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Metro Storage International LLC v. Harron

Court of Chancery of Delaware

July 19, 2019

METRO STORAGE INTERNATIONAL LLC, a Delaware limited liability company, METRO STORAGE LATAM LLC, a Delaware limited liability company, MSI MANAGER LLC, a Delaware limited liability company, LATAM MANAGER LLC, a Delaware limited liability company, MATTHEW M. NAGEL, AS TRUSTEE OF THE MATTHEW M. NAGEL REVOCABLE TRUST DATED JULY 27, 2001, AS AMENDED, and K. BLAIR NAGEL, AS TRUSTEE OF THE K. BLAIR NAGEL REVOCABLE TRUST DATED JULY 30, 2003, AS AMENDED, Plaintiffs,
v.
JAMES A. HARRON, Defendant.

          Date Submitted: May 7, 2019

          David C. McBride, Emily V. Burton, Lauren Dunkle Fortunato, YOUNG CONAWAY STARGATT & TAYLOR, LLP., Wilmington, Delaware; Harold C. Hirschman, Leah R. Bruno, Jacqueline A. Giannini, DENTONS US, LLP, Chicago, Illinois; Counsel for Plaintiffs.

          E. Chaney Hall, Kasey H. DeSantis, FOX ROTHSCHILD LLP, Wilmington, Delaware; Jeffrey L. Widman, FOX ROTHSCHILD LLP, Chicago, Illinois; Counsel for Defendant.

          MEMORANDUM OPINION

          LASTER, V.C.

         Defendant James Harron served as president of plaintiffs Metro Storage International LLC ("International") and Metro Storage LATAM LLC ("LATAM"; together, the "Companies"). After Harron resigned, his former employers discovered that he had been pursuing personal business ventures on the side. The Companies filed suit, joined by the other plaintiffs. They contend that Harron violated the Companies' LLC agreements, breached his fiduciary duties, and violated the Stored Communications Act. They also seek declarations that Harron defaulted on loans he received.

         Harron moved to dismiss the complaint for lack of personal jurisdiction. The exercise of personal jurisdiction requires a valid means of serving process. The plaintiffs argue that they properly served Harron under the implied consent provision in the Delaware Limited Liability Company Act (the "LLC Act"), 6 Del. C. § 18-109(a), which establishes a mechanism for serving process on a manager of an LLC.

         For purposes of service, Section 18-109(a) defines the term "manager" as encompassing two categories of persons: first, a person formally named as a manager pursuant to the governing LLC agreement; and second, a person not formally named as a manager pursuant to the governing LLC agreement but who nevertheless "participates materially in the management of the limited liability company." 6 Del. C. § 18-109(a). This decision refers to the first category as a "formal manager" and the second category as an "acting manager."

         The Companies were manager-managed LLCs, and their LLC agreements vested authority over their business and affairs in formal managers. Harron was not a formal manager, but he was an acting manager. The record supports a reasonable inference that Harron participated materially in the Companies' management. As president, he managed their day-to-day operations. That conduct satisfies the plain language of the statute.

         Harron argues that a greater showing is required. He asserts that to qualify as an acting manager, the person must have occupied a "control or decision-making role." He argues that any time an LLC agreement vests authority in a formal manager, another person cannot occupy a control or decision-making role, because the formal manager has that role. He further argues that when a person participates in management as an agent for another, the person's actions as an agent cannot support acting-manager status.

         Based on these theories, Harron argues that the plaintiffs cannot serve him under Section 18-109(a). He contends that even though he served as president of the Companies and, in that capacity, managed their day-to-day operations, he never held a control or decision-making role because the LLC agreements designated formal managers, and he was merely their agent.

         This decision analyzes the precedent on which Harron relies and traces the lines of reasoning to their origins. In each case, the archaeological effort uncovers a weak foundation, which subsequent decisions have built upon without shoring up. In each case, Harron's theories conflict with the LLC Act or with jurisdictional doctrines. This decision therefore rejects Harron's arguments.

         The exercise of personal jurisdiction also must comply with the Due Process Clause of the Constitution of the United States. Harron has sufficient contacts with the State of Delaware to render this court's exercise of personal jurisdiction constitutionally permissible. Harron's motion to dismiss for lack of personal jurisdiction is denied.

         I. FACTUAL BACKGROUND

         The facts are drawn from the plaintiffs' complaint and the documents it incorporates by reference. Citations to exhibits ("Ex. -") refer to documents attached to the complaint. When considering a Rule 12(b)(2) motion, a court may consider affidavits relating to the jurisdictional issues, and this decision takes into account the affidavits that the parties submitted. At this stage of the proceedings, the complaint's allegations are assumed to be true, and the plaintiffs receive the benefit of all reasonable inferences.

         A. Metro and Harron

         Non-party Metro Storage LLC ("Metro") is one of the largest privately owned operators of self-storage facilities. Two brothers own Metro: plaintiff Matt Nagel, who serves as its chairman, and plaintiff Blair Nagel, who serves as its chief executive officer. The Nagel brothers are parties to this action solely as trustees of their respective trusts, which own member interests in the Companies. For simplicity, this decision refers to the Nagels using their first names.

         In 2011, Harron approached Matt about developing self-storage facilities in Brazil. Matt liked the idea, and Harron began working with Metro to develop it. Later, the concept broadened to include pursuing opportunities throughout Latin America.

         Harron took the lead in working with counsel and accountants to establish the necessary entities. He formulated the business objectives and strategy, and he negotiated a joint venture with a Brazilian company.

         B. International

         Effective October 10, 2012, Harron, Matt, and Blair executed the LLC agreement for International (the "International Agreement"). It established a manager-managed governance structure for International and designated MSI Manager LLC as the formal manger. Matt and Blair owned and controlled MSI Manager.

         As the LLC Act requires when establishing a manager-managed governance structure, the International Agreement contained a provision specifically empowering MSI Manager to manage the entity. Section 10.1 of the International Agreement stated:

Except as hereinafter expressly provided the Manager shall have exclusive authority to manage the operations and affairs of the Company and to make all decisions regarding the business of the Company, and the Members (as Members) shall have no right to vote upon or otherwise make any decisions relating to the operation of the Company except as may be otherwise expressly provided in this Agreement. The Manager shall have all the rights and powers of Manager [sic] as provided in the Act and as otherwise provided by law, subject to the express limits set forth herein. Any action taken by the Manager shall constitute the act of and serve to bind the Company; provided that the Manager agrees not to cause the Company to take any Unanimous Approval Action other than requiring Capital Contributions unless such Unanimous Approval Action shall have been approved by the Principals and, during the first two years after the date hereof, the Executive.

         As is customary when establishing a manager-managed governance structure, the International Agreement contained a reciprocal provision confirming that the members did not have the ability to participate in management. Section 10.5 of the International Agreement stated:

Except as may be otherwise expressly provided herein, the Members shall not participate in the management or control of the Company's business or transact any business for the Company, nor shall they have the power to act for or bind the Company, all such powers being vested solely and exclusively in the Manager.

         Under this structure, MSI Manager had the exclusive authority to manage International, and MSI Manager's actions would constitute the acts of and bind International, except that MSI Manager could not unilaterally take what Section 10.1 identified as "Unanimous Approval Actions." Those actions required the prior approval of "the Principals," defined as Matt and Blair, and (for the first two years) the "Executive," defined as Harron. In Section 10.3, the International Agreement identified nineteen "Unanimous Approval Actions." They generally reflected major actions that International might take, such as dissolving or merging, terminating or replacing the manager, admitting a new member, or amending the agreement. But several of the Unanimous Approval Actions involved decisions that could be expected to arise with some frequency for an entity planning to develop self-storage facilities, such as

(iii) borrowing money or guaranteeing the debt of any other Person;
(iv) encumbering any of the Company's assets; . . . [or]
(vi) directly or indirectly acquiring any real property or entering into any binding agreement to directly or indirectly acquire any real property.

         For the first two years of International's existence, Harron had a veto over these and other Unanimous Approval Actions.

         The International Agreement authorized the Company to have officers. Section 10.7 stated:

The Company may have officers (each an "Officer") to exercise such power and perform such duties as shall be determined from time to time by the Manager. The Officers may include a Chairman, a Chief Executive Officer, a President, a Chief Operating Officer, a Secretary a [sic] Treasurer and one or more Vice Presidents, Executive Vice Presidents, Assistant Secretaries and Assistant Treasurers. . . . The Officers, to the extent of their powers set forth in this Agreement or otherwise vested in them by action of the Manager not inconsistent with this Agreement, are agents of the Company for the purpose of the Company's business and the actions of the Officers taken in accordance with such powers shall bind the Company. However, no Officer shall execute any agreement by or on behalf of the Company, or any Metro International Entity, relating to (i) the acquisition or disposition of real property, (ii) the borrowing of money or any guarantees relating to the borrowing of money, or (iii) any other matter pursuant to which the Company, or any Metro International Entity would be expected to expend or receive $25, 000 or more unless in any such case the applicable action shall have been approved in writing by the Manager.

         The International Agreement designated Matt as Chairman, Blair as CEO, and Harron as President.

         Notably, Section 10.7 recognized that "the actions of the Officers taken in accordance with [their] powers shall bind the Company." But Section 10.7 contained three exceptions when an officer could not act without the written approval of MSI Manager: (i) acquiring real property, (ii) borrowing money or providing a guarantee, or (iii) any other matter involving more than $25, 000. The first two exceptions also qualify as Unanimous Approval Actions that Harron could veto during the first two years of International's existence.

         C. Harron Runs International.

         As president, Harron ran International's day-to-day operations. His responsibilities included screening opportunities, negotiating joint venture agreements, coordinating meetings with third parties, analyzing whether to make capital calls, overseeing joint venture staff, interacting with joint venture partners, and monitoring the company's performance. He was quite literally the face of the business, and International's website identified him as the point of contact for any potential investor or business partner. Harron's resume represents that he "led all elements of international investment."

         Although MSI Manager formally had authority to manage International, its principals, Matt and Blair, were not directly involved in International's day-to-day operations. Harron only sought approval from Matt and Blair for major decisions, such as borrowing money or entering into joint venture agreements. By seeking these approvals, Harron complied with the last sentence of Section 10.7 of the International Agreement, which limited his authority as president to acquire or dispose of real property, to borrow money or provide guarantees, or to commit International or its affiliates to spend or receive $25, 000 or more.

         D. LATAM

         The International Agreement implied that International would be the vehicle through which Metro's principals would pursue all of their international operations. But in 2017, Matt, Blair, and Harron formed a separate entity-LATAM-to pursue opportunities in Latin America outside of Brazil.

         LATAM's internal affairs are governed by a limited liability company agreement dated March 28, 2017 (the "LATAM Agreement"). The terms of the LATAM Agreement and the governance structure it created largely track the International Agreement.

         Like the International Agreement, the LATAM Agreement established a manager-managed governance structure, and it designated LATAM Manager LLC as the formal manager. Like MSI Manager, LATAM Manager was owned and controlled by Matt and

          Blair. As in the International Agreement, the LATAM Agreement (i) empowered the manager to manage LATAM, (ii) prohibited members from participating in management, and (iii) identified a list of Unanimous Approval Actions that required unanimous approval from Matt, Blair, and Harron. The LATAM Agreement also authorized LATAM Manager to appoint officers and empower them to act on behalf of the Company, subject to the same limitations found in the International Agreement. Like the International Agreement, the LATAM Agreement designated Matt as Chairman, Blair as CEO, and Harron as President. As with International, Harron ran LATAM's day-to-day operations. Among other things, he led the creation of a joint venture with Central America's leading operator of self-storage facilities.

         E. Harron Resigns.

         In 2018, Harron resigned from Metro and its affiliates. After Harron's departure, Matt and Blair uncovered evidence that Harron had been pursuing personal projects and investments in the storage industry while working for Metro and its affiliates. In December 2018, the plaintiffs filed this lawsuit against Harron.

         The complaint in this action contains seven counts:

• Counts I and II contend that Harron breached the International and LATAM Agreements by misusing the Companies' confidential information to conduct business with third parties for his own personal benefit.
• Count III contends that Harron breached his fiduciary duties as an officer of the Companies by pursuing business opportunities for his own personal benefit.
• Count IV asserts that Harron violated the Stored Communications Act by using Metro's email servers and computer systems for unauthorized purposes and by attempting to delete emails and files from his Metro accounts before his departure.
• Counts V and VI seek declaratory judgments that the Companies have the right to repurchase Harron's member interests at no cost because of Harron's breaches of the International and LATAM Agreements.
• Count VII seeks a declaration that Harron defaulted on loans he received from the Companies to meet capital calls and that he must repay the amounts due after the Companies repurchase his member interests.

         II. LEGAL ANALYSIS

         Harron moved to dismiss the complaint under Rule 12(b)(2) for lack of personal jurisdiction. "When a defendant moves to dismiss a complaint pursuant to Court of Chancery Rule 12(b)(2), the plaintiff bears the burden of showing a basis for the court's exercise of jurisdiction over the defendant." Ryan v. Gifford, 935 A.2d 258, 265 (Del. Ch. 2007).

         Under Delaware law, the exercise of personal jurisdiction has two requirements. Matthew v. Fläkt Woods Gp. SA, 56 A.3d 1023, 1027 (Del. 2012). First, the plaintiff must identify a method of serving process. Second, the defendant must have certain minimum contacts with Delaware such that the exercise of personal jurisdiction "does not offend traditional notions of fair play and substantial justice." Id. (quoting Int'l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945)).

         A. Service of Process

         As their method of serving process, the plaintiffs rely on Section 18-109(a) of the LLC Act. In relevant part, it states:

A manager . . . may be served with process in the manner prescribed in this section in all civil actions or proceedings brought in the State of Delaware involving or relating to the business of the limited liability company or a violation by the manager . . . of a duty to the limited liability company or any member of the limited liability company, whether or not the manager . . . is a manager . . . at the time suit is commenced.
A manager's . . . serving as such constitutes such person's consent to the appointment of the registered agent of the limited liability company (or, if there is none, the Secretary of State) as such person's agent upon whom service of process may be made as provided in this section.

6 Del. C. § 18-109(a) (formatting added).

         Like other entity statutes that authorize service of process on members of the governing body of an entity or its officers, Section 18-109(a) only provides a basis for specific jurisdiction, not general jurisdiction. See Total Hldgs. USA, Inc. v. Curran Composites, Inc., 999 A.2d 873, 885 n.39 (Del. Ch. 2009). The claim against the manager must therefore "involv[e] or relat[e] to the business of the limited liability company or a violation by the manager . . . of a duty to the limited liability company or any member of the limited liability company." 6 Del. C. § 18-109(a). Harron does not dispute that dimension of the analysis.

         Section 18-109(a) defines the term "manager" to encompass both formal managers and acting managers. It states:

As used in this subsection (a) and in subsections (b), (c) and (d) of this section, the term "manager" refers
(i) to a person who is a manager as defined in § 18-101(10) of this title and
(ii) to a person, whether or not a member of a limited liability company, who, although not a manager as defined in § 18-101(10) of this title, participates materially in the management of the limited liability company;
provided however, that the power to elect or otherwise select or to participate in the election or selection of a person to be a manager as defined in § 18-101(10) of this title shall not, by itself, constitute participation in the management of the limited liability company.

6 Del. C. § 18-109(a) (formatting added); accord id. ยง 18-110(c) (using same definition). The two-part manager definition in Section 18-109(a) reference Section 18-101(10), which defines a "manager" as "a person who is named as a manager of a limited liability company in, or designated as a manager of a limited liability company pursuant to, a limited liability company agreement or similar ...


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