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Marion #2-Seaport Trust v. Terramar Retail Centers, LLC

Supreme Court of Delaware

November 1, 2019

MARION #2-SEAPORT TRUST U/A/D JUNE 21, 2002, Defendant-Below, Appellant,
TERRAMAR RETAIL CENTERS, LLC, Plaintiff-Below, Appellee.

          Submitted: October 23, 2019

          Court Below: Court of Chancery of the State of Delaware C.A. No. 12875-VCL

          Before VALIHURA, Acting Chief Justice; [*] VAUGHN, and TRAYNOR, Justices.



         (1) This action is another chapter in a prolonged dispute regarding the dissolution of Seaport Village Operating Company, LLC (the "Company"). Company members had set their sights on renewing a lease on Seaport Village, a tourist attraction and specialty shopping center located in San Diego, California, and leasing and developing an adjacent property. Disputes arose when the plans fell through. On November 4, 2016, when this action was first filed, Appellee-Plaintiff, Terramar Retail Centers, LLC[1]("Terramar") owned fifty percent of the membership interests in the Company, and Appellant-Defendant, Marion #2-Seaport Trust U/A/D June 21, 2002 (the "Trust" or "Appellant"), and non-party San Diego Seaport Village, Ltd. ("Limited"), each owned twenty-five percent.[2]

         (2) In April 2012, Limited filed an action for dissolution in a San Diego, California Superior Court based on Terramar's alleged failure to diligently pursue a lease renewal of Seaport Village. In August 2013, the California court held that the Company's dissolution matters must be resolved in Delaware.[3] Later that month, Limited filed a petition for dissolution in the Court of Chancery, alleging breach of fiduciary duty and breach of contract against Terramar (the "Limited Action"). In February 2014, the Court of Chancery granted Terramar's motion to dismiss, in part. After trial and post-trial argument, on November 9, 2015, the Court of Chancery ruled in favor of Terramar on all counts.[4] This Court affirmed that ruling.[5]

         (3) The Trust, which was not party to the Limited Action, threatened to bring similar claims against Terramar. Terramar entered into a Settlement Agreement and Mutual General Releases (the "Settlement Agreement") with the Trust to stave off the potential litigation. Except for certain phantom income claims, the Settlement Agreement, dated as of October 2, 2015, released and discharged "any and all manner of claims, actions or causes of action, in law or in equity, suits, debts, liens, damages, losses, costs, attorneys' fees or expenses, of any nature whatsoever, known or unknown, fixed or contingent, accrued or not yet accrued, including specifically, but not exclusively, and without limitation, those arising out of, in connection with, or in any way related to the Cohen Claims or Seaport Village through the date of this Agreement."[6]

         (4) In December 2015, Terramar sent a notice to the members pursuant to Section 9.5 of the Operating Agreement of the Company (the "LLC Agreement") exercising its right to have its membership interests in the Company purchased by the other members (the "Put Right").[7] If a purchase under the Put Right were not closed within six months, under Section 9.5(d) of the LLC Agreement, Terramar had the ability unilaterally to cause the dissolution of the Company and sell the Company's assets (the "Dissolution Right").[8] The Trust and Limited disputed Terramar's ability to exercise its rights under Section 9.5, which prompted Terramar to file this action for declaratory judgment. Specifically, Terramar sought a declaration that, under the LLC Agreement, it was "entitled to unilaterally sell all of [the Company's] property and assets to a third party in connection with [the Company's] dissolution" as per Section 9.5, and that it had correctly calculated the Waterfall Distribution under Section 4.[9] Limited then sold its membership interests to Terramar, making the Trust and Terramar the only remaining members of the Company. Limited, by stipulation, was dismissed from the action with prejudice.

         (5) On July 17, 2017, two days before the argument on the Trust's motion to dismiss this action for lack of personal jurisdiction, and approximately eight months after this action was filed, the Trust filed an action against Terramar in the Superior Court in Los Angeles, California (the "California Action") based on theories of breach of fiduciary duty, breach of the LLC Agreement, and the breach of the implied covenant of good faith and fair dealing. It sought a declaration that Terramar may not sell Company assets without the Trust's consent, that it invalidly purchased Limited's interests, and that it is not entitled to its priority return under the LLC Agreement. The Trust had originally moved to dismiss the instant action for lack of personal jurisdiction. The Court of Chancery denied that motion, and this Court affirmed on April 20, 2018.[10] In May of 2018, the Trust moved for a stay or dismissal on forum non conveniens grounds in favor of the second-filed California Action. The Court of Chancery denied that motion, [11] and then denied the Trust's attempt to add counterclaims in this action.[12] It also sanctioned the Trust for engaging in "serial efforts to delay this case," and for deploying "these tactics both for litigation advantage and to gain leverage in the underlying business dispute, which involves the dissolution of an entity and the sale of its assets."[13]

         (6) After a two-day trial on January 23-24, 2019, the Court of Chancery, in its May 22, 2019 Memorandum Opinion (the "Opinion"), ruled in favor of Terramar on all counts.[14] It granted the requested declaratory relief, finding that Terramar had met the requirements under the LLC Agreement to exercise its rights under Section 9.5 and unilaterally sell the Company's assets, and that the Waterfall Distribution had been correctly calculated.[15] The Trust filed a timely notice of appeal on July 17, 2019.

         (7) Having considered this matter on the briefs, oral arguments of the parties, and the record below, this Court concludes that the same should be affirmed on the basis of and for the reasons assigned by the Court of Chancery in its well-reasoned Opinion, Final Order and Judgment dated June 17, 2019, Order Denying Defendant's Motion in Limine dated January 18, 2019, Order Denying Defendant's Second Motion in Limine dated January 18, 2019, Order Denying Defendant's Motion for Leave to File Amended Answer and Counterclaims dated December 4, 2018, Memorandum Opinion dated December 4, 2018 granting Plaintiff's Motion in Limine, Order Denying Defendant's Motion for Reargument and/or Amendment of Case Scheduling Order dated September 19, 2018, Order Denying Defendant's Motion to Dismiss or Stay in Deference to the California Action dated August 23, 2018, and Order Governing Case Schedule dated June 14, 2018.

         (8) As to the Trust's claim that the Court of Chancery erred by declining to dismiss or stay this action, and in the process, improperly expanded the scope of Terramar's pleadings to include issues not raised by its Complaint, but which were alleged in the California Action, we disagree. The court weighed the Cryo-Maid[16] factors in response to the Trust's motion arguing forum non conveniens, and it found that this action should remain in Delaware.[17] We find no abuse of discretion in its ruling.[18] Further, the court correctly understood Terramar's Complaint to request that the court address whether the conditions in Section 9.5 of the LLC Agreement had been satisfied. Paragraph 31 of the Complaint alleges that "[t]here is a ripe dispute among the parties concerning Terramar's right under Section 9.5 of the Operating Agreement to sell [the Company's] property and assets, and the Waterfall Distribution, and therefore there is a ripe dispute among the parties as to the amount of the Waterfall Distribution."[19] Moreover, the Complaint requests a declaration that "Terramar is entitled to unilaterally sell all of [the Company's] property and assets to a third party in connection with [the Company's] dissolution."[20] Terramar clearly sought a judicial determination as to whether it could exercise its Dissolution Right. Implicit in that request was the question of whether Terramar had complied with Section 9.5. Accordingly, this claim fails.

         (9) Further, we agree with the Court of Chancery that the Trust cannot raise its "affirmative defenses" here because the defenses are time-barred.[21] The Trust filed its answer containing the defenses on June 28, 2018, but the alleged conduct spans a time-frame from 2003 to 2012. The trial court explained that a narrow exception to the limitations period exists that permits a defendant to use the defense of recoupment to resuscitate a time-barred claim and reduce the amount of damages that a plaintiff recovers. "[T]ime-barred claims can only be asserted for recoupment 'when they arise out of the same factually-related transaction as the plaintiff's claim.'"[22] Further, "[t]he defendant also must show that 'the recoupment claim seeks the same type of relief as is sought by the plaintiff' and that 'the claim is purely a defensive set-off and does not seek an affirmative recovery from the plaintiff.'"[23] "Both the primary damages claim and a claim in recoupment must involve the same litigants."[24]

         (10) In this case, the Court of Chancery held that the Trust could not save its time-barred challenges as a recoupment defense "because the time-barred challenges do not arise out of the same transaction as the claims that Terramar has asserted under Section 9.5 of the LLC Agreement."[25] Whereas Terramar's claims relate to its exercise of the Put Right and Dissolution Right, "[t]he Trust's challenges relate to historical events involving alleged breaches of other provisions of the LLC Agreement."[26] We find no error in the Court of Chancery's analysis. Thus, we conclude that the Court of Chancery correctly held that the three-year statute of limitations precluded assertion of the Trust's challenges predating June 28, 2015 (three years prior to the Trust's assertion of its affirmative defenses).[27]

          (11) Moreover, we find no error with any other aspect of the Court of Chancery's decision, including whether the conditions in Section 9.5 of the LLC Agreement were satisfied, whether the true opinion of the Company Fair Market Value was disclosed, whether the Purchase Price was accurately computed, and ...

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