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AM General Holdings LLC v. The Renco Group, Inc.

Court of Chancery of Delaware

April 10, 2019

AM GENERAL HOLDINGS LLC, directly and derivatively on behalf of ILSHAR CAPITAL LLC, Plaintiff,


          Joseph R. Slights III Vice Chancellor

         WHEREAS, this matter has been pending for almost seven years and has generated numerous written opinions where the complex contractual arrangement that binds the parties along with the various disputes that are the subject of this litigation have been thoroughly discussed.[1] There is no need to rehash those matters here.

         WHEREAS, the parties have presented four motions for summary judgment (the "Motions") for decision in advance of a trial scheduled to begin on July 22, 2019:

         1. The Renco Group Inc.'s ("Renco") Motion for Partial Summary Judgment on Count I (Breach of Contract) and Count VIII (Declaratory Judgment) of its Second Amended Complaint (the "RSAC") against MacAndrews AMG Holdings LLC ("MacAndrews AMG") for improperly causing AM General LLC ("AM General") to charge its subsidiary, General Engine Products LLC ("GEP"), certain royalty and management fees (the "Royalty and Management Fee Claims") (D.I. 592)[2];

         2. Renco's Motion for Partial Summary Judgment on Count I and Count VIII of the RSAC against MacAndrews AMG for misallocating GEP's engineering, research and development ("ER&D") expenses to Renco's capital account (the "Engineering, Research and Development Claims") (D.I. 593);

         3. Renco's Motion for Summary Judgment on Count III (Direct and Derivative Claims for Breach of Limited Liability Company Agreement) of AM General Holdings LLC's ("Holdco") Second Amended Complaint (the "HSAC") with respect to the requested removal of ILR Capital LLC ("ILR") as the managing member of Ilshar Capital LLC ("Ilshar") (the "Ilshar-Breach of Contract Claims") (D.I. 601); and

         4. MacAndrews AMG's Motion for Partial Summary Judgment on Count I, Count II (Breach of Implied Covenant of Good Faith and Fair Dealing) and Count VIII of the RSAC. (D.I. 594) with respect to claims related to Renco's alleged misappropriation of MacAndrews AMG's distributions (the "Revalued Capital Account Claims").

         WHEREAS, I will address the Motions in the order presented at oral argument.

         WHEREAS, "[t]here is no 'right' to a summary judgment."[3] Summary judgment is appropriate only when, upon an examination of the record, the Court finds "no genuine issue as to any material fact and . . . the moving party is entitled to judgment as a matter of law."[4] "Summary judgment may not be granted when the record indicates a material fact is in dispute or if it seems desirable to inquire more thoroughly into the facts in order to clarify the application of law to the circumstances."[5]

         NOW, THEREFORE, this 10th day of April, 2019, it appears to the Court that:

         A. The Revalued Capital Account Claims

         1. The parties dispute the construction of Sections 8.3(a) and 8.3(b) of the Holdco Agreement. Having determined that the parties presented reasonable competing constructions of these provisions, I previously denied summary judgment so that the parties could present "extrinsic evidence that hopefully [provides] insight regarding the parties' intent."[6]

         2. The parties have proffered competing extrinsic evidence in support of their interpretations of Sections 8.3(a) and (b). MacAndrews AMG contends that the drafting history of the Holdco Agreement indisputably demonstrates that Section 8.3(a) applies before Renco may elect to receive a distribution under 8.3(b). Renco claims that even after the changes to the applicable provisions in the drafting sequence, counsel for both parties agreed that Renco's election right under 8.3(b) could be exercised before the allocations in 8.3(a).

         3. Genuine issues of fact remain regarding the proper construction of these provisions, including:

         a. A draft of Section 8.3(b) dated June 29, 2004 permitted Renco to take distributions "in lieu of" a reallocation under Section 8.3(a).[7]

         b. In the July 9, 2004 draft of the Holdco Agreement, the definition of Revalued Capital Account and the calculation of hypothetical gains and losses appeared in Section 4.4, which referenced "Sections 8.1, 8.2, 8.3(d), and 8.4."[8]

         c. In the July 29, 2004 draft of the Holdco Agreement, the "in lieu of" language from previous versions of Section 8.3(b) was removed and Section 4.4 was expanded to include "Sections 8.1, 8.2, 8.3, and 8.4."[9]

         d. Jeff Samuels, a tax attorney involved in the transaction, testified that "The 'in lieu of' language became inappropriate . . . at the point where revalued capital accounts came into play. Prior to the use of the revalued capital account . . . an allocation to Renco of loss beyond what should have been allocated to them or an allocation of income away from them would have had economic consequences. . . . Once revalued capital accounts are introduced into the mix, the test that is being done [is] done on a hypothetical basis . . . in order to determine whether a threshold has been met so as to be able to demonstrate to ERISA regulators that Renco does not and cannot have 80 percent or more of the capital of the combined company. No economic harm in that circumstance has been done to Renco."[10]

         e. In May 2004, Renco proposed, and MacAndrews agreed, that "Renco has the option, in its sole discretion, to take any distribution to which it is entitled to receive and which it determines will not cause a deemed sale or other adverse tax consequence prior to any special allocation of losses."[11]

         f. The June 2, 2004 draft of the Holdco Agreement provides in Section 8.3(b) that "Renco may elect" to take a distribution to reduce or eliminate the excess of the Renco capital account over the 80% cap. The final version of 8.3(b) provides for the same right "[a]t the election of Renco."

         g. Barnet Phillips, MacAndrews and Forbes's ("M&F") tax counsel, testified that for "book tax capital accounts, [] Renco had a contractual right to take a distribution to solve any imbalance."[12] He was not aware of any conversations about changes to the revalued capital accounts definition or the removal of the "in lieu of" language from Section 8.3(b).[13]

         h. David Miller, Renco's lead tax counsel, recalled "that the meaning never changed, that Renco was always able to receive distributions to avoid the application of 8.3(a)," and that no discussion ever occurred regarding Renco's limited ability to receive distributions.[14]

         4. Drafting history may well carry the day in proving the parties' intent.[15] But the Court may not weigh evidence or resolve disputes arising from the evidence until it hears all evidence, including live witness testimony, that may be in conflict.[16] When issues presented on a motion for summary judgment require the Court to make a credibility determination or "weigh the evidence to a greater degree than to determine that it is hopelessly inadequate ultimately to sustain the substantive burden," summary judgment should be denied.[17] MacAndrews AMG asks the Court to weigh conflicting evidence of the parties' negotiations and determine the credibility of counsel involved in the transaction. That is an exercise I cannot undertake at this stage of litigation. Accordingly, MacAndrews AMG's Motion as to Counts I and VIII related to the Revalued Capital Account Claims is DENIED.

         B. The Management and Royalty Fee Claims

         5. The parties dispute the construction of Sections 1.1(v), 6.4(c) and 6.4(s) of the Holdco Agreement. Section 1.1(v) defines "AM General Major Decision" to include the "sale, transfer, distribution or other disposition of any of the assets or Capital Stock of GEP."[18] Section 6.4(c), in turn, requires mutual consent for an AM General Major Decision.[19] Section 6.4(s) requires mutual consent for "the hiring or contracting with of any Person who is an affiliate of [MacAndrews AMG or M&F] to perform any management, consulting or similar services for, or payment of a management or similar fee by, the Company, AM General or any of its subsidiaries to any such Person."[20] Renco contends that the challenged management and royalty fees are a "transfer" of "assets" prohibited by Sections 6.4(c) and 6.4(s). MacAndrews AMG argues that neither provision prohibits the charges and they are, therefore, not subject to mutual consent.

         6. The Court previously decided that the contested provisions are ambiguous, specifically the terms "AM General Major Decision," "asset" and "affiliate."[21] The Court's determination of ambiguity is law of the case.[22]

         7. After reviewing the extrinsic evidence, I have concluded that significant factual disputes remain, including:

         a. One week before Renco proposed Subsection v in the Holdco Agreement, MacAndrews AMG's counsel circulated an "issues list." Under the header "Definition of AM General Major Decision," the list identified outstanding negotiation points including the "[e]xtent of Renco veto over changes in the manner of conducting the GEP business, thereby limiting M&F's flexibility in managing that business (as Renco proposes)."[23]

         b. Adam Ingber, M&F's Chief Tax Officer, testified that the purpose of Subsection v is tax-related, "intended to preserve a substantial item of income for Renco," and "to prevent the major transformation of the GEP business."[24]

         c. Edward Taibi, MacAndrews AMG's in-house counsel, testified that Subsection v was intended to preclude any unilateral decision by MacAndrews AMG to sell or effectively dissolve GEP.[25]

         d. Ira Rennert testified, "we put in so many restrictions to protect ourselves [so] that they wouldn't . . . manipulate the cost and expenses to the detriment of our income . . . ...

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