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Freeman Family LLC v. Park Avenue Landing LLC

Court of Chancery of Delaware

April 30, 2019

FREEMAN FAMILY LLC, Plaintiff,
v.
PARK AVENUE LANDING LLC, Defendant.

          Submitted: January 31, 2019

          Patricia L. Enerio and Jamie L. Brown, HEYMAN ENERIO GATTUSO & HIRZEL LLP, Wilmington, Delaware; Attorneys for Plaintiff.

          Thad J. Bracegirdle and Scott B. Czerwonka, WILKS LUKOFF & BRACEGIRDLE, LLC, Wilmington, Delaware; Adam K. Derman and Brian P. O'Neill, CHIESA SHAHINIAN & GIANTOMASI PC, West Orange, New Jersey; Attorneys for Defendant.

          MEMORANDUM OPINION

          MONTGOMERY-REEVES, Vice Chancellor.

         In this action, the parties dispute whether a member of a limited liability company is entitled to advancement under the company's operating agreement. The operating agreement at issue provides that members shall receive advancement if they are made party to an action by reason of their status as a member. The plaintiff, a member of the company, is defending a federal lawsuit in New Jersey brought by the company's managing member, relating to the plaintiff's call right under the operating agreement. The plaintiff argues that the federal lawsuit arises because of the plaintiff's status as a member, and therefore, the company must provide advancement. The company responds that although the Delaware Limited Liability Company Act allows for broad indemnification and advancement, the parties here incorporated language from the Delaware General Corporation Law, and therefore, the Court should look to corporate advancement cases. Under those cases, the Court must examine whether the party seeking advancement was made a party to the action by reason of the fact that the party seeking advancement was acting in his or her official capacity. The company argues that the action in New Jersey relates to a personal right, not to the member's official capacity; therefore, the member is not entitled to advancement.

         The parties cross-move for judgment on the pleadings. In this opinion I must answer two questions. First, does corporate case law apply because the advancement provision in the limited liability company's operating agreement mirrors the corporate statute? Second, does the New Jersey action arise by reason of the fact that the party seeking advancement acted in its official capacity? As to the first question, I hold that corporate case law does apply by analogy. As to the second question, I hold that the party seeking advancement is entitled to it. Thus, I grant judgment on the pleadings in favor of the plaintiff.

         I. BACKGROUND

         The parties cross-move for judgment on the pleadings. "As is the case when ruling on any motion addressed solely to the pleadings, . . . the following facts are drawn exclusively from the complaint."[1] I also "consider, for carefully limited purposes, documents integral to or incorporated into the complaint by reference."[2]

         On May 1, 2008, Plaintiff Freeman Family LLC ("Freeman Family") entered into the First Amended Limited Liability Company Agreement of Park Avenue Landing LLC (formerly known as C.O.S. Properties LLC) (the "Operating Agreement").[3] The other parties to the Operating Agreement were the managing member, non-party Hugo Neu Corporation ("Hugo Neu"); two entities affiliated with Hugo Neu; and non-party Andrew Feurstein.[4]

         When Freeman Family entered into the Operating Agreement, Defendant Park Avenue Landing LLC ("Park Avenue" or the "Company") owned property in New Jersey (the "Original Property"), parts of which it wanted to exchange for other property in New Jersey (the "Exchange Property") owned by Liberty Harbor Holdings, L.L.C. (the "Property Exchange").[5] Freeman Family agreed to cause Robert Freeman, its owner, to "use his best efforts on behalf of the Company" to effect the Property Exchange and support the Company in other ways.[6] In exchange, Freeman Family received equity in the Company.[7]

         The Operating Agreement contains two call rights (collectively, the "Call Rights") that allow Hugo Neu to buy back Freeman Family's equity in two circumstances. The first circumstance arises if, after December 31, 2008, the Company has not completed the Property Exchange or the redevelopment plan for the Exchange Property has not been modified to allow a residential development of at least 677 units.[8] The second circumstance arises if, as of October 31, 2010, no reputable developer is ready, willing, and able to participate in development of the Exchange Property.[9] Furthermore, the Call Rights are extendable at the Company's option.[10]

         Hugo Neu attempted to exercise the Call Rights on November 7, 2016; Freeman Family resisted, arguing that Hugo Neu had waived those rights by failing to exercise them.[11] On January 18, 2017, Hugo Neu filed its complaint in Hugo Neu Corp. v. Freeman Family LLC (the "New Jersey Action"), [12] which is pending in the United States District Court for the District of New Jersey.[13] In the New Jersey Action, Hugo Neu asserts claims against Freeman Family to enforce the Call Rights.[14] Freeman Family brought counterclaims in the New Jersey Action, seeking declaratory judgment in its own favor as to the validity of the Call Rights.

         On September 17, 2018, Freeman Family filed its Verified Complaint for Advancement (the "Complaint"). Freeman Family brings this action to obtain advancement of legal fees arising from the New Jersey Action under the terms of the Operating Agreement.[15] Section 14(a) of the Operating Agreement, which discusses indemnification, states that

[t]he Company shall indemnify any person (each, an "Indemnitee") who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding brought by or against the Company, or otherwise . . . including, without limitation, any action by or in the right of the Company to procure a judgment in its favor, by reason of the fact that such Indemnitee is or was a Managing Member, Member or an officer of the Company.[16]

         Section 14(b) of the Operating Agreement, which discusses advancement, adds that

[t]he Company shall pay expenses incurred by any Indemnitee in defending any action, suit or proceeding described in Section 14(a) in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Indemnitee to repay such advance if it shall ultimately be determined that such Indemnitee is not entitled to be indemnified by the Company pursuant to this Section 14.[17]

         On November 8, 2018, Freeman Family filed its Motion for Judgment on the Pleadings. On December 7, 2018, Park Avenue filed its Cross-Motion for Judgment on the Pleadings. On January 8, 2018, I heard oral argument on the Cross-Motions for Judgment on the Pleadings.

         II. ANALYSIS

         "After the pleadings are closed but within such time as not to delay the trial, any party may move for judgment on the pleadings."[18] "When considering a Rule 12(c) motion, the court must accept well-pled facts in the complaint as true and view those facts in the light most favorable to the nonmoving party."[19] "A motion for judgment on the pleadings will be granted if no material issue of fact exists and the moving party is entitled to judgment as a matter of law."[20] "A court may not grant the motion unless it appears beyond doubt that the claimant can prove no set of facts in support of its claims which would entitle it to relief."[21] "Advancement cases are particularly appropriate for resolution on a paper record, as they principally involve the question of whether claims pled in a complaint against a party . . . trigger a right to advancement under the terms of a corporate instrument."[22]

         The cross-motions at issue here turn on the interpretation of the Operating Agreement. "When analyzing an LLC Agreement [or Operating Agreement], a court applies the same principles that are used when construing and interpreting other contracts."[23] Delaware follows the objective theory of contracts. "Under Delaware law, courts interpret contracts to mean what they objectively say. This approach is longstanding and is motivated by grave concerns of fairness and efficiency."[24]

Because Delaware adheres to the objective theory of contract interpretation, the court looks to the most objective indicia of that intent: the words found in the written instrument. As part of this initial review, the court ascribes to the words their common or ordinary meaning, and interprets them as would an objectively reasonable third-party observer.[25]

         "Standing in the shoes of an objectively reasonable third-party observer, if the court finds that the terms and language of the agreement are unmistakably clear, then the court should look only to the words of the contract to determine its meaning and the parties' intent."[26]

         When the "meaning [of a contract] is unambiguous and the underlying facts necessary to its application are not in dispute, judgment on the pleadings is an appropriate procedural device for resolving the dispute."[27] "When ruling on dueling Rule 12(c) motions that turn on an issue of contract construction, the Court must deny both motions if each has advanced reasonable but conflicting readings of the [contract in dispute], or, in other words, if the contract provision in question is ambiguous."[28]

         A. Corporate Case Law Applies

         First, I must determine the applicability of corporate case law to this noncorporate context. As I discuss above, Delaware limited liability companies are "creatures of contract," and typically in the limited liability company ("LLC") context, I would apply principles of contract interpretation to construe the Operating Agreement's terms. The Delaware Limited Liability Company Act (the "LLC Act") provides that "[i]t is the policy of this chapter to give maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements."[29] "[T]he parties have broad discretion to use an LLC agreement to define the character of the company and the rights and obligations of its members."[30]

         Importantly, the contractual freedom that the LLC Act creates allows drafters of an LLC agreement or operating agreement to adopt concepts from the laws of other entities.

Using the contractual freedom that the LLC Act bestows, the drafters of an LLC agreement can create an LLC with bespoke governance features or design an LLC that mimics the governance features of another familiar type of entity. The choices that the drafters make have consequences. If the drafters have embraced the statutory default rule of a member-managed governance arrangement, which has strong functional and historical ties to the general partnership (albeit with limited liability for the members), then the parties should expect a court to draw on analogies to partnership law. If the drafters have opted for a single managing member with other generally passive, non-managing members, a structure closely resembling and often used as an alternative to a limited partnership, then the parties should expect a court to draw on analogies to limited partnership law. If the drafters have opted for a manager-managed entity, created a board of directors, and adopted other corporate features, then the parties to the agreement should expect a court to draw on analogies to corporate law.[31]

         The Operating Agreement in the case before me states that

[t]he Company shall indemnify any person (each, an "Indemnitee") who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding brought by or against the Company, or otherwise . . . including, without limitation, any action by or in the right of the Company to procure a judgment in its favor, by reason of the fact that such Indemnitee is or was a Managing Member, Member or an officer of the Company.[32]

         In discussing advancement, it adds that

[t]he Company shall pay expenses incurred by any Indemnitee in defending any action, suit or proceeding described in Section 14(a) in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Indemnitee to repay such advance if it shall ultimately be determined that such Indemnitee is not entitled to be indemnified by the Company pursuant to this Section 14.[33]

         By comparison, 8 Del. C. § 145(a) and (b) state that "[a] corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action . . . by reason of the fact that the person is or was a director, officer, employee or agent of the corporation."[34] Thus, the parties chose to use language that is nearly identical to the corporate statute. The logical conclusion for why they did that is to import a predictable and well-defined rule from corporate statutory and case law.

         Freeman Family argues against application of corporate case law on the basis of four Delaware cases: Hyatt v. Al Jazeera American Holdings II, LLC;[35] Branin v. Stein Roe Investment Counsel, LLC;[36] Bernstein v. TractManager, Inc.;[37] and Costantini v. Swiss Farm Stores Acquisition LLC.[38] Each case supports the notion that the parties have contractual freedom when they write an operating agreement and that they may choose to adopt corporate case law.

         In Hyatt, Vice Chancellor Glasscock considered the advancement rights of directors and officers who sought to assert their rights against the corporation that acquired their employer, an LLC.[39] Vice Chancellor Glasscock wrote that

[t]he parties also agree that, while [the company] was a limited liability company not subject to the Delaware General Corporate Law ("DGCL"), the Operating Agreement confers advancement to former officers and directors that incur expense "by reason of the fact" that he was a former officer and director-a standard that tracks the language of Section 145 of the DGCL that grants a corporation the authority to provide indemnification. Based on the clear language in those sections of the Operating Agreement, and bolstered by the fact that both parties utilized this Court's discussions of Section 145 in their briefing, I conclude that the parties intended to import the strictures of Section 145. Accordingly, my determination of the Plaintiffs' right to advancement is informed by the case law interpreting that section.[40]

         Thus, Hyatt stands for the proposition that in some circumstances, parties to a contract can choose to import ideas from corporate case law. Freeman Family notes that Hyatt addresses directors or officers of the LLC, not members like Freeman Family.[41] While this is true, the fact that Hyatt concerns directors or officers does not create any restriction limiting the freedom of parties to contract for corporate case law concepts in other circumstances.

         In Branin, Vice Chancellor Noble considered the indemnification provision of an operating agreement, which originally extended to the limit the LLC Act allows but which the defendants modified to be much more restrictive when they learned of the case against the plaintiff.[42] In considering a motion for judgment on the pleadings, Vice Chancellor Noble noted that "the corporate indemnification rights at issue in [corporate cases] do not necessarily or automatically resolve [the plaintiff's] entitlement to indemnification under a limited liability company agreement."[43] More to the point, however, the Vice Chancellor wrote that

case law must be used cautiously in searching for the intent of the parties for an indemnification provision in a limited liability company agreement. The parties are largely free to draft an indemnification provision as they see fit. Yet, when the agreement is silent on a particular issue, well-settled principles of indemnification law drawn from 8 Del. C. § 145 may be helpful in the analysis because sophisticated parties can safely be presumed to be familiar with the policies and precepts embedded generally in the corporate law. Nevertheless, the parties' freedom to contract must be respected.[44]

         Thus, Branin stands both for the importance of freedom of contract in developing and interpreting the language of LLC indemnification agreements and for the proposition that parties may intend to draw ...


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