Nederlander of San Francisco Associates v. CSH Theaters LLC ( 2018 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
NEDERLANDER OF SAN )
FRANCISCO ASSOCIATES, )
)
Plaintiff, )
)
v. ) C.A. No. 2018-0701-TMR
)
CSH THEATRES LLC, CSH CURRAN )
LLC, CSH PRODUCTIONS, LLC, )
CURRAN LIVE, LLC, CAROLE )
SHORENSTEIN HAYS, JEFFREY )
HAYS, and THOMAS HART, )
)
Defendants, )
)
and )
)
SHORENSTEIN HAYS- )
NEDERLANDER THEATRES LLC, )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: November 13, 2018
Date Decided: November 30, 2018
Tammy L. Mercer and M. Paige Valeski, YOUNG CONAWAY STARGATT &
TAYLOR, LLP, Wilmington, Delaware; Matthew L. Larrabee and Benjamin M.
Rose, DECHERT LLP, New York, New York; Michael S. Doluisio, DECHERT
LLP, Philadelphia, PA; Attorneys for Plaintiff.
Raymond J. DiCamillo, Susan M. Hannigan, and Sarah T. Andrade, RICHARDS,
LAYTON & FINGER P.A., Wilmington, Delaware; David B. Tulchin, Brian T.
Frawley, and Andrew J. Finn, SULLIVAN & CROMWELL, LLP, New York,
New York; Attorneys for Defendants.
MONTGOMERY-REEVES, Vice Chancellor.
The parties in this case have a long history together. Certain of the parties are
members of Shorenstein Hays-Nederlander Theatres, which operated three theaters
in San Francisco playing Broadway-style shows beginning in the 1970s. The other
parties are affiliates of the members. Shorenstein Hays-Nederlander Theatres owned
two of the theaters and leased the third. Although the partners and later members
and their affiliates had some disagreements through the years, they seem to have
mostly gotten along until 2010. In 2010, the theater that Shorenstein Hays-
Nederlander Theatres leased, the Curran, came up for sale by its previous owner.
Shorenstein Hays-Nederlander Theatres was unwilling to pay the price that the
previous owner wanted, but Carole Shorenstein Hays, an affiliate of one of
Shorenstein Hays-Nederlander Theatre’s members, decided to purchase the Curran
through an entity she controlled called CSH Curran.
That purchase and the surrounding events were the subject of a previous
lawsuit in this Court. The core allegations were that Hays had agreed to lease the
Curran to Shorenstein Hays-Nederlander through CSH Curran and that Hays had
breached her fiduciary and contractual obligations to Shorenstein Hays-Nederlander
by staging Broadway-style productions that she or an affiliate controlled at the
Curran in violation of the operative LLC Agreement. In my Post-Trial
Memorandum Opinion, I held that CSH Curran was bound by the LLC Agreement
as an affiliate, but no new or renewed lease of the Curran existed. I also defined the
2
meaning of control under the terms of the LLC Agreement and held that owning the
Curran was not equivalent to controlling every production that played there. I held,
however, that CSH Curran controlled one production at the Curran based on a
contractual right of first refusal.
The current dispute between the parties relates to two new productions at the
Curran. Pending before me is Plaintiff’s Motion for Preliminary Injunction asking
this Court to enjoin Defendants from staging Dear Evan Hansen (“DEH”) and Harry
Potter and the Cursed Child (“Harry Potter”) within 100 miles of San Francisco
(and particularly at the Curran) until final resolution of Plaintiff’s claims in this case.
For the reasons that follow, I deny Plaintiff’s motion.
I. BACKGROUND
The facts of this case derive from the pleadings, the affidavits, and the exhibits
submitted to this Court. 1
A. The Previous Litigation
Plaintiff Nederlander of San Francisco Associates (“Nederlander,” together
with its affiliates, the “Nederlander Entity”) and Defendants CSH Theatres LLC
(“CSH Theatres”), Carole Shorenstein Hays (“Hays”), Jeff Hays (together with
Carole Shorenstein Hays the “Hayses,” together with their affiliates, the
1
This opinion assumes familiarity with CSH Theatres, LLC v. Nederlander of San
Francisco Assocs., 2018 WL 3646817, at *3 (Del. Ch. July 31, 2018).
3
“Shorenstein Entity”), and Thomas Hart were long-time business associates in the
theater industry in San Francisco.2 CSH Curran LLC (“CSH Curran”) owns the
Curran Theatre (the “Curran”).3 CSH Productions, LLC (“CSH Productions”) was
the vehicle for Hays’s investment in the musical Fun Home.4 Curran Live operates
the Curran.5 CSH Theatres and Nederlander each own fifty percent of Shorenstein
Hays-Nederlander Theatres LLC (“SHN” or the “Company”), which directly owns
two theaters in San Francisco, the Orpheum and Golden Gate Theatres, and for many
years leased a third theater, the Curran, from its previous owner.6
In 2010, Hays, who at the time was Co-President and Director of SHN, caused
an affiliate entity to purchase the Curran from its previous owner after SHN declined
to buy the Curran. 7 On February 21, 2014, CSH Theatres sued Nederlander (the
“First Action”) based on a series of disputes related to a purported promise by Hays
to renew the lease of the Curran to Nederlander, as well as breaches of fiduciary
2
Compl. 2.
3
Id. at 5.
4
Id. at 15 (citation omitted).
5
Id. at 6.
6
Id. at 2-5; CSH Theatres, 2018 WL 3646817, at *3.
7
Compl. 2.
4
duties and contractual obligations.8 “The claims at issue in [that] case [fell] into
three broad categories: (1) those concerning the lease of the Curran; (2) those
concerning breaches of the LLC Agreement; and (3) those concerning breaches of
fiduciary duty.” 9 This Court issued a final post-trial decision resolving the First
Action (the “Opinion”) on July 31, 2018.10
I focus on the holdings from the Opinion that are relevant to the current
dispute. In the Opinion, I first held that “[u]nder [the] definitions in the LLC
Agreement, the Hayses and any entities they control are Affiliates and part of the
Shorenstein Entity and, therefore, are bound by Section 7.02(a)” 11 of the LLC
Agreement and that “any actions they took in their capacities as controllers of CSH
Theatres or CSH Curran were subject to the LLC Agreement.” 12
Second, I held that Sections 7.02, 7.03, and 7.06 of the LLC Agreement
regarding competition must be interpreted together. I held that “[w]hile Section
7.02(a) requires the ‘Shorenstein Entity’ to ‘devote their efforts to maximize the
economic success of the Company and avoid any conflicts of interest between the
8
Id. at 13; CSH Theatres, 2018 WL 3646817.
9
CSH Theatres, 2018 WL 3646817, at *13.
10
Compl. 13.
11
CSH Theatres, 2018 WL 3646817, at *23.
12
Id. at *22.
5
Members,’ Section 7.06 contains an exception.” 13 Under that exception, “any
Member, any Affiliate of any Member or any officer or director of the Company
shall be entitled to . . . engage in the ownership, operation and management of
businesses and activities, for its own account and for the account of others.”14
Members, affiliates, directors, and officers may also “own interests in the same
properties as those in which the Company or the other Members own an interest,
without having or incurring any obligation to offer any interest in such properties,
businesses or activities to the Company or any other Member.” 15 Furthermore,
“[n]either the Company nor any Member shall have any rights in or to any
independent ventures of any Member or the income or profits derived therefrom.” 16
The exception in Section 7.06, however, is not endless. Section 7.02(b) sets
the outer limits of Section 7.06: it “disallows either the Nederlander or Shorenstein
Entities from staging ‘any Production that it controls (as defined in Section 7.03)
within 100 miles of San Francisco,’” 17 unless “that production had played at one of
the Company’s theaters, the other Member’s representative had turned down the
13
Id. at *24 (citation omitted).
14
Id. (quoting JX 10-25) (emphasis omitted).
15
Id. (quoting JX 10-25).
16
Id.
17
Id.
6
play, or ‘the Company shares in the profits and/or losses of any booking pursuant to
an agreement mutually acceptable to the Members.’” 18 “Section 7.03 defines
‘control over production’ as: ‘the Person having the ability to determine where the
Production plays and the terms and conditions of said engagement.’”
Thus, the “plain language of the contract, when read through the lens of
generalia specialibus non derogant, creates a detailed scheme governing
competition.” 19 Members, affiliates, directors, and officers may “compete with the
Company, except that they cannot stage a production within 100 miles of San
Francisco if they have ‘the ability to determine where the [p]roduction plays and the
terms and conditions of said engagement,’” unless they satisfy one of the three
exceptions in Section 7.02(b).20
Applying this interpretation of the LLC Agreement, I held that Hays had
controlled one play—Fun Home. “In 2014, after [Hays] had resigned as director and
co-president of the Company, she entered into an investment agreement with the
production Fun Home on behalf of her entity [CSH Productions].” 21 In order to
receive the investment, “Fun Home agreed that if the production went on tour it
18
Id.
19
Id.
20
Id. (emphasis in original).
21
Id. at *25 (citing JX 290).
7
would not perform at any other Bay Area theater but the Curran,” 22 because “‘an
important inducement for [Hays’s] significant investment in the Broadway
Production is to obtain the first right to present the first commercial production of
[Fun Home] in the Bay Area, preferably to launch the national tour.’” 23 I held that
“[t]his concession constitutes control over the production as defined in Section 7.03
because it allows [Hays] ‘the ability to determine where the Production plays and
the terms and conditions of said engagement.’” 24
On August 6, 2018, Nederlander moved for clarification of the Opinion,
asking this Court whether “(1) CSH Curran is itself part of the Shorenstein Entity
for purposes of Section 7.02 of the LLC Agreement” and “(2) the Shorenstein Entity
must comply with Section 7.02 by providing [Nederlander] and SHN with
documents relevant to whether the Shorenstein Entity has ‘control’ over two
productions that are scheduled to play at the Curran: [Harry Potter] and [DEH].” 25
22
Id. (citing JX 290-4).
23
Id.
24
Id. (citations omitted).
25
Pl.’s Mot. for Clarification 2, CSH Theatres, LLC v. Nederlander of San Francisco
Assocs., C.A. No. 9380-VCMR (Del. Ch. Aug. 6, 2018) (citation omitted).
8
On September 5, 2018, I issued an order (the “Order” 26) denying the motion.
I held that “the Opinion states that the Shorenstein Entity consists of CSH Theatres
and its respective Affiliates. The Opinion also recognizes that [CSH Theatres]
[admits] that Carole Hays, Jeff Hays, and CSH Curran are Affiliates. Thus, there is
nothing to clarify.” 27 The Order further held that “[t]he existence of [DEH] and
Harry Potter is not new evidence about the definition of control under Sections
7.02(b) and 7.03 of the LLC Agreement. Instead, these productions at the Curran
are new potential breaches, and [Nederlander] will have to litigate them as such.”28
B. New Developments
There have been two significant developments since the end of the last trial.
First, DEH signed a contract to show at the Curran. Second, Harry Potter will show
at the Curran.
Hays and the producers of DEH engaged in a long courtship. Hays started by
donating $25,000 to Arts Connection, a non-profit that helped teens see DEH and
create art inspired by the show. 29 Stacey Mindich, the lead producer of DEH,
26
Order Den. Mot. for Recons. 2, CSH Theatres, LLC v. Nederlander of San Francisco
Assocs., C.A. No. 9380-VCMR (Del. Ch. Sept. 5, 2018).
27
Id. (citation omitted).
28
Pl.’s Mot. for Clarification 2-3, CSH Theatres, LLC v. Nederlander of San
Francisco Assocs., C.A. No. 9380-VCMR (Del. Ch. Aug. 6, 2018).
29
Valeski Aff. in Supp. of Pl.’s Opening Br. (“Valeski Aff.”) Ex. 8, at 54.
9
thanked Hays and “wrote that she looked forward to ‘finding ways to work with
[Hays] in the coming months and years.’” 30 This provided the opening to negotiate
a deal, which “included one particularly unique term: it required that the producer
of [DEH] be guaranteed at least $1.3 million per week” in revenue. 31 On November
28, 2017, during negotiations, DEH asked for more money for Arts Connection, and
Hays contributed an additional $200,000.32
After the trial ended in the First Action, Hays promised the producers of DEH
“financial protection in the event that this Court enjoined the show from playing at
the Curran” and promised to “personally cover ‘not only losses arising from the
litigation but also . . . any failure of CSH theater to remit the promised
amounts . . . .’” 33 On December 11, 2017, Hays and the DEH producers entered into
two agreements to memorialize these and other terms: the deal memo (covering the
location, the schedule of performances, etc.) and the “Inducement and Agreement”
30
Id.
31
Id. Ex. 1 (Hays Deposition), 88:4-12.
32
Id. Exs. 37, 38.
33
Id. Ex. 22, at 278.
10
(covering protections in case of injunction). 34 DEH is scheduled to play at the
Curran from December 5 to December 30, 2018. 35
Harry Potter is a “sit-down production” intended to play at the same theater
for several years.36 Prior to the Harry Potter deal, Ambassador Theater Group
(“Ambassador”), an international theater owner/operator, approached a Curran
executive about the possibility of leasing the Curran long-term, with Ambassador
controlling programming. 37 Hays pushed back on the programming point, and on
February 16, 2018, Ambassador made a formal offer to lease the Curran and “work
in close partnership with [Hays]” on programming, although her input would be
limited.38 Hays emphatically rejected this offer.
The sides eventually negotiated terms to Hays’s liking, including (1) only
allowing the presentation of “an extended sit-down production of Harry Potter”
unless a replacement production is “approved in writing in advance by [Hays],” 39
34
Id. Ex. 39, at 1212-14 (the deal memo), 1215-17 (the Inducement and Agreement).
35
Holland Aff. ¶ 6; Valeski Aff. Ex. 39, at 1214.
36
Holland Aff. ¶ 12.
37
Valeski Aff. Ex. 48, at 9531.
38
Id. Ex. 50, at 9565.
39
Id. Ex. 58, Ex. A, Sec. 9.
11
(2) guaranteeing revenue for Hays, 40 (3) Ambassador agreeing to hire current Curran
personnel,41 and (4) Hays maintaining control over physical alterations to the theater
necessary for Harry Potter.42 CSH Curran LLC and ATG San Francisco, LLC
signed a binding Memorandum of Understanding on April 20, 2018. 43 Ambassador
negotiated a separate show license with Harry Potter’s producers and signed it
simultaneously. 44 The Memorandum of Understanding requires Defendants to
consent to the Show License,45 and the Memorandum of Understanding recognizes
that the lease is solely for the purpose of presenting Harry Potter. 46 Harry Potter is
due to play at the Curran in fall 2019 47 and is expected to run through December 31,
2022 absent an extension. 48
40
Id. Ex. 58, Ex. A, Sec. 7.
41
Id. Ex. 58, Ex. C, ¶ 2.1.
42
Id. Ex. 58, Ex. A, Sec. 10.
43
Id. Ex. 58.
44
Id. Ex. 85.
45
Id. Ex. 69 § 12.2.
46
Id. Ex. 58, Ex. A, Sec. 4.
47
Holland Aff. ¶ 6.
48
Valeski Aff. Ex. 58, Ex. A, Sec. 5.
12
C. The Current Litigation
On September 25, 2018, Nederlander brought the action now pending before
me. Nederlander claims Defendants breached the LLC Agreement, breached
fiduciary duties, and aided and abetted breaches of contractual and fiduciary duties
by entering into contracts to stage DEH and Harry Potter without first complying
with Section 7.02(b) of the LLC Agreement.49 Through this action, Plaintiff seeks
to enjoin Defendants from staging these plays at the Curran.
II. ANALYSIS
Nederlander seeks a preliminary injunction to prevent Defendants from
staging DEH and Harry Potter until this case concludes.50 Nederlander posits that
it has a reasonable probability of success on the merits because “[a]s the Shorenstein
Entity had the ability to determine where [DEH and Harry Potter] would play (at
the Curran) and the terms of the engagements, the Shorenstein Entity has control
over [DEH] and Harry Potter under the LLC Agreement.” 51 Since SHN has control
and does not meet any of the exceptions in Section 7.02(b), SHN is violating the
LLC Agreement. 52 Nederlander argues that it would suffer irreparable harm from
49
Compl. 2.
50
Pl.’s Mot. for Prelim. Inj. 1-2.
51
Compl. 4-5.
52
Id.
13
Defendants staging DEH and Harry Potter both because of a contractual stipulation
that breach constitutes irreparable harm, and because of reputational damage it will
suffer if the plays go forward.53 Nederlander claims that the balance of equities
weigh in its favor because while it will suffer irreparable harm, Defendants will only
be required to comply with contractual obligations. 54
Defendants object, arguing that the doctrines of res judicata 55 and collateral
estoppel bar Plaintiff’s claims. 56 Defendants also contend that Nederlander fails to
establish the elements necessary for a preliminary injunction. Defendants argue that
Plaintiff cannot show a reasonable probability of success on the merits because none
of the Defendants “control” the plays as the LLC Agreement defines the term.
Defendants argue that Nederlander cannot show an imminent threat of irreparable
harm because the LLC Agreement provides for damages.57 Defendants also argue
that the balance of the equities weighs in their favor because an injunction would
strip them of their property rights and harm their customers. 58
53
Id. at 24.
54
Pl.’s Opening Br. 48-49.
55
Defs.’ Opp’n Br. 31 (citation omitted).
56
Id. at 37 (citation omitted).
57
Id. at 53-57.
58
Id. at 57-61.
14
I begin my analysis by addressing the res judicata and collateral estoppel
arguments. Then, I analyze the merits of the request for a preliminary injunction.
A. Res Judicata
Defendants first argue that Nederlander’s claims are barred by the doctrine of
res judicata, also known as claim preclusion. 59 Defendants argue that Plaintiff
attempts to bring this second suit based on the same claims Plaintiff asserted in the
First Action after a final judgment has been entered in the First Action against the
same defendants. 60
Res judicata plays an important role in our legal system.
The doctrine of res judicata is common to all civilized
systems of jurisprudence, and is based upon the salutary
concept that the solemn decision of a competent court
upon a disputed state of facts should forever set the
controversy at rest. It embodies a rule of public policy that
courts as well as litigants should have rest and repose from
the vexatious renewal of the same law suit. Without the
doctrine court systems would become impotent to perform
their most important function, that of ascertaining and
enforcing rights, for without it litigation would be endless.
The doctrine rests upon the reasonable premise that a party
who has once litigated, or has had the opportunity to
litigate, the same matter before a court of competent
jurisdiction, must thereafter hold his peace. 61
59
Id. at 31.
60
Id.
61
Epstein v. Chatham Park, Inc., 153 A.2d 180, 184 (Del. Super. 1959).
15
Res judicata “precludes a second attempt to litigate the same ‘cause of action’ and,
under certain circumstances, matters which might have been litigated in the prior
suit.”62
Central in the rule is the rationale that a person is entitled
to an opportunity to once litigate a claim on its merits, and
once only. Renewal of the same claim after disposition on
its merits is not permissible, whatever the theory. But
basic to the principle of rest and repose is the notion that
one is entitled to his day in court on the merits of a claim.
This means that a judgment for a defendant, which is valid
and final but not ‘on the merits,’ is conclusive only as to
what is actually decided. 63
Delaware’s application of the doctrine of res judicata is well developed and
defined. It applies when
(1) the original court had jurisdiction over the subject
matter and the parties; (2) the parties to the original action
were the same as those parties, or in privity, in the case at
bar; (3) the original cause of action or the issues decided
was the same as the case at bar; (4) the issues in the prior
action must have been decided adversely to the [Plaintiffs]
in the case at bar; and (5) the decree in the prior action was
a final decree.64
62
Hughes v. Trans World Airlines, Inc., 336 A.2d 572, 574 (Del. 1975) (citing Ezzes
v. Ackerman, 234 A.2d 444 (Del. 1967)).
63
Id. (citing Restatement (First) of Judgments § 48 (Am. Law. Inst. 1942)).
64
Dover Historical Soc’y, Inc. v. City of Dover Planning Comm’n, 902 A.2d 1084,
1092 (Del. 2006) (citing Bailey v. Wilmington, 766 A.2d 477, 481 (Del. 2001)).
16
In order for res judicata to bar an action, a Defendant must prove that “Plaintiff has
had a ‘full, free, and untrammeled opportunity to present his facts,’ but has neglected
to present some of them or has failed to assert claims which should in fairness have
been asserted.”65
Under Delaware law, “a contract is considered a single ‘transaction’ for the
purpose of claim preclusion.”66 Under the transactional approach, “[t]he procedural
bar of res judicata extends to all issues which might have been raised and decided
in the first suit,” and “a contract that is the subject of sequential claims is regarded
as a single transaction.” 67 “Contractual rights that are triggered and pursued after
the initial action is filed, however, are not barred by res judicata because a prior
judgment cannot be given the effect of extinguishing claims which did not even then
exist.” 68 As the Delaware Supreme Court clarified in RBC Capital Markets, LLC v.
Education Loan Trust IV, LLC, although Delaware follows a “transactional”
approach when applying res judicata, “[a] subsequent breach of contract claim will
65
Fitzgerald v. Chandler, 1998 WL 442440, at *6 (Del. Ch. July 20, 1998) (quoting
Maldonado v. Flynn, 417 A.2d 378, 382 (Del. Ch. 1980)).
66
LaPoint v. AmerisourceBergen Corp., 970 A.2d 185, 192 (Del. 2009) (citation
omitted).
67
RBC Capital Mkts., LLC v. Educ. Loan Trust IV, LLC, 87 A.3d 632, 635 (Del. 2014)
(citations omitted).
68
LaPoint 970 A.2d at 192 (citation omitted).
17
not be treated as identical to an earlier contract claim . . . where the facts underlying
the later claim were either unknown or incapable of being known at the time of the
earlier action.”69
Here, Plaintiff asks this Court to determine (1) whether Hays or her affiliate
actually controls certain productions under the terms of the LLC Agreement and
(2) whether the affiliate should be prohibited from staging these productions due to
failure to comply with the terms of the LLC Agreement. I hold that res judicata
does not apply to the claims asserted in this action because neither the third element
(the same claim was previously before the court) nor the fourth element (the claim
was previously decided adversely) is met. Plaintiff knew at the time of the first trial
that DEH would play at the Curran,70 but the contract was not signed until December
11, 2017, after trial ended in the First Action. Plaintiff did not become aware of the
terms of the deal until Defendants produced the deal documents in October 2018,71
after I issued the post-trial Opinion in the First Action. The Harry Potter contracts
were not signed until April 20, 2018, after trial in the First Action, and Defendants
only produced the Harry Potter documents in October 2018, after the post-trial
Opinion in the First Action. Defendants argue that res judicata bars all actions that
69
RBC Capital Mkts., 87 A.3d at 645 (citations omitted).
70
Pl.’s Reply Br. 4.
71
Id. at 4-5.
18
“could have been raised” in the prior litigation,72 but the terms of the contract, and
not the simple act of the play showing, give rise to Plaintiff’s claims.
Thus, the alleged breaches occurred after the trial in the First Action ended,
and the facts surrounding the purported indicia of control over DEH and Harry
Potter were “unknown or incapable of being known.” Defendants’ interpretation of
the application of res judicata would render the LLC Agreement unenforceable
against future breaches because of one failed claim for breach of contract, which is
not Delaware law. Whether Plaintiff’s claims are an attempt to relitigate the
meaning of “control” is a separate question, and I address it below. Plaintiff’s claims
that the same contractual terms (the control requirement) applies to a new set of facts
(DEH and Harry Potter) are not barred by res judicata. I did not rule on whether
CSH’s productions of DEH and Harry Potter at the Curran constituted breaches of
the LLC Agreement in my Opinion because the issue was not properly before me. I
confirmed this in my Order when I held that that the productions of DEH and Harry
Potter are “new potential breaches and Counterclaim Plaintiff will have to litigate
them as such.”73
72
Defs.’ Opp’n Br. 31 (quoting Branson v. Branson, 2013 WL 1164827, at *2 (Del.
Mar. 19, 2013)).
73
Order Den. Mot. for Clarification 3, CSH Theatres, LLC v. Nederlander of San
Francisco Assocs., C.A. No. 9380-VCMR (Del. Ch. Sept. 5, 2018).
19
B. Collateral Estoppel
Defendants next argue that collateral estoppel also bars Plaintiff from bringing
its claims because Plaintiff simply attempts to relitigate the meaning of “control,”
which this Court decided in the First Action.74
Collateral estoppel is a parallel doctrine to res judicata. “The rule of collateral
estoppel is a rule of repose designed to end litigation.”75 “[W]here a question of fact
essential to the judgment is litigated and determined by a valid and final judgment,
the determination is conclusive . . . [and] a party is estopped from relitigating the
issue again in the subsequent case.”76 “Thus, the doctrine of collateral estoppel
provides repose by preventing the relitigation of an issue previously decided. In
addition, by putting an end to litigation, it conserves judicial resources.” 77 “The test
for applying collateral estoppel requires that (1) a question of fact essential to the
judgment, (2) be litigated and (3) determined (4) by a valid and final judgment.”78
“Whether the [previous] Court’s conclusion is correct or not is irrelevant . . . . All
74
Defs.’ Opp’n Br. 37.
75
Tyndall v. Tyndall, 238 A.2d 343, 346 (Del. 1968) (citing Bata v. Bata, 163 A.2d
493, 507 (Del. Ch. 1960)).
76
Id. (citations omitted).
77
Columbia Cas. Co. v. Playtex FP, Inc., 584 A.2d 1214, 1216 (Del. 1991).
78
Messick v. Star Enter., 655 A.2d 1209, 1211 (Del. 1995) (citing Taylor v. State, 402
A.2d 373, 375 (Del. 1979)).
20
that matters, for purposes of an issue preclusion inquiry, is whether the two decisions
purported to address the same issue.”79
Defendants argue that this action is collaterally estopped because
“[Nederlander] seeks to litigate the theory that a theatre owner or operator
necessarily has ‘control over’ a production under Section 7.02(b)—the same theory
it argued in the first case.”80 Plaintiff concedes (as it must) that I determined the
meaning of control, but Plaintiff argues that “[t]he fact that 7.02(b) does not apply
to all shows,” as I held in my Opinion, “does not mean it applies to none” and that
“[t]he only specific discussion of ‘control’ was the Court’s finding that Defendants
controlled Fun Home.” 81
In the First Action, Plaintiff effectively argued that ownership equals
control. 82 I rejected this interpretation of the LLC Agreement. Instead, I determined
that members, affiliates, directors, and officers are “allowed to compete with the
Company, except that they cannot stage a production within 100 miles of San
Francisco if they have ‘the ability to determine where the [p]roduction plays and the
79
Acierno v. New Castle Cty., 679 A.2d 455, 460 (Del. 1996).
80
Defs.’ Opp’n Br. 38.
81
Pl.’s Reply Br. 11 (emphasis in original) (citation omitted).
82
See, e.g., Opp’n to Mot. to Dismiss 30, CSH Theatres, LLC v. Nederlander of San
Francisco Assocs., C.A. No. 9380-VCMR (Del. Ch. Sept. 9, 2014).
21
terms and conditions of said engagement’” unless they meet one of the exceptions
under 7.02(b).83 Based on that interpretation of Section 7 of the LLC Agreement, I
held that Hays controlled the production of Fun Home because a previous investment
in that show gave her “the first right to present the first commercial production of
the [p]lay in the Bay Area.” 84 I held “[t]his concession constitutes control over the
production as defined in Section 7.03 because it allows [Hays] ‘the ability to
determine where the Production plays and the terms and conditions of said
engagement.’” 85
Now Plaintiff asserts a new argument about control. Plaintiff essentially
argues that staging—i.e., presenting—a play equals control. Plaintiff’s purported
evidence of Hays’s control over the productions of DEH and Harry Potter includes
items such as (1) Hays negotiating for months, with aid of counsel, before agreeing
to terms to produce specific shows;86 (2) Hays providing a personal guarantee of
revenue to the DEH producers;87 (3) Hays leasing the Curran for a term linked to the
83
Id.
84
Id. at 25.
85
Id. (quoting JX 10-25).
86
Pl.’s Opening Br. 13.
87
Id. at 12-13.
22
expected duration of Harry Potter; 88 and (4) Hays being unwilling to sign the
contract with Ambassador unless it included specific terms she desired, particularly
related to staffing and branding the production of Harry Potter in a way that would
benefit the Curran’s brand. 89 Plaintiff effectively argues that any exercise of Hays’s
ownership of the Curran beyond a long-term, passive lease with no influence over
programming is equal to control. Under Plaintiff’s interpretation, Defendants
control every play that is staged (i.e. presented) at the Curran if they engage in the
“making of the agreement” or if they retain any influence over programming.90
Plaintiff argues that Defendants may own the Curran and Broadway-style shows
may play at the Curran without competing. For example, Plaintiff states that the
previous owners of the Curran “owned the theater, but they did not control any
production that played at the theater because they (unlike the Defendants) agreed to
a lease that ceded control over particular shows and their terms to SHN.” 91 Under
this interpretation, SHN, not the previous owner, staged shows. Thus, in essence,
Plaintiff argues that Defendants control any production that they stage.
88
Id. at 24-25.
89
Id. at 25-27.
90
Pl.’s Reply Br. 14.
91
Id. at 15 (emphasis omitted).
23
For me to find that the two arguments—ownership equals control (from the
previous litigation) and staging a production equals control (from this litigation)—
are the same and the second is barred by collateral estoppel, I would have to believe
that staging a production equals ownership. Although the ability to stage a play at a
theater you own may be an important stick in the bundle of property rights we call
ownership, it is not the only right in the bundle. Even if I held that Hays could not
stage Broadway-style plays at her theater because staging is control, she would retain
other core ownership rights such as the right to rent out the theater (albeit under
restrictions), the right to sell the land, the right to occupy the land, and so forth. The
ability to stage a play is not the same as ownership. Thus, collateral estoppel does
not bar Plaintiff’s claims.
C. The Request for Injunctive Relief
I turn now to the merits of Plaintiff’s request for this Court to grant a
preliminary injunction in its favor. Plaintiff seeks a preliminary injunction to
prevent Defendants and their associates from staging productions of DEH or Harry
Potter within 100 miles of San Francisco, including at the Curran, on the basis that
Defendants have not met any of the three exceptions in Section 7.02(b) that allow
Defendants to stage a play they control at the Curran. 92
92
Pl.’s Mot. for Prelim. Inj. 1-2 (quoting Compl. Ex. 1 § 7.02(b) (“(i) such Production
has first played in one of [SHN’s] Theatres; or (ii) such Production has been rejected
for bookings at one of the Theaters by the other Member’s representative on the
24
“The relief afforded by a preliminary injunction is both powerful and
extraordinary. As such, it is not granted lightly.” 93 “The Court of Chancery has
broad discretion in granting or denying a preliminary injunction.” 94 “A preliminary
injunction may be granted where the movants demonstrate: (1) a reasonable
probability of success on the merits at a final hearing; (2) an imminent threat of
irreparable injury; and (3) a balance of the equities that tips in favor of issuance of
the requested relief.” 95 “The moving party bears a considerable burden in
establishing each of these necessary elements. Plaintiffs may not merely show that
a dispute exists and that plaintiffs might be injured; rather, plaintiffs must establish
clearly each element because injunctive relief ‘will never be granted unless
earned.’” 96 Yet, “there is no steadfast formula for the relative weight each [element]
Board of Directors; or (iii) the Company shares in the profits and/or losses of any
booking” through an agreement between SHN and the competing member)).
93
N.K.S. Distribs., Inc. v. Tigani, 2010 WL 2367669, at *5 (Del. Ch. June 7, 2010).
94
Data Gen. Corp. v. Dig. Comput. Controls, Inc., 297 A.2d 437, 439 (Del. 1972)
(citing Richard Paul, Inc. v. Union Improvement Co., 91 A.2d 49 (Del. 1952)).
95
Nutzz.com, LLC v. Vertrue, Inc., 2005 WL 1653974, at *6 (Del. Ch. July 6, 2005).
96
La. Mun. Police Emps.’ Ret. Sys. v. Crawford, 918 A.2d 1172, 1185 (Del. Ch. 2007)
(citing Lenahan v. Nat’l Comput. Analysts Corp., 310 A.2d 661, 664 (Del. Ch.
1973)).
25
deserves. Accordingly, a strong demonstration as to one element may serve to
overcome a marginal demonstration of another.” 97
1. Reasonable Probability of Success on the Merits
Plaintiff argues that it has shown a reasonable probability of success on the
merits because Defendants breached the LLC Agreement by “stag[ing] any
Production” (under Section 7.02(b)) “that it controls” (under Section 7.02(b), with
control defined under Section 7.03) without meeting any of the exceptions allowing
them to compete (under Section 7.02(b)).98
The question of whether Defendants breached the LLC Agreement requires
me to interpret the terms of the LLC Agreement. “Limited liability companies are
creatures of contract, and the parties have broad discretion to use an LLC agreement
to define the character of the company and the rights and obligations of its
members.” 99 When interpreting an LLC agreement like this one, “Delaware [courts]
97
Alpha Builders, Inc. v. Sullivan, 2004 WL 2694917, at *3 (Del. Ch. Nov. 5, 2004)
(citing Cantor Fitzgerald, L.P. v. Cantor, 724 A.2d 571, 579 (Del. Ch. 1998)). The
parties disagree as to the appropriate standard in this case. Plaintiff argues that it is
attempting to enforce the status quo, not change it, so the prohibitory injunction
standard applies. Defendants disagree, and suggest that the status quo is where
things stand at this moment. Because Plaintiff is attempting to change the status
quo, Defendants say, Plaintiff must meet the higher standard for a mandatory
injunction. Because I conclude that Plaintiff does not show a reasonable probability
of success on the merits sufficient to satisfy the lower standard, I do not decide
which standard applies.
98
Compl. Ex. 1 §§ 7.02(b), 7.03, 7.06.
99
Kuroda v. SPJS Hldgs., L.L.C., 971 A.2d 872, 880 (Del. Ch. 2009).
26
adhere[] to the ‘objective’ theory of contracts, i.e. a contract’s construction should
be that which would be understood by an objective, reasonable third party.”100
Contracts are interpreted as a whole, and each provision and term will be given effect
as to not render any part “mere surplusage” or “meaningless or illusory.” 101 If a
contract is “clear and unambiguous,” then the Court “will give effect to the plain-
meaning of the contract’s terms and provisions.” 102 Alternatively, “a contract is
ambiguous . . . when the provisions in controversy are reasonably or fairly
susceptible of different interpretations or may have two or more different
meanings.”103 If a contract is ambiguous, a “court may then look to extrinsic
evidence to uphold to the extent possible, the reasonable shared expectations of the
parties at the time of contracting.”104
In the Opinion, I determined that members, affiliates, directors, and officers
may “compete with the Company, except that they cannot stage a production within
100
Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010) (quoting NBC
Universal v. Paxson Commc’ns, 2005 WL 1038997, at *5 (Del. Ch. Apr. 29, 2005)).
101
Id. at 1160 (quoting Kuhn Constr., Inc. v. Diamond State Port Corp., 990 A.2d 393,
397 (Del. 2010), and Sonitrol Hldg. Co. v. Marceau Investissements, 607 A.2d 1177,
1183 (Del. 1992)).
102
Id. (citing Rhone–Poulenc Basic Chem. Co. v. Am. Motorists Ins. Co., 616 A.2d
1192, 1195 (Del. 1992)).
103
Rhone-Poulenc, 616 A.2d at 1196 (citing Hallowell v. State Farm Mut. Auto. Ins.
Co., 443 A.2d 925, 926 (Del. 1982)).
104
Comrie v. Enterasys Networks, Inc., 837 A.2d 1, 13 (Del. Ch. 2003).
27
100 miles of San Francisco if they have ‘the ability to determine where the
[p]roduction plays and the terms and conditions of said engagement’” unless they
meet one of the exceptions under Section 7.02(b).105 I must now evaluate Plaintiff’s
contention that the circumstances surrounding the production of DEH and Harry
Potter evidence control—the ability to determine where to produce the plays and the
terms and conditions of said engagement.
Plaintiff points to the terms of the contracts regarding the productions of DEH
and Harry Potter as evidence of control. Plaintiff argues that these contracts
demonstrate the Defendants’ ability to determine where DEH and Harry Potter
play—at the Curran. Plaintiff also contends that these contracts show Defendants’
control over the terms and conditions under which DEH and Harry Potter will play.
According to Plaintiff, the terms and conditions that Defendants control include, for
DEH, “[t]he financial terms, the number of performances, the dates, the duration of
the show. Ticketing fees, for example, facility fees, . . . . Seat sales, sale dates, the
dynamic pricing arrangement.” 106 For Harry Potter, Plaintiff argues that
Defendants’ control over terms and conditions include that Hays “had to approve the
manager of [the] operation . . . . [and got] priority seating requirements for
105
CSH Theatres, 2018 WL 3646817, at *24 (quoting JX 10-25).
106
Oral Arg. Tr. 18:3-9.
28
subscribers.”107 Hays also had final say over physical renovations to the theater.108
Plaintiff acknowledges that none of the Defendants had any preexisting rights to
force DEH or Harry Potter to play at the Curran. For example, Plaintiff
acknowledges that DEH or Harry Potter could have chosen to play at an SHN theater
without breaching any obligation to any of the Defendants. 109 Likewise, Plaintiff
acknowledges that all the terms and conditions are the product of negotiations that
occurred simply because Hays’s affiliate owns the Curran and she had the ability to
say no to a request to use the Curran on terms that she did not find agreeable.110
According to Plaintiff, however, none of that matters.
Plaintiff interprets “control” to exist under the LLC Agreement anytime
Defendants “stage” (i.e., present) a show directly (rather than through a passive lease
with another party controlling all programming such as the choice of production,
pricing, marketing, etc.). 111 Plaintiff argues that this control can occur at any time
107
Id. at 21:1-11.
108
Id. at 20:13-24.
109
Id. at 29:21-30:5.
110
Valeski Aff. Ex. 144 (Wilson Dep.) 53:21-54:10 (“Q. If the producers didn’t agree
to the terms, then the show wouldn’t play at the Curran, correct? A. Yes. Q. And
if the [Hayses] didn’t agree to the terms, then the show wouldn’t play at the Curran,
correct? A. Correct.”).
111
Oral Arg. Tr. 27:6-16.
29
prior to the staging of the show, whether two years before staging the show (based
on something like the right of first refusal in Fun Home) or two days before the
staging of the show (based on a contract allowing the production to play).112
Therefore, Plaintiff argues, the control over the productions of DEH and Harry
Potter that Defendants gained through the contracts they signed booking those
productions to play at the Curran is sufficient to make the productions subject to
Defendants’ “control” as defined in Section 7.03. This, Plaintiff explains, is because
Defendants were involved in negotiating the terms and could have rejected them at
any time, preventing DEH and Harry Potter from playing at the Curran. 113 I disagree
with this interpretation.
Section 7.02 says that “neither [party] will stage any Production that it
controls (as defined in Section 7.03) within 100 miles of San Francisco” unless
(1) the production first plays in a NSF theater, (2) NSF rejected the production, or
(3) the two agree on how to share the profits. 114 Plaintiff’s interpretation would
112
Id. at 27:12-16.
113
See, e.g., Valeski Aff. Ex. 144 (Wilson Dep.) 53:15-20 (“Q. Do you agree that the
producers and the Curran have joint control over the final terms that were agreed
upon? A. Yes.”); id. at Ex. 143 (Rogers Dep.) 100:10-15 (“Q. Does CSH control
whether it’s willing to enter into an agreement with [Ambassador]? A. CSH
controls, yes. Q. Does it control whether it’s willing to agree to certain terms with
[Ambassador]? A. Yes.”).
114
Compl. Ex. 1 § 7.02(b).
30
make parts of Section 7.02 unnecessary surplusage. If, as Plaintiff contends, to stage
a production is to control it, 115 Section 7.02’s limits on a member or affiliate’s ability
to “stage a Production that it controls (as defined in Section 7.03)” is repetitive,
because “that it controls (as defined in Section 7.03)” adds nothing to the sentence.
This interpretation creates surplusage.
Although the text of Section 7 is unambiguous and I need not look to extrinsic
evidence, the contractual history further supports my interpretation. As I wrote in
the Opinion, Section 4 of the partnership agreement for SHN’s predecessor entity
required that “[n]either party will stage any production within 100 miles of San
Francisco” unless it meets the same three exceptions available under Section
7.02(b). 116 By contrast, Section 7.02 of the LLC Agreement only places limits on
members’ ability to show productions that they “control.” Thus, “Section 7.02 of
the LLC Agreement is substantially similar to Section 4, except that ‘Shorenstein
Entity and Nederlander Entity’ replaced ‘partners,’ and instead of a prohibition on
any production within 100 miles, there is only a prohibition on controlled
productions within 100 miles.”117 I concluded that “Section 7.02(b) seems to strike
115
See Section II.B, Collateral Estoppel.
116
CSH Theatres, 2018 WL 3646817, at *76.
117
Id. at *77.
31
a balance by applying to more people, but in a more limited way.” 118 The parties
explicitly rejected language limiting the ability to “stage” a production in favor of
language limiting the ability to show productions that a party “controls.” This is
further evidence that “stage” and “control” do not have the same meaning.
Plaintiff’s interpretation would also render parts of Section 7.06 surplusage.
Section 7.06 lays out a series of ways that members, affiliates, directors, and officers
may compete against the Company, with a narrow circumstance where they may not.
Section 7.06 allows any member or affiliate to “have business interests and engage
in business activities . . . without having or incurring any obligation . . . to the
Company or any other Member, and no other provision of this Agreement shall be
deemed to prohibit any such Person from conducting such other businesses and
activities.”119 Section 7.06 allows members, affiliates, directors, and officers to
engage in “ownership, operation and management of businesses and activities, for
its own account and for the account of others . . . [including] interests in the same
properties in which the Company or the other Members own an interest.”120
Plaintiff’s interpretation would reduce Section 7.06 to only allowing competition
when the member or affiliate is a passive, uninvolved investor. This interpretation
118
Id.
119
Compl. Ex. 1 § 7.06.
120
Id.
32
would make large parts of Section 7.06—for example, the language regarding the
ability to operate and manage a business for its own account and others’ accounts—
unnecessary surplusage.
Finally, Plaintiff attempts to analogize these plays to Fun Home, but the
circumstances are substantially different. In Fun Home, Hays invested in the
production company in exchange for a right of first refusal if the play showed in the
San Francisco Bay Area. 121 Hays created a situation where the producers of Fun
Home would have breached their contract by playing elsewhere. 122 By contrast, here
the producers of DEH and Harry Potter openly negotiated with multiple venues,
which competed against each other to hold the productions. Greg Holland of SHN
confirmed that he “tried to convince the producer of [DEH] to show that show at one
of the SHN Theatres,” 123 but the producer declined at least in part based on the
Curran’s more “intimate” setting. 124 Holland also attempted to convince the
producers of Harry Potter to choose an SHN theater; Holland exchanged emails with
the producers of Harry Potter and sent the producers technical specifications for
121
CSH Theatres, 2018 WL 3646817, at *25.
122
Oral Arg. Tr. 29:21-30:2.
123
Transmittal Aff. of Sarah T. Andrade in Supp. of the Defs.’ Opp’n Br. (“Andrade
Aff.”) Ex. 106 (Holland Dep.) 29:2-6.
124
Wilson Aff. ¶ 25.
33
SHN theaters, but to no avail. 125 The parties engaged in an open competition to show
both DEH and Harry Potter. Defendants had no independent right or authority to
cause DEH or Harry Potter to play at the Curran or to set the terms for either play.
Thus, the facts of Fun Home do not apply.
Plaintiff’s interpretation is not reasonable and would impermissibly turn large
parts of Section 7 of the LLC Agreement into “mere surplusage.” The terms of
Section 7 of the LLC Agreement are not ambiguous. Staging does not mean control
under the LLC Agreement. Thus, I hold that Plaintiff has failed to show a likelihood
of success on the merits.126
2. The Footnoted Fiduciary Duty Claim
Nederlander raises in a footnote that it has brought claims for breach of
fiduciary duty and aiding and abetting and that these have “a reasonable probability
of success” because CSH is a member and fifty percent owner of SHN, leading to
“common law and contractual fiduciary duties.”127 “As such, the individual
defendants who ultimately control CSH likewise owe fiduciary duties.”128
125
Defs.’ Opp’n Br. 26-27 (citing Exs. 121-122).
126
Because Plaintiff fails to show a reasonable probability of success on the merits, I
decline to address imminent threat of irreparable harm, balance of the equities, the
appropriate size of an injunction bond, or estoppel.
127
Pl.’s Opening Br. 40 n.6 (citations omitted).
128
Id.
34
Nederlander also asserts in the same footnote that even if some Defendants “did not
breach duties they owed directly, they knowingly participated in the transactions that
violated those duties. Accordingly, they are liable as aiders and abettors.”129
Defendants argue that I should ignore this argument both because “standalone
arguments in footnotes are usually not considered fairly raised in any court” 130 and
because “the Court already ruled ‘that Members are not transformed into fiduciaries
of one another by way of the LLC Agreement.’” 131 Plaintiff did not respond either
in its Reply or at oral argument.
Plaintiff addresses the issue so summarily in its footnote that it lends no
assistance to its argument about reasonable probability of success on the merits.
Plaintiff does not mention the issue at all in its sections on Irreparable Harm or
Balance of the Equities. Finally, because Defendants objected to the issue as not
properly raised, and because Plaintiff did not respond to that objection either in its
Reply Brief or at Oral Argument, it appears that Plaintiff has abandoned this
argument. Thus, I decline to rule on the fiduciary duty claim.
129
Id.
130
Defs.’ Opp’n Br. 50 (citing Sabree Envtl. & Constr. v. Summit Dredging, 149 A.3d
517, 2016 WL 5930270, at *1 (Del. Oct. 12, 2016) (TABLE)).
131
Id. (quoting CSH Theatres, 2018 WL 3646817, at *21).
35
III. CONCLUSION
For the foregoing reasons, I conclude that Plaintiff has not satisfied the
requisite elements for preliminary injunctive relief. Thus, I DENY Plaintiff’s
Motion for a Preliminary Injunction.
IT IS SO ORDERED.
36