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

Court of Chancery of Delaware

January 29, 2019

A&J CAPITAL, INC., Plaintiff,
LAW OFFICE OF KRUG, Defendant, and LA METROPOLIS CONDO I, LLC, a Delaware limited liability company, Nominal Defendant.

          Date Submitted: October 30, 2018

          Kurt M. Heyman, Esquire, Melissa N. Donimirski, Esquire and Elizabeth A. DeFelice, Esquire of Heyman Enerio Gattuso & Hirzel LLP, Wilmington, Delaware, Attorneys for Plaintiff.

          Stephen B. Brauerman, Esquire and Sara E. Bussiere, Esquire of Bayard, P.A., Wilmington, Delaware and Craig H. Marcus, Esquire of Glaser Weil Fink Howard Avchen & Shapiro LLP, Los Angeles, California, Attorneys for Defendant.



         A dispute over the management of a Delaware limited liability company has sparked allegations of conspiracy, forged documents and perjured testimony. The company, nominal defendant, LA Metropolis Condo I, LLC ("LAMC" or the "Company"), was formed to raise investment capital under a federal government program whereby the government offers favorable immigration treatment in exchange for qualified foreign investments in new commercial enterprises in the United States. The members of the Company are two hundred Chinese nationals who collectively contributed $100 million to be invested in a construction loan for the development of residential and commercial space in downtown Los Angeles. The loan was extended to Greenland LA Metropolis Development I, LLC (including its affiliates, collectively, "Greenland"). The plaintiff, A&J Capital, Inc. ("A&J" or "Plaintiff"), was engaged to serve as Class B Manager of the Company in exchange for a management fee. It is alleged that Greenland became displeased with A&J and then colluded with certain members of the Company to trump up reasons to have A&J removed as manager. That removal occurred in March 2018.

         The Company's operating agreement and the management agreement by which A&J was engaged both provide that the Class B Manager may be removed only for "cause." In its complaint, A&J alleges that no such cause existed, that certain members were cajoled by Greenland into voting to remove A&J so that Greenland could extract concessions from the Company, and that defendant, Law Office of Krug ("Krug" or "Defendant"), acted as the facilitator of the plot improperly to remove A&J and now occupies the role of Class B Manager without authority.

         At least as to the management agreement, the "for cause" removal provision was a protection for which A&J bargained and gave consideration. "For cause" removal provisions are not aspirational, nor do they allow the principal to remove the agent on a whimsy and then manufacture "cause" after-the-fact to justify the removal. Nevertheless, the majority of the members of LAMC, influenced by Greenland and guided by Krug, apparently viewed their removal rights differently. As explained in this post-trial Memorandum Opinion, I am satisfied from the preponderance of the evidence that these members removed A&J without cause and then formulated after-the-fact explanations for removal that are neither credible nor adequate under the operative agreements to justify their actions. Accordingly, as requested, A&J is entitled to declarations pursuant to 6 Del. C. §§ 18-110 and 18-111 that it was improperly removed as Class B Manager and that it must be reinstated to that position immediately with all of its rights and obligations under the operative agreements restored.

         I. BACKGROUND

         The Court held a two-day trial during which it received over 400 trial exhibits and heard live testimony from six witnesses. I have drawn the facts from the stipulations of fact entered in advance of trial, the testimony and exhibits presented during trial and from reasonable inferences that flow from that evidence.[1] To the extent I have relied upon evidence to which an objection was raised but not resolved at trial, I will explain the bases for my decision to admit that evidence before I discuss it.

         A. The Parties and Relevant Non-Parties

         Plaintiff, A&J, is a financial services and advisory firm incorporated and based in California.[2] It is the designated Class B Manager of LAMC and also manages ten other companies that operate under the EB-5 Immigrant Investor Visa Program ("EB-5").[3] Qingfu "Frank" Xu is A&J's founder and President.[4] Alex Verba is A&J's Senior Vice President and in charge of LAMC's day-to-day operations.[5]

         Defendant, Krug, is a single-person, unincorporated law firm based in California that is operated by James Krug.[6] Krug was appointed as the interim Class B Manager following A&J's purported removal.[7]

         Nominal Defendant, LAMC, is a Delaware LLC principally based in California that formed in April 2014 to raise immigrant investor capital under the EB-5 visa program.[8] As noted, the investment capital was used to provide a $100 million construction loan to Greenland for the development of the first phase of a multi-phase real estate project.[9]

         Non-party, Greenland, is a Delaware LLC and an affiliate of one of the largest state-owned real estate developers in China.[10] Greenland was in charge of developing a 38-story residential tower in downtown Los Angeles (the "Project") and received the EB-5 construction loan from the Company to fund the development.[11]

         Non-party, Henry Global Consulting Group ("Henry Global"), is a Chinese company that solicits investments for EB-5 projects and was responsible for securing investments in the Company.[12] Henry Global is a strategic partner of A&J and is involved with each of the EB-5 companies managed by A&J.[13] Henry Global's owner's sister is married to Mr. Xu, A&J's founder and President.[14]

         B. The Company and the Project

         In 1990, Congress enacted EB-5 to permit foreign nationals to become lawful permanent residents of the United States (or "green card" holders) by making a threshold investment in a "new commercial enterprise" ("NCE") that creates or preserves at least ten jobs for U.S. workers.[15] In addition to meeting numerous requirements imposed by EB-5 regulations, the foreign national must serve as limited partner of the NCE or as an investor in an entity that makes a loan to a NCE.[16] The foreign national's investment must be maintained in the NCE and must remain "at risk" while the United States Citizenship and Immigration Service ("USCIS") processes the application for permanent residency, a process that can take as long as ten years.[17]

         In late 2013, Mr. Xu was introduced to Ifei Chang, then-CEO of Greenland USA, to discuss an EB-5 investment in the Project.[18] When Ms. Chang expressed interest, Mr. Xu introduced her to A&J's strategic partner, Henry Global.[19] By late summer of 2014, Greenland, Henry Global and A&J had agreed to structure the EB-5 investment as a Delaware LLC that would extend a $100 million construction loan to Greenland with a 2.2% rate of return to mature after five years.[20] As Henry Global prepared to market the investment to Chinese citizens, Greenland named Home Paradise Investment Center, LLC ("Home Paradise") to be the "Regional Center" for the Project.[21] It also named Urban Harmony, a wholly owned subsidiary of Home Paradise, as the Company's Class A Manager.[22]

         C. The Disclosure Document and Agreements

         Four documents are particularly important in determining the validity of A&J's removal: the Private Placement Memorandum ("PPM") (a disclosure document from Greenland to potential investors), [23] the Operating Agreement (a contract between Urban Harmony and the investors), [24] the Management Agreement (a contract between the Company, A&J and the investors)[25] and the Distribution Services Agreement ("DSA") (a contract between the Company and Henry Global).[26]

         1. The PPM

         On July 11, 2014, Henry Global and Home Paradise issued a PPM to prospective EB-5 investors that described the Project and the terms of the investment offering.[27] The PPM explains that upon payment of a $500, 000 "Subscription Price" and a $45, 000 "Administration Fee," each EB-5 investor will receive a "Class B Unit" and will become a "Class B Member of the Company" (a "Member").[28] By the terms of the offering, Class B Members together own 100% of the Class B membership interests in the Company.[29]

         The $100 million loan funded by the Members' Subscription Price bears an interest rate of 2.2% with 1.8% payable in cash and 0.4% accrued annually.[30] The PPM discloses that Members can expect to receive 1.0% total interest on the loan (or 0.2% per year payable in five years at the loan's maturity date).[31] Given the low interest return, the PPM makes clear that the primary benefit of the Members' investment is participation in the EB-5 program and resulting reward of permanent residency in the United States.[32] In this regard, the PPM states that "the Loan may not be prepaid prior to the Maturity Date unless (i) all Class B Members receive final adjudication of their respective Form I-829 Petition . . . and (ii) no rights or economic interests of any Class B Member will otherwise be adversely affected."[33]

         The PPM contemplates that a Class A Manager and Class B Manager will administer the Company.[34] Although the PPM states that the Class B Manager will be elected by majority vote of the Class B Members, it presupposes that A&J will be appointed as Class B Manager and lists A&J's contact information.[35] The PPM also advises investors that the Class A and Class B Managers may be removed only "by majority vote of the Class B Members for gross negligence, intentional misconduct, fraud or deceit."[36]

         As disclosed in the PPM, each person or entity that performs a role described in the PPM-Class A Manager, Class B Manager, Program Locator and Processor- is to be paid a fee for their services. The Class A Manger is to receive a management fee of $4, 000 per Class B Member plus 0.1% per year of the outstanding loan balance.[37] The Class B Manger is to receive 0.4% per year of the outstanding loan amount.[38] There is no explicit fee disclosed for the Program Locator and Processor, but the PPM states "that the Company may pay a fee to compensate firms and individuals for those [Program Locator and Processor] services."[39]

         The PPM also discloses the permitted and prohibited sources of payment for so-called Manager Fees:

All of the Administration Fees are paid to Program Locators and Processors for capital raising and document processing and to the Class A Manager and Regional Center as payment for their fees . . . . None of such fees shall be paid out of the Subscription Price or investment in the Membership Interests of the Company.[40]
The Company will pay out of the Administration Fee and interest income all ordinary administrative and operating expenses . . . as well as payments to Managers and other third party service providers for servicing the Loan, assisting with the Offering, and providing immigration services to the Company, Subscribers, and Class B Members.[41]

         2. The Operating Agreement

         As previewed in the PPM, the duties of the Class A and Class B Mangers are set forth in an Operating Agreement that became effective on the same day the PPM was issued.[42] Under Section 5.3(d)(i) of the Operating Agreement, the Class A Manager is responsible for maintaining the Company's compliance with USCIS rules and regulations and communicating with USCIS about those matters.[43] Under Section 5.3(d)(ii), the Class B Manager is responsible for the day-to-day administration of the Company, which includes, among other responsibilities, managing investment of Company funds, negotiating, amending and/or supplementing the terms of any loans made by the Company and entering into any agreement deemed appropriate for any beneficial purpose of the Company.[44]

         The appointment and removal of the Class B Manager is governed by Section 4.8 of the Operating Agreement, which provides:

The Class B Members, by Majority Vote, [45] shall have the sole and exclusive right to approve or disapprove of the following . . . f) Subject to 5.3, appointment, reappointment and removal as applicable of any Manager.[46]

         Section 5.3, in turn, permits the Class B Members to remove the Class A and Class B Managers only for "gross negligence, intentional misconduct, fraud or deceit, as more fully set forth in the Management Agreement."[47]

         3. The Management Agreement

         On or about the same day the Operating Agreement became effective, the Company, A&J and the Class B Members entered a Management Agreement that states more specifically the terms by which A&J would serve as the Class B Manager of the Company.[48] The Management Agreement reiterates previous disclosures that A&J would receive an annual management fee equal to 0.4% of the outstanding loan. Section 6(a) of the Management Agreement, however, provides that the Members and A&J may agree to modify A&J's compensation: "The Management Fee shall from time to time be reviewed and modified as may be mutually agreed upon by the Company and the Class B Manager, subject to any approval rights of the Members pursuant to Section 4.8 and 5.11 of the Operating Agreement."[49]

         Section 12(b) of the Management Agreement repeats the removal standard stated in the PPM and Operating Agreement:

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.[50]

         4. The DSA

         In August 2014, the Company executed a Distributor Services Agreement that names Henry Global as a "Distributor" responsible for recruiting EB-5 investors from China.[51] Under the DSA, Henry Global agrees to

(i) comply with and/or assist EB-5 Investors with the compliance of information requests of all competent authorities regarding Distributor and/or EB-5 investors, (ii) liaise with and/or procure consents from EB-5 Investors in relation to the Project, and (iii) provide other reasonable incidental assistance to the Lender, Borrower or EB-5 Investors.[52]

         In exchange for these services, the Company agrees to pay Henry Global $41, 000 from the proceeds of each investor's Administration Fee, 1.3% of the outstanding loan amount on a calendar quarter basis and 1% of the outstanding loan amount at maturity.[53]

         In sum, the agreements allocate the entities' and investors' shares of the 2.2% interest on the loan as follows: 0.2% per year to the Class B Members;[54] 0.4% per year to the Class B Manager;[55] 0.1% per year to the Class A Manager;[56] and 1.5% per year to Henry Global.[57] Under the same agreements, of the $45, 000 Administration Fee, $4, 000 is allocated to the Class A Manager[58] and $41, 000 is allocated to Henry Global.[59]

         D. The Company's Financial Statements and the Resignation of the Class A Manager

         The loan to Greenland was executed on August 28, 2014.[60] For each fiscal year of the loan, A&J directed an accounting firm to review the Company's unaudited financial statements.[61] From 2014 through 2016, A&J sent the written product of the accounting firm's reviews and the firm's notes to Henry Global for dissemination to the Members.[62] The balance sheet and statement of cash flows always included line item payments to Henry Global and a "related party."[63] In addition to explaining that the "related party" is Urban Harmony, which receives a portion of the Administration Fee, the notes state that the Company is required to pay Henry Global "1.3% of the outstanding Note amount on a calendar quarter basis upon receipt of payment from the Developer and 1% of the outstanding Note amount during the term of the Note upon receipt of payment from the Developer at the Maturity . . . of the Note."[64] Although Henry Global distributed copies of the financial statements to the Members per A&J's direction, it apparently did not distribute the pages of notes that referenced the payments to Henry Global.[65]

         In September 2017, the U.S. Securities and Exchange Commission brought an enforcement action against the principal of Home Paradise, his wife and several of the principal's companies, including Home Paradise.[66] A&J notified the Class B Members of the suit and, soon after, Urban Harmony (a subsidiary of Home Paradise) resigned from its role as Class A Manager.[67] A&J was concerned that the suit may also lead to Home Paradise's termination as the Regional Center.[68] Fearing the potential negative impact of Home Paradise's separation from LAMC on the Members' pending immigration petitions, A&J sought to engage more directly with investors and provide assurances of their EB-5 status.[69] As part of this effort, A&J sent the 2017 financial reviews with the attached notes directly to the Members instead of relying on Henry Global to distribute them.[70] A&J did not receive any inquiries from the Members regarding the financial statements or the payments to Henry Global.[71]

         E. The Events Leading to A&J's Removal as Manager

         Once the Project was substantially completed, funds from the sale of individual condominium units were released to an account in Greenland's name for the benefit of the Company (the "Pledge Account").[72] Greenland and the Company entered a pledge agreement to ensure that Greenland would not use the money in the Pledge Account without A&J's approval or for purposes other than those permitted by the loan agreement.[73] Greenland, however, considered the proceeds from the condominium sales to belong to it as borrower since it had not yet paid those funds to the Company.[74] It became frustrated over time that the sales proceeds were essentially locked up in escrow within the Pledge Account and that the funds could not be deployed either to pay down the loan or to advance other Greenland interests. To make matters worse from its perspective, Greenland had to pay interest to the Company on those funds since they were not being committed to pay down the loan.[75]

         Around May or June 2017, Greenland's CFO, Jian Zhang, approached Mr. Xu with an offer to repay the loan before its maturity date, with the implicit understanding that freed capital could be redeployed as a loan to fund another Greenland project.[76] Mr. Xu pointed out that the money in the Pledge Account, then $55 million, was growing quickly and could exceed the principal of the loan by the end of the year, meaning the Members' investment would no longer be "at risk" as required by EB-5 regulations.[77] Although the loan agreement explicitly prohibited prepayment, A&J and Greenland developed a prepayment plan to avoid the potential overflow of the Pledge Account.[78]

         In September 2017, A&J provided the first drafts of amendments to the loan agreement, which noted that "Borrower has requested the right to prepay the Loan in accordance with certain conditions, as more fully set forth in the Note."[79] On October 19, 2017, Greenland provided counter-drafts that made certain changes but did not modify the "Borrower has requested . . ." language.[80] The Fourth Amendment to the Loan Agreement memorialized the final prepayment proposal.[81]

         As part of the prepayment plan, A&J and Greenland negotiated a $1 million prepayment fee to A&J.[82] A&J believed it had engaged in substantial additional work prior to the negotiations for prepayment as a result of Greenland's repeated changes to the Project's budget and the process for draw requests.[83] A&J also maintained that additional compensation was warranted for its participation in prepayment negotiations and the pending redeployment process.[84] It estimated that redeployment could take up to two years and that, if prepayment occurred, it would forego $1.6 million in management fees that it would otherwise receive by the maturity of the loan.[85] Given that prepayment of the loan would allow Greenland to keep $8 to $9 million in unpaid interest, Greenland agreed to pay A&J directly so that Members would be unaffected by the prepayment fee.[86] Of the $1 million fee, $200, 000 would go to the Company.[87] The remaining $800, 000 would go to A&J for:

time and expense incurred to date in amending the Loan Documents, underwriting and negotiating closing documents in connection with the Senior Loan, research and analysis into matters including EB-5 Program Laws compliance and securities compliance for Lender investors in connection with prepayment of the Loan, and processing, underwriting, closing and administration of any replacement investment using prepaid amounts of Loan principal required by EB-5 Program Laws[.][88]

         A&J advised the Members of the prepayment proposal in a memorandum dated October 26, 2017, which explained that prepayment was necessary to "cure [a] potential immigration violation" and "salvage the immigration status of most if not all of the Class B Members."[89] The following day, A&J presented the proposed plan for the Members' approval with a Notice to Class B Members and Request for Consent to Prepayment (the "Prepayment Notice").[90] The Prepayment Notice explained that A&J requested $800, 000 from Greenland (not the Members) "for services rendered in connection with the Prepayment, including, without limitation:

• Negotiating with the Borrower the terms of the Fourth Loan Amendment;
• Negotiating prior amendments to the Loan Agreement and other ancillary documentation related thereto;
• Negotiating inter-creditor terms with the secured lender;
• Preparing documentation and conducting research with respect to preserving the collateral securing the Loan for the benefit of the Class B Members;
• Assisting developer to organize the construction supporting documents and related costs categories to comply with the regulation requirements of USCIS and U.S. security laws;
• Coordinating execution of legal documents related to the Company;
• Continued oversight of the Company and investment management during the interim period between repayment of the loan; and
• Identifying opportunities for redeployment of capital. "[91]

         The Prepayment Notice does not address the anticipated length of time required for redeployment of the Company's capital or the $1.6 million in lost management fees as a basis to justify the prepayment fee. In addition to explaining the terms of the prepayment plan, the Prepayment Notice solicited the Members' approval and disclosed that A&J would consider a Member's abstention from voting as a vote in favor of the prepayment plan.[92] A&J hoped that this structure would expedite the implementation of the prepayment plan given the concern that the Pledge Account would soon exceed the Members' investments.[93]

         Before the voting deadline of November 30, 2017, Greenland became concerned that A&J would not commit the redeployed investment funds to Greenland on favorable terms once the original loan was repaid.[94] With these concerns in mind, Greenland's support for the prepayment plan evaporated. Without A&J's knowledge, Greenland contacted certain Members of the Company directly and advised them that A&J was pushing for prepayment of the loan while Greenland opposed it.[95] Ultimately, 135 Members returned votes rejecting the proposed prepayment.[96] Of those 135 Members, ten are employees of Greenland or have family members who are employees of Greenland.[97] And, as among the 135 no votes, emails transmitting 102 of those votes were copied to Liming Wang, the husband of Member Zhu Wang.[98]

         On November 20, 2017, Krug, who had previously been retained by certain Members to perform an analysis of the at-risk nature of the Pledge Account funds, [99]sent two demand letters to A&J opposing the prepayment plan and requesting a list of Members.[100] Neither letter mentioned the prepayment fee. The Company rejected Krug's demand for the Member list and neither Krug nor any Member elected to pursue an action to enforce inspection rights.[101]

         F. Krug Purports to Remove and Replace A&J on Behalf of the Members

         On December 8, 2017, after the prepayment plan had been rejected, A&J and Henry Global held a meeting in Beijing with the Members.[102] The attendees did not discuss the prepayment fee, but they did discuss concerns regarding the resignation of Urban Harmony as well as prepayment of the loan and redeployment of the Members' investment.[103] Notwithstanding the evidence that Greenland had initiated the prepayment discussions, one attendee-Liming Wang-complained that A&J had requested prepayment of the loan (apparently to advance its own interests) and criticized the structure of the vote on the prepayment plan.[104] After the meeting, Greenland contacted A&J and the two agreed to recommend a new proposal that would allow Greenland to cash out $55 million of its equity, thereby reducing the collateral of the loan and providing funds that Greenland could freely use for other projects.[105] The new proposal did not include a prepayment fee.[106]

         A&J notified the Members of the new proposal and structured the vote so that only votes in favor of the plan counted as affirmative votes.[107] Roughly a dozen Members delivered votes opposing the new proposal, but during the voting period, 91 Members emailed the Company asking A&J to cancel the vote and release $15.08 million to Greenland unconditionally.[108] Of these emails, 75 were copied to Liming Wang.[109]

         On or about February 26, 2018, Krug drafted a Notice to Class B Members and Request for Vote and a Notice of Election (the "Removal Ballot").[110] The Members were asked to vote on the following proposals: "Remove A&J Capital Investment, Inc. as the Class B Manger? Yes. No." and "Elect Law Office of Krug as the interim Class B Manager? Yes. No."[111] The Removal Ballot did not identify a basis for removal, either in any prefatory statement or in the solicitation, but it did note the Members' rights to remove the Class B Manager under Sections 5.3(c)(ii) and 12 of the Operating and Management Agreements, respectively.[112] The Removal Ballot also instructed Members to return their votes via email to Krug and to copy Liming Wang.[113] Krug sent the Removal Ballot to Liming Wang, who, as liaison between the Members and Krug, forwarded the ballots to Members.[114] Krug received 105 emails with votes to remove A&J and appoint the Law Office of Krug as interim manager.[115] Of the 105 Members who voted to remove A&J, 11 are employees of Greenland or have family members who are employed by Greenland.[116]

         On March 14, 2018, A&J received written notice that it had been removed as Class B Manager and replaced by Krug (the "Removal Notice").[117] The Removal Notice specifically states that "[a] majority of the Class B members have, in writing, voted to remove A & J [] as the Class B Manager," but it does not identify a basis for removal or the details of the Class B Member vote effectuating the removal.[118]Two weeks after sending the Removal Notice to A&J, and again on April 2 and April 3, 2018, Krug sent notices confirming the results of the removal vote to the email addresses from which Krug had received votes in favor of removing A&J.[119] He did not receive any replies questioning the results or his notices.[120]

         G. Procedural History

         On April 3, 2018, A&J filed its Verified Complaint for Injunctive Relief pursuant to Sections 18-110 and 18-111 of the Delaware Limited Liability Company Act seeking a declaration that A&J was improperly removed as Class B Manager of the Company.[121] A&J simultaneously filed a Motion for Order to Maintain Status Quo and a Motion for Expedited Proceedings. After two hearings, the Court entered a status quo order on May 9, 2018, providing that A&J would remain as Manager pending resolution of the action.[122] On May 2, 2018, Krug filed its Answer and Counterclaims. The following day, A&J moved for summary judgment on the grounds that the Members were required as a matter of law to provide A&J with notice of their intent to remove the Class B Manager prior to the Member vote, an explanation of the grounds for removal and an opportunity to respond to the notice. On July 18, 2018, after oral argument, the Court denied summary judgment upon holding that neither Delaware law nor the Company's agreements require pre-removal notice.[123] Expedited discovery followed. Trial proceedings concluded on October 30, 2018, and the matter was submitted for decision that day.

         II. ANALYSIS

         A&J initiated this action under 6 Del. C. § 18-110, which provides, in part:

Upon application of any member or manager, the Court of Chancery may hear and determine the validity of any . . . election, appointment, removal . . . of a manager of a limited liability company, and the right of any person to become or continue to be a manager of a limited liability company, and, in case the right to serve as a manager is claimed by more than 1 person, may determine the person or persons entitled to serve as managers; and to that end make such order or decree in any such case as may be just and proper.

         A&J seeks a declaration that its removal by an improper and unsubstantiated vote and its replacement as Class B Manager by Krug are invalid. In response, Krug asks the Court to declare that Krug was properly and effectively appointed Class B Manager and that A&J has no authority to continue to act in that capacity. Krug further requests that A&J immediately tender possession and control of all the Company's assets, property, documents, books, records and accounts to Krug.[124]

         A. The Authenticity of the Ballots

         The parties devoted significant briefing and oral argument to A&J's challenge regarding the authenticity of the Removal Ballots (and, by extension, the legitimacy of the underlying votes). To be sure, the process by which removal purportedly occurred leaves much to the imagination. The Removal Ballot does not provide any basis for removal, or even state that removal is for cause as defined in the operative agreements. Nor does it provide for Members to indicate their physical address or any other means of identification beyond a signature line. Since Krug relied on Liming Wang to transmit the Removal Ballot to the Members, and Liming Wang did not testify at trial, the Court has no basis to discern how the Removal Ballots were distributed, what, if anything, the Members were told about the bases for removal or even whether the Members were asked to remove A&J for cause. The testimony of Zhu Wang and Ms. Sun fell far short of filling these information gaps.[125]

         The parties debate whether the signatures on several of the Removal Ballots are real and to whom they belong.[126] A&J alleges that at least 25 email addresses used to send Ballots to Krug and 22 signatures on the Removal Ballots do not match addresses and signatures in Company records. Other Removal Ballots contain exact copies of signatures from other known documents, suggesting that someone copied and pasted the signatures onto the Removal Ballots.[127] Casting a shadow over all of this is A&J's allegation that Greenland, supported by a block of Members who are Greenland employees or related to Greenland employees, improperly influenced the removal vote.

         Although much ink has been spilled and much breath has been expelled to proffer and debunk A&J's forgery and conspiracy evidence, I need not go down that craggy path to resolve this dispute. If Krug cannot establish that cause for removal existed, including whether Members knew the cause for removal at the time they cast their votes, then the process by which removal occurred, and the question of whether the Ballots are authentic and valid, are irrelevant.[128] For reasons explained below, I find by a preponderance of evidence that Krug's supposed bases to remove A&J do not rise to the standards for removal set by the Operating and Management Agreements. Accordingly, I decline to address the claims of forgery or collusion between certain Members and Greenland, and also decline to decide whether the haphazard means by which Krug solicited the removal votes nullifies the results of the vote.[129]

         B. The Standards for Removal

         Under the unambiguous terms of the Operating and Management Agreements, A&J can be removed only for cause, which the agreements define as "gross negligence, intentional misconduct, fraud or deceit."[130] Proving any one of these predicates for removal is no easy task.

         "In the civil context, the Delaware Supreme Court has defined gross negligence as 'a higher level of negligence representing an extreme departure from the ordinary standard of care.'"[131] "It refers to a decision 'so grossly off-the-mark as to amount to reckless indifference or a gross abuse of discretion.'"[132] Stated differently, "[t]o establish gross negligence, a plaintiff must plead and prove that the defendant was 'recklessly uninformed' or acted 'outside the bounds of reason.'"[133]

         Our law sets the mark to prove intentional misconduct so that it is similarly difficult to strike. "The duty to refrain from intentional misconduct is . . . essentially a subset of or another name for, the duty to act in good faith, where the focus is on whether the defendant (1) acted intentionally to harm those to whom he owes the duty or (2) intentionally or consciously ignored his duties, thereby causing harm to those to whom he owes the duty to refrain from intentional misconduct."[134]

         Lastly, "'fraud' is defined as 'an intentional perversion of truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or to surrender a legal right.'"[135] To prove fraud, a plaintiff must demonstrate five elements: (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 refrain from acting; (4) the plaintiff's action or inaction taken in justifiable reliance upon the representation; and (5) damage as a result of such reliance.[136]At common law, "fraud" and "deceit" are interchangeable.[137]

         Krug argues that the for cause standards set forth in the operative agreements define standards of conduct only and, therefore, if A&J engaged in conduct that violated any of the standards, then it may be removed as Class B Manager even if that conduct was not undertaken for a purpose of causing, or did not cause, harm to the Company or its Members. I disagree. First, the operative agreements do not state that the Class B Manager may be removed for grossly negligent or fraudulent conduct; they state, instead, that removal will be justified, among other reasons, for "gross negligence" or "fraud." Second, and more to the point, the contractually imposed standards of conduct necessarily incorporate an appreciation that the proscribed conduct must either be harmful or cause harm to justify removal. If there is no risk of harm to the Company as a result of the Manager's actions, then there can be no deviation from the standards of care or conduct contemplated by the definitions of gross negligence, intentional misconduct, fraud or deceit.[138] Third, Krug has not cited any case in support of his construction of the contractual removal standards that would justify divorcing the proscribed conduct from anticipated or actual harm caused by the conduct and he does not appear to disagree that the parties likely incorporated the elements of the standards as commonly known in our law.[139]And finally, even if harm (foreseeable or actual) were divorced from the contractual standards as Krug would have it, as explained below, the preponderance of evidence does not support the contention that A&J violated any of the standards of conduct in connection with any of the alleged grounds for removal.

         C. The Preponderance of Evidence Does Not Support Removal for Cause

         Krug points to two series of actions undertaken by A&J that justified its removal for cause: (i) A&J's request for the prepayment fee as part of the prepayment of the loan coupled with the manner by which A&J structured the vote for approval of the prepayment plan (by stating that abstention would be deemed as approval); and (ii) the payments authorized by A&J and made to Henry Global. Krug does not clearly tie these events to any one or more of the particular standards for removal as stated in the operative agreements but rather contends in general terms that the identified conduct violates all of the standards.[140] He does suggest, however, that if each act standing alone is not enough to establish cause, then together they represent misconduct that more than justifies removal.[141] For reasons explained below, here again, I disagree.

         1. A&J's Request for the Prepayment Fee and Structure of the Prepayment Approval Vote Did Not Provide Cause for Removal

         Krug characterizes A&J's request for a prepayment fee as an "attempt to steal a substantial amount of money from the Members, under false pretenses . . . ."[142] I reject that claim summarily as nothing more than litigation hyperbole.[143] In addition to his allegation of attempted theft, Krug claims that three aspects of the prepayment fee reveal A&J's fraudulent ...

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