### IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

----------------------- ---------------------------- Yucaipa American Alliance Fund I, LP and Yucaipa American Alliance (Parallel) Fund I, LP,

Plaintiffs,

v. SBDRE LLC, Black Diamond Commercial Finan ce L.L.C., Spectrum Commercial Finance L.L.C., BDCM Opportunity Fund II, LP, Black Diamond CLO 2005

- 1 Ltd., and Spectrum Investment Partners, L.P.,

Defendants. :

: : : : : : : : : : : : : : : : C.A. No. 9151

– VCP

------------------- ------------ -------------------- MEMORANDUM OPINION Submitted: June 16, 2014 Decided: October 31, 2014

Martin S. Lessner, Esq., Michael R. Nestor, Esq., Emily V. Burton, Esq., Matthew C. Bloom, Esq., YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; Att orneys for Plaintiffs

. Adam G. Landis, Esq., Rebecca L. Butcher, Esq., K. Tyler O‘Connell, Esq., LANDIS RATH & COBB LLP, Wilmington, Delaware; Adam C. Harris, Esq., Robert J. Ward, Esq., David M. Hillman, Esq., SCHULTE ROTH & ZABEL LLP, New York, New York ; Attorneys for Defendants

.
PARSONS, Vice Chancellor.1

This case involves a dispute among the major lenders to a now

- bankrupt compan y known as Allied Systems Holdings, Inc. Resolving the parties ‘ competing positions requires navigating a maze of relevant documents: a senior credit agreement, the third amendment to that credit agreement, the related security agreement, and the limited liability company agreement of SBDRE LLC, a Delaware limited liability company (―LLC‖) formed by the defendant Black Diamond to acquire and realize upon the
lenders‘ collateral. The Court of Chancery is at least the sixth court to become involved in this controversy

. An opening sk irmish between the p laintiffs and a non

- party to this case seeking a declaratory judgment about the validity of a purported fourth amendment to the credit agreement dragged on for two years in Georgia before those parties settle d. Then, litigation in New York between the parties currently before me resul ted in an opinion invalidating the same disputed fourth amendment. The Appellate Division of New York‘s Supreme Court affirmed that holding and the New York Court of A ppeals den ied
further review. Meanwhile, parallel litigation moved forward in the United States Bankruptcy Court for the District of Delaware (the ―Bankruptcy Court‖) . That litigation
continues

. An appeal from a significant decision of the Bankruptcy Court curren tly is pending before the United St ates District Court for the District of Delaware (the ―District Court‖) . Amidst all of this litig ation, the parties also attempted unsuccessfully to mediate their dispute

. In this case, the p laintiffs initially sought a status quo order. I denied the motion for a status quo order on December 20, 2013 . This action is c urrently b efore me on2

Defendants‘ motion to dismiss or s tay the complaint . For the reasons that follow, I
conclude that a covenant not to sue in the thi rd amendment to the credit agreement ba rs the p laintiffs from bringing several of the fourteen c ounts asserted in the complaint and portions of other counts

. As for the claims that have survived the motion to dismiss in whole or in part , I find that resol ution of those claims should be stayed pending completion of the litigation in the Bankruptcy Court.
I. BACKGROUND 1
A. The Parties Allied Systems Holdings, Inc. (―Allied‖) operated a car

- hau ling and car

- delivery
business. Allied is currently in bankruptcy pro ceedings. The dispute in this case
revolves around Allied‘s debt. Yucaipa American Alliance Fund I, LP and Yucaipa American Alliance (Parallel) Fund I, LP (together , ―Plaintiffs‖ or ―Yucaipa‖) are investment funds. Plaintiffs held a majority equity inter est in Allied when it entered bankruptcy. Before the bankruptcy,
Yuca ip a also had purchased a majority of the relevant Allied debt.
Defendants BDCM Opportunity Fund II, LP, Black Diamond CLO 2005

- 1 LTD, and Spectrum Investment Partners, L.P. (together , ―B lack Diamond‖) are also investment
funds. Black Diamond owns a significant amount of the relevant Allied d ebt.

1 Unless otherwise noted, the facts recited herein are drawn from the well

- pled allegations of the Amended Verified Complaint (―Complaint‖), together with its attached exhibits, and are presumed true for the purposes of Defendants‘ motion to dismiss. The factual record is largely undisputed.3

Defendant Black Diamond Commercial Finance L.L.C. and Spectrum Commercial Finance, LLC (together, the ―Black Diamond Agents‖) are entities cr eat ed by Black Diamond to serve important roles under the credit agreement governing the Allied debt.
Defendant SBDRE LLC (―SBDRE‖) is a Delaware LLC created by Black
Diamond to realize upon assets acquired from the Allied estate following a successful
credit bid

. Black Diamond, the Black Diamond Agents, and SBDRE collectively comprise
the ―Defendants‖ in this case.
B. Facts Allied emerged from its first bankruptcy in May 2007. Under the plan of reorganization, Yucaipa became the controlling stockholder. Yuca ipa held no Allied debt
at that time. Allied had a $265 million senior secured priority credit facility (the ― Allied
Debt ‖) from a collection of lenders (the ―Lenders‖). The Allied Debt is governed by the Amended and Restated First Lien Secured Super

- Pri ority Debtor in Possession and Exit Credit and Guaranty Agreement (the ―Credit Agreement‖) and the related Amended and Restated Pledge and Security Agreement (First Lien) (the ―Security Agreement‖). As defined in the Credit Agreement, one or more Lenders holding more than 50%
of the total Allied Debt can act as the ―Requisite Lender.‖ The Requisite Lender has the authority, in the event of a default by Allied, either to exercise the Lenders‘ rights or to cause the Lenders to forbear from exercising their rights under the Credit Agreement. Basically, this case is about Yucaipa‘s thwarted attempt to become the Requisite Lender.
U nder the Credit Agreement, however, Yucaipa was not an ―Eligible Assignee‖

— one to4

whom the Lenders could assign their debt

— and , therefore , Yucaipa could not become a Lender, much less the Requisite Lender.
After two amendments of no importance here, a majority of the Lenders agreed to Amendment No. 3 to Credit Agreement and Consent (the ―Third Amendment‖) on April 17, 2008 . The Th ird Amendment allowed Yucaipa to acquire some Allied Debt from the
other Lenders. But, the T hird Amendment imposed onerous restrictions on Yucaipa, such as limiting it to acquiring no more than 25% of the term loan debt

— one of three
kinds of debt recogniz ed under the Credit Agreement

— requiring Yucaipa to make capital contributions to Allied in proportion to the debt it acquired, stripping any Yucaipa

- held
debt of voting rights, and subjecting Yucaipa to a broadly

- worded covenant not to sue. Indeed, under the Third Amendment, Yucaipa assumed the unique status of a ―Restricted Sponsor Affiliate‖ and was not permitted to become a Lender. Given the 25% cap on the
amount of Allied Debt Yucaipa could acquire, it also c ould not become Requisite Lender
under the Third Amendment. In February 2009, ComVest Investment Partners III, L.P. (―ComVest‖) acquired roughly 55% of the Allied Debt. Later that year, a majority of the Lenders approved a fourth amendment to the Credit Agreement (the ―Fourth Amendment‖). The F ourth
Amendment lifted all restriction s on Yucaipa‘s acquisition of Allied Debt. Following approval of the Fourth Amendment, Yucaipa purch ased ComVest‘s lending position , thereby acquiring 55.2% of the Allied Debt. The Complaint alleges t hat on August 21 , 2009, Yucaipa became the Requisite Lender. As such, Yucaipa purportedly gained the ability to ca use the Lenders to for bear from exercising their rights in the event of a5

default by Allied. Given Allied‘s struggles following its exit from its first bank ruptcy, Yucaipa apparently saw this as a valuable power. Nonetheless, i n May 2012, Black
Diamond filed an involuntary petition for bankruptcy against Allied in the Bankruptcy Court, and Allied entered bankruptcy a second time only five years after its fir st bankruptcy. The second bankruptcy proceeding is still pending. Unfortunately for Yucaipa, the New York courts declared the Fourth Amendment
void. That ruling had an important impact on the current bankruptcy litigation. The Bankruptcy Court declared Black Diamond the Requisite Lender. Thereafter, the vast majority of Allied‘s assets were sold to Jack Cooper Holdings Corp. (the ―Jack Cooper Sale‖) . That sale closed on December 20, 2013 , and was funded on December 27, 2013. While the Jack Cooper Sale w as in the works, Black Diamond , acting as Requisite Lender, made a credit bid (the ―Credit Bid‖) for the remaining assets of Allied (the ―Assets‖) . On September 17, 2013, the Bankruptcy C ourt approved the Credit Bid. In that context, t he Black Diamond Agents formed SBDRE on August 20, 2013 , to
receive and hold the A ssets that the Lenders anticipated acquiring from the Credit Bid. One part of the dispute currently before this Court involves the relationship between the
Amended and Restated Limited Liab ility Company Agreement of SBDRE LLC (the ―LLC Agreement‖) and the Credit Agreement. After the formation of SBDRE, on November 8, 2013, Black Diamond circulated a memorandum (the ―Memo‖) to the Lenders. The Memo disclosed that the Black Diamond Agents, w ho were named in the LLC Agreement as the managing members of SBDRE, would hold the Lenders ‘ pro rata Class A Membership Interests in SBDRE for the benefit of the Lenders

.6

More importantly, the Memo described the contemplated issuance of new membership i nterests in SBDRE (the ―New Issuance‖). Following the New Issuance, SBDRE would have Class B and Class C Membership Interests. SBDRE issued $10 million in new Class B Membership Interests that were to receive 66.6% of the voting rights in and rights to d istributions from SBDRE. The Lenders were allowed to buy up to their pro rata share of Class B Membership Interests if they subscribed to the New Issuance by November 15, 2013, one week after the Memo was circulated

. Thus, for example: a Lender holding 1 0% of the Allied Debt would have a 10% Class A Membership Interest and had the opportunity during the New Issuance to purchase up to
10% of the Class B Member Interests for $1 million

. In exchange for backstopping the New Issuance, Black Diamond granted i tself all of the new Class C Membership Interests, which represented 3% of the aggregate Membership Interests in SBDRE

. Because n either Yucaipa nor any of the other Lenders participated in the New
Issuance , Black Diamond now controls all of the Class B an d Class C Membership
Interests in addition to its pro rata share of the Class A Membership Interests. In total , Black Diamond holds approximately 70% of the aggregate Membership Interests in SBDRE. As a result of the New Issuance, the Class A Membership Interests control 30.3% of the vote and receive 30.3% of any distribution from SBDRE. The Complaint alleges that the Assets are worth more than $5 million, and that the New Issuance , therefore, unfair ly diluted the Lenders‘ rights. Further, Yucaipa compl ains that it only was allowed to acquire 9.9% of the Class B Membership Interests, meaning that the New7

Issuance was not a true pro rata issuance in that Yucaipa had purchased 55.2% of the
Allied Debt from ComVest. Finally, t here is a dispute about fees and e xpenses relating to the current Allied
b ankruptcy. On December 3, 2013, Black Diamond informed the Lenders that the Black Diamond Agents would reimburse Black Diamond, the Black Diamond Agents, and the
other Lender s their reasonable fees and expenses related to Allied‘s bankruptcy from the proceeds of the Jack Cooper Sale, pursuant to Section 10.2 of the Credit Agreement. On December 19, after a Bankruptcy Court hearing on the matter, Black Diamond and the Black Diamond Agents caused those reimbursem ents to be made

. T he Complaint alleges , however, that Black Diamond refused to reimburse Yucaipa and instead has
caused Yucaipa‘s fees and expenses to be held in escrow.
C. Procedural History The procedural history of this and the other related litigation constitute s an important part of the background of the pending motion

. This S ection, therefore, recites that history in some detail.
1. The New York L itigation Black Diamond filed suit against Yucaipa in New York state court in 2012 seeking a declaratory j udgment that the Fourth Amendment was invalid (the ―New York Litigation‖) . The New York Supreme Court issued an opinion on March 8, 2013 , in
which it concluded that : (1) the previous Georgia litigation settlement did not bind Black Diamond; (2) the Fourth Amendment was invalid ab initio because, pursuant to Section 10.5 of the Credit Agreement, enacting the Fourth Amendment required the unanimous8

consent of all L enders, which was not given; and (3) based on the invalidity of the Fourth Amendment, Yucaipa w a s not the Requisite Lender. 2

T he First Department of the New York Supreme Court‘s Appellate Division affirmed the Supreme Court ‘s opinion in all relevant respects. The Appellate Division‘s opinion , however, modified the trial court ‘s opinion in that it held there was a triable issue of fact as to whether Black Diamond waived the ability to challenge Yucaipa‘s status as Requisite Lender. 3 The New York Court of Appeals denied further review on April 3, 2014. 4 Despite the remaining issue of whether Blac k Diamond waived the ability to challenge Yucaipa‘s Requisi te Lender status, the New York L itigation is concluded for all purposes relevant to this action . Even if Black Diamond did waive its right to challenge Yucai pa‘s claim to Requisite Lender s tatu s, Defendants represented to this Court that Defendant Spectrum, which also participated in the New York L itigation, objects to Yucaipa serving as Requisite Lender. 5 The Appellate Division held that

2 BDCM Opportunit y Fund II, LP v. Yucaipa Am. Alliance Fund I, LP , 2013 WL 1290394 (N.Y. Sup. Ct. Mar. 8, 2013).

3 BDCM Opportunity Fund II, LP v. Yucaipa Am. Alliance Fund I, LP , 978 N.Y.S.2d 10 , 13 (N.Y. App. Div. 2013).

4 BDCM Opportunity Fund II, LP v. Yucaipa Am. Al liance Fund I, LP , 8 N.E.3d 849 (N.Y. 2014).

5 Oral Arg. On Defs.‘ Mot. to Dismiss or Stay and Mot. to Stay Disc. (June 16, 2014) (―Yucaipa MTD Arg. ‖) Tr. 132

- 33.9

Spectrum did not waive its rights to challenge Yucaipa‘s st atus

. 6 Thus, because the New
York courts determined that the Fourth Amendm ent required unanimous consent , any waiver by Black Diamond is irrelevant

. 2. The Bankruptcy Action Black Diamond brought an involuntary petition for bankruptcy against Allied in
the Bankruptcy Court on May 17, 2012 (the ―Bankruptcy Action‖). The Bankruptcy
A ction and related adversary proceedings remain pending before the Bankruptcy Court

. 7 The Bankruptcy Court issued two rulings relevant to this case an d several notable issues

rem ain under advisement . Defendants place significant weight on a collateral estoppel argument and, in the alternative, seek a stay of this case . The Bankruptcy Court‘s rulings are vital to both arguments. First, and most importantly for present purposes , t he Bankruptcy Court issued an oral ruling on February 27, 2013, granting a motion to dismiss Yucaipa‘s cross

- claims in the Bankruptcy Action. 8 The Bankruptcy Court, as one of its alternative holdings, ruled
that the Third Amendment‘s covenant not to sue b arred Yucaipa‘s claims. 9 I discuss t his

6 BDCM Opportunity Fund , 978 N.Y.S.2d at 13.

7 The Official Comm. o f Unsecured Creditors o

f Allied Sys. Hldgs., Inc. ( In re Allied Sys. Hldgs., Inc. ), Ch. 11 Case No. 12

- 11564 (CSS), Adv. No. 13

- 50530

- CSS (Bankr. D. Del.) [hereinafter Allied Bankr. ].

8 Allied Bankr. M ot. to Dismiss (Feb. 27, 2013) (―MTD‖) Arg

. Tr. 103

- 10.

9 Id. at 107 (―[T] hese are really two rulings. It‘s granting the motion to dismiss on the covenant not to sue, granting the motion to dismiss in connection with the statute of limitations.‖).10

holding in greater detail below in connection with Defendants‘ argument that Yucaipa is collaterally estopped from re

- litigating the meaning of the covenant not to sue. 10 Second, the Bankruptcy Court granted summary judgment in favor of Black Diamond, an intervenor in that case, finding them to be the Requisite Lenders under the Credit Agreement. 11 Unlike the New York Litigation, t he Bankruptcy Court‘s rulings remain the subject of further proceedings. Yucaipa appe aled at least the s ummary judgment ruling
to the District Court

. 12 The appeal apparently was stayed for a period while the parties attempted mediation. 13 Additionally, Defendants in this case, along with other Allied
creditors , are pursuing equitable subor dination claims against Yucaipa in the Bankruptcy
Action. 14 Yucaipa has suggested to this Court that most of the parties in the Bankruptcy

10 See infra Section II.B.2.

11 Allied Bankr. S umm. J

. Op. (Aug. 7, 2013) , at 3; Allied Bankr. Summ. J. Arg. Tr. (July 30, 2013) 126

- 27.

12 Allied Bankr. Notice of Appeal (Aug. 21, 2013) (appealing the Allied Bankr. S umm. J

. Op.). But see Yucaipa MTD Arg. Tr. 43

- 45 (counsel for defendants: asserting that Yucaipa appealed both the Requ isite Lender ruling and the dismissal of its cross

- claims). In any event, my decision does not depend on whether Yucaipa also appealed the motion to dismiss

. 13 See In re Allied Sys. Hldgs., Inc. , No. 1:13

- cv
- 01580 (D. Del.) (minimal docket activity). Counsel for Defendants have indicated that the bankruptcy

- related mediation recently was declared at an impasse. Yucaipa MTD Arg. Tr. 44

- 45

. 14 See Transmittal Aff. of K. Tyler O‘Connell in Supp. of Defs.‘ Mot. to Dismiss or Stay the Am. Com pl. Ex. 4

.11

Action have reached a settlement and only need approval by the Bankruptcy Court. 15
Defendants dispute that representa tion, however, and contend that the settlement agreement is stale

. 16 I n any case , Defendants stated that they would not settle their equitable subordination claims against Yucaipa even if the other creditors did settle

. 17
N othing in the record to date indi cates t hat the Bankruptcy Court has approved a settlement of any of the relevant claims.

3. The current Court of Chancery litigation Plaintiffs filed their initial V erified C omplaint on December 11, 2013 , together with a Motion to Expedite and a Motion for En try of a Status Quo Order ( the ―Status Quo Motion‖). After full briefing, the Court heard argument on the Status Quo Motion and
rendered an oral ruling on December 20, 2013 , denying the motion. 18 Plaintiffs then amended their complaint and , on February 14 , 2014 , filed the current operative Complaint.
Defendants moved to dismiss or s tay this action shortly thereafter. The parties completed their briefing on that motion on May 5, 2014. 19 In the midst of th at briefing,

15 Yucaipa MTD Arg. Tr. 101. See also Transmi ttal Aff. of Matthew C. Bloom Ex. 2.

16 Yucaipa MTD Arg. Tr. 56.

17 Id. at 128

- 29.

18 Status Quo Arg. Tr. 77

- 94.

19 Briefing on the motion to dism iss consisted of Defendants‘ Opening Brief (― Defs.‘ Opening Br.‖) , Plaintiffs‘ Opposition Brief (― Pls.‘ Opp‘n Br.‖) , and Defendants‘ Reply Brief (―Defs.‘ Reply Br.‖).12

Defendants moved to stay discovery pe nding resolution of thei r motion to d ismiss. The Court heard oral argument on both of Defendants‘ motions on June 16 (the ―Argument‖)

. At the conclusion of the Argument , the Court took the motion to dismiss or stay under advisement, but granted the motio n to stay discovery. 20 This Memorandum Opinion
resol v es the motion to dismiss or s tay.

4. An overview of litigated and un litigated issues As indicated in the preceding portions of this Memorandum O pinion, the parties to this case have engaged in and continue to engage in extensive litigation elsewhere. Thus
far , the results of that related litigation are as follows: (1) t he New York Litigation has
been concluded and the New York courts found that the Fourth Amendment to the Credit Agreement was invalid ab ini tio ; and (2) t he Bankruptcy Action is continuing and to date (a) the Bankruptcy Court has dismissed Yucaipa‘s cross
- claims, finding that the Third Amendment bound Yucaipa and that the Third Amendment‘s covenant not to sue barred Yucaipa ‘s claims; 21 (b) the Bankruptcy Court has found that Defendants are the Requisite Lenders; 22 (c) Yucaipa has appealed at least determ ination (b) and that appeal remains

20 Yucaipa MTD Arg. Tr. 133

- 36

. 21 Allied Bankr. MTD Arg

. Tr. 105

- 06.

22 Allied Bankr. S u mm. J. Op. 3.13

pending; 23 and (d) Defendants are pursuing equitable subordination claims against
Plaintif fs in the Bankruptcy Action. 24
As demonstrated in the following po rtions of this Memorandum O pinion, a number of Plaintiffs‘ arguments in this Court either are contingent upon a not

- yet

- issued
final determ ination by the Bankruptcy Court or are duplicative of claims pending before the Bankruptcy Court, or were decided against Yucaipa in a previous proceeding . In sum, Yucaipa lost in the New York Litigation and exhausted its appeals , and Yucaipa
also lost at least twice in the Bankruptcy Court, though its a ppeal from that court remain s pending . It is against that backdrop that this Court must analyze Yucaipa‘s claims here.
D. Parties’ Contentions Yucaipa asserts four teen separate c ounts in its 227

- paragraph Complaint. The

c ounts mostly can be grouped into fou r overarching categories: (1) claims related to Yucaipa‘s debt ownership (Counts I

- III); (2) claims based on the alleged i nconsistency of the SBDRE LLC Agreement with the Credit Agreement (Counts IV

- VI); (3) claims regarding the New Issuance (Counts VII

- IX ); and (4) claims pertaining to the disputed
fee reimbursemen ts (Counts X

- XII). Count XIII for ai ding and abetting the foregoing
and Count XIV for UCC violations cut across the four substantive categories. The specific nature of Yucaipa‘s claims is ident ified briefly below:

23 See supra note s 1 2

- 13

. 24 See supra note 14.14  Count I seeks a declaratory judgment that Yucaipa validly owns 55.2% of the Allied Debt and that Black Diamond cannot disregard that fact

.

 Count II seeks a declaratory judgment that, u nder Section 18

- 110 of the Delaware LLC Act (―DLLC A‖), Yucaipa has elected itself managing member of SBDRE.

 Count III seeks a declaratory judgment that, u nd er Section 18

- 111 of the DLLCA, Yucaipa has elected itself managing member of SBDRE.

 Count IV accuses Defendants of breach of contract based on SBDR E‘s LLC Agreement impermissibly modifying the Lenders‘ rights under the Credit Agreement.

 Count V asserts that Defendant Black Diamond, as Requisite Lender, owes the Lenders fiduciary duties and breached those duties by granting itself extra powers in SBD RE‘s LLC Agreement.

 Count VI alleges that , by forming SBDRE and imposing its LLC Agreement on the Lenders , Defendants breached the implied covenant of good faith and fair dealing in the Credit Agreement.

 Count VII avers that t he New Issuance constituted a breach of the Credit Agreement.

 Count VIII accuses Black Diamond of breach ing fiduciary d uties it owed to the other Lenders , which stem from its status as Requisite Lender , by adopting and implementing the New Issuance.

 Count IX asserts that Defendants b r eached the implied covenant of good faith and fair d ealing in the Credit Agreement by adopting and implementing the New Issuance.15  C ount X claims that Defendants breached the Credit Agreement by reimbursing their own and other Lenders‘ fees and expenses or, alternatively, by treating Yucaipa‘s fee requests differently.

 Count XI avers that Black Diamond breached the fiduciary duties it owes as Requisite Lender by eliminating third

- party oversight of its and its Agents expense reimbursements.

 Count XII al leges that the fee reimbursements made by Defendants in the absence of third

- party oversight violated the implied covenant of good faith and fair dealing in the Credit Agreement.

 Count XIII accuses the B lack Diamond Agents of aiding and abetting Black Dia mond‘s breaches of fiduciary duties.

 Count XIV asserts that t he New Issuance and Black Diamond‘s self

- serving management of SBDRE violated various requirements of Article 9 of the UCC governing the handling of collateral.
Defendants counter that all of Y ucaipa‘s claims are barred by a covenant not to sue in the Third Amendment to the Credit Agreement. In the alternative, Defendants argue that any claims this Court does not dismiss should be stayed pending resolution of
the on going litigation in the Ba nkruptcy Court. Relatedly , Defendants contend that Yucaipa is collaterally estopped from making a number of its arguments because of rulings adverse to it in the New York Litigation and in the Bankruptcy Action. Besides
these primary challenges to the su fficiency of Plaintiffs‘ claims , Defendants also ad vance a number of more targeted arguments related to some of Plaintiffs‘ specific theories, such

as a rguments disputing the applicability of UCC Article 9 to the Assets.16 II. ANALYSIS To have any of its claims hear d in this Court, Yucaipa must survive Defendants‘ challenge to the legal sufficiency of its claims and also surmount the ir arguments for staying this case pending resolution of the Bankruptcy Action. After reciting the standards of review, this Section an alyzes the parties‘ arguments. Ultimately, I conclude that the covenant not to sue bars a large portion of this action. As for the remaining
C ounts in the C omplaint , I find that a stay is appropriate.
A. Standards of Review 1. Motion to Dismiss Pursuant to C ourt of Chancery Rule 12(b)(6), this Court may grant a motion to dismiss for failure to state a claim if a complaint does not assert sufficient facts that, if proven, would entitle the plaintiff to relief. As recently reaffirmed by the Supreme Court,
―the governing pleading standard in Delaware to survive a motion to dismiss is reasonable  ̳conceivability.‘‖ 25 That is, when considering such a motion, a court must :

25 Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC , 27 A.3d 531 , 537 (Del. 2011) (footnote omitted).17 accept all well

- pleaded factual allegations in the Complaint as true, accept even vague allegat ions in the Complaint as ―well

pleaded‖ if they provide the defendant notice of the claim, draw all reasonable inferences in favor of the plaintiff, and deny the motion unless the plaintiff could not recover under any reasonably conceivable set of circumst ances susceptible of proof. 26 This reasonable ―conceivability‖ standard asks whether there is a ―possibility‖ of
recovery. 27 The court, however, need not ―accept conclusory allegations unsupported by specific facts or . . . draw unreasonable inferences in favor of the non

- moving party.‖ 28

F ailure to plead an element of a claim precludes entitlement to relief and, therefore, is grounds to dismiss that claim. 29 Generally, the Court will consider only the pleadings on a motion to dismiss under Rule 12(b)(6). ― A judge may consider documents outside of the pleadings only when: (1) the document is integral to a plaintiff‘s claim and incorporated in the complaint or (2) the document is not being relied upon to prove the truth of its contents.‖ 30 In this case , a

num ber of documents are in play for purposes of Defendants‘ motion to dismiss. Most of

26 Id. at 536 (citing Savor, Inc. v. FMR Corp. , 812 A.2d 894, 896

- 97 (Del. 2002)).

27 Id. at 537 & n.13.

28 Price v. E.I. duPont de Nemours & Co. , Inc. , 26 A.3d 162, 166 (Del. 2011) (citing Clinton v. Enter

. Rent

- A

- Car Co. , 977 A.2d 892, 895 (Del. 2009)).

29 Crescent/Mach I P’rs, L.P. v. Turner , 846 A.2d 963, 972 (Del. Ch. 2000) (Steele, V.C., by designation).

30 Allen v. Encore Energy P’rs , 72 A.3d 93, 96 n.2 (Del. 2013).18

these items were submitted by the Plaintiffs as attachments 31 or were discussed by
Plaintiffs

. 32 The Credit Agreement, the Security Agreement, the Third Amendment, and the SBDRE LLC Agreement indisputably are integral documents to the Complaint. Additionally, t he New York Litigation and the Bankruptcy Action are inextricably intertwined with this case, and I consider the rulings in the se actions to be integral to the Compla int as well

. 33 To provide but one example, Black Diamond‘s Requisite Lender

31 The initial complaint included: (a) the Bankruptcy Court‘s oral ruling approving the Credit Bid; (b) the New Issuance Memo circulated by Black Diamond; and (c) the SB DRE LLC Agreement. Upon amending and filing the current Complaint, Plaintiffs also attached: (a) the Credit Agreement; (b) the Security Agreement; (c) a December 19 oral ruling of the Bankruptcy Court relating to the disputed fee reimbursements; and (d) B lack Diamond and Yucaipa‘s filings in the Bankruptcy Court related to the disputed fees.

32 The Complaint discusses the history of both the Third Amendment and the Fourth Amendment. Compl. ¶¶ 22

- 23. The Complaint describes the related New York Litigation and the Bankruptcy Action, including the Bankruptcy Court‘s summary judgment order. Id. ¶¶ 27

- 37. T he Complaint also briefly discusse s the relationship of the New York Litigation to the Bankruptcy Court‘s rulings. Id. ¶¶ 125

- 27. In their briefing, Pla intiffs described the history of the New York Litigation. Pls.‘ Opp‘n Br. 4

- 5. In the course of describing the Bankruptcy Action, Plaintiffs mention Defendants‘ intervention and assertion of the equitable subordination claim and also note the proposed se ttlement. Id. at 6

- 7. Plaintiffs further describe their pending appeal of the Bankruptcy Court‘s rulings that the Third Amendment is the operative amendment to the Credit Agreement and that Black Diamond is the Requisite Lender. Id. at 7

- 8.

33 See Orman v. Cullman , 794 A.2d 5, 15

- 16 (Del. Ch. 2002) (describing standard of review on a motion to dismiss and describing consideration of documents outside the four corners of the complaint). I also take judicial notice of the related opinions in the New York Litigation and the Bankruptcy Action. See Del. R. Evid. 201(a), 202. See also In re Gen. Motors S’holder Litig. , 897 A.2d 162, 168

- 69 (Del. 2006) (describing appropriate situations when trial courts can consider19

status comes from its invalidating the Fourth Amendment in New York and then winning summary judgment in the Bankruptcy Action. Several c ounts in the Complaint allege
that Black D iamond breached fiduciary duties it owed as Requisite Lender. As discussed below, the related litigation is important because of its collateral estoppel effect and
because it demonstrates why sta ying this matter is appropriate.
2. Motion to Stay Ordering a s tay ― is an inherent power of the trial court, which is concomitant to the control vested in a trial court, to manage its affairs and to achieve the orderly disposition of its business.‖ 34 As such, ―[t] he granting of a motion to stay is not a matter of righ t, but rather rests within the sound discretion of the court. ‖ 35 In assessing which of multiple actions challenging the same conduct should proceed, Delaware c ourt s often appl y the McWane doctrine, also known as the first

- filed rule.

matters outside the complaint on a motion to dismiss); Wal

- Mart Stores, Inc. v. AIG Life Ins. Co. , 86 A.2d 312, 320 & n.28 (Del. 2004) (noting the propriety of judicial notice of publicly filed documents and collecting cases).

34 State v. Harris , 616 A.2d 288 , 291 ( Del. 1992) (citing Gebhart v. Er nest DiSabatino & Sons, Inc., 264 A.2d 157, 159 ( Del. 1970) ); accord Taylor v. LSI Logic Corp. , 689 A.2d 1196 , 1201 ( Del. 1997) (noting that the Court of Chancery has ―the inherent power . . . to control its own docket, manage its affairs, achieve the orde rly disposition of its business and promote the efficient administration of justice.‖).

35 In re The Bear Stearns Cos. S ’ holder Litig., 2008 WL 959992, at *5 (Del. Ch. Apr. 9, 2008) (citing Adirondack GP, Inc. v. Am. Power Corp., 1996 WL 684376, at *6 (Del . Ch. Nov. 13, 1996) (― The court should inform its analysis with considerations of comity and the necessities of an orderly and efficient administration of justice. ‖))

.20

― It has long been h eld in Delaware that,  ̳as a general rule, litigation should be confined to the forum in which it is first commenced, and a defendant should not be permitted to defeat the plaintiff‘s choice of forum in a pending suit by commencing litigation involving the same cause of action in another jurisdiction of its own choosing.‘‖ 36 Thus, ―[u] nder the [ McWane ] first

- filed rule, this Court freely exercises its broad discretion to grant a stay  ̳ when there is a prior action pending elsewhere, in a court capable of doin g prompt and complete justice, involving the same parties and the same
issues. ‘‖ 37
Under McWane , however, the parties and issues need not be identical. ―Instead , the courts examine whether the ultimate legal issues to be litigated will be determined in

t he first

- filed action, and thus, repeatedly have held that McWane requires only a showing of  ̳[s]ubstantial or functional identity.‘‖ 38 Similar issues are those that arise out of a

36 Transamerica Corp. v. Reliance Ins. Co. of Ill

. , 1995 WL 1312656, at *3 (Del. Super. Aug. 30, 1995) ( quo ting McWane Cast Iron Pip e Corp. v. McDowell

Wellman Eng ’ g Co., 263 A.2d 281, 283 ( Del. 1970) ).

37 Bear Stearns , 2008 WL 959992, at *5 (quoting McWane , 263 A.2d at 283 ).

38 McQuaide v. McQuaide , 2005 WL 1288523 , at *4 ( Del. Ch. May 24, 2005) (quoting AT & T Corp. v. Prime Sec

. Distrib., Inc., 1996 WL 633300, at *2 (Del. Ch. Oct. 24, 1996) ); see also Chadwick v. Metro Corp., 856 A.2d 1066 (Table), 2004 WL 1874652, at *2 (Del. 2004) (― Under McWane and its progeny, a judge, in the exercise of his or her discretion, may stay or dismiss a later

- filed suit where a first

- filed suit is pending in a court capable of administering prompt and complete justice, and involves substantially similar parties and issues.‖) ; Transamerica Corp. , 1995 WL 1312 656, at *3.21

―common nucleus of operative facts.‖ 39 Likewise, parties are considered sub stantially the same for purposes of McWane ―where related entities are involved but not named in both actions, referring to the exclusion as  ̳more a matter of form than substance.‘‖ 40

B. Does the Covenant N ot to Sue Bar this Action?

1. The Covenant Section 2.7(e) of the Third Amendment creates a new Section 10.6(j) in the Credit Agreement. 41 Part of the new Section 10.6(j) is the covenant not to sue (the ― Covenant ‖)

. As demonstrated by its language below, the Covenant is exceptionally broad :

To the fullest extent permitted by applicable law, no Restricted Sponsor Affiliate [which includes Plaintiffs] shall assert, and each Restricted Sponsor Affiliate immediately and automatically upon becoming a Lender, hereby irrevocably (i) waives, any claim or cause of action against any Lender, any Agent and their respective Affiliates, directors, employees, attorneys, agents or sub

- agents (whether or not the claim is based on contract, tort or duty imposed by any applicable legal requirement or otherwise) arising out of, in c onnection with, as a result of, or in any way related to, this Agreement or any Credit Document or any agreement or instrument contemplated hereby or thereby or referred to herein or therein, the transactions contemplated hereby or thereby, any Loan or the use of the proceeds thereof or any act or omission or event occurring in connection therewith except to the extent caused by such Lender’s or Agent’s gross negligence or willful misconduct on or after the date such Restricted Sponsor Affiliate becomes a L ender hereunder as determined

39 Schnell v. Porta Sys. Corp., 1994 WL 148276, at *4 (Del. Ch. Apr. 12, 1994)

. 40 McQuaide , 2005 WL 1288523 , at *4 (quoting FWM Corp. v. VKK Corp., 1992 WL 87327, at *1 (Del. Ch. Apr. 27, 1992) ).

41 The C redit Agreement, which includes the Cov enant, is governed by New York law. Credit Agreement § 10.14.22 by a court of competent jurisdiction by a final and non

appealable judgment , (ii) waives, releases and agrees not to sue upon any such claim or any such cause of action, whether or not accrued and whether or not known or suspe cted to exist in its favor and (iii) waives any claim or cause of action against any Agent or any Lender and their respective Affiliates, directors, employees, attorneys, agents or sub

agents on any theory of liability for special, indirect, consequential or punitive damages, arising out of, in connection with, as a result of, or in any way related to this Agreement, or any other Credit Document or any agreement or instrument contemplated hereby or thereby, any Loan or the use of proceeds thereof or any act or omission or event occurring i n connection therewith. (E mphase s added). Yucaipa fo cus es the Court‘s attention on the portion emphasized with italics (the ―Carve Out‖) . Defendants point instead to the language emphasized with underlining (the ―Prior
De termination Requirement‖).
D etermining the meaning of the Covenant requires referencing a series of cross

defined terms. A ―Restricted Sponsor Affiliate,‖ as defined in Section 2.1 of the Third Amendment, means ―Sponsor and its Affiliates (other than Borr owers or any of their Subsidiaries).‖ The term Sponsor means ―collectively, Yucaipa American Alliance Fund I, LP and Yucaipa American Alliance (Parallel) Fund I, LP ‖ 42

— i.e. , Plaintiffs herein.
The parties to the Third Amendment presumably use d the new ter m Restricted Sponsor Affiliate, rather than just Sponsor, because the Third Amendment modified the definitions of ―Eligible Assignee‖ and ―Term Loan Exposure,‖ among other provisions,
to account for possible debt acquisition by the Restricted Sponsor Affil iate, i.e. , Yucaipa.

42 Credit Agreement § 1.1.23

T he Covenant , therefore, applies to Yucaipa. Indeed, the Covenant by its terms applies only to Yucaipa and ―Affiliates‖ of Yucaipa, as def ined in the Credit Agreement. Nothing in t he record indicates that any party other than Yucaip a ever satisfied the definition of Restricted Sponsor Affiliate. Finally, I note that the Credit Agreement contained a more limited exculpatory
clause applicable to all ―Lenders. ‖ That term , as used throughout this Memorandum Opinion, applies to those p arties that signed the Credit Agreeme nt as Lenders or who became a party to the Credit Agreement by means of an assignment from a Lender. Section 9.3(b) of the Credit Agreement states : ―No A gent nor any of its officers, partners, directors, employees or a gents shall be liable to Lenders for any action taken or omitted by any Agent under or in connection with any of the Credit Documents except to the extent caused by such Agent‘s gross negligence or willful misconduct.‖ This exculpatory provision plainly i s narrow er than t he Covenant. Overall , the intention of the drafters of
the Third Amendment seems clear: i f Yucaipa acquired any of the Allied Debt , it would
be ―Restricted‖ in the sense that Yucaipa would have to surrender a number of rights
otherwise he ld by a Lender

.

2. The Bankruptcy Court’s holding Based on the rulings of the Bankruptcy Court, Defendants argue that Plaintiffs are collaterally estopped from re

- litigating the Covenant. This Court , therefore, needs to examine closely what the Bankruptcy Court held. Yucaipa, in the 59

- page amended answer, counterclaim, and cross

- claim that it filed in the Bankruptcy Action , alleged four24

main claims against Defendants , who are Yucaipa‘s co
- creditors in the Bankruptcy
Action :

 Count I s ought a declaratory ju dgment that several

portions of the Third Amendment are invalid and that Yucaipa validly holds the Allied D ebt it purchased from ComVest;

 Count II sound ed in unjust enrichment; Yucaipa aver red that strict enforcement of the Third Amendment against Yucaipa wou ld unjustly enrich the Debtor (Allie d) and the other Lenders;

 Count III assert ed that the other Lenders are estopped from arguing that the Third Amendment controls because they did not object t o the Fourth Amendment; and

 Count IV request ed injunctive relie f preventing the P etitioning Creditors (Black Diamond ) from act ing as Requisite Lender and appoint ing t heir Agents

— a defined term under the Credit Agreement

— to act in ways harmful to Yucaipa. 43 In late February 2013, the Bankruptcy Court dismissed Yucaipa‘ s cross
- claims on the basis of the Covenant and, in the alternative, a statute of limitations defense

. 44 The Bankruptcy Court observed that ―for all material aspects [it] adopt[ed] the petitioning creditors‘ arguments virtually in toto.‖ 45 Referring speci fically to the Covenant, the Bankruptcy Court found the Covenant ―very clear‖ and did not find the

43 Transmittal Aff. of Rebecca L. Butcher in Further Supp. of Defs.‘ Mot. to Dismiss or Stay the Am. Compl. Ex. 2 , at 42

- 50.

44 Allied Bankr. MTD Arg. Tr. 103

- 10.

45 Id. at 104.25

―carve out to be particularly troubling.‖ 46 As to the Carve O ut and the Prior Determination Requirement , the Bankruptcy Court held:

I agree that the carve o ut as written deals with the narrow situation of a finding at some time post signing of the covenant by a court that there‘s been willful misconduct or gross negligence. And . . . I don‘t think that is done in the auspices of a lawsuit directly related be tween the parties, it has to come from somewhere else. It‘s a little vague, but I think it‘s fair to say it has to be a narrow exception. 47 In addition, t he Bankruptcy Court noted the absence of any allegations of fraud or wrongdoing in connection with th e enactment of the Third Amendment or the Covenant
that might provide a basis upon which to invalidate the Covenant.
3. C ollateral estoppel Collateral estoppel, also known as issue preclusion, prevents a party who litigated
an issue in one fo rum from later re
- litigating that issue in another forum. Although more narrow than res judicata, which also is known as claim preclusion, issue preclusion materially can alter the course of litigation. Under Delaware law , ―the  ̳preclusive effect of a foreign judgment is measured by [the] standards of the rendering forum.‘‖ 48 Here,
because t he Bankruptcy Court rendered the relevant opinion, I look to the law of the United States Court of Appeals for the Third Circuit. In t he Third Circuit , ―[i] ssue preclusion applies w hen  ̳(1) the issue sought to be precluded [is] the same as that

46 Id. at 105.

47 Id.

48 Acierno v. New Castle Cty. , 679 A.2d 455, 459 (Del. 1996) (quoting Columbia Cas. Co. v. Playtex F.P., Inc. , 584 A.2d 1214, 1217 (Del. 1991)).26

involved in the prior action; (2) that issue [was] actually litigated; (3) it [was] determined by a final and valid judgment; and (4) the determination [was] essential to the prior judgment.‘‖ 49
In its February 2013 decision , the Bankruptcy Court dismissed Plaintiffs‘ cross
claims with prejudice on the basis of the Covenant and denied leave to amend. 50 This was a final and valid judgment. 51 T he parties actually litigated the applicability of th e Covenant

. B oth sides briefed the issue and dealt with it at length during oral argument

. The ruling as to the Covenant also was essential to the judgment of the Bankruptcy
Court

. 52 The only element of collateral estoppel potentially open to debate is w hether the
issue presented here is the same as in the Bankruptcy Action.

49 In re Graham , 973 F.2d 1089, 1097 (3d Cir. 1992) (quoting In re Braen , 900 F.2d 621, 628

- 29 n.5 (3d Cir. 1990)). See also Leyse v. Bank of Am., Nat’l Ass’n , 538 Fed. App‘x 156, 158

- 59 (3d Cir. 2013) (identical statement of the standard).

50 Allied Bankr. MTD Arg. Tr. 110

. 51 See Free Speech Coal., Inc. v. Att’ y Gen. of U.S. , 677 F.3d 519, 541 (3d Cir. 2012) (―We have stated that  ̳ [f]inality for purposes of issue preclusion is a more pliant concept than i t would be in other contexts,‘ and that finality  ̳may mean little more than that the litigation of a particul ar issue has reached such a stage that a court sees no really good reason for permi tting it to be litigated again.‘‖) (quoting In re Brown , 951 F.2d 564, 569 (3d Cir. 1991)) (internal quotations omitted); R ESTATEMENT (S ECOND ) OF J UDGMENTS § 13 (1982) (―[F] or purposes of issue preclusion . . .  ̳final judgment‘ includes any prior adjudication of an issue in another action that is determined to be sufficiently firm to be accorded conclusive effect.‖).

52 Although the parties did not brief this point, the Thi rd Circuit recently took a side in the circuit split over the preclusive effect of alternative judgments , such as the one rendered by the Bankruptcy Court . The dispute centers on whether an alternative holding is ―necessary‖ to the judgment. Some courts give preclusive2 7

Defendants advance the Covenant as the first of several argument s in the ir Opening Brief. According to Defendants, ―because all of the claims in the Amended Complaint are barred by t he Covenant Not to Sue, the Amended Complaint should be dismissed in its entirety.‖ 53 Yucaipa respond s in three ways, one of which is clearly
pr ecluded by the Bankruptcy Court‘s ruling , another of which is either precluded or
incorrect , and the third of wh ich does not appear to be precluded by the prior ruling

. Yucaipa first point s to the C arve O ut and reasons that because it is alleging willful
misconduct , that is sufficient to avoid the effect of the Covenant

. As discussed in the preceding subsection, t he Bankruptcy Court specifically addressed this argument and
found that the Prior Determination Re quirement trumped the Carve Out. A lleging wil lful misconduct is not enough: Yucaipa must show the existence of a final , non
- appealable judgm ent finding gross negligence or w illful misconduct by Black Diamond before Yucaipa can bring suit. T his holding implies that some other party, such as another
Lender , must bring suit and obtain a final, non

- appealable judgment before Yucaipa
could file its own lawsuit.

effect to neither holding ; some courts give preclusive effect to both holdings ; and a small minority of courts applies a middle ground and examin es the carefulness of the alternative determination before deciding whether to give it preclusi ve effect. The Third Circuit came down firmly on the side of giving preclusive effect to both holdings. See generally Jean Alexander Cosmetics, Inc. v. L’Oreal USA, Inc. , 458 F.3d 244 , 249

- 55 (3d Cir. 2006) (describing the circuit split , the rationales o f each position , and the basis for the Third Circuit‘s conclusion ).

53 Defs.‘ Opening Br. 30.28

Second, Yucaip a argue s that the claims involving SBDRE and its LLC Agreement
fall outside the scope of the Covenant. T he Bankruptcy Court dismissed Yucaipa‘s cross

claims based on the ―plain meaning‖ of the Covenant , suggesting it read the Covenant broadly

. 54 The Coven ant , for example, bars all claims :

arising out of, in connection with, as a result of, or in any way related to this Agreement, or any other Credit Document or any agreement or instrument contemplated hereby or thereby, any Loan or the use of proceeds there of or any act or omission or event occurring in connection therewith. 55 Yucaipa has alleged claims relating to: (1) its debt ownership; (2) the SBDRE LLC Agreement; (3) the New Issuance; and (4) the disputed fees. T he language of the Covenant, as interpre ted by the Bankruptcy Court, covers all of Yucaipa‘s claims. Determining the amount of Allied D ebt that Yucaipa holds requires interpretation of the Credit Agreement and its related amendments. Yucaipa purchased a majority of the Allied Debt pursuant to the Fourth Amendment. The Fourth Amendment , however, was found to be void in the New York Litigation and Yucaipa is collaterally estopped from relitigating that issue

. 56 The Bankruptcy Court later held that the Third Amendment
is the operative amendment

. Under the Third Amendment, Yucaipa: (1) is quantitatively limited in the amount of Allied debt it can acquire; (2) is required to make capital

54 Allied Bankr. MTD Arg. Tr. 105.

55 Third Amendment § 2.7(e).

56 BDCM Opportunity Fund II, LP v. Yucaipa Am. Alliance Fund I, LP , 978 N.Y.S.2d 10 , 13 (N.Y. Ap p. Div. 2013) ; s ee also supra Section I.C.1.29

contributions to Allied in proportion to its debt acquisitions; and (3) is not entitled to voting rights for th e debt it buys

. Any determination of Yucaipa‘s debt ownership would require analyzing these and other provisions of the Credit Agreement. As such, a lawsuit to determine Yucaipa‘s debt holdings is , at least, ―related to‖ the Credit Agreement and , therefo re, comes within the scope of the Covenant. For similar reasons, Yucaipa‘s claims relating to SBDRE also are covered by the language of the Covenant. SBDRE relates to the Credit Agreement in several ways. First, SBD R E is a sub

- agent of the Black Diamond Agents, which serve defined roles under the Credit Agreement. 57 Second, SBDRE was created t o receive and realize upon
the A ssets that formerly secured the Credit Agreement and were directly the subject of the Security Agreement. 58 Third, Yucaipa only has r ights in SBDRE because o f Yucaipa‘s status as a Restricted Sponsor Affiliate. That status derives from the Credit Agreement and its amendments. The claims relating to the New Issuance alternatively allege breach of the Credit Agreement, breach of the impl ied covenant of good faith and fair dealing in the Credit

57 See Credit Agreement § 9.7.

58 On a related note, Count XIV, alleging violations of Article 9 of the UCC, relates to SBDRE, because SBDRE holds the Assets. More fundamentally, Yucaipa alleges that the Ass ets are collateral or proceeds of collateral. If the Assets were collateral, then they comprised collateral securing the Credit Agreement and also were subject to the Security Agreement. If the assets were proceeds, then they still relate to the Credit A greement, because the Credit Bid that resulted in the proceeds was a transaction contemplated by Section 9.8(b) of the Credit Agreement , which describes the Lenders‘ ability to realize upon the collateral. As such, Count XIV also is covered by the Covenan t.30

Agreement, and breach of Black Diamond‘s fiduciary duties as Requisite Lender. Any claim directly alleging a breach of the Credit Agreement undoubtedly falls within the Covenant‘s scope and any cla ims against the Requisite Lender also relate to the Credit Agreement. The Requisite Lender is a creation of the Credit Agreement and does not exist outside of it. Any analysis of the Requisite Lender‘s duties vis

- à

- vis the Lenders requires an interpretat ion of the Credit Agreem ent and falls within the plain language of
the Covenant

. Finally, the disputed fees directly relate to the Credit Agreement and are covered by the Covenant . In its Complaint, Yucaipa states that the fees violated Section 10.2 of the Credit Agreement and Section 7.2 of the Security Agreement. 59
In sum, all of the Counts in Yucaipa‘s Complaint are covered by the Covenant. 60 Under the Bankruptcy Court‘s interpretation of the Covenant, which has collateral estoppel effect here, Yucai pa cannot sue Black Diamond in the absence of a final, non

appealable determination that Black Diamond acted with gross negligence or willful
misconduct. 61 There is no such ruling. Accordingly, Defendants‘ argument that

59 See Compl. ¶¶ 107

- 08.

60 That is, each claim advanced by Yucaipa qualifies as ― arising out of, in connection with, as a result of, or in any way related to, this [Credit] Agreement or any Credit Document or any agreement or instrument contemplated hereby or thereby or referred to herein or therein, the transactions contemplated hereby or thereby, any Loan or the use of the proceeds thereof or any act or omission or event occurring in connection therewith .‖ Credit Agreement § 10(j).

61 Yucaipa does not allege gross negligence, but there is no dispute that all of Yucaipa‘s claims assert willful misconduct.31

Yucaipa‘s claims are barred by the Covenant and that the entire Complaint should be dismissed initially appears persuasive. Plaintiffs, however, advance a third argument. 62 According to Yucaipa, interpreting the Covenant in this manner would be ―commercially unreasonable‖ or would produce a n absurd result. Plaintiffs most clearly stated the ir position at oral argument: ―public policy does not permit an intentional prospective waiver of a tort like
this.‖ 63 They contend that adopting Defendants‘ interpretation of the Covenant would
allow Bla ck Diamond to ―declare all of Yucaipa‘s Allied Debt void at any time, without any Court order, and Yucaipa would have no recourse whatsoever.‖ 64 At th e motion to
dismiss sta ge, I find it reasonably conceivable that Yucaipa could show that the outer
boundar ies of the Covenant are ambiguous , even after giving collateral estoppel effect to the Bankruptcy Court‘s ruling, and that public policy would prevent the wholesale adoption of the broad interpretation Defendants advance. For instance, a logical pre m i se of the Bankruptcy Court‘s holding is that another
Lender actually could bring the claim Yucaipa seeks to assert against Defendants. As such, in any instance where Yucaipa suffers a distinct harm not shared by any other person or entity that reasonabl y could bring suit, it would be impossible to satisfy the

62 Plaintiffs devoted only one paragraph to this argument in their Answering Brief. Pls.‘ Opp‘n Br. 20

- 21

. They pressed it somewhat more at the Argument

. See Yucaipa MTD Arg. Tr. 31

- 32, 36, 39

- 40.

63 Yucaipa MTD Arg. Tr. 39.

64 Pls.‘ Opp‘n Br. 2 0

- 21.32

Prior Determination Requirement. Covenants not to sue are valid and enforceable under
New York law. 65 But , agreements prospectively limiting a party‘s liability resulting from that party‘s intentio nal misconduct are void as against public policy. 66 This Court will not revisit the Bankruptcy Court‘s interpretation of the Covenant and the relationship between the Carve Out and the Prior Determination Requirement. Yucaipa received a full and fair opp ortunity to litigate that issue to the extent it was presented in the Bankruptcy Action and can not re

- litigate it here. Yucaipa advances a reasonably conceivable argument, however, that i n situations wher e it alleges a unique

65 See, e.g. , Joao v. Cenuco, Inc. , 376 F. Supp. 2d 380 , 382 (S.D.N.Y. 2005) (―Covenants not to sue are expressly permitted under New York law

. . . . If two parties sign a covenant not to sue each other, then a dispute arising out of the conduct covered by that agreement cannot provide the basis for a justiciable controversy, and the case must be dismissed.‖); Kamfar v. New World Rest. Gp., Inc. , 3 47 F. Supp. 2d 38, 50 (S.D.N.Y. 2004) (―Covenants not to sue, requiring that the obligor forbear from bringing any current or future claims against the obligee, are valid in New York.‖); Sommer v. Fed. Signal Corp. , 593 N.E.2d 1365, 1370 (N.Y. 1992) (― Abse nt a statute or public policy to the contrary, a contractual provision absolving a party from its own negligence will be enforced.‖); Klapper v. Graziano , 970 N.Y.S.2d 355, 360 (Sup. Ct. 2013) (―[P]arties are free to enter into contractual agreements which limit liability and such agreements will be binding upon the parties provided the language is sufficiently clear and unambiguous.‖).

66 See, e.g. , Kalisch

- Jarcho, Inc. v. City of New York , 448 N.E.2d 413, 416 (N.Y. 1983) (―But an exculpatory agreement, no matter how flat and unqualified its terms, will not exonerate a party from liability under all circumstances. Under announced public policy, it will not apply to exemption of willful or grossly negligen t acts.‖); Schwartz v. Martin , 919 N.Y.S.2d 217, 2 19 (App. Div. 2011) (―[A]n enforceable release will not insulate a party from grossly negligent conduct.‖); Goldstein v. Carnell Assocs., Inc. , 906 N.Y.S.2d 905, 905 (App. Div. 2010) (stating that ―the public policy of this State dictates that  ̳a party may not insulate itself from damages caused by grossly negligent conduct,‘‖ and collecting cases) (quoting Sommer , 593 N.E.2d at 1370).33

harm

— meaning no other Lender could sue and the Prior Determination Requirement
could not be satisfied

— construing the Carve Out so broadly that it would fail to provide an escape hatch for Yucaipa in those circumstances arguably would produce a prohibited
result

. T he Bankruptcy Court was not called upon to interpret the Covenant in a situation such as Yucaipa alleges here. On the whole, I find it reasonably conceivable that Yucaipa could show that , even after giving collateral estoppel effect to the Bankruptcy Court‘s holding, Defenda nts‘ interpretation of the Covenant , in the limited circumstances posited above, c ould produce a result contrary to public policy

. 67

4. Which Counts are dismissed? As discussed, the Covenant‘s reach ex tends quite far. All fourteen C ounts in the Complaint come within its ambit. The re is no indication in the record of any final, non

appealable judicial determination that any of the Defendants engaged in willful misconduct. As such, the Prior Determination Requirement is not satisfied . Based on the preceding a nalysis, a ny Count alleging a harm for which another Lender could have brought suit is barred by the Covenant, as interpreted in the Bankruptcy Action. I will
not dismiss , however, any Count in which Yucaipa sufficiently has alleged that it

67 See Colton v. N.Y. Hosp. , 414 N.Y.S.2d 866, 872 (Sup. Ct. 1979) (―The proper approach is to hold, as we hold here, that a covenant not to sue and a release are both contracts governed by the same principle of contract law, the intention of the parties.‖); see also XO Commc’ns, LLC v. Level 3 Commc’ns, Inc. , 948 A.2d 1111, 1123 (Del. Ch. 2007) (― ̳A contract should not be int erpreted to produce a result that is absurd, commercially unreasonable or contrary to the reasonable expectations of the parties.‘‖) (quoting Superb Gen. Contracting Co. v. City of New York , 833 N.Y.S.2d 64, 66

- 67 (App. Div. 2007)).34

sustained a un ique wrong not suffered by other Lenders, i.e. , situations in which the Prior Determination Requirement cannot be satisfied.
I decline to dismiss Count I. 68 Even assuming some other party might have standing to bring this claim, it is unrealistic to assu me anyone other than Yucaipa would seek a declaratory judgment as to the percentage of the Allied Debt held by Yucaipa.
Counts II and III depend on resolution of Count I and those Counts raise similar standing

concerns . Accordingly, they will not be dism issed for related reasons. Additionally, Yucaipa advances a reasonably conceivable argument that it could establish that these claims are outside the scope of the Covenant because they stem from willful misconduct taken by Defenda nts that affects only Yuc aipa. For example, while all Lenders are subject to Black Diamond‘s managem ent of SBDRE, Yucaipa alone has claim s that it
should be the managing member of SBDRE because it purchased a majority of the Allied
Debt.
Counts IV

- VI are dismissed. T hese Count s allege that SBDRE‘s LLC Agreement runs afoul of the Lenders‘ rights as established in the Credit Agreement. 69 But, these alleged wrongs are not unique to Yucaipa. Any other Lender could bring these claims if

68 Section I.D supra li sted and briefly described the fourteen Counts in Yucaipa‘s Complaint.

69 These Counts appear to be asserted in the alternative, because the ―imposition‖ of the LLC Agreement could not be a breach of contract, a breach of fiduciary duty, and a breach of th e implied covenant of good faith and fair dealing. More likely, Defendants could be liable under only one of these theories, depending on the facts proved.35

they feel wronged by SBDRE‘s LLC Agreement. To date, it appears that n o one else has brought such a claim . Accordingly, the Prior Determination Requirement applies here
and these Counts are dismissed.
Counts VII

- IX are dismissed in part. The se Counts assert that the New Issuance
violated the Lende rs‘ rights. 70 As with Counts IV

- VI, all Lenders suffered the same alleged wrong of dilution or other impairment of rights held under the C redit Agreement, and any of th e other Lenders could have brought suit, but did not. In one sense , however, Yucaipa su ffered the distinct wrong of only being able to participate in the New Issuance at 9.9%, rather than its alleged full ownership of 55.2%. Thus, Yucaipa arguably had its
stake diluted more than the other Lenders . Accordingly, Counts VII

- IX of the Complain t,
are dismissed such that Yucaipa cannot allege a general challenge to the New Issuance,
but without prejudice to Yucaipa‘s ability to pursue those Counts to the extent they challenge the specific wrong allegedly suffered by Yucaipa as a result of the re duction of its participation in the New Issuance to 9.9%

. 71

70 Similar to Counts IV

- VI, these Counts allege breach of contract, breach of fiduciary duty, and b reach of the implied covenant of good faith and fair dealing, respectively.

71 Specifically, for example, Count VII would include a claim that the New Issuance violated the Credit Agreement to the extent that Yucaipa was not allowed to participate pro rata at its alleged 55.2% level of ownership. The precise level of Yucaipa‘s ownership, and the related amount of extra dilution Yucaipa suffered, is entangled with resolution of Count I. Count VIII similarly would be restricted to the unique harm Yucaipa su ffered and effectively would read: Black Diamond breached its fiduciary duties as Requisite L ender by not allowing Yucaipa to participate in the New Issuance at its 55.2% level of ownership . The same limitations apply to Count IX.36

For the r easons discussed in the next S ection, I decline to reach the issue of
whether the Covenant precludes Count s X

- XIII. Finally, Count XIV is dismissed. Any other Lender could have brought this claim, but did not. As such, the Covenant bars Yucaipa from pursuing Count XIV at this time

. In sum, Counts IV

- VI and Count XIV are dismissed with prejudice

. Counts VII

I X are dismissed with prejudice in part and may be pursued solely in accordan ce with the limitations stated in this Section. Finally, I deny the motion to dismiss as to Counts I

- III,
Counts VII

- IX (as narrowed), and Counts X

- XII I

. C. Is a Stay Appropriate? Of the Counts not dismiss ed on the basis of the Covenant, I conclude that all of those Counts are intimately intertwined with the litigation in the first

- filed Bankruptcy
Action. T he Bankruptcy Action involves substantially similar parties and issues and the Bankruptcy Court, despite being a court of limited jurisdiction, is capabl e of rendering prompt and complete justice. Resolution of the claims pending before the Bankruptcy Court could moot every non

- dismissed aspect of this case and terminate this litigation. To the extent any Counts of Yucaipa‘s Complaint require further pro ceedings after the

conc lusion of the Bankruptcy Action

— such as the Ne w Issuance Counts

— I consider it likely that the issues then

- presented will be narrowed significantly and will be substantially more well

- defined than they currently are

. For these reason s , I conclude
that all remaining aspects of this proceeding should be stayed. Count I seeks a declaratory judgment that Yucaipa validly owns 55.2% of the Allied Debt. Relatedly, Counts II and III seek a declaratory judgment that Yucaipa has37

elected itse lf managing member of SBDRE. Defendants advance a colorable argument that Yucaipa is collateral ly estopped from pursuing the key issues underlying these
claims because those issues were decided adversely to Yucaipa in the context of the Bankruptcy Court‘s summary judgment decision on the Requisite Lender issue. 72 Yucaipa disagrees . Regardless, it is uncontested that Yucaipa‘s appeal of the Bankruptcy Court‘s summary judgment opinion remains pending. All of the issues presented by
Counts I

- III could be re solved in the context of the Bankruptcy Action

. 73 A decision
here , however, could result in inconsistent judgments. Furthermore , to the extent Yucaipa succeeds in having the Bankruptcy Court‘s summary judgment ruling reversed on appeal, Counts II and III , which appear contingent on the resolution of Count I, likely
would become moot. Counts VII, VIII, and IX relate to the New Issuance and state claims most properly presented to this Court. Distilled to their essence, the New Issuance Counts allege that Black Diamond, through the Black Diamond Agents, diluted the other Lenders‘ Membership Interests in SBDRE, a Delaware LLC, in a self

- dealing transaction designed

to seize control of a majority of SBDRE‘s Membership Interests and distribution rights.

72 See Allied Bankr. S u mm. J. Op. 3; Allied Bankr. S umm. J. Arg. Tr. 126

- 27.

73 A creditor is a claimant upon the bankrupt estate. 11 U.S.C. §§ 101(5) & (10) (West 2014). Yucaipa, as a creditor, is a claimant on the bankrupt Allied estate. In determining distributions from th e estate‘s assets, the Bankruptcy Court likely will decide how much debt Yucaipa holds and the priority of that debt. See i d. §§ 502(b), 726; see also id. § 506(a)(1). If Yucaipa is equitably subordinated, however, the Bankruptcy Court may not reach this specific issue.38

Aside from Count VIII, Defendants do not even seek dismissal of these Counts of the Complaint on any ground other than the Covenant.
A s I concluded in the preceding S ection of this Memorandum Opinion, these
Counts are barred in large part by the Covenant. On ly substantially narrower version s of
the New Issuance Counts remain

. 74 Indeed, d epending on the outcome of Count I, which
is being stayed, Counts VII

- IX could be moot. 75 I also note that t hese are only damages
claims and there is no indication in the reco rd that it would be difficult or impossible to collect on a judgment against Black Diamond. Based on all of these factors, I conclude
that these narrowed Counts VII

- IX should be stayed.
Counts X

- XII, relating to the disputed fees, provide textbook example s of
instances where a stay under McWane is appropriate

. Yucaipa, according to its own Complaint, brought the fee reimbursement issue to the Bankruptcy Court‘s attention

. 76
This issue relates entirely to the Bankruptcy Action and the Bankruptcy Court appe ars to
have taken it under advisement. Resolving the disputed fee issue here would be wastefully duplicative and create a risk of inconsistent judgments

. Therefore, I am
convinced that Counts X

- XII, regarding t he disputed fee reimbursements , should be

st ayed pending resolution of the first

- filed Bankruptcy Action

.

74 See supra note 71

. 75 If Count I is resolved such that Yucaipa‘s holdings of the Allied Debt do not exceed 9.9%, Yucaipa would have suffered no distinct wrong in the New Issuance.

76 Compl. ¶¶ 111, 116, 118

- 20.39

Finally, I stay Count XIII as well. That Count alleges that the Black Diamond Agents aided and abetted Black Diamond‘s breaches of fiduciary duties. Having determined to stay C ounts VIII and X I, which involve the underlying alleged breaches of fiduciary duty by Black Diamond, there is no point in proceeding with the dependent
Count XIII at this time

. III. CONCLUSION The parties to this case previously litigated the Covenant issue in the Bankruptcy Court. The Bankruptcy Court‘s ruling precludes Yucaipa from re

- litigating that determination here. As a result, the principles of issue preclusion support dismissal of Counts IV, V, VI, and XIV, and I hereby dismiss those Counts with prejudice. T he
Ban kruptcy Court , however, does not appear to have faced the issue of whether the
Covenant bars claims for willful misconduct uniquely harmful to Yucaipa. I conclude
that Yucaipa conceivably could show that interpreting the Covenant to bar Yucaipa from suing in such situations would be contrary to public policy in New York, whose law is controlling here

. Therefore, I deny Defendants‘ motion to dismiss Counts I

- III and X

X I I I , and grant in part and deny in part Defendants‘ motion to dismiss Counts VII

- IX , as specified in Section II.B.4 supra . As to Defendants‘ motion to stay, I find that t he remaining portions of the Complaint require determination of issues properly before the Bankruptcy Court and currently pending resolution in that forum. Determination o f those issues could terminate all remaining litigation here. In any event, the Bankruptcy Court‘s rulings, particularly as to Yucaipa‘s debt holdings, are likely to eliminate , or at least narrow , the issues before40

this Court. For these reasons, I grant Defendants‘ motion to stay these proceedings as to
Counts I

- III, VII

- IX (as narrowed ), and X

- X III, until completion of the Bankruptcy
Action or further order of this Court

. IT IS SO ORDERED

.