Court Opinion

ID: 4123149
Source: CourtListenerOpinion
Date Created: 2017-02-03 19:06:07.517389+00
Date Added: 2024-06-11T14:37:26.652386
License: Public Domain

EFiled: Feb 02 2017 02:29PM EST
                                                        Transaction ID 60154279
                                                        Case No. 12920-VCS
    IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

CHARLES MERINOFF and                    :
GREGORY L. BAIRD,                       :
                                        :
                    Plaintiffs,         :
                                        :
             v.                         :       C.A. No. 12920-VCS
                                        :
EMPIRE MERCHANTS, LLC,                  :
                                        :
                    Defendant.          :

                         Date Submitted: January 30, 2017
                          Date Decided: February 2, 2017

                  ORDER GRANTING MOTION TO DISMISS

      1.      Plaintiffs, Charles Merinoff and Gregory L. Baird (together

“Plaintiffs”), brought this action to obtain advancement of legal fees to which they

are allegedly entitled pursuant to the Amended and Restated Limited Liability

Company Agreement of Empire Merchants, LLC (“Empire”), dated as of

October 18, 2006 (the “LLC Agreement”). Plaintiffs here are defendants in a

separate action brought by Empire in the United States District Court for the Eastern

District of New York in which it is alleged, inter alia, that they, and others, carried

out a massive and long running bootlegging scheme to illegally divert wine and

spirits from Maryland into New York (the “New York Action”). On November 18,

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2016, Plaintiffs filed their Verified Complaint for Advancement (the “Complaint”)

in this Court in which they seek advancement of the legal fees they have and will

incur in defense of the New York Action.

      2.     On December 12, 2016, Empire filed a motion to dismiss under Court

of Chancery Rule 12(b)(3) for improper venue and Court of Chancery Rule 12(b)(6)

for failure to state a claim upon which relief may be granted. Empire’s argument

under Rule 12(b)(3) is that a valid and binding forum selection clause in the LLC

Agreement requires this action to be brought in a federal or state court in New York

within the Borough of Manhattan. Because I conclude that Plaintiffs’ Complaint

must be dismissed under Rule 12(b)(3) for improper venue, I do not reach the parties’

arguments under Rule 12(b)(6).

      3.     Section 12.6 of the LLC Agreement states, in part, that the parties

“agree that any suit, action, or other legal proceeding arising out of this Agreement

shall be brought in the United States District Court for the Southern District of New

York or in any courts of the state of New York sitting in the Borough of

Manhattan. . . .”1 This broad, mandatory forum selection clause is modified by a

carve-out in the final sentence of Section 12.6 which states: “[n]otwithstanding the

foregoing, any legal proceeding arising out of this Agreement which, under

1
 Aff. of Matthew D. Perri, Esq. in Supp. of Def.’s Mot. to Dismiss, Ex. 2 (“LLC
Agreement”) § 12.6.

                                         2
[Delaware’s Limited Liability] Act or, to the extent made applicable to the Company

pursuant to this Agreement, the DGCL, is required to be brought in the Delaware

Court of Chancery may only be brought in the Delaware Court of Chancery and the

parties hereto hereby consent to the jurisdiction of the Delaware Chancery Court

under such circumstances.”2 The parties dispute whether this carve-out that allows

certain actions to be brought in the Court of Chancery applies to Plaintiffs’

advancement claims.3

          4.   “The courts of Delaware defer to forum selection clauses and routinely

give effect to the terms of private agreements to resolve disputes in a designated

judicial forum out of respect for the parties’ contractual designation.” 4 Forum

selection clauses are interpreted according to the law chosen to govern the contract.5

The LLC Agreement is governed by Delaware law.6 Under Delaware law, the court

2
    Id.
3
  I note that Plaintiffs do not contend that enforcing the forum selection clause would cause
“grave inconvenience” or effectively “deprive them of [their] day in court.” See Healthtrio,
Inc. v. Margules, 2007 WL 544156, at *3 (Del. Super. Ct. Jan. 16, 2007). Accordingly, I
address only whether the New York forum selection clause by its terms should be applied
to the advancement claims brought here.
4
 Ashall Homes Ltd. v. ROK Entm’t Gp. Inc., 992 A.2d 1239, 1245 (Del. Ch. 2010) (quoting
Troy Corp. v. Schoon, 2007 WL 949441, at *2 (Del. Ch. Mar. 26, 2007)) (internal
quotations omitted).
5
    Id.
6
    LLC Agreement §12.5.

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interprets a contract to effectuate the parties’ intent and gives clear and unambiguous

contractual language its plain and ordinary meaning.7

         5.     The right to advancement under the LLC Agreement is governed by

Section 5.5(b). Plaintiffs acknowledge that the Delaware Limited Liability Act does

not speak to where any claim for advancement that a party might assert under the

LLC operating agreement must be filed. They are left, then, to argue that the LLC

Agreement somehow incorporated the DGCL when addressing the parties’ right to

seek advancement. Specifically, Plaintiffs argue that because Section 5.5 of the LLC

Agreement references the DGCL three times, and advancement rights are addressed

in the DGCL at 8 Del. C. § 145, the parties must have intended that the DGCL should

apply to their right to advancement. Plaintiffs then point to Section 145(k) which

vests the Court of Chancery “with exclusive jurisdiction to hear and determine all

actions for advancement of expenses or indemnification brought under this

section . . . .”8 And because the DGCL expressly designates the Court of Chancery,

as among the courts of the State of Delaware, as the exclusive venue for

advancement actions, Plaintiffs urge the Court to conclude that the carve-out in

Section 12.6 applies and that venue is proper in this court.

7
    Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728 (Del. 2006).
8
    8 Del. C. § 145(k).
                                            4
         6.   I see two fundamental flaws with Plaintiffs’ argument.          First,

Section 5.5 does not incorporate the DGCL with respect to Plaintiffs’ contractual

right to advancement. Second, even if the DGCL were somehow applicable to

Plaintiffs’ advancement claim, the limited carve-out in Section 12.6 still would not

apply.

         7.   To be sure, Section 5.5 does mention the DGCL in three separate places

(as indicated by italics below). In Section 5.5(a), the LLC Agreement says that

“[e]ach Manager and each officer of the Company will have the same fiduciary

duties to the Company that he or she would have if the Company were a corporation

subject to the DGCL, provided that no Manager or officer of the Company shall be

liable to the Company or to any of the Members for any loss or damages resulting

from a breach of his or her duty of care (as such concept is interpreted under the

DGCL) . . . .” Section 5.5(b), in describing the right to indemnification under the

LLC Agreement, states that “no indemnification shall be provided hereunder to any

such Person for any Losses arising out of such Person’s breach of his or her duty of

loyalty (as such concept is interpreted under the DGCL) . . . .” These references to

the DGCL define the fiduciary duties of the Managers and officers of the LLC and

clarify that these duties will be interpreted consistently with the DGCL. In this

regard, the DGCL is incorporated only to define the fiduciary duties referenced in

Section 5.5 in order to clarify the type of conduct that would and would not trigger

                                          5
the right to indemnification under the LLC Agreement. No reasonable interpretation

of Section 5.5 would suggest that the parties intended to incorporate the DGCL to

define or address in any manner the contractual right to advancement. And there

certainly is no basis to conclude that the references to the DGCL were intended to

incorporate the forum language in Section 145(k).

      8.     Even if I were to interpret the references to the DGCL in Section 5.5 as

applying to the contractual right to advancement, this construction would not assist

the Plaintiffs in their effort to fit their advancement claim within the limited carve-

out in Section 12.6. The unambiguous language of this forum selection provision

states that if a legal proceeding is required to be brought in the Delaware Court of

Chancery under either the LLC Act or the DGCL, then the action must be brought

in the Court of Chancery. The LLC Act does not require an advancement proceeding

to be brought in the Court of Chancery, a point that is not in dispute. The DGCL,

despite conferring “exclusive jurisdiction” upon the Court of Chancery to hear and

determine all actions for advancement, likewise does not require an advancement

proceeding to be brought in the Court of Chancery to the exclusion of courts in other

jurisdictions.

      9.     As this court has stated previously, “[w]hen a Delaware state statute

assigns exclusive jurisdiction to a particular Delaware court, the statute is allocating

                                           6
jurisdiction among the Delaware courts.”9 Therefore, the fact that Section 145(k) of

the DGCL vests this court with exclusive jurisdiction over actions for advancement

will not be construed as “a claim against the world that no court outside of Delaware

can exercise jurisdiction over that type of case.”10 This is evident in the fact that

actions for advancement involving Delaware entities are regularly brought and

adjudicated in courts outside of Delaware, frequently because a forum selection

clause mandates that the claims must be prosecuted elsewhere.11 Therefore, even if

Section 145(k) of the DGCL were applicable to the provision of the LLC Agreement

which contains the right to advancement, the DGCL does not require a proceeding

for advancement to be brought in this court and the limited carve-out within the

forum selection provision would be inapplicable.

           10.   Plaintiffs argue that the carve-out does apply in this instance because

the unambiguous language of the provision means that any time the DGCL provides

that the Court of Chancery has exclusive jurisdiction over an action, then the parties

must bring that action in the Court of Chancery. In essence, then, according to

9
    IMO Daniel Kloiber Dynasty Trust, 98 A.3d 924, 939 (Del. Ch. 2014).
10
     Id.
11
  See, e.g., Island Two LLC v. Island One, Inc., 2015 WL 1026495, at *5 (S.D.N.Y. Mar. 9,
2015); Abakan, Inc. v. Uptick Capital, LLC, 943 F.Supp 2d 410, 417 (S.D.N.Y. 2013);
Souder v. Rite Aid Corp., 911 A.2d 506 (Pa. Super. Ct. Oct. 13, 2006).

                                             7
Plaintiffs, the exception does not mean that the only time the parties must litigate in

the Court of Chancery is when they are required to do so to the exclusion of all other

courts (including their chosen New York fora), but rather means that anytime the

LLC Act or the DGCL states that the Court of Chancery has exclusive jurisdiction

as among the courts in Delaware, the parties agreed to bring that specific type of

action in this court. In my view, that reading stretches the carve-out well beyond its

terms and ignores the clear and unambiguous language of the forum selection

provision taken as a whole.

       11.    Section 12.6 begins by setting out a broad forum selection provision

designating specific state and federal courts in New York as the mandatory chosen

forum for all suits arising under the LLC Agreement. The limited exception in the

final sentence of Section 12.6 means, by its plain terms, that legal proceedings, e.g.

dissolution proceedings,12 statutory appraisal proceedings,13 which for one reason or

another arguably can only be brought in the Court of Chancery (to the exclusion of

courts in other jurisdictions), must be brought in the Court of Chancery. The

unambiguous language of the carve-out reveals that, rather than list the few

situations in which a party must bring suit in the Court of Chancery, the parties

12
  Meyer Natural Foods, LLC v. Duff, C.A. No. 9703-VCN (Del. Ch. Sept. 24, 2014)
(TRANSCRIPT) (“[T]he Oklahoma courts, whether they be state or federal, are not
capable of ordering judicial dissolution. This Court’s jurisdiction is exclusive.”).
13
   8 Del. C. § 262(a) (“Any stockholder of a corporation of this State . . . shall be entitled
to an appraisal by the Court of Chancery . . .”).
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agreed ex ante that if such a suit arose, they would initiate the action in the Court of

Chancery without looking to the otherwise preferred and designated fora of New

York.

        12.   Based on the clear and unambiguous language of the forum selection

provision contained in the LLC Agreement, the Complaint must be dismissed under

Court of Chancery Rule 12(b)(3) for improper venue. The motion to dismiss is

GRANTED.14

        IT IS SO ORDERED, this 2nd day of February, 2017.

                                                 /s/ Joseph R. Slights III
                                                      Vice Chancellor

14
  Pending before the Court is a contested motion to seal certain documents. For reasons
explained on the record on January 30, 2017, I decided to stay resolution of that motion
pending the resolution of related proceedings in the United States District Court for the
District of Maryland. Since I am retaining jurisdiction over this matter for that limited
purpose only, I conclude that there is no just reason to delay the entry of final judgment on
the claims asserted in the Complaint. See Ct. Ch. R. 54(b). I shall await word from the
parties regarding appropriate next steps with respect to the motion to seal.

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