Standard General L.P. v. Dov Charney ( 2017 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
STANDARD GENERAL L.P., )
STANDARD GENERAL MASTER )
FUND L.P., P STANDARD )
GENERAL LTD., )
)
Plaintiffs, )
)
v. ) C.A. No. 11287-CB
)
DOV CHARNEY, )
)
Defendant. )
MEMORANDUM OPINION
Date Submitted: September 19, 2017
Date Decided: December 19, 2017
Raymond J. DiCamillo & Matthew D. Perri, RICHARDS, LAYTON & FINGER,
P.A., Wilmington, Delaware; Shannon Rose Selden, Derek Wikstrom & Justin
Horton, DEBEVOISE & PLIMPTON LLP, New York, New York; Attorneys for
Plaintiffs.
Mark M. Billion, BILLION LAW, Wilmington, Delaware; Attorney for Defendant.
BOUCHARD, C.
In June 2014, the board of directors of American Apparel, Inc. suspended its
founder, Dov Charney, from his position as Chief Executive Officer for alleged
misconduct. Hoping to take control of the Company, Charney teamed up with
Standard General, L.P., an investment firm. Charney borrowed approximately $20
million from Standard General to increase his holdings to close to 43% of the
Company’s outstanding shares in contemplation of running a proxy contest to
replace the board that suspended him.
In July 2014, after the Company fought back, Charney, Standard General, and
American Apparel entered into a “Standstill Agreement.” The Standstill Agreement
reconstituted the board of American Apparel, established a process for a committee
of the new board called the Suitability Committee to investigate Charney’s alleged
misconduct and decide whether he would return as CEO, and documented Standard
General’s commitment to invest up to $25 million in the Company. Charney and
Standard General entered into a series of other agreements that, together with the
Standstill Agreement, define the terms of their relationship (the “Agreements”).
In December 2014, the Suitability Committee voted against reinstating
Charney, and its new board terminated his employment for cause. Over the course
of the next year, the parties became embroiled in litigation in multiple forums and
American Apparel filed for bankruptcy. Standard General filed this action in July
1
2015, a few weeks after Charney filed suit in California asserting that the
Agreements were invalid and unenforceable.
Before the Court is Standard General’s motion for judgment on the pleadings
for (1) a declaration that the Agreements were valid and enforceable when entered
into, and (2) an award of damages for amounts due under the loan it made to
Charney. In defending this action, Charney made a deliberate choice not to assert
any counterclaims but has asserted a kitchen sink of eleven affirmative defenses.
Charney’s primary defense is that Standard General made certain oral promises to
him that were false, which fraudulently induced him to enter into the Agreements.
For the reasons explained below, I conclude that Charney could not have
reasonably relied on any of these alleged false promises because they directly
conflict with the terms of the eight written Agreements he signed, and that his other
affirmative defenses fail as a matter of law and undisputed fact. Accordingly,
Standard General is entitled to entry of judgment on the pleadings.
2
I. BACKGROUND
Unless noted otherwise, the facts recited in this opinion are based on the
allegations in the Verified Complaint that are admitted in defendant’s answer,1 and
documents incorporated therein.2 Any additional facts are either not subject to
reasonable dispute or subject to judicial notice.3
A. The Parties
Plaintiff Standard General L.P. is an investment firm. Plaintiffs Standard
General Master Fund L.P. and P Standard General Ltd. are two of its private
investment vehicles that each hold one of the two notes at issue in this case. I refer
to these three entities together in this decision as “Standard General.”
Defendant Dov Charney is the founder and former Chief Executive Officer of
American Apparel Inc. (“American Apparel” or “the Company”), a Delaware
corporation. American Apparel is a clothing manufacturer, retailer, and wholesaler.
1
See In re: GR BURGR, LLC, 2017 WL 3669511, at *5 (Del. Ch. Aug. 25, 2017) (under
Court of Chancery Rule 12(c), courts view claims “in the light most favorable to the
nonmoving party” and “facts admitted in the Answer are deemed true”). In responding to
the allegations in Standard General’s complaint, Charney misnumbered his responses. The
citations to his answer attempt to correct for this error.
2
See Winshall v. Viacom Int’l, Inc., 76 A.3d 808, 818 (Del. 2013) (citations omitted)
(“plaintiff may not reference certain documents outside the complaint and at the same time
prevent the court from considering those documents’ actual terms” in connection with a
motion to dismiss).
3
Among the documents of which I take judicial notice are filings from related actions,
including a complaint Charney filed in California state court, which is attached as Exhibit
H to the complaint in this action. See Compl., Dov Charney v. Standard General L.P., BC
586119 (Cal. Sup. Ct. June 24, 2015) (hereafter, “CA Compl.”).
3
B. Charney Enters into an Agreement with Standard General After
Being Suspended from American Apparel
In the late 1980s, Charney founded American Apparel from his college dorm
room. He served as the CEO from its inception until his termination in June 2014.4
American Apparel initially grew rapidly but ran into financial difficulties in 2009,
which continued through 2014. In March 2014, American Apparel held a secondary
equity offering to raise capital, which diluted Charney’s stake in the Company from
approximately 43% to 27%.5
On June 18, 2014, the American Apparel board of directors suspended
Charney from his position as CEO immediately after the Company’s 2014 annual
stockholders’ meeting due to concerns that he had “allegedly violated various
company policies” and breached his fiduciary duties in his management of the
Company.6 Charney maintains that those concerns were fabricated.
After his termination as CEO, Charney entered into discussions with a number
of investors and sought funding to increase his stake in American Apparel in an
effort to run a proxy contest to challenge the incumbent board that suspended him
and take control of the Company.7 One of the firms Charney spoke with about a
4
Compl. ¶¶ 2, 18; Ans. ¶ 17.
5
Compl. ¶ 29; Ans. ¶ 113.
6
Ans. ¶¶ 7, 47.
7
Ans. ¶¶ 4, 116.
4
potential investment was Standard General, which had previously approached both
Charney and American Apparel about investing in the Company.8
On June 23, 2014, Standard General made a presentation to Charney and sent
him a term sheet contemplating the purchase of approximately $20 million of
American Apparel shares. According to Charney, an introductory e-mail from
Standard General stated that the loan was being offered “as part of [Charney’s] effort
to gain control of the company.”9 Charney forwarded the term sheet to a former
Chief Financial Officer of American Apparel to review.10
Over the next two days, Charney, Standard General, and their respective
counsel began to negotiate a transaction. During these negotiations, Charney agreed
to a voting arrangement in which the parties would share voting control of both his
existing and any newly purchased American Apparel shares, subject to certain
exceptions.11 Charney also told Standard General he was fit to return to control of
American Apparel and that the Company’s allegations against him were meritless.12
On June 25, after working through the night on its terms, Charney and Standard
8
Compl. ¶ 27; Ans. ¶¶ 18, 111.
9
Ans. ¶ 19.
10
Ans. ¶ 21.
11
Compl. ¶ 32; Ans. ¶ 116.
12
Compl. ¶¶ 32-33; Ans. ¶¶ 20, 116-17.
5
General signed a letter agreement (the “Letter Agreement”).13 As discussed later,
Charney alleges that Standard General made a number of oral misrepresentations to
him that induced him to enter into the Letter Agreement, as well as other agreements
with Standard General that he entered into over the next two months.14
C. Charney Increases His Stake in American Apparel After Entering
into the Letter Agreement with Standard General
The Letter Agreement contemplates that Standard General would attempt to
purchase, on Charney’s behalf, at least 10% of the outstanding shares of American
Apparel using funds that Standard General would loan to Charney, with the newly
acquired shares serving as collateral for the loan along with Charney’s existing
shares.15 The Letter Agreement also describes some of the terms of other agreements
Standard General and Charney would enter into later as part of the transaction if
Standard General was able to purchase the requisite number of shares, including:
 A warrant agreement “in form and substance satisfactory to” Standard
General providing for the issuance of warrants to Standard General that
“expire July 15, 2017 and may be cash settled” (the “Warrant
Agreement”);16 and
 A cooperation agreement that would be “in form and substance reasonably
satisfactory to” Standard General and require that all of Charney’s
American Apparel shares be “voted only as agreed among [Standard
General] and Charney” but for two exceptions (the “Cooperation
13
Compl. ¶ 33; Ans. ¶¶ 21-22.
14
See infra Section III.C.
15
Compl. Ex. A (Letter Agreement) ¶ 1.
16
Id. ¶ 2.
6
Agreement”). Charney would be permitted to vote approximately 47.2
million shares that he already held “(i) in favor of his election as director
and (ii) pursuant to the Investment Voting Agreement” that Charney had
with Lion Capital.17
Lion Capital, referred to above, had provided an approximately $10 million loan to
American Apparel and had a voting agreement with Charney.
Upon signing the Letter Agreement, Standard General began purchasing
American Apparel common stock on the market. Standard General purchased
approximately 16% of American Apparel’s outstanding shares over a two-day period
for almost $20 million.18 On June 27, 2014, Standard General loaned Charney the
aggregate principal amount of $19,556,256 so that he could purchase the new block
of shares in accordance with the Letter Agreement.19
D. American Apparel Adopts a Shareholder Rights Plan in Response
to Charney’s Increased Holdings
On June 27, 2014, Charney filed a Schedule 13D with the Securities and
Exchange Commission announcing his increased stake in the Company.20 The next
day, American Apparel adopted a shareholder rights plan that “purported to
17
Id. ¶ 3.
18
Compl. ¶ 36; Ans. ¶¶ 24, 28.
19
Compl. ¶ 36; Ans. ¶¶ 24, 28.
20
Compl. ¶ 50; Ans. ¶ 25.
7
retroactively block consummation of the transaction contemplated by the Letter
Agreement.”21
In late June, Lion Capital called an event of default on its $10 million loan to
the Company, which had the potential to trigger a cross-default on the Company’s
credit facility according to Standard General.22 Charney alleges that Standard
General’s CEO told him during this period that Standard General was being
pressured by its investors, who were unhappy with its arrangement with Charney.23
In the context of these events, Standard General proposed to Charney that they
negotiate a settlement with American Apparel in lieu of running a proxy contest.24
Charney alleges he was uncomfortable with the idea of settling and “felt trapped,”
but he nevertheless “committed himself to a course of action where he was hitched
to Standard General’s star.”25
E. The Cooperation and Standstill Agreements
On July 9, 2014, Charney and Standard General entered into two agreements.
The first is the Cooperation Agreement, which was contemplated under the Letter
Agreement. It governs the voting of Charney’s original and newly acquired
21
Compl. ¶¶ 50-52; cf. Ans. ¶¶ 134-36.
22
Compl. ¶ 52.
23
Ans. ¶¶ 29-31.
24
Ans. ¶ 32.
25
Ans. ¶ 30.
8
American Apparel shares. The second is a Nomination, Standstill, and Support
Agreement (the “Standstill Agreement”). The Standstill Agreement was an
agreement among American Apparel, Charney, and Standard General.
The Standstill Agreement reflects the parties’ attempt to reach a settlement.
It provides for a reconstitution of the American Apparel board by requiring that most
of the then-current directors (including Charney) resign and by having the two
continuing directors appoint five new directors to the board.26 Three of the new
directors would be designated by Standard General and two would be designated by
the mutual agreement of Standard General and American Apparel. Charney was not
permitted to be reappointed. The Standstill Agreement further provides that the
newly-constituted board of American Apparel would establish a committee (the
“Suitability Committee”) charged with investigating Charney’s alleged misconduct
and determining whether he should be “reinstated as CEO of the Company or serve
as an officer or employee.”27
The Standstill Agreement generally prohibits Charney and Standard General
from attempting to impact the corporate governance of American Apparel, including
by running a proxy contest or consent solicitation against the board, until the
26
Compl. Ex. G (Standstill Agreement) §§ 1(a)-(c).
27
Id. §§ 5(a)-(b).
9
completion of the Company’s 2015 annual meeting.28 It also calls for Standard
General to “timely provide” up to $25 million to buy out Lion Capital’s loan and
“for any other purposes as the Board, following the Director Appointments, may
determine are appropriate.”29
On July 16, 2014, Standard General purchased Lion Capital’s loan for
approximately $9.5 million.30 It is not disputed that Standard General invested an
additional $15 million in American Apparel, although Charney asserts that this
additional investment should have been made a few months earlier than it was.31
After the Standstill Agreement was executed, Charney and other American
Apparel board members resigned, and five new members were appointed to the
board of American Apparel in accordance with its terms.32
F. Charney and Standard General Enter into Additional Agreements
Documenting the Terms of the Loan and the Warrant
On August 25, 2014, Standard General and Charney executed the remaining
five agreements contemplated by the Letter Agreement. They included: two Notes
28
Id. §§ 3(a)-(b).
29
Id. § 2(a).
30
Hearing Tr. 86-87 (Sept. 19, 2017) (Dkt. 200).
31
Standard General contends it made an additional $15 million investment “into one of
American Apparel’s United Kingdom subsidiaries” in March 2015. Pls.’ Opening Br. 55
(Dkt. 157). Charney asserts that Standard General “failed to invest $15 million in
American Apparel for almost a year” (Ans. ¶ 69) and that the investment should have
occurred by December 2014. Hearing Tr. 71 (Sept. 19, 2017) (Dkt. 200).
32
See Compl. Ex. G (Standstill Agreement) §§ 1(a)-(b); Ans. ¶¶ 37, 57.
10
and a related Credit Agreement setting forth the terms of Standard General’s loan to
Charney; a Pledge Agreement documenting the allocation of Charney’s previously-
owned and newly-purchased American Apparel shares as collateral for the loan; and
a Warrant Agreement permitting Standard General to purchase a portion of the
jointly-controlled American Apparel shares at a designated price.33 I refer hereafter
to the Notes, the Credit Agreement, and the Pledge Agreement as the “Loan
Agreements.”
The Notes, which are essentially identical other than their principal amount
and the identity of the lending entity,34 provide that the principal and accrued interest
of the loan are due on June 26, 2019, except in the event of a default.35
G. Suitability Committee Does Not Make a Clearance Determination
In accordance with the Standstill Agreement, the American Apparel board
appointed three directors to the Suitability Committee to conduct the contemplated
investigation of Charney’s conduct.36 The Standstill Agreement provides that the
Suitability Committee would “use its reasonable best efforts to conclude the
33
Compl. Ex. B (Credit Agreement); Compl. Ex. C (Notes); Compl. Ex. D (Pledge
Agreement); Compl. Ex. E (Warrant Agreement).
34
The principal amount of one Note is $14,960,662.14, which is owed to Standard General
Master Fund L.P. The principal amount of the second Note is $4,595,593.86, which is
owed to P Standard General Ltd. The combined principal amount of the Notes is
$19,556,256. Compl. Ex. C (Notes) § 1.
35
Id. §§ 1, 4, 11.
36
See Compl. ¶ 60; Ans. ¶ 70.
11
Investigation as promptly as practicable but no later than 30 days after the date” of
the agreement, “subject to any extensions that the Suitability Committee, by majority
vote, determines in good faith are reasonably required to satisfy its members’
fiduciary duties.”37 The investigation ultimately concluded in December 2014.38
In the latter part of 2014, Charney become disillusioned with the Suitability
Committee’s investigation and Standard General’s role in American Apparel.39
Charney viewed the management team in place as ill-equipped and thought Standard
General was “dominating and entrenching itself in the company” and had deceived
him by making representations it had no intention of keeping.40 Charney alleges that
the investigation was flawed and that Standard General rigged the investigation
against him,41 or failed to rig it in his favor.42 Charney also alleges that he was not
afforded a preliminary hearing or provided with access to his e-mail account as
required under the Standstill Agreement.43
37
Compl. Ex. G (Standstill Agreement) § 5(b).
38
Compl. ¶ 60; Ans. ¶¶ 102, 144.
39
Compl. ¶ 62; Ans. ¶ 146.
40
Ans. ¶¶ 11-12, 146.
41
Ans. ¶¶ 11, 41, 48, 56, 70.
42
Ans. ¶¶ 33-34, 36, 55.
43
Ans. ¶ 77.
12
In September 2014, Charney allegedly offered to buy out Standard General’s
interests in American Apparel.44 In or around November 2014, Charney allegedly
approached American Apparel with an indication of interest from a private equity
firm interested in buying the Company.45 Standard General and American Apparel
did not pursue these or other overtures according to Charney.46
In December 2014, after it completed its investigation, the Suitability
Committee voted against reinstating Charney as CEO. On December 15, 2014, the
American Apparel board voted to terminate Charney’s employment for cause.47
Although it has no bearing on Standard General’s motion for judgment on the
pleadings, the parties disagree about whether Charney was properly terminated.48
H. Litigation Ensues and American Apparel Files for Bankruptcy
On May 15, 2015, American Apparel filed an action against Charney in this
Court asserting that he had breached the Standstill Agreement by, among other
things, seeking the removal of members of the Company’s board.49 On June 1, 2015,
this Court entered a temporary restraining order against Charney enjoining him from,
44
Ans. ¶¶ 10, 83.
45
Ans. ¶¶ 11, 84.
46
Ans. ¶¶ 82-86.
47
Compl. ¶¶ 66-67; Ans. ¶ 102.
48
Compl. ¶¶ 66-67 (listing grounds for termination); Ans. ¶ 146 (maintaining the
Investigation “was a sham”).
49
Compl., Am. Apparel, Inc. v. Charney, C.A. No. 11033-CB (June 4, 2015) (Dkt. 1).
13
among other things, “directly or indirectly seeking the removal of any member of
American Apparel’s board of directors.”50
On June 24, 2015, Charney filed a complaint in California state court against
Standard General, American Apparel, and its directors, seeking, among other things,
to invalidate the Agreements (the “California action”).51 On July 11, 2015, Standard
General filed this action asserting four claims for relief, which are described below.
On October 5, 2015, American Apparel filed a Chapter 11 petition in the
United States Bankruptcy Court for the District of Delaware.52 Charney appeared in
the bankruptcy proceeding and objected to American Apparel’s reorganization plan,
but his objection was overruled.53 In the confirmation order, Chief Judge Shannon
found that “all documents and agreements necessary to implement the Plan . . . have
been negotiated in good faith and at arm’s-length with the [various committees],
Standard General, [and other relevant parties],” that American Apparel “exercised
reasonable business judgment in determining which agreements to enter into,” and
50
Temporary Restraining Order, C.A. No. 11033-CB (June 1, 2015) (Dkt. 21).
51
CA Compl. ¶¶ 142, 171, 190(f), & Prayer for Relief ¶¶ 5, 7(f).
52
Voluntary Pet., In re Am. Apparel, Inc., Case No. 15-12055 (BLS) (Bankr. D. Del. Oct.
5, 2015).
53
In re Am. Apparel, Inc., C.A. No. 15-12055 at 4-6, 28-29 (BLS) (Bankr. D. Del. Jan. 27,
2016) (OPINION).
14
that the issuance of “reorganized equity interests was an essential element of the Plan
and is in the best interests of [American Apparel], [its] Estates and their creditors.”54
On December 22, 2015, the California Superior Court granted Standard
General’s motion to stay the California action pending the outcome of this case.
Discussing the Delaware exclusive forum selection clauses in the Standstill,
Cooperation, and Warrant Agreements, the California Superior Court held that:
The parties clearly intended for disputes that relate to the Agreements
to be adjudicated in Delaware and under Delaware law . . . . Delaware
is capable of handling the litigation, and is currently doing so. It would
not only be contrary to the Agreements, but also unduly inefficient and
burdensome on the courts and the parties to allow the case to proceed
on a different schedule in California.55
II. PROCEDURAL POSTURE
Standard General’s complaint in this action asserts four claims. Count I seeks
a declaratory judgment that the Agreements are valid and enforceable against
Charney and that an event of default has occurred under the Notes, making them due
and payable. Count II seeks damages and other relief for Charney’s alleged breaches
of various provisions of the Agreements. Count III seeks an injunction to enjoin
Charney from taking certain actions to impair the Notes’ collateral on the theory that
Charney breached the implied covenant of good faith and fair dealing inherent in the
54
Id. at 24-25.
55
Dov Charney v. Standard General, Case No. BC586119 10-11 (Cal. Sup. Ct. Dec. 22,
2015) (ORDER).
15
Agreements. Count IV seeks damages and injunctive relief for impairment of the
collateral for the Notes.
Charney was represented by counsel at the outset of this case but proceeded
pro se for much of this litigation after his initial counsel sought and was granted
leave to withdraw in November 2015.56 On April 29, 2016, the Court denied
Charney’s motion to dismiss this action under Court of Chancery Rules 12(b)(3) and
12(b)(6), noting, among other things, that courts “in Delaware will enforce valid
forum selection clauses.”57
On June 22, 2016, Charney filed his answer, which asserts eleven putative
“affirmative defenses”: fraudulent inducement, promissory estoppel, breach of
fiduciary duty, aiding and abetting, coercion, duress, breach of contract, failure to
mitigate, unclean hands, unconscionability, and breach of the implied covenant of
good faith and fair dealing.58 Charney consistently has maintained throughout this
litigation that he is advancing these issues solely as affirmative defenses and that he
deliberately chose not to file any counterclaims in this action because he wishes to
press his putative claims in the California action.59 The Court has cautioned Charney
56
Order Granting Mot. to Withdraw (Nov. 3, 2015) (Dkt. 44).
57
Order Denying Mot. to Dismiss ¶ 7 (citation omitted) (Apr. 29, 2016) (Dkt. 78).
58
Ans. ¶¶ 15-98.
59
Status and Sched. Conf. 12-17 (Sept. 23, 2016) (Dkt. 101) (“I’m not making
counterclaims. I’m preserving my counterclaims for my California action.”); Hearing Tr.
7 (Jan. 19, 2017) (Dkt. 154) (Charney explaining that his “counterclaims will be resolved”
16
on more than one occasion that his decision to proceed in this manner could impact
his legal rights and that he would be well-advised to seek the assistance of counsel.60
On February 28, 2017, Standard General filed the present motion seeking
entry of a “judgment confirming that the written Agreements between the parties are
valid and enforceable, that the loan Standard General made to Charney is due,
payable, and owing, and . . . judgment at law in the amount of the loan, plus interest
and attorneys’ fees as provided by the Agreement.”61 On April 27, 2017, Charney
filed his opposition papers. Although Charney was still pro se at the time, the
opposition papers appear to have been prepared with the assistance of legal counsel
as evidenced by their reference to pertinent legal authorities and the inclusion of an
analysis from his bankruptcy counsel as an exhibit to his opposition papers.62
On July 10, 2017, new counsel entered an appearance to represent Charney in
this action.63 On July 11, 2017, the Court rescheduled the oral argument on Standard
in the California litigation); Order Implementing Special Master’s Report ¶ 4 (Jan. 11,
2017) (Dkt. 145) (noting how Charney brought “a series of what are styled as affirmative
defenses” and that Charney “represented that he is not asserting any counterclaims”).
60
See, e.g., Status and Sched. Conf. 15-16 (Sept. 23, 2016) (noting in response to Charney’s
argument he was not asserting claims that “you’ve been throwing out a lot of things that
impact your legal rights . . . and you move at your own peril when you represent yourself”);
Hearing Tr. 13-14 (Jan. 19, 2017) (Dkt. 154) (advising Charney that he had twice addressed
“saving [his] counterclaims for California” and suggesting that Charney “seek some legal
guidance on those issues” as a Delaware decision could impact his California case).
61
Pls.’ Opening Br. 56.
62
Def.’s Ans. Br. & Ex. 2 (Dkts. 176, 178).
63
Entry of Appearance (Dkt. 182).
17
General’s motion for judgment on the pleadings from July 18 to September 19 to
afford Charney’s new counsel additional time to prepare for the hearing and granted
Charney leave to file a supplemental opposition brief by August 18.64 Charney
elected not to do so. Oral argument proceeded on September 19, 2017.
Although Standard General contends its motion covers all four of its claims,
it made no genuine effort in its briefs or at oral argument to explain a basis for entry
of judgment in its favor with respect to Counts III and IV. Those counts appear moot
in any event because the collateral for the Notes (Charney’s shares of American
Apparel) was wiped out by virtue of American Apparel’s bankruptcy
reorganization.65 Accordingly, this decision considers whether judgment in
Standard General’s favor is warranted only under Counts I and II of its complaint.
III. ANALYSIS
In Count I of its complaint, Standard General seeks two declarations: (1) that
the Agreements are valid and enforceable and (2) that the loan it made to Charney is
due, payable, and owing. In Count II, Standard General seeks a monetary judgment
for the amounts due under the loan. The resolution of Count II necessarily overlaps
with the declaratory relief Standard General seeks.
64
Order Amending Br. Sched. (July 12, 2017) (Dkt. 184).
65
Hearing Tr. 27-28 (Sept. 19, 2017) (Dkt. 200).
18
In his answer, Charney asserts eleven affirmative defenses, which are recited
above.66 Two of these putative defenses are irrelevant to the resolution of either
Count I or Count II and can be addressed in short order: breach of fiduciary duty
and aiding and abetting.
Charney asserts that Standard General breached fiduciary duties that it owed
to him and aided and abetted a breach of fiduciary duties by American Apparel.67 As
an initial matter, Charney made no effort to explain in his opposition papers the basis
for his assertion that Standard General—his contractual counterparty—owed a
fiduciary duty to him,68 or how Standard General could have aided and abetted
American Apparel—as opposed to its directors—in breaching a fiduciary duty.69
66
Ans. ¶¶ 15-98.
67
Ans. ¶¶ 51-59, 60-64.
68
The facts presented here do not resemble those “special” circumstances where Delaware
courts have recognized a fiduciary relationship, and instead reflect an arm’s length-
commercial relationship where courts have consistently declined to find a fiduciary
relationship. See Forsythe v. ESC Fund Mgmt. Co. (U.S.), 2007 WL 2982247, at *10 (Del.
Ch. Oct. 9, 2007) (holding that a fiduciary relationship requires a special trust, and “a
straightforward, arm’s-length commercial relationship arising from contract does not give
rise to fiduciary duties”); Metro Ambulance, Inc. v. E. Med. Billing, Inc., 1995 WL 409015,
at *3 (Del. Ch. July 5, 1995) (discussing how Delaware is wary of recognizing a “special”
nature in relationships, and has only recognized it in limited circumstances like “general
partners; administrators or executors; guardians; and, in special circumstances, joint
venturers or principles and their agents”); McMahon v. New Castle Assoc., 532 A.2d 601,
604 (Del. Ch. 1987) (Allen, C.) (“[A]ttention must be paid to the word ‘special’ lest the
statement be thought to describe too broadly chancery’s concerns.”).
69
It is well established that corporations themselves do not owe fiduciary duties. See, e.g.,
Buttonwood Tree Value Partners, L.P. v. R.L Polk & Co., Inc., 2014 WL 3954987, at *5
(Del. Ch. Aug. 7, 2014) (“corporations do not owe fiduciary duties to their stockholders”);
In re Dataproducts Corp. S’holders Litig., 1991 WL 165301, at *6 (Del. Ch. Aug. 22,
19
Putting those issues aside, Charney has not offered any authority, and I am aware of
none, to suggest that a breach of fiduciary duty or the aiding and abetting of a breach
of fiduciary duty could form the basis of an affirmative defense as opposed to a claim
or counterclaim. As such, these putative defenses fail as a matter of law.70
The remaining nine affirmative defenses can be grouped into two categories.
The first category concerns those affirmative defenses that focus on events or
circumstances that predate the execution of the Agreements and potentially could be
relevant to determining their legal validity or enforceability at the time they were
executed. This category consists of Charney’s affirmative defenses for fraudulent
inducement, coercion and duress, and unconscionability. I consider these defenses
in Section III.C when addressing Standard General’s request under Count I for a
declaration that the Agreements are valid and enforceable, which I construe as a
request for a declaration of validity and enforceability as of the time the Agreements
were executed.
1991) (“The claims stated against Dataproducts are clearly for breach of fiduciary
duty . . . . However, the plaintiffs concede that a corporation qua corporate entity is not a
fiduciary of, and thus cannot owe a fiduciary duty to, its shareholders.”).
70
Under Court of Chancery Rule 8(c), when a “party has mistakenly designated a defense
as a counterclaim or a counterclaim as a defense, the Court on terms, if justice so requires,
shall treat the pleading as if there had been a proper designation.” Given Charney’s
emphatic position that he does not intend to assert counterclaims in this case, I decline to
treat his designation as a mistake.
20
The second category concerns those affirmative defenses that focus on events
or circumstances post-dating execution of the Agreements that potentially could be
relevant to determining whether Standard General is entitled to relief under Count II
for Charney’s alleged breach of the Notes. This category consists of Charney’s
affirmative defenses for breach of contract, breach of the implied covenant of good
faith and fair dealing, failure to mitigate, promissory estoppel, and unclean hands. I
consider these defenses in Section III.D. when addressing Standard General’s
request under Count II for entry of judgment on the amount due under the Notes.
A. Applicable Law
Before considering Counts I and II specifically, I address a preliminary issue
to which the parties devoted little attention, namely what law governs Standard
General’s claims and Charney’s affirmative defenses.71 This issue implicates
essentially two questions: first, whether the parties made an election as to the law
governing the Agreements, which logically would apply to affirmative defenses
sounding in contract; and second, whether the choice of law provisions in the
Agreements are sufficiently broad to encompass Charney’s affirmative defenses that
sound in tort. The answer to both of these questions is yes in my view.
71
Charney’s answer and brief focus on Delaware law for all of his affirmative defenses.
Standard General states in a footnote that New York law governs the Agreements
containing New York choice of law provisions (Pls.’ Opening Br. 29 n.15), but its brief
otherwise focuses exclusively on Delaware law.
21
Three of the Agreements contain Delaware choice of law provisions: the
Standstill, Cooperation, and Warrant Agreements.72 The other five Agreements
contain New York choice of law provisions: the Letter Agreement and the four Loan
Agreements.73
Under Delaware law, the first step in a choice of law analysis is to ask whether
the parties made an effective choice of law in their contracts.74 Under New York
law, where there is a New York choice of law clause, a court may apply New York
law without conducting a choice of law analysis.75 The Agreements here clearly
72
Compl. Ex. E (Warrant Agreement) § 7.10 (“All disputes arising out of or relating to this
agreement” shall be governed by Delaware law); Compl. Ex. F (Cooperation Agreement)
§ 3.13 (“All disputes arising out of or relating to this Agreement” shall be governed by
Delaware law); Compl. Ex. G (Standstill Agreement) § 11 (“This Agreement shall be
governed in all respects, including validity, interpretation and effect, by the laws of the
State of Delaware” and Charney consents to jurisdiction in Delaware).
73
Compl. Ex. A (Letter Agreement) at 3 (New York law applies to “[a]ll disputes arising
out of or relating to this Agreement”); Compl. Ex. B (Credit Agreement) at 2 (“This Credit
Agreement shall be governed and construed in accordance with the laws of the State of
New York” and Charney consents to jurisdiction in New York); Compl. Ex. C (Notes) §§
20-21 (“this Note shall be deemed to have been made under and shall be governed by the
laws of the United States, and to the extent not preempted, the laws of the State of New
York in all respects, including matters of construction, validity and performance” and
Charney consents to jurisdiction of New York); Compl. Ex. D (Pledge Agreement) §§ 14,
16 (“This Agreement shall be governed by and construed in accordance with the laws of
the State of New York” and Charney consents to jurisdiction in New York).
74
Certain Underwriters at Lloyds, London v. Chemtura Corp., 160 A.3d 457, 464 (Del.
2017) (citation omitted) (the first of three components in choice of law analysis is
“determining if the parties made an effective choice of law through their contract”).
75
Ministers & Missionaries Benefit Bd. v. Snow, 45 N.E.3d 917, 918 (N.Y. 2015), rearg.
denied, 47 N.E.3d 779 (N.Y. 2016) (holding that the inclusion of a “a New York choice-
of-law clause in a contract . . . demonstrates the parties’ intent that courts not conduct a
conflict-of-laws analysis”).
22
manifest an intention to have either Delaware or New York law apply by including
express choice of law language.76 Thus, the next step is to analyze whether the
language in the Agreements is sufficiently broad to cover affirmative defenses
incident to the contract that sound in tort.
“Under New York law, in order for a choice-of-law provision to apply to
claims for tort arising incident to the contract, the express language of the provision
must be ‘sufficiently broad’ as to encompass the entire relationship between the
contracting parties.”77 “A basic precept of contract interpretation is that agreements
should be construed to effectuate the parties’ intent.”78 In determining whether
parties intended to have an agreement govern all related claims, New York courts
“have interpreted [broad] . . . choice-of-law-cum-forum-selection clauses to
mandate application of New York law to all claims, including fraud claims, arising
out of a transaction.”79
Delaware law similarly stresses the importance of honoring the parties’
intention in selecting the law that governs a contract and related claims. In Abry
76
See supra notes 72-73 and accompanying text.
77
Krock v. Lipsay, 97 F.3d 640, 645 (2d Cir. 1996) (citation omitted).
78
Welsbach Elec. Corp. v. MasTec N. Am., Inc., 859 N.E.2d 498, 500 (N.Y. 2006); see
also Ministers & Missionaries, 45 N.E.3d at 923 (“[W]e should apply the most reasonable
interpretation of the contract language that effectuates the parties’ intended and
expressed choice of law.”).
79
Nanopierce Techs., Inc. v. Southridge Capital Mgmt. LLC., 2002 WL 31819207, at *10
(S.D.N.Y. Oct. 10, 2002).
23
Partners V, L.P. v. F & W Acquisition LLC, then-Vice Chancellor Strine discussed the
importance of providing certainty to parties when they elect to choose law to govern
their contract, and how the parties’ choice of law clause also should determine the
relevant law for fraud and related tort claims:
Parties operating in interstate and international commerce seek, by a
choice of law provision, certainty as to the rules that govern their
relationship. To hold that their choice is only effective as to the
determination of contract claims, but not as to tort claims seeking to
rescind the contract on grounds of misrepresentation, would create
uncertainty of precisely the kind that the parties’ choice of law
provision sought to avoid.
. . . . To layer the tort law of one state on the contract law of another
state compounds that complexity and makes the outcome of disputes
less predictable, the type of eventuality that a sound commercial law
should not seek to promote.80
Here, all the Agreements either have language that the choice of law covers
“all” disputes relating to the Agreements or have an express choice of law provision
accompanied by a consent to jurisdiction (by Charney) in the same forum as the
chosen law.81 I thus find that the language of the Agreements reflects an intention
to have the chosen law govern the contractual claims as well as affirmative defenses
incident to those claims.
This result is compelled by two additional factors. First, under the logic of
Abry, the application of a contract’s chosen law is particularly compelling where
80
891 A.2d 1032, 1048 (Del. Ch. 2006).
81
See supra note 72-73 and accompanying text.
24
Charney, as the defendant, is not asserting any tort claims but merely bringing
affirmative defenses that seek to preclude an award of relief in Standard General’s
favor. Second, the Agreements are interlocking and include integration clauses
demonstrating the parties’ clear intention to have the Agreements read together to
encompass their entire relationship.82
For the reasons stated above, I will apply Delaware law to all claims and
affirmative defenses concerning or incident to the three Agreements containing
Delaware choice of law provisions and will apply New York law to all claims and
affirmative defenses concerning or incident to the five Agreements containing New
York choice of law provisions.83
B. Motion for Judgment on Pleadings Standard
Court of Chancery Rule 12(c) provides that “[a]fter the pleadings are closed
but within such time as not to delay the trial, any party may move for judgment on
the pleadings”84 where there are no material issues of fact. “[U]nder Court of
Chancery Rule 12(c) for judgment on the pleadings, a trial court is required to view
the facts pleaded and the inferences to be drawn from such facts in a light most
82
See Compl. Ex. A (Letter Agreement) ¶ 6; Compl. Ex. B (Credit Agreement) at 1; Compl.
Ex. C (Notes) § 19; Compl. Ex. E (Warrant Agreement) § 7.6; Compl. Ex. F (Cooperation
Agreement) § 3.7; Compl. Ex. G (Standstill Agreement) § 13.
83
This approach ends up being an academic exercise because no issue has been presented
where the analysis and results would differ in any material respect under either state’s law.
84
Del. Ch. Ct. R. 12(c).
25
favorable to the non-moving party.”85 In determining the relevant facts, this Court
may consider “document[s] attached to the complaint when the document is integral
to a plaintiff’s claim.”86
Under Delaware law, which governs three of the Agreements, the “proper
interpretation of language in a contract, while analytically a question of fact, is
treated as a question of law,”87 and “judgment on the pleadings . . . is a proper
framework for enforcing unambiguous contracts.”88 Similarly, under New York
law, which governs the other five Agreements, “[t]he interpretation of an
unambiguous contract is a question of law for the court, and the provisions of
a contract addressing the rights of the parties will prevail over the allegations in the
[pleadings].”89
C. Standard General is Entitled to a Declaration Under Count I that
the Agreements were Valid and Enforceable when Entered
In this section, I consider whether Standard General is entitled to a declaration
that the Agreements were valid and enforceable when they were entered. A
85
Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199,
1205 (Del. 1993).
86
VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 611 (Del. 2003).
87
Pellaton v. Bank of New York, 592 A.2d 473, 478 (Del. 1991) (quoting Klair v. Reese,
531 A.2d 219, 222 (Del. 1987)).
88
NBC Universal, Inc. v. Paxson Comm. Corp., 2005 WL 1038997, at *5 (Del. Ch. Apr.
29, 2005).
89
Taussig v. Clipper Gp., L.P., 13 A.D.3d 166, 167 (N.Y. App. Div. 2004).
26
necessary predicate to affording a declaratory judgment under 10 Del. C. § 6501 is
the existence of an “actual controversy.”90 Our Supreme Court has described the
criteria for there to be an actual controversy as follows:
(1) It must be a controversy involving the rights or other legal relations
of the party seeking declaratory relief; (2) it must be a controversy in
which the claim of right or other legal interest is asserted against one
who has an interest in contesting the claim; (3) the controversy must be
between parties whose interests are real and adverse; (4) the issue
involved in the controversy must be ripe for judicial determination.91
Each of these criteria is easily met here. Charney does not argue otherwise.
The first element is satisfied because Standard General seeks declaratory
relief concerning contracts to which it and Charney are both parties. The second
element is satisfied because Standard General seeks declarations relating to rights
under the Agreements—declarations Charney has a clear interest in contesting. The
third and fourth elements are satisfied because the parties’ interests are real and
adverse and the controversy is ripe for judicial determination, as evidenced by the
fact that Charney asserts both in this action and in the California action that the
Agreements are invalid and may not be enforced against him.
It is not disputed that the Agreements are facially valid and enforceable.
Rather, Charney challenges their validity and enforceability as of the time they were
90
Stroud v. Milliken Enters., Inc., 552 A.2d 476, 479 (Del. 1989) (quoting Rollins Int’l,
Inc. v. Int’l Hydronics Corp., 303 A.2d 660, 662 (Del. 1973)).
91
Rollins Int’l, 303 A.2d at 662-63.
27
signed based on three affirmative defenses (fraudulent inducement, coercion or
duress, and unconscionability) that focus on events or circumstances predating their
execution. I now turn to those affirmative defenses.
1. Fraudulent Inducement
Charney’s primary challenge to the validity and enforceability of the
Agreements is his fraudulent inducement affirmative defense, which alleges that
Standard General made false statements to induce him to enter into the Agreements.
As explained below, this defense fails under both New York and Delaware law
because the oral misrepresentations Charney purports to have relied on directly
conflict with the express written terms of the Agreements, making any purported
reliance by Charney unreasonable.92
Under New York law, in order to prove fraudulent inducement, a party must
establish that there was a “misrepresentation of a material fact, which was known by
[the adversary] to be false and intended to be relied on when made, and that there
was justifiable reliance and resulting injury.”93 New York courts find it
92
Given Charney’s failure to plead facts establishing that his reliance on the alleged
misrepresentations was reasonable in light of the express terms of the Agreements, I do not
reach Standard General’s alternative argument that Charney’s fraudulent inducement
defense is barred by anti-reliance language in the Agreements.
93
Perella Weinberg Partners LLC v. Kramer, 153 A.D.3d 443, 449 (N.Y. App. Div. 2017)
(citing Braddock v. Braddock, 60 A.D.3d 84, 86 (N.Y. App. Div. 2009)). New York law
has a “peculiar knowledge” carveout to fraudulent misrepresentation that does not apply
here as Charney, a sophisticated businessman who was represented by counsel when he
entered into the Agreements, was capable of understanding the plain terms of the
28
unreasonable as a matter of law to rely on oral representations that conflict
“directly”94 or “meaningful[ly]” 95 with a written agreement.
To prove fraud under Delaware law, a party must show, among other things,
reasonable reliance on a false representation:
1) a false representation, usually one of fact, made by the defendant; 2)
the defendant’s knowledge or belief that the representation was false,
or was made with reckless indifference to the truth; 3) an intent to
induce the plaintiff to act or to refrain from acting; 4) the plaintiff’s
action or inaction taken in justifiable reliance upon the representation;
and 5) damage to the plaintiff as a result of such reliance.96
Like New York law, Delaware law finds it “unreasonable to rely on oral
representations when they are expressly contradicted by the parties’ written
agreement. ‘Fraudulent inducement is not available as a defense when one had the
opportunity to read the contract and by doing so could have discovered the
misrepresentation.’”97
Agreements. See, e.g., Psenicska v. Twentieth Century Fox Film Corp., 409 Fed.Appx.
368, 371 (2d Cir.2009) (stressing that peculiar knowledge carveout is meant to address
cases where there are high costs to determining truth and is not applicable where a low cost
alternative might exist); RAA Mgmt., LLC v. Savage Sports Holdings, Inc., 45 A.3d 107,
115 (Del. 2012) (applying New York law and finding peculiar knowledge carveout
inapplicable where “sophisticated parties could have easily insisted on contractual
protections for themselves”).
94
Ruffino v. Neiman, 17 A.D.3d 998, 999 (N.Y. App. Div. 2005).
95
Urstadt Biddle Properties, Inc. v. Excelsior Realty Corp., 65 A.D.3d 1135, 1137 (N.Y.
App. Div. 2009) (quoting Stone v. Schulz, 231 A.D.2d 707, 707-708 (N.Y. App. Div.
1996)).
96
Lord v. Souder, 748 A.2d 393, 402 (Del. 2000) (emphasis added).
97
Carrow v. Arnold, 2006 WL 3289582, at *11 (Del. Ch. Oct. 31, 2006) (quoting 17A Am.
29
Although Charney spends fourteen pages in his answer explaining why he
believes he was fraudulently induced to enter into the Agreements, Charney’s case
appears to boil down to essentially three false promises that Standard General
allegedly made to him orally before he signed the various Agreements: (1) that
Standard General would ensure that Charney would retake control of the Company;98
(2) that Standard General would ensure that the investigation would come out in
Charney’s favor and that he quickly would return as CEO of the Company;99 and (3)
that Charney could cancel all of the Agreements at any time by repaying Standard
General’s loan.100 I address these alleged misrepresentations in that order.
Jur.2d Contracts § 214 (2006)), aff’d, 933 A.2d 1249 (Del. 2007); accord Chapter 7 Tr.
Constantino Flores v. Strauss Water Ltd., 2016 WL 5243950, at *7 (Del. Ch. Sept. 22,
2016) (dismissing claim under Rule 12(b)(6) where “alleged promises are expressly
contradicted by those same contracts”).
98
See, e.g., Ans. ¶ 16 (“Standard General repeatedly promised to assist Charney in . . .
regaining control over American Apparel.”); ¶ 21 (“Glazek [a Standard General partner]
promised that Standard General would help Charney ‘take control of your company
immediately.’”); ¶ 37 (“Standard General continuously promised Charney that he would
be put back in control of the Company.”).
99
See, e.g., Ans. ¶ 33 (“Kim [Standard General’s CEO] represented to Charney that there
would only be a short ‘investigation,’ merely to offer assurances to Standard General
investors that there was at least some semblance of process, and that Charney would soon
return to running the Company ‘within a matter of weeks.’ The investigation was in
essence a charade to help expedite Charney’s return.”), ¶ 34 (“Kim assured Charney
that . . . the end result would be a victory for Charney.”).
100
Ans. ¶ 35 (“Kim represented and assured Charney that Charney could ‘tap Standard
General out’ at any time by repaying the Loan, and Charney would be able to cancel all of
the agreements in connection with the American Apparel ‘settlement.’”).
30
a. Representations About Retaking Control
Charney first contends that Standard General represented it would ensure that
he would retake control of the Company. Charney could not have reasonably relied
on any representation to this effect, however, given that the plain terms of the
Agreements he signed were to the contrary, both at the outset of his contractual
relationship with Standard General and as that relationship evolved.
The first of the Agreements that Charney signed was the Letter Agreement.
Contrary to the notion that Standard General made an unequivocal commitment to
ensure that Charney could retake control of the Company, the Letter Agreement
instead makes clear that Standard General had only agreed to vote the shares in
limited ways. It provides that, if Standard General were able to purchase at least ten
percent of the Company’s outstanding shares, then Standard General and Charney
“shall enter into a cooperation agreement” with respect to both Charney’s original
shares and the newly purchased shares of American Apparel “in form and substance
reasonably satisfactory to [Standard General] providing that the Additional Shares
and the Original Shares shall be voted only as agreed among [Standard General]
and Charney.”101 The Letter Agreement contained only two carveouts to this voting
arrangement: Charney was “entitled to vote the Original Shares (i) in favor of his
101
Compl. Ex. A (Letter Agreement) ¶ 3 (emphasis added).
31
election as director and (ii) pursuant to the Investment Voting Agreement [with Lion
Capital].”102
The express language of the Letter Agreement undercuts any alleged promise
by Standard General to fully support Charney in returning to control because it
provides for a negative voting arrangement where neither party can compel the
shares to be voted in a particular way. Further, by expressly permitting Charney to
vote his “Original Shares” but not the newly acquired shares in favor of his election
as director, the clear implication is that the parties had not agreed to vote the new
shares even in favor of Charney’s election as a director.
The Standstill Agreement similarly undercuts such a promise by expressly
limiting Standard General’s ability to return Charney to control. To start, the
Standstill Agreement explicitly provides for Charney and certain other individuals
to resign from the board shortly after the Standstill Agreement went into effect, for
the board to immediately be restructured by having the continuing directors appoint
new directors designated by Standard General and by the mutual agreement of
Standard General and American Apparel (but in no case Charney), and for the
members of the newly-constituted board to serve as directors until their “successors
are duly elected and qualified.”103 The Standstill Agreement also specifically barred
102
Id. ¶ 3.
103
Compl. Ex. G (Standstill Agreement) §§ 1(a)-(c).
32
Standard General and Charney from soliciting proxies or consents to elect directors
or taking any action to “seek the removal of any member of the Board or propose
any nominee for election to the Board” until after the completion of the 2015 annual
meeting.104
The Standstill Agreement further provides that Charney could not seek
representation on the board until after the completion of American Apparel’s 2015
annual meeting,105 and that any shares held by Charney and Standard General
exceeding one-third of the Company’s outstanding shares be voted at meetings prior
to and including the 2015 annual meeting in proportion to the votes cast by the
Company’s other stockholders.106 Thus, contrary to Charney’s allegation that
Standard General promised to help Charney take control of the Company
“immediately,”107 Standard General could only have done so by materially breaching
express terms of the Standstill Agreement.
The Cooperation Agreement formalizes the voting provisions set forth in the
Letter Agreement, namely that Charney’s original shares and the newly purchased
shares of American Apparel be voted “in such manner as has been agreed in writing”
by Standard General and Charney, with the same two carveouts set forth in the Letter
104
Id. § 3(c).
105
Id. §§ 1(c), 3(c).
106
Compl. Ex. G (Standstill Agreement) § 4.
107
Ans. ¶ 21.
33
Agreement.108 The Cooperation Agreement also contains a provision stating that
“the Parties have not entered into any agreement or arrangement relating to the
voting of the [American Apparel Shares] with respect to any matters or items of
business except as set forth” in the Letter Agreement, Standstill Agreement, and
Cooperation Agreement—expressly negating the existence of any unwritten
understanding to ensure that Charney would retake control of the Company. 109
In sum, given that the plain terms of the contracts expressly prevented both
Charney and Standard General from seeking to retake control of the Company before
the 2015 annual meeting, limited their ability to vote Charney’s shares during this
period, and required Standard General’s agreement with respect to the voting of
those shares thereafter (with certain exceptions), Charney could not have reasonably
relied on any alleged promise that Standard General would ensure that he would be
able to retake control of the Company.
b. Representations About Returning as CEO
Charney next contends that Standard General assured him that the
investigation would come out in his favor and that he quickly would return as CEO
108
Compl. Ex. F (Cooperation Agreement) §§ 1.1(a)-(b).
109
Id. § 1.1(c). The Loan Agreements and Warrant Agreement did not include any
representations that Standard General would assist Charney in retaking control, and the
Notes made it an event of default to fail to comply with the terms of certain of the other
Agreements. See Compl. Ex. C (Notes) § 11; Compl. Ex. E (Warrant Agreement).
34
of the Company. Any such representation cannot be squared with the investigation
process outlined in the Standstill Agreement.
Specifically, the Standstill Agreement provides that the Suitability Committee
“shall oversee the investigation . . . of alleged misconduct by Charney,” 110 and that
American Apparel—not Standard General—would be responsible for forming the
Suitability Committee. Further, the Standstill Agreement recites that any clearance
determination to permit Charney to be reinstated as CEO would be the responsibility
of the members of the Suitability Committee, acting “by majority vote and in good
faith and consistent with its members’ fiduciary duties.”111 Given the express
language of these provisions, Charney could not have reasonably relied on any
alleged representation that Standard General would be able to control the
investigation and guarantee his return as CEO. To the contrary, that determination
would be made by the members of the Suitability Committee who were obligated to
comply with their fiduciary duties as directors of a Delaware corporation.
Even in the absence of an express provision acknowledging that the members
of the Suitability Committee were required to act “in good faith and consistent with
[their] fiduciary duties,”112 it simply is not credible for Charney to suggest he could
110
Compl. Ex. G (Standstill Agreement) § 5(a).
111
Id. § 5(b)-(c).
112
Id. § 5(b).
35
reasonably rely on a representation that guaranteed his return as CEO. The fact that
the directors serving on the Suitability Committee would be required to act
independently and in good faith in conducting the investigation into Charney’s
alleged misconduct, and could not just be a rubber stamp for Standard General or
Charney, should have been palpably obvious to Charney—himself a longtime
director and fiduciary of a Delaware corporation—even if Standard General had
designated (which it did not) every director for appointment to the Company’s board
in the first place.113
c. Representation About Buying Out Standard General
Charney alleges Standard General assured him that “Charney could ‘tap
Standard General out’ at any time by repaying the Loan, and Charney would be able
to cancel all of the agreements in connection with the American Apparel
‘settlement.’”114 Once again, it would have been unreasonable to rely on such a
representation given the directly conflicting terms of the Agreements.
113
Charney alleges that Standard General assured him that “the investigators would
examine the conduct of the Board members who had attempted to defraud Charney.” Ans.
¶ 34. It also would be unreasonable to rely on such a representation. The investigative
process detailed in the Standstill Agreement provided that the investigation would look
into Charney’s actions and included terms from which any reasonable person would
recognize that it would be up to the members of the Suitability Committee, consistent with
their delegation of authority and fiduciary obligations, to define the scope of their inquiry.
114
Ans. ¶ 35.
36
In particular, Charney could not reasonably rely on a representation that he
and Standard General could cancel all of the Agreements by themselves because
American Apparel was a party to the Standstill Agreement and its consent would be
necessary to unwind the “settlement.” Significantly, the Standstill Agreement
included a number of provisions for American Apparel’s specific benefit, including
Standard General’s commitment to provide the Company with up to $25 million in
additional capital or financial support, governance provisions that lasted until the
completion of the 2015 annual meeting, and a process for addressing Charney’s
alleged misconduct and whether he should be reinstated as CEO. None of these
provisions—or any other provision in the Standstill Agreement—could be amended
unless “approved by a majority of the members of the [American Apparel] Board
who are not Standard General Designees.”115
Reinforcing the need for American Apparel’s consent to cancel all of the
Agreements, (1) the Standstill Agreement provides that the “Cooperation Agreement
shall not be amended in any manner, terminated or suspended, directly or indirectly”
to get around the terms of the Standstill Agreement,116 and (2) the Warrant
Agreement provides that “any term [thereof] may be amended, altered, modified or
115
Compl. Ex. G (Standstill Agreement) § 20.
116
Id. § 2(h).
37
waived only by an instrument in writing signed by” American Apparel.117 These
provisions further demonstrate that Standard General and Charney alone could not
cancel all of the Agreements and unwind the settlement even if they wanted to, and
negate any notion that Charney could have reasonably relied on a contrary
representation.118
2. Coercion/Duress
Charney’s next affirmative defense is that he “was under duress between the
time [he] signed the Letter Agreement and the Standstill Agreement.”119 Charney
provides no details in his opposition to support this contention, stating only that he
“received almost no consideration let alone fair consideration from the Standstill
Agreement” and that “his consent was obtained by duress, fraud and coercion.”120
117
Id. § 7.4.
118
Charney reprises his “buyout” theory in the promissory estoppel section of his answer,
focusing on a conversation he had with Standard General’s CEO on July 15, 2014 (see
Ans. ¶ 48), after the Standstill Agreement was signed but before the Loan Agreements and
the Warrant Agreement had been executed—each of which contains mutually-reinforcing
integration clauses. See supra note 82 and accompanying text. “Promissory estoppel does
not apply, however, where a fully integrated, enforceable contract governs the promise at
issue.” SIGA Techs., Inc. v. PharmAthene, Inc., 67 A.3d 330, 348 (Del. 2013); see also
Wilson v. Dantas, 80 N.E.3d 1032, 1039 (N.Y. 2017) (finding that where an integrated
“agreement covers the same subject matter as the alleged promise” it extinguishes an ability
to rely on the promise).
119
Def.’s Ans. Br. 10 (Dkt. 176).
120
Id.38
Under Delaware law, which governs the Standstill Agreement that is the focus
of Charney’s coercion/duress defense, “[t]here are three basic elements of a claim
that coercion or duress taints the enforceability of a contract: (1) a ‘wrongful’ act,
(2) which overcomes the will of the aggrieved party, (3) who has no adequate legal
remedy to protect himself” and thereby assents to an agreement.121 The “wrongful
act” can include economic duress by the counterparty. 122 “Economic duress exists
where a person is deprived of the free exercise of his will through wrongful threats
or acts directed against the person’s business interests.”123 Delaware Courts have
noted that a party may ratify a contract it agreed to in duress by accepting the benefits
flowing from it or failing to challenge it for any considerable length of time.124
121
Cianci v. JEM Enter., Inc., 2000 WL 1234647, at *9 (Del. Ch. Aug. 22, 2000) (citation
omitted). The standard is similar under New York law. See Stewart M. Muller Const. Co.,
Inc. v. New York Tel. Co., 359 N.E.2d 328, 328 (N.Y. 1976) (citing Austin Instrument, Inc.
v. Loral Corp., 272 N.E.2d 533, 534 (N.Y. 1971)) (agreement voidable “where the
complaining party was compelled to agree to its terms by means of a wrongful threat which
precluded the exercise of its free will”).
E.I. DuPont de Nemours & Co. v. Custom Blending Int’l, Inc., 1998 WL 842289, at *4
122
(Del. Ch. Nov. 24, 1998) (Strine, V.C.).
123
Hanna Sys., Inc. v. Capano Gp., L.P., 1985 WL 21119, at *3 (Del. Ch. Apr. 16, 1985)
(“Hanna I”). Under Delaware law “[p]arties are generally held to the resulting agreement,
even though one has taken advantage of the other’s adversity, as long as the contract has
been dictated by general economic forces.” Cianci, 2000 WL 1234647, at *10 (quoting
Restatement (Second) of Contracts § 176 (1981)).
124
Cianci, 2000 WL 1234647, at *12. Similarly, the availability of legal advice may refute
a claim that a party’s free will was overborne in a given situation. Hanna I, 1985 WL
21119, at *3.
39
Charney’s coercion/duress defense suffers from two fatal flaws. First,
Charney has failed to identify any wrongful act of Standard General that could be
said to rise to the level of overcoming his free will. He does not, for example,
identify any threats that Standard General made against his personal safety or his
business interests of such a serious nature as to deprive him of the ability to say no
to entering into the Standstill Agreement, or any of the other Agreements. Instead,
Charney contends his coercion/duress defense requires “additional fact-finding.”125
This is illogical. If Charney truly believed he had been coerced into entering into
the Standstill Agreement, he should be able to explain the reason why, particularly
since the test “is a subjective one that focuses on the state of mind of the ‘victim’ of
the duress.”126
The most Charney musters as grounds for his coercion/duress defense is an
allegation that he “received almost no consideration let alone fair consideration from
the Standstill Agreement.”127 This allegation has nothing to do with a threat that was
made against Charney to overcome his exercise of free will, but simply reflects
buyer’s remorse. Charney is a sophisticated businessperson who founded and served
as the CEO of a public company, and who was represented by separate counsel when
125
Def.’s Ans. Br. 10 (Dkt. 176).
126
Hanna Sys., Inc. v. Capano Gp., L.P., 1985 WL 21128, at *3 (Del. Ch. Nov. 29, 1985)
(citing Restatement (Second) of Contracts § 175, cmt. c. (1981)).
127
Def.’s Ans. Br. 10 (Dkt. 176).
40
he entered into the Standstill Agreement. Undoubtedly, he was disappointed when
American Apparel adopted a shareholder rights plan in response to his increased
shareholdings in the Company, which complicated his hope to return as the
Company’s CEO. He has not, however, come close to identifying a wrongful act
that could be said to have overcome his free will in deciding to enter into the
Agreements.
Second, Charney’s coercion/duress defense fails for the independent reason
that Charney did not repudiate the terms of the Standstill Agreement in a timely
manner but instead treated it as valid, performed under it, and enjoyed its benefits
for a considerable period until litigation ensued. The retention of benefits defeats a
claim of duress or undue influence as it is “axiomatic that a party cannot both accept
the benefits which accrue under a contract on the one hand and shirk its
disadvantages on the other.”128 The pleadings reflect that after entering into the
Standstill Agreement, Charney resigned as a member of the American Apparel board
and engaged in the investigation process in an effort to vindicate himself to facilitate
his return as CEO. Even when Charney’s counsel wrote a letter to the Suitability
128
See Graham v. State Farm Mut. Auto. Ins. Co., 1989 WL 12233, at *2 (Del. Super. Ct.
Jan. 26, 1989), aff’d, 565 A.2d 908 (Del. 1989) (a “party to a contract cannot silently accept
its benefits and then object to its perceived disadvantages”), overruled other grounds,
Scion Breckenridge Managing Member, LLC v. ASB Allegiance Real Estate Fund, 68 A.3d
665 (Del. 2013); Cianci, 2000 WL 1234647, at *12 (citation omitted) (“Ratification results
if the party who executed the contract under duress accepts the benefits flowing from it.”).
41
Committee’s counsel on December 12, 2014—just a few days before the
investigation concluded—to object to how it was being conducted, Charney did not
repudiate the Standstill Agreement.129 Under Delaware law, Charney’s acceptance
of the benefits and protracted silence precludes a finding of duress or coercion.130
3. Unconscionability
Citing Section 2-302 of the Uniform Commercial Code, Charney advances
the affirmative defense of unconscionability in his answer.131 The basis for his
invocation of that defense, however, is obscure and plainly insufficient to sustain a
viable defense to the validity of any of the Agreements when they were signed.
Under Delaware law, the doctrine of unconscionability is “a limited exception
to Delaware law’s broad support for freedom of contract.”132 “When parties have
129
Def.’s Ans. Br. Ex. 3 (Dkt. 179). Indeed, even as of June 19, 2015, Charney asserted in
this Court that “[t]he plain language of the Standstill Agreement requires American
Apparel to advance the fees and costs Mr. Charney incurs in defending” an action that
American Apparel had brought against him for violating the Standstill Agreement. Pl.’s
Opening Br. 17, C.A. No. 11098-CB (Dkt. 15); see also Charney v. Am. Apparel, Inc.,
2015 WL 5313769, at *3-4, 5-6 (Del. Ch. Sept. 11, 2015).
130
Rudnitsky v. Rudnitsky, 2001 WL 1671149, at *6 (Del. Ch. Dec. 20, 2001); see also Lee
Builders, Inc. v. Wells, 92 A.2d 710, 713 (Del. Ch. 1952) (finding that entry into another
agreement on substantially the same terms where represented by counsel undermined
plaintiff’s claim that entered into prior agreement under duress). The result is the same
under New York law, where a party must timely repudiate a contract. DiRose v. PK Mgmt.
Corp., 691 F.2d 628, 633 (2d Cir. 1982) (citing Joseph F. Egan, Inc. v. City of New York,
215 N.E.2d 490, 493 (N.Y. 1966)) (a party “claiming duress must act promptly to repudiate
the contract or release or he will be deemed to have waived his right to do so”).
131
Ans. ¶¶ 93-96.
132
James v. Nat’l Fin., LLC, 132 A.3d 799, 812 (Del. Ch. 2016) (Laster, V.C.).
42
ordered their affairs voluntarily through a binding contract, Delaware law is strongly
inclined to respect their agreement, and will only interfere upon a strong showing
that dishonoring the contract is required to vindicate a public policy interest even
stronger than freedom of contract.”133 In order to find an agreement unconscionable,
Delaware courts must find what amounts to both substantive and procedural
unconscionability134—“that the party with superior bargaining power used it to take
unfair advantage of his weaker counterpart” and that “its terms [are] so one-sided as
to be oppressive.”135
New York law similarly recognizes two components of unconscionability:
procedural and substantive unconscionability. “The procedural element of
unconscionability concerns the contract formation process and the alleged lack of
meaningful choice; the substantive element looks to the content of the contract.”136
New York courts have defined an unconscionable contract as “one which is so
grossly unreasonable as to be unenforceable because of an absence of meaningful
133
Libeau v. Fox, 880 A.2d 1049, 1056–57 (Del. Ch. 2005) (Strine, V.C.), aff’d in relevant
part, 892 A.2d 1068 (Del. 2006).
134
James, 132 A.3d at 814-15 (citing Fritz v. Nationwide Mut. Ins. Co., 1990 WL 186448(Del. Ch. Nov. 26, 1990) (noting application of ten Fritz factors to determine whether
agreement was substantively or procedurally unconscionable).
135
Graham, 565 A.2d at 912 (citation omitted).
136
State v. Wolowitz, 468 N.Y.S.2d 131, 145 (N.Y. App. Div. 1983).
43
choice on the part of one of the parties together with contract terms which are
unreasonably favorable to the other party.”137
Here, Charney has not identified anything suggestive of either substantive
unconscionability or procedural unconscionability sufficient to meet the high
showing necessary to void the Agreements.138 The defense is makeweight.
As to the substantive terms of the transaction: Standard General purchased
approximately $20 million of American Apparel stock on Charney’s behalf, which
he pledged as collateral for a loan to make the purchases; Charney issued warrants
to Standard General for roughly 10% of those shares; the parties agreed that neither
could vote the shares without the consent of the other; and further agreed—along
with American Apparel—to a protocol that offered Charney the opportunity to return
as CEO of the Company after being suspended for misconduct.139 On their face,
these terms were not so one-sided or grossly unreasonable to warrant interfering with
137
King, 851 N.E.2d at 1191.
138
See id. (discussing how unconscionability requires a high showing and that at common
law an unconscionable agreement is “one that no promisor (absent delusion) would make
on the one hand and no honest and fair promisee would accept on the other”); Ryan, 610
A.2d at 1381-82 (Del. Ch. 1992) (Allen, C.) (finding that “American courts have continued
the centuries old practice of [refusing to enforce] shockingly oppressive contracts, at least
when they could find sharp practice or overreaching present” but otherwise do not
intervene).
139
See Gillman v. Chase Manhattan Bank, N.A., 534 N.E.2d 824, 829 (N.Y. 1988)
(upholding agreement where terms, “considering their commercial context, their purpose,
and their effect . . . were not so overbalanced in favor of Chase as to be found substantively
unconscionable”).
44
the parties’ freedom to contract.140 If they were, virtually any commercial
transaction would be open to judicial second-guessing on the grounds of
unconscionability. Notably, totally missing from Charney’s allegations are any of
the hallmarks of an unconscionable contract, such as a significant disparity in price,
unjust penalty clauses, inconspicuous and misleading clauses, and substantial
imbalances in the parties’ obligations.141
The undisputed facts surrounding the negotiation of the Agreements also
undercut any notion of procedural unconscionability. As discussed above,
Charney’s opposition is devoid of any allegations that would support a defense of
coercion or duress. To the contrary, the record reflects that Charney is a
sophisticated businessman who founded and served as CEO for a public company.
Before entering into any of the Agreements, Charney had been in negotiations with
other potential investors, and he was represented by his own counsel at the time he
negotiated and entered into the Agreements over a period of months. Where
sophisticated parties negotiate agreements over a period of time, courts “rarely will
intervene.”142
140
See Williams v. Walker–Thomas Furniture Co., 350 F.2d 445, 450 (D.C. Cir. 1965)
(quoting 1 Corbin on Contracts § 128 (1963)) (finding that Courts intervene when “the
terms are ‘so extreme as to appear unconscionable according to the mores and business
practices of the time and place’”).
141
See, e.g., Fritz, 1990 WL 186448, at *4.
142
James, 132 A.3d at 826 (discussing how Delaware courts tend not to intervene where
there appears to be legitimate negotiation since parties can enter into good and bad
45
*****
For the reasons discussed above, Charney’s affirmative defenses of fraudulent
inducement, coercion/duress, and unconscionability fail as a matter of law.
Accordingly, Standard General is entitled to a declaratory judgment that the
Agreements were valid and enforceable when they were executed.
D. The Undisputed Facts Establish that Charney Breached Provisions
of the Agreements that Trigger an Event of Default Under the
Notes and Make them Due and Payable
Standard General argues that it is entitled to relief under Count II of its
complaint (breach of contract) because Charney breached the Notes by challenging
the validity of certain of the Agreements in the California action and in this Court.
According to Standard General, these breaches constitute events of default entitling
Standard General to immediate payment of the principal, accrued interest, and costs
and expenses due under the Notes.143
contracts unless “the contract appears fundamentally unfair and there are valid reasons to
suspect that the outcome did not result from legitimate negotiation”); accord Gillman, 534
N.E.2d at 828.
143
Standard General offered additional grounds for an event of default that I do not address,
including that Charney failed to deliver to Standard General the pledged shares and warrant
certificates, and attempted to launch a proxy contest in violation of the Standstill
Agreement. Compl. ¶ 72; Pls.’ Opening Br. 3-4; Hearing Tr. 8-10 (Sept. 19, 2017) (Dkt.
200). Charney tersely denies these contentions even though they involve certain events
(e.g., delivering pledged shares and warrant certificates) that would not seem to lend
themselves to controversy.
46
The principal amount and accrued interest of the Notes are not due until June
26, 2019, except “after the happening of any Event of Default.”144 Upon the
occurrence of “any Event of Default,” Standard General is entitled to declare all
“amounts payable [on the Notes] to be immediately due and payable . . . without
presentment, protest, demand or notice.”145 Section 11 of the Notes sets forth events
of default. Relevant here are Sections 11(b) and 11(f).
Section 11(b) provides that an event of default occurs if Charney fails “to
perform or observe any other covenant, agreement, term or obligation . . . under . . .
the Cooperation Agreement or the Warrant Agreement” and such failure continues
ten days after notice is given.146 Section 7.10 of the Warrant Agreement and Section
3.13 of the Cooperation Agreement both provide that each of the parties to those
agreements “agrees that it shall not bring any action relating to this Agreement or
the transactions contemplated by this Agreement in any court other than the Court
of Chancery or other federal or state courts of the State of Delaware.”147
Charney indisputably breached these provisions by filing the California
action, in which Charney asks the California court to determine, among other things,
that “the Agreements [including the Warrant Agreement and the Cooperation
144
Compl. Ex. C (Notes) §§ 1, 4, 11.
145
Id. § 11.
146
Id. § 11(b).
147
Compl. Ex. E (Warrant Agreement) § 7.10; Ex. F (Cooperation Agreement) § 3.13.
47
Agreement]148 with American Apparel and Standard General which limit Charney’s
rights relating to the Company were procured by fraud, and therefore are null and
void and of no force or effect.”149 These breaches in turn triggered an event of
default under Section 11(b) of the Notes, making the principal and accrued interest
under the Notes immediately due and payable.150 Standard General emphasizes (and
I agree) that these breaches are not just technical because Standard General
needlessly has been put through the burden and expense of litigating claims in
California that Charney unequivocally agreed to litigate only in Delaware.151
Charney does not dispute that he breached the Delaware exclusive forum
provisions in the Warrant and Cooperation Agreements by filing the California
action. By way of defense, he contends only that he did not receive the notice
required under Section 11(b).152 This argument is frivolous. The complaint in this
action expressly alleges that Charney’s filing of the California action gave rise to an
148
CA Compl. ¶¶ 86, 98 (defining “Agreements” to include the Warrant Agreement and
the Cooperation Agreement).
149
Id. ¶ 190(f); see also id. ¶ 142 (seeking rescission of Warrant Agreement), ¶ 171
(seeking rescission of Warrant Agreement and Cooperation Agreement), Prayer for Relief
¶ 5 (for a determination that the Agreements have been rescinded), Prayer for Relief ¶ 7(f)
(“the Agreements were procured by fraud, and there are null and void and of no further
force or effect.”).
150
Compl. Ex. C (Notes) § 11(b).
151
Hearing Tr. 29-30 (Sept. 19, 2017) (Dkt. 200).
152
See id. 54-55.
48
event of default under Section 11 of the Notes,153 and the record reflects that the
complaint was served on Charney via Federal Express on July 15, 2015, at the
address specified in the Notes.154 Despite being put on notice of his breach of
Section 11(b) more than two years ago, Charney has refused to withdraw his
complaint in California and, to the contrary, repeatedly has stated his intention to
press his claims in that forum in contravention of the express terms of the Delaware
exclusive forum provisions.
Section 11(f) of the Notes provides that it is an event of default if the “Pledge
Agreement shall at any time after its execution and delivery for any reason . . . [have
its validity or enforceability] be contested by the Borrower or the Borrower shall
deny he has any further liability or obligation under the Pledge Agreement or the
Borrower shall fail to perform any of his obligations thereunder.”155 Charney
breached this provision in two respects. He first breached it by filing the California
action in which he challenged the validity of the Pledge Agreement,156 along with
153
Compl. ¶ 81.
154
Aff. of Service ¶ 2 & Ex. A (documenting service of Charney at 1809 Apex Avenue,
Los Angeles, CA 90026) (Dkt. 6); see also Compl. Ex. C (Notes) § 16 & Schedule 1
(requiring that notice be sent to Charney at 1809 Apex Avenue, Los Angeles, CA 90026).
155
Compl. Ex. C (Notes) § 11(f).
156
CA Compl. ¶ 190(f) (seeking declaration that “the Agreements were procured by fraud,
and therefore are null and void and of no force or effect”); Prayer for Relief ¶ 5 (seeking
determination “that said Agreements have been rescinded” because they were fraudulently
induced); Prayer for Relief ¶ 7(f) (same). The California complaint defines the term
“Agreements” twice, but only one of those definitions includes the Pledge Agreement. See
49
other Agreements, as discussed above. He breached the provision a second time by
asserting in this action that all of the Agreements, including the Pledge Agreement,
are unenforceable. More specifically, Charney explicitly challenges the validity of
the Pledge Agreement in this action by, among other things, asserting as an
affirmative defense that the Agreements (including the Pledge Agreement) were
procured by fraud and by seeking an order “denying Standard General all relief.”157
For the reasons explained above, the undisputed facts of record establish that,
barring application of an affirmative defense, Standard General is entitled to
judgment in its favor on Count II of its complaint for the principal amount of the
Notes and accrued interest. In its brief, Standard General also seeks an award for
“attorneys’ fees as provided by the Agreements.”158 Standard General failed,
however, to offer any evidence as to the magnitude of attorneys’ fees it was seeking
or how those fees were payable under the Agreements. Given the lack of any
meaningful attention to the issue, I decline to award Standard General attorneys’ fees
on this motion.
id. ¶ 86. Given the wholesale challenge Charney has mounted to the transactions he entered
into with Standard General, and the specific reference to the Pledge Agreement in
paragraph 86 of the California complaint, it seems plain that Charney is challenging the
validity of the Pledge Agreement in the California action.
157
Ans. ¶¶ 15-43, 93-96 & Prayer for Relief.
158
Pls.’ Opening Br. 56.
50
I now turn to Charney’s affirmative defenses that are relevant to Count II,
namely: breach of contract, breach of the implied covenant of good faith and fair
dealing, failure to mitigate, promissory estoppel, and unclean hands.
1. Breach of Contract Affirmative Defense
Charney asserts that he “is excused from performance under the Loan by
virtue of Standard General’s breaches of contract.”159 Charney identified three
alleged breaches, each of which relates to the Standstill Agreement: (1) that Standard
General failed to “timely invest” $25 million in American Apparel, (2) that the
investigation into Charney’s alleged misconduct was not conducted in accordance
with the terms of the Standstill Agreement, and (3) that Standard General failed (or
caused American Apparel to fail) to provide reimbursement for his expenses.160
The Standstill Agreement is governed by Delaware law.161 “Under Delaware
law, the elements of a breach of contract claim are: 1) a contractual obligation; 2) a
breach of that obligation by the defendant; and 3) a resulting damage to the
plaintiff.”162 In order for a breach to excuse performance by a counterparty, the
159
Ans. ¶¶ 68-71.
160
Ans. ¶¶ 69-70; Def.’s Ans. Br. at 2-3 (Dkt. 176).
161
Compl. Ex. G (Standstill Agreement) §§ 11, 13.
162
H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 140 (Del. Ch. 2003) (citing Moore
Bus. Forms, Inc. v. Cordant Holdings Corp., 1995 WL 662685, at *7 (Del. Ch. Nov. 2,
1995)).
51
breach by the party seeking performance must be material.163 This Court has treated
a prior material breach as an affirmative defense.164
As explained below, each of Charney’s theories of prior material breach fails
either because he has failed to plead facts to demonstrate a prior material breach by
Standard General, or because the actions about which he complains do not implicate
a contractual obligation owed by Standard General.
a. Standard General’s Investment Obligation
Charney argues that Standard General breached the Standstill Agreement by
failing to “timely invest” $25 million in American Apparel. 165 The relevant
provision of the Standstill Agreement states as follows:
Standard General commits to timely provide, or to cause one or more
of its Affiliates (other than Charney) or third parties approved by the
Company to provide, additional capital or other financial support to the
Company in an aggregate amount up to $25 million, (i) to the extent
necessary to permit the Company to repay amounts due under the
[Lion] Credit Agreement . . . and amounts related thereto . . . and (ii)
for any other purposes as the Board, following the Director
Appointments, may determine are appropriate.166
163
In re Mobilactive Media, LLC, 2013 WL 297950, at *13 (Del. Ch. Jan. 25, 2013)
(citation omitted) (“[A] slight breach by one party, while giving rise to an action for
damages, will not necessarily terminate the obligations of the injured party to perform
under the contract.”).
164
See All Pro Maids, Inc. v. Layton, 2004 WL 1878784, at *6 (Del. Ch. Aug. 9, 2004),
aff’d, 880 A.2d 1047 (Del. 2005) (discussing prior material breach as a “defense”).
165
Ans. ¶ 69; Def.’s Ans. Br. at 2-3 (Dkt. 176).
166
Compl. Ex. G (Standstill Agreement) § 2(a).
52
As to the first part of this provision, it is undisputed that Standard General
purchased Lion Capital’s loan for approximately $9.5 million on July 16, 2014, just
one week after Standard General entered into the Standstill Agreement.167 Thus, the
record shows that Standard General satisfied its obligation with respect to that loan.
As to the second part of the provision, it also is undisputed that Standard
General invested an additional $15 million in American Apparel, thereby satisfying
the “up to $25 million” requirement.168 Charney’s grievance is not that the additional
investment was never made, but that it should have been made about three months
sooner than it was.169 Critically, the Standstill Agreement makes clear, as Charney
conceded,170 that Standard General’s obligation to invest additional funds was
predicated upon the reconstituted American Apparel board making a request for the
funds as it “may determine are appropriate.”171 Given this requirement, Charney’s
failure to allege any facts concerning when the board made such a request is fatal as
it precludes a finding that the investment was not timely. Accordingly, Charney has
167
Hearing Tr. 86-87 (Sept. 19, 2017) (Dkt. 200).
168
Ans. ¶ 69.
169
As noted above, Standard General contends it invested the $15 million in March 2015,
and Charney contends it should have been invested by December 2014. See supra note 31.
170
Hearing Tr. 88 (Sept. 19, 2017) (Dkt. 200).
171
Compl. Ex. G (Standstill Agreement) § 2(a).
53
failed to plead a viable breach of contract defense with respect to Standard General’s
investment obligation.
b. The Investigation of Charney’s Alleged Misconduct
Charney asserts that the investigation into his alleged misconduct was not
conducted in accordance with the terms of the Standstill Agreement.172 More
specifically, Charney complains that he did not receive access to his e-mail or the
required preliminary hearing under Section 5(c) of the Standstill Agreement.173
Even assuming that Charney has pled sufficient facts to support these
contentions, they fail to state a contractual defense against Standard General because
the plain language of the Standstill Agreement shows that the members of the
Suitability Committee—not Standard General—were responsible for conducting the
investigation into Charney’s alleged misconduct.
The Standstill Agreement provides that American Apparel was to form the
Suitability Committee and that the Suitability Committee was responsible for
overseeing the investigation and for making the determination of whether Charney
should be reinstated as CEO:
No later than one business day following the Director Resignations, the
Company [American Apparel] shall form a committee of the Board (the
“Suitability Committee”) consisting of David Danziger, one Standard
General Designee and one Joint Designee. All decisions of the
172
Ans. ¶ 70; Def.’s Ans. Br. at 2-3 (Dkt. 176).
173
Ans. ¶ 77; Hearing Tr. 60-61 (Sept. 19, 2017) (Dkt. 200).
54
Suitability Committee shall be made by majority vote of the members
of the Suitability Committee. The Suitability Committee shall oversee
the investigation (the “Investigation”) of alleged misconduct by
Charney.
*****
Based on the findings of the Investigation, the Suitability Committee
shall determine, by majority vote and in good faith consistent with its
members’ fiduciary duties, whether it is appropriate under the
circumstances for Charney to be reinstated as CEO of the Company or
serve as an officer or employee of the Company or any of its
subsidiaries (the “Clearance Determination”).174
Under the terms of the Standstill Agreement, Standard General’s sole role with
respect to the investigation was to identify individuals (three of its own choosing
and two who would be mutually agreeable to Standard General and American
Apparel) to be appointed to the reconstituted board.175 Nothing suggests Standard
General failed to do so. These five individuals, along with two continuing directors
(David Danziger and Allan Mayer),176 comprised the reconstituted American
Apparel board that was responsible for selecting the three members of the Suitability
Committee. It was the Suitability Committee members who in turn were responsible
for conducting the investigation in accordance with their fiduciary duties, as set forth
above.
174
Compl. Ex. G (Standstill Agreement) §§ 5(a)-(b).
175
Id. §§ 1(b), 5(a).
176
Id. § 1(b).
55
Thus, Standard General had no contractual responsibility for the manner in
which the investigation was conducted. Any grievance on that score would have to
be directed to the American Apparel directors on the Suitability Committee,
including any complaint of a failure to provide a preliminary hearing or access to
email, which were similarly the responsibility of the Suitability Committee. 177
c. Failure to Provide Timely Reimbursement
Charney asserts, without reference to any specific contractual obligation, that
Standard General “caused American Apparel to fail and refuse to provide re-
imbursement” to which he was entitled “under his employment contract and the
Standstill Agreement” to defend himself in connection with the Suitability
Committee’s investigation.178 This conclusory allegation, on its face, does not state
cognizable grounds for a breach of contract defense against Standard General.
Furthermore, insofar as the Standstill Agreement is concerned, I previously ruled in
a separate action that the Standstill Agreement does not provide “an independent
source of a right to advancement” and that it “merely confirmed preexisting rights
to indemnification.”179
177
Id. § 5(c) (noting that the “Suitability Committee shall provide” the opportunity for a
preliminary hearing, and be responsible for providing “specific authorization” to enable
access to the Company’s computer systems).
178
Ans. ¶ 70.
179
Charney v. Am. Apparel, Inc., 2015 WL 5313769, at *1, 4-6.
56
2. Breach of Implied Covenant of Good Faith and Fair Dealing
Affirmative Defense
The last affirmative defense Charney included in his answer is the implied
covenant of good faith and fair dealing. Charney asserts that Standard General
breached the implied covenant because it failed to “assist Charney in regaining
control of American Apparel.”180
Under both New York and Delaware law, the implied covenant “requires a
party in a contractual relationship to refrain from arbitrary or unreasonable conduct
which has the effect of preventing the other party to the contract from receiving the
fruits of the contract.”181 But the implied covenant cannot be used to “create a ‘free-
floating duty . . . unattached to the underlying legal document’” 182 or enforce terms
that “would be inconsistent with other terms of the contractual relationship.”183
Here, there was nothing in the Agreements that created an obligation to “assist
Charney in regaining control of American Apparel.”184 Charney identifies no gap in
the contract or obligation the parties would have agreed to had they considered the
180
Ans. ¶ 98.
181
Wilgus, 498 A.2d at 159 (citing Restatement (Second) of Contracts § 205 (1981));
accord Aventine Inv. Mgmt., Inc. v. Canadian Imperial Bank of Commerce, 265 A.D.2d
513, 513-14 (N.Y. App. Div. 1999).
182
Dunlap, 878 A.2d at 441 (quoting Glenfed Fin. Corp., Commercial Fin. Div. v. Penick
Corp., 647 A.2d 852, 858 (N.J. App. Div. 1994)).
183
Dalton v. Educ. Testing Serv., 663 N.E.2d 289, 292 (N.Y. 1995) (quoting Murphy v.
Am. Home Products Corp., 448 N.E.2d 86, 91 (N.Y. 1983)).
184
Ans. ¶ 98.
57
issue.185 At bottom, Charney’s conclusory-pled implied covenant of good faith
“defense” amounts to an impermissible effort to create an obligation that would be
inconsistent with the structure and terms of the Agreements, discussed above.186
Accordingly, the defense fails as a matter of law.
3. Failure to Mitigate Affirmative Defense
Charney asserts that Standard General cannot collect the amounts due under
the Notes because Standard General failed to mitigate its harm.187 Charney’s failure
to mitigate defense is unavailing because there is no duty to mitigate under New
York law, which governs both of the Notes,188 where there is a valid liquidated
damages clause.189
185
Nemec v. Shrader, 991 A.2d 1120, 1125 (Del. 2010) (“The implied covenant of good
faith and fair dealing involves a ‘cautious enterprise,’ inferring contractual terms to handle
developments or contractual gaps that the asserting party pleads neither party
anticipated.”); Forman v. Guardian Life Ins. Co. of Am., 76 A.D.3d 886, 887-88 (N.Y.
App. Div. 2010) (finding that implied covenant sufficiently plead where being used to fill
gap between agreements).
186
See supra III.C.1 (analysis of fraudulent inducement defense).
187
Ans. ¶¶ 80, 89-90. Charney’s failure to mitigate theory argues that Standard General is
not entitled to full damages since it “blocked Charney from actively pursuing necessary”
means to help the Company and otherwise prevented him from taking steps that would
have reduced the harm American Apparel suffered. Id. ¶¶ 80, 82, 86, 90. To the extent
that Charney claims that Standard General was required to give up its clear contractual
rights, such an argument is unavailing. See Corbin on Contracts § 5715 at 344 (rev. ed.
2005) (“Courts have generally held that it is not necessary for the plaintiff to make another
contract with the defendant who has repudiated, even though he offers terms that would
result in avoiding loss.”).
188
Compl. Ex. C (Notes) §§ 20-21.
189
Crown IT Servs., Inc. v. Koval-Olsen, 11 A.D.3d 263, 265-266 (N.Y. App. Div. 2004).
58
Under New York law, if there is a valid liquidated damages clause, the amount
that is due to the non-breaching party will not be reduced based upon a failure to
mitigate:
An acceleration clause is one type of liquidated damages provision,
which . . . requires a party who defaults on installment payments to pay
the balance of the debt in one lump sum. Parties frequently agree to
acceleration clauses, and New York courts typically enforce such
provisions according to their terms.190
Whether an acceleration clause “represents an enforceable liquidation of damages
or an unenforceable penalty is a question of law, giving due consideration to the
nature of the contract and the circumstances.”191 In determining whether a clause is
a penalty, courts look to whether “the amount liquidated bears a reasonable
proportion to the probable loss and the amount of actual loss is incapable or difficult
of precise estimation.”192 The burden lies with the party opposing the liquidated
damages to proffer evidence that would suggest the provision is unconscionable or
punitive since, “as a general matter parties are free to agree to a liquidated damages
190
See, e.g., Rattigan v. Commodore Int’l Ltd., 739 F. Supp. 167, 169-70 (S.D.N.Y. 1990)
(finding plaintiff employee entitled to accelerated contract benefits following his
involuntary resignation); Fifty States Mgmt. Corp. v. Pioneer Auto Parks. Inc., 389 N.E.2d
113, 115 (N.Y. 1979) (enforcing acceleration of remaining monthly rent due under 20-year
lease where defendant willfully breached); Key Int’l Mfg. v. Stillman, 103 A.D.2d 475,
478-80 (N.Y. App. Div. 1984) aff’d in relevant portion, 489 N.E.2d 764 (N.Y.
1985) (allowing acceleration of a ten-year $2 million debt where plaintiff neglected to
renew annual letters of credit per contract).
191
JMD Holding Corp. v. Congress Fin. Corp., 828 N.E.2d 604, 609 (N.Y. 2005).
192
Truck Rent-A-Ctr., 361 N.E.2d at 1018.
59
clause ‘provided that the clause is neither unconscionable nor contrary to public
policy.’”193
Charney has failed to provide evidence that the liquidated damages provision
is unconscionable or punitive, or that the amount payable in the event of a breach is
“grossly disproportionate to the amount of actual damages.”194 To the contrary, the
amount payable upon an event of default correlates precisely to the amount payable
in the event of Charney’s performance, i.e., the principal of the Notes and accrued
interest.195 Where “the clause ‘is intended by the parties to operate in lieu of
performance,’”196 instead of being used as a threat to compel performance,197 courts
172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Ass’n, Inc., 25 N.E.3d
193952, 957 (N.Y. 2014) (quoting Truck Rent-A-Ctr., 361 N.E.2d at 1018).
194
Truck Rent-A-Ctr, 361 N.E.2d at 1018.
195
Compl. Ex. C (Notes) §§ 1, 3.
196
Rattigan, 739 F.Supp. at 169 (quoting Brecher v. Laikin, 430 F.Supp. 103, 106
(S.D.N.Y. 1977)).
197
Fifty States Mgmt. Corp., 389 N.E.2d at 116 (enforcing contract since damages under
clause “no greater than the amount [defendant] would have paid had it fully performed” its
obligations under the contract).
60
will enforce it.198 Because the acceleration clause in the Notes is valid, Standard
General owed no duty to mitigate under the Notes.199
4. Promissory Estoppel Affirmative Defense
Charney asserts that Standard General is estopped “from seeking money
from” him under the doctrine of promissory estoppel.200 Focusing on the time period
after the Agreements were executed,201 Charney identifies only one alleged promise
that was made to him: that Standard General’s CEO (Soo Kim) sent him a text
message on September 16, 2014, stating: “You are welcome to take me out. I am a
man of my word.”202
198
Although New York courts have been hesitant to award damages if a breach is trivial
compared to the harm, that is not the case here. As explained above, supra notes 59-60,
Charney has steadfastly refused to honor express Delaware exclusive forum provisions—
even after this suit was filed taking him to task for doing so—causing Standard General to
bear the burden and expense associated with litigating claims in California that should not
have been filed there.
199
Even if a duty to mitigate did exist here, such a duty only would require “reasonable”
efforts to mitigate. Taking the facts Charney plead as true and drawing all reasonable
inferences in his favor, Charney fails to show that Standard General failed to act reasonably
to mitigate any harm relating to the Notes or the other Agreements. See LaSalle Bank Nat.
Ass’n v. Nomura Asset Capital Corp., 47 A.D.3d, 107-08 (N.Y. App. Div. 2007); 11 Corbin
on Contracts § 5715 at 344 (rev. ed. 2005) (“[c]ourts have generally held that it is not
necessary for the plaintiff to make another contract with the defendant who has repudiated,
even though he offers terms that would result in avoiding loss.”).
200
Ans. ¶ 44.
201
The promises that allegedly were made to Charney before he entered the Agreements
are addressed in Section III.C.1.
202
Def.’s Ans. Br. 7.
61
To establish promissory estoppel under New York law, a party must show “a
clear and unambiguous promise; a reasonable and foreseeable reliance by the party
to whom the promise is made; and an injury sustained by the party asserting the
estoppel by reason of his reliance.”203 Delaware law is similar. A “plaintiff must
show by clear and convincing evidence that:”
(i) a promise was made; (ii) it was the reasonable expectation of the
promisor to induce action or forbearance on the part of the promisee;
(iii) the promisee reasonably relied on the promise and took action to
his detriment; and (iv) such promise is binding because injustice can be
avoided only by enforcement of the promise.204
Charney’s promissory estoppel “defense” fails for three reasons. First,
Charney’s allegation concerning a September 16, 2014 text message does not appear
in his pleading, and it is impermissible to attempt to amend one’s pleading through
a brief.205
Second, the alleged “promise” is too amorphous to be enforced. No specifics
are provided concerning any of the financial or other terms under which Standard
General allegedly was willing to be “taken out.” Nor are any specifics provided as
Ripple’s of Clearview, Inc. v. LeHavre Associates, 88 A.D.2d 120, 122 (N.Y. App. Div.
203
1982).
204
Souder, 748 A.2d at 399.
205
See Orman v. Cullman, 794 A.2d 5, 28 & n.59 (Del. Ch. 2002) (“[A]ny attempt
contained within [briefs] to plead new facts or expand those contained in the complaint
will not be considered.”). Charney asserts, without citation, that this “fact is cited in [his]
June 22, 2016 answer” (Def.’s Ans. Br. 7), but I was unable to find any reference to a
September 2014 text message in his answer.
62
to how such a transaction could be implemented, which is particularly significant
given that American Apparel’s consent was necessary to modify the Standstill
Agreement or the Warrant Agreement.206
Finally, “the more routine role of promissory estoppel should be to assure that
those who are reasonably induced to take injurious action in reliance upon a non-
contractual promise receive recompense for that harm.”207 Thus, even assuming that
the text message constituted an enforceable promise, it would make no sense to
excuse Charney from repaying an approximately $20 million credit obligation as a
result. Indeed, such a result would be an injustice and turn the doctrine of promissory
estoppel—the purpose of which is “to prevent injustice”208—on its head.
5. Unclean Hands Affirmative Defense
Finally, Charney’s invocation of the doctrine of unclean hands clearly fails as
a defense to Count II. Under both New York and Delaware law, “the ‘unclean hands’
doctrine bars equitable, but not legal, relief.”209 Because Count II seeks money
206
See supra Section III.C.1.c.
207
Ramone v. Lang, 2006 WL 905347, at *14 (Del. Ch. April 3, 2006) (Strine, V.C.).
208
Souder, 748 A.2d at 398.
209
Lehman Bros. Hldgs., Inc. v. Spanish Broad. Sys., Inc., 2014 WL 718430, at *7 & n.47
(Del. Ch. Feb. 25, 2014) (citation omitted), aff’d, 105 A.3d 989 (Del. 2014); see also Cohn
& Berk v. Rothman-Goodman Mgmt. Corp., 125 A.D.2d 435, 436 (N.Y. App. Div. 1986)
(discussing how unclean hands applies to equitable relief); Manshion Joho Ctr. Co., Ltd.
v. Manshion Joho Ctr., Inc., 24 A.D.3d 189, 189 (N.Y. App. Div. 2005) (“unclean hands”
inapplicable in action for damages).
63
damages—a quintessentially legal form of relief—Charney’s unclean hands defense
fails a matter of law.
*****
For the reasons discussed above, Charney’s affirmative defenses for breach of
contract, breach of the implied covenant of good faith and fair dealing, failure to
mitigate, promissory estoppel, and unclean hands do not bar relief under Count II.
Accordingly, Standard General is entitled to judgment in its favor under Count II of
its complaint for the principal amount of the Notes and accrued interest.
IV. CONCLUSION
For the reasons explained above, Standard General is entitled under Count I
of its complaint to a declaratory judgment that the Agreements were valid and
enforceable when they were executed and, under Count II of its complaint, to a
judgment in its favor for the principal amount of the Notes and accrued interest. As
noted above, it appears that Counts III and IV of the complaint are moot.
The parties are directed to confer and submit an implementing order, which
should be in the form of a final judgment if no further relief is sought under Counts
III and IV, within ten business days of the date of this opinion.
IT IS SO ORDERED.
64