John Joseph Smith, IV v. Thomas M. Scott ( 2021 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
JOHN JOSEPH SMITH, IV, )
KENILWORTH VENTURES, LLC, )
)
JOHN JOSEPH SMITH, IV, as trustee of
the JJS 2015 Trust, JOHN JOSEPH )
)
SMITH, IV, as trustee of the John J. Smith
Revocable Trust, KENILWORTH )
DESIGN BUILD, LLC, )
)
Plaintiffs, )
)
v. ) C.A. No. 2020-0263-JRS
)
THOMAS M. SCOTT, CA VENTURES, )
LLC, CAR TEAM HOLDINGS, LLC, CA )
STUDENT LIVING TEAM HOLDINGS, )
LLC, CA SENIOR, LLC, aka CA SENIOR )
LIFESTYLE, LLC, aka CA SENIOR )
LIVING, LLC, CA STUDENT LIVING )
TEAM MANAGER, LLC, CA STUDENT )
LIVING HOLDING COMPANY, LLC, )
CAV GLOBAL, LLC, CAV EUROPE )
HOLDING, LLC, CA INDUSTRIAL, )
LLC, CA DESIGN BUILD, LLC, CA )
SENIOR LIVING INVESTMENT )
MANAGEMENT, LLC, CASL )
INVESTMENT MANAGEMENT, LLC, )
CA RESIDENTIAL INVESTMENT )
MANAGEMENT, LLC, CA VENTURES )
HOLDING, LLC, CA STUDENT LIVING )
TEAM MANAGER, LLC, CA STUDENT )
LIVING OPERATING COMPANY, LLC, )
CA MANAGER, LLC, ANTHONY )
DiBIASE, CA VENTURES )
INVESTMENT MANAGEMENT, LLC, )
CAMPUS ACQUISITIONS )
MANAGEMENT, LLC, )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: April 15, 2021
Date Decided: April 23, 2021
David E. Wilks, Esquire and D. Charles Vavala, Esquire of Wilks Law, LLC,
Wilmington, Delaware, and Douglas Albritton, Esquire of Actuate Law LLC,
Chicago, Illinois, Attorneys for Plaintiffs.
Robert A. Penza, Esquire and Stephen J. Kraftschik, Esquire of Polsinelli PC,
Wilmington, Delaware and Anthony C. Porcelli, Esquire and Scott M. Gilbert,
Esquire of Polsinelli PC, Chicago, Illinois, Attorneys for Defendants.
SLIGHTS, Vice Chancellor
Plaintiff, John Joseph Smith, individually and on behalf of entities he controls,
alleges that Defendants, Thomas M. Scott, CA Ventures, LLC, and a number of other
related entities formed by Scott and CA Ventures (the “CA Ventures
Subsidiary LLCs”), terminated him from his employment with CA Ventures without
cause, but nevertheless stripped him of certain accumulated equity and other
interests (the “Vested Interests”) in twelve of the CA Ventures Subsidiary LLCs as
if he had been terminated for cause. 1 According to Smith, those interests are worth
as much as $70 million today. Defendants deny the allegations and maintain that
Smith was terminated for cause and, therefore, has forfeited his right to the Vested
Interests.
Plaintiffs’ Verified Complaint comprises seven counts. 2 Count I seeks a
declaratory judgment that Smith’s termination was without cause and in bad faith,
that his Vested Interests were not forfeited and that Defendants are required to
repurchase the Vested Interests at fair market value.3 Count II alleges breach of
contract arising from Defendants’ breach of the CA Ventures LLC Agreements
1
This Opinion follows the parties’ submissions and adopts the nomenclature
“Vested Interests” to describe the various economic interests in the CA Ventures
Subsidiary LLCs that Smith alleges have been wrongfully taken from him. The Vested
Interests include various “units,” “membership interests” and “profits interests,”
as provided in each of the operative LLC Agreements and illustrated in the chart below.
2
Verified Compl. (“Compl.”) (D.I. 1).
3
Compl. ¶¶ 88–90.
1
(defined below) by terminating Smith without cause and stripping him of his Vested
Interests. 4 Count III alleges breach of the implied covenant of good faith and fair
dealing related to Scott’s alleged bad faith termination of Smith without cause.5
Count IV alleges breach of fiduciary duty 6 and Count V alleges conversion,7 both
based largely on the same factual predicate as Counts I–III. Finally, Counts VI and
VII assert claims under Illinois law, with Count VI alleging a violation of the Illinois
Wage Payment and Collection Act (the “Wage Act”) and Count VII alleging
defamation.8
Defendants have moved to dismiss most, but not all, counts of the Complaint.
They seek dismissal of Counts I and II only to the extent Plaintiffs seek a judgment
compelling Defendants to pay the fair market value of the Vested Interests. 9
Defendants seek dismissal of all other counts for failure to state viable claims.
The implied covenant claim fails, they say, because the conduct at issue is governed
4
Compl. ¶¶ 92–97.
5
Compl. ¶¶ 98–106.
6
Compl. ¶¶ 107–114.
7
Compl. ¶¶ 115–122.
8
Compl. ¶¶ 123–134.
9
D.I. 18; Compl. ¶¶ 87–146. To the extent the Complaint seeks this remedy in connection
with other counts of the Complaint, Defendants seek dismissal of those prayers for relief
as well.
2
by contract. Similarly, they argue the breach of fiduciary duty and conversion claims
cannot stand alongside breach of contract claims arising from the same conduct.
They additionally assert that the fiduciary duty claim is precluded by the LLC
Agreements’ limitation of liability. And finally, the Wage Act and defamation
claims must be dismissed, they say, for failure to well plead requisite elements.
As explained below, my ruling is a mixed bag. As for Defendants’ request
that I dismiss Plaintiffs’ prayer for a buyout remedy, the request is premature. It is
reasonably conceivable that the buyout remedy falls within the reasonable
expectancy of the parties at the time of contracting. Likewise, the implied covenant
claim survives because it is reasonably conceivable, as alleged, that Defendants
manufactured bases to terminate Smith for cause in violation of the covenant of good
faith that is implied within Smith’s employment contract and the LLC Agreements.
The conversion claim survives because, at least for now, it is reasonably conceivable
that it is not duplicative of the breach of contract claim. Finally, Plaintiffs’ claim for
violation of the Wage Act well pleads that Smith’s Vested Interests can reasonably
be considered “earned wages” and that the forfeiture of such interests, assuming the
allegations in the Complaint are true, amounts to an improper deduction from those
wages.
Plaintiffs remaining claims must be dismissed. The breach of fiduciary duty
claim fails because it is supplanted by the contractual standards of conduct set forth
3
in the LLC Agreements, and the Complaint fails to well plead a violation of those
standards. Plaintiffs’ claim for defamation must be dismissed because this court, on
balance, will not exercise subject matter jurisdiction over common law defamation
claims. All claims against Anthony DiBiase must be dismissed for failure to make
any allegation of wrongdoing. And the prayer for punitive damages must be
dismissed as this court of equity does not award punitive remedies.
I. BACKGROUND
I have drawn the facts from well-pled allegations in the Complaint and
documents incorporated by reference or integral to that pleading. 10 For purposes of
the motion, I accept as true the Complaint’s well-pled factual allegations and draw
all reasonable inferences in Plaintiffs’ favor. 11
A. Parties
Plaintiff, Smith, was an employee of Defendant, Scott, for nearly thirteen
years, serving as an executive in connection with a number of ventures Scott owned
and operated. 12 He is a resident of the State of Illinois.13
10
Compl.; Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 320 (Del. 2004)
(noting that on a Motion to Dismiss, the Court may consider documents that are
“incorporated by reference” or “integral” to the complaint).
11
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002).
12
Compl. ¶ 1.
13
Compl. ¶ 12.
4
Plaintiff, Kenilworth Ventures, LLC (“Kenilworth Ventures”), is an
Illinois LLC, with Smith acting as its sole managing member. 14 This entity held
several of the Vested Interests that Smith allegedly acquired during his time working
for Scott, each laid out in more detail in the chart below. 15
Plaintiff, JJS 2015 Trust, is an Illinois trust, with Smith acting as sole trustee.16
Similar to Kenilworth Ventures, this entity held several of Smith’s Vested
Interests. 17
Plaintiff, John J. Smith Revocable Trust (“JJS Revocable Trust”), is also an
Illinois trust, with Smith acting as sole trustee. 18 Again, this entity owned certain of
Smith’s Vested Interests. 19
14
Compl. ¶ 13.
15
Id.16
Compl. ¶ 14.
17
Id.18
Compl. ¶ 15.
19
Id.5
Plaintiff, Kenilworth Design Build, LLC, is an Illinois LLC, with Smith acting
as the sole managing member. 20 This entity owned certain Vested Interests in
Defendant, CA Design Build, LLC.21
Defendant, Scott, founded and operates in some form each of the fifteen LLCs
listed in Column 1 of the chart below. 22 Like Smith, he is a resident of Illinois.23
As indicated, the chart lists each of the relevant CA Ventures Subsidiary LLCs, all
of which are Delaware LLCs, and each individual or LLC that managed the LLC,
as well as the corresponding Vested Interest that Smith either claims directly or
through one of his wholly owned or controlled entities:
Remainder of Page Intentionally Left Blank
20
Compl. ¶ 16.
21
Id.22
Compl. ¶ 19.
23
Compl. ¶ 17.
6
Entity Manager/Managing Smith’s Initial
Member Ownership/Investment
CA Ventures, LLC24 Thomas Scott N/A
CAR Team Holdings, CA Ventures Holdings, JJS 2015 Trust: 200,000
LLC 25 LLC units
CA Student Living Team CA Student Living Team JJS 2015 Trust and Smith
Holding, LLC26 Manager, LLC individually: 220,000
units
CA Student Living Team CA Student Operating Kenilworth Ventures:
27
LLC Company, LLC 17.021% profits interest
28
CA Senior, LLC CA Senior Manager, Kenilworth Ventures:
LLC 12.15% membership
interest plus an additional
$160,000 investment
CA Student Living CA Manager, LLC Kenilworth Ventures:
Holding Company, 8.15% membership
29
LLC interest plus an additional
$313,000 investment
30
CAV Global, LLC Anthony DiBiase Kenilworth Ventures: 5%
membership interest
24
Compl. ¶¶ 18, 19.
25
Compl. ¶¶ 19(a)–(b).
26
Compl. ¶¶ 19(c)–(d).
27
Compl. ¶¶ 19(e)–(f).
28
Compl. ¶¶ 19(g)–(h).
29
Compl. ¶¶ 19(i)–(j).
30
Compl. ¶¶ 19(k)–(l).
7
CAV Europe Holdings, CA Manager, LLC (1) JJS Revocable Trust:
LLC 31 5% membership interest
(2) Plaintiffs collectively:
$100,000 investment
CA Industrial, LLC32 CA Manager, LLC (1) Kenilworth Ventures:
7.5% membership
interest
(2) Plaintiffs collectively:
$100,000 investment
CA Design Build, LLC 33 CA Manager, LLC Kenilworth Design: 15%
profits interest
CA Senior Living CA Ventures Investment JJS Revocable Trust: 5%
Investment Management, Management, LLC profits interest
LLC 34
CASL Investment CA Ventures Investment (1) JJS Revocable Trust:
Management, LLC35 Management, LLC 2.8% profits interest
(2) JJS 2015 Trust: 7.2%
profits interest
CA Residential CA Ventures Investment JJS Revocable Trust: 5%
Investment Management, Management, LLC profits interest
LLC 36
Campus Acquisitions Thomas Scott N/A
Management, LLC37
CA Manager, LLC38 Thomas Scott N/A
31
Compl. ¶¶ 19(m)–(n).
32
Compl. ¶¶ 19(o)–(p).
33
Compl. ¶¶ 19(q)–(r).
34
Compl. ¶¶ 19(s)–(t).
35
Compl. ¶¶ 19(u)–(v).
36
Compl. ¶¶ 19(w)–(x).
37
Compl. ¶ 21.
38
Compl. ¶ 22.
8
B. CA Ventures
Scott founded CA Ventures in the mid-2000s as a vehicle to acquire student-
housing apartments.39 Smith became CA Ventures’ first executive-level employee
in 2007, at a time when the company “had less than $75 million in assets under
management, annual revenue of less than $2 million, approximately 15 property-
management personnel, and had never completed a new construction real-estate
development project.” 40
Today, CA Ventures has more than 1,300 employees and 135 assets under
management worth more than $10 billion. It operates as a vertically integrated
management company with a variety of real estate asset classes, including student,
senior, multi-family, office, hospitality and international development
opportunities.41 Each of the Defendants is either an LLC controlled by CA Ventures
or a manager of an LLC controlled by CA Ventures (many of the managers
themselves, as standalone LLC entities, are likewise controlled by CA Ventures).42
Scott sits atop all of these entities as the controller of CA Ventures. 43
39
Compl. ¶¶ 24–25.
40
Id.41
Compl. ¶ 26.
42
Compl. ¶¶ 28, 30–32.
43
Compl. ¶ 28.
9
C. Smith’s Ongoing Role at CA Ventures
Smith has a background in architecture and started at CA Ventures as a project
manager overseeing CA Ventures’ first ground-up development. 44 Throughout his
thirteen-year stint at CA Ventures and the CA Ventures Subsidiary LLCs, Smith
sourced, created and oversaw the execution of nearly $6 billion in real-estate
assets. 45 For example, from 2007 to 2010, Smith oversaw nearly $300 million in
assets across college campuses; from 2010 to 2015, he oversaw the creation of new
buildings totaling over $1.5 billion in value creation; and in 2012, he played an
integral role in the sale of certain assets for $627 million, which allowed Scott to
expand into new lines of business and diversify CA Ventures’ product offerings.46
In recognition of his prior successes, Scott promoted Smith to the position of Chief
Operating Officer of CA Ventures in 2015, a role he occupied until 2017.47
His responsibilities over the years spread across all of CA Ventures’ various
business lines, and as a result, he received equity interests and other forms of
incentive compensation from several of the CA Ventures Subsidiary LLCs.48
44
Compl. ¶ 35.
45
Id.46
Compl. ¶¶ 36, 39(c).
47
Compl. ¶ 36.
48
Compl. ¶ 40.
10
Beginning in 2017, after CA Ventures received a significant investment in its
student-housing business, Scott asked Smith to focus 100% of his time on that line
of business through CA Student Living Holding Company, LLC. 49 To fulfill this
new role, Smith was promoted to President of CA Student Living. 50 While focusing
on projects collectively worth in excess of $1 billion in 2018 and 2019, Smith was
also tasked with starting CA Ventures Industrial division and helping to create
CA Design Build and CA Ventures’ new European entity. 51 All the while, Smith
continued to accrue Vested Interests. While his compensation was contingent on
compliance with certain LLC Agreements, Smith at no time had a written
employment agreement with any CA Ventures entity.
D. Smith’s Termination
During a meeting in early January 2020, Scott informed Smith that he would
be moved into a different role where he would continue to help CA Student Living,
CA Industrial and CA Design Build. 52 At the end of this meeting, Scott requested
that Smith agree to forfeit a majority of his Vested Interests for no payment.53
49
Compl. ¶ 41–42.
50
Compl. ¶ 42.
51
Compl. ¶ 44.
52
Compl. ¶ 54.
53
Compl. ¶ 55.
11
Scott later memorialized the request in two letters, both dated January 9, 2020.54
In one letter, Scott outlined a proposal whereby there would be a “realignment” of
Smith’s roles and responsibilities, including with respect to CA Student Living and
CA Design Build.55 In the other, Scott reiterated his request that Smith give up his
interests in a number of the CA Ventures Subsidiary LLCs, providing a chart listing
most of Smith’s ownership interests and the corresponding reduction that would
result from the realignment.56 According to Smith, the request had no basis in any
agreement he had reached with Scott or any CA Ventures entity. 57 In closing the
second letter, Scott demanded that Smith execute an agreement forfeiting his Vested
Interests within 48 hours.58
When Smith refused the demand, Scott threatened that if Smith did not agree
to forfeit his Vested Interests, he would be terminated from all of his CA Ventures
positions for “cause.”59 To sweeten the sour “forfeit for nothing” deal, Scott offered
54
Id.55
Id.; Compl., Ex. A.
56
Compl. ¶ 55; Compl., Ex. B.
57
Compl. ¶ 55.
58
Id.59
Compl. ¶ 57.
12
Smith $2 million for his Vested Interests.60 At the same time, on January 10, 2020,
CA Ventures issued a press release that announced Smith’s “promotion” to
managing principal of CA Ventures’ student living division. 61
After Smith again refused to hand over his Vested Interests, CA Ventures and
Campus Acquisitions Management, LLC, through Scott, advised Smith, by letter
dated January 13, 2020, that he was terminated for “cause” effective immediately.62
The letter explained that the termination followed Smith’s “persistent performance
deficiencies that have continued despite repeated discussions regarding the need for
improvement with respect to these deficiencies.”63 By way of example, the letter
cited Smith’s “habitual failure to dedicate a sufficient portion of [his] business time
to performing [his] job duties . . . ,” causing, among other harm, CA Ventures to
“absorb[] over $30 million in project cost overruns” over the course of three years.64
Because he was being terminated for “cause,” Scott informed Smith that he would
lose his Vested Interests in at least eleven different CA Ventures Subsidiary LLCs.65
60
Id.61
Id.; Compl., Ex. D.
62
Compl., Ex. C.
63
Id.64
Id.65
Id.13
E. The LLC Agreements
Each of the twelve relevant CA Ventures Subsidiary LLCs is governed by an
LLC agreement (the “LLC Agreements”). The Defendants in which Smith
maintains he possesses Vested Interests are divided into three categories, Group 1,
Group 2 and Group 3, based on differences in their respective LLC Agreements.66
Groups 1 and 2 are populated based on the “cause” definition that exists in each LLC
Agreement. The LLC Agreements for the “Group 1 Defendants,” which include
CASL Investment Management, LLC, CAV Europe Holdings, LLC, CA Senior
Living Investment Management, LLC, CA Residential Investment Management,
LLC, CA Design Build, LLC and CA Industrial, LLC, define “cause” (with minor
deviations) as follows:
with respect to any Person (other than the Managing Member),
termination of such Person’s or such Person’s Key Person’s
Engagement with CA and/or any of its Subsidiaries (such that there is
no longer an employment or service type relationship with any of the
foregoing entities) by CA as a direct result of (in CA’s sole discretion)
any one or more of the following: (a) such Person or its Key Person
having been convicted or entered a guilty plea or a plea of nolo
contendere with respect to: (i) any felony and/or (ii) any crime
involving moral turpitude, including misappropriation, embezzlement
and similar crimes which, in any case pursuant to this clause (a), (x) was
committed during the Person’s or such Person’s Key Person’s
Engagement with CA and/or any of its Affiliates and (y) results in
material harm to the business of CA or any of its Affiliates; (b) (other
than in the case of the Bakaya Member or its Key Person) such Person
66
I note that the categories laid out here do not track the categories set out in either the
Complaint or Opening Brief.
14
or its Key Person having violated any rule or regulation of any
regulatory agency or self-regulatory agency; or (c) (other than in the
case of the Bakaya Member or its Key Person) such Person or its Key
Person having intentionally and deliberately engaged in dishonesty,
willful misconduct, willful or gross neglect, bribery, fraud,
misappropriation, embezzlement or misrepresentation of material facts
with respect to such Person’s or Key Person’s employment giving rise
to material harm to CA or any of its Subsidiaries.67
The LLC Agreements for the “Group 2 Defendants,” which include CAR
Team Holdings, LLC, CA Student Living Team Holdings, LLC and CA Student
Living Team, LLC, contain a more expansive definition of “cause”:
“Cause” means, with respect to any Person (other than the Managing
Member), termination of such Person’s or such Person’s Key Person’s
Engagement with CASLOC and/or any of its Subsidiaries (such that
there is no longer an employment or service type relationship with any
of the foregoing entities) by CASLOC as a direct result of (in the
Company’s sole discretion) any one or more of the following: (a) such
Person or its Key Person having been indicted on charges of, or
convicted or entered a guilty plea or a plea of nolo contendere with
respect to: (i) any felony and/or (ii) any crime involving moral
67
Compl., Ex. K (CASL) Art. I, Ex. N (CAV Europe) Art. I, Ex. Q (CA Senior Investment
Management) Art. I, Ex. R (CA Residential) Art. I. The definition of “cause” within the
LLC Agreements for CA Design Build and CA Industrial varies from the other Group 1
LLC Agreements in immaterial respects. Compl., Ex. P (CA Design Build) § 1.2, Ex. O
(CA Industrial) § 1.2 (“‘Cause’ means any of the following with respect to any Member or
its Key Person: (a) the Person has engaged in fraud, dishonesty or other willful or malicious
acts or misconduct related to the Company or any of its Members; (b) the Person is
prosecuted by the federal government or any state on the basis of a felony charge and such
charge is not dismissed within one hundred twenty (120) days of its commencement; (c) the
Person files a voluntary petition of bankruptcy; and/or (d) an involuntary petition of
bankruptcy or insolvency is filed against the Person or a receiver is appointed for the Person
by a court of competent jurisdiction, and such bankruptcy or receiver proceeding is not
vacated or dismissed within one hundred twenty (120) days of its commencement.”).
15
turpitude, including misappropriation, embezzlement and similar
crimes (whether related to the such employment, engagement or
otherwise); (b) such Person or its Key Person having violated any rule
or regulation of any regulatory agency or self-regulatory agency;
(c) such Person or its Key Person having intentionally and deliberately
engaged in dishonesty, willful misconduct, willful or gross neglect,
bribery, fraud, misappropriation, embezzlement or misrepresentation of
material facts with respect to such Person’s or Key Person’s
employment giving rise to material harm to CASLOC or any of its
Affiliates; (d) such Person or its Key Person having repeatedly and
habitually refused to devote substantially all of such Person’s or such
Person’s Key Person’s business time and efforts to CASLOC and its
Affiliates following and in direct contravention of express instructions
given by Managing Member in writing (it being agreed that service on
charitable and similar boards of directors shall not constitute such a
refusal as long as any such involvement does not materially interfere
with the performance of such Person’s or such Person’s Key Person’s
duties and obligations to CASLOC and its Affiliates); (e) a material
breach or violation by such Person or by such Person’s Key Person of
any confidentiality, non-competition, non-solicitation or other similar
contractual obligation or agreement binding upon such Person or such
Person’s Key Person in favor of CASLOC and/or any of its
Subsidiaries, on the one hand, and CASLOC and/or any of its Affiliates,
on the other hand; and (f) breach by such Person, in their capacity as a
Participating Member, of this Agreement.68
The other potentially relevant provision in each LLC Agreement for the
Group 1 and Group 2 Defendants, apart from the definition of “cause,” is the
forfeiture provision. Of the Group 1 Defendants, the LLC Agreements for
CA Industrial, LLC and CA Design Build, LLC do not permit forfeiture of Vested
Interests, but in the event of termination for “cause,” these LLC Agreements do
68
Compl., Ex. F (CAR Team Holdings) Art. I, Ex. H (CA Student Living Team Holdings)
Art. I, Ex. I (CA Student Living Team) Art. I (emphasis added).
16
permit CA Ventures to purchase the terminated member’s interest for an amount
equal to its capital contribution. 69 The LLC Agreements for the remaining Group 1
and Group 2 Defendants contain forfeiture provisions that force a member to forfeit
his Vested Interests in the event the member is terminated for “cause.”70
For the “Group 3 Defendants,” which include CA Senior, LLC, CA Student
Living Holding Company, LLC and CAV Global, LLC, the LLC Agreements
governing those entities either do not contain a forfeiture provision, as is the case for
CA Student Living Holding Company and CAV Global, or have a for “cause”
definition that requires a criminal conviction, as in the case of CA Senior.71
II. ANALYSIS
The standard for deciding a Motion to Dismiss under Court of Chancery
Rule 12(b)(6) is well-settled:
69
Compl., Ex. P (CA Design Build) §§ 10.4, 10.8, Ex. O (CA Industrial) §§ 10.5, 10.8.
70
Compl., Ex. F (CAR Team Holdings) § 5.2(b), Ex. H (CA Student Living Team
Holdings) § 5.2(b), Ex. I (CA Student Living Team LLC), § 5.2(b), Ex. K
(CASL Investment Management) § 5.2(c), Ex. N (CAV Europe Holding) § 5.4(c), Ex. Q
(CA Senior Living Investment Management) § 5.2(c), Ex. R (CA Residential Investment
Management) § 5.2(c).
71
Compl., Ex. L (CA Student Living Holding), Ex. M (CAV Global), Ex. J (CA Senior)
§ 1.2. The January 13, 2020 letter advising Smith of his termination does not purport to
revoke Smith’s equity interests in CA Student Living Holding Company, LLC or CAV
Global, LLC. Compl., Ex. C. As for CA Senior, LLC, Scott recognizes that its inclusion
in the January 13 was a mistake. Defs.’ Opening Br. in Supp. of Mot. to Dismiss (“OB”)
(D.I. 17) at 14 n.11. The Motion does not seek to dismiss all claims against the Group 3
Defendants, and this Opinion does not address whether Smith has well pled that he
maintains his interests in these three entities because the question has not been called.
17
all well-pleaded factual allegations are accepted as true; (ii) even vague
allegations are “well-pleaded” if they give the opposing party notice of
the claim; (iii) the Court must draw all reasonable inferences in favor
of the non-moving party; and (iv) dismissal is inappropriate unless the
plaintiff would not be entitled to recover under any reasonably
conceivable set of circumstances susceptible of proof. 72
A. Breach of the Implied Covenant of Good Faith and Fair Dealing
Smith alleges that Defendants ginned up a for cause termination as a means
to strip him of his Vested Interests and thereby breached the covenant of good faith
and fair dealing (the “Covenant”) implied in both his oral at-will employment
agreement and the LLC Agreements. According to Defendants, the Covenant claims
fail because they rest on matters that are fully and expressly addressed by written
contract.
“Under Delaware law, the implied covenant of good faith and fair dealing
inheres in every contract.”73 To sustain a claim for a breach of the Covenant,
“a complaint ‘must allege a specific implied contractual obligation, a breach of that
obligation by the defendant, and resulting damage to the plaintiff.’” 74 The Covenant
72
Savor, Inc, 812 A.2d at 896–97 (citation omitted).
73
Amirsaleh v. Bd. of Trade of City of New York, Inc., 2009 WL 3756700, at *4 (Del. Ch.
Nov. 9, 2009).
74
Sheehan v. AssuredPartners, Inc., 2020 WL 2838575, at *11 (Del. Ch. May 29, 2020)
(quoting Kuroda v. SPJS Hldgs., L.L.C., 971 A.2d 872, 888 (Del. Ch. 2009)).
18
“embodies the law’s expectation that each party to a contract will act with good faith
toward the other with respect to the subject matter of the contract.” 75 And it prevents
a party from using an agreement as a shield to deny the other party the fruits of the
bargain where the first party engages in bad faith conduct.76
While the Covenant plays an important role in the administration of
contractual relationships, its application “involves a ‘cautious enterprise’—inferring
contractual terms to handle developments or contractual gaps that the asserting party
pleads neither party anticipated.”77 The courts of Delaware undertake this enterprise
with great care to ensure they are not rewriting the parties’ written contract or
restructuring what one party now believes to have been a bad deal. 78
As noted, Plaintiffs assert a claim under the Covenant with respect to both the
at-will employment agreement and LLC Agreements. I address each in turn.
75
Allied Capital Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1032 (Del. Ch. 2006)
(internal quotations omitted).
76
Sheehan, 2020 WL 2838575, at *11 (“The covenant protects an agreement’s spirit
against underhanded tactics that deny a party the fruits of its bargain.”).
77
Nemec v. Shrader, 991 A.2d 1120, 1125 (Del. 2010) (quoting Dunlap v. State Farm Fire
& Cas. Co., 878 A.2d 434, 441 (Del.2005)).
78
Id. at 1126 (“When conducting [an implied covenant] analysis, we must assess the
parties’ reasonable expectations at the time of contracting and not rewrite the contract to
appease a party who later wishes to rewrite a contract he now believes to have been a bad
deal. Parties have a right to enter into good and bad contracts, the law enforces both.”).
19
The Employment Agreement
The application of the Covenant is particularly delicate when an employee in
an “at-will” employment relationship with his employer seeks to invoke the
Covenant to state a claim for wrongful termination. In these instances, the court
must be mindful of the “concern that the implied covenant could swallow the
[employment-at-will] doctrine and effectively end at-will employment.”79
Recognizing the need to strike a balance between the laudable purpose of the
Covenant and the limited rights of an at-will employee, in DuPont v. Pressman, our
Supreme Court held that an employee may bring a claim for breach of the Covenant
only when the employer engages in “an act or acts [] manifesting bad faith or unfair
dealing achieved by deceit or misrepresentation in falsifying or manipulating a
record to create fictitious grounds to terminate employment.” 80 Even here, however,
the Covenant must be invoked and enforced cautiously. Pressman makes clear that
terminating an at-will employee “based solely on personal motivations,” including
79
Sheehan, 2020 WL 2838575, at *11 (quoting E.I. DuPont de Nemours & Co. v.
Pressman, 679 A.2d 436, 442 (Del. 1996)) (alteration in original).
80
Pressman, 679 A.2d at 443–44. I note that subsequent applications of Pressman have
clarified that actual falsification of documents to justify a termination decision is not
required to sustain a claim that the employer breached the Covenant by manufacturing a
basis to terminate for cause. See, e.g., Lawver v. Christiana Care Health Sys., Inc., 2017
WL 1167321, at *4 (Del. Super. Ct. Feb. 21, 2017) (holding that “[m]anufacturing
materially false grounds includes the falsification or manipulation of employment records
to create fictitious grounds for termination” (emphasis added)).
20
“dislike, hatred or ill will, alone,” will not be actionable as a matter of Delaware
law. 81
This court’s recent decision in Sheehan v. AssuredPartners provides useful
guidance, post Pressman, regarding the application of the Covenant to a claim of
wrongful termination brought by an at-will employee. 82 There, the plaintiffs were
terminated for “cause,” resulting in cancellation of certain of their equity interests in
the company.83 The court noted that while the employment agreements laid out the
process by which employment could be terminated for “cause,” that process did not
address (or excuse) instances where the termination was carried out in “bad faith.”84
The court then clarified that while the plaintiffs would have to “prove at trial that
[defendant] exercised its discretion in bad faith,”85 in order “[t]o survive a motion to
dismiss, [] the [plaintiffs] only must allege that the termination decision was
motivated by an improper purpose.”86
81
Pressman, 679 A.2d at 444.
82
2020 WL 2838575.
83
Id. at *6–7.
84
Id. at *11.
85
Id.
86
Id.
21
Here, Plaintiffs allege and argue that the Covenant inheres in Smith’s oral at-
will employment agreement with each of the Scott-controlled entities he worked for,
and Defendants violated the Covenant by purporting to fire Smith for cause when,
in fact, their sole motivation was to take his Vested Interests without compensation.
The allegations in the Complaint to support Plaintiffs’ Covenant claim nearly mirror
the allegations in Sheehan and, as held there, they are well-pled here.87
Defendants argue that Smith’s oral at-will employment agreement is
contextualized by the LLC Agreements, and those agreements clearly define the
meaning and implications of a firing for “cause,” leaving no room for the Covenant
to operate.88 For example, each of the Group 2 Defendants’ LLC Agreements
includes six separate ways that an employee’s termination will be deemed for
“cause,” including when the employee “repeatedly and habitually refused to devote
substantially all of such Person’s . . . business time and efforts to [the LLC].”89 Yet,
notwithstanding similar provisions in the employment agreements at issue there, the
87
Id. (finding a well-pled improper purpose where complaint alleges defendant fired
plaintiffs “in order to steal [their] Class B Profits Interests for zero consideration and to
pay nothing more than cost for the Sheehans’ Class A-2 Interests” (alteration in original));
see Compl. ¶¶ 9, 56, 105; see also Lawver, 2017 WL 1167321, at *4 (holding that plaintiff
well-pled a breach of the Covenant by alleging defendant had “manufactur[ed] materially
false grounds” to terminate employment for cause).
88
Defs.’ Reply Br. in Supp. of Mot. to Dismiss (D.I. 27) at 13.
89
Compl., Ex. F (CAR Team Holdings) Art. I, Ex. H (CA Student Living Team Holdings)
Art. I, Ex. I (CA Student Living Team) Art. I.
22
court in Sheehan determined that the provisions did not excuse a termination
undertaken in “bad faith.”90 The same result is compelled here. Smith has well pled
that the reasons given for termination were false and were intended to mask the
Defendants’ design to seize Smith’s Vested Interests. At this stage, that is enough
to state a claim for breach of the Covenant. 91 “Whether [Plaintiffs] are entitled to
damages distinct from their contract claim must await determination at a later
stage.”92
The LLC Agreements
The LLC Agreements do not plainly cover the forfeiture of Smith’s Vested
Interests under the circumstances alleged in the Complaint. As mentioned, the
Covenant is intended “to handle developments of contractual gaps that the asserting
90
Sheehan, 2020 WL 2838575, at *9 (including, as grounds for termination for “cause,”
“(ii) frequent unexplained absence or other malfeasance by Employee; . . . [and] (v) a
failure to observe policies and/or standards (excluding any immaterial failure that does not
actually harm or potentially harm the Company)”); id. at *11 (noting that the employment
agreements did not cover the circumstance in which a termination would be carried out in
bad faith).
91
The facts here are distinguishable from West v. Access Control Related Enters., LLC,
2019 WL 2385863, at *2 (Del. Super. Ct. June 5, 2019), cited by Defendants. There, the
court determined that because the employment agreement thoroughly defined “cause,” any
claim that the plaintiff was “tricked” into creating cause for termination “would [be counter
to] Cause as defined by the contract.” Id. Unlike West, whether Scott engaged in bad faith
when invoking the “cause” provision is not answered by any of the specific “cause”
provisions within the LLC Agreements. Sheehan, 2020 WL 2838575, at *11 (noting the
complaint readily identified “a possible gap, specifically that a termination will not be done
in ‘bad faith’”).
92
Sheehan, 2020 WL 2838575, at *11.
23
party pleads neither party anticipated.”93 In the context of the LLC Agreements, one
such gap is a circumstance where a party to the contract dissembles a basis to
terminate for cause in order to cause a forfeiture of Vested Interests. While the LLC
Agreements define “cause” in a manner that leaves few, if any, “gaps,” there most
certainly is a contractual gap in the failure to define what is to occur when a party to
the contract invokes the “cause” provision in bad faith to avail itself of the
contractual consequences of a for “cause” termination.
This is where Defendants’ reliance on West v. Access Control Related
Enterprises, LLC is misplaced. 94 There, a severance agreement plainly provided for
certain payments to be made if the employee was terminated without cause.95
Subsequently, the employee was purportedly terminated for cause, as defined in an
equity award incentive agreement. 96 The two agreements were linked in a manner
that caused the court to conclude that the definition of “cause” in the equity award
incentive agreement filled any gap that may have arguably existed in the severance
93
Nemec, 991 A.2d at 1125.
94
West, 2019 WL 2385863, at *1.
95
Id. (“The Severance Agreement provided for certain payments to be made to West if his
employment with ACRE were terminated without ‘Cause.’”).
96
Id.24
agreement, such that a claim for breach of the Covenant was unavailable as a matter
of law.97
Here, as explained, none of the operative contracts explain what is to happen
if a party fabricates a basis to fire for cause in order to trigger a forfeiture of Vested
Interests. 98 It is at least reasonably conceivable that Smith’s bad faith termination
for cause, and the resulting forfeiture of Smith’s Vested Interests, would not violate
a specific term of the LLC Agreements, but would constitute breach of the Covenant.
Accordingly, the claims survive dismissal.
B. Breach of Fiduciary Duty
Smith alleges he was owed fiduciary duties and those duties were breached
when Defendants wrongfully cancelled his Vested Interests. In response,
Defendants argue Plaintiffs’ fiduciary duty claim fails because it is waived by the
plain language of the LLC Agreements.
The Delaware Limited Liability Company Act (the “LLC Act”) provides that
“the fiduciary duties of a member, manager, or other person that is a party to or
97
Id. at *3 (noting that the claim the employer did not, in fact, terminate for cause was
expressly addressed by the contracts).
98
Compl., Ex. F (CAR Team Holdings) § 5.2(b), Ex. H (CA Student Living Team
Holdings) § 5.2(b), Ex. I (CA Student Living Team LLC), § 5.2(b), Ex. K
(CASL Investment Management) § 5.2(c), Ex. N (CAV Europe Holding) § 5.4(c), Ex. Q
(CA Senior Living Investment Management) § 5.2, Ex. R (CA Residential Investment
Management) § 5.2(c).
25
bound by a limited liability company agreement may be expanded or restricted or
eliminated by provisions in the limited liability company agreement.”99 If the
operating agreement is silent with respect to standards of conduct, then,
“[b]y default, the traditional fiduciary duties applicable to corporations [will]
apply . . .” 100 If, on the other hand, an LLC’s operating agreement plainly disclaims,
restricts or limits the duties of its managers and members, the parties must look to
the agreement’s “provisions to understand their rights and remedies.”101
“Drafters of a limited liability company agreement ‘must make their intent to
eliminate fiduciary duties plain and unambiguous.’” 102 This court has determined
99
Zimmerman v. Crothall, 62 A.3d 676, 702 (Del. Ch. 2013) (internal quotations omitted);
6 Del. C. § 18–1101(c) (“To the extent that, at law or in equity, a member . . . has duties
(including fiduciary duties) to a limited liability company or to another member . . . , the
member’s . . . duties may be expanded or restricted or eliminated by provisions in the
limited liability company agreement . . . .”).
100
Ross Hldg. & Mgmt. Co. v. Advance Realty Gp., LLC, 2014 WL 4374261, at *12
(Del. Ch. Sept. 4, 2014); Auriga Cap. Corp. v. Gatz Props., 40 A.3d 839, 852 (Del. Ch.
2012), aff’d, 59 A.3d 1206 (Del. 2012) (“[T]he [LLC] statute allows the parties to an LLC
agreement to entirely supplant those default [fiduciary duty] principles or to modify them
in part. Where the parties have clearly supplanted default principles in full, we give effect
to the parties’ contract choice. Where the parties have clearly supplanted default principles
in part, we give effect to their contract choice.”); Miller v. HCP & Co., 2018 WL 656378,
at *8 (Del. Ch. Feb. 1, 2018) (“The Delaware Limited Liability Company Act permits
parties to an LLC agreement to eliminate fiduciary duties that members or managers would
otherwise owe to one another.”).
101
Brinckerhoff v. Enbridge Energy Co., Inc., 159 A.3d 242, 253 (Del. 2017).
102
Ross Hldg., 2014 WL 4374261, at *12 (quoting Feeley v. NHAOCG, LLC, 62 A.3d 649,
664 (Del. Ch. 2012)).
26
that an LLC agreement’s “language unambiguously eliminates the traditional
fiduciary duties” when it states: “none of the Directors . . .shall have any duties or
liabilities, including fiduciary duties, to the Company or any Member.”103 When
such language exists, the only duties imposed “are those set forth elsewhere in the
LLC Agreement.”104 Here, each of the operative LLC Agreements contains a nearly
identical express waiver of traditional fiduciary duties. 105 For example, in the vast
majority of the LLC Agreements, the relevant section reads: “The provisions of this
Agreement replace, eliminate, and otherwise supplant those duties (including
fiduciary duties) and liabilities that the Managing Member might otherwise have
with respect to each other.” 106
In the sentence immediately preceding the express waiver of traditional
fiduciary duties, the LLC Agreements provide that the managing member must act
“(i) in accordance with this Agreement and the implied covenant of good faith and
103
In re Atlas Energy Res., LLC, 2010 WL 4273122, at *12 (Del. Ch. Oct. 28, 2010);
see also Bandera Master Fund LP v. Boardwalk Pipeline P’rs, LP, 2019 WL 4927053,
at *8 (Del. Ch. Oct. 7, 2019) (“Except as expressly set forth in this Agreement, neither the
General Partner nor any other Indemnitee shall have any duties or liabilities, including
fiduciary duties, to the Partnership or any Limited Partner or Assignee.”).
104
Atlas Energy, 2010 WL 4273122, at *12.
105
Defs.’ Opening Br. in Supp. of Mot. to Dismiss (“OB”) (D.I. 17), Ex. 3, col. B.
106
See Compl., Ex. F, H, I, K, Q, R § 10.10.
27
fair dealing and (ii) in a manner that does not constitute gross negligence or fraud.”107
While these contractual standards track, to some extent, Delaware’s common law
fiduciary duties, they can and must stand on their own as contractual covenants that
expressly and exclusively govern the conduct of managers and members. 108 Parties
intending to impose a duty of loyalty through contractual standards will include
language that prohibits conflict transactions or makes clear that managers or
members may not act in “bad faith” or engage in “willful misconduct.” 109 When
parties to an LLC operating agreement elect not to include contractual standards that
track the common law duty of loyalty, that election cannot be ignored.110 The parties
to the LLC Agreements at issue here made that election and, by doing so, made clear
107
Id.
108
See, e.g., Zimmerman, 62 A.3d at 703 (limiting the role of the court to determining
whether the defendants complied with the agreement’s replacement contractual duties
rather than traditional fiduciary duties).
109
United Bhd. of Carpenters Pension Plan v. Fellner, 2015 WL 894810, at *4 (Del. Ch.
Feb. 26, 2015) (“Willful misconduct is one standard for evaluating whether a fiduciary
breached the duty of loyalty by acting in bad faith.”); Feeley, 62 A.3d at 664 (same);
Zimmerman v. Crothall, 2012 WL 707238, at *6 (Del. Ch. Mar. 5, 2012), as revised
(Mar. 27, 2012) (concluding that “self-dealing” and “willful misconduct” correspond with
the duty of loyalty).
110
Bandera, 2019 WL 4927053, at *10 (permitting a disclaimer of all traditional fiduciary
duties, including the duty of loyalty, and holding that based on the contractual language,
the defendant general partner only owed a contractual duty of good faith different than a
common law good faith standard).
28
that only claims for breach of the Covenant (already addressed), “gross negligence”
(duty of care)111 or fraud may be brought against managers or members.
The fact that a plaintiff styles a breach of a contractual standard of conduct as
a breach of fiduciary duty in his complaint, as Plaintiffs have done here, is not, alone,
fatal to the claim.112 What matters is whether Plaintiffs have well pled either gross
negligence or fraud. They have not. The phrase “gross negligence” does not appear
in the Complaint a single time, and Plaintiffs make no effort to plead that Defendants
acted without due care. Indeed, the allegations are that Defendants knew exactly
what they were doing when they manufactured a for cause termination to get at
Smith’s Vested Interests.
There is also no well pled claim of fraud. While Plaintiffs appear to argue
that the LLC Agreements’ reference to fraud as a contractual standard of conduct
somehow lessens their burden to plead fraud with particularity, 113 that argument
111
Feeley, 62 A.3d at 664 (“Gross negligence is the standard for evaluating a breach of the
duty of care.”).
112
See, e.g., CMS Inv. Hldgs., LLC v. Castle, 2015 WL 3894021, at *18 (Del. Ch. June 23,
2015) (concluding that the complaint well pleads certain breaches of contractual duties
even though such claims were pled as breaches of common law fiduciary duties);
Atlas Energy, 2010 WL 4273122, at *12 (analyzing the complaint’s common law fiduciary
duty claims under the contractual duty of good faith).
113
Pls.’ Answering Br. in Opp’n to Defs.’ Mot. to Dismiss (D.I. 23) at 38.
29
finds no support in our law. Fraud is fraud and it must be pled with particularity in
all of its forms.114 Plaintiffs made no effort to carry that burden here.
Because the LLC Agreements waive traditional fiduciary duties and supplant
them with contractual standards of conduct, and Plaintiffs fail to well plead breaches
of those contractual standards, their breach of fiduciary duty claim must be
dismissed. 115
C. Conversion
Plaintiffs allege Defendants’ seizure of the Vested Interests constitutes
conversion. Defendants counter that the claim fails because it duplicates Plaintiffs’
breach of contract claim.
Conversion, a claim sounding in tort, is “any distinct act of dominion
wrongfully exerted over the property of another, in denial of [the plaintiff’s] right,
114
Del. Ch. Ct. R. 9(b) (“In all averments of fraud or mistake, the circumstances
constituting fraud or mistake shall be stated with particularity.”).
115
Plaintiffs argue the termination letter indicates that an entity named Campus
Acquisitions Management, LLC made the decision to terminate Smith. Compl., Ex. C.
They reason that because Smith is not a member of this LLC, the LLC Agreement cannot
replace traditional fiduciary duties. Even assuming Smith is correct, if Smith is not a
member of the relevant LLC, then that LLC does not owe fiduciary duties to him. 6 Del. C.
§ 18-1101(c) (noting that, to the extent any fiduciary duties are owed, they are owed “to a
limited liability company or to another member or manager or to another person that is a
party to or is otherwise bound by a limited liability company agreement”). Thus, at least
in his role as manager of Campus Acquisitions Management, LLC, Scott owed no fiduciary
duties to Smith.
30
or inconsistent with it.” 116 “Under Delaware law, a plaintiff bringing a claim based
entirely upon a breach of the terms of a contract generally must sue in contract, and
not in tort.”117 “In order to assert a tort claim along with a contract claim, the plaintiff
must generally allege that the defendant violated an independent legal duty, apart
from the duty imposed by contract.”118
If Plaintiffs fail to prove that Defendants breached the LLC Agreements by
manufacturing a termination of Smith for cause, then they would also fail in proving
that Plaintiffs’ Vested Interests were converted. To reiterate, if Smith was
terminated for cause, the Vested Interests, by contract, were forfeited.119 If the
termination for cause was manufactured as justification to take from Plaintiffs what
was rightfully theirs, however, that would plausibly meet the elements of
conversion—there would be an “act of dominion wrongfully exerted” over the
Vested Interests “in denial of [Plaintiffs] rights.” 120
116
Kuroda, 971 A.2d at 889 (alterations in original).
117
Sheehan, 2020 WL 2838575, at *14 (quoting West, 2019 WL 2385863, at *2).
118
Kuroda, 971 A.2d at 889.
119
Compl. ¶¶ 96, 97, 116–118, 122; Kuroda, 971 A.2d at 890 (“[T]o establish a claim for
conversion apart from the contract claim, Kuroda would have to show that he had a right
to the money—other than a right pursuant to the contract—that was violated by the
defendants' exercise of dominion over the money.”).
120
Kuroda, 971 A.2d at 889.
31
While it is true the propriety of the forfeiture turns on contractual rights and
obligations, and in this sense the conversion claim overlaps with the breach of
contract claim, Plaintiffs have well pled Defendants acted without Plaintiffs’ consent
wrongfully to seize their property. 121 And, unlike Sheehan, where the court found
the conversion claim duplicative of the breach of contract claim since, in connection
with both claims, the plaintiff sought the return of the allegedly forfeited equity,122
Plaintiffs here seek a “traditional remedy for a conversion”—“the value of the
property at the time of the conversion, with interest.”123 As discussed below,
Defendants maintain that Plaintiffs may not achieve that remedy through their
breach of contract claims, and the point is well taken. If that should prove to be the
case, it surely will be the case that the conversion claim is not duplicative of the
breach of contract claim. That remains to be seen. For now, the conversion claim
survives.
D. The Illinois Wage Payment and Collection Act
Plaintiffs allege the manufactured forfeiture of the Vested Interests violates
the Wage Act. Defendants disagree and move to dismiss this statutory claim.
121
See Tansey v. Trade Show News Networks, Inc., 2001 WL 1526306, at *6 (Del. Ch.
Nov. 27, 2001) (holding that the wrongful seizure of stock constituted conversion).
122
Sheehan, 2020 WL 2838575, at *14.
123
Tansey, 2001 WL 1526306, at *8.
32
“The purpose of the Wage Act is to provide employees with a cause of action
for the timely and complete payment of earned wages or final compensation.”124
To prevail on a claim under the statute, the employee must demonstrate that “wages
or final compensation is due to him or her as an employee from an employer under
an employment contract or agreement.”125 The Wage Act’s punitive aspects—a 2%
interest penalty and the right to recover attorneys’ fees and costs—serve as
protections for employees and incentives to employers to pay their workers what
they are owed when they are owed it.126
Vested Interests As “Earned Wages” or “Final Compensation”
The Wage Act requires employers to “pay every employee all wages earned
during the semi-monthly pay period.”127 “Wages” are defined “as any compensation
owed an employee by an employer pursuant to an employment contract or agreement
between the 2 parties.” 128 Based on this definition, and as explained below, it is
124
Majmudar v. House of Spices (India), Inc., 1 N.E.3d 1207, 1210 (Ill. App. Ct. 2013).
125
Landers–Scelfo v. Corporate Office Systems, Inc., 827 N.E.2d 1051, 1067 (Ill. App. Ct.
2005).
126
The Illinois Wage Payment and Collection Act, 820 ILCS 115/14.
127
820 ILCS 115/3.
128
820 ILCS 115/2.
33
reasonable to infer that Smith’s Vested Interests were intended as compensation and
can be characterized, therefore, as earned wages.129
In Kim v. Citigroup, the court determined that certain unvested stock awards
were part of an employee’s compensation and qualified as “earned wages” where
the agreement providing such awards clearly stated the stock awards were intended
as compensation. 130 Here, the Complaint well pleads the Vested Interests were part
of Smith’s compensation package as an employee of the CA Ventures entities,
in addition to other standard salary and benefits.131 For example, Smith was awarded
certain PPU awards in CA Residential, LLC and CA Student Living Holding
Company, LLC based on his performance at the CA Ventures entities. 132 And,
looking at each LLC Agreement, it is clear that Smith and his related entities, in fact,
held the interests they purported to hold. 133
129
Compl. ¶¶ 49–50.
130
Kim v. Citigroup, Inc., 856 N.E.2d 639, 646 (Ill. App. Ct. 2006) (holding that the
“CAP stock was compensation and, therefore, governed by the Wage Act based upon the
plain language of the election agreement”); id. at 642 (“The retained amounts included
approximately $18,386 of earned wages which had been paid to Kim in the form of the
CAP stock.”)
131
Compl. ¶¶ 48–52.
132
Compl. ¶ 49.
133
See, e.g., Compl., Ex. J, at Ex. A (noting Kenilworth Ventures, LLC as maintaining a
12.16% membership interest).
34
Defendants argue that even if the Vested Interests are classified as
“compensation,” these interests are not “final compensation” as contemplated by the
Wage Act because the interests had already been paid and, therefore, were not
“owed.” “Final compensation” is defined as “wages, salaries, earned commissions,
earned bonuses, and the monetary equivalent of earned vacation and earned
holidays, and any other compensation owed the employee by the employer pursuant
to an employment contract or agreement between the 2 parties.”134 The Illinois
appeals court in Majmudar v. House of Spices (India) used the dictionary to define
“owe” to mean “under obligation to pay or repay in return for something received:
be indebted in the sum of.”135 Defendants argue that because they had already paid
Smith his Vested Interests, he was no longer “owed” those interests. Even if that
were true, and Smith contests this, if Smith is able to prove that Defendants, as
employers, wrongfully stripped him of the Vested Interests, he would then be able
to prove that the employer has denied him compensation that is due and owing.
Moreover, as mentioned, even if the Vested Interests cannot readily be classified as
“final compensation,” they are plausibly “earned wages” under the statute.136
134
820 ILCS 115/2.
135
Majmudar, 1 N.E.3d at 1211.
136
See Kim, 856 N.E.2d at 646.
35
Whether classified as “earned wages” or “final compensation,” either is sufficient to
bring the Vested Interests under the purview of the Wage Act.
The Improper “Deduction” Under the Wage Act
Plaintiffs allege that because the forfeiture of Smith’s Vested Interests
constitutes a “deduction” from final compensation, and this particular deduction did
not meet the statutory requirements, the forfeiture is a violation of the Wage Act.
The Wage Act prohibits “deductions by employers from wages or final
compensation” unless certain conditions are met.137 Those conditions are satisfied
if “such deductions are (1) required by law; (2) to the benefit of the employee;
(3) in response to a valid wage assignment or wage deduction order; or (4) made
with the express written consent of the employee, given freely at the time the
deduction is made.”138
In the context of restricted stock options, the court in Kim held that the
employers’ decision to withhold the options should be deemed a proper deduction
because it was in response “to a valid wage deduction order with plaintiff’s express
written consent, which was voluntarily given.”139 Here, there is no indication that
137
820 ILCS 115/9; Osorio v. The Tile Shop, LLC, 939 F.3d 847, 850 (7th Cir. 2019).
138
820 ILCS 115/9.
139
Kim, 856 N.E.2d at 646. I note that Osorio v. The Tile Shop, cited by Defendants, is
inapposite. 939 F.3d at 850. There, the Seventh Circuit concluded that “the term
‘deductions’ as used in the Act refers to withholdings from an employee’s gross wages, not
the formula used to calculate an employee’s gross wages.” Id. at 852. Osorio did not speak
36
any of the statutory conditions to a valid deduction have been satisfied. Defendants
do not argue that they have withheld the Vested Interests as required by law, for the
benefit of Smith, in response to a valid wage assignment order or otherwise with
Smith’s consent. Accordingly, since it is at least reasonably conceivable that the
Vested Interests can be considered “earned wages” and that forfeiture of the Vested
Interests can be classified as an improper deduction, Plaintiffs’ Wage Act claim is
well pled and survives dismissal.140
to whether withholding stock awards could be classified as deductions. That question was
answered definitively and persuasively in Kim. Kim, 856 N.E.2d at 646.
140
Defendants make two more arguments, each of which I find unpersuasive. First, they
argue that Kim supports the proposition that forfeitures of earned compensation do not
violate Illinois public policy and, therefore, the forfeiture of Smith’s shares is not
actionable. OB at 46–47; Kim, 856 N.E.2d at 646. Defendants are correct in stating that
forfeiture of earned compensation will not, per se, offend Illinois public policy, but this
misses the point. Here, Plaintiffs have well pled that the Vested Interests are “earned
wages” or “final compensation” and the Defendants, as employers, improperly deducted
from what was owed Smith through the wrongful forfeiture. This states a viable claim
under the Wage Act. Second, Defendants argue that Majmudar v. House of Spices (India),
Inc. held that when there is a dispute over termination for “cause,” the Wage Act cannot
apply. OB at 45 (citing Majmudar, 1 N.E.3d at 1212). In my view, however, Majmudar’s
holding is cabined to a dispute over “unpaid future wages” and whether “unpaid future
wages” can properly be classified as “final compensation.” Majmudar, 1 N.E.3d at 1211
(“Therefore, in these circumstances, the unpaid future wages pursuant to the terminated
contract is not final compensation and cannot be recovered under the Act.”). Thus, while
it is true the court there determined that allowing a claim for future wages to proceed under
the Wage Act when the employer and employee were still disputing whether the employee
was terminated for cause would create an “unfair burden on employers that may have a
reasonable employment dispute with separated employees,” there is no indication the court
intended to extend that ruling to cases where the employee was seeking enforcement of the
Wage Act to remedy unpaid wages already earned. Id. Indeed, a ruling to that effect would
undoubtedly encourage all employers to claim the employee was terminated for “cause” in
37
E. Defamation
The Court of Chancery is a court of “limited jurisdiction;” it maintains subject
matter jurisdiction “only when (1) the complaint states a claim for relief that is
equitable in character, (2) the complaint requests an equitable remedy when there is
no adequate remedy at law or (3) Chancery is vested with jurisdiction by statute.”141
In addition to these settled bases for subject matter jurisdiction, to avoid piecemeal
litigation, the so-called “clean-up doctrine” provides Chancery the discretion to
exercise subject matter jurisdiction over a claim at law if the plaintiff has stated
a bona fide claim over which Chancery has original subject matter jurisdiction.142
With respect to claims for defamation, however, “the Court of Chancery, in all
instances, lacks subject matter jurisdiction to adjudicate the questions of whether a
defendant made a false statement about the plaintiff and whether it did so with actual
malice.”143 The rationale for this perspective was well stated by Vice Chancellor
order to avoid the application of the Wage Act in all instances. That, of course, would
defeat the remedial purpose of the statute.
141
Perlman v. Vox Media, Inc., 2019 WL 2647520, at *4 (Del. Ch. June 27, 2019), aff’d,
2021 WL 1042985 (Del. Mar. 18, 2021); see also 10 Del. C. § 342 (“The Court of Chancery
shall not have jurisdiction to determine any matter wherein sufficient remedy may be had
by common law, or statute, before any other court or jurisdiction of this State.”).
142
Perlman, 2019 WL 2647520 at *4; Kraft v. Wisdom Trees Invs., Inc., 145 A.3d 969,
975 (Del. Ch. 2016).
143
Perlman, 2019 WL 2647520 at *1. I note that, as provided in Organovo Hldgs., Inc. v.
Dimitrov, 162 A.3d 102, 119–27 (Del. Ch. 2017), there are limited exceptions to this rule,
38
Laster in his scholarly opinion in Organovo Holdings, Inc. v. Dimitrov, and need not
be repeated at length here. 144 Suffice it to say that issues of “falsity and malice [are]
for the collective wisdom of a jury rather than [] a judge as the sole arbiter of
defamation and libel.” 145
To the extent the parties would have me exercise subject matter jurisdiction
over Plaintiffs’ defamation claim under the “clean-up” doctrine, I decline to do so.146
The “clean-up” doctrine serves the important function of avoiding, when
appropriate, piecemeal litigation, but the historical imperative that a jury, not a
judge, should evaluate whether a defendant’s statements are defamatory shines even
brighter.147 Accordingly, I will dismiss Count VII of the Complaint subject to the
specifically for trade libel and adjudicated falsehoods. Those exceptions, however, do not
apply here.
144
Organovo, 162 A.3d at 116 (explaining that the common law roots of defamation
recognized that “jurors, rather than judges, [should exercise] the power to determine
whether publications were in fact defamatory” (quoting Michael I. Meyerson,
The Neglected History of the Prior Restraint Doctrine: Rediscovering the Link Between
the First Amendment and the Separation of Powers, 34 Ind. L. Rev. 295, 306 (2001))).
145
Perlman, 2019 WL 2647520, at *5.
146
Nichols v. Lewis, 2007 WL 1584622, at *1 (Del. Ch. May 24, 2007) (discussing this
court’s discretionary powers under the “clean-up” doctrine).
147
See Gannett Co., Inc. v. Kanaga, 750 A.2d 1174, 1180, 1183 (Del. 2000) (concluding
that a “claim of defamation was correctly submitted to the jury” because the “issue of
whether the article [in question] was fact or opinion posed a jury question”); Midland Food
Services v. Castle Hills Hldgs., 1999 WL 669324, at *3 (Del. Ch.1999), aff’d, 782 A.2d
265 (Del. 2001) (declining to exercise discretionary jurisdiction where “[n]either efficiency
or fairness would be enhanced”).
39
Plaintiffs’ right to elect under 10 Del. C. § 1902 to have the claim transferred to the
Superior Court of Delaware.
F. The Claims Against DiBiase
When a plaintiff asserts claims against multiple defendants, at a minimum, his
complaint must contain “a short and plain statement of the claim showing that the
pleader is entitled to relief” as to each defendant.148 To plead a viable claim of
breach of fiduciary duty, for example, Plaintiffs must allege “sufficiently detailed
acts of wrongdoing to place [each] defendant on notice of what [that defendant]
purportedly did wrong.” 149
The Complaint names DiBiase as a defendant in Counts I–VI. 150 The only
allegation against DiBiase is that, in his role as manager of CAV Global, LLC, he
was controlled by Scott and could not “make any ‘major decisions’ without the
consent of Defendant Scott.”151 Alleging that a manager is “controlled” by a
wrongdoer is a far cry from alleging that the manager, himself, has engaged in
148
Del. Ct. Ch. R. 8(a).
149
In re Viacom Inc. S’holders Litig., 2020 WL 7711128, at *25 (Del. Ch. Dec. 29, 2020)
(quoting Gantler v. Stephens, 965 A.2d 695, 709 (Del. 2009)).
150
Compl. ¶ 19(l).
151
Id.40
wrongdoing.152 Here, the Complaint fails to well plead a single allegation that
DiBiase participated in Smith’s termination or otherwise had a role in Scott’s alleged
scheme to strip Smith of his Vested Interests. Because Plaintiffs have failed to allege
DiBiase engaged in “actionable wrongdoing,” all claims against him must be
dismissed. 153
G. The “Buyout” Remedy
As noted, among Plaintiffs’ prayers for relief is a request that the Court order
Defendants to pay Plaintiffs the value of the purportedly forfeited Vested Interests.
Defendants maintain that this relief does not exist in the Court’s remedial toolbox.
According to Defendants, in the event Plaintiffs prevail on their claims at trial, the
only remedy they can achieve is reinstatement of the Vested Interests. While I
disagree with this proposition as relates to the conversion claim for reasons already
explained,154 the proposition may hold true with respect to the contract-related
claims (Counts I–III). Even so, in my view, while it is not certain that a “buyout”
152
Viacom, 2020 WL 7711128, at *25 (dismissing claims against an executive
notwithstanding the existence of a controller and the application of entire fairness because
the complaint failed to allege wrongdoing as against that executive); see, e.g., In re
Cornerstone Therapeutics, Inc. S’holder Litig., 115 A.3d 1173, 1182–83 (Del. 2015)
(noting that, even when a controller exists and entire fairness applies to the controller’s
action, the presumption of the business judgment rule still applies for each individual
fiduciary unless specific wrongdoing is alleged as against that specific fiduciary).
153
Viacom, 2020 WL 7711128, at *25.
154
Tansey, 2001 WL 1526306, at *8.
41
fits within the realm of expectation damages, it is simply premature to make that call
on a pleading stage motion.155
“Contract damages are designed to place the injured party in an action for
breach of contract in the same place as he would have been if the contract had been
performed. Such damages should not act as a windfall.”156 “Historically, damages
for breach of contract have been limited to the non-breaching parties’ expectation
interest.” 157 “Expectation damages are measured by the losses caused and gains
prevented by defendant’s breach.”158
In support of their argument that Plaintiffs have no right to a forced buyout,
Defendants cite Blaustein v. Lord Baltimore Capital Corp., where our Supreme
Court held that a minority stockholder did not possess an inherent right to be bought
155
I recognize that Count VI (the Wage Act claim) has likewise survived the Motion, but
that only provides a further reason why a “buyout” remedy cannot be dismissed at this
stage. Even if a “buyout” is not the expectation of the parties because of the forfeiture
language in the LLC Agreements, the grant of a damages award equaling the fair value of
Smith’s shares could very well be available as a remedy under the Wage Act. Zabinsky v.
Gelber Gp., Inc., 807 N.E.2d 666, 671 (Ill. App. Ct. 2004) (“The Act provides an employee
with remedies more expansive than a common law breach of contract action when it uses
the words ‘employment contract or agreement.’”).
156
Paul v. Deloitte & Touche, LLP, 974 A.2d 140, 146 (Del. 2009) (internal quotations
omitted).
157
Pressman, 679 A.2d at 445.
158
Paul, 974 A.2d at 146–47; see also E. Allan Farnsworth, Legal Remedies for Breach of
Contract, 70 Colum. L. Rev. 1145, 1147 (1970) (“Our system, then, is not directed at
compulsion of promisors to prevent breach; rather, it is aimed at relief to promisees to
redress breach.”).
42
out because, “[u]nder common law, the directors of a closely held corporation have
no general fiduciary duty to repurchase the stock of a minority stockholder.” 159 Here
again, Defendants’ cited authority misses the point. The question is not whether the
Defendants have a fiduciary duty to repurchase Smith’s Vested Interests, but
whether a buyout should be available as a potential remedy for breach of contract.
Defendants next argue that the Group 1 and Group 2 Defendants’ LLC
Agreements expressly provide for what happens in the event of forfeiture. In the
case of all Group 1 and 2 Defendants (except for CA Industrial, LLC and CA Design
Build, LLC), if Smith was fired for “cause,” he forfeits his entire membership
interests.160 As for CA Industrial and CA Design Build, their LLC Agreements
provide only for the return of Smith’s capital contribution and nothing more.161
While Defendants correctly describe the state of the forfeiture provisions in each
159
Blaustein v. Lord Baltimore Cap. Corp., 84 A.3d 954, 958 (Del. 2014); see also Nixon
v. Blackwell, 626 A.2d 1366, 1380 (Del. 1993) (“The tools of good corporate practice are
designed to give a purchasing minority stockholder the opportunity to bargain for
protection before parting with consideration. It would do violence to normal corporate
practice and our corporation law to fashion an ad hoc ruling which would result in a court-
imposed stockholder buy-out for which the parties had not contracted.”).
160
Compl., Ex. F (CAR Team Holdings) § 5.2(b), Ex. H (CA Student Living Team
Holdings) § 5.2(b), Ex. I (CA Student Living Team LLC), § 5.2(b), Ex. K
(CASL Investment Management) § 5.2(c), Ex. N (CAV Europe Holding) § 5.4(c), Ex. Q
(CA Senior Living Investment Management) § 5.2(c), Ex. R (CA Residential Investment
Management) § 5.2(c).
161
Compl., Ex. P (CA Design Build) §§ 10.4, 10.8, Ex. O (CA Industrial) §§ 10.5, 10.8.
43
LLC Agreement, these provisions do not speak to what happens in the event that
certain membership interests are wrongfully forfeited. In that circumstance, if the
Court finds the conduct of Defendants to be in breach of contract, the Court is then
obliged to put Plaintiffs in the position they would have occupied but for the breach.
That position might be, as Defendants suggest, the return of Smith’s Vested
Interests. But it is also reasonably conceivable that a buyout will better serve this
remedial requisite. This determination should be made on a more developed
record.162 Indeed, “what is important at the pleadings stage is that [Plaintiffs] has
given the [Defendants] sufficient notice as to the damages [they are] claiming.”163
And, Plaintiffs’ prayer for relief in pursuit of a buyout remedy indisputably does
just that.
H. Punitive Damages
The Complaint seeks an award of punitive damages in both Count V
(Conversion) and Count VII (Defamation). The defamation claim will be dismissed
for want of subject matter jurisdiction on the condition that Plaintiffs may pursue the
162
Whittington v. Dragon Gp. L.L.C., 2011 WL 1457455, at *15 (Del. Ch. Apr. 15, 2011);
Domain Assocs., L.L.C. v. Shah, 2018 WL 3853531, at *14 (Del. Ch. Aug. 13, 2018);
Pharm. Prod. Dev., Inc. v. TVM Life Sci. Ventures VI, L.P., 2011 WL 549163, at *7
(Del. Ch. Feb. 16, 2011) (holding that, on a motion to dismiss, the court could not
indisputably classify damages as general versus special).
163
Pharm. Prod. Dev., 2011 WL 549163, at *7.
44
claim in a court that actually can award punitive damages. As for the conversion
claim, this court of equity has no authority to grant punitive relief. 164
III. CONCLUSION
For the foregoing reasons, Defendants’ Motion to Dismiss Counts IV and
VII,165 as well as all claims against DiBiase and all prayers for punitive damages, is
GRANTED. Defendants’ Motion to Dismiss Counts III, V and VI, as well as the
“fair value” remedy sought in Counts I–III, V and VI is DENIED.
IT IS SO ORDERED.
164
Touch of Italy Salumeria & Pasticceria, LLC v. Bascio, 2014 WL 108895, at *8
(Del. Ch. Jan. 13, 2014) (dismissing punitive damages as a remedy because “this Court has
only that jurisdiction enjoyed by the English Court of Chancery in 1776, as supplemented
by the General Assembly, and neither source permits the Court to award exemplary or
punitive damages”); Beals v. Washington Int’l, Inc., 386 A.2d 1156, 1159 (Del. Ch. 1978)
(“Traditionally and historically the Court of Chancery as the Equity Court is a court of
conscience and will permit only what is just and right with no element of vengeance and
therefore will not enforce penalties or forfeitures.”).
165
Plaintiffs shall file their election to transfer Count VII to the Superior Court within sixty
(60) days of this Opinion and Order. 10 Del. C. § 1902.
45