CelestialRX Investments, LLCv. Joseph J. Krivulka ( 2017 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
CELESTIALRX INVESTMENTS, LLC )
and KRITTIKA LIFE SCIENCES, LLC, )
)
Plaintiffs, )
)
v. ) C.A. No. 11733-VCG
)
JOSEPH J. KRIVULKA; LEONARD )
MAZUR; DONALD OLSEN; JJK )
PARTNERS, LLC; MIST )
ACQUISITION, LLC; MIST )
PHARMACEUTICALS, LLC; MIST )
PARTNERS, LLC; JAK INVESTMENT )
PARTNERS, LLC; CRANFORD )
PHARMACEUTICALS, LLC; )
CRANFORD THERAPEUTICS, LLC; )
HOLMDEL PHARMACEUTICALS, )
LP; HOLMDEL THERAPEUTICS, )
LLC; LMAZUR ASSOCIATES, JV; and )
AKRIMAX PHARMACEUTICALS, )
)
Defendants, )
)
and )
)
AKRIMAX PHARMACEUTICALS, )
LLC, )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: October 20, 2016
Date Decided: January 31, 2017
Steven Schwartz, of SCHWARTZ & SCHWARTZ, Dover, Delaware; OF
COUNSEL: Benjamin C. Curcio, Paul F. Campano, Jessica A. Tracy, Michael D.
Zahler, of CURCIO MIRZAIAN SIROT LLC, Roseland, New Jersey, Attorneys for
Plaintiffs CelestialRX Investments, LLC, and Krittika Life Sciences, LLC.
Garrett B. Moritz, John A. Eakins, Nicholas D. Mozal, of ROSS ARONSTAM &
MORITZ LLP, Wilmington, Delaware; OF COUNSEL: Andrew E. Anselmi,
Zachary D. Wellbrock, of MCCUSKER, ANSELMI, ROSEN & CARVELLI, P.C,
Florham Park, New Jersey, Attorneys for Defendants Joseph J. Krivulka, JJK
Partners, LLC, JAK Investment Partners, LLC, Mist Acquisition, LLC, Mist
Pharmaceuticals, LLC, Mist Partners, LLC, Cranford Therapeutics, LLC, and
Holmdel Therapeutics, LLC.
Samuel T. Hirzel, II, of HEYMAN ENERIO GATTUSO & HIRZEL LLP,
Wilmington, Delaware, Attorney for Defendants Leonard Mazur and LMazur
Associates, JV.
Andrew D. Cordo, F. Troupe Mickler IV, of ASHBY & GEDDES, Wilmington,
Delaware, Attorneys for Defendant Donald Olsen.
Jody C. Barillare, of MORGAN, LEWIS & BOCKIUS LLP, Wilmington, Delaware;
OF COUNSEL: Brian A. Herman, of MORGAN, LEWIS & BOCKIUS LLP, New
York, New York, Attorneys for Defendant Cranford Pharmaceuticals, LLC.
Ryan P. Newell, Lauren P. DeLuca, of CONNOLLY GALLAGHER LLP,
Wilmington, Delaware, Attorneys for Defendant Holmdel Pharmaceuticals, LP.
Phillip A. Rovner, Jonathan A. Choa, of POTTER ANDERSON & CORROON
LLP, Wilmington, Delaware, Attorneys for Defendant Akrimax Pharmaceuticals
LLC.
GLASSCOCK, Vice Chancellor
This procedurally awkward and factually prolix Memorandum Opinion
reserves outstanding Motions to Dismiss, in favor of consideration of Motions for
Partial Summary Judgment, which appeared to offer low-hanging fruit which, if
reaped at the outset, might avoid significant litigation effort. The two issues so
addressed involve the standard of care in the governing limited liability company
agreement, and the effect of a release agreement, entered by the principal of the main
plaintiff here, on that entity’s ability to proceed with its claims. Plucking that fruit
has proved more difficult than I anticipated, and whether its elimination from the
menu of this litigation will shorten the meal remains to be seen. With these issues
resolved, at any rate, I encourage the parties to mediate this dispute, litigation of
which will no doubt involve much more unpalatable effort.
This action arises out of an alleged conspiracy to funnel valuable
pharmaceutical interests away from an entity in which the Plaintiff, CelestialRX,
LLC (“CelestialRX”), is a member. The operative amended complaint brings
sixteen different counts against over a dozen Defendants. The numerous Defendants
have banded together into five groups; each group has moved to dismiss this action.
Two groups have moved for partial summary judgment. The parties have identified
two preliminary issues which, if decided, could significantly clarify the legal issues
in this action. The first is whether a July 1, 2013 release (the “Release Agreement”)
bars causes of action brought by CelestialRX that accrued prior to the release. The
1
second is the extent to which the limited liability company agreement (the “LLC
Agreement”) and a July 1, 2013 amendment to that agreement (“Amendment No.
7”) limit or modify fiduciary duties. This Memorandum Opinion addresses those
preliminary issues.
Because these two preliminary issues were raised by Defendants’ Motions for
Partial Summary Judgment, I will address them under that standard. I am reserving
decision on the outstanding Motions to Dismiss and will ask for further guidance
from the parties in light of my decisions below on these two preliminary legal issues.
I undertake this unusual procedure in the interest of efficiency.
I. BACKGROUND1
This action involves a tangled web of pharmaceutical transactions, licensing,
and sales agreements among various related entities. Thus this case’s background is
dense. The following provides a detailed but non-exhaustive overview of the context
of this dispute sufficient to understand this Court’s analysis of the two legal issues
addressed: interpretation of the July 1, 2013 Release Agreement, and interpretation
of certain duty-related provisions in the LLC Agreement and Amendment No. 7. A
heavier focus is given to the pre-July 1, 2013 events as such context is helpful to
understand the documents executed that day. There are substantial disputes in this
1
Except where otherwise noted, the information in this section is undisputed and taken from the
verified pleadings, affidavits, and other evidence submitted to the Court. Reasonable inferences
are drawn in favor of the non-moving party—the Plaintiffs here.
2
litigation arising after July 1, 2013; because of the nature of this Memorandum
Opinion, those are discussed with less detail. The casual reader may be satisfied
with the brief summary, below.
This action arises from allegedly improper self-dealing transactions by two
members of a three-member limited liability company. The company, Akrimax
Pharmaceuticals, LLC (“Akrimax” or the “Company”), is a Defendant in this action
along with the two alleged wrong-doers—Joseph J. Krivulka and Leonard Mazur.
The third member of Akrimax is itself a limited liability company, and brings this
action challenging such transactions on various grounds. That third member,
Plaintiff CelestialRX, is wholly owned by a non-party, Steve Laumas. Akrimax is a
pharmaceutical business and engaged in a morass of licensing and sales agreements
underlying this dispute. The Plaintiffs allege that Krivulka improperly inserted
various entities that he controlled or was invested in (the “Middlemen Entities”) as
middlemen between Akrimax and other drug companies from whom Akrimax
sought to receive drug rights. The Middlemen Entities received a cut of the sales or
marketing performed by Akrimax. The favorability of the terms under which the
Middlemen Entities were interposed between the company and third parties is
heavily disputed.
In the Spring of 2013 Krivulka and his entities notified Akrimax of their
intention to terminate Akrimax’s rights to sell and distribute certain drugs.
3
Allegedly, this was the first time CelestialRX and Laumas learned of the Middlemen
Entities’ existence and dealings with Akrimax, and Laumas thereafter began
investigating—and disputing the propriety of—Krivulka’s actions. Ultimately a
“settlement” was reached whereby the Middlemen Entities agreed that Akrimax
would retain certain drug rights in exchange for paying additional fees, among other
concessions. In connection with the settlement, Laumas (but, according to the
Plaintiffs, not CelestialRX) released all claims against Krivulka and Mazur. These
higher fees ultimately were not paid, allegedly as part of a scheme by Krivulka to
damage Akrimax, and Akrimax eventually lost the rights returned to it via the
settlement. CelestialRX brings this action alleging misconduct by Krivulka and
others for almost every transaction between Krivulka’s related entities and Akrimax.
A. Parties
1. The Plaintiffs
Plaintiff CelestialRX is a Delaware limited liability company with its
principal place of business in Old Greenwich, Connecticut.2 CelestialRX’s sole
member and manager is Sandeep “Steve” Laumas (“Laumas”).3 The Plaintiff,
CelestialRX, is a member of the Defendant, Akrimax.4
2
Transmittal Aff. of Michael D. Zahler, Esq., in Support of Pls’ Opposition to Motions for
Summary Judgment and to Dismiss (“Zahler Aff.”) at Ex. 1 (the “Amended Complaint” or
“Compl.”) ¶ 4.
3
Compl. ¶ 4; Pls’ Answering Br. in Opposition to Krivulka Defs’ Motions 6 (“Laumas is the sole
member of CelestialRX and Krittika.”).
4
Compl. ¶ 4.
4
Plaintiff Krittika Life Sciences, LLC (“Krittika”) is also a Delaware limited
liability company and shares a principal place of business with CelestialRX in Old
Greenwich, Connecticut.5 Krittika’s sole member is Laumas and, as with
CelestialRX, Laumas manages Krittika.6 Krittika is a consulting entity which had a
contractual relationship with Defendant Akrimax.7
2. The Defendants
a. Nominal Defendant
Defendant Akrimax is a Delaware limited liability company that sells and
markets “pharmaceutical products in the areas of cardiovascular medicine
endocrinology and pain management.”8 Defendants Joseph Krivulka and Leonard
Mazur were the initial members of Akrimax.9 Plaintiff CelestialRX subsequently
joined as a third member.10 Akrimax is a nominal defendant for purposes of
CelestialRX’s claims, but is also a direct defendant for Krittika’s breach of contract
claims regarding its consulting agreement.11
5
Id. at ¶ 5.
6
Id.; Pls’ Answering Br. in Opposition to Krivulka Defs’ Motions 6 (“Laumas is the sole member
of CelestialRX and Krittika”).
7
Compl. ¶ 3.
8
Id. at ¶ 28; See Krivulka Defs’ Opening Br. 9.
9
Compl. ¶ 28.
10
Id.
11
Id. at ¶ 6.
5
b. Individual Defendants
Defendant Joseph J. Krivulka (“Krivulka”) is a resident of New Jersey and an
investor in numerous pharmaceutical businesses.12 He is an original member of
Akrimax. Following the July 1, 2013 settlement and amendments Krivulka holds
100% of Akrimax’s Common Voting Units and a majority of total units.13 He
became the sole Manager of Akrimax pursuant to the July 1, 2013 amendment.14
Prior to the July 1, 2013 amendment the Manager of Akrimax was the Board of
Directors “acting collectively.”15 Krivulka also has investments in various other
entities including Mist Acquisition, LLC, Mist Pharmaceuticals, LLC, Mist Partners,
LLC, JJK Partners, LLC, JAK Investment Partners, LLC, Holmdel Therapeutics,
LLC and Cranford Therapeutics, LLC.16
Defendant Leonard Mazur (“Mazur”) is a resident of New Jersey and co-
founded Akrimax in 2007.17 Between January 11, 2008, and July 1, 2013, Mazur
12
Id. at ¶ 7; See Krivulka Defs’ Opening Br. 8. (citing Compl. ¶ 7).
13
See Transmittal Aff. of John A. Eakins, Esq., in Support of Krivulka Defs’ Motions for Summary
Judgment and to Dismiss (“Eakins Aff.”) Ex. 45 at Ex. A.
14
See Eakins Aff. Ex. 45 ¶ 6(b).
15
See Eakins Aff. Ex. 2 § 4.01(b).
16
See Compl. ¶ 7; Krivulka Defs’ Opening Br. 8 (citing Compl. ¶ 7). Through his ownership
interests in Holmdel Therapeutics Krivulka is also a minority equity holder in Holmdel
Pharmaceuticals. Similarly, through his interest in Cranford Therapeutics Krivulka is also a
minority equity holder in Cranford Pharmaceuticals.
17
Compl. ¶¶ 8, 28.
6
served on Akrimax’s board of directors with Krivulka and Laumas.18 Mazur, like
Krivulka, has various investment interests outside his interest in Akrimax.
Defendant Donald Olsen (“Olsen”) resides outside of Delaware, and is the
former President and CEO of nominal defendant Akrimax.19
Before turning to the blizzard of entities involved in this matter, I note that the
basic initial membership structure for Akrimax is set out in Figure 1 below.
Figure 120
18
Zahler Aff. Ex. 3 § 4.01(b); See Eakins Aff. Ex. 45 ¶ 6(b).
19
Compl. ¶ 9; Def Olsen’s Opening Br. 2.
20
See Zahler Aff. Ex. 2 at Ex. A, Signature Page; Zahler Aff. Ex. 3 at Ex. A. I have excluded
North Sounds’ Class A shares to avoid confusion.
7
c. The Entity Defendants
There are numerous entity level defendants—some more relevant than others.
Below is a brief description of each.
Defendant JJK Partners, LLC (“JJK Partners”) is a Delaware limited liability
company.21 Krivulka is the sole member of JJK Partners.22 Following Amendment
No. 7 Krivulka holds his interest in Akrimax through JJK Partners—that is JJK
Partners is a Member of Akrimax holding “Krivulka Units.”23 However, he initially
held his interest in Akrimax in his own name.24 Further, JJK Partners has a
consulting agreement with Akrimax through which Krivulka receives his board
fees.25
Defendant JAK Investment Partners, LLC (“JAK Investment Partners”) is a
Delaware limited liability company.26 Krivulka is the sole member of JAK
21
Zahler Aff. Ex. 5.
22
See Zahler Aff. Ex. 7 at Ex. B.
23
Eakins Aff. Ex. 45 at Ex. A (indicating JJK Partners is the member holding “Krivulka Units”).
24
See Eakins Aff. Ex. 2 at Ex. A.
25
Zahler Aff. Ex. 25.
26
Zahler Aff. Ex. 6. I note that JAK Investments, LLC was named in the Amended Complaint,
but was dismissed via stipulation of the parties. See Compl. ¶ 13; Stipulation and Order Dismissing
Defendant JAK Investments, LLC Without Prejudice (April 6, 2016). The Complaint alleged that
Krivulka had signed documents on behalf of JAK Investments, LLC and held interests in certain
entities via JAK Investments, LLC. See Compl. ¶ 13. Certain ownership documents were in fact
errantly signed by JAK Investments, LLC, however it is now clear they should have referred to
JAK Investment Partners. Stipulation and Order Dismissing Defendant JAK Investments, LLC
Without Prejudice (April 6, 2016).
8
Investment Partners.27 Defendant Mist Partners, LLC was majority owned by JAK
Investment Partners.28
Defendant Mist Partners, LLC (“Mist Partners”) is a Delaware limited liability
company and was formed in October 2009.29 Mist Partners was majority owned by
JAK Investment Partners, which Krivulka beneficially owned.30 Mist Partners is the
sole owner and member of Mist Acquisition, LLC.31
Defendant Mist Acquisition, LLC (“Mist Acquisition”) is also a Delaware
limited liability company formed in October 2009 and, as stated above, is wholly
owned by Mist Partners.32 Krivulka has served as Chairman of Mist Acquisition,
and Mazur has served as Vice Chairman.33 Mist Acquisition, as discussed below,
engaged in a number of the transactions challenged in this litigation.
Defendant Mist Pharmaceuticals, LLC (“Mist Pharmaceuticals”) is a
Delaware limited liability company formed in June 2011.34 Mist Pharmaceuticals,
at various points in this litigation held, distributed and revoked rights to sell or
27
See Zahler Aff. Ex. 8 at Signature Block, Ex. B.
28
See Compl. ¶ 14; Krivulka Defs’ Opening Br. 12.
29
Eakins Aff. Ex. 7 § 2.01.
30
See id. at Ex. B; Stipulation and Order Dismissing Defendant JAK Investments, LLC Without
Prejudice (April 6, 2016).
31
See Eakins Aff. Ex. 8 at Ex. A.
32
Eakins Aff. Ex. 8.
33
Eakins Aff. Ex. 8 ¶ 7.
34
See Zahler Aff. Ex. 14.
9
promote certain drugs at issue. Krivulka had an over ninety percent interest in Mist
Pharmaceuticals.35 Krivulka was Chairman of Mist Pharmaceuticals’ board.36
Defendant Cranford Therapeutics, LLC (“Cranford Therapeutics”) is a
Delaware limited liability company formed in October 2013 by Krivulka.37
Krivulka, through JJK Partners, held a majority interest in Cranford Therapeutics.38
Defendants Olsen and Mazur also held equity in Cranford Therapeutics.39 Cranford
Therapeutics owns a minority interest of approximately twelve percent in Defendant
Cranford Pharmaceuticals, LLC.40
Defendant Cranford Pharmaceuticals, LLC (“Cranford Pharmaceuticals”) is a
Delaware limited liability company and was also formed by Krivulka in October
2013.41 Krivulka has served as CEO of Cranford Pharmaceuticals.42 The majority
equity holder of Cranford Pharmaceuticals is a third-party investor—Juggernaut
Capital.43 Cranford Pharmaceuticals engaged in a number of the transactions which
the Plaintiffs challenge in this litigation.
35
Eakins Deposition Aff. Ex. A at 19:15–18 (Krivulka); Zahler Aff. Ex. 15 at Ex. B.
36
Zahler Aff. Ex. 15 § 6.01(b).
37
Zahler Aff. Ex. 18.
38
Zahler Aff. Ex. 19 at Ex. B.
39
Id.
40
See Eakins Aff. Ex. 58 at Ex. A.
41
Zahler Aff. Ex. 20.
42
Eakins Aff. Ex. 58 § 4.03(a).
43
Id. at Ex. A. (indicating Juggernaut Capital contributed $22 million, whereas Cranford
Therapeutics contributed on $3 million).
10
Defendant Holmdel Therapeutics, LLC (“Holmdel Therapeutics”) is a
Delaware limited liability company formed in December 2012.44 Defendant
Krivulka, through JJK Partners, owns 50.05% of Holmdel Therapeutics.45
Defendant Mazur, through his entity LMazur Associates JV, owns 25% of Holmdel
Therapeutics.46 Holmdel Therapeutics is a limited partner in Holmdel
Pharmaceuticals, LP, and holds an approximately 13% stake as a minority investor.47
Holmdel Pharmaceuticals, LP (“Holmdel Pharmaceuticals”) is a Delaware
limited partnership formed in December 2012.48 Holmdel Pharmaceuticals’ general
partner is HP General Partner LLC,49 which is controlled by unrelated third-party
SWK.50 SWK contributed approximately $13 million in capital whereas Holmdel
Therapeutics contributed approximately $2 million.51 Holmdel Pharmaceuticals
acquired and transferred rights to certain drugs at issue in this litigation.
Defendant LMazur Associates JV (“LMazur”) is an entity which had a
consulting agreement with Akrimax.52 Defendant Mazur received his board fees via
LMazur. Defendant Mazur also made investments in various entities via LMazur.
44
Zahler Aff. Ex. 17.
45
Eakins Aff. Ex. 24 at Ex. B.
46
Id.
47
Eakins Aff. Ex. 25 at Partner Schedule.
48
Id. at Recitals.
49
Id. at Partner Schedule.
50
See Eakins Aff. Ex. 67 at Note 1.
51
Eakins Aff. Ex. 25 at Partner Schedule.
52
See Zahler Aff. Ex. 24.
11
d. Defendant Groups
Given the number of Defendants in this litigation, it is helpful to note that the
Defendants have formed the five groups discussed below.
The first group of Defendants is the “Krivulka Defendants” which consists of
the following: Joseph Krivulka, JJK Partners, JAK Investment Partners, Mist
Acquisition, Mist Pharmaceuticals, Mist Partners, Cranford Therapeutics and
Holmdel Therapeutics. The Krivulka Defendants have moved to dismiss each count
against them, and for partial summary judgment on each of the two preliminary
issues.
The next group of Defendants, the “Mazur Defendants,” consists of
Defendants Leonard Mazur and LMazur. The Mazur Defendants have moved to
dismiss each count against them for lack of personal jurisdiction and failure to state
a claim, and for partial summary judgment regarding the preliminary issue of the
effect of the July 1, 2013 release.
Defendant Olsen is on his own, and has moved to dismiss for lack of personal
jurisdiction and failure to state a claim. Similarly, Defendant Holmdel
Pharmaceuticals is on its own, and has moved to dismiss for failure to state a claim.
Finally, Cranford Pharmaceuticals is on its own and has moved to dismiss for failure
to state a claim.
12
B. Akrimax’s Beginnings and Select Transactions53
Akrimax was formed by Krivulka and Mazur on October 24, 2007.54 There
was no initial capital contribution by Krivulka or Mazur.55 On January 11, 2008,
Akrimax amended its governing documents to permit an investment by a hedge fund,
North Sound Capital.56 Laumas previously worked at North Sound Capital, however
at the time of North Sound’s investment he was no longer at the hedge fund.57 North
Sound invested $35 million and received 35,000,000 non-voting, Class A preferred
units.58 The record indicates that in connection with this investment, which Laumas
was involved in facilitating, CelestialRX, Laumas’ entity, received 49% of
Akrimax’s common voting units.59 Thus the common voting units, as outlined in
Figure 1, were initially distributed as follows, 49% to CelestialRX, 25.5% to Mazur,
and 25.5% to Krivulka.60 These voting shares appear to have been received without
capital contribution, and the initial capital came from North Sound.61
53
I note other transactions involving the drugs InnoPran XL and Suprenza, for example, occurred
between formation and July 1, 2013 and were mentioned in the briefing. However, because they
were not heavily emphasized I chose to omit them from this background section for efficiency.
54
Zahler Aff. Ex. 2 at Recitals.
55
See id. at Ex. A.
56
See Eakins Aff. Ex. 2 at Recital C.
57
Eakins Deposition Aff. Ex. B at 33:12–21 (Laumas).
58
See Krivulka Defs’ Opening Br. 11 (citing Eakins Aff. Ex. 2); Pls’ Answering Br. in Opposition
to Krivulka Defs’ Motions 5 (citing Zahler Aff. Ex. 3).
59
See Zahler Aff. Ex. 3 at Ex. A.
60
See id.
61
See Zahler Aff. Ex. 2 at Ex. A; Pls’ Answering Br. in Opposition to Krivulka Defs’ Motions 13
(indicating the “sole source” of initial capital was the $35 million from North Sound).
13
Akrimax’s January 11, 2008 Second Amended LLC Agreement provided that
the initial directors “shall be Joseph Krivulka, Len Mazur and Steve Laumas,”62 and
that each director had one vote.63 Further, it provided that the Manager of the
Company was the Board of Directors acting collectively.64 The Second Amended
LLC Agreement contained various provisions modifying fiduciary duties.65
a. Rouses Point and Inderal
Also on January 11, 2008, Akrimax purchased a manufacturing facility in
Rouses Point, New York from Wyeth Pharmaceuticals for $20 million.66 As part of
a separate agreement executed the same day Akrimax purchased rights to Inderal
and certain other drugs for $12 million from Wyeth Pharmaceuticals.67 Thus
Akrimax’s early productive assets were the facility and the drug rights purchased
from Wyeth. Later that year, Rouses Point Pharmaceuticals (“RPP”) was formed.68
Krivulka and Mazur collectively hold a controlling interest in RPP.69 Akrimax
62
Eakins Aff. Ex. 2. § 4.01(b).
63
Id. at § 4.01(c).
64
Id. at § 4.01(b).
65
Id. at §§ 4.01(h), 8.01–02.
66
Eakins Aff. Ex. 4 § 2.1.
67
Eakins Aff. Ex. 3 § 2.1.
68
Zahler Aff. Ex. 27.
69
Zahler Aff. Ex. 28 at Ex. A; Krivulka Defs’ Opening Br. 52.
14
appointed RPP as the exclusive distributor of Propranolol ER, an Inderal generic, on
February 9, 2009.70
b. NitroMist
On October 27, 2009 Mist Acquisition entered into a transaction with a third
party, NovaDel Pharma Inc. (“NovaDel”) to acquire the rights to the drug NitroMist
via a License and Distribution Agreement.71 To secure the rights, Mist Acquisition
agreed to pay NovaDel an up-front fee of $1 million, milestone payments, and
performance payments.72 Two days later, on October 29, 2009, Mist Acquisition
entered into a Commercialization, Distribution, and Support Services Agreement
with Akrimax (the “NitroMist Services Agreement”).73 Via the NitroMist Services
Agreement, Akrimax was assigned Mist Acquisition’s right to distribute NitroMist
in exchange for Akrimax assuming the responsibilities of the October 27, 2009
License Agreement, excluding the $1 million up-front payment in the License
Agreement,74 and agreeing to pay Mist Acquisition a royalty on net sales.75 Thus
Akrimax was able to receive the rights, without the substantial upfront payment;
however, if certain milestones were met, deferred payments totaling $1 million
70
Zahler Aff. Ex. 29 at 33–34. Rouses Point Pharmaceuticals, as a result of the agreement, was
responsible for paying Akrimax a service fee of 60% of Propranolol ER’s gross profit. Id. I note,
the term of this deal was five years. See id.
71
Eakins Aff. Ex. 9.
72
See id. at §§ 4.1–4.3.
73
Eakins Aff. Ex. 10.
74
See id. at §§ 3.5(h), 4.1.
75
See id. at §§ 4.1, 4.2.
15
would be owed by Akrimax to Mist Acquisition.76 Additionally, Akrimax was
required to make a $45,000 per quarter distribution fee payment to Mist Acquisition
for four quarters.77
c. Tirosint
On January 27, 2010 Akrimax entered into a Promotion Agreement (the
“Tirosint Agreement”) with Alpharma Pharmaceuticals, LLC to market and
distribute the drug Tirosint.78 The Tirosint Agreement provided Akrimax and its
affiliates an exclusive right to promote, market, sell and distribute Tirosint.79 The
Tirosint Agreement required Akrimax to expend millions per year on product
promotion,80 and required certain minimum product purchases per year. 81
That same day, January 27, 2010, Akrimax assigned to Mist Acquisition all
of its “rights and obligations” under the Tirosint Agreement.82 From the record
developed at this point, it appears at the time of this transfer, there was no
consideration rendered by Mist Acquisition other than assuming Akrimax’s
obligations under the Tirosint Agreement.83
76
Id. at § 4.4.
77
Id. at § 4.3.
78
See Eakins Aff. Ex. 11.
79
Id. at § 2.2.
80
Id. at § 3.1.
81
Id. at § 5.4.
82
Eakins Aff. Ex. 12 ¶¶ 1–2.
83
See id.; Eakins Deposition Aff. Ex. C at 91:3–11 (Mazur).
16
On December 7, 2011, Mist Acquisition entered into a Promotion,
Distribution and Support Services Agreement (the “Tirosint Services Agreement”)
with Akrimax.84 Pursuant to this agreement Akrimax would retain 90% of Tirosint’s
sales and would pay a 10% royalty to Mist Acquisition.85 Further, the Tirosint
Services Agreement was backdated to be effective as of January 27, 2010.86 The
Tirosint Services Agreement required the 10% royalty rate to be paid on accrued
distributions since the promotion commencement date.87 The favorability of these
terms is disputed—the Krivulka Defendants argue the transfer occurred after
Tirosint’s launch, which presumably required some expenditure by Mist, and that
the terms were favorable given Mist Acquisitions’ “substantial assumption of
obligations.”88 The Plaintiffs, for their part, assert that the transactions were
“purposeless” and that “[b]ut for these purposeless transactions, Akrimax would
have retained 100% of . . . gross sales.”89
d. Primlev
On October 3, 2011, Mist Pharmaceuticals entered into a Marketing Rights
Agreement (the “Primlev Agreement”) with unrelated third-parties Argent
Development Group and Mikart, Inc. to acquire distribution rights for the drug
84
Eakins Aff. Ex. 19.
85
Id. at § 6.2.
86
Id. at Recitals.
87
Id. at § 6.3.
88
Krivulka Defs’ Opening Br. 14.
89
Pls’ Answering Br. in Opposition to Krivulka Defs’ Motions 17.
17
Primlev.90 The Primlev Agreement required Mist Pharmaceuticals to pay a total of
$1,923,581 over four years, with a $700,000 payment due upon closing.91 The
Primlev Agreement indicated that Mist Pharmaceuticals “does not have a sales
force,” but that Akrimax does and desires to market and distribute Primlev on behalf
of Mist Pharmaceuticals.92
The next day, October 4, 2011, Mist Pharmaceuticals entered into a
Commercialization, Distribution and Support Services Agreement (the “Primlev
Services Agreement”) with Akrimax.93 This agreement provided Akrimax the
ability to market and distribute Primlev in exchange for Akrimax bearing the “costs
and expenses” associated with commercialization,94 paying Mist Pharmaceuticals
$1,503,000 in scheduled payments over four years—but with no up-front payment
due upon closing,95 and paying Mist Pharmaceuticals a 20% royalty on net sales.96
Again the parties dispute the favorability of these terms. The Plaintiffs assert Mist
Pharmaceuticals is an unnecessary “middle man,”97 whereas the Krivulka
Defendants assert Akrimax did not have the resources to expend upfront and the
90
Eakins Aff. Ex. 16.
91
Id. at § 8.1.
92
Id. at Recitals.
93
Eakins Aff. Ex. 17.
94
Id. at § 3.3.
95
Id. at § 4.2.
96
Id. at § 4.1.
97
Pls’ Answering Br. in Opposition to Krivulka Defs’ Motions 18.
18
Primlev Services Agreement permitted them to generate revenue “without
purchasing the rights.”98
C. The Settlement with Pfizer
In 2011 and 2012, an ongoing dispute between Akrimax and Pfizer was
settled.99 Pfizer had acquired Wyeth after Wyeth’s January 11, 2008 transaction
with Akrimax for the Rouses Point manufacturing facility and various drug rights,
including Inderal. Pfizer alleged that Akrimax had failed to comply with its
obligations arising from the January 2008 transactions.100 Laumas voted in favor of
the settlement with Pfizer.101 Mazur also voted in favor of the settlement over
Krivulka’s objection.102
The settlement had two different agreements. The first was the Settlement
Agreement entered on June 27, 2011.103 The Settlement Agreement required
Akrimax to return the Rouses Point manufacturing facility to Pfizer, along with the
rights to Inderal and the other pharmaceutical products.104 In exchange Pfizer
released Akrimax of certain obligations—appearing to total upwards of $20
98
Krivulka Defs’ Opening Br. 16.
99
See Eakins Aff. Ex. 71 at 9–10.
100
See Eakins Aff. Ex. 13 at Recitals.
101
Eakins Deposition Aff. Ex. B at 115:13–17 (Laumas).
102
See Feb. 2, 2016 Krivulka Aff. ¶ 13.
103
Eakins Aff. Ex. 13.
104
Id. at Recitals, §§ 1.47, 1.94, 2.2.
19
million.105 That same day Pfizer and Akrimax entered into a License and Option
Agreement.106 The License and Option Agreement permitted Akrimax to continue
its sales of both Inderal and its generic version Propranolol ER, 107 and provided
Akrimax the option to reacquire certain rights for $45,000,000.108
Thus, over Krivulka’s objection, Laumas and Mazur voted to return the
Inderal rights and the Rouses Point manufacturing facility to Pfizer.109 Each side
has a different theory regarding the effect of this vote. The Plaintiffs assert that this
dispute between Mazur, Laumas, and Krivulka angered Krivulka; it motived him to,
in bad faith, “exact revenge upon his partners” and Akrimax. 110 The Krivulka
Defendants’ spin on the vote is that it fundamentally changed Akrimax as a
company. The Defendants argue Akrimax “transitioned from an entity receiving
revenues based on manufacturing” and revenue streams from its initial Inderal
purchase in 2008, “to an entity earning revenues marketing and selling
pharmaceuticals under rights acquired by other entities.”111
105
See id. at § 2.2; Krivulka Defs’ Opening Br. 15 (“Pfizer released Akrimax’s obligations of
approximately $20 million.”).
106
Eakins Aff. Ex. 14.
107
Id. at Recital B, Schedule 1.44.
108
Id. at § 6.3.2.
109
See Pls’ Answering Br. in Opposition to Krivulka Defs’ Motions 50.
110
Id.; See id. at 114 (“Thus, Krivulka decided prior to July 1, 2013 that he didn't need those kind
of partners [Laumas]; and he engineered the default as revenge for the vote.”) (alterations in
original) (internal quotations omitted).
111
Krivulka Defs’ Opening Br. 15.
20
D. “For Convenience” Termination Provisions
On February 23, 2011, the October 29, 2009 NitroMist Services Agreement
between Mist Acquisition and Akrimax was amended.112 The original NitroMist
Services Agreement provided that Akrimax could terminate the agreement “for
convenience” upon one hundred eighty days prior written notice, under certain
conditions.113 The 2011 amendment changed the “for convenience” termination
provision by adding that Mist Acquisition may terminate the agreement and retake
Akrimax’s distribution rights “at any time for convenience upon thirty (30) days
prior written notice.”114 The Plaintiffs argue this amendment was improper and done
“with neither Laumas’ knowledge nor consent.”115
Regarding Primlev, the original October 4, 2011 Primlev Services Agreement
between Mist Pharmaceuticals and Akrimax provided that Mist Pharmaceuticals
may terminate the agreement “for any reason with a 30 day notice.”116 Similarly,
regarding Tirosint, the original December 7, 2011 Tirosint Services Agreement
between Mist Acquisition and Akrimax provided that Mist Acquisition may
terminate the agreement “for convenience upon thirty (30) days’ prior written notice
to Akrimax.”117
112
Zahler Aff. Ex. 32.
113
See Eakins Aff. Ex. 10 § 8.2(d).
114
Zahler Aff. Ex. 32 § 8.2(f).
115
Pls’ Answering Br. in Opposition to Krivulka Defs’ Motions 18.
116
Eakins Aff. Ex. 17 § 8.1.
117
Eakins Aff. Ex. 19 § 11.3(c).
21
E. Spring 2013—Certain Akrimax Rights Are Terminated
On April 12, 2013 a series of letters were sent providing Akrimax notice that
its rights to Primlev, NitroMist, and Tirosint, were being terminated effective June
1, 2013, pursuant to the “for convenience” provisions described above.118
Specifically, Mist Pharmaceuticals, via letter over Krivulka’s signature, informed
Akrimax that the Primlev Services Agreement was terminated.119 Mist Acquisition,
via letters over Krivulka’s signature, terminated the NitroMist Services Agreement
and the Tirosint Services Agreement.120
Following these termination letters, Laumas began requesting information
from Akrimax.121 Through the termination letters Laumas learned, purportedly for
the first time, of the Mist entities’ involvement with Akrimax.122 On May 7, 2013
Laumas sent a flurry of emails requesting information from Akrimax.123 On the
evening of May 7, 2013, Laumas also sent Krivulka and Mazur a consolidated list
of eighteen categories of documents he was requesting, which included account
balances, employee credit card statements, and legal invoices.124
118
See Zahler Aff. Ex. 37.
119
Id.
120
Id.
121
See, e.g., Zahler Aff. Ex. 38.
122
See Compl. ¶¶ 60–62; See also Pls’ Answering Br. in Opposition to Krivulka Defs’ Motions 20
(“Thus, Laumas first discovered Mist Acquisition's and Mist Pharmaceutical's involvement with
Tirosint, NitroMist, and Primlev from the April 12, 2013 termination letters.”).
123
See Zahler Aff. Exs. 39, 40, 41, 42, 43.
124
Eakins Aff. Ex. 32.
22
Laumas was provided with much of the information and documents he
requested. For example, Laumas was sent a disk containing various Akrimax
contracts, after which he requested further information about particular drugs.125 He
was also given various financial statements.126 Laumas indicated that he was
gathering this information to inform his decision to enter “some kind of settlement
agreement with Joe [Krivulka].”127
F. The July 1, 2013 “Settlement”
1. The Lead Up
The record reflects that on May 28, 2013, Mazur and Laumas, over Krivulka’s
objection,128 voted to retain Reitler Kailas & Rosenblatt LLC (“Reitler”) on behalf
of the Akrimax board of directors.129 A complaint was drafted by Reitler, dated May
29, 2013, with Akrimax as the plaintiff and Krivulka, Mist Pharmaceuticals, and
Mist Acquisition as the defendants.130 Laumas worked together with Mazur in
preparing the complaint, but it was not filed.131 The draft complaint alleged several
counts including conversion, breach of fiduciary duty, aiding and abetting breaches
of fiduciary duty, and fraud.132 The counts in the draft complaint arose out of many
125
Eakins Aff. Exs. 34, 36.
126
See Eakins Aff. Exs. 28, 29, 31, 33, 35.
127
Eakins Deposition Aff. Ex. B at 184:7–21 (Laumas).
128
See Eakins Aff. Ex. 37.
129
See Eakins Aff. Ex. 38.
130
Eakins Aff. Ex. 39 at 1, 21.
131
Eakins Deposition Aff. Ex. B at 204:12–206:23 (Laumas).
132
Eakins Aff. Ex. 39 ¶¶ 60–75.
23
of the pre-July 1, 2013 transactions at issue in the present litigation—including
Nitromist, Tirosint and Primlev.133 The complaint, however, was never filed and
Reitler was not further retained because progress was made towards settlement.134
On June 3, 2013, Laumas sent Mazur a draft term sheet for a settlement
between Akrimax and both Mist Pharmaceuticals and Mist Acquisition.135 Laumas’
June 3, 2013 draft term sheet proposed that “Akrimax becomes the licensee and
owner of all products with a royalty paid to Mist on a product by product basis” with
the products being Tirosint, NitroMist, Suprenza, and Primlev.136 The proposed
terms substantially increased the royalty percentage Akrimax would pay to the Mist
entities on each product.137 It also provided that certain catch-up board fees would
be paid and, under the heading “Legal” that there would be “[g]eneral releases
amongst all members.”138
The termination notices sent in April 2013 indicated that the termination date
would be June 1, 2013. However, on June 5, 2013, Mist Pharmaceuticals and Mist
Acquisition agreed to forbear the respective termination notices until the end of the
month.139 The stated purpose of the forbearance was to give the Mist Entities and
133
See id. at ¶¶ 22–51.
134
Eakins Deposition Aff. Ex. B at 206:12–16 (Laumas).
135
Eakins Aff. Ex. 40.
136
Id.
137
See id. For example, Tirosint would go from a royalty of 10% of gross sales to 30% of gross
sales.
138
Id.
139
Zahler Aff. Ex. 52.
24
Akrimax the opportunity to negotiate “a mutually agreeable resolution of the
disputes among the Parties.”140 The agreement was signed by Krivulka on behalf of
the Mist entities and by Mazur and Laumas on behalf of Akrimax.141 During the
forbearance period, Akrimax agreed to not seek additional documentation from a
particular law firm, or to “seek any discovery.”142
On June 10, 2013, Krivulka circulated an email titled “Issues to discuss.”143
Among other things, the email proposed that Mazur and Laumas choose between (1)
paying a 30% royalty on drugs coming back into Akrimax, and keeping a 49% equity
stake in Akrimax, or (2) paying a 20% royalty and keeping a 24.5% equity stake in
Akrimax.144 Krivulka’s terms also provided that “Steven Laumas and Leonard
Mazur will release any and all parties without prejudice,” and that Krivulka would
have the final decision over the sale of any company assets.145
On June 14, 2013 Laumas circulated a new term sheet to Krivulka and
Mazur.146 The royalty rates Laumas selected to be paid by Akrimax remained at
30%—the same as his June 3, 2013 proposal.147 Laumas stated the “Members of
Akrimax consist of Joseph Krivulka (‘Krivulka’), Leonard Mazur (‘Mazur’) and
140
Id.
141
Id.
142
Id.
143
Eakins Aff. Ex. 41.
144
Id.
145
Id.
146
Eakins Aff. Ex. 42.
147
Id.
25
Steve Laumas (‘Laumas’)”—omitting to identify the actual Member, CelestialRX,
owned by Laumas.148 Further, Laumas’ June 14 term sheet provided that, as part of
the settlement the “Mist [entities] will assign the NDAs and all intellectual property
to Akrimax with the right to takeback the assignment upon non-payment of royalties
subject to a cure period and arbitration.”149 Finally, Laumas’ June 14 term sheet
again provided for “[g]eneral releases amongst all members,”150 described in the
term sheet as Krivulka, Mazur, and Laumas.
On June 18, 2013, Krivulka indicated via e-mail to Laumas that “the process
needs to move.”151 The next day, Krivulka emailed Laumas “Tick Tock. Tick
Tock.”152 The negotiation process continued—by June 25, 2013, the draft
Amendment No. 7 circulated by Krivulka indicated that Krivulka would be the
“Manager” of Akrimax, and that he would have “full, exclusive and complete
discretion” to manage the company subject to the “input” of the Board.153 Following
this draft, Laumas requested a few changes which Krivulka rejected on June 28,
2013.154 That same day, Krivulka pushed for final execution copies of the various
148
Id.
149
Id.
150
Id.
151
Zahler Aff. Ex. 53.
152
Id.
153
Zahler Aff. Ex. 55.
154
Zahler Aff. Ex. 56.
26
agreements155 and rejected Laumas’ pushback about how a company airplane was
being handled in the settlement.156
Ultimately several agreements were executed on July 1, 2013. The Plaintiffs
assert the agreements were fraudulently induced via Krivulka’s representations that
he would use his best efforts to ensure that the royalties owed to Mist and other
entities were not defaulted on so that the products did not “snap back” or revert out
of Akrimax.157 Similarly, the Plaintiffs assert that Krivulka represented that he
would leverage Akrimax to help it acquire new products, and acquire additional
licenses.158 The Plaintiffs argue these were fraudulent representations that induced
Laumas to enter the settlement.159
2. The Agreements
Over a dozen documents were executed on July 1, 2013.160 Two of those
documents are the focus of this Memorandum Opinion—the Release Agreement and
Amendment No. 7’s fiduciary duty standard. Because a close discussion of those
documents’ text is necessary to this opinion they are addressed in detail infra.
155
Zahler Aff. Ex. 57.
156
Zahler Aff. Ex. 58.
157
Zahler Aff. Ex. 62 Response No. 8.
158
Id.
159
Id.; Pls’ Answering Br. in Opposition to Krivulka Defs’ Motions 28–29.
160
Compl. ¶ 73 (stating the agreement “comprised of some fourteen separate documents”); Pls’
Answering Br. in Opposition to Krivulka Defs’ Motions 28 (indicating there were sixteen
documents executed).
27
However, a brief overview of the settlement is helpful to understanding the two
particular documents at issue here.
I note that certain agreements, including Amendment No. 7, were
incorporated into a unanimous written consent of Akrimax’s Board, signed by
Laumas, Krivulka and Mazur, indicating that the agreements were “advisable and in
the best interest” of Akrimax.161 The Release Agreement was not included in the
unanimous written consent.162 In sum, the agreements called for certain drug rights
to be put back into Akrimax, or to undo the cancellation of certain rights, in exchange
for a revamped ownership structure, with Krivulka’s ownership and management
power increasing, and Akrimax paying higher royalty rates on the products returned
to Akrimax.
One of the July 1, 2013 agreements, the Tirosint “Termination and Royalty
Agreement,”163 provided that Akrimax would terminate the earlier assignment to
Mist Pharmaceuticals of its rights to Tirosint.164 The drug was returned to Akrimax,
in exchange for Akrimax paying a 35% royalty on gross sales.165 However, if
Akrimax failed to pay these royalties, upon 45 days’ notice Mist Acquisition could
retake the rights to Tirosint.166 Similar agreements were signed for NitroMist and
161
See Eakins Aff. Ex. 44.
162
See id.
163
See Eakins Aff. Ex. 46.
164
See id. at Recitals.
165
Id. at § 2.1
166
Id. at §§ 3.1, 3.5.
28
Primlev.167 Each permitted Akrimax to continue distributing those drugs at a royalty
rate of 30% of net sales.168
There was some give and some get from both sides of the July 1, 2013
agreements. For example, a portion of the July 1, 2013 settlement required Laumas’
consulting entity, Krittika, to have its consulting fees or board fees paid off the top
of Akrimax’s payment waterfall.169 However, in exchange for having certain drug
rights put back into Akrimax and increasing his payment priority, Laumas made
several concessions including: allowing Krivulka’s stake in Akrimax to increase and
his to decrease,170 requiring Akrimax to pay higher royalty rates on drugs put back
into Akrimax, Krivulka becoming Akrimax’s Manager, and Laumas and Mazur
forfeiting their seats on Akrimax’s board.171 Further, as part of the transaction,
Laumas executed a Release Agreement releasing certain claims arising prior to the
settlement.172
G. Post July 1, 2013 Settlement
While post July-2013 events are not essential to this partial summary
judgment opinion, I note a number of the issues contested in this litigation occurred
in this time frame. However, because this decision only addresses the legal question
167
See Eakins Aff. Exs. 47, 49.
168
See Eakins Aff. Exs. 47 at §4.1, 49 at ¶ 4.
169
Eakins Aff. Ex. 45 ¶ 10.
170
See id. at Ex. A.
171
See id. at ¶ 6.
172
See Eakins Aff. Ex 51.
29
of what standard of care applied after July 1, 2013, a detailed discussion of those
events is not necessary here. It is sufficient to state that after the settlement, Krivulka
continued certain investment activities outside of Akrimax, including in, for
example, Cranford Therapeutics. Additionally, Akrimax defaulted on several of the
royalty payments it was obligated to make on drugs involved in the settlement in late
2013 and early 2014.173 Krivulka ultimately loaned Akrimax $1.3 million in March
2014,174 allegedly due to its low cash balance. The parties heavily dispute why cash
balances were low, why defaults occurred, and whether the payment waterfall was
properly complied with. It is Plaintiffs’ position that Krivulka “engineered” a
default, under which Akrimax’s rights to drugs reverted out of the company to
Krivulka related entities.175
H. Procedural History
Plaintiff CelestialRX filed a verified complaint on November 20, 2015
pleading twelve counts. A TRO hearing was held on November 24, 2015, and this
Court subsequently entered an order granting the TRO on December 3, 2015. The
parties then engaged in expedited discovery and on February 8, 2016, this Court
heard argument on CelestialRX’s motion for a preliminary injunction.
173
See Compl. ¶¶ 107–08; Eakins Aff. Ex. 66.
174
Eakins Aff. Ex. 65.
175
Pls’ Answering Br. in Opposition to Krivulka Defs’ Motions 46 (arguing “[i]t is clear Krivulka
engineered the default”).
30
CelestialRX’s request for a preliminary injunction was denied and I indicated to the
parties that, moving forward, two legal issues will need to be decided: first, the
effect, if any, of the July 1, 2013 Release Agreement, and second, the duties owed
under the LLC Agreement.176
An Amended Complaint (the “Complaint”) was filed on March 8, 2016.177
The Complaint added several new parties—including a new Plaintiff, Krittika—as
well as four new counts. Further, it added the following Defendants: Donald Olsen,
JAK Investment Partners, Cranford Pharmaceuticals, Cranford Therapeutics,
Holmdel Pharmaceuticals, and Holmdel Therapeutics.
On April 14, 2016, the Court granted a stipulated order governing the
proceedings on the two preliminary issues addressed in this Memorandum
Opinion.178 That order permitted discovery to be taken on the two preliminary issues
of the effect of the July 1, 2013 Release Agreement, and the duties provided by the
LLC Agreement.179 Each Defendant has moved to dismiss this action on various
grounds, including failure to state a claim, and lack of jurisdiction. I am reserving
on those motions.
176
See Feb. 8, 2016 Oral Arg. Tr. 76:6–77:2.
177
See Zahler Aff. Ex. 1.
178
April 14, 2016 Scheduling Order for Proceedings Regarding Preliminary Issues.
179
Id. at 3–4.
31
On July 19, 2016, the Krivulka Defendants moved for partial summary
judgment on the following two issues:
(i) [whether] CelestialRX Investments, LLC’s claims relating to or
arising from actions through and including July 1, 2013 [should be]
barred and dismissed with prejudice, including entry of judgment
against Plaintiffs on Count VIII [, the fraudulent inducement count,] of
Plaintiffs’ First Amended Verified Complaint
(ii) [whether] Akrimax Pharmaceuticals, LLC’s Second and Restated
Limited Liability Company Agreement and the Seventh Amendment
thereof (collectively, the ‘LLC Agreement’) eliminated fiduciary duties
and Sections 8.01 and 8.02 of the LLC Agreement provide the
applicable contractual burden of proof and/or persuasion for conflict
transactions.180
The Mazur Defendants also moved for partial summary judgment on July 19, 2016
for the grounds set forth in its briefing.181 In briefing, the Mazur Defendants seek
partial summary judgment on the issue of the July 1, 2013 Release Agreement.182
Oral argument was held October 17, 2016 on all motions, however, the majority of
the hearing focused on these two preliminary issues.183 This Memorandum Opinion
addresses Defendants’ Motions for Partial Summary Judgment.
II. STANDARD OF REVIEW
As discussed above, this Memorandum Opinion addresses two preliminary
issues raised by the partial summary judgment motions. The parties submit, and I
180
Krivulka Defs’ Motion for Partial Summary Judgment.
181
See Mazur Defs’ Motion for Partial Summary Judgment.
182
See Mazur Defs’ Opening Br. 15–17.
183
See Oct. 17, 2016 Oral Arg. Tr. 7–51, 74–117, 160–163.
32
agree, that a decision on these two issues could clarify the issues in this litigation.
Thus I apply the traditional summary judgment analysis to these two issues,
reserving decision on the remaining case-dispositive motions.
This Court may enter summary judgment when the record demonstrates that
“there is no genuine issue as to any material fact and that the moving party is entitled
to a judgment as a matter of law.”184 The summary judgment standard puts the initial
burden on the moving party to demonstrate the “absence of a material factual
dispute.”185 If the moving party satisfies its initial burden then “the burden shifts to
the nonmovant to present some specific, admissible evidence that there is a genuine
issue of fact for a trial.”186 At this point, the nonmoving party may not simply rest
on their pleadings, but must point to conflicting evidence in the record that creates a
genuine dispute of material fact. In reviewing a motion for summary judgment, the
facts and reasonable inferences drawn therefrom “must be viewed in the light most
favorable to the non-moving party.”187 However, the Court “will not, draw
unreasonable inferences in favor of the non-moving party.”188
184
Del. Ch. Ct. R. 56(c).
185
In re Transkaryotic Therapies, Inc., 954 A.2d 346, 356 (Del. Ch. 2008), as revised (June 24,
2008) (citation omitted).
186
Id. (citation omitted).
187
Enrique v. State Farm Mut. Auto. Ins. Co., 142 A.3d 506, 511 (Del. 2016) (citation omitted).
188
Id. (citation omitted).
33
III. ANALYSIS
In analyzing the Defendants’ Motions for Partial Summary Judgment, each of
which requires me to construe a contract, I am guided by our case law discussing
when summary judgment is appropriate in such a context. Generally, “[w]hen the
issue before the Court involves the interpretation of a contract, summary judgment
is appropriate only if the contract in question is unambiguous.” 189 Our Supreme
Court has explained that
[t]his Court has long upheld awards of summary judgment in contract
disputes where the language at issue is clear and unambiguous. In such
cases, the parol evidence rule bars the admission of evidence from
outside the contract's four corners to vary or contradict that
unambiguous language. But, where reasonable minds could differ as to
the contract's meaning, a factual dispute results and the fact-finder must
consider admissible extrinsic evidence. In those cases, summary
judgment is improper.190
Specifically, the Supreme Court has indicated that “in a dispute over the proper
interpretation of a contract, summary judgment may not be awarded if the language
is ambiguous and the moving party has failed to offer uncontested evidence as to the
proper interpretation.”191 I note this same standard applies to the construction of a
189
United Rentals, Inc. v. RAM Holdings, Inc., 937 A.2d 810, 830 (Del. Ch. 2007).
190
GMG Capital Investments, LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776, 783 (Del.
2012) (citations omitted).
191
Id. at 784.
34
LLC agreement.192 Thus my analysis in interpreting the Release Agreement and the
fiduciary standard set by the LLC Agreement will proceed in light of this standard.
A. The Release Agreement
The Defendants seek partial summary judgment that the Plaintiff,
CelestialRX, has released all claims existing as of the date of execution of the
Release Agreement. The Defendants argue that the Release Agreement, signed by
Laumas individually, “is general and broad in scope” and released claims pre-dating
July 1, 2013, including a count for fraudulent inducement now brought in the present
action by Laumas’ wholly owned entity CelestialRX.193 The Plaintiffs argue that the
Release Agreement is clear that only Laumas’ individual claims were released, and
that CelestialRX and Krittika were not parties to the agreement and thus it is not
enforceable against them. Further, the Plaintiffs allege the agreement was
fraudulently induced and therefore not enforceable under New York law. Because
192
In re NextMedia Inv'rs, LLC, 2009 WL 1228665, at *3 (Del. Ch. May 6, 2009) (“In a dispute
requiring interpretation of a contract, summary judgment is appropriate only where the contract is
unambiguous. Ambiguity exists when the provisions in controversy are reasonably or fairly
susceptible of different interpretations or may have two or more different meanings. In other
words, to succeed on their motion for summary judgment, the petitioners must demonstrate that
their interpretation of the LLC Agreement is the only reasonable one.”) (citations and internal
quotations omitted). See Matthew v. Laudamiel, 2012 WL 2580572, at *5 (Del. Ch. June 29, 2012)
(applying traditional contract standard in reviewing motion for summary judgment when
interpreting an LLC agreement).
193
Krivulka Defs’ Opening Br. 37.
35
New York law governs this document, I first review that law and then apply it to the
terms of the Release Agreement.194
1. New York Contract Law
New York law provides that the “fundamental, neutral precept of contract
interpretation is that agreements are construed in accord with the parties' intent[, and
that t]he best evidence of what parties to a written agreement intend is what they say
in their writing.”195 “Thus, a written agreement that is complete, clear and
unambiguous on its face must be enforced according to the plain meaning of its
terms.”196 Under New York law, “[a]mbiguity in a contract arises when the contract,
read as a whole, fails to disclose its purpose and the parties' intent . . . , or when
specific language is susceptible of two reasonable interpretations.”197 Courts
applying New York law have recognized that “[a] contract is ambiguous when it
could suggest multiple meanings to a reasonable, objective reader familiar with the
context of the contract . . . the Court should take into account both the language of
the contract and the inferences that can be drawn from that language.”198 Similarly,
194
Eakins Aff. Ex. 51 § 12.
195
Innophos, Inc. v. Rhodia, S.A., 10 N.Y.3d 25, 29 (N.Y. 2008) (quoting Greenfield v. Philles
Records, Inc., 98 N.Y.2d 562, 569 (N.Y. 2002)) (alterations provided by New York Court of
Appeals in Rhodia).
196
Greenfield, 98 N.Y.2d at 569 (citations omitted).
197
Ellington v. EMI Music, Inc., 24 N.Y.3d 239, 244 (N.Y. 2014) (internal quotation marks and
citations omitted).
198
Kobrand Corp. v. Abadia Retuerta S.A., 2012 WL 5851139, at *4 (S.D.N.Y. Nov. 19, 2012)
(citations omitted).
36
New York law recognizes that a “contract should not be interpreted to produce a
result that is absurd, commercially unreasonable or contrary to the reasonable
expectations of the parties.”199 However, “[e]xtrinsic evidence of the parties' intent
may be considered only if the agreement is ambiguous, which is an issue of law for
the courts to decide.”200
In Broyhill Furniture Industries, Inc. v. Hudson Furniture Galleries, LLC,201
the New York Appellate Division explained interpretation of a release under New
York law as follows:
[a]s with contracts generally, the courts must look to the language of a
release—the words used by the parties—to determine their intent,
resorting to extrinsic evidence only when the court concludes as a
matter of law that the contract is ambiguous. . . . The scope of a general
release depends on the controversy being settled and the purpose for
which the release is actually given . . . . However, if from the recitals
therein or otherwise, it appears that the release is to be limited to only
particular claims, demands or obligations, the instrument will be
operative as to those matters alone.202
Regarding introductory portions of a contract, New York law recognizes that
“[a]lthough a statement in a ‘whereas’ clause may be useful in interpreting an
199
Greenwich Capital Fin. Prod., Inc. v. Negrin, 903 N.Y.S.2d 346, 348 (N.Y. App. Div. 2010)
(internal quotation marks and citation omitted).
200
Rhodia, S.A., 10 N.Y.3d at 29 (citation omitted).
201
Broyhill Furniture Indus., Inc. v. Hudson Furniture Galleries, LLC 877 N.Y.S.2d 72 (N.Y.
App. Div. 2009).
202
Id. at 74 (internal quotation marks and citations omitted) (emphasis added); See Consol. Edison,
Inc. v. Northeast Utilities, 332 F. Supp. 2d 639, 647 (S.D.N.Y. 2004) (applying New York law and
observing “it is well established that the scope of a release turns on the controversy being settled
and the purpose for which the release was actually given . . . .[but a] release may not be read to
cover matters which the parties did not desire or intend to dispose of”) (internal quotation marks
and citations omitted).
37
ambiguous operative clause in a contract, it cannot create any right beyond those
arising from the operative terms of the document.”203 Similarly, “although recitals
in a contract cannot grant rights extending beyond those particularly described in the
agreement, they may be useful in construing the rights and obligations created by
the agreement.”204 Thus, under New York law, a recital may be helpful in
interpreting the scope of a release, but it cannot create a substantive right beyond the
express operative terms of the agreement. With this guidance, I turn to an analysis
of the Release Agreement’s terms.
2. Who Released What?
The Release Agreement was executed on July 1, 2013 as part of Akrimax’s
reorganization and settlement.205 The Release Agreement, in its introduction,
defines the term parties to mean Steve Laumas, Leonard Mazur, and Joseph Krivulka
(the “Parties”).206 I note that CelestialRX is not included as a “Party.” The recitals
to the Release Agreement indicate that “[t]he Parties, directly or indirectly, own one
hundred percent (100%) of the outstanding membership interests of Akrimax
Pharmaceuticals, LLC, a Delaware limited liability company (the ‘Company’)” and
203
Grand Manor Health Related Facility, Inc. v. Hamilton Equities Inc., 885 N.Y.S.2d 255, 256
(N.Y. App. Div. 2009); See RSL Commc'ns, PLC v. Bildirici, 2010 WL 846551, at *4 (S.D.N.Y.
Mar. 5, 2010) (observing that under New York law, recitals, such as “whereas” clauses, “can be
used to clarify the meaning of an ambiguous contract, but cannot be used to modify or create
substantive rights not found in the contract's operative clauses”).
204
In re FKF 3, LLC, 501 B.R. 491, 506 (S.D.N.Y. 2013).
205
See Eakins Aff. Ex. 51.
206
Id. at Introduction.
38
that “[t]he Parties desire to fully and finally settle any and all disputes and
differences between them, both known and unknown, among themselves.”207
Under the heading “AGREEMENT” in the first subheading titled “1. Release
of Claims,” the contract provides that:
IN CONSIDERATION OF THE MUTUAL PROMISES SET FORTH
IN THIS AGREEMENT AND OTHER GOOD AND VALUABLE
CONSIDERATION, THE RECEIPT AND SUFFICIENCY
WHEREOF IS HEREBY ACKNOWLEDGED BY THE PARTIES,
THE PARTIES, AND THEIR PAST, PRESENT AND FUTURE
AGENTS, EMPLOYEES, REPRESENTATIVES, ATTORNEYS,
ESTATES, AND ASSIGNS (THE ‘RELEASING PARTIES’)
HEREBY AGREE TO FULLY RELEASE AND DISCHARGE EACH
OF THE OTHER PARTIES, AND EACH OF THEIR PAST,
PRESENT AND FUTURE AGENTS, OFFICERS, DIRECTORS,
SHAREHOLDERS, MEMBERS, PARTNERS, PARTNERSHIPS,
EMPLOYEES, REPRESENTATIVES, ATTORNEYS, ESTATES,
VENDORS, OWNERS, PARENTS, SUBSIDIARIES, AFFILIATES,
SUCCESSORS AND ASSIGNS (THE ‘RELEASED PARTIES’)
FROM ANY AND ALL ACTIONS, CAUSES OF ACTION, SUITS,
DEBTS, DUES, SUMS OF MONEY, ACCOUNTS, RECKONINGS,
BONDS, BILLS, COVENANTS, CONTRACTS,
CONTROVERSIES, AGREEMENTS, PROMISES, DAMAGES,
JUDGMENTS, EXECUTIONS, DEMANDS, CLAIMS,
OBLIGATIONS, AND/OR LIABILITIES OF ANY KIND
WHATSOEVER, KNOWN OR UNKNOWN, DIRECT OR
CONSEQUENTIAL, THAT THE RELEASING PARTIES EVER
HAD, NOW HAVE, OR MAY IN THE FUTURE HAVE. WITHOUT
LIMITING THE FORGOING, THE RELEASES IN THIS
PARAGRAPH INCLUDE, BUT ARE NOT IN ANY WAY LIMITED
TO, THE RELEASING PARTIES’ FULL AND UNCONDITIONAL
RELEASE AND DISCHARGE OF THE RELEASED PARTIES
FROM ANY AND ALL CLAIMS RELATING TO, ARISING FROM,
207
Id. at Recitals (emphasis added).
39
OR IN ANY WAY CONNECTED TO ANY ACTIONS TAKEN BY
THE PARTIES IN CONNECTION WITH THE COMPANY.208
The “Release of Claims” subheading of the Agreement, quoted above, defines
Releasing Parties, and Released Parties, but it also uses terms previously defined in
either the recitals (the Company), or in the introduction (the Parties).209 The Release
Agreement provides, at a subheading titled “4. Entire Agreement” that:
[t]his is a ‘fully integrated’ agreement. This Agreement contains the
entire agreement of the Parties with respect to its subject matter, and all
prior oral or written agreements, contracts, negotiations,
representations and discussions, if any, pertaining to this matter and the
Parties hereto are merged into this Agreement. No party to this
Agreement has made any oral or written representation other than those
set forth in this Agreement, and no party has relied upon, or is entering
into, this Agreement in reliance upon any representation other than
those set forth in this Agreement.210
The Release Agreement was signed over each individual Parties’ name.211 The issue
before the Court on the Defendants’ Motion for Partial Summary Judgment is
whether CelestialRX is barred from bringing claims for pre-July 1, 2013 conduct by
the release.212
“Parties” is a defined contractual term, specified to mean Mazur, Laumas, and
Krivulka. The Releasing Parties—those releasing their claims—are defined as “the
208
Id. at § 1 (Capitalization in original).
209
See id. I note that under New York law, a defined term in an introductory portion of a contract
may be considered to “assist in determining the proper construction of a contract.” Potter v.
Padilla, 38 N.Y.S.3d 372, 372 (N.Y. App. Div. 2016) (citations omitted).
210
Eakins Aff. Ex. 51. § 4.
211
Id. at Signature Blocks.
212
The same analysis applies to the second Entity Plaintiff controlled by Laumas, Krittika.
40
parties [Mazur, Lamas, and Krivulka], and their past, present and future agents,
employees, representatives, attorneys, estates, and assigns. . . .” 213 CelestialRX is
not an agent, employee, representative, attorney, estate or assign of Laumas. The
contract defines Released Parties—those being released—more broadly, however.
Released Parties includes the “other parties [Mazur, Lamas, and Krivulka], and each
of their past, present and future agents, officers, directors, shareholders, members,
partners, partnerships, employees, representatives, attorneys, estates, vendors,
owners, parents, subsidiaries, affiliates, successors and assigns”214 I find the
language of the Release Agreement clear: CelestialRX is a Released Party, but not
a Releasing Party, as those terms are explicitly described; therefore, the Plaintiff
here, CelestialRX, did not release claims existing as of July 1, 2013.215
The Defendants point out that the recitals to the contract express that Laumas,
along with the other named Parties, is an owner, direct or indirect, of Akrimax, and
that the named Parties expressed the desire to settle all claims, “known and unknown,
among themselves.”216 They argue that this precatory language is inconsistent with
213
Id. at § 1.
214
Id. (emphasis added). I note that “affiliates” is an undefined contractual term, but its ordinary
meaning would presumably include CelestialRX and Krittika.
215
While it does not inform my decision here based on the unambiguous language of the Release
Agreement, I note that the signature block of the Release Agreement was signed over Laumas’
own name with no reference to CelestialRX, whereas other documents executed on July 1, 2013
clearly indicate when Laumas is signing on behalf of an entity. See Eakins Aff. Ex. 52 at Signature
Block; Eakins Aff. Ex. 45 at Signature Block.
216
Eakins Aff. Ex. 51 at Recitals.
41
a reading of the release as barring claims by Laumas, but not his entity, CelestialRX,
the direct Member of Akrimax. It is not clear to me that the intent expressed by the
language of the recitals is inconsistent with the contractual release. In any event, to
the extent the Defendants are correct, it is unhelpful to them; under New York law,
the recitals can be employed to help to interpret an ambiguous contract, or limit the
scope of an agreement, but not to vary the terms where no ambiguity exists or expand
the scope of an operative section.217 The individual Parties to the release entered a
contract that explicitly defined Releasing Parties more narrowly than Released
Parties; CelestialRX is included in the latter, not the former. The Defendants argue
vehemently that the intention of the parties at the time they entered the Release
Agreement, as reflected in the record, is contrary to this express language. They
point to much of the record evidence recited in the background section of this
Memorandum Opinion, highlighting the dispute over the Middlemen Entities that
had arisen among the Akrimax principals; and argue that, in light of that dispute, and
in light of the drafting history, it would be nonsensical, and contrary to all Parties’
subjective intent, to have excluded CelestialRX from the release. Perhaps so: the
argument may raise issues of reformation, but that issue is neither before me on the
current motion nor generally susceptible to summary judgment. Accordingly, the
217
See Grand Manor Health Related Facility, Inc. v. Hamilton Equities Inc., 885 N.Y.S.2d 255,
256 (N.Y. App. Div. 2009); RSL Commc'ns, PLC v. Bildirici, 2010 WL 846551, at *4 (S.D.N.Y.
Mar. 5, 2010).
42
Defendants’ Motion for Partial Summary Judgment that CelestialRX has released
claims existing as of July, 1, 2013, is denied.
B. Duties Under the LLC Agreement
The second prong of Defendants’ Motion for Partial Summary Judgment
seeks a judicial determination that Akrimax’s LLC Agreement together with
Amendment No. 7 thereto “eliminated fiduciary duties.”218 Additionally,
Defendants seek partial summary judgment that “Sections 8.01 and 8.02 of the LLC
Agreement provide the applicable contractual burden of proof and/or persuasion for
conflict transactions.”219 Thus the Defendants seek a determination that even if
Amendment No. 7 did not eliminate fiduciary duties, and “some residual fiduciary
duties survived, Sections 8.01 and 8.02 of the LLC Agreement provide express
contractual standards for corporate opportunities and conflict transactions that
displaced whatever remaining fiduciary duty might otherwise apply.” 220 The
Defendants’ assert that their position presents “two paths” to the same result.221
These provisions are analyzed in turn below. I note that I have taken the unusual
step of addressing this contractual standard before evidence of the behavior of the
parties is fully in the record, because I believe that addressing the Defendants’
218
Krivulka Defs’ Motion for Partial Summary Judgment; Krivulka Defs’ Opening Br. 55.
219
Krivulka Defs’ Motion for Partial Summary Judgment.
220
Krivulka Defs’ Opening Br. 55.
221
See Oct. 17, 2016 Oral Arg. Tr. 36:18–19 (“We have two paths to get there. These are paths
that both lead to the same result.”).
43
motions in this fashion will clear some of the underbrush of this overgrown
litigation, and allow rational litigation (or settlement) decisions going forward. The
discussion below defines only duties applicable to the Defendants after July 1, 2013.
1. Amendment No. 7
Resolving the issues stated above requires interpretation of the fiduciary
duties provided by Akrimax’s LLC Agreement. Specifically, the parties dispute the
meaning of the language in Section 4.01(h)222 which was added by Amendment No.
7 on July 1, 2013, contemporaneously with the Release Agreement discussed above.
Under the Delaware Limited Liability Company Act (“LLC Act”) our Courts have
implied fiduciary duties to managers of an LLC, unless contractually waived.223 This
approach has been embodied in the LLC Act itself.224 In other words, the intention
of the parties to the agreement that fiduciary duties apply to managers is implied
where that agreement does not provide otherwise. The LLC Act is explicitly
contractarian, however, and permits the elimination of some, or all, fiduciary duties
for members, managers or others through a provision in an LLC agreement,
222
I note that Delaware law applies to the interpretation of Amendment No. 7 and the LLC
Agreement. See Eakins Aff. Ex. 45 ¶ 16; Eakins Aff. Ex. 2 § 11.07.
223
See Kelly v. Blum, 2010 WL 629850, at *10 n.69 (Del. Ch. Feb. 24, 2010) (collecting cases and
explaining interpretation); see also, Feeley v. NHAOCG, LLC, 62 A.3d 649, 661 (Del. Ch. 2012)
(“the Delaware Limited Liability Company Act . . . contemplates that equitable fiduciary duties
will apply by default to a manager or managing member of a Delaware LLC”).
224
See H.B. 126, 147th Gen. Assemb. (Del. 2013) (amending 6 Del. C. § 18-1104 to provide the
following: “In any case not provided for in this chapter, the rules of law and equity, including the
rules of law and equity relating to fiduciary duties and the law merchant, shall govern.”).
44
“provided, that the limited liability company agreement may not eliminate the
implied contractual covenant of good faith and fair dealing.”225 Similarly, in the
context of construing LLC agreements, this Court has recognized that "[a]lthough
fiduciary duties may be disclaimed, agreements' drafters must do so clearly, and
should not be incentivized to obfuscate or surprise investors by ambiguously
stripping away the protections investors would ordinarily receive.”226 Thus, this
Court has consistently found that removal of a manager’s default fiduciary duties
from an LLC agreement must be clear and unambiguous.227
The parties dispute the extent to which Amendment No. 7’s language
removes, modifies, or alters fiduciary duties owed by Members, Managers, and
Officers of Akrimax. The battleground in this dispute centers around whether the
following language completely removes fiduciary duties—or removes fiduciary
duties except for subparts (i) and (ii):
[n]otwithstanding anything to the contrary in this Agreement, neither
the Manager nor any of the members of the Board of Directors nor any
Member shall have any fiduciary duties to the Company or the
Members or shall be personally liable to the Company or its Members
for a breach of any duty that does not involve (i) an act or omission not
in good faith or which involves intentional misconduct or a knowing
violation of law; or (ii) a transaction from which such Manager, a
225
6 Del. C. § 18-1101(c).
226
Ross Holding & Mgmt. Co. v. Advance Realty Grp., LLC, 2014 WL 4374261, at *15 (Del. Ch.
Sept. 4, 2014).
227
Feeley v. NHAOCG, LLC, 62 A.3d 649, 664 (Del. Ch. 2012) (“Drafters of an LLC agreement
‘must make their intent to eliminate fiduciary duties plain and unambiguous.’”) (quoting Bay Ctr.
Apartments Owner, LLC v. Emery Bay PKI, LLC, 2009 WL 1124451, at *9 (Del. Ch. Apr. 20,
2009)).
45
member of the Board of Directors, or Member derived an improper
personal benefit.228
Each side asserts various textual arguments regarding the above language. Further,
in the alternative, the Krivulka Defendants argue that even if the above did not
eliminate all fiduciary duties, the LLC Agreement provides specific contractual
standards via Sections 8.01 and 8.02 to govern conflict transactions and corporate
opportunities, respectively.229
Despite the linguistic, grammar and punctuation arguments each side
advances,230 I read this provision by what I view as its plain meaning in accordance
with Delaware law.231 I find that the plain language of 4.01(h) generally eliminates
common-law fiduciary duties except that it retains liability for intentional or illegal
misconduct and other bad faith actions, as well as for improper self-dealing.232
228
Eakins Aff. Ex. 45 ¶ 6(h).
229
See Krivulka Defs’ Opening Br. 58.
230
Such arguments brought to my attention the existence of the “Purdue Owl,” which is apparently
a helpful tool for grammarians. See Oct. 17, 2016 Oral Arg. Tr. 111:13–23. I note that I am
cognizant of our case law that provides punctuation and grammar provide useful signposts. See
Paul v. Deloitte & Touche, LLP, 974 A.2d 140, 146 (Del. 2009) (resolving “a grammatical dispute”
in the interpretation of a contract).
231
Eakins Aff. Ex. 45 ¶ 16 (indicating Delaware law governs the interpretation of the amendment);
Scion Breckenridge Managing Member, LLC v. ASB Allegiance Real Estate Fund, 68 A.3d 665,
683 (Del. 2013) (observing that under Delaware law, courts “interpret clear and unambiguous
contract terms according to their plain meaning”).
232
The Plaintiffs have pled and asserted in briefing that all constituent documents of the July 1,
2013 agreements, including Amendment No. 7, were fraudulently induced and thus not
enforceable. See Pls’ Answering Br. in Opposition to Krivulka Defs’ Motions 70–71 (arguing
“Krivulka and/or Mazur fraudulently induced Laumas to enter into the Release Agreement (indeed,
all of the July 1, 2013 Agreements, including the 7th Amendment to the Operating Agreement)”);
Compl. at Count VIII. The issue of fraudulent inducement of Amendment No. 7 is reserved.
46
Those duties are contractual in nature, but to the extent they employ undefined terms
such as “bad faith,” the common law fiduciary duties are instructive in supplying the
definition.
Subparts (i) and (ii) of Section 4.01(h) provide that Managers, Members and
the Board are liable where they have acted in bad faith, or where they have engaged
in certain acts of self-dealing; that is, have engaged in transactions creating an
“improper personal benefit.”233 Interpreting, as I must, the contract as a whole, it
becomes clear that whether a conflicted transaction involves an “improper personal
benefit” must be assessed in light of Sections 8.01 and 8.02 of the LLC Agreement.
As discussed below, I find that together these provisions provide specific contractual
standards which govern conflict transactions and corporate opportunities.
2. Sections 8.01 and 8.02
Unfortunately, examination of liability here must involve an application of the
facts to the contractual language of these sections—unfortunately, because, as is all-
too-common in LLC agreements litigated in this Court (a self-selecting sample, I
acknowledge), the provisions here are poorly drafted. The text of the sections is as
follows:
[Section 8.01 provides:] (a) [u]nless entered into in bad faith, no
contract or transaction between the Company and one or more of its
233
See Eakins Aff. Ex. 45 ¶ 6(h) (“(i) an act or omission not in good faith or which involves
intentional misconduct or a knowing violation of law; or (ii) a transaction from which such
Manager, a member of the Board of Directors, or Member derived an improper personal benefit”).
47
Members or any Indemnified Party, or between the Company and any
other Person in which one or more of its Members or any Indemnified
Party has a financial interest or is a director, manager or officer, shall
be voidable solely for this reason if such contract or transaction is fair
and reasonable to the Company as determined in good faith by the
Manager; and no Member or Indemnified Party interested in such
contract or transaction, because of such interest, shall be liable to the
Company or to any other Person or organization for any loss or expense
incurred by reason of such contract or transaction or shall be
accountable for any gains or profit realized from such contract or
transaction.234
(b) [u]nless otherwise expressly provided herein, (i) whenever a
conflict of interest exists or arises between the Company, its Members
and/or the Indemnified Parties, or (ii) whenever this Agreement
provides that any such Person shall act in a manner that is, or subject to
Section 8.01(a) above, provide terms that are, fair and reasonable to the
Company or any Member, such Person shall resolve such conflict of
interest, taking such action or providing such terms, considering in each
case the relative interest of each party (including its own interest) to
such conflict, agreement, transaction or situation and the benefits and
burdens relating to such interests, any customary or acceptable industry
practices, and any applicable generally acceptable accounting practices
or principles. In the absence of bad faith by the Member or Indemnified
Party, as the case may be, the resolution, action or term so made, taken
or provided by such Person shall not constitute a breach of this
Agreement or any other agreement contemplated herein or of any duty
or obligation of such Person at law or in equity or otherwise.235
[Section 8.02 provides:] [n]othing in this Agreement shall be construed
to prohibit any Director or any Member from engaging in or possessing
an interest in another business venture of any nature, even if
competitive with the Company; and neither the Company nor any other
Member shall have any rights by virtue of this Agreement in or to any
such venture or the income or profits derived therefrom. No Person
solely by virtue of his or its status as a Director or Member of the
Company, shall be prohibited from engaging in or possessing an
234
Zahler Aff. Ex. 3 § 8.01(a).
235
Id. at § 8.01(b).
48
interest in another business venture of any nature, even if competitive
with the Company. Neither any Director nor any Member shall be
obligated, by the provisions hereof or by their status as a Director or
Member, to present any particular investment or business opportunity
to the Company even if such opportunity is of a nature which could be
taken by the Company. This Section 8.02 is not intended to waive or
amend any restriction on competition, confidentiality[,] disclosure,
solicitation, or other activities, which may be governed by applicable
law, or included in an employment agreement, confidentiality or
nondisclosure agreement, or any other contract between the Company
and any Member or Manager, which restrictions shall in all such
matters control.236
a. Section 8.02
This section eschews the corporate opportunity doctrine, and permits
conflicted interests to be held by Directors and Members, unless provided otherwise
by separate contract. The requirements under which conflicted transactions are
permitted are set out in the safe-harbor provisions of Section 8.01, discussed below.
b. Section 8.01
The safe harbor of Section 8.01(a) exists where a conflicted transaction
involving the Company and its Members or “any Indemnified Party”—a defined
term that includes officers and affiliates237—is (1) entered in the absence of bad faith,
and (2) the “Manager” (before July 1, 2013, collectively Mazur, Krivulka and
Laumas; thereafter Krivulka) determines—in good faith—that the transaction is
236
Id. at § 8.02.
237
See id. at Article I (defining “Indemnified Parties” stating it “shall mean the Manager, the
Directors, any Affiliate of the Directors and each Officer of the Company and their respective
successors and assigns, each in their capacity as such”).
49
“fair and reasonable to the Company.”238 In such case, the conflicted party bears no
liability to the “Company or to any other Person” arising from the transaction.
Section 8.01(b), as I read it, provides an alternative safe harbor. With respect
to conflicted transactions as defined in Section 8.01(a), the terms of which are
limited to those “fair and reasonable to the Company or any Member,” the conflicted
party who seeks a safe harbor under subsection (b) is charged with “resolv[ing] such
conflict” by “considering . . . the relative interest of each party (including its own
interest) to such . . . transaction or situation and the benefits and burdens relating to
such interests, any customary or acceptable industry practices, and [GAAP].”239
Where the conflicted party has acted in good faith, and makes the required resolution
of the conflict by a good-faith balancing of the factors above, he is insulated from
liability, since he is deemed not in “breach of this Agreement . . . or of any duty or
obligation . . . at law or in equity . . . .”240 Conflicted transactions not achieving one
of these safe harbors are, by contrast, transactions from which the party may be
shown to have derived an improper personal benefit under Section 4.01(h)(ii), in
breach of his duty under that section.
The parties do not contend that the safe harbor of Section 8.01(a) applies here.
Therefore, the Defendants will be found not to have breached a duty under Section
238
Id. at § 8.01(a).
239
Id. at § 8.01(b).
240
Id.
50
4.01(h)(ii), and are insulated from liability under Section 8.01(b), where the
conflicted transaction was (1) entered in good faith,241 and (2) where the particular
Defendant subjectively determined that the transaction was fair and reasonable to
the Company and Members after the required good-faith balancing of interests. That
is the standard against which the challenged transactions (entered on or after July 1,
2013) shall be evaluated. This specific contractual standard applies to all
Indemnified Parties, as defined in the LLC Agreement.242 I note that good faith—a
subjective standard, applies separately to both the transaction and to the conflicted
party’s analysis of whether it is “fair and reasonable.” I do, however, note that the
subjective good faith standard here must be read consistently with the purpose of
Sections 8.01 and 8.02, which is to permit conflicted transactions in certain
circumstances.243
241
Our Supreme Court, when faced with an undefined good faith or bad faith provision in an
alternative entity situation has employed the following standard: “an action ‘so far beyond the
bounds of reasonable judgment that it seems essentially inexplicable on any ground other than
bad faith.’” DV Realty Advisors LLC v. Policemen's Annuity & Ben. Fund of Chicago, 75 A.3d
101, 110 (Del. 2013) (quoting Brinckerhoff v. Enbridge Energy Co., 67 A.3d 369, 373 (Del.
2013)).
242
See Zahler Aff. Ex. 3 at Article I, § 8.01(b).
243
See Related Westpac LLC v. JER Snowmass LLC, 2010 WL 2929708, at *8 (Del. Ch. July 23,
2010) (explaining that when parties to an alternative entity “cover a particular subject in an
express manner, their contractual choice governs and cannot be supplanted by the application of
inconsistent fiduciary duty principles that might otherwise apply as a default”).
51
IV. CONCLUSION
For the forgoing reasons, the Defendants’ Motions for Partial Summary
Judgment are GRANTED in part and DENIED in part. Specifically, the prong of
the motion regarding the release is DENIED. The prong of the motion interpreting
fiduciary duties owed by the governing documents is resolved consistent with the
discussion above. The parties should confer regarding the most efficient way to
move this matter forward in light of this Memorandum Opinion.
52