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Klein v. Wasserman

Court of Chancery of Delaware

May 29, 2019


          Date Submitted: February 14, 2019

          Michael F. Bonkowski, Andrew L. Cole, COLE SCHOTZ P.C., Wilmington, Delaware; Steven R. Klein, Rachel A. Mongiello, COLE SCHOTZ P.C., Hackensack, New Jersey; Counsel for Plaintiffs John H. Klein and Cambridge Therapeutic Technologies, LLC.

          Lisa A. Schmidt, Matthew D. Perri, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Joseph L. Fogel, Michael P. Kornak, FREEBORN & PETERS LLP, Chicago, Illinois; Counsel for Defendants Marc Wasserman, Robert Breslow, and Monica Breslow.


          MCCORMICK, V.C.

          In June 2016, defendants Monica and Robert Breslow invested $12.5 million in plaintiff Cambridge Therapeutic Technologies, LLC ("CTT"). The plaintiffs allege that after investing, the Breslows exhibited buyer's remorse. They pressed for a buy-out of their equity stake and, to achieve this outcome, enlisted the aid of their board nominee, Marc Wasserman. According to the plaintiffs, through Wasserman, the Breslows embarked on a bad faith campaign to disrupt CTT's operations as much as possible. Wasserman demanded that CTT allocate tax losses to the Breslows, circumvented protocol by requesting information directly from employees, threatened litigation to obtain that information, and interfered with CTT's efforts to raise additional capital. The plaintiffs allege that Wasserman's actions caused internal disruption, hostility, and instability, as well as delays in filing K-1 tax statements. To boot, CTT's tax accountants and Chief Financial Officer resigned. But the Breslows never obtained a buy-out.

         Instead, CTT's founder John H. Klein caused CTT to commence this litigation. CTT alleges that Wasserman breached his fiduciary duty of loyalty by placing the Breslows' interests ahead of the best interests of CTT and that the Breslows aided and abetted in Wasserman's disloyal actions. CTT further alleges that the Breslows owed fiduciary duties as controllers of CTT, which they breached. In the alternative, CTT contends that the defendants breached the implied covenant of good faith and fair dealing inherent in CTT's operating agreement.

         The defendants have moved to dismiss the amended complaint, and this decision grants that motion as to the majority of the plaintiffs' claims. Whittled down to size, the amended complaint states a claim for breach of fiduciary duty against Wasserman and for aiding and abetting against the Breslows. Wasserman owed a duty to advance the best interests of CTT. Under the plaintiff-friendly pleading standard, it is reasonably conceivable that Wasserman breached duties to CTT by engaging in a course of conduct to benefit the Breslows and harm CTT. Given the nature of Wasserman's alleged acts, it is also reasonably conceivable that the Breslows knowingly participated in Wasserman's actions.

         The amended complaint, however, does not adequately allege facts sufficient to impose fiduciary duties on the Breslows as controllers. At bottom, the plaintiffs argue that the Breslows used their sources of influence-their board designee and his blocking rights under the operating agreement-to disrupt CTT's operations to a level sufficient to force a buy-out. Some theories posit that chronic disruption could rise to the level of control. Take Trotskyism, for example. The allegations in this case do not support such a holding. The amended complaint itself describes the Breslows as on a "quest" for control, not wielding control. The Breslows never achieved their alleged goal. At best, CTT pleads that the Breslows successfully disrupted CTT, but not to a degree that would support a reasonable inference of control.

         CTT's claim for breach of the implied covenant of good faith and fair dealing likewise fails. Courts invoke the implied covenant to fill contractual gaps concerning developments that the parties did not anticipate. In this case, CTT identifies no gaps that require filling. The plaintiffs argue that the Breslows promised, before executing the operating agreement, to deliver certain clients to CTT. That alleged promise, however, was known and could have been expressly addressed in the agreement; it is not a promise the Court may enforce by implying terms now.

         Klein is also a plaintiff in this case. After CTT commenced this litigation, Mark Adams (Klein's own Board nominee) and Wasserman voted to remove Klein from his management positions at CTT. Klein subsequently alleged that the defendants tortiously interfered with Klein's employment agreement and engaged in civil conspiracy. Both of these claims fail. To state a claim for tortious interference with his rights under the employment agreement, or a civil conspiracy claim based on that tortious interference, Klein must adequately allege that CTT breached his employment agreement. Because Klein does not allege facts to establish a contractual breach, both the claim for tortious interference and conspiracy lack a necessary predicate.


         The facts are drawn from the amended complaint[1] and documents incorporated therein.

         A. CTT, Its Members, and Its Management Structure

         CTT is a Delaware limited liability company headquartered in Teaneck, New Jersey. CTT packages and distributes pharmaceuticals, with a focus on "creating cost effective innovative medication delivery and packaging systems designed to improve patient medication adherence."[2]

         CTT has three classes of units-A, B, and C. Only Class A units carry voting rights. Klein owns 37, 000 Class A units, which is a majority of the Class A units and CTT's voting equity. Defendants Robert and Monica Breslow own 20, 000 Class A units. Non-party Blue Valley, LLC ("Blue Valley") owns 9, 111 Class A units. Another non-party owns 8, 000 Class A units.

         The Breslows acquired their units for $12.5 million in June 2016. The plaintiffs allege that before the Breslows acquired a stake in CTT, they represented that they had "'substantial' connections to numerous dental clinics" and "that they would 'bring' 105 [such] . . . contacts to CTT."[3]

         B. The Operating Agreement

         In connection with the Breslows' investment, CTT's members executed an operating agreement in June 2016 (as amended in September 2016, the "Operating Agreement").[4]

         The Operating Agreement establishes a three-person Board of Managers (the "Board") to manage CTT's business and affairs. Of the three Board managers, Klein appoints two and the Breslows appoint one. At the time of the events prompting this litigation, the Board comprised Klein (Chairman), Adams (designated by Klein), and Wasserman (designated by the Breslows). Neither Wasserman nor Adams is currently a Board member.

         The Operating Agreement permits the Board to appoint a CEO. Klein served as CEO and President pursuant to a June 2014 employment agreement that was amended at the time of the Breslows' investment (the "Employment Agreement"). Klein served in those capacities until December 14, 2017, when Adams and Wasserman voted to remove Klein for cause.

         The Operating Agreement conditions certain business decisions on Board approval and the affirmative vote of the Breslows' Board designee. These decisions include making investments outside the approved Board policy, incurring capital expenditures over $250, 000, and merging, selling, or liquidating all or a substantial portion of the company's assets.

         C. The Alleged Campaign to Force a Buy-Out

         Blue Valley acquired its units for $7 million in September 2016 at a substantially higher valuation than the Breslows' investment. The Amended Complaint alleges that after Blue Valley invested, the Breslows "became anxious to extract an immediate return" or "exit their investment" in CTT.[5] CTT says that Wasserman and the Breslows "began a bad faith campaign intended solely to disrupt CTT's business operations with the hopes that the Breslows could gain control of CTT or force a buy-out of their interest in CTT."[6]

         The factual allegations concerning the putative campaign fall into four categories.

         First, Wasserman made multiple demands on the Board designed to further the Breslows' interests. Wasserman demanded: "that CTT allocate its full tax losses to the Breslows";[7] that "the [Board] authorize a buyout of the Breslows' ownership interest, even though CTT lacked sufficient working capital to support any such payment";[8] and that the Board approve a "transaction" with "a potential third-party investor" "without conducting any diligence or negotiating the terms of the deal, contrary to the best interests of CTT . . . ."[9] Wasserman also "criticized" CTT's decision to switch software providers and "blamed others for supposedly harming" CTT.[10]

         The Board took no action on these demands or criticisms. When CTT and its Board rejected Wasserman's tax allocation demand, Wasserman "created immense animosity and conflict within CTT, ultimately leading CTT's tax accountants to resign and causing delays in filing the Company's K1 statements."[11]

         Second, Wasserman made information demands on CTT employees designed to disrupt CTT operations. Wasserman "incessantly" requested "information" about the company, which distracted people from their jobs and created "hostility throughout CTT."[12] If Wasserman did not receive immediate responses, he threatened CTT and its officers with litigation and "other adverse employment actions."[13] CTT's Chief Financial Officer resigned due to Wasserman's information demands.

         Third, Wasserman refused to allow the Board to "consider potential investments that would provide needed capital."[14] Wasserman blocked these "transactions" because they "were not in the Breslows' best interest[, ]" according to the Amended Complaint.[15] CTT "could have potentially benefitted from exploring these business opportunities more fully."[16] CTT does not identify with any detail the alleged "transactions," how they were considered, or when they were refused.

         Fourth, Wasserman and Adams terminated Klein as CEO and President in December 2017. CTT and Klein allege that Wasserman and the Breslows "were able to coopt Adams"[17] to vote to remove Klein "through guile" and "by exerting pressure through false representations."[18] As a result of this conduct, Klein suffered financial losses[19] and CTT suffered disruption, instability, and "harm to normal business operations."[20]

         D. This Litigation

         The plaintiffs commenced this litigation in September 2017. The defendants moved to dismiss the initial complaint in October 2017. The Board removed Klein as CEO in December 2017. The plaintiffs amended their complaint in April 2018 in response to the motion to dismiss and to add claims concerning Klein's removal. The defendants renewed their motion to dismiss in June 2018. The parties completed briefing in September 2018, [21] and the Court heard oral arguments on February 14, 2019.[22]

         II. ANALYSIS

         The Amended Complaint asserts five counts: three by CTT and two by Klein. In Count I, CTT asserts a claim for breach of fiduciary duty against Wasserman as a manager and the Breslows as controllers. In Count II, CTT asserts a claim against the Breslows for aiding and abetting Wasserman's breach of fiduciary duties. In Count III, CTT asserts a claim against all defendants for breach of the implied covenant of good faith and fair dealing. In Count IV, Klein asserts a claim against all defendants for tortious interference with his Employment Agreement. In Count V, Klein asserts a claim against all defendants for civil conspiracy.

         The breach of fiduciary duty claims asserted in the Amended Complaint are typically pursued derivatively by an investor. By contrast, here, the entity possessing the claims-CTT-is a named plaintiff and pursues those claims in its own right. As a result, the Amended Complaint is not subject to the heightened pleading requirements of Court of Chancery Rule 23.1. Thus, the defendants' motion to dismiss is governed by Court of Chancery Rule 12(b)(6).

         On a motion pursuant to Rule 12(b)(6), the Court accepts "all well-pleaded factual allegations in the Complaint as true, [and] accept[s] even vague allegations in the Complaint as 'well-pleaded' if they provide the defendant notice of the claim."[23] "A trial court is not, however, required to accept as true conclusory allegations 'without specific supporting factual allegations.'"[24] The Court "draw[s] all reasonable inferences in favor of the plaintiff[s], and den[ies] the motion unless the plaintiff could not recover under any reasonably conceivable set of circumstances susceptible of proof."[25]

         A. CTT's Claim for Breach of Fiduciary Duties

         1. Against Wasserman as Manager

         Count I alleges that Wasserman breached his fiduciary duties as a manager of CTT. By default, limited liability company managers owe fiduciary duties akin to those owed by directors of a corporation.[26] Although Delaware law permits a limited liability company to eliminate fiduciary duties in the governing agreement, [27] CTT's Operating Agreement does not do so.[28] The Operating Agreement does contain exculpatory language. The practical effect of that language is that, to survive a motion to dismiss, CTT must plead that Wasserman acted in bad faith, recklessly, fraudulently, or with willful malfeasance.[29]

         CTT's allegations against Wasserman target the bad faith aspect of this standard. The duty to act in good faith requires "true faithfulness and devotion, "[30]"'honesty of purpose,' and a genuine care for the fiduciary's constituents[.]"[31] Bad faith, on the other hand, includes "fiduciary conduct motivated by an actual intent to do harm, "[32] or actions taken "with a purpose other than that of advancing the best interests of the corporation . . . ."[33]

         In support of dismissal, the defendants adopt a divide-and-conquer approach, urging the Court to evaluate CTT's allegations of bad faith piecemeal, and conclude that because no single allegation suffices to support a claim for breach of fiduciary duty, the collection of CTT's allegations likewise fail. At the pleadings stage, this Court does not review in piecemeal fashion, but rather, reads the allegations as a whole.[34]

         Reading CTT's allegations as a whole, it is reasonably conceivable that Wasserman acted in bad faith by placing the interests of the Breslows above the interests of CTT. Wasserman allegedly demanded that the Board allocate its full tax losses to the Breslows and authorize a buyout of the Breslows' ownership interest. Wasserman also allegedly demanded information from employees directly, thereby bypassing ordinary channels and disrupting operations. Harm conceivably flowed from this alleged misconduct: CTT's tax accountants and Chief Financial Officer resigned; CTT suffered delays in filing K-1 tax statements; and Wasserman's actions disrupted and destabilized CTT.[35]

         Delaware courts have recognized that a course of conduct designed to disrupt the operations of a company may constitute a breach of fiduciary duty. In BelCom, Inc. v. Robb, for example, former Chancellor Chandler found post-trial that a director of BelCom, Inc. breached his duty of loyalty by engaging in a "campaign of harassment" designed to "extract millions" from the company.[36] In BelCom, the campaign involved threatening litigation against the company, and then demanding that employees obtain indemnification agreements to defend against the litigation, which caused key employees to refuse to continue working for the company.[37]

         Likewise, in Auriga Capital Corp. v. Gatz Properties, LLC, then-Chancellor Strine found post-trial that a manager breached his fiduciary duties by engaging in a "course of conduct to enrich himself and his family without any regard for the interests" of the company or its minority members.[38] In Auriga, the course of conduct involved avoiding strategic options, refusing to provide corporate information to potential bidders, failing to take any steps to preserve the value of the company, and using contractual veto rights as a "chokehold" over the LLC.[39]

         As in BelCom and Auriga, the Amended Complaint alleges that Wasserman repeatedly used his powers as a manager, including his ability to interact with key employees and exercise contractual veto rights, to further goals not in the company's best interests. To be sure, both BelCom and Auriga involve bad actions a degree more severe than those described in the Amended Complaint. In both cases, the Court found that the fiduciary had committed flagrant fraud, which CTT does not plead in this case. But both decisions were decided post-trial upon a fully developed record. In this case, a more complete record might reveal more egregious facts; it might not. At the pleadings stage, giving CTT all inferences to which it is entitled, the Amended Complaint states a non-exculpated claim for breach of fiduciary duty against Wasserman.

         The defendants' other arguments in support of dismissal are similarly unavailing. The defendants describe CTT's allegations concerning Wasserman's course of conduct as conclusory. Conclusory allegations are those that "state[] a generalized conclusion with no supporting facts."[40] By contrast, the Amended Complaint points to specific events demonstrating the alleged campaign, including demands on the Board. CTT's allegations concerning the alleged campaign could be more detailed, but a lack of detail does not render an allegation conclusory.[41]

         The defendants further argue that CTT's claims are not ripe because the Board did not consummate any transaction that Wasserman demanded. Consequently, in CTT's words, there is no "actionable harm."[42] The mere fact that the Board did not act on Wasserman's demands, however, does not defeat CTT's claim at the pleadings stage. Although it is true that the Court may not issue advisory opinions determining the legal sufficiency of a transaction that a company has not committed to pursue, CTT does not seek that relief. Rather, CTT points to those proposed transactions as evidence that Wasserman was acting in a systematic manner to benefit the Breslows and not CTT.

         In any event, CTT has pled harm. CTT alleges that because Wasserman disregarded CTT protocol by making direct demands on employees, requesting immediate responses, and threatening some employees with adverse employment actions, CTT suffered. Specifically, key persons resigned and CTT experienced delays in filing documents.[43] CTT further alleges that Wasserman's actions caused internal disruption and corporate instability. CTT will have the burden of proving ...

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