remove A&J that contained an explanation of the ground(s) for removal, and (2) an opportunity to respond to the notice. In taking this position, A&J acknowledges that the Company's operating agreement does not expressly contain either condition to "for cause" removal.

         For the reasons discussed below, I am satisfied that the common law does not alter or amend the Company's operating agreement with respect to "for cause" removal procedures. Consequently, the motion for summary judgment must be denied.

         I. FACTUAL BACKGROUND

         I have drawn the facts from the admissions in the pleadings and uncontested facts presented in the parties' submissions.[1] I have resolved any doubt as to the absence of a genuine issue of fact in favor of the non-moving party.[2]

         A. The Parties

         Plaintiff, A&J, is a California corporation and the designated Class B Manager of the Company pursuant to the Operating Agreement of LAMC (the "Operating Agreement") and the Management Agreement by and among LAMC, A&J and the Joined Members (the "Management Agreement"), [3] both dated July 11, 2014 (collectively, the "Agreements").[4] Nominal Defendant, LAMC, is a Delaware LLC that was formed for the purpose of raising immigrant investor capital under the EB-5 visa program administered by the United States Citizenship and Immigration Services.[5] The Company solicited capital from 200 foreign investors, and these investors became Class B Members of the Company.[6] Defendant, Law Office of Krug ("Krug"), is a single-person California law firm appointed as the interim Class B Manager following A&J's purported removal.[7]

         B. A&J's Removal as Class B Manager

         The Operating Agreement and Management Agreement contain three removal provisions that are relevant to this dispute. Under Section 4.8 of the Operating Agreement, "the Class B Members, by Majority Vote, [8] shall have the sole and exclusive right to approve or disapprove the following . . . (f) Subject to 5.3, appointment, reappointment and removal, as applicable of any Manager."[9] Pursuant to Section 5.3(c)(ii) of the Operating Agreement, "[t]he Class B Manager may be removed by Majority Vote of the Class B Members for gross negligence, intentional misconduct, fraud or deceit, all as more fully set forth in the Management Agreement."[10] Section 12(b) of the Management Agreement states, in its entirety:

The Class B Manager may be removed by Majority Vote (as defined in the Operating Agreement) of the Class B Members for gross negligence, intentional misconduct, fraud or deceit; provided that in any of such events as specified in this Section 12(b), without limiting any of their respective rights and remedies, the Members shall be entitled to exercise their respective powers under the Operating Agreement to appoint a new Class B Manager and to cause the Company to issue written notice of termination to the Class B Manager hereunder.[11]

         These three provisions-Sections 4.8(f) and 5.3(c)(ii) of the Operating Agreement and Section 12(b) of the Management Agreement-comprise the universe of contractual provisions that govern the procedure for removal of the Class B Manager.

         On or about March 14, 2018, A&J received a letter (dated March 14, 2018) notifying it that a majority of the Class B Members had voted to remove A&J as the Class B Manager and had appointed Krug as the interim Class B Manager (the "Removal Notice").[12] The Removal Notice states that "[a] majority of the Class B members have, in writing, voted to remove A&J [] as the Class B Manager," but is silent as to the reason(s) for A&J's removal or the details of the Class B Member vote effectuating the removal.[13] A&J asserts that prior to receiving the Removal Notice, "neither A&J nor the Company received any notice of any alleged default, or of the intent to hold a vote . . . by the Class B Members either to remove A&J or to appoint Krug in A&J's place as Class B Manager."[14]

         C. Procedural Posture

         The parties do not dispute that the Agreements specify, in essence, that removal of the Class B Manager must be "for cause."[15] They do, however, dispute whether the Agreements, on their face, require the Class B Members to deliver to the Class B Manager a notice of intent to remove and provide an opportunity to be heard, prior to removal. A&J construes the Agreements to require notice and an opportunity to respond to the notice; Krug maintains that no such requirements can be drawn from any of the clear and unambiguous provisions at issue.[16]Alternatively, A&J argues that Delaware common law, as expressed by our courts in the context of Delaware corporation law, requires that managers be given notice prior to a purported for cause removal. Not surprisingly, Krug disagrees, principally on the ground that LAMC's governance scheme is a product of the parties' contract (the Operating Agreement), and that scheme cannot be altered by the common law or otherwise without the consent of the parties to the contract.

         Regardless of which approach the Court might take-enforcement of a notice requirement as a matter of contract or as a matter of common law-A&J contends that the Court can decide that it was improperly removed as Class B Manager as a matter of law on summary judgment without the need for a trial. I agree that there are no factual issues in dispute with respect to A&J's motion. I disagree, however, with the legal premises of that motion. Simply stated, there is neither a contractual nor a common law basis to impose upon the Class B Members a "notice and response" condition as a predicate to removal of the Class B Manager for cause.

         II. LEGAL ANALYSIS

         The court may grant summary judgment only if "there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law."[17] "When the issue before the Court involves the interpretation of a contract, summary judgment is appropriate only if the contract in question is unambiguous" and favors the movant's position.[18] If the court construes the "plain-meaning of the contract's terms and provisions" in a manner differently than the construction proffered by the movant, the court must deny summary judgment and enforce the contract as written.[19]

         A. The Agreements Do Not Contemplate Notice and an Opportunity to Be Heard Prior to Removal

         As noted, A&J maintains that its right to pre-removal notice is set forth in the Agreements themselves.[20] After carefully reviewing the clear and unambiguous terms of the operative provisions, however, I am at a loss to see where that right is either expressly stated or implied. Indeed, the Agreements say nothing at all about notice or an opportunity to be heard prior to removal. The only "notice" that is required is referenced in Section 12(b) of the Management Agreement, and that notice is an after-the-fact notice of termination, not a prior notice of the cause the Class B Members believe they have to justify removal. That the Management Agreement speaks to notice of termination after the Class B Members have voted, but is silent about prior notice and an opportunity to be heard, is meaningful in discerning that the parties did not intend to contract for pre-removal notice.[21]

         A&J urges the Court to infer that the procedural protections it seeks are embedded in the Agreements because "the common meaning of being removed 'for gross negligence, intentional misconduct, fraud or deceit' means 'by reason of' or 'due to' those bases," thus requiring notice prior to removal.[22] In the context of noncorporate business entities, however, the entity operating agreement typically will expressly provide for such procedural protections when the parties intend for them to apply.[23] In the absence of such provisions, the Court will not infer them or rewrite the contract to include them.[24]

         B. Common Law Cannot Be a Basis to Rewrite the Parties' Agreements

         A&J alternatively argues that pre-removal notice is implicit in the Agreements because that is a sine qua non of for cause removal recognized in our common law. Relying upon Campbell v. Loew's, Inc., Bossier v. Connell and Superwire.com, Inc. v. Hampton, A&J argues that a requirement has emerged in the common law that before a director of a Delaware corporation may be removed for cause, that director must be given pre-removal notice of the purported "cause" for removal and an opportunity to respond.[25] According to A&J, there is simply no principled basis to deny a managing member of a Delaware LLC that same right and protection. For reasons explained below, I disagree.

         1. Limited Liability Companies Are ...


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