Court Opinion

ID: 4410915
Source: CourtListenerOpinion
Date Created: 2019-06-27 17:02:45.689404+00
Date Added: 2024-06-11T14:52:30.463588
License: Public Domain

THE COURT OF CHANCERY OF THE STATE OF DELAWARE

ABSALOM ABSALOM TRUST f/k/a              )
ANNE DEANE 2013 REVOCABLE                )
TRUST,                                   )
                                         )
              Plaintiff,                 )
                                         )
         v.                              ) C.A. No. 2018-0452-TMR
                                         )
SAINT GERVAIS LLC,                       )
                                         )
              Defendant.                 )

                           MEMORANDUM OPINION

                           Date Submitted: April 16, 2019
                            Date Decided: June 27, 2019
Kevin R. Shannon, Christopher N. Kelly, and Jay G. Stirling, POTTER
ANDERSON & CORROON LLP, Wilmington, Delaware; Nathan M. Bull, Adam
K. Magid, and Ailsa H. Chau, CADWALADER, WICKERSHAM & TAFT, LLP,
New York, New York; Attorneys for Plaintiff.
Davis S. Eagle and Sean M. Brennecke, KLEHR HARRISON HARVEY
BRANZBURG LLP, Wilmington, Delaware; Kenneth E. Warner, WARNER
PARTNERS, P.C., New York, New York; Richard A. Greenberg, Steven Y.
Yurowitz, and William J. Dobie, NEWMAN & GREENBERG LLP, New York,
New York; Attorneys for Defendant.

MONTGOMERY-REEVES, Vice Chancellor.
         In this action, plaintiff seeks to compel defendant, a limited liability company,

to turn over certain financial records based on plaintiff’s status as a member of

defendant. Defendant resists, arguing that plaintiff is not a member. For the reasons

that follow, I hold that plaintiff is not a member and is not entitled to the records it

seeks.

I.       BACKGROUND
         These are my findings of fact based on the parties’ stipulations, documentary

evidence, and arguments during a half-day trial.1

         Defendant Saint Gervais LLC (the “Company”) is a Delaware limited liability

company formed in 1997. 2 Disque D. Deane and Carol G. Deane formed the

Company to pass on wealth to their children, Anne and Carl, while maintaining

control over that wealth.3 The Company is governed by the Amended and Restated

Operating Agreement for Saint Gervais LLC of June 30, 2006, as amended (the

“LLC Agreement”). 4

1
         I cite trial exhibits as “PX #” for Plaintiff’s trial exhibits or “DX #” for Defendant’s
         trial exhibits. Unless otherwise indicated, citations to the parties’ briefs are to trial
         briefs.
2
         PX 01 at 1.
3
         Transmittal Aff. of Jay. G. Stirling in Supp. of Pl.’s Opening Trial Br. (“Stirling
         Aff.”) Ex. A, at 2. I use first names herein for clarity and without intending
         disrespect or familiarity.
4
         PX 01.

                                                 2
      Non-party Anne Deane is the settlor and trustee of Plaintiff Absalom Absalom

Trust (“Absalom”). 5 Anne owned a 35.96% membership interest in the Company,

which she purported to assign to Absalom. 6 Absalom brings its claims as a purported

member of the Company.

      The LLC Agreement places restrictions on transfers of membership interests.

Section 5.1 defines disposition to include any type of transfer of membership. Types

of disposition include “sale, assignment, transfer, exchange, mortgage, pledge, grant,

hypothecation or other disposition.” 7 Section 5.2 provides that any disposition

without prior written unanimous consent of the managers is “null and void.”8

Section 5.3 declares any substitution of members without prior written consent of all

of the managers is “null and void.” 9

5
      Stirling Aff. Ex. A, at 2.
6
      Id.
7
      Stirling Aff. Ex. B § 5.1.
8
      “[A] Member may dispose of such Member’s membership interest in the Company
      in whole or in part only with the prior written consent of all of the Managers which
      consent may be given or withheld in their sole and absolute discretion. Any
      purported disposition of a membership interest in the Company without the prior
      written consent of all the Managers shall be null and void.” Id. § 5.2.

9
      “An assignee of a membership interest shall be admitted as a substitute Member . . .
      only with the prior written consent of all of the Managers, which consent may be
      given or withheld in their sole and absolute discretion. Any purported substitution
      of a Member in the Company without such prior written consent shall be null and
      void.” Id. § 5.3.

                                           3
      On June 7, 2018, counsel for Absalom sent the Company a letter demanding

to inspect certain categories of documents (the “Demand Letter”). 10 The Demand

Letter stated that the purposes for the inspection were to “(i) evaluate the value of

[Absalom’s] ownership interests, (ii) evaluate the financial condition of the

Company, and (iii) investigate possible acts of mismanagement and/or improper

conduct in connection with the management of the Company.” 11 The Demand Letter

identified as the topics for inspection “(i) [Carol]’s decision to reduce the Company’s

sharing ratio in Starrett City Preservation LLC,” a company in which the Company

has an economic interest, “(ii) [Carol]’s improper use of Company funds for personal

expenses, and (iii) [Carol]’s improper refusal to provide true and full information

regarding the financial and operation condition of the Company.” 12

      The Demand Letter sought seven categories of books and records:

(1) “[d]etailed balance sheets for each year from 2014 through the latest available

date in 2018;” (2) “[d]etailed profit and loss statements for each year from 2014

through the latest available date in 2018;” (3) “[f]ederal and state tax returns filed

by the Company from 2014 through the present;” (4) “[d]ocuments sufficient to

determine all payments or distributions made by the Company since 2014, including

10
      Stirling Aff. Ex. A, Ex. A, at 1.
11
      Id. at 2.
12
      Id.

                                          4
the date, amount, and recipient of all such payments or distributions;” (5) “[t]o the

extent not included in the above requests, the ‘complete and accurate books and

records of the Company’s business and affairs’ kept in accordance with Section 2.1

of the LLC Agreement;” (6) “[t]o the extent not included in the above requests, the

‘reports concerning the financial condition and results of operations of the Company

and the capital accounts of the Members’ prepared in accordance with Section 2.3

of the LLC Agreement;” and (7) “[a]ll documents relating to Carol’s decision to

reduce the Company’s sharing ration in Starrett City Preservation LLC.” 13

      After Absalom sent its Demand Letter, the parties discussed the documents

Absalom had requested, which documents the Company had already provided,

Anne’s assignment of her interest to Absalom, and a potential settlement. 14 These

discussions lasted several weeks but ultimately did not produce a negotiated

agreement.

      On June 25, 2018, Absalom filed this lawsuit. 15

13
      Id. at 1-2.
14
      See Transmittal Aff. of Sean M. Brennecke in Supp. of Def.’s Opening Trial Br.
      (“Brennecke Aff.”) Ex. 6.
15
      See Stirling Aff. Ex. D.

                                         5
II.    ANALYSIS
       The LLC Agreement authorizes only members to inspect books and records.

The Company argues that Absalom lacks standing to seek books and records because

Anne’s attempt to transfer her membership interest to Absalom was null and void.

Absalom argues that equitable principles bar the Company from raising this defense.

       The validity of the transfer and the outcome of the standing issue turn on the

meaning of the LLC Agreement. “When analyzing an LLC agreement, a court

applies the same principles that are used when construing and interpreting other

contracts.”16 “When interpreting a contract, the role of a court is to effectuate the

parties’ intent.”17

              Because Delaware adheres to the objective theory of
              contract interpretation, the court looks to the most
              objective indicia of that intent: the words found in the
              written instrument. As part of this initial review, the court
              ascribes to the words their common or ordinary meaning,
              and interprets them as would an objectively reasonable
              third-party observer.18

16
       Godden v. Franco, 2018 WL 3998431, at *8 (Del. Ch. Aug. 21, 2018).
17
       Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 739 (Del. 2006).
18
       Sassano v. CIBC World Mkts. Corp., 948 A.2d 453, 462 (Del. Ch. 2008) (footnotes
       omitted).

                                           6
“[W]here a word has attained the status of a term of art and is used in a technical

context, the technical meaning is preferred over the common or ordinary meaning.”19

“When established legal terminology is used in a legal instrument, a court will

presume that the parties intended to use the established legal meaning of the

terms.” 20 “If a writing is plain and clear on its face, i.e., its language conveys an

unmistakable meaning, the writing itself is the sole source for gaining an

understanding of intent.” 21    “[W]hen we may reasonably ascribe multiple and

different interpretations of a contract, we will find that the contract is ambiguous.”22

Despite that, “[t]he parties’ steadfast disagreement will not, alone, render [a] contract

ambiguous.”23

19
      Viking Pump, Inc. v. Liberty Mut. Ins. Co., 2007 WL 1207107, at *13 (Del. Ch. Apr.
      2, 2007).
20
      Penton Bus. Media Hldgs., LLC v. Informa PLC, 2018 WL 3343495, at *12 (Del.
      Ch. July 9, 2018) (citations omitted).
21
      Id. (quoting City Investing Co. Liquid. Tr. v. Cont’l Cas. Co., 624 A.2d 1191, 1198
      (Del. 1993)).
22
      Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1160 (Del. 2010).

23
      Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1195
      (Del. 1992) (“A contract is not rendered ambiguous simply because the parties do
      not agree upon its proper construction.”).

                                           7
      A.     Absalom Is Not a Member

      The LLC Agreement forbids any “disposition” of a membership interest,

including “assignment” and “transfer,” absent “prior written consent of all of the

Managers” of the Company. 24 Any disposition made in violation of this provision,

or any substitution of members, is “null and void.” 25 The Delaware Supreme Court

recently examined language in an LLC agreement declaring certain acts to be void.

In CompoSecure, L.L.C. v. CardUX, LLC, the Supreme Court considered an LLC

agreement that provided that Restricted Activities, as defined by the LLC agreement

at issue, were “void and of no force or effect whatsoever.” 26 In considering whether

a separate contract was voidable or void, the Supreme Court determined that “the

plain language of the provision would render the [contract] void, and therefore

incapable of being ratified.”27 The Supreme Court defined void acts as those that

are “ultra vires and generally cannot be ratified.”28

      The same result follows here.       The language before me is functionally

identical to the language before the Supreme Court in CompoSecure.              Both

24
      Stirling Aff. Ex. B §§ 5.1-5.3.
25
      Id. §§ 5.2, 5.3.
26
      206 A.3d 807, 810 (Del. 2018).
27
      Id. at 816.
28
      Id.

                                          8
provisions contain the word “void.” “Null” means “[h]aving no legal effect; without

binding force.”29 The parties agree that Anne’s transfer of her membership to

Absalom occurred without prior written consent.            Thus, by the plain and

unambiguous terms of the LLC Agreement, the transfer has no effect, meaning

Absalom holds no interest in the Company.

      B.     Absalom’s Contextual Arguments Fail

      Absalom responds with several arguments: (1) equitable defenses bar the

Company from claiming that Absalom is not a member; (2) the nature of LLCs is to

be flexible and informal such that the course of conduct should control rather than

the language of the LLC Agreement; and (3) the anti-transfer provision exists to

prevent strangers from becoming members, and Absalom is not a stranger. All fail.

             1.     Equitable defenses are not available

      Absalom argues that several equitable defenses bar the Company’s assertion

that the assignment is void and Absalom is not a member. Absalom points to laches,

waiver, equitable estoppel, ratification, and acquiescence, 30 arguing that the

Company granted Absalom access to some of the Company’s records,31 referred to

29
      Null, Black’s Law Dictionary (11th ed. 2019). Furthermore, “[t]he phrase null and
      void is a common redundancy.” Id.
30
      See Pl.’s Opening Supp. Br. 8-17.
31
      Pl.’s Reply Br. 3.

                                          9
Absalom as a member in some of its trial papers, 32 and issued Schedule K-1 tax

forms to Absalom, 33 all without reserving the right to contest Absalom’s status as a

member. 34 According to Absalom, this conduct estops the Company from now

disputing Absalom’s status as a member and its entitlement to seek books and

records. 35

       Equitable defenses can validate voidable acts but not void acts. 36                 In

CompoSecure, the Delaware Supreme Court recently held that by using the word

“void” in an LLC agreement, the parties to the agreement adopted the common law

rule and foreclosed the application of equitable defenses. The court reasoned as

follows:

               The common law rule is that void acts are ultra vires and
               generally cannot be ratified, but voidable acts are acts
               falling within the power of a corporation, though not
               properly authorized, and are subject to equitable defenses.
               Ordinarily, [a contract] would be voidable for failure to

32
       Id.
33
       Id. at 4.
34
       Id. at 5-6.
35
       Id. at 6. Absalom further argues that this Court should not consider the Company’s
       argument that Absalom is not a member because the Company waited too long to
       assert it. See Pl.’s Reply Br. 3-7. The Company sufficiently raised the issue of
       Absalom’s membership in its Answer. See Answer ¶¶ 3, 4, 23.
36
       See Klaassen v. Allegro Dev. Corp., 106 A.3d 1035, 1046 (Del. 2014) (“[o]nly
       voidable acts are susceptible to . . . equitable defenses.” (quoting Boris v. Schaheen,
       2013 WL 6331287, at *15 (Del. Ch. Dec. 2, 2013))).

                                             10
             comply with [a provision]. But, given the plain language
             of the [provision]—“void and of no force or effect
             whatsoever”—its application would trump the common
             law rule and render the [contract] void and incapable of
             being ratified. 37

Although CompoSecure addressed the defense of ratification, its logic extends to

other equitable defenses as well.

      At common law Anne’s transfer of her membership interest to Absalom would

be likely be voidable, not void. The reasoning in CompoSecure, however, mandates

that the contractual language—“void”—trumps the common law, rendering the

assignment ineffective and invulnerable to equitable defenses.          Thus, under

CompoSecure, Absalom cannot rely on equitable defenses to validate its status as a

member.

      Absalom attempts to distinguish CompoSecure, arguing that in that case, the

parties “promptly” sought to enforce their rights, while here they waited.38 Although

this is a valid factual distinction, it does not impact the conclusion that using the

word “void” in the LLC Agreement trumps the common law rule.

      Absalom also argues that CompoSecure differs from this case because the

CompoSecure court “held that corporate action taken in violation of the entity’s

37
      CompoSecure, 206 A.3d at 816-17 (citations omitted).
38
      Pl.’s Opening Supp. Br. 7.

                                         11
governing instrument was void. The Courts were concerned with the ultra vires

nature of the corporate action. That is a wholly irrelevant consideration here because

no such prohibited corporate action is challenged.”39 Absalom adds that “[e]ven if

Anne’s transfer implicated prohibited corporate action, a technical deficiency would

be no basis to avoid the transfer. Anne’s failure to obtain prior consent should be

construed as merely resulting in the transfer being ‘capable of being avoided’ by the

Company.” 40 Absalom’s arguments highlight what makes an act void or voidable

under common law. But, Absalom’s arguments fail to take into account the Supreme

Court’s ruling in CompoSecure that the contractual imposition of voidness “trumps”

the common law. Although ultra vires acts are void and although the transfer of

interest is likely not ultra vires under the common law, the LLC Agreement

nonetheless renders the transfer void and immune to equitable defenses.

      Absalom also argues that the statute of limitations prevents the Company from

asserting its affirmative defenses. The parties have agreed that the statute of

limitations is a legal defense and thus is not foreclosed by CompoSecure, and I accept

39
      Pl.’s Reply Supp. Br. 4-5.
40
      Id. at 5 (citations omitted).

                                         12
their agreement for purposes of this decision. A statute of limitations, however, is

not available to defeat an affirmative defense. 41

             2.     The informality of LLCs

      Absalom adds that the “flexible and less formal nature of LLCs” means that

this Court should treat Absalom as a member “notwithstanding the language of the

operating agreement.” 42 Absalom relies on Mickman v. American International

Processing, L.L.C. 43 to argue that this Court should consider the “‘course of dealing

among parties,’ rather than rely on formalities. Indeed, ‘under Delaware’s LLC Act,

“substance is supposed to be paramount over form.”’” 44

41
      See United States v. W. Pac. R.R. Co., 352 U.S. 59, 72 (1956) (“To use the statute
      of limitations to cut off the consideration of a particular defense in the case is quite
      foreign to the policy of preventing the commencement of stale litigation.”); Wells v.
      Rockefeller, 728 F.2d 209, 215 (3d Cir. 1984) (“Although expiration of the
      limitations period may not be used to deny the assertion of an affirmative defense,
      a claim for affirmative relief that relies on the same factual basis nevertheless comes
      within the limitations ban.”); Davis v. 24 Hour Fitness Worldwide, Inc., 75 F. Supp.
3d 635, 638 (D. Del. 2014) (“[G]enerally, affirmative defenses are not subject to
      statutes of limitations.”).
42
      Pl.’s Reply Trial Br. 7 (quoting Mickman v. Am. Int’l Processing, L.L.C., 2009 WL
891807, at *2 (Del. Ch. Apr. 1, 2009)).
43
      2009 WL 891807 (Del. Ch. Apr. 1, 2009).
44
      Pl.’s Reply Br. 8 (quoting In re Grupo Dos Chiles, LLC, 2006 WL 668443, at *2
      (Del. Ch. Mar. 10, 2006); In re Oxbow Carbon LLC Unitholder Litig., 2018 WL
818760, at *47 (Del. Ch. Feb. 12, 2018)).

                                            13
      In Mickman the Court considered a motion for summary judgment in an action

for books and records. 45 The defendant argued that it was entitled to summary

judgment because the plaintiff was not a member. 46 The company, however, had

submitted documents to the IRS signed by the company’s only manager and only

two members reporting that the plaintiff was a member. 47 The plaintiff argued that,

as a result, the company was estopped from arguing that she was not a member.48

The Court considered the equitable defenses and declined to decide the issue on the

merits. Instead, the Court denied both motions due to “disputed issues of material

fact” and in light of the company’s “apparent failure to provide appropriate

discovery on their defense that [p]laintiff lacks a membership interest.”

      Mickman is distinguishable because nothing suggests that the operating

agreement deemed unauthorized transfers “null and void.” Mickman also pre-dated

the CompoSecure ruling that a contractual specification of voidness would override

the application of equitable defenses. In this case, the unambiguous contractual

language controls.

45
      Mickman, 2009 WL 891807, at *1.
46
      Id. at *2.
47
      Id.
48
      Id.

                                         14
             3.     The no-strangers argument

      Absalom also argues that the anti-transfer provision’s aim is to ensure that

“LLC members not be forced into business with a stranger,” which is not a concern

here because there is no real difference between Anne and Absalom. 49 The evident

purpose of a provision can influence its interpretation, but it cannot override the plain

language of the provision. “When interpreting a contract, this Court ‘will give

priority to the parties’ intentions as reflected in the four corners of the agreement.’”50

“Under standard rules of contract interpretation, a court must determine the intent of

the parties from the language of the contract.”51 “When the language of a contract

is plain and unambiguous, the intent of the parties expressed in that language is

binding.” 52 “A disguised intent, not immediately obvious in the language of the

contract and requiring a tortured construction of its terms, can not overcome plain,

49
      Pl.’s Reply Br. 8-9 (quoting Cornerstone Techs., LLC v. Conrad, 2003 WL
1787959, at *2 (Del. Ch. Mar. 31, 2003) (“This Provision can be viewed as touching
      on important aspects of the Companies’ governance and basic nature, reflecting as
      it does a commitment by the founding members . . . that the original members should
      have the opportunity to buy the other members’ units before they passed into the
      hands of strangers.” (alteration in original))).
50
      Salomone v. Gorman, 106 A.3d 354, 367-68 (Del. 2014) (quoting GMG Capital
      Invs., LLC v. Athenian Venture P’rs I, L.P., 36 A.3d 776, 779 (Del. 2012)).
51
      Twin City Fire Ins. Co. v. Del. Racing Ass’n, 840 A.2d 624, 628 (Del. 2003).
52
      Sun-Times Media Gp., Inc. v. Black, 954 A.2d 380, 389 (citing Citadel Hldg. Corp.
      v. Roven, 603 A.2d 818, 822 (Del. 1992)).

                                           15
unambiguous language.” 53 In light of the Supreme Court’s holding in CompoSecure,

the plain language of “null and void” reflects a specific intent to override the

common law and cause the transfer to be void. Whether or not Anne is a stranger

does not impact the intent as reflected in the four corners of the contract, and thus,

it also does not impact Absalom’s lack of standing in this case. Further, the

Company has repeatedly asserted that Anne is a member, so Anne may seek books

and records on her own behalf.

      C.      Absalom Does Not Have Equitable Standing for This Action

      Absalom argues that even if it is not a member, “equity must intervene to

permit [Absalom] to review the materials sought in the Demand.”54 Absalom

contends that “‘[e]quity always attempts to . . . ascertain, uphold, and enforce rights

and duties which spring from the real relations of parties,’ ‘regards substance rather

than form,’ and also ‘regards that as done which in conscience ought to be done.’” 55

Absalom adds that “any other result would allow a fiduciary to avoid liability for her

self-serving conduct.” 56

53
      Sanders v. Wang, 1999 WL 1044880, at *8 (Del. Ch. Nov. 8, 1999).
54
      Pl.’s Reply Br. 9-10.
55
      Id. (quoting In re Carlisle Etcetera LLC, 114 A.3d 592, 607 (Del. Ch. 2015)).
56
      Id. at 9.

                                          16
       Absalom fails to explain in any convincing manner why this Court should

invoke equitable principles to override the plain language of the provision, especially

in light of the CompoSecure ruling that the contractual imposition of voidness

trumps the common law. Thus, the unambiguous language controls in this case. The

plain language of the LLC Agreement limits books and records requests to members,

and I held above that Absalom is not a member. Therefore, Absalom does not have

standing.

III.   CONCLUSION
       For the foregoing reasons, I hold that Absalom is not entitled to inspect the

books and records it seeks in this litigation.

       IT IS SO ORDERED.

                                           17