Court Opinion

ID: 2797639
Source: CourtListenerOpinion
Date Created: 2015-04-30 13:02:22.138882+00
Date Added: 2024-06-11T12:12:15.180585
License: Public Domain

COURT OF CHANCERY
                                   OF THE
                             STATE OF DELAWARE

 JOHN W. NOBLE                                             417 SOUTH STATE STREET
VICE CHANCELLOR                                            DOVER, DELAWARE 19901
                                                          TELEPHONE: (302) 739-4397
                                                          FACSIMILE: (302) 739-6179

                                   April 29, 2015

Marc S. Casarino, Esquire                     Samuel T. Hirzel, II, Esquire
Timothy S. Martin, Esquire                    Proctor Heyman Enerio LLP
White and Williams LLP                        300 Delaware Avenue, Suite 200
824 N. Market Street, Suite 902               Wilmington, DE 19801
Wilmington, DE 19801

      Re:    Hampton v. Turner
             C.A. No. 8963-VCN
             Date Submitted: January 15, 2015

Dear Counsel:

      Plaintiffs sought judicial dissolution of a company they founded, and the

company responded by exercising an option to purchase Plaintiffs’ units pursuant

to its operating agreement.       Defendants consequently moved for summary

judgment. They argue that Plaintiffs lack standing to pursue dissolution because

they are no longer members, and that the company properly paid the Plaintiffs the

fair market value of their units. The action has evolved into a dispute about the

purchase price to which Plaintiffs are entitled.
Hampton v. Turner
C.A. No. 8963-VCN
April 29, 2015
Page 2

                                    *****

      Plaintiffs David Hampton, Sorin Brull, and Richard Szymke, along with

Defendant Michael Turner (individually and as trustee of the Michael E. Turner

Trust under Agreement dated June 15, 1978, “Turner”), founded Defendant

T4Analytics LLC (“T4” or the “Company,” and with Turner, the “Defendants”) in

July 2011.1 T4 is a Delaware limited liability company (“LLC”) that primarily

develops a medical technology invented by Hampton and Brull. Turner, T4’s

Manager, Chair, and Chief Executive Officer, contributed $220,000 from the trust

and has raised $829,000 from T4’s other (non-founding) members.2 Hampton,

Brull, and Szymke have not made any capital contributions, but each of the

founding parties (including Turner) was given a 23.54% interest in T4. As relevant

to this action, the parties’ relationship is governed by the Second Amended and

Restated Limited Liability Agreement for T4Analytics LLC dated as of

September 20, 2012 (the “Operating Agreement”).3

1
  The facts are drawn from the Verified Complaint (“Compl.”), T4’s operating
agreement, and exhibits to the parties’ briefs. There is no material dispute about
the facts as they are presented herein.
2
  Mem. in Supp. of Defs.’ Mot. for Summ. J. (“Defs.’ Mem.”) Ex. B.
3
  Compl. Ex. C.
Hampton v. Turner
C.A. No. 8963-VCN
April 29, 2015
Page 3

      On October 1, 2013, Plaintiffs filed a complaint asking for T4’s dissolution

pursuant to 6 Del. C. § 18-801 by Plaintiffs’ agreement or 6 Del. C. § 18-802 “on

the grounds that it is not reasonably practicable to carry on the business in

conformity with [the Company’s] limited liability company agreement.”4             In

response, T4 expressed its intent to exercise its option to purchase Plaintiffs’ units

through a letter dated January 15, 2014.5 Section 5.3 of the Operating Agreement

gives T4 a ninety-day option to purchase the units of a member who seeks

dissolution under 6 Del. C. § 18-801 for the “Fair Market Value” of the member’s

units,6 and Section 5.4 explains (in relevant part) that “Fair Market Value shall be

4
  Compl. ¶ 1 (alteration in original) (internal quotation marks omitted).
5
  Defs.’ Mem. Ex. F.
6
  Section 5.3 of the Operating Agreement states:
       In the event a Member commences an action for dissolution of the
       Company under § 18-801 of the Act . . . , the Company shall, for a
       period of ninety (90) days after such an action . . . is served upon the
       Company, have the option to purchase such Member’s Units by
       giving written notice to the Member of the exercise thereof. The
       purchase price shall be equal to the Fair Market Value of the Units or,
       in the case of the Founding Members, the sum of Fair Market Value
       of the Vested Interest (as defined in the Buy/Sell Agreement) and
       Capital Price of the Unvested Interest (as defined in the Buy/Sell
       Agreement), if any, paid in accordance with the provisions of
       Section 5.4. The Company may decline to close following exercise of
       this option at any time prior to the closing of the purchase.
Hampton v. Turner
C.A. No. 8963-VCN
April 29, 2015
Page 4

determined by an appraiser . . . without taking into account any illiquidity or a

discount for a minority interest.”7 Also relevant to the action is Section 4.3 of the

Operating Agreement addressing distributions—and particularly assigning priority

to the return of capital contributions through a payment “waterfall.”8

Compl. Ex. C § 5.3. To avoid a factual dispute for the purposes of this
motion, Defendants assume that all of Plaintiffs’ interests have vested.
Defs.’ Mem. 8 n.3.
7
  Compl. Ex. C § 5.4.1.
8
  In relevant part, the agreement provides as follows:
       4.3 Distributions. The Company shall make distributions to the
       Members from time to time in such amounts and at such times as is
       determined by the Manager . . . that the Company has sufficient cash
       in excess of the current and anticipated needs of the Company to
       fulfill its business purposes . . . . All such distributions shall be made
       in the following order and priority:
       4.3.1 First, to the Founding Members in proportion to, and to the
       extent of the excess of, their respective cumulative Preference Return
       (as hereinafter defined) through the date on which such distribution is
       made, over the sum of all prior distributions to such members
       pursuant to this Section 4.3.1;
       4.3.2 Second, to the Founding Members, pro rata in proportion to
       and to the extent of their respective Net Capital Amount (as
       hereinafter defined);
       4.3.3 Third, to the Members, pro rata in proportion to and to the
       extent of their respective Net Capital Amount (as hereinafter defined);
       and
       4.3.4 Finally, to the Members pro rata in proportion to their
       respective Percentage Interest.
       4.3.5 No distribution shall be declared or made if, after giving it
       effect, the Company would not be able to pay its debts as they become
Hampton v. Turner
C.A. No. 8963-VCN
April 29, 2015
Page 5

      The mutually selected appraiser, Gregory Urbanchuck (“Urbanchuck”),

determined that T4 had a Fair Market Value of $1,886,000.9          However, he

explained that he could not make a final determination of the value of the

Plaintiffs’ units because of conflicting interpretations of the Operating

Agreement.10 In October 2014, T4 issued checks to each of the Plaintiffs based on

a purchase price of $197,029.80, purporting to “close on its acquisition” of

Plaintiffs’ membership interests.11

       due in the usual course of business or the Company’s total assets
       would be less than the sum of its total liabilities.
       ....
       4.3.7 “Preference Return” shall mean a 10% per annum cumulative
       return, compounded annually, on the average daily balance of each
       Founding Member’s Net Capital Amount.
       4.3.8 The “Net Capital Amount” of each Member shall equal the
       total amount of capital contributed to the Company by such Member,
       less any distributions to such Member pursuant to Sections 4.3.2 and
       4.3.3.
Id. § 4.3.
9
  Defs.’ Mem. Ex. K. Urbanchuck’s letter explained that fair market value means
“the price . . . at which property would change hands between a hypothetical
willing and able buyer and a hypothetical willing and able seller, acting at arms
length in an open and unrestricted market.” Id. at 1 (internal quotation marks
omitted).
10
   Defs.’ Mem. Exs. I & J.
11
   Defs.’ Mem. 8-10. Generally speaking, Defendants started with $1,886,000,
subtracted $1,049,000 (representing the capital contributions of various members),
and multiplied $837,000 (the difference) by 23.54%. Id. at 8. Defendants did not
Hampton v. Turner
C.A. No. 8963-VCN
April 29, 2015
Page 6

                                     *****

      Defendants have moved for summary judgment, asking the Court to dismiss

Plaintiffs’ complaint because (1) with T4’s purchase of their units, Plaintiffs lack

standing to seek dissolution, (2) Plaintiffs’ complaint is moot now that they are no

longer members, and (3) T4 paid Plaintiffs the appropriate price pursuant to

Section 4.3 of the Operating Agreement—the only provision expressly addressing

distributions. According to Defendants, failing to account for capital contributions

and debts before compensating Plaintiffs would violate the parties’ “basic business

deal”12 and result in a windfall for Plaintiffs with “no textual, legal or common

sense basis.”13 They liken the valuation exercise to a “theoretical arms-length

sale,” adding that the price Plaintiffs received was more favorable than that to

which they are otherwise entitled or could have earned through a sale.14

subtract out Turner’s preferred return or certain debts. See Reply Mem. in Supp. of
Defs.’ Mot. for Summ. J. (“Defs.’ Reply”) 7-8. There is no dispute that the
Operating Agreement allows T4 to buy all of Plaintiffs’ units by paying twenty-
five percent of the purchase price up front and issuing a promissory note for the
remainder.
   Although not critical to the Court’s analysis, Plaintiffs have not cashed their
checks. Pls.’ Response in Opp’n to Defs.’ Mot. for Summ. J. (“Pls.’ Opp’n”) 5.
12
   Defs.’ Reply 2.
13
   Id. at 9.
14
   Id. at 4.
Hampton v. Turner
C.A. No. 8963-VCN
April 29, 2015
Page 7

      Plaintiffs, on the other hand, contend that Section 5.4 requires a payment of

23.54% of $1,886,000 and, as such, T4 has not purchased their membership

interests.15 More specifically, Plaintiffs believe that they are entitled to a purchase

price of $443,964.40 each because Section 4.3 applies to “distributions of excess

cash” and to distributions upon dissolution—not the case here.16               Rather,

Section 5.3 refers to Section 5.4, which discusses fair market value without any

minority or illiquidity discount.

                                      *****

A. The Summary Judgment Standard

      Pursuant to Court of Chancery Rule 56, the Court grants summary judgment

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

entitled to a judgment as a matter of law.”17 The Court views the facts and makes

15
   Plaintiffs initially asked the Court to deny summary judgment because of the
dispute over the purchase price and a possible dispute regarding whether
Defendants drafted the Operating Agreement. At oral argument, Plaintiffs clarified
their position that the proper price is a matter of contract interpretation that can be
decided at law.
16
   Pls.’ Opp’n 7-9.
17
   Ct. Ch. R. 56(c).
Hampton v. Turner
C.A. No. 8963-VCN
April 29, 2015
Page 8

reasonable inferences “in the light most favorable to the non-moving party.”18 The

meaning of a contract can be an appropriate subject for summary judgment if the

contract is not ambiguous.19

B. The Proper Purchase Price According to the Operating Agreement

      The primary dispute between the parties is whether T4 has properly

exercised its purchase option by issuing each of the Plaintiffs a check based on his

percentage of T4’s value after applying the waterfall provision.20 Both Plaintiffs

and Defendants contend that the Operating Agreement is not ambiguous and that

theirs is the correct reading.

18
   Roncone v. Phoenix Payment Sys., Inc., 2014 WL 6735210, at *3 (Del. Ch.
Nov. 26, 2014).
19
   E.g., 2009 Caiola Family Trust v. PWA, LLC, 2014 WL 1813174, at *7 (Del. Ch.
Apr. 30, 2014).
20
   Technically, the analysis of standing and mootness should precede the merits
analysis. However, the parties have agreed that the Court should interpret the
Operating Agreement and have briefed the price issue thoroughly. Moreover,
rendering an opinion on the purchase price would not result in an advisory opinion.
See Stuart Kingston, Inc. v. Robinson, 596 A.2d 1378, 1382 (Del. 1991) (“[S]tate
courts apply the concept of standing as a matter of self-restraint to avoid the
rendering of advisory opinions . . . .”). The Court addresses the procedural issues
infra.
Hampton v. Turner
C.A. No. 8963-VCN
April 29, 2015
Page 9

      To interpret a contract, the Court first looks to the plain language as

evidence of the parties’ intent.21 “Delaware adheres to the ‘objective’ theory of

contracts, i.e. a contract’s construction should be that which would be understood

by an objective, reasonable third party.”22 In reaching its conclusions, the Court

takes a holistic view in attempt “to give effect to all of the contract terms and to

reconcile or harmonize all of the contract’s provisions.”23 The Court also avoids

interpretations that produce absurd results to which the parties would not have

agreed.24 The Court can determine the “superior interpretation” as a matter of

law,25 and “[a]mbiguity does not exist simply because the parties disagree about

what the contract means.”26

      Section 5.3 sets forth T4’s right to acquire Plaintiffs’ units and is an

appropriate starting point. Read alone, the section talks about payment of “Fair

21
   E.g., Caiola Family Trust, 2014 WL 1813174, at *7.
22
   Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010) (internal
quotation marks omitted).
23
   Caiola Family Trust, 2014 WL 1813174, at *7.
24
   See Osborn, 991 A.2d at 1160 n.21 (citing authority from other states).
25
   Wills v. Morris, James, Hitchens & Williams, 1998 WL 842325, at *2 (Del. Ch.
Nov. 6, 1998).
26
   United Rentals, Inc. v. RAM Hldgs., Inc., 937 A.2d 810, 830 (Del. Ch. 2007). It
is also true that the Court need not accept the parties’ agreement that a contract is
unambiguous. If there is more than one reasonable interpretation of the contract,
the contract is ambiguous and the Court cannot grant summary judgment.
Hampton v. Turner
C.A. No. 8963-VCN
April 29, 2015
Page 10

Market Value” and “Capital Price” to founding members like Plaintiffs. It also

refers to Section 5.4 for more detail on payment. Section 5.4 defines Fair Market

Value of the units as an amount (a) for which the Company has sold units in a

recent arms-length transaction or (b) to be determined by an appraiser without a

discount for illiquidity or a minority interest. This definition mentions neither pro

rata division nor the waterfall, but an arms-length sale and an appraisal would

seem to consider net assets, not capital contributions. Capital Price, as defined in

the Founding Members’ Buy/Sell Agreement, is not an issue at present because

Defendants have made an assumption in favor of vesting to eliminate a factual

issue.27

       The Court’s understanding of the parties’ objective agreement becomes

clearer upon looking at the contract as a whole. Defendants point to the waterfall

provision in Section 4.3 as the only part of the contract to address distributions.

Black’s Law Dictionary defines “distribution” as “[t]he giving out or division

27
   Capital Price considers “the value of the cash contributions made by such
Founding Member in respect of the purchase of such Units pursuant to the LLC
Agreement.” Compl. Ex. B § 4(a)(i). In other words, although the parties did not
focus on this reasoning, Section 5.3 is not wholly silent on the issue of returning
capital contributions.
Hampton v. Turner
C.A. No. 8963-VCN
April 29, 2015
Page 11

among a number, sharing or parceling out, allotting, dispensing, apportioning.”28

In that broad sense, Section 4.3 could apply to paying Plaintiffs anything (whether

after a sale or a transaction based on a hypothetical sale). Yet, in the business

context, it is not a foregone conclusion that paying to buy units back from a

member is a distribution. Furthermore, Section 4.3 details distributions of excess

cash “in such amounts and at such times as is determined by the Manager.” The

section expressly excludes compensation to members and assumes that T4 must

maintain cash for business needs, including mandatory distributions.29            The

reference to excess cash is some evidence that Section 4.3 does not apply to buying

Plaintiffs’ units, but it is not dispositive. After all, Section 9.2 on dissolution

specifically refers to the waterfall,30 and there is no need to consider cash for

continued operations upon winding up.

28
   Black’s Law Dictionary 475 (6th ed. 1990).
29
   “Mandatory distributions” is not defined. Plaintiffs argue that payments to
purchase their units would be mandatory distributions “even if Section 4.3 were
applicable—which it is not.” Pls.’ Opp’n 8. The Court does not reach this
alternative argument because of its conclusion that Section 4.3 does not apply.
30
   As Plaintiffs suggest, a provision on dissolution does not govern when T4 buys
Plaintiffs’ units to avoid dissolution and another part of the contract discusses that
precise scenario. In other words, just because Plaintiffs asked for dissolution does
not mean that Section 9.2, with its reference to Section 4.3, governs the pending
dispute.
Hampton v. Turner
C.A. No. 8963-VCN
April 29, 2015
Page 12

      Confirming the interpretation that the waterfall does not apply is that the

parties, whether intentionally or unintentionally, did not refer to Section 4.3 in

Sections 5.3 and 5.4. Defendants cite Auriga Capital Corp. v. Gatz Properties,

LLC31 for the proposition that “in the context of a waterfall like §4.3 here, all

capital should be returned before there are pro rata distributions,”32 but nothing

compels the Court to find that this case involves a distribution or that a waterfall

provision always applies to distributions.          In Auriga, the Court merely

acknowledged the contractual provision relevant to a capital transaction or

liquidation and accepted an expert’s analysis (that “did not strictly follow the

requirements of the distribution waterfall”33), “given [the defendants’] failure to

challenge this aspect of [the expert’s] analysis or the Minority Members’

contention that none of them received cash distributions over the period of their

investment.”34

      Defendants make a sympathetic argument that Section 4.3 represents the

basic business deal of the parties. In their reply brief, they reason that it would not

31
   40 A.3d 839 (Del. Ch. 2012), aff’d, 59 A.3d 1206 (Del. 2012).
32
   Defs.’ Mem. 13 n.6.
33
   Auriga, 40 A.3d at 879 n.168.
34
   Id.
Hampton v. Turner
C.A. No. 8963-VCN
April 29, 2015
Page 13

make sense to do a simple multiplication exercise before returning capital

contributions—for example, one member who contributed $250,000 to T4 would

stand to receive only $33,194 (for its 1.76% interest) in a sale if Section 4.3 did not

apply.35   However, under the circumstances, Delaware law limits analysis to

questions of (1) whether the contract’s language is unambiguous and (2) whether

applying its objective meaning would produce an unacceptable result. As above,

the plain meaning of Sections 5.3 and 5.4, in the context of the overall Operating

Agreement, is that T4 can buy Plaintiffs’ units—to avoid dissolution—for their

portion of T4’s appraised value.36

      Moreover, the result is not absurd or inequitable: Hampton and Brull

invented the technology key to T4’s business, the Operating Agreement

distinguishes between founding members and other members, and Defendants

played some role in drafting the contract.37 When one contributes something of

35
   Defs.’ Reply 5 n.2. It should be remembered that Plaintiffs are not arguing to
apply their calculations in any other context than when T4 chooses to avoid
dissolution pursuant to Section 5.3.
36
    The Court does not determine the propriety of the various assumptions
Defendants made for the purposes of this motion (or provide the exact sum to
which Plaintiffs are entitled) but anticipates that subsequent calculations will be
performed in good faith.
37
   See id. at 5 n.1 (mentioning a joint drafting effort).
Hampton v. Turner
C.A. No. 8963-VCN
April 29, 2015
Page 14

value to a business, she no longer fully owns that asset. If she wants it available

upon terminating her relationship with that business, she should protect her rights

in a contract. The parties knew how to address specific situations when they

wanted the payment waterfall to apply, but they chose not to refer to the waterfall

in describing the purchase option. In sum, the Court can find no reason to disrupt

the objective language of the parties’ agreement.

C. Standing, Mootness, and Procedural Matters

         Plaintiffs originally filed this action to ask for dissolution of T4, and T4

purported to buy all of Plaintiffs’ units pursuant to the Operating Agreement.

Defendants, thus, argue that Plaintiffs no longer retain standing as “members” for

the purposes of their request to dissolve T4.        Broadly speaking, Delaware’s

Limited Liability Company Act (the “LLC Act”), under which Plaintiffs requested

dissolution, allows dissolution of an LLC “upon the affirmative vote or written

consent of the members”38 or judicial dissolution “[o]n application by . . . a

member . . . whenever it is not reasonably practicable to carry on the business in

conformity with a limited liability company agreement.”39 As relevant to this

38
     6 Del. C. § 18-801(a)(3).
39
     6 Del. C. § 18-802.
Hampton v. Turner
C.A. No. 8963-VCN
April 29, 2015
Page 15

action, the LLC Act defines a member as “a person who is admitted to a limited

liability company as a member as provided in § 18-301,”40 which in turn initially

recognizes admission upon the LLC’s formation, as provided in the LLC

agreement, or as documented in the LLC’s records.41

      A litigant must have standing to initiate an action.42 Furthermore, “[a] party

must have continued standing throughout the pendency of the action to avoid an

invocation of the mootness doctrine.”43 Under the mootness doctrine, the Court

dismisses an action “if the alleged threatened injury no longer exists.”44 Delaware

courts have found that plaintiffs lacked standing to demand inspection of company

records45 and to seek dissolution46 of LLCs when they were not “members” as

40
   6 Del. C. § 18-101(11).
41
   6 Del. C. § 18-301(a).
42
   E.g., Gen. Motors Corp. v. New Castle Cnty., 701 A.2d 819, 823 (Del. 1997).
43
   Id. at 824.
44
   Energy P’rs, Ltd. v. Stone Energy Corp., 2006 WL 2947483, at *6 (Del. Ch.
Oct. 11, 2006).
45
   See Prokupek v. Consumer Capital P’rs LLC, 2014 WL 7452205, at *7 (Del. Ch.
Dec. 30, 2014) (“While Plaintiff was recently a member of Smashburger and
believes that he has a proper purpose in making his demand, these circumstances
do not justify stretching the LLC Act’s plain language in order to find standing.”).
46
   See R & R Capital, LLC v. Buck & Doe Run Valley Farms, LLC, 2008 WL
3846318, at *2 (Del. Ch. Aug. 19, 2008) (“The petitioners, however, are neither
members nor managers of the [LLCs]. . . . There is no authority for the proposition
Hampton v. Turner
C.A. No. 8963-VCN
April 29, 2015
Page 16

required by the LLC Act. In Prokupek v. Consumer Capital Partners LLC,47 for

example, the Court dismissed an action for inspection because the plaintiff’s

membership units had been redeemed according to the plain language of the LLC

agreement. The LLC agreement allowed the company to redeem all of the units of

a “Terminated Member” for fair market value as determined by the manager,

provided for a specific closing date and method, left vesting decisions for certain

units to the manager, and set forth a dispute resolution process.48 After reviewing

the terms of the LLC agreement and finding that the defendant’s actions to redeem

the plaintiff’s units “were facially valid,” the Court observed, “[T]hat damages

might ultimately be forthcoming does not prevent the Court from concluding that

[the plaintiff] was no longer a member of [the company] when he demanded

inspection.”49

      In Prokupek, the plaintiff’s units had been acquired and the debate was only

about price. Here, in contrast, Defendants have asserted not only that the payment

which they tendered was in the correct amount but that, if that amount was

that a member of an LLC which is itself a member of another LLC can seek
dissolution or the winding up of the latter LLC.”).
47
   2014 WL 7452205.
48
   Id. at *4-5.
49
   Id. at *5.
Hampton v. Turner
C.A. No. 8963-VCN
April 29, 2015
Page 17

incorrect, they should have the thirty days allowed by the agreement to decide

whether to complete the purchase of Plaintiffs’ units.50 Thus, there is an issue, first

squarely addressed in Defendants’ reply brief, about whether Defendants are

obligated to pay the purchase price pursuant to the Court’s contract interpretation

or if they should be able to choose whether to leave Plaintiffs with their units. The

parties did not have a fair opportunity to address this issue as it was raised late in

the briefing, and the Court is reluctant to weigh in.

         Without resolution of this issue, there is unfortunate uncertainty. If the

transaction is “completed,” the Plaintiffs no longer own T4 units, but are entitled to

payment of an amount significantly in excess of the amount previously tendered by

T4. If the transaction is not “completed,” and T4 has the choice of “restoring”

Plaintiffs to their prior status as unit holders with standing to seek dissolution of

T4, an entirely different course for the litigation seems likely.        Yet another

argument, advanced at one point by Plaintiffs, is that T4’s failure to pay the proper

amount in timely fashion results in its loss of any right to exercise an option or to

close upon that option.51

50
     Defs.’ Reply 10-11.
51
     See Pls.’ Opp’n 13-14.
Hampton v. Turner
C.A. No. 8963-VCN
April 29, 2015
Page 18

      These questions remain for the parties to address, but, at this point and for

the reasons set forth above, Defendants’ Motion for Summary Judgment must be

denied.

      IT IS SO ORDERED.
                                            Very truly yours,

                                            /s/ John W. Noble

JWN/cap
cc: Register in Chancery-K