Court Opinion

ID: 9840830
Source: CourtListenerOpinion
Date Created: 2023-09-20 15:06:05.381043+00
Date Added: 2024-06-11T08:24:06.701318
License: Public Domain

SUPERIOR COURT
                                 OF THE
                           STATE OF DELAWARE
 SHELDON K. RENNIE                                LEONARD L. WILLIAMS JUSTICE CENTER
      JUDGE                                        500 NORTH KING STREET, SUITE 10400
                                                         WILMINGTON, DE 19801

                        Date Submitted: August 17, 2023
                        Date Decided: September 19, 2023

Jason Z. Miller                                 Daniel B. Rath
SMITH, KATZENSTEIN & JENKINS LLP                Rebecca L. Butcher
1000 N. West Street, Suite 1501                 Jennifer L. Cree
Wilmington, Delaware 19801                      LANDIS RATH & COBB LLP
                                                919 Market Street, Suite 1800
                                                Wilmington, Delaware 19801

RE: Lynn Tilton and Octaluna III, LLC v. Stila Styles, LLC
    C.A. No. N23C-02-088-SKR CCLD
    Defendant’s Partial Motion to Dismiss and Plaintiff’s Motion for Partial
    Judgment on the Pleadings

Dear Counsel:
      This letter decision resolves Defendant’s Partial Motion to Dismiss and

Plaintiff’s Motion for Partial Judgment on the Pleadings. For the reasons explained

below, the motions are DENIED.
Lynn Tilton and Octaluna III, LLC v. Stila Styles, LLC
C.A. No. N23C-02-088 SKR CCLD
September 19, 2023
Page 2 of 17

                                      I.    BACKGROUND1

          Plaintiffs, Lynn Tilton and Octaluna III, LLC (“Octaluna”), an entity

controlled by Ms. Tilton, seek to recover $22 million in payments for tax obligations

allegedly owed by Defendant Stila Styles (“Stila” or the “Company”) between 2009

and 2015.2 Stila is a prestige cosmetics firm, incorporated in Delaware and governed

by a Limited Liability Company Agreement (the “LLC Agreement”).3 As set forth

in the LLC Agreement, the Company’s sole member is Zohar III Limited (“Zohar

III”), a pooled investment fund, that helped finance the acquisition of Stila in 2009.4

Ms. Tilton was Stila’s sole Manager from its formation in 2009 until 2022.5

          Under Section 4.9 of the LLC Agreement, the Manager is required to make

tax distributions owed for a given year to each Member.6 If a Member is a

“disregarded entity,” the distribution goes directly to the owner of such Member.7

Section 4.9 states in relevant part that:

1
  The facts are drawn from the well-pleaded allegations in the Complaint and documents
incorporated by reference. Additional facts are drawn from the pleadings as admitted and denied
in Defendant’s Answer to the Complaint. See D.I. No. 1 (“Compl.”); D.I. No. 15 (“Ans.”).
2
    Compl. ¶ 1.
3
    Id., Ex. 1 (“LLC Agreement”); Compl. ¶¶ 2, 15.
4
    Compl. ¶ 2; LLC Agreement Preamble.
5
    Compl. ¶ 2.
6
    LLC Agreement § 4.9.
7
    Id.
Lynn Tilton and Octaluna III, LLC v. Stila Styles, LLC
C.A. No. N23C-02-088 SKR CCLD
September 19, 2023
Page 3 of 17

          Within sixty days of the end of each Taxable Year … the Manager will
          cause the Company to distribute to each Member an amount equal to
          the excess of (a) the product of (i) the maximum combined United
          States Federal and state income tax rate applicable to corporations (or
          individuals, if higher) doing business in the state to which the Company
          allocates at least ten percent of its Net Income and which has the highest
          such rate and (ii) the excess of the Net Income of the Company for all
          Taxable Years over the Net Losses of the Company for all prior Taxable
          Years (the “Net Income Excess”) over (b) amounts of previous
          distributions theretofore made under this Section 4.9. Such amount will
          be distributed to the Members in proportion to the amount of the Net
          Income Excess allocated to such Members; provided that any amount
          that would be distributed to a Member that is a disregarded entity for
          United States Federal income tax purposes will instead be paid directly
          to the owner of such Member that is considered the Member for United
          States Federal income tax purposes.8

          From 2009 to 2015, Stila generated taxable income.9        During the relevant

time, Zohar III was a disregarded entity, and the owner of Zohar III was Octaluna.10

As a result, under Section 4.9, Stila owed Octaluna tax distributions for years 2009

to 2015.11

          Stila did not make the distributions. Instead, as Stila’s sole Manager and also

on behalf of Octaluna, Ms. Tilton agreed to defer payment so that the available cash

8
    Id.
9
    Compl. ¶ 4.
10
     Id. ¶ 20.
11
     Id. ¶¶ 2, 3, 20.
Lynn Tilton and Octaluna III, LLC v. Stila Styles, LLC
C.A. No. N23C-02-088 SKR CCLD
September 19, 2023
Page 4 of 17

could be used to meet Stila’s working capital and cash flow needs.12 Plaintiffs allege

no specific terms to this purported deferral agreement, though according to them,

both parties “understood … that Stila would pay the deferred Tax Distributions as

soon as it had the available cash to do so without imperiling its business.”13 Plaintiffs

only identify Stila’s audited financial statements, which record the value of the tax

obligations owed to Octaluna.14 They are copied below:

12
     Id. ¶¶ 22-23.
13
     Id. ¶ 23.
14
     Id. ¶¶ 4, 23; Id., Ex. 3 (Stila Styles LLC Cash Balance and Taxes Due 2009-2020).
Lynn Tilton and Octaluna III, LLC v. Stila Styles, LLC
C.A. No. N23C-02-088 SKR CCLD
September 19, 2023
Page 5 of 17

           In March 2018, Zohar III filed for bankruptcy.15 Shortly thereafter, Ms.

Tilton, Zohar III and other creditors entered into a settlement agreement.16 The

settlement agreement, approved by the Bankruptcy Court, provided for the sale of

Stila.17 In March 2021, Stila’s officers and outside auditors discussed how to handle

the allegedly deferred tax distributions.18 Stila then received invoices dated as of

April 19, 2021 for payment of the tax distributions.19 Stila “agreed to pay the amount

owed to Octaluna III,” and accordingly set aside money in a separate account.20

           On April 30, 2021, Zohar III removed Ms. Tilton as Stila’s sole manager,

which the Court of Chancery upheld in Zohar III, Limited v. Stila Styles, LLC and

Lynn Tilton, No. 2021-0384-KSJM (the “Chancery Action”).21 Ms. Tilton appealed

to the Delaware Supreme Court.22 While the appeal was pending, on September 21,

2022, Ms. Tilton requested the Bankruptcy Court to order the monetization of Stila

and freeze the approximately $22 million Stila had set aside for the tax

15
     Compl. ¶ 5.
16
     Id. ¶ 25.
17
     Id.
18
     Id. ¶ 24.
19
     Id.
20
     Id.
21
     Id. ¶¶ 26-27.
22
     Id. ¶ 27.
Lynn Tilton and Octaluna III, LLC v. Stila Styles, LLC
C.A. No. N23C-02-088 SKR CCLD
September 19, 2023
Page 6 of 17

distributions.23 The Bankruptcy Court found that it only had the jurisdiction to order

the monetization of Stila.24 On October 12, 2022, the Delaware Supreme Court

affirmed the decision in the Chancery Action.25 On November 7, 2022, counsel for

Ms. Tilton’s affiliated entities requested Stila to pay the $22 million in tax

distributions.26

          Stila has not made the requested tax distributions.27 On February 16, 2023,

Plaintiffs initiated this action by filing a complaint against Stila for breach of contract

concerning the unpaid tax distributions (Count I), and fees and expenses that were

not advanced pending the appeal of the Chancery Action (Counts II and III). Stila

moved to dismiss Count I and answered Counts II and III.28 Ms. Tilton then moved

for partial judgment on the pleadings on Counts II and III.29

                                   II.    STILA’S CONTENTIONS

          Stila makes two arguments in moving to dismiss Plaintiffs’ breach of contract

claim for the unpaid tax distributions. The first is that the claim is time-barred

23
     Id. ¶ 28.
24
     Id. ¶ 29.
25
     Id. ¶ 27.
26
     Id. ¶ 30.
27
     Id.; see id., Ex. 2 (November 7, 2022 Letter).
28
     D.I. No. 9; D.I. No. 10.
29
     D.I. No. 17.
Lynn Tilton and Octaluna III, LLC v. Stila Styles, LLC
C.A. No. N23C-02-088 SKR CCLD
September 19, 2023
Page 7 of 17

because it accrued sixty days after each taxable year that the payments were not

made.30 The claim for the last distribution therefore would have expired on March

2019.31 This argument assumes no deferral agreement existed.

          The second is that this action should be stayed or dismissed in favor of the

earlier filed bankruptcy proceeding of Zohar III. There, Zohar III, in an adversary

proceeding, raised fiduciary duty claims against Ms. Tilton for her alleged

mismanagement of certain portfolio companies, including Stila (the “Adversary

Proceeding.”)32

                                III.   STANDARD OF REVIEW

          In resolving a Rule 12(b)(6) motion, the Court (1) accepts as true all well-

pleaded factual allegations in the complaint; (2) credits vague allegations if they give

the opposing party notice of the claim; (3) draws all reasonable factual inferences in

favor of the non-movant; and (4) denies dismissal if recovery on the claim is

reasonably conceivable.33 The Court need not “accept conclusory allegations

unsupported by specific facts or . . . draw unreasonable inferences in favor of the

 Defendant Stila Styles, LLC’s Opening Brief in Support of Partial Motion to Dismiss (“Def.’s
30

Motion”) at 13-15.
31
     Id. at 14-15.
32
     Id. at 23-24.
33
     Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Holdings LLC, 27 A.3d 531, 535 (Del. 2011).
Lynn Tilton and Octaluna III, LLC v. Stila Styles, LLC
C.A. No. N23C-02-088 SKR CCLD
September 19, 2023
Page 8 of 17

non-moving party.”34 Still, even with those cautions in mind, Delaware’s pleading

standard is “minimal.”35 Dismissal is inappropriate unless “under no reasonable

interpretation of the facts alleged could the complaint state a claim for which relief

might be granted.”36

                                       IV.     DISCUSSION

          Defendant’s lead argument for dismissal is that Plaintiffs’ claims are

untimely. Claims for breach of contract are subject to a three-year statute of

limitations in Delaware.37 Courts apply a three-step analysis to determine whether

a claim is time-barred – (1) when the cause of action accrues, (2) whether the statute

of limitations may be tolled, and (3) if a tolling exception applies, whether the

plaintiff was on inquiry notice.38 A cause of action “accrues” at the time of the

wrongful act.39 If a cause of action accrues outside the statute of limitations, the

plaintiff has the burden of pleading facts that one of the tolling doctrines applies, and

34
  Price v. E.I. DuPont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011), overruled on other
grounds by Ramsey v. Ga. S. Univ. Advanced Dev. Ctr., 189 A.3d 1255, 1277 (Del. 2018).
35
     Cent. Mortg., 27 A.3d at 536 (citing Savor, Inc. v. FMR Corp., 812 A.2d 894, 895 (Del. 2002)).
36
   Unbound Partners Ltd. P’ship v. Invoy Holdings Inc., 251 A.3d 1016, 1023 (Del. Super. 2021)
(internal quotation marks omitted).
37
     10 Del. C. § 8106.
38
  AssuredPartners of Virginia, LLC v. Sheehan, 2020 WL 2789706, at *12 (Del. Super. May 29,
2020).
39
     Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 319 (Del. 2004).
Lynn Tilton and Octaluna III, LLC v. Stila Styles, LLC
C.A. No. N23C-02-088 SKR CCLD
September 19, 2023
Page 9 of 17

if a tolling exception applies, the court must determine whether the plaintiff was on

inquiry notice of the claim based on the allegations.40

          Plaintiffs allege that an agreement existed between Stila and Octaluna to defer

the tax distributions owed from 2009 to 2015.41 Absent this deferral agreement, any

cause of action for the tax distributions would accrue sixty days from the end of each

taxable year that any distributions were owed, and expire three years later under the

applicable statute of limitations.42 In that scenario, absent a tolling exception, the

latest that Plaintiffs could have asserted a claim for any tax distributions would have

been March 2019.43

          To establish that a deferral agreement existed, and thereby extend (or toll) the

accrual date, Plaintiffs allege the following:

          • For each tax year thereafter, through 2015, Stila had taxable income
            and therefore owed a Tax Distribution in each of those years. But
            Ms. Tilton repeatedly agreed to defer those Tax Distributions
            because, as shown in the chart below, Stila did not have sufficient
            cash to both make the tax payments to Octaluna III and sustain its
            working capital obligations and operating costs.44

40
  Young & McPherson Funeral Home, Inc. v. Butler's Home Improvement, LLC, 2015 WL
4656486, at *1 (Del. Super. Aug. 6, 2015).
41
     Compl. ¶¶ 4, 22-24.
42
     See LLC Agreement § 4.9; 10 Del. C. § 8106.
43
     See Def.’s Motion at 3.
44
     Compl. ¶ 22.
Lynn Tilton and Octaluna III, LLC v. Stila Styles, LLC
C.A. No. N23C-02-088 SKR CCLD
September 19, 2023
Page 10 of 17

          • It was understood by both parties, however, that Stila would pay the
            deferred Tax Distributions as soon as it had the available cash to do
            so without imperiling its business.45

          • Beginning in March 2021, Ms. Tilton, Stila’s CFO, Greg Gittens,
            and the outside auditors discussed how Stila was to handle the
            outstanding Tax Distributions.        In connection with these
            discussions, invoices were provided to Stila for the outstanding Tax
            Distributions for 2009 through 2015, all of which are dated April 19,
            2021. The Company agreed to pay the amount owed to Octaluna III.
            Stila transferred funds from its operating account to its account at
            BBVA bank, so that sufficient funds were in that account to pay the
            Tax Distributions.46

          • The Company’s audited financial statements each year stated that
            Stila was required to make a Tax Distribution but had not yet done
            so, and as such, the value of the taxes owed to Ms. Tilton was
            recorded in Members Equity.47

A. PLAINTIFFS HAVE ADEQUATELY PLED THAT THERE WAS A
   DEFERRAL AGREEMENT
          Under Delaware’s notice pleading standard, Plaintiffs sufficiently allege that

a deferral agreement existed. Stila generated taxable income from 2009 to 2015, but

based on its financial statements, did not appear to have sufficient cash to make both

the tax payments to Octaluna III as well as sustain its working capital obligations

and operating costs.48 In support of these allegations, Plaintiffs attached to the

45
     Id. ¶ 23.
46
     Id. ¶ 24.
47
     Id. ¶ 4; Compl., Ex. 3.
48
     Compl. ¶ 22.
Lynn Tilton and Octaluna III, LLC v. Stila Styles, LLC
C.A. No. N23C-02-088 SKR CCLD
September 19, 2023
Page 11 of 17

Complaint an exhibit purporting to compare Stila’s cash balances and tax obligations

owed during the relevant period.49 This exhibit demonstrates that Stila did not have

sufficient cash to make both the tax payments and meet its working capital and cash

flow needs, because the “cumulative owed” in tax distributions was greater than the

available cash in nearly all years during the relevant period.50 It also shows that the

tax distributions owed in a given year carried over into the next year such that, by

the end of the 2015 taxable year, the cumulative owed was nearly $22 million. Based

on this circumstantial evidence, a reasonable, plaintiff-friendly inference is that a

deferral agreement existed.

B. PLAINTIFFS HAVE ADEQUATELY PLED                   THAT    THE   DEFERRAL PERIOD
   EXTENDED UP TO FEBRUARY 16, 2020

           Plaintiffs filed their claims on February 16, 2023. In order for Plaintiffs to

preserve their claims under the three-year statute of limitations for all the tax

distributions owed during the relevant period, Plaintiffs must sufficiently allege that

all payments were deferred until at least February 16, 2020. At that point, any

deferred tax distributions would become due, the non-payment of which would

49
     See id., Ex. 3.
50
     Id.
Lynn Tilton and Octaluna III, LLC v. Stila Styles, LLC
C.A. No. N23C-02-088 SKR CCLD
September 19, 2023
Page 12 of 17

constitute a breach, thereby starting the three-year clock on a breach of contract

claim.51

          Plaintiffs’ allegations leave much to be desired. But fortunately for Plaintiffs,

the pleading standard under Rule 12(b)(6) motion is minimal. Plaintiffs sufficiently

allege that a deferral agreement extended to at least April 19, 2021. Beginning in

March 2021, Stila’s officers and outside auditors discussed how to handle the tax

distributions, and invoices that were provided to Stila, dated as of April 19, 2021.52

Based on this allegation, the plaintiff-friendly inference is that the deferral

agreement extended to at least April 19, 2021.

          While Plaintiffs’ claims survive at this stage in the proceedings, the lack of

detail that Plaintiffs provide as to the alleged deferral agreement and the dual roles

Ms. Tilton held at Stila and Octaluna, warrant limited discovery as to the nature and

terms of the agreement. Plaintiffs provide no documentation about the deferral

agreement itself and allege only circumstantial evidence. They do not plead any

specific terms of the deferral agreement, such as when the agreement was first made,

how long each year’s tax distributions would be deferred, or how the agreement was

memorialized. Moreover, Ms. Tilton was the sole Manager of Stila, while she also

51
     Alternatively, Plaintiffs may show any breach occurring prior to February 16, 2020 was tolled.
52
     Compl. ¶ 24.
Lynn Tilton and Octaluna III, LLC v. Stila Styles, LLC
C.A. No. N23C-02-088 SKR CCLD
September 19, 2023
Page 13 of 17

controlled Octaluna when the deferral agreement was allegedly entered into. In light

of these concerns, limited discovery as to the nature and terms of the alleged deferral

agreement to determine whether the claims are barred by the statute of frauds or

statute of limitations will help efficiently move this case forward.53

                                     V.     ADVANCEMENT

       Ms. Tilton prematurely moves for judgment on the pleadings as to Counts II

and III regarding her advancement rights for legal fees and expenses incurred

between May and August 2022 in the Chancery Action. Rather than provide Stila’s

counsel with an opportunity to determine the reasonableness of Ms. Tilton’s

advancement requests, Ms. Tilton’s counsel precipitously sought court intervention.

These are the exact sort of litigation tactics that unnecessarily burden the Court and

53
   Stila also moves to dismiss, or in the alternative, stay this action in favor of the Adversary
Proceeding. But it is not evident that Plaintiffs’ claims are at issue in that proceeding or that the
proceeding would resolve them. The complaint in the Adversary Proceeding contains fiduciary
duty claims against Ms. Tilton for placing “provisions in the LLC Agreements of Portfolio
Companies to compel them to separately make tax distributions to her, by bypassing the Zohar
Funds…entirely.” Def.’s Motion, Ex. A (Bankruptcy Complaint) ¶ 174. This action, on the other
hand, concerns the non-payment of tax distributions, not the allocation of distributions already
made. Though Stila argues that the Adversary Proceeding challenges the validity of the underlying
provision that gives rise to a claim for the tax distributions, the Adversary Proceeding in fact
appears to be challenging the last clause of Section 4.9, not the entirety of Section 4.9. See LLC
Agreement § 4.9. That is, the allegations take aim at the clause in Section 4.9 whereby
distributions are given directly to Octaluna, as opposed to Zohar III, due to Zohar III’s disregarded
status. See Bankruptcy Compl. ¶ 174. Based on the current record, it is not sufficiently clear that
the issue of whether Stila owes any tax distributions for the years 2009 to 2015 would be resolved
in the Adversary Proceeding such that a stay is warranted.
Lynn Tilton and Octaluna III, LLC v. Stila Styles, LLC
C.A. No. N23C-02-088 SKR CCLD
September 19, 2023
Page 14 of 17

vitiate what would otherwise be a good faith petition for judicial relief. Ms. Tilton’s

motion for judgment on the pleadings is therefore unripe.

           Ms. Tilton seeks fees and expenses arising out of the Chancery Action

between June 2022 and October 2022 for a total of $872,029.27.54 On May 1, 2021,

Zohar III initiated the Chancery Action to determine the rightful manager of Stila.55

On July 11, 2022, the Court of Chancery held that Zohar III properly appointed

Kevin Carey as Stila’s manager.56 On August 8, 2022, Mr. Carey was appointed

manager of Stila.57 On October 12, 2022, the Delaware Supreme Court affirmed the

Chancery Action.58

           On December 28, 2022, Ms. Tilton’s counsel demanded approximately

$900,000 in fees incurred between June and October 2022.59 The attached invoices

were redacted in their entirety, except for the invoice amounts.60 In response, on

January 3, 2023, Stila’s counsel requested:

           (i)   unredacted copies of the invoices;

54
     Id. ¶ 36.
55
     Id. ¶ 26.
56
     Id. ¶ 27.
57
     Id.
58
     Id.
59
     Ans. Response 12.
60
     Id.
Lynn Tilton and Octaluna III, LLC v. Stila Styles, LLC
C.A. No. N23C-02-088 SKR CCLD
September 19, 2023
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           (ii)    unredacted copies of all invoices for which Stila provided
                   advancement under Ms. Tilton’s authorization;

           (iii)   the undertaking signed by Ms. Tilton;

           (iv)    any documents by or undertaken for Stila of its advancement or
                   indemnification obligations made before Ms. Tilton began
                   receiving advancement payments;

           (v)     applicable D&O insurance policies;

           (vi)    documentation concerning claims under the D&O policies;

           (vii) all insurance companies’ responses to claims made under the
                 D&O policies.61

           On February 13, 2023, Ms. Tilton’s counsel provided partially redacted copies

of the invoices.62 The same day, Plaintiffs filed the complaint, seeking, in Count II

and III, $872,029.27 in advancement costs, plus interest and fees on fees.

           The motion for judgment on the pleadings is unripe. Ms. Tilton’s counsel

frustrated any viable process to resolve the advancement requests in good faith by

providing partially redacted invoices the same day that they filed the instant action,

seeking payment of those entries. Whether the entries themselves are reasonable or

not is a factual dispute, and until the parties meet and confer on a good faith basis to

resolve the advancement demands, moving for partial judgment on the pleadings is

61
     Id.
62
     Id.
Lynn Tilton and Octaluna III, LLC v. Stila Styles, LLC
C.A. No. N23C-02-088 SKR CCLD
September 19, 2023
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not ripe, and hence, improper. The Court advises the parties to agree to a Fitracks-

type process to resolve the disputed amounts, with the opportunity to file an

appropriate motion for resolution of any remaining amounts in dispute.

                             IV.    CONCLUSION

      Based on the foregoing, Defendant’s Partial Motion to Dismiss is DENIED,

and Plaintiff’s Motion for Partial Judgment on the Pleadings is DENIED.

      As the parties have made clear, key issues remain regarding the nature of the

deferral agreement. The parties shall engage in a meet-and-confer within three

weeks of the date of this letter opinion. The parties will then submit a stipulated and

proposed limited discovery schedule. After the close of limited discovery, the

parties may file abbreviated summary judgment applications on the timeliness

question and potential statute of frauds defense.

      In addition, the parties shall engage in a meet-and-confer within two weeks of

this Opinion regarding the outstanding advancement requests. They shall provide a

joint report to the Court within one month of this letter opinion. At a minimum,

Stila’s counsel will respond to the advancement requests in writing, identifying each

specific time entry or expense to which Stila objects and explain the nature of the

objection. The response shall cite any legal authority on which Stila relies. Ms.
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C.A. No. N23C-02-088 SKR CCLD
September 19, 2023
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Tilton’s counsel will reply to the advancement response in writing and provide

supporting information and authority.

      IT IS SO ORDERED.

                                                    _____________ _________
                                                     Sheldon K. Rennie, Judge