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Coyne v. Fusion Healthworks, LLC

Court of Chancery of Delaware

April 30, 2019

KATHLEEN COYNE, Plaintiff,
v.
FUSION HEALTHWORKS, LLC, JAMES W. SHEEHAN, ANDREW M. LEITZKE, SHEEHAN CHIROPRACTIC, LTD., AATJ CHIROPRACTIC, INC., Defendants.

          Submitted: January 9, 2019

          Kathleen Coyne, pro se, Plaintiff.

          Josiah R. Wolcott, CONNOLLY GALLAGHER LLP, Wilmington, Delaware, Attorney for Defendants Fusion Healthworks, LLC, James W. Sheehan, Andrew M. Leitzke, Sheehan Chiropractic, Ltd., and AATJ Chiropractic, Inc.

          MEMORANDUM OPINION

          ZURN, Vice Chancellor.

         Four men formed a limited liability company to test a new business model for providing chiropractic services. Their enterprise was plagued by treachery and tragedy. One of the men committed fraud against the company and was forced out. A second declared personal bankruptcy, and then, with the third, allegedly created a competing business, looted the company, and then cancelled the company. The fourth man sued the second and third for those acts, but took his own life before that suit concluded.

         The deceased member's widow has sued the company, the second and third man, and their affiliated entities. She claims she is entitled to the proceeds from the life insurance policy the LLC had taken out on her husband under an agreement among the members. The enforceability of that agreement depends on, inter alia, whether the LLC had dissolved before her husband's death. On the defendants' motion to dismiss, I find that the dissolution provision of the company's LLC agreement is susceptible to two reasonable interpretations. I therefore must construe the provision in favor of the plaintiff, and under that construction, her rights to the life insurance policy are not terminated by the company's dissolution. I also conclude the plaintiff states a claim for a statutory receivership.

         I. BACKGROUND

         On the pending motion to dismiss, I draw the facts from the allegations in and documents incorporated by reference or integral to the complaint.[1] I must accept as true the complaint's well-pled factual allegations and draw all reasonable inferences from those allegations in the plaintiff's favor.[2]

         A. The Company Is Formed As An LLC.

         Christopher Coyne ("Christopher") was a pharmaceutical representative and owner of diagnostic medical imaging facilities.[3] Through these roles, Christopher developed relationships with Delaware physicians.[4] James Sheehan was a chiropractor in Delaware.[5] In 2006, Christopher and Sheehan created a business plan to deliver chiropractic care by hiring chiropractors and subcontracting them to Delaware medical offices.[6] The two started an enterprise called Fusion to execute their plan.

         In 2007, Sheehan introduced Christopher to a friend and fellow chiropractor, Andrew Leitzke.[7] Sheehan and Christopher brought Leitzke into Fusion, and each held a one-third interest.[8] Fusion's certificate of formation as a limited liability company was filed with the Delaware Secretary of State in August 2007.[9] The company lacked an operating agreement at that time.[10]

         In early 2008, Sheehan and Leitzke brought their friend Sean Maas, also a chiropractor, into Fusion.[11] Maas joined as an equal, such that each man held a twenty-five percent interest.[12] The owners formalized their agreement with a Limited Liability Company Agreement on February 14, 2008 (the "LLC Agreement").[13]

         B. Maas Betrays The Company, Leading To Litigation.

         As planned, Fusion contracted with physician offices to provide chiropractic services. Through Fusion, Maas provided chiropractic services at two clinics in Wilmington.[14] The clinics succeeded and would have been profitable for Fusion had Maas not provided services "under his own banner."[15] Maas kept proceeds from those services for himself, leading Fusion to sue Maas in this Court in October 2010.[16]

         On May 6, 2013, Vice Chancellor Parsons ordered Maas to pay Fusion $111, 000 in damages, and ruled that Maas had breached his fiduciary duties and had no valid or protectable ownership rights in the clinics.[17] Maas has yet to pay the judgment.[18]

         C. Christopher, Leitzke, And Sheehan Enter Into A Buy-Sell Agreement.

         With Maas out of the picture, [19] Christopher, Leitzke, and Sheehan executed a "Buy-Sell Agreement" in April 2012.[20] The Buy-Sell Agreement bound Fusion to purchase life insurance policies on each member, the proceeds of which would be used to buy the member's interest from his estate upon his death.[21] The Buy-Sell Agreement identifies each member's spouse as the beneficiary of his policy, including Kathleen as the beneficiary of Christopher's policy.[22] But the Buy-Sell Agreement also identifies Fusion as "the owner and primary beneficiary of all life insurance policies," and gives Fusion the responsibility "as beneficiary, [to] promptly file claims to collect in cash the death proceeds of [] the policies" and to "pay over to the personal representative [of the deceased's estate] an amount equal to the full proceeds collected, in full payment for the deceased Stockholder's shares."[23] Fusion purchased the insurance policies.[24]

         Importantly for the events that unfolded, the Buy-Sell Agreement "terminate[d] upon" Fusion's "dissolution, bankruptcy or insolvency."[25]

         D. Leitzke Declares Bankruptcy.

         In August 2013, Leitzke filed a voluntary Chapter 13 petition for bankruptcy.[26] Leitzke's bankruptcy was an "Involuntary Withdrawal" under the LLC Agreement, with two consequences.[27] First, Leitzke's status changed from Member to Withdrawn Member, and his successor, if any, became "an Interest Holder but [] not [] a Member."[28] Second, Fusion would dissolve "unless the remaining Members, within ninety (90) days after the occurrence of the Involuntary Withdrawal, by majority vote, elect[ed] to continue the business of the Company."[29]

         Kathleen alleges Leitzke's bankruptcy had three additional consequences. First, Kathleen claims Leitzke made many false statements in his bankruptcy filings and did not list his interest in Fusion.[30] As a result, Kathleen alleges, the bankruptcy proceeding did not address Leitzke's interest in Fusion, and so there was no successor to his interest.[31]

         Second, Kathleen alleges that Leitzke never disclosed his bankruptcy petition to Christopher, and that Christopher did not learn of it until January 2015.[32] The remaining members did not vote whether to continue Fusion as permitted by the LLC Agreement.[33] And third, although the LLC Agreement deemed Leitzke to be a Withdrawn Member after his bankruptcy filing, he continued to act as a full Member, which Kathleen contends rendered any action he took as a purported Member null and void.[34]

         E. Sheehan And Leitzke Deceive Christopher In Competing Against And Dissolving The Company: Christopher Sues, Then Takes His Own Life.

         Under the LLC Agreement, Christopher and the other members were to receive equal distributions.[35] Fusion stopped making distributions to Christopher in July 2013, the month before Leitzke declared bankruptcy.[36] Kathleen alleges Leitzke and Sheehan "caused Fusion to cease paying any further distributions or draws to [Christopher] after July 2013, while they continued to pay themselves handsomely and cause Fusion to pay for their personal expenses."[37] Kathleen describes these acts in detail, but they are not the basis of her claims.[38] For today, it is enough to say that Leitzke and Sheehan stopped providing information to Christopher and deceived him about the future of Fusion's business. They then created a competitor and funneled Fusion's business to themselves, at Christopher's expense, and stole Fusion's assets, both outright and through improper payments of personal expenses.[39]

         It took Christopher time to discover these acts.[40] In December 2014, Christopher confronted Leitzke and Sheehan, and requested that they cease and desist from using Fusion's logo for their new business.[41] Shortly thereafter, Leitzke and Sheehan began winding up and liquidating Fusion. In January 2015, counsel for Leitzke and Sheehan demanded that Christopher cease all communication with his clients, as well as others associated with Fusion.[42] In February 2015, Leitzke and Sheehan adopted a dissolution plan by written consent.[43] The dissolution plan engaged an accounting firm to value Fusion.[44] On April 20, Leitzke and Sheehan again purported to act by written consent to adopt the accounting firm's valuation of Fusion ($62, 000 total), to pay each member their share, [45] and to file a certificate of cancellation with the Secretary of State.[46]

         Christopher learned of these actions on April 22, 2015, and he quickly contested them.[47] On May 5, he sued Leitzke, Sheehan, and their affiliated entities in this Court, seeking a declaratory judgment and asserting claims for breaches of fiduciary duty, breaches of contract, and conversion.[48] Kathleen alleges that the defendants used "delay tactics" and that it took until late December 2015 for the defendants to "produce a paltry amount of" discovery.[49] According to Kathleen, that discovery confirmed that Leitzke and Sheehan "had plotted, along with the recommendation of Fusion's accountant … to close Fusion and reopen it without [Christopher]."[50]

         This "caused [Christopher] substantial humiliation, grief and depression."[51]"[Christopher] fretted over how he would be able to continue to finance the litigation," as he already owed about $18, 000 in legal fees.[52] Christopher's "emotional and mental state began to deteriorate rapidly."[53] Tragically, Christopher took his own life on January 18, 2016.[54]

         Pursuant to the Buy-Sell Agreement, Fusion had paid the premiums on Christopher's life insurance policy.[55] The Buy-Sell Agreement provided that Fusion would pay the proceeds to the personal representative of the decedent's estate "in full payment for the deceased Stockholder's" interests, and identified each member's spouse as the ultimate beneficiary of each life insurance policy.[56] After Christopher's death, the insurance company paid Fusion the proceeds of the policy, but Fusion has not paid those proceeds to Christopher's estate (the "Estate").[57]According to Kathleen, the Estate did not have the financial resources to continue litigating Christopher's case, and voluntarily dismissed its claim without prejudice on August 16, 2017.[58]

         F. Kathleen Sues In Pursuit Of Life Insurance Proceeds.

         Kathleen, who is Christopher's heir but not the executor of the Estate, picked up the fight by filing this suit, pro se, on January 8, 2018. In her operative complaint, she asserts four causes of action against defendants Fusion Healthworks, LLC; Sheehan; Leitzke; Sheehan Chiropractic, Ltd.; and AATJ Chiropractic, Inc. (together, "Defendants"). First, she seeks a declaratory judgment that (1) "the Buy Sell [Agreement] was not terminated at the time of [Christopher's] death on January 18, 2016" and (2) "the Buy Sell [Agreement] is enforceable among the parties."[59]Second, she seeks the appointment of a receiver to protect Fusion's assets.[60] Third, she alleges Leitzke and Sheehan breached the Buy-Sell Agreement by withholding the life insurance proceeds.[61] Fourth and finally, Kathleen requests an order of specific performance ordering Defendants to pay the insurance proceeds to the Estate, of which Kathleen is an heir.[62]

         Defendants moved to dismiss for failure to state a claim on May 11, 2018. The case was reassigned to me on October 4, and I heard oral argument on the fully briefed motion on January 9, 2019.

         II. ANALYSIS

         The standards that normally apply to reviewing a motion to dismiss for failure to state a claim for relief are well settled:

(i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are "well-pleaded" if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences in favor of the non-moving party; and [iv] dismissal is inappropriate unless the "plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof."[63]

         Because Kathleen is pro se, she is "held to a somewhat less stringent technical standard than formal pleadings drafted by lawyers, and [her Complaint] is dismissed for failure to state a claim only if it appears that [she] can prove no set of facts … which would entitle [her] to relief."[64]

         Questions of contractual interpretation are generally questions of law that are appropriate for a motion to dismiss.[65] But the Court cannot choose between reasonable interpretations of ambiguous contract provisions at this stage.[66] "Dismissal, pursuant to Rule 12(b)(6), is proper only if the defendants' interpretation is the only reasonable construction as a matter of law."[67] Ambiguity exists when the provision in controversy is reasonably or fairly susceptible of different interpretations.[68] "An unreasonable interpretation [of a contract] produces an absurd result or one that no reasonable person would have accepted when entering the contract."[69] Where the provision is susceptible to more than one reasonable interpretation, for purposes of deciding a motion to dismiss, its meaning must be construed in the light most favorable to the non-moving party.[70]

         I address Kathleen's declaratory judgment, breach of contract, and specific performance claims based on the Buy-Sell Agreement together, before turning to her claim for a receiver.

         A. Kathleen Has Adequately Pled The Buy-Sell Agreement Did Not Terminate Due To Leitzke's Bankruptcy.

         1. Kathleen Has Pled She Is A Third Party Beneficiary.

         As an initial matter, the parties dispute Kathleen's standing to bring contractual claims as a third party beneficiary to the Buy-Sell Agreement. She was not a party to the Buy-Sell Agreement, and so will need to establish she has standing to enforce the contract as a third party beneficiary.[71] To do so, Kathleen must show

(i) the contracting parties must have intended that the third party beneficiary benefit from the contract, (ii) the benefit must have been intended as a gift or in satisfaction of a pre-existing obligation to that person, and (iii) the intent to benefit the third party must be a material part of the parties' purpose in entering into the contract.[72]

         For the first element, Kathleen has adequately pled that the parties intended for her to benefit from the Buy-Sell Agreement, even if indirectly through the Estate. The Buy-Sell Agreement required Fusion to pay insurance proceeds to the Estate.[73]And Kathleen has pled that she is an heir to the Estate, and that she is named in the Buy-Sell Agreement as the intended beneficiary of Christopher's policy.[74]

         To satisfy the second element, that benefit must be either in satisfaction of a pre-existing obligation to that person, or a gift. The Second Restatement of Contracts describes these categories as follows: "(a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or (b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance."[75] As an example of a gift, the Restatement describes the purchase of life insurance: "A, an insurance company, promises B in a policy of insurance to pay $10, 000 on B's death to C, B's wife. C is an intended beneficiary …."[76] Performance need not be "rendered directly to" the third party beneficiary.[77]Here, the parties to the Buy-Sell Agreement agreed the life insurance proceeds would be used to buy their interests in Fusion from their estates after their deaths. Neither the pleadings nor the parties have provided any basis to conclude that this agreement satisfied any pre-existing obligation to the members' estates or any person. Rather, it appears the promised performance - purchase of the deceased member's Fusion interest for $1 million - would benefit the deceased member's estate and heirs by purchasing the member's interest in Fusion at a generous valuation.[78] It is reasonably conceivable that Fusion's agreement to pay the $1 million to a member's estate, in the context of an identified intended beneficiary, reflects an intent to give that beneficiary the benefit of the promised performance.[79]

         The third and final element requires the intent to benefit the third party to be a material part of the parties' purpose in entering into the contract. The Buy-Sell Agreement states its purpose was "(1) to provide for the sale by a deceased Stockholder's Estate, of his interest … and for the purchase of such interest … at redemption of life insurance policy; and (2) to provide all or a substantial part of the funds for the purchase."[80] I conclude Kathleen has pled she has standing to pursue her claims under the Buy-Sell Agreement as a third party beneficiary.

         2. It Is Reasonably Conceivable The Buy-Sell Agreement Remained In Effect At The Time Of Christopher's Death.

         In order for Kathleen's claims under the Buy-Sell Agreement to survive Defendants' motion, it must be reasonably conceivable that the Buy-Sell Agreement survived Fusion's tumultuous history. Specifically, it must be reasonably conceivable that the Buy-Sell Agreement survived Leitzke's bankruptcy. Defendants assert that bankruptcy triggered Fusion's dissolution, which in turn terminated the Buy-Sell Agreement.

         Under its own terms, the Buy-Sell Agreement terminates upon Fusion's dissolution.[81] The Buy-Sell Agreement thus incorporated the LLC Agreement by reference, at least implicitly, for the limited purpose of determining whether Fusion dissolved.[82] The LLC Act provides that an LLC Agreement is the primary source for defining the terms of dissolution.[83] Members of an LLC can agree that the LLC "is dissolved and its affairs shall be wound up upon … the happening of events specified in a limited liability company agreement."[84] "[S]uch specified events that cause a Delaware limited liability company to dissolve may include occurrences, such as the bankruptcy of a member, that as a default rule under the DLLC Act do not otherwise cause dissolution."[85]

         Under Fusion's LLC Agreement, Leitzke's bankruptcy filing precipitated his Involuntary Withdrawal.[86] Upon Leitzke's withdrawal, Section 7.1.2 of Fusion's LLC Agreement provided that unless a majority of the remaining members voted to continue the business of Fusion, Fusion would dissolve after ninety days:

The Company shall be dissolved … upon the occurrence of an Involuntary Withdrawal of a Member, unless the remaining Members, within ninety (90) days after the occurrence of the Involuntary Withdrawal, by majority vote, elect to continue the business of the Company.[87]

         The Members did not vote on whether Fusion should continue, and Christopher did not know he needed to do so.[88]

         The parties offer conflicting interpretations of Section 7.1.2. Defendants argue that Fusion dissolved in the absence of a vote, regardless of whether the remaining members held an election. Kathleen reads the provision to require an election before Fusion could dissolve.[89] For Defendants to prevail on their motion to dismiss, their interpretation of Section 7.1.2 must be the only reasonable construction as a matter of law.[90]

         In my view, both interpretations of Section 7.1.2 appear reasonable at this stage. Defendants' interpretation fairly tracks the plain language of the provision: the Company "shall" be dissolved "upon the occurrence of an Involuntary Withdrawal," unless the remaining members affirmatively act to stop dissolution by electing to continue the business within ninety days. But Defendants' interpretation produces a result that is arguably absurd. It places Fusion's fate in the hands of a Withdrawn Member, rather than the hands of the remaining members, particularly when that Withdrawn Member does not disclose his withdrawal.[91] This is inconsistent with Fusion's managerial framework, which otherwise vests authority solely in members in good standing. Under the LLC Agreement, Withdrawn Members are no longer Members and have no right to manage the Company[92] or vote ...


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