IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

KEVIN CAPONE and STEVEN 

SCHEINMAN,

Plaintiffs,

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v.

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C.A. No. 11687-VCG

LDH MANAGEMENT HOLDINGS 

LLC, LDHMH MM, LLC, 

CASTLETON COMMODITIES 

INTERNATIONAL LLC (f/k/a LOUIS 

DREYFUS HIGHBRIDGE ENERGY 

LLC), TODD BUILIONE, GLENN 

DUBIN, GEORGE FERRIS, WILLIAM 

C. REED II, and JACQUES VEYRAT,

Defendants.

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MEMORANDUM OPINION

Date Submitted: February 13, 2018

Date Decided: April 25, 2018

Daniel A. Dreisbach and Ryan P. Durkin, of RICHARDS, LAYTON & FINGER, 

P.A., Wilmington, Delaware; OF COUNSEL: Brendan V. Sullivan, Jr., Stephen L. 

Urbanczyk, Paul Mogin, Steven M. Cady, and Matthew H. Blumenstein, of 

WILLIAMS & CONNOLLY LLP, Washington, DC, Attorneys for Plaintiffs.

Donald J. Wolfe, Jr., T. Brad Davey, and Seth R. Tangman, of POTTER 

ANDERSON & CORROON LLP, Wilmington, Delaware; OF COUNSEL: Andrew 

Ditchfield, David B. Toscano, Edward Fu, and Sagar D. Thakur, of DAVIS POLK & 

WARDWELL LLP, New York, New York, Attorneys for Defendants.

GLASSCOCK, Vice Chancellor
1

This matter raises a discrete question under our LLC Act. The Plaintiffs were 

unitholders in an LLC. Their equity was subject to a call, which the company made. 

Contractually, the units were to be redeemed at a price derived from the value of the 

LLC’s parent, as of the end of the preceding year. In making that valuation, the 

Defendants—including directors and officers of the company and its parent—were 

contractually required to act in good faith. The Defendants made the valuation using 

information available as of the valuation date. After that date, however, but before 

the valuation, a portion of the parent entity was sold for a price that suggested that 

the valuation was grossly insufficient. One of the Plaintiffs made this precise 

complaint to the Defendants shortly after the call was exercised. Subsequently, but 

before the statute of limitations on the Plaintiffs’ claims had run, the LLC (and its 

managing member, another LLC) were dissolved, and their assets were distributed 

to the equity holders. Under the LLC Act, the dissolving entity must set aside a 

reserve to satisfy, among other things, known claims. The amount of the reserve 

must be reasonably likely to be sufficient to these ends. The Defendants, however, 

failed to set aside a reserve for the Plaintiffs’ claims (or, looked at another way, set 

a reserve of zero dollars). The Plaintiffs allege that the zero-dollar reserve was not 

reasonably sufficient to their claims, and ask me to nullify the certificates of 

cancellation so that they may proceed with these claims, currently pending in a court 

in New York.
2

Because I determine that the dissolutions violated the requirement that a 

reasonable reserve be created to address known claims, I grant the relief the Plaintiffs 

seek here. My reasoning follows.

I. BACKGROUND

A. The Parties

Defendant Castleton Commodities International LLC, formerly known as 

Louis Dreyfus Highbridge Energy LLC (“LDH”), is a Delaware limited liability 

company.1 Castleton is a commodities trading company, and its principal place of 

business is in Stamford, Connecticut.2

Defendants Todd Builione, Glenn Dubin, George Ferris, William C. Reed II, 

and Jacques Veyrat served on the LDH Board of Directors at all relevant times.3 

Reed also served as LDH’s President and CEO, and Ferris was its CFO.4

In 2009, LDH formed Defendant LDH Management Holdings LLC 

(“Management Holdings”), a Delaware limited liability company.5 As part of an 

employee equity incentive plan, Management Holdings held a fifteen-percent profits 

interest in LDH.6 Pursuant to the plan, LDH granted high-level employees 

membership interests in Management Holdings; those interests were referred to as 

 

1 Compl. ¶ 18.

2

Id. ¶¶ 4, 18.

3

Id. ¶¶ 19–23.

4

Id. ¶¶ 21–22.

5

Id. ¶ 16.

6

Id. ¶ 4; Cady Aff. Ex. 1, § 1.3.
3

“Units.”7 LDH created another entity, Defendant LDHMH MM LLC (“Managing 

Member”), to serve as Management Holdings’ managing member.8 Managing 

Member was a wholly owned subsidiary of LDH.9 I refer to Management Holdings 

and Managing Member as the “LLCs.”

Before his termination from LDH in January 2011, Plaintiff Kevin Capone 

served as the company’s head trader.10 Plaintiff Steven Scheinman was fired from 

LDH in December 2010, though his termination became effective in January 2011; 

before then, he was the company’s General Counsel, Executive Vice President, 

Chief Compliance Officer, and Corporate Secretary.11 Both Capone and Scheinman 

held Units in Management Holdings under LDH’s equity incentive plan.12 

Specifically, Capone held fifteen Units, representing 10% of Management Holdings’ 

outstanding Units, and Scheinman owned seven Units, representing 4.67% of the 

outstanding Units.13 These equity interests gave Capone and Scheinman an indirect 

profits interest in LDH of 1.5% and 0.7%, respectively.

 

7 Compl. ¶ 4.

8 Cady Aff. Ex. 1, at 9.

9

Id.

10 Compl. ¶ 14; Cady Aff. Ex. 42, at 54:18–20.

11 Compl. ¶ 15; Cady Aff. 48, at 6:5–7.

12 Cady Aff. Ex. 29, at CCIDEL_00004956.

13 Compl. ¶ 5; Cady Aff. Ex. 29, at CCIDEL_00004956.
4

B. Factual Background

1. The LLC Agreement

The underlying dispute in this case turns on the interpretation of several

related provisions of Management Holdings’ LLC agreement. When Capone and 

Scheinman were awarded their Units, they signed Unit Award Agreements that 

bound them to the LLC agreement.14 Under the LLC agreement, Management 

Holdings had the right to redeem the Units of any LDH employee who was 

terminated without cause.

15

 This call right was required to be exercised at “the Fair 

Market Value for such Unit as of the last day of the last Fiscal Year preceding the 

Fiscal Year in which the Call Notice is given.”

16

 Management Holdings redeemed 

Capone and Scheinman’s Units on April 12, 2011, several months after they were 

fired.17 Thus, the relevant “as of” date for determining those Units’ fair market value

was December 31, 2010.

The LLC agreement provided the following definition of fair market value:

“Fair Market Value” shall mean, with respect to a Unit of a particular 

Series, the amount that would be distributed as of any relevant date if 

(x) all of the assets of LDH and its subsidiaries had been sold at their 

Gross Asset Value (adjusted immediately prior to such deemed sale by 

the [Management Holdings] Board in good faith and in consultation 

with the LDH Board), (y) the net proceeds of such sale (after payment 

of any liabilities of LDH and its subsidiaries other than any liabilities 

of LDH and its subsidiaries associated with the Plan Income or 

 

14 E.g., Cady Aff. Ex. 2, at KC-000158. 

15 Cady Aff. Ex. 1, § 7.4(b).

16 Id. § 7.4(c)(i).

17 Compl. ¶ 47.
5

Expense) had been distributed to the members of LDH (including the 

Company) upon liquidation of LDH in accordance with the LDH 

Agreement (assuming for this purpose that all Units are Vested Units), 

and (z) the amount of such distribution to the Company had been 

distributed to the Members in accordance with Section 8.3.

18

The LLC agreement also stated that 

[t]he Gross Asset Value of all Company assets shall be adjusted to equal 

their respective gross fair market values as determined by the Managing 

Member, immediately prior to the following times: . . . (ii) the 

distribution by the Company to a Member of more than a de minimis 

amount of Company assets as consideration for all or part of an interest 

in the Company (including the redemption of all or any portion of a 

Member’s Units).

19

Finally, the LLC agreement provided that 

[a]ll determinations of Gross Asset Value made by the Managing 

Member shall be subject to the review and approval of the 

[Management Holdings] Board. Determinations of Gross Asset Value 

hereunder shall be made promptly following the relevant date and, to 

the extent applicable, shall be based on the Company’s financial 

statements for the fiscal quarter ending on such relevant date or during 

which such relevant date occurs, unless otherwise determined by the 

Board.20

2. LDH Explores a Sale of the Midstream Assets

As of the fall of 2010, LDH contained two separate divisions: the Midstream 

Assets Business, which consisted of natural gas pipelines and storage facilities, and 

 

18 Cady Aff. Ex. 1, at 7.

19 Id. at 8.

20 Id. The LLC agreement also provided that “[a]ny claim by a Participating Member, or any 

beneficiary of a Participating Member or any other person having or claiming a right under this 

Agreement or a Unit Award Agreement, may be asserted solely against [Management Holdings]

or the Managing Member, as applicable.” Id. § 9.9(a).
6

the Merchant Trading Business, which traded energy commodities through LDH’s 

trading platform.21 In November 2010, LDH retained Goldman Sachs and Barclays 

Capital to explore a sale of the Midstream Assets.22 The next month, on December 

14, LDH sent a ninety-six page confidential information memorandum to potential 

bidders for the Midstream Assets.23 That memorandum contained extensive 

information about the Midstream Assets.24 The bidders used the memorandum to 

formulate their bids, which were submitted on January 14, 2011.

25

Even before the confidential information memorandum went out, however, 

Energy Transfer Partners (“ETP”) had expressed interest in buying the Midstream 

Assets. On November 30, 2010, Goldman Sachs reached out to several parties, 

including ETP.26 Kelcy Warren, ETP’s CEO, responded to the inquiry by asking 

whether LDH would “entertain a pre-empt.”27 Warren noted that ETP was 

“considering many projects that would make this a very good fit,” and he indicated 

that ETP “plan[ned] to be aggressive in this process.”28 The next day, Michael 

Dowling, the head of the Midstream Assets Business, sent an email to LDH 

Managing Director David Wallace, explaining that “Energy transfer would be a 

 

21 Compl. ¶ 39.

22 Cady Aff. Exs. 5, 6.

23 Cady Aff. Ex. 14.

24 Id.

25 Cady Aff. Ex. 20; Cady Aff. Ex. 45, at 185:25–187:5

26 Cady Aff. Ex. 7.

27 Id. at CCIDEL_00001901.

28 Id.
7

perfect fit for our merchant. They have no liquids marketing and would likely be 

interested in us partnering on projects.”29

About a week later, on December 10, Dowling followed up with Wallace and 

Ferris: “This is the guy [ETP’s CEO] that asked if they can stop the process and go 

exclusive. . . . As I stated before, it could be they think this [that is, agreeing to a 

joint venture with LDH involving a fractionator] is a way to do an exclusive with us 

as our assets and people are an excellent fit with them.”30 ETP reached out to LDH 

again a few days later.31 Dowling informed Ferris and Wallace that ETP “would 

like to go exclusive and [the CEO] asked about the possibility.”32 Dowling also 

noted that he had told ETP to “continue communications with Goldman on the 

topic.”33

Capone and Scheinman testified at their depositions that, in mid-December 

2010, they learned that ETP was interested in buying the Midstream Assets for 

around $2 billion. Capone said that two or three Houston-based LDH employees 

had told him about a “rumor . . . that ETP [wa]s gonna pay close to $2 billion for . . 

. this bunch of assets.”34 After returning to LDH’s headquarters in Connecticut, 

Capone shared the rumor with several members of LDH management, including 

 

29 Id. at CCIDEL_00001898.

30 Cady Aff. Ex. 11.

31 Cady Aff. Ex. 13.

32 Id.

33 Id.

34 Cady Aff. Ex. 42, at 139:5–141:7.
8

Ferris.35 Around the same time, Scheinman learned from Ferris that “ETP asked to 

go exclusive and had proposed a number [that is, $2 billion].”36

3. LDH Performs Its Own Valuation of the Midstream Assets

On December 23, 2010, LDH finalized its own valuation of the Midstream 

Assets Business and the Merchant Trading Business.37 The valuation was performed 

as part of an issuance of a new series of Management Holdings Units; it was also 

used by LDH’s auditors.38 Ferris, Wallace, and Herbert Quan (an LDH Vice 

President) were responsible for creating the valuation,39 and the LDH Board 

approved it.40 LDH valued the Midstream Assets using four methodologies: a 

comparable companies analysis, a transaction multiples analysis, a discounted cash 

flow (“DCF”) analysis, and a master limited partner yield analysis.41 Based on these 

methodologies, LDH estimated that the Midstream Assets had an enterprise value of 

$1.43 billion as of December 31, 2010.

42

 The valuation report also noted that 

Goldman Sachs and Barclays Capital had estimated the Midstream Assets’ 

enterprise value to be between $1.3 billion and $1.6 billion.43

 

35 Id. at 148:7–10.

36 Cady Aff. Ex. 48, at 64:6–7, 64:13–14.

37 Cady Aff. Ex. 17.

38 Toscano Aff. Ex. 6, at 58:2–7.

39 Cady Aff. Ex. 45, at 168:16–21; Cady Aff. Ex. 46, at 14:8–14.

40 Cady Aff. Ex. 41, at 43:14–17, 44:21–45:4; Cady Aff. Ex. 45, at 212:15–213:15; Cady Aff. Ex. 

49, at 23:23–25:2.

41 Cady Aff. Ex. 17, at 3–7.

42 Id. at 1, 3; Cady Aff. Ex. 45, at 192:9–21.

43 Cady Aff. Ex. 17, at 20.
9

The Plaintiffs take issue with several aspects of the December 23 valuation. 

Their primary criticism is that the DCF analysis used higher discount rates (and 

lower EBITDA multiples) than previous valuations. For example, in its November 

30, 2010 DCF analysis, LDH used a discount rate of 8% to 10% and an EBITDA 

multiple of 9.5 to 10.5 to value Mont Belvieu, the largest piece of the Midstream 

Assets.44 As a result, the Midstream Assets were valued at between $1.65 billion 

and $1.96 billion.45 By contrast, in the December 23 DCF analysis, LDH valued 

Mont Belvieu using a discount rate of 10% to 12% and an EBITDA multiple of 7.5 

to 8.5.46 The result was that the Midstream Assets were valued in the range of $1.33 

to $1.61 billion.47 The Plaintiffs also point out that Dowling, who headed the 

Midstream Assets Business, could not recall playing any role in generating the

December 23 valuation.48 And they complain that Ferris, who helped prepare the 

valuation, could not recall whether it was required to be conducted in good faith.49

4. The Plaintiffs Are Fired, and the Sales Process Continues

As noted above, Capone was fired in January 2011, and Scheinman was 

terminated in December 2010 (though the termination did not become effective until 

 

44 Cady Aff. Ex. 15, at 21.

45 Id.

46 Cady Aff. Ex. 17, at 6.

47 Id.

48 Cady Aff. Ex. 43, at 102:22–103:19.

49 Cady Aff. Ex. 45, at 221:22–222:2. The Plaintiffs also point out that Highbridge Capital, one 

of LDH’s owners, offered a slightly higher valuation of the Midstream Assets. Cady Aff. Ex. 18.
10

January 2011).

50

 Around the same time, LDH was continuing its efforts to auction 

the Midstream Assets. On January 14, LDH received twenty-three conforming bids 

for the Assets.51 The median bid was $1.8 billion, and all but one of the twentythree bids were higher than the $1.43 billion valuation LDH had placed on the 

Midstream Assets on December 23.52 Goldman Sachs described the bids as 

“preliminary indicative bids,” and they were not binding.53

About a week after the bids came in, Scheinman told Reed, LDH’s CEO, that 

it was legal error not to take account of the bids in valuing the Midstream Assets.54 

Scheinman also told Wallace that it was a mistake not to consider “third-party bids,” 

and that “the company was obligated to be sure about this because the so-called 

profits interest characterization of the units based on the IRS guidance required that 

the Series 1 be fully valued before issuing Series 2.”

55

 Later, on January 25, 

Scheinman sent an email to Reed and Wallace: “In the spirit of our ‘spirited debate’ 

yesterday, here are the Tax regulations governing the determination of FMV for 

book-up purposes.”56 Wallace then emailed Reed to “suggest refraining from 

 

50 Compl. ¶¶ 14–15.

51 Cady Aff. Ex. 20, at 4.

52 Id.

53 Toscano Aff. Ex. 15.

54 Cady Aff. Ex. 45, at 232:3–15; Cady Aff. Ex. 48, at 170:16–171:19.

55 Cady Aff. Ex. 48, at 209:20–210:2; see also Cady Aff. Ex. 50, at 42:25–43:19.

56 Cady Aff. Ex. 23.
11

continuing this dialogue.”57 Scheinman made the same argument about considering 

third-party bids to John Damasco, LDH’s Tax Director.58 

On January 28, Damasco sent an email to Wallace and Ferris, informing them 

that he had “[s]poke[n] to Steve [Scheinman] last night at his farewell party and he 

told me he wants to discuss the valuation issue with Bill [Reed] today. Steve also 

indicated that Capone has the same valuation question.”59 Damasco labeled the 

email “PRIVILEGED & CONFIDENTIAL ATTORNEY WORK PRODUCT.”60

The next month, on February 4, Capone wrote a letter to Reed in which he 

expressed concern that “the Fair Market Value at 12/31/10 has been set exceedingly 

low, especially in light of the bids for the assets that came in just a few days later.”61 

Indeed, Capone said that “[i]f . . . the FMV has been significantly undervalued, it 

would be devastating to the value of my interest in the equity plan and it is something 

I would need to review and perhaps formally question.”62 Reed did not respond to 

the letter.63

 

57 Id.

58 Cady Aff. Ex. 48, at 213:19–214:15.

59 Cady Aff. Ex. 24.

60 Id. (emphasis omitted). Damasco included the same label in another email in this chain. Id.

61 Cady Aff. Ex. 25, at KC-000227.

62 Id.

63 Cady Aff. Ex. 42, at 183:17–184:17.
12

5. The Midstream Assets Are Sold, and the Plaintiffs’ Units Are 

Redeemed

On March 22, 2011, LDH sold the Midstream Assets to a joint venture 

between ETP and Regency Energy Partners for $1.925 billion.64 Then, on April 12, 

2011, the Defendants redeemed the Plaintiffs’ Units.65 For purposes of the 

redemptions, the Defendants valued LDH as a whole at $1.744 billion, and the 

Midstream Assets in particular at $1.43 billion.66 The valuations purported to be 

based on the fair market value of LDH as of December 31, 2010.67 As the Plaintiffs 

point out, however, $1.744 billion is about $200 million less than the $1.925 billion 

ETP paid to acquire the Midstream Assets alone, and there is no evidence that the 

Assets materially increased in value between December 2010 and March 2011.

On April 20, 2011, Scheinman sent Ferris an email asking for information 

about how “the per Unit price of $780,919.29 was derived from the $1,744 

million.”

68

 Ferris forwarded the email to Damasco, who then said that his “litigation 

view would be to discuss verbally as opposed to written communication.”69 For his 

part, Capone continued to reach out to Reed, sending a letter on May 17 in which he 

expressed confusion about “how the low value of $1.744 billion could have been 

 

64 Cady Aff. Ex. 27.

65 Cady Aff. Ex. 29, at CCIDEL_00004956–57; Toscano Aff. Exs. 16, 17.

66 Toscano Aff. Exs. 16, 17; Cady Aff. Ex. 45, at 193:14–19, 204:10–12.

67 Toscano Aff. Exs. 16, 17.

68 Cady Aff. Ex. 32, at 2.

69 Id. at 1.
13

reached given the fact that only one part of the Company was sold a few months 

later for more than $1.9 billion.”70 While Reed did not respond to this letter,71 he 

and Ferris met with several LDH employees (including an LDH lawyer) to discuss 

it.72 Three days after this meeting, Capone sent a follow-up email to Reed, who 

again did not write back.

73

 Capone then emailed Ferris, who responded by saying 

that he was “a little puzzled why you feel the need to write letters and send detailed 

emails to Bill [Reed].”

74

 Ferris nevertheless agreed to discuss Capone’s questions 

over the phone.75

Capone and Ferris spoke over the phone on June 7, 2011.76 Ferris answered 

some of Capone’s questions about the valuation, but the conversation quickly 

became “almost a shouting match where [Ferris] told me to get off . . . my soapbox, 

and to stop lecturing him or he was going to end the call right now and not give me 

anymore [sic] information.”77 Capone testified that during the call he accused the

Defendants of “act[ing] in bad faith under the contract . . . [and] act[ing] with 

malice.”78 Indeed, Capone “told [Ferris] I thought he had breached, very clearly.”79 

 

70 Cady Aff. Ex. 34.

71 Cady Aff. Ex. 42, at 184:12–14.

72 Cady Aff. Ex. 35.

73 Cady Aff. Ex. 36; Cady Aff. Ex. 42, at 184:12–14.

74 Cady Aff. Ex. 38.

75 Id.

76 Cady Aff. Ex. 39; Cady Aff. Ex. 42, at 181:5–182:5.

77 Cady Aff. Ex. 42, at 181:11–18.

78 Id. at 181:19–21; see also Cady Aff. Ex. 39, at KC-000303.

79 Cady Aff. Ex. 42, at 188:6–7.
14

Capone further testified that he called Ferris “a liar and [said] he was cheating.”80 

Ferris had a similar recollection of the conversation: 

I remember reviewing the valuation methodology with him and, at the 

end, having him accuse me of lying and cheating. And I use the word 

“cheating” not as a specific reference of words that he said, but more 

the accusation that the valuation was fixed at a level that he disagreed 

with and that was done out of malice.81

Ferris later told Reed about his conversation with Capone.82

6. The LLCs Are Cancelled, and the Plaintiffs Pursue Litigation in 

New York

On December 31, 2012, LDH was acquired by third-party investors and 

renamed Castleton Commodities International LLC.83 That same day, Management 

Holdings and Managing Member were cancelled.84 John Damasco, LDH’s Tax 

Director, testified that the cancellations were part of the restructuring necessary to 

consummate the acquisition.85 The Defendants did not notify the Plaintiffs of the 

cancellations, and the Defendants did not reserve funds for Plaintiffs’ claims relating 

to breach of the LLC agreement.86

 

80 Id. at 181:21–22.

81 Cady Aff. Ex. 45, at 242:25–243:9.

82 Id. at 244:2–3.

83 Capone v. Castleton Commodities Int’l, LLC, 2016 WL 1222163, at *3 (N.Y. Sup. Ct. Mar. 29, 

2016), aff’d, 48 N.Y.S.3d 583 (App. Div. 2017).

84 Toscano Aff. Ex. 24.

85 Toscano Aff. Ex. 25, at 210:7–14.

86 Compl. ¶¶ 90, 94.
15

On May 21, 2015, the Plaintiffs sued Management Holdings, Managing 

Member, and Castleton in New York state court for breach of contract, breach of the 

implied covenant of good faith and fair dealing, and unjust enrichment.87 The 

Plaintiffs later amended their complaint, adding Builione, Dubin, Ferris, Reed, and 

Veyrat as defendants, and seeking recovery “for contractual breaches, unjust 

enrichment, torts, wrongful cancellation of Management Holdings and the Managing 

Member, and clawback of the improper distributions and/or transfers of 

Management Holdings’ and the Managing Member’s assets.”88 The Plaintiffs’ 

breach of contract claims rested on the allegation that the “Defendants failed to 

determine in good faith the fair market value of LDH Energy and Plaintiffs’ Units.”

89

 

On March 29, 2016, the New York court dismissed all of the Plaintiffs’ claims except 

the breach of contract claims against the LLCs, which the court stayed pending a 

ruling from this Court on the Plaintiffs’ claim for nullification of the cancellations.90

C. This Litigation

The Plaintiffs commenced this action on November 6, 2015, and they 

amended their Complaint on July 5, 2016. Count I of the Complaint seeks an order 

nullifying the cancellations of Management Holdings and Managing Member.91 

 

87 Id. ¶ 96.

88 Id. ¶ 98.

89 Toscano Aff. Ex. 26, ¶ 101.

90 Capone, 2016 WL 1222163, at *10.

91 Compl. ¶¶ 101–04.
16

According to the Plaintiffs, the Defendants violated Delaware law by cancelling the 

LLCs without setting aside a reserve for the Plaintiffs’ breach of contract claims.92 

Count II seeks to hold the Defendants liable for that purported violation of Delaware 

law.93 In Count III, the Plaintiffs seek to hold the Defendants “liable for clawbacks 

up to the amount of any distributions they received [as part of the acquisition and 

cancellations] in order to satisfy Plaintiffs’ claims against Management Holdings 

and the Managing Member.”94 Finally, Count IV alleges that the Defendants 

fraudulently transferred assets belonging to Management Holdings and Managing 

Member in the course of winding up those entities.95

On December 2, 2016, I denied the Defendants’ Motion to Dismiss as to 

Count I and asked the parties to confer about how the litigation should go forward.96 

The parties then agreed that the Motion to Dismiss as to Counts II to IV would be 

withdrawn without prejudice, and that discovery would proceed as to Count I. After 

the completion of that discovery, the parties cross-moved for summary judgment on 

the Plaintiffs’ nullification claim.97 I heard oral argument on those Motions on 

 

92 Id. ¶ 103.

93 Id. ¶¶ 105–09.

94 Id. ¶ 120.

95 Id. ¶¶ 123–34.

96 Dec. 2, 2016 Oral Arg. Tr. 69:18–74:12.

97 According to the Defendants, a ruling in their favor on Count I necessarily means they win on 

the remaining Counts. Because the Plaintiffs are entitled to summary judgment on Count I, I need 

not address this issue.
17

February 13, 2018, during which the parties agreed that I could consider the Motions 

submitted on a stipulated record.98

II. ANALYSIS

Under Court of Chancery Rule 56, summary judgment shall be granted if 

“there is no genuine issue as to any material fact and . . . the moving party is entitled 

to a judgment as a matter of law.”99 The moving party bears the initial burden of 

demonstrating the “absence of a material factual dispute.”100 If the moving party 

makes this initial showing, “the burden shifts to the nonmovant to present some 

specific, admissible evidence that there is a genuine issue of fact for a trial.”

101

 In 

reviewing a summary judgment motion, the Court “must view the evidence in the 

light most favorable to the non-moving party.”102 Thus, the Court must deny a

request for summary judgment “if there is any reasonable hypothesis by which the 

opposing party may recover, or if there is a dispute as to a material fact or the 

inferences to be drawn therefrom.”

103

Where, as here, the parties have filed cross-motions for summary judgment 

and have not argued that a material issue of fact exists, “the Court shall deem the 

 

98 Feb. 13, 2018 Oral Arg. Tr. 4:20–5:3.

99 Ct. Ch. R. 56(c).

100 In re Transkaryotic Therapies, Inc., 954 A.2d 346, 356 (Del. Ch. 2008) (quoting Levy v. HLI 

Operating Co., 924 A.2d 210, 219 (Del. Ch. 2007)). 

101 Id.

102 Merrill v. Crothall-American, Inc., 606 A.2d 96, 99 (Del. 1992).

103 In re El Paso Pipeline Partners, L.P. Derivative Litig., 2014 WL 2768782, at *8 (Del. Ch. June 

12, 2014) (quoting Vanaman v. Milford Mem’l Hosp., Inc., 272 A.2d 718, 720 (Del. 1970)).
18

motions to be the equivalent of a stipulation for decision on the merits based on the 

record submitted with the motions.”104 Nevertheless, “even when presented with 

cross-motions for summary judgment, a court must deny summary judgment if a 

material factual dispute exists.”105

A. Nullification

The parties have moved for summary judgment on the Plaintiffs’ nullification 

claim. That claim seeks to revive the cancelled LLCs—Management Holdings and 

Managing Member—so that the Plaintiffs can pursue their breach of contract claims

against those entities in New York.106 Specifically, the Plaintiffs argue that the 

Defendants violated Section 18-804(b) of the Delaware Limited Liability Company 

Act by cancelling the LLCs without setting aside a reserve to cover the Plaintiffs’ 

breach of contract claims. According to the Plaintiffs, at the time of cancellation, 

the Defendants either knew of the claims or were aware of facts that made them

likely to arise. Either way, say the Plaintiffs, the Defendants improperly wound up 

the LLCs, making it appropriate to nullify the certificates of cancellation. The 

Defendants argue strenuously that the dissolutions were in compliance with the Act; 

 

104 Ct. Ch. R. 56(h).

105 Bank of N.Y. Mellon v. Realogy Corp., 979 A.2d 1113, 1119 (Del. Ch. 2008).

106 As this Court has pointed out, Section 18-803(b) of the LLC Act “provides that suit generally 

may be brought by or against a limited liability company only until the certificate of cancellation 

is filed.” Metro Commc’n Corp. BVI v. Advanced Mobilecomm Techs. Inc., 854 A.2d 121, 138 

(Del. Ch. 2004).
19

they do not contest that, should I find that their actions violated the Act, nullification 

of the cancellations is the appropriate remedy.

I turn first to the relevant provisions of the LLC Act. I then examine whether 

the Plaintiffs have established that the LLCs were cancelled in violation of the Act.

1. Section 18-804(b)

Section 18-804 of the LLC Act governs the distribution of a dissolved LLC’s 

assets. In particular, Section 18-804(b)(1) provides that “[a] limited liability 

company which has dissolved” “[s]hall pay or make reasonable provision to pay all 

claims and obligations, including all contingent, conditional or unmatured 

contractual claims, known to the limited liability company.”107 Section 18-804(b)(3) 

requires an LLC undergoing the wind-up process to 

make such provision as will be reasonably likely to be sufficient to 

provide compensation for claims that have not been made known to the 

limited liability company or that have not arisen but that, based on facts 

known to the limited liability company, are likely to arise or to become 

known to the limited liability company within 10 years after the date of 

dissolution.108

 

107 6 Del. C. § 18-804(b)(1).

108 Id. § 18-804(b)(3). Section 18-804(b)(2) provides that a dissolved LLC “[s]hall make such 

provision as will be reasonably likely to be sufficient to provide compensation for any claim 

against the limited liability company which is the subject of a pending action, suit or proceeding 

to which the limited liability company is a party.” That provision is irrelevant here, because the 

Plaintiffs’ breach of contract claims were not the subject of a pending suit or proceeding when the 

LLCs were dissolved.
20

If an LLC is not wound up in accordance with the LLC Act, this Court “may nullify 

the certificate of cancellation, which effectively revives the LLC and allows claims 

to be brought by and against it.”109

Several features of these statutory provisions bear emphasis. First, Section 

18-804(b)(1) is clear that a dissolved LLC must provide for all claims—“including 

all contingent, conditional or unmatured contractual claims”—that are “known to 

the limited liability company.”110 One leading treatise provides an illustrative

discussion of the LLC Act’s treatment of known claims:

One example of a contingent, conditional contractual claim is a right to 

indemnification under the limited liability company agreement; under 

many such indemnification provisions, the claim arises only if a 

covered loss occurs and becomes an entitlement only if the would-be 

indemnitee has satisfied an applicable standard of conduct. A 

contingent or conditional claim against the limited liability company 

must be accounted for under Section 18-804([b])(1) irrespective of the 

likelihood that it will actually “vest.”

111

Second, “claims” are not limited to purely contractual obligations; instead, they 

“include, without limitation, contract, tort, or statutory (e.g., tax) claims against . . . 

the limited liability company, whether or not . . . reduced to judgment.”112

 

109 Matthew v. Laudamiel, 2012 WL 605589, at *22 n.148 (Del. Ch. Feb. 21, 2012).

110 6 Del. C. § 18-804(b)(1) (emphasis added).

111 Robert L. Symonds, Jr. & Matthew J. O’Toole, Symonds & O’Toole on Delaware Limited 

Liability Companies § 16.06[E][2][b][ii] (2d ed. 2016) (emphasis added). Nevertheless, as 

discussed below, “[t]he probability of such vesting may be relevant . . . in determining whether 

provision for payment . . . is reasonable.” Id.

112 Id.
21

Finally, the LLC Act provides some flexibility to those tasked with making 

provision for a dissolved LLC’s claims and obligations.113 The Act “does not specify 

a particular method by which the dissolved company must provide for claims and 

obligations that it does not pay on a current basis.”114 Instead, “[t]he statute simply 

sets forth a reasonableness standard by which any provision for payment is to be 

evaluated.”115 Whether a provision for a particular claim is reasonable depends on 

several factors, including “the potential amount of such [a] claim[] and the likelihood 

of [it] actually becoming [a] liabilit[y] for which the company must answer.”116 “For 

example, with respect to evaluation of claims, the minimal likelihood of a given 

claim . . . actually arising or vesting could justify the reasonableness of making no 

provision, or minimal provision, for payment thereof.”117 Likewise, a claim “might 

be valued by applying a discount based on probability of success.”118 Statutory

flexibility notwithstanding, I must keep in mind Section 18-804’s underlying 

 

113 Id. § 16.06[E][2][c][ii].

114 Id.

115 Id. § 16.06[E][2][c][iii]; see also 6 Del. C. § 18-804(b)(1) (requiring a dissolved LLC to make 

“reasonable provision to pay” claims and obligations) (emphasis added); id. § 18-804(b)(2) 

(requiring a dissolved LLC to make “such provision as will be reasonably likely to be sufficient 

to provide compensation for” claims) (emphasis added).

116 Symonds & O’Toole, supra, § 16.06[E][2][c][iii].

117 Id.

118 Id.
22

purpose of providing “mandatory protection to creditors of a limited [limited 

company] if the [limited liability company] dissolves and winds up its affairs.”119

2. The Plaintiffs’ Breach of Contract Claims

The first step in analyzing the Plaintiffs’ request for nullification is to 

understand the claims for which the Defendants purportedly were required to make 

provision. According to the Plaintiffs, the Defendants breached the LLC agreement 

by redeeming the Plaintiffs’ Units based on a bad-faith estimate of LDH’s value as 

of December 31, 2010. The LLC agreement gave Management Holdings the right 

to redeem the Plaintiffs’ Units if the Plaintiffs were terminated without cause. The 

redemption had to be based on the “Fair Market Value” of those Units as of 

December 31, 2010.

120

 Under the LLC agreement, “Fair Market Value” meant, 

with respect to a Unit of a particular Series, the amount that would be 

distributed as of any relevant date [here, December 31, 2010] if (x) all 

of the assets of LDH and its subsidiaries had been sold at their Gross 

Asset Value (adjusted immediately prior to such deemed sale by the 

[Management Holdings] Board in good faith and in consultation with 

the LDH Board).

121

The LLC agreement further provided that 

 

119 Techmer Accel Holdings, LLC v. Amer, 2010 WL 5564043, at *7 (Del. Ch. Dec. 29, 2010). 

Amer involved a limited partnership, not an LLC. Given the dearth of caselaw interpreting the 

relevant provisions of the LLC Act, I may look to cases examining analogous statutory provisions

for guidance. See, e.g., In re Delta Holdings, Inc., 2004 WL 1752857, at *8 & n.54 (Del. Ch. July 

26, 2004) (evaluating a corporation’s wind-up process by reference to a case involving a limited 

partnership because “[t]he same considerations guiding the Court in that decision-the protection 

of creditors in the end-game of an entity’s existence-guide the Court here”).

120 Cady Aff. Ex. 1, § 7.4(c)(i).

121 Id. at 7 (emphasis added).
23

Gross Asset Value . . . shall be [determined] promptly following the 

relevant date [here, December 31, 2010] and, to the extent applicable, 

shall be based on the Company’s financial statements for the fiscal 

quarter ending on such relevant date or during which such relevant date 

occurs, unless otherwise determined by the Board.122

The Defendants redeemed the Plaintiffs’ Units in April 2011. For purposes 

of the redemptions, the Defendants valued LDH as of December 31 using only the 

information contained in the December 23 valuation. Thus, the Defendants valued 

LDH as a whole at $1.744 billion, and they valued the Midstream Assets in particular 

at $1.43 billion. The problem, according to the Plaintiffs, is that between December 

23, 2010, and April 2011, highly probative evidence emerged that, as of December 

31, the Midstream Assets were worth almost half a billion dollars more than the 

value used to redeem the Units. Specifically, on January 14, 2011, LDH received 

twenty-three bids for the Midstream Assets, and the median bid was $1.8 billion. 

Indeed, twenty two of those bids were higher than $1.43 billion. And in March 2011, 

LDH sold the assets to a joint venture for $1.925 billion. Notably, the record is 

devoid of evidence that the Midstream Assets materially increased in value between 

December 2010 and March 2011. 

The Plaintiffs argue that the Defendants breached the LLC agreement by 

refusing to take account of this market evidence in redeeming the Units. The 

Plaintiffs focus on the LLC agreement’s requirement that Management Holdings 

 

122 Id. at 8.
24

“adjust[] [the Gross Asset Value of LDH’s assets] immediately prior to [the] deemed 

sale . . . in good faith.”

123

 By the Plaintiffs’ lights, a good-faith valuation of LDH 

could not ignore market evidence suggesting that the Midstream Assets were worth 

far more than the December 23 valuation implied.

124

 The Plaintiffs also draw 

attention to the LLC agreement’s requirement that the determination of gross asset

value be made “promptly following the relevant date [here, December 31].”125 The 

Defendants purportedly violated that provision by determining gross asset value on 

December 23, over a week before the relevant date. According to the Plaintiffs, the 

Defendants knew that bids probative of fair market value would arrive in January, 

so they performed the valuation ahead of the schedule established by the LLC 

agreement. 

3. Were the Defendants on Notice of the Plaintiffs’ Claims?

I now turn to the question whether the Defendants were aware of the 

Plaintiffs’ breach of contract claims in December 2012, when the LLCs were 

dissolved. Section 18-804(b)(1) requires that provision be made for claims “known 

to the limited liability company.”126 The LLC Act defines “knowledge” “as a 

person’s actual knowledge of a fact, rather than the person’s constructive knowledge 

 

123 Id. at 7 (emphasis added).

124 The Plaintiffs additionally argue that it was improper for LDH to ignore the December 2010 

rumor that ETP was interested in buying the Midstream Assets for around $2 billion.

125 Id. at 8.

126 6 Del. C. § 18-804(b)(1).
25

of the fact.”

127

 Thus, “known claims and obligations [are] limited to those of which 

the limited liability company has actual, rather than constructive, knowledge.”128 In 

my view, the record is clear that the Defendants, including LDH’s CEO, were aware 

of the Plaintiffs’ claims for breach of contract when the LLCs were cancelled.

129

a. Capone

Even before his Units were redeemed in April 2011, Capone was objecting to 

LDH’s valuation of its assets. On February 4, he wrote Reed, LDH’s CEO, to stress 

the importance of ensuring “a fair result” with respect to “the equity plan.”130 

Capone was “worried that the Fair Market Value at 12/31/10 has been set 

exceedingly low, especially in light of the bids for the [Midstream Assets] that came 

in just a few days later.”131 Capone further suggested that if LDH had in fact been 

“significantly undervalued, it would be devastating to the value of my interest in the 

equity plan and it is something I would need to review and perhaps formally 

question.”132

 

127 Id. § 18-101(5).

128 Symonds & O’Toole, supra, § 16.06[E][2][b][ii].

129 Because I find that the Defendants were aware of the Plaintiffs’ claims under Section 18-

804(b)(1), I need not decide whether the Plaintiffs have also established an improper cancellation 

under Section 18-804(b)(3), which covers “claims that have not been made known to the limited 

liability company or that have not arisen but that, based on facts known to the limited liability 

company, are likely to arise or to become known to the limited liability company.” 6 Del. C. § 18-

804(b)(3).

130 Cady Aff. Ex. 25, at KC-000227.

131 Id.

132 Id.
26

Capone continued to complain about the valuation after his Units were 

redeemed. On May 17, he wrote another letter to Reed, seeking information that 

would clarify “the basis for the amounts I have been paid and that I am to be paid 

next year in connection with the Company’s Call of my Units.”133 Capone confessed 

to “having difficulty understanding how the low value of $1.744 billion could have 

been reached given the fact that only one part of the Company was sold a few months 

later for more than $1.9 billion.”134 Reed did not write back; indeed, he never 

responded to any of Capone’s inquiries. Reed did take notice, though: Soon after 

receiving the May 17 letter, Reed met with Ferris and an LDH lawyer to discuss it.

Capone eventually got Ferris to agree to talk on the phone about some of 

Capone’s concerns regarding the valuation. The two spoke on June 7, 2011. During 

the conversation, Capone accused the Defendants of “act[ing] in bad faith under the 

contract . . . [and] act[ing] with malice.”135 Capone also “told [Ferris] I thought he 

had breached, very clearly.”136 Finally, Capone called Ferris a liar and a cheater. 

Ferris’s recollection of the conversation tracked Capone’s, and Ferris told Reed 

about the call.

 

133 Cady Aff. Ex. 34.

134 Id.

135 Cady Aff. Ex. 42, at 181:19–21; see also Cady Aff. Ex. 39, at KC-000303.

136 Cady Aff. Ex. 42, at 188:6–7.
27

The evidence just reviewed makes clear that, as of June 2011, at least two of 

LDH’s highest-ranking officers knew that Capone had not only raised serious 

questions about the valuation used to redeem his Units, but had specifically accused 

the Defendants of breaching the LLC agreement in connection with that valuation. 

Capone’s repeated complaints about the valuation both before and after the 

redemption track the allegations underlying the Plaintiffs’ breach of contract 

claims—namely, that the “Defendants failed to determine in good faith the fair 

market value of LDH Energy and Plaintiffs’ Units.”

137

 Moreover, Capone’s breach 

of contract claim raised the prospect of millions of dollars in damages. For example, 

the Plaintiffs’ New York complaint seeks “$7.5 million to Capone . . . , in respect of 

the money taken from Capone based on the understated value of the Midstream Asset 

Business.”138 Of course, a request for damages is just that—a request. But about a 

month before the redemptions, LDH itself calculated the losses that Capone, 

Scheinman, and another departing LDH executive would incur as a result of the 

valuation: “The post 12/31/2010 [Unit] value (assuming asset sale @ 1.9B) to 

Former Employees would have been an additional $5m of incremental value.”

139

 

The large sums potentially at stake in Capone’s breach of contract claim make it 

 

137 Toscano Aff. Ex. 26, ¶ 101.

138 Id. at 33.

139 Cady Aff. Ex. 25B, at CCIDEL_00011136. Ferris testified at his deposition that he was “sure” 

LDH had performed such a calculation. Cady Aff. Ex. 45, at 320:23–321:7.
28

more likely that the Defendants were paying close attention when he raised concerns 

about the valuation in early to mid-2011. Thus, the Plaintiffs have established that 

the Defendants were aware of Capone’s claim for breach of contract when the LLCs 

were cancelled in December 2012.140

b. Scheinman

Scheinman was not as persistent or vocal as Capone in objecting to the 

valuation. Nevertheless, Scheinman took enough steps to put the Defendants on 

notice of his claim as well. Soon after LDH received almost two dozen bids for the 

Midstream Assets, Scheinman told Reed and Wallace, LDH’s Managing Director, 

that it was legally improper not to consider the bids in valuing the Assets. 

Scheinman expressed the same view to Damasco, LDH’s Tax Director. In an email 

labeled “PRIVILEGED & CONFIDENTIAL ATTORNEY WORK PRODUCT,” 

Damasco told Wallace and Ferris that he had “[s]poke[n] to Steve [Scheinman] last 

night at his farewell party and he told me he wants to discuss the valuation issue with 

Bill [Reed] today. Steve also indicated that Capone has the same valuation 

 

140 I reject the Defendants’ suggestion that I should not impute knowledge of Capone’s claim to 

the Defendants because Capone “stayed silent” from June 2011 to May 2015, when the New York 

lawsuit was initiated. Defs.’ Reply Br. 21. By June 2011, Capone had made very clear his position 

that the Defendants had breached the LLC agreement. To my mind, it would make little sense to 

find that an LLC lacked “knowledge” of a claim unless the claimant continued to remind the 

company of the claim. That is especially so here, where the company in question was run by 

sophisticated actors who could reasonably be expected to make a record of potential litigation by 

former high-level executives—particularly when that potential litigation raised the prospect of

millions of dollars in damages. Moreover, the Defendants do not suggest that the Plaintiffs brought 

their breach of contract claims after the expiration of the applicable statute of limitations.
29

question.”141 Moreover, after his Units were redeemed in April 2011, Scheinman 

emailed Ferris seeking information about how “the per Unit price of $780,919.29 

was derived from the $1,744 million.”142 That email was forwarded to Damasco, 

who stated that his “litigation view would be to discuss verbally as opposed to 

written communication.”143 

Unlike Capone, Scheinman never explicitly accused the Defendants of 

breaching the LLC agreement. But Scheinman told several high-level LDH 

executives that, in his opinion, it was legal error not to consider the January 14 bids 

in fixing a value for the Midstream Assets. One of those executives appears to have 

thought litigation over the valuation was a real possibility,

144 since he labeled 

“ATTORNEY WORK PRODUCT” at least two emails he sent about the issue.145 

And soon after the redemptions took place, Scheinman emailed LDH’s CFO asking 

for information about how his Units were valued. True, Scheinman testified that he 

had only friendly interactions with Reed after his termination.146 But Scheinman 

 

141 Cady Aff. Ex. 24. As noted above, Damasco labeled another email in this chain in the same 

manner. Id.

142 Cady Aff. Ex. 32, at 2.

143 Id. at 1.

144 Notably, there was no mystery as to who the defendants would be in such a litigation. The LLC 

agreement provided that the any claims by the Plaintiffs relating to the Units “may be asserted 

solely against [Management Holdings] or the Managing Member, as applicable.” Cady Aff. Ex. 

1, § 9.9(a).

145 See, e.g., Rohm & Haas Co. v. Dow Chem. Co., 2009 WL 537195, at *2 (Del. Ch. Feb. 26, 

2009) (“The key question that the Court must ask when evaluating a claim of work product 

protection is whether the material at issue was ‘prepared in anticipation of litigation or for trial.’” 

(quoting Ct. Ch. R. 26(b)(3))).

146 Cady Aff. Ex. 48, at 115:9–116:14; 176:24–177:6; 177:22–179:4.
30

also testified that he never told Reed that their disagreements over the valuation used 

to redeem his units had been resolved.147 To my mind, all of this evidence 

demonstrates that the Defendants were on notice of Scheinman’s claim for breach 

of the LLC agreement.148 Additionally, the Defendants surely evaluated 

Scheinman’s concerns in light of Capone’s contemporaneous and strongly stated 

position that the Defendants had acted in bad faith.149

4. Did the Defendants Make Reasonable Provision for the Plaintiffs’ 

Claims?

Having found that the Defendants were on notice of the Plaintiffs’ claims, I 

next determine whether the Defendants made reasonable provision for those claims. 

As noted above, Section 18-804(b)(1) requires a dissolved LLC to “pay or make 

reasonable provision to pay all [known] claims.”150 It is undisputed that the 

Defendants did not set aside any funds for the Plaintiffs’ claims. According to the 

Defendants, that was entirely proper, because those claims were “meritless,” and a 

 

147 Id. at 206:17–21. The Defendants also point to Scheinman’s admission in this litigation that he

considered litigation to be a mere “possibility” in late 2012. Id. at 22:17–21. But Scheinman’s 

intentions are, strictly speaking, beside the point; the question under Section 18-804(b)(1) is 

whether the LLCs were aware of a potential claim. The Defendants do not point to any evidence 

suggesting that Scheinman told anybody at LDH that litigation was merely possible, or unlikely, 

let alone that he was waiving any claim.

148 In any event, even if Scheinman’s complaints alone were not enough to put the Defendants on 

notice, Capone’s certainly were. And I agree with the Plaintiffs that Capone and Scheinman’s 

breach of contract claims were sufficiently similar that notice as to one of them provided notice as 

to the other.

149 See Cady Aff. Ex. 24 (“Steve also indicated that Capone has the same valuation question.”).

150 6 Del. C. § 18-804(b)(1).
31

reserve of zero dollars was therefore sufficient to account for them.151 I agree with 

the Defendants’ premise, but not their conclusion.

Several considerations inform the reasonableness inquiry, including “the 

potential amount of . . . [a] claim[] and the likelihood of [it] actually becoming [a] 

liabilit[y] for which the company must answer.”152 For instance, “the minimal 

likelihood of a given claim . . . actually arising or vesting could justify the 

reasonableness of making no provision, or minimal provision, for payment 

thereof.”153 Similarly, a claim “might be valued by applying a discount based on 

probability of success.”154

A hypothetical illustrates the point. Suppose a delusional individual who had 

never worked at LDH wrote a letter to Reed, LDH’s CEO, just before the windingup process began. In that letter, the individual maintained that the LLCs owed him 

$1 million for services rendered as an LDH employee, even though, as just noted, 

he had never worked at LDH. (Assume as well that Reed knew the individual was 

delusional and had never been employed by LDH.) Any claim stemming from such 

an allegation would be obviously frivolous so that a reserve of zero dollars would

likely be sufficient to account for it. On the other hand, even a relatively weak claim 

 

151 Defs.’ Opening Br. 18.

152 Symonds & O’Toole, supra, § 16.06[E][2][c][iii].

153 Id.

154 Id.
32

may justify a reserve, especially where, as here, the claim raises the prospect of a

large damages award.155 Where the LLC faces a claim for a large amount, its 

principals are justified in nonetheless setting a reserve of zero dollars only where the 

claim is procedurally barred—as, for example, where a statute of limitation bars the 

claim—or where the claim itself is legally frivolous. Because the claims here were

not procedurally barred, I examine their facial legal frivolity as known to the LLCs

at the time of dissolution.156

Were the Plaintiffs’ claims objectively frivolous at the time of dissolution? A

claim is not frivolous simply because it will likely be unsuccessful.

157

 Instead, the 

question is whether the claim “lacks even [a good-faith,] arguable basis in law.”158 

In my view, the claims at hand easily clear this bar.

The Defendants argue that the Plaintiffs’ claims lack merit because the LLC 

agreement forbade consideration of events postdating December 31, 2010, in valuing 

 

155 See id. (noting that a reasonable reserve may take account of “the potential amount of . . . [a] 

claim[]”).

156 At oral argument, counsel for the Defendants agreed that if the Defendants were aware of a 

“nonfrivolous claim” at the time of winding up, that would be enough to establish improper 

dissolution under Section 18-804(b). Feb. 23, 2018 Oral Arg. Tr. 12:15–13:14.

157 See, e.g., Neitzke v. Williams, 490 U.S. 319, 328 (1989) (“When a complaint raises an arguable 

question of law which the district court ultimately finds is correctly resolved against the plaintiff, 

dismissal on Rule 12(b)(6) grounds is appropriate, but dismissal on the basis of frivolousness is 

not.”); Allen v. Briggs, 331 F. App’x 603, 604 (10th Cir. 2009) (noting that the Neitzke standard 

“means much more than just merely wrong”); see also In re BioClinica, Inc. S’holder Litig., 2013 

WL 5631233, at *1 n.1 (Del. Ch. Oct. 16, 2013) (“[T]he standard for expedition, colorability, 

which simply implies a non-frivolous set of issues, is even lower tha[n] the ‘conceivability’

standard applied on a motion to dismiss.”).

158 Neitzke, 490 U.S. at 328.
33

the Midstream Assets for purposes of the redemptions.

159

 The Defendants point to 

the LLC agreement’s definition of fair market value: 

“Fair Market Value” shall mean, with respect to a Unit of a particular 

Series, the amount that would be distributed as of any relevant date [that 

is, December 31, 2010] if (x) all of the assets of LDH and its 

subsidiaries had been sold at their Gross Asset Value (adjusted 

immediately prior to such deemed sale by the [Management Holdings] 

Board in good faith and in consultation with the LDH Board).160

The Defendants emphasize that the good-faith obligation relied on by the Plaintiffs

appears in a clause requiring that any adjustment to the valuation be performed 

“immediately prior to such deemed sale.”161 According to the Defendants, the 

“deemed sale” in this provision unambiguously refers to “the hypothetical sale 

whose proceeds were distributed as of December 31, 2010.”

162

 Since an adjustment 

made before December 31 cannot possibly take account of information from 

subsequent months, the LLC agreement supposedly prohibited the Defendants from 

considering the January 14 bids or the March 2011 sale in valuing the Midstream 

Assets and, by extension, the Plaintiffs’ Units.

The Plaintiffs offer two primary responses to this argument. First, they say 

that the phrase “adjusted immediately prior to such deemed sale” simply means “that 

 

159 The Defendants also argue that the Plaintiffs have abandoned any claim premised on a failure 

to consider ETP’s purported $2 billion offer in December 2010. I need not address this issue, 

however, because I conclude that the Plaintiffs’ claims are not frivolous to the extent they rely on 

a failure to consider events after December 31, 2010.

160 Cady Aff. Ex. 1, at 7.

161 Id.

162 Defs.’ Opening Br. 26.
34

immediately prior to redeeming Units, the Board will determine in good faith the 

fair market value used to redeem the Units.”

163

 According to the Plaintiffs, that 

good-faith determination should have taken into account the highly probative market 

evidence that emerged between December 31 and the April 2011 redemptions. 

Second, according to the Plaintiffs, the Defendants ignore that the valuation was 

finalized on December 23, over a week before the “as of” date. The Plaintiffs view 

that decision as improper in light of the LLC agreement, which required the 

determination of gross asset value to be made “promptly following the relevant date

[that is, December 31].”164 The Plaintiffs also suggest that this early valuation 

supports an inference of bad faith on the part of the Defendants, who knew probative 

market evidence would arrive when the bids came in less than a month later. In the 

Plaintiffs’ view, the actual sale price is not itself determinative of value as of the date 

of the hypothetical sale, but it is strong evidence of value as of that date. This is, in 

my view, not a frivolous position.

To repeat, my task is not to decide the merits of these competing 

interpretations of the LLC agreement. The Plaintiffs’ breach of contract claims are 

not before me; they are being pursued in the New York action (though, as noted 

above, the New York court has reserved decision pending my resolution of the 

 

163 Pls.’ Opening Br. 58.

164 Cady Aff. Ex. 1, at 8.
35

request for nullification). It is for that court to determine what view of the contract, 

in light of the facts, must prevail. My task is different, and focuses on the 

reasonableness of the LLCs’ reserve at the time of dissolution. That issue requires 

that I determine whether the Defendants acted reasonably by setting a zero-dollar

reserve, based on their apparent determination that any claim raised by the Plaintiffs 

would be clearly meritless. I find that they did not. 

Nothing in the LLC agreement unequivocally states that information learned 

after December 31, and relevant to value as of the time immediately preceding the 

“deemed sale,” cannot be considered in determining the fair market value of the 

Plaintiffs’ Units. While the Defendants may be correct that the phrase “adjusted 

immediately prior to such deemed sale” achieves the same prohibitory effect, their 

reading of that provision is not the only reasonable construction. It is not 

indisputably wrong to read the provision, as the Plaintiffs do, as simply requiring a 

good-faith adjustment of the LDH assets’ gross asset value immediately before 

redeeming a terminated employee’s Units.165 

 

165 Consider a contractual provision requiring a good-faith valuation on July 1 of corporate assets 

as of December 31 of the previous year. It is in the corporate interest that the valuation be as low 

as possible. The assets, so far as is known on December 31, had a value of $1,000,001. $1 of this 

valuation was attributed to a framed $1 bill, the first dollar the corporation had earned in 1922. 

Suppose in January, a visitor to corporate headquarters, who happened to be a numismatist, noticed 

that the 1922 dollar has a rare printing error, is a collector’s item, and has a value of $1 million. 

She communicates such to the company’s principals. Nonetheless, in its valuation on July 1, the 

company values itself as of December 31 at $1,000,001 rather than $2 million, based on corporate 

knowledge as of December 31. Alleging that such a valuation resulted from bad faith is, in my 

view, non-frivolous.
36

I also note that the Plaintiffs point out that the Defendants relied on a valuation 

performed over a week before the LLC agreement contemplated such an exercise 

being conducted. That in itself may have been a breach of the agreement. In any 

event, it supports a reasonable inference that the Defendants, knowing that bids for 

the Midstream Assets would arrive in a few weeks, rushed the valuation so that the 

Plaintiffs’ Units could be redeemed at below fair market value. Such conduct could 

potentially constitute a violation of the contractual obligation to adjust the valuation 

in good faith.166

In sum, I cannot say that the Plaintiffs’ reading of the LLC agreement’s rather 

complex provisions is frivolous. Thus, because the Defendants167 were aware at the 

time of dissolution of the Plaintiffs’ non-frivolous claims against the LLCs for 

breach of contract, the LLC Act required creation of a reserve to cover the Plaintiffs’ 

claims. It is undisputed that the Defendants failed to do that. Accordingly, the LLCs 

were dissolved in violation of Section 18-804(b)(1), and the certificates of 

cancellation shall be nullified.168

 

166 The Plaintiffs have also introduced evidence suggesting that in early December 2010, Reed, 

Ferris, and Wallace were considering a plan to “[m]aximize [the] dilutive effect of issuing [a] new 

series [of units].” Cady Aff. Ex. 10, at 1.

167 At least Reed and Ferris were aware of the breach of contract claims. Both were high-level 

officers of LDH whose knowledge may be imputed to the LLCs, which were controlled by LDH. 

See, e.g., Teachers’ Ret. Sys. of La. v. Aidinoff, 900 A.2d 654, 671 n.23 (Del. Ch. 2006) (“[I]t is 

the general rule that knowledge of an officer or director of a corporation will be imputed to the 

corporation.”).

168 See Laudamiel, 2012 WL 605589, at *22 n.148 (“[I]f the Court finds that an LLC’s affairs were 

not wound up in compliance with the Delaware Limited Liability Company Act, it may nullify the 
37

III. CONCLUSION

For the foregoing reasons, the Plaintiffs’ Motion for Summary Judgment is 

granted, and the Defendants’ Motion for Summary Judgment is denied. The parties 

should submit an appropriate form of order, and should inform me within one week 

whether additional issues remain in this Delaware litigation.

 

certificate of cancellation, which effectively revives the LLC and allows claims to be brought by

and against it.”).