Court Opinion

ID: 9913243
Source: CourtListenerOpinion
Date Created: 2023-12-27 16:02:01.743001+00
Date Added: 2024-06-11T13:08:08.243822
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

JOHN C. TATUM III and JCT CAPITAL          )
LLC,                                       )
                                           )
      Plaintiffs and Counterclaim          )
      Defendants,                          )
                                           )
      v.                                   )   C.A. No. 2022-0970-JTL
                                           )
FAIRSTEAD AFFORDABLE LLC, FCM              )
AFFORDABLE LLC, JD2 AFFORDABLE             )
LLC, STUART FELDMAN, JEFFREY               )
GOLDBERG, FSC EF&F LLC, FAIRSTEAD          )
CAPITAL LLC, FAIRSTEAD CAPITAL             )
MANAGEMENT LLC, JD2 REALTY                 )
MANAGEMENT LLC, FA DC LLC, FSC             )
REALTY MANAGEMENT LLC, and SDF             )
FUNDING LLC,                               )
                                           )
      Defendants and Counterclaim          )
      Plaintiffs.                          )

       MEMORANDUM OPINION DISMISSING COUNT IV OF THE
                    COUNTERCLAIMS

                      Date Submitted: November 6, 2023
                      Date Decided: December 22, 2023

Thomas A. Uebler, Adam J. Waskie, Sarah P. Kaboly, MCCOLLOM D’EMILIO
SMITH UEBLER LLC, Wilmington, Delaware; Counsel for John C. Tatum III and
JCT Capital LLC.

Ryan D. Stottman, Thomas P. Will, Alec Hoeschel, MORRIS, NICHOLS, ARSHT &
TUNNELL LLP, Wilmington, Delaware; Michael B. Carlinsky, Rollo C. Baker,
Jonathan E. Feder, Alison Y. Lo, Cohl K. Love, Stephanie Keleman, QUINN
EMANUEL URQUHART & SULLIVAN, LLP, New York, New York; Counsel for
Fairstead Affordable LLC, FCM Affordable LLC, JD2 Affordable LLC, Stuart
Feldman, Jeffrey Goldberg, FSC EF&F LLC, Fairstead Capital LLC, Fairstead
Capital Management LLC, JD2 Realty Management LLC, FA DC LLC, FSC Realty
Management LLC, and SDF Funding LLC.

LASTER, V.C.
      The defendants comprise an investment fund complex specializing in

affordable housing. One of the entities in the fund complex employed plaintiff John

C. Tatum, III. The defendants agreed to his departure, deeming it a resignation

without good reason.

      After Tatum filed this action, the defendants asserted a counterclaim in which

they sought to recharacterize his departure as a termination for cause. Doing so

would allow them to cancel all of his economic interest in the fund complex for no

consideration. Tatum holds those interests through plaintiff JCT Capital LLC, an

entity he controls.1

      Tatum moved to dismiss the counterclaim, contending that the defendants

cannot recharacterize his departure. This decision grants that motion. The

allegations in the counterclaims demonstrate that the defendants knew about the

alleged misconduct on which they now rely before they accepted Tatum’s departure

as a resignation without good reason. The defendants benefited from that

determination, which delayed Tatum’s ability to work for another firm. The

defendants then waited another eight months before changing course. They cannot

now retroactively treat Tatum’s departure as a termination for cause.

                       I.     FACTUAL BACKGROUND

      The facts are drawn from the currently operative pleadings and the documents

      1  The distinction between Tatum and his entity is not significant to this
decision, which for simplicity refers only to Tatum.
they incorporate by reference. For purposes of the motion to dismiss, the

counterclaims’ allegations are assumed to be true, and the defendants receive the

benefit of all reasonable inferences.2

A.    Fairstead

      The entity defendants are part of an investment fund complex that operates

under the trade name “Fairstead.” Defendants Stuart Feldman and Jeffrey Goldberg

control Fairstead.

      In 2016, Tatum and William Blodgett co-founded Fairstead Affordable LLC

with Feldman and Goldberg. They negotiated an operating agreement to govern the

internal affairs of Fairstead Affordable. Ex. 1 (the “Operating Agreement”). Tatum

became a member of Fairstead with a 5.25% member interest. Tatum also signed an

employment agreement with one of the entities in the fund complex. Ex. 4 (the

“Employment Agreement”).

B.    Fairstead 2.0

      By 2020, Blodgett, Tatum, and other Fairstead employees had become

unhappy with their compensation and equity ownership. In late 2020, Tatum and

Blodgett worked with advisors on strategies for increasing their equity ownership,

gaining control of the fund complex, or alternatively starting a competing business.

While Tatum and Blodgett were making plans, they continued working for Fairstead.

      2 Citations in the form “Ex. ___” refer to documents attached to the amended

complaint. Citations in the form “CC ¶ ___” refer to allegations in amended
counterclaims.

                                         2
      Tatum’s 5.25% member interest in Fairstead vested on May 6, 2021. Three

days later, Tatum and Blodgett began downloading thousands of Fairstead

documents to their devices. They inferably downloaded those documents in case they

decided to start a competing firm.

      That same month, Blodgett told Feldman that Fairstead’s employees were

unhappy with their compensation and intended to leave. During a meeting on May

18, 2021, Blodgett provided Feldman with a term sheet for restructuring Fairstead.

Called “Fairstead 2.0,” it contemplated that Blodgett, Tatum, and other employees

would own 80–90% of the equity. Feldman and Goldberg would own the balance.

      Feldman rejected the term sheet and asked Blodgett to identify the employees’

concerns. Blodgett never did.

      The defendants allege that Blodgett and Tatum timed their proposal to take

advantage of Feldman and Goldberg when they were most vulnerable. In May 2021,

Fairstead had at least twenty-eight construction projects underway. Feldman and

Goldberg had personally guaranteed the financing for those projects. If Tatum and

Blodgett left and took Fairstead’s employees with them, then Fairstead could default

on its loans, making Feldman and Goldberg liable on their guarantees.

      Meanwhile, Blodgett and Tatum downloaded more Fairstead documents to

their devices. Tatum connected four personal flash drives to a Fairstead computer

and copied thousands of documents.

      During June 2021, matters became more tense. Tatum met again with

Feldman about Fairstead 2.0. Feldman again rejected the proposal and made clear

                                         3
that he and Goldberg would not give up control of Fairstead. Shortly after the

meeting, Tatum downloaded additional Fairstead documents, including organization

charts, valuation documents, and information about business contacts.

      Feldman decided to investigate Tatum and Blodgett’s activities. After

discovering their suspicious downloading, Fairstead hired a forensic analyst to

investigate further. Fairstead also hired outside counsel to oversee an investigation

and identify any potential claims against Tatum and Blodgett.

C.    Blodgett And Tatum Leave.

      Based on the investigation, Feldman and Goldberg concluded that Tatum and

Blodgett had breached their contractual and fiduciary obligations to Fairstead. They

caused Fairstead to terminate Blodgett for cause on September 14, 2021. They did

not terminate Tatum. According to the counterclaims, they were “concerned that the

announced termination of two of [Fairstead’s] senior executives could have a negative

impact on the business.” CC ¶ 78.

      Shortly thereafter, Tatum announced his intention to leave Fairstead. He

prepared and began implementing a transition plan.

      On October 21, 2021, Fairstead’s general counsel notified Tatum that by

engaging in actions such as transferring his 401(k) account to a new provider, he had

constructively resigned. Fairstead’s general counsel informed Tatum that Fairstead

had accepted his resignation and deemed it a resignation without good reason. Under

the Operating Agreement, that meant Tatum had to give 120-days written notice

before leaving. Tatum could not work for a competitor during that period without

                                         4
breaching the Operating Agreement. His departure from Fairstead did not become

official until February 10, 2022.

D.    Fairstead And Tatum Negotiate The Terms Of His Departure.

      Beginning in October 2021, Tatum and Fairstead negotiated the terms of his

departure. Fairstead demanded that Tatum return any confidential or proprietary

information in his possession. Fairstead’s counsel also stated in various

communications that Fairstead was reserving “any and all rights, claims, and

recourse it may have against Mr. Tatum, whether arising by or in contract, law,

equity, or otherwise.” CC ¶ 84.

      As early as December 2021, Fairstead made clear to Tatum that he had

breached the Employment Agreement and the Operating Agreement. CC ¶ 86. In

April 2022, Fairstead’s counsel told Tatum in writing that Fairstead had determined

that he “engaged in numerous offenses that would easily serve as grounds to have

fired [him] for cause.” CC ¶ 87. Counsel then reiterated that Fairstead had accepted

Tatum’s resignation without good reason, while reserving all rights to dispute

Tatum’s entitlement to compensation. Counsel then proposed to proceed with a

buyout process for Tatum’s interests in Fairstead Affordable. Fairstead exercised its

buyout right, and Fairstead and Tatum subsequently engaged in an appraisal

process.

E.    Fairstead Changes Course.

      On June 28, 2022, Fairstead’s counsel informed Tatum that although

Fairstead previously accepted his resignation without good reason, it had now

determined that Tatum had engaged in a scheme to usurp control of Fairstead and

                                         5
steal Fairstead’s employees. Fairstead therefore was recharacterizing Tatum’s

departure as a termination for cause.

         Fairstead counsel asserted that Tatum’s misconduct began before May 6, 2021,

when his member interest in Fairstead Affordable vested. Fairstead contended that

it would have fired Tatum for cause before the vesting date if it had known about his

misconduct. Fairstead therefore deemed all of Tatum’s interests to be forfeited and

cancelled them without providing any compensation to Tatum.

F.       This Litigation

         Tatum sued on October 26, 2022. Among other things, he sought an order

directing Fairstead to comply with the buyout mechanism in the Operating

Agreement. Alternatively, he seeks money damages for breach of those provisions.

         The defendants responded with eleven counterclaims. In Count IV, the

defendants seek a declaration that they retroactively terminated Tatum for cause.

Tatum has moved to dismiss Count IV.

                            II.       LEGAL ANALYSIS

         Tatum contents that Count IV fails to state a claim on which relief can be

granted.

         When considering a defendant’s motion to dismiss, a trial court should
         accept all well-pleaded factual allegations in the Complaint as true,
         accept even vague allegations 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 circumstances
         susceptible of proof.

Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 536 (Del.

2011).

                                            6
         Section 8.8(a)(v) of the Operating Agreement provides that if Tatum were

terminated for cause before May 6, 2021, he would forfeit 100% of his membership

interests. The defendants allege that Tatum engaged in conduct that would have

allowed them to terminate him for cause before the vesting date if they had known

about it. They further allege that Tatum concealed his misconduct until June 2022.

         To support their argument for a retroactive, for-cause termination, the

defendants rely on Metro Storage International LLC v. Harron, 275 A.3d 810 (Del.

Ch. 2022). That case involved an executive who engaged in misconduct throughout

his employment. The company only discovered the misconduct after the executive had

resigned. The company sought to exercise an option to repurchase the executive’s

equity interests for no consideration, which it could only do after a termination for

cause.

         The Metro Storage decision permitted the company to recharacterize the

executive’s departure as a termination for cause, reasoning as follows: “Under the

‘after-acquired evidence’ doctrine, an employer can ‘introduce evidence the employer

collected after the discharged employee brings suit for wrongful discharge.’” Id. at

879 (citing Davenport Gp. MG, L.P. v. Strategic Inv. P’rs, Inc., 685 A.2d 715, 723 (Del.

Ch. 1996)). “The doctrine typically applies when an employer uses evidence acquired

after an employee’s termination to defend against a claim that it wrongfully

terminated that employee.” Id. The doctrine “applies all the more persuasively . . .

where a faithless fiduciary [] concealed the wrongdoing that could have supported a

for-cause termination.” Id. As a policy matter, the court noted that unless an

                                           7
employer could invoke the doctrine, a faithless fiduciary could benefit from its acts of

deception. Id.

      The defendants attempt to rely on Metro Storage, but the allegations of the

counterclaims defeat their claim. Assuming for purposes of analysis that Tatum

breached his obligations, the defendants concede that they knew about Tatum’s

conduct before they accepted Tatum’s resignation without good reason. The

counterclaims allege that it was “clear” to the defendants “in July 2021” that

“Blodgett and Tatum were not acting in good faith to better Fairstead but were,

instead, focused on their hostile takeover.” CC ¶ 10. The defendants necessarily knew

about those activities in May 2021, when Blodgett told Feldman about Fairstead 2.0.

      The counterclaims also acknowledge that after conducting an investigation,

Fairstead terminated Blodgett for cause in September 2021, citing “material

breaches” of his agreements. The same investigation “revealed that Tatum had

engaged in misconduct that caused numerous breaches of his legal obligations.” Id. ¶

78. According to their own allegations, the defendants had sufficient knowledge to

terminate Tatum for cause in September 2021.

      The counterclaims further allege that the defendants consciously chose not to

terminate Tatum, out of concern for the “negative impact on the business” that could

occur if Fairstead announced that two of its senior executives had been terminated.

Id. Instead, the defendants accepted Tatum’s resignation on October 21, 2021,

deeming it a resignation without good reason. That allowed Fairstead to insist on

                                           8
120-days written notice, which prevented Tatum from working elsewhere until

February 2022.

      For the next eight months, the defendants continued to act as if Tatum had

resigned without good reason. Fairstead exercised its buyout right, and the parties

engaged in an appraisal process. On multiple occasions, the defendants described

Tatum as having resigned without good reason and noted that his resignation had

been accepted. In April 2022, the defendants told Tatum again that they were aware

of breaches of his contractual and fiduciary duties that would have provided grounds

for termination for cause. Yet the defendants did not purport to retroactively change

the nature of Tatum’s termination until June 2022.

      Having taken these positions, Fairstead cannot now claim that it did not

terminate Tatum for cause because he had concealed his misconduct. The Metro

Storage case relied on the after-acquired evidence doctrine. It did not countenance a

previously acquired evidence doctrine. The employer in Metro Storage did not know

about the executive’s breaches until after he had left, then promptly acted on the

information. Fairstead knew about Tatum’s alleged misconduct by May 2021, decided

not to terminate him for cause, accepted his resignation in September 2021, then

continued along that path for eight months before eventually reversing position in

June 2022.

      To try to squeeze back into the Metro Storage framework, the defendants argue

that they only delayed contending that Tatum had been terminated for cause so that

they could conduct a thorough investigation. But the defendants have not identified

                                         9
anything that they learned that might justify a change of position. The allegations of

the counterclaims indicate that the defendants knew everything they needed to know

in September 2021, when they accepted Tatum’s departure and deemed it a

resignation without good reason.

                            III.     CONCLUSION

      The after-acquired evidence doctrine prevents a faithless fiduciary from

retaining the benefits flowing from his concealment and deception. It does not

authorize an employer to learn about misconduct, make a business decision not to act

on it, treat an employee as having resigned, accept the benefits of that mode of

departure, then reverse course months later. The motion to dismiss Count IV of the

counterclaims is granted.

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