77 Charters, Inc. v. Jonathan D. Gould (Stonemar Cookeville Partners, LLC and Cookeville Retail Holdings, LLC, Nominal Defendants) ( 2020 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
77 CHARTERS, INC., individually and )
derivatively on behalf of Stonemar Cookeville )
Partners, LLC, and Cookeville Retail Holdings, )
LLC, )
)
Plaintiff, )
)
v. ) C.A. No. 2019-0127-JRS
)
JONATHAN D. GOULD, STONEMAR MM )
COOKEVILLE, LLC, COOKEVILLE )
CORRIDOR, LLC, EIGHTFOLD )
COOKEVILLE INVESTOR, LLC, )
)
Defendants, )
)
STONEMAR COOKEVILLE PARTNERS, )
LLC and COOKEVILLE RETAIL HOLDINGS, )
LLC, )
)
Nominal Defendant. )
)
MEMORANDUM OPINION
Date Submitted: February 4, 2020
Date Decided: May 18, 2020
John L. Williams, Esquire and Brian C. Crawford, Esquire of The Williams Law Firm, P.A.,
Wilmington, Delaware, Attorneys for Plaintiff 77 Charters, Inc.
John A. Sensing, Esquire of Potter Anderson & Corroon LLP, Wilmington, Delaware and Greg S.
Zucker, Esquire and Michael B. Weitman, Esquire of Westerman Ball Ederer Miller Zucker &
Sharfstein, LLP, Uniondale, New York, Attorneys for Defendants Jonathan D. Gould,
Stonemar MM Cookeville, LLC, Cookeville Corridor, LLC and Eightfold Cookeville
Investor, LLC.
SLIGHTS, Vice Chancellor
In 2007, three groups of investors acquired a shopping mall in Tennessee for
$29,394,000. One of these investors, Plaintiff, 77 Charters, Inc. (“77 Charters”),
contributed $1,211,717 to the venture in exchange for a non-preferred ownership
interest. The second investor, Defendant, Jonathan D. Gould, indirectly held a
similar non-preferred interest. Non-party, Kimco Preferred Investor LXXIII, Inc.
(“Kimco”), received preferred interests. Among other rights, Kimco’s preferred
stake entitled it to receive a 9% annual rate of return on its investment before
77 Charters or Gould would receive any distributions. All parties agreed that Gould,
and entities he controlled, would run the mall’s day-to-day operations.
While 77 Charters’ involvement with Gould and Kimco was limited to the
mall in Tennessee, Kimco and Gould owned and operated malls throughout the
Southeast. In 2013, without 77 Charters’ knowledge and for reasons unpled, Kimco
decided to shed these investments. This left Gould in need of a new preferred
investor. To fill the role, he identified Defendant, Eightfold Cookeville Investor,
LLC (“Eightfold”). Unbeknownst to 77 Charters, Gould, Kimco and Eightfold
negotiated a three-step transaction whereby Eightfold ultimately acquired Kimco’s
interest in the mall.
First, Gould acquired Kimco’s preferred investment for $1,995,283. This
gave Gould sole control over the operating entity the parties had formed to hold and
operate the mall. Second, Gould amended the operating entity’s constitutive
1
documents to advantage the mall’s preferred investors (i.e., himself) beyond the
rights Kimco had enjoyed. Among other changes, Gould increased his distribution
preference from a 9% rate of return to 12.5%. Third, Gould sold part of Kimco’s
interest to Eightfold for $1,995,283—the same price he paid for all of Kimco’s
interest—while retaining a slice of the preferred stake for himself.
By 2016, 77 Charters decided to investigate the status of its investment.
Its efforts eventually led to a formal books and records demand in 2017 under
6 Del. C. § 18-305 of the Delaware Limited Liability Company Act (the “Act”).
Just as it appeared 77 Charters would be receiving documents, in 2018, Gould and
Eightfold agreed to sell the mall for $30,200,000. After paying off the mall’s
creditors, $4,768,045 was left over for distribution to preferred investors.
77 Charters received nothing.
In the wake of the sale, 77 Charters filed a complaint in this Court, which it
later amended.1 While creative minds can differ on how best to structure and plead
a complaint, I have found 77 Charters’ approach here to have made the task of
discerning the precise nature of its legal claims quite difficult. 77 Charters structured
its Complaint as a streaming narrative followed by a laundry list of claims that
1
D.I. 1; First Am. Verified Compl. (“Compl.”) (D.I. 25).
2
generally incorporate the narrative but do not state why or how the facts meet the
prima facie elements of the claim asserted.
As best I can tell, 77 Charters’ primary allegation is that Gould, and the
entities he controlled, breached their fiduciary duties by acquiring Kimco’s interest,
amending the relevant operating agreement to benefit Gould and then selling the
mall at a time and in a manner where he would recover his investment (and more)
while leaving 77 Charters with nothing. In some instances, 77 Charters describes
this chain of events from 2013 to 2018 as a single wrong; in others, it describes them
as several “Wrongful Acts.”2
To further complicate the Court’s analysis, one of 77 Charters’ “main
target[s]” in this action is Gould, who was neither a member nor a manager of the
mall’s operating entity in his individual capacity. 3 Perhaps acknowledging that
Gould’s remote status would not give rise to traditional fiduciary duties, 77 Charters
attempts to rest its claims upon the framework established in USACafes, L.P.
Litigation,4 where Chancellor Allen held remote “controllers” of an alternative entity
2
Compare Compl. ¶ 3 (describing this chain of events as a single “deal”), with Compl. ¶ 93
(describing a long list of separate “wrongful acts”).
3
Oral Arg. on Defs.’ Mot. to Dismiss First Am. Compl. (“Tr.”) (D.I. 40) at 39.
4
Compl. ¶ 104; In re USACafes, L.P. Litig., 600 A.2d 43 (Del. Ch. 1991).
3
may owe limited fiduciary duties, the “full scope” of which the court did not
“delineate.”5
In addition to 77 Charters’ claims against Gould and the entities he controls,
77 Charters also brings aiding and abetting, civil conspiracy, unjust enrichment and
breach of contract claims against Eightfold. Again, the precise factual bases of these
claims is difficult to make out.
All Defendants have moved to dismiss the Complaint under Court of
Chancery Rule 12(b)(6) for failure to state viable claims (the “Motion”).6
For reasons explained below, after giving 77 Charters all fair and reasonable
inferences, the Motion will be granted in part and denied in part. 77 Charters’ efforts
to loop Eightfold into its dispute with Gould fail as it is not reasonably conceivable
that Eightfold was anything other than a third-party purchaser of Kimco’s preferred
interest. As for Gould and his entities, I am satisfied 77 Charters has well pled viable
breach of fiduciary duty and civil conspiracy claims against these defendants.
But only a narrow swath of the Complaint’s enumerated “Wrongful Acts” is
actionable as a matter of law.7
5
In re USACafes, 600 A.2d at 49.
6
D.I. 27.
7
Compl. ¶ 93.
4
Based on the operating entity’s constitutive documents, Gould’s acquisition
of the preferred interest, standing alone, could not have been wrongful as he (and his
entities) had the contractual right to compete with 77 Charters for additional
investments in the mall. Similarly, 77 Charters has not well pled a stand-alone
breach of fiduciary duty claim arising out of the mall’s sale in 2018. Gould’s
amendment of the operating agreement, however, is a different story. It is reasonable
to infer Gould amended the mall’s operating agreement in a self-dealing transaction
that was not entirely fair to 77 Charters. Accordingly, this narrow aspect of
77 Charters’ claims must survive Defendants’ Motion.
I. FACTUAL BACKGROUND
I draw the facts from the allegations in the Complaint, documents
incorporated by reference or integral to that pleading and judicially noticeable facts.8
For purposes of the Motion, I accept as true the Complaint’s well-pled factual
allegations and draw all reasonable inferences in 77 Charters’ favor.9
8
See Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 320 (Del. 2004) (quoting
In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 69 (Del. 1995)) (noting that on a
motion to dismiss, the court may consider documents that are “incorporated by reference”
or “integral” to the complaint); D.R.E. 201–02 (codifying Delaware’s judicial notice
doctrine).
9
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002).
5
Parties and Relevant Non-Parties
Nominal Defendant, Cookeville Retail Holdings, LLC (“Cookeville Retail”),
is a Delaware limited liability company that was formed to invest in a retail shopping
center located in Cookeville, Tennessee (“Jackson Plaza”).10 Cookeville Retail was
formed on March 8, 2007, by (i) its managing member (nominal Defendant and
Delaware limited liability company, Stonemar Cookeville Partners, LLC
(“Stonemar Cookeville”)) and (ii) its preferred member, Kimco.11
For its part, Stonemar Cookeville was formed on July 31, 2007, by (i) its
managing member (Defendant, Stonemar MM Cookeville, LLC (“Stonemar MM”))
and (ii) its non-managing members, one of which is 77 Charters.12 Stonemar
Cookeville is a special purpose entity formed “to hold direct or indirect investments
in commercial real estate properties,” but its main “objective . . . was to obtain
financial distributions from Cookeville Retail.”13
At the top of the organizational hierarchy sits Defendant, Jonathan D. Gould,
a New York resident and managing member of Stonemar MM and Defendant,
10
Compl. ¶ 1; Compl. Ex. C § 1.1 (definition of the “Project”), § 2.5 (Cookeville Retail’s
“purposes and scope” were “strictly limited” to acquiring and maintaining Jackson Plaza.).
11
Compl. ¶¶ 1, 8, 19.
12
Compl. ¶¶ 5, 7, 15.
13
Compl. ¶¶ 15, 17–18.
6
Cookeville Corridor, LLC (“Cookeville Corridor”).14 In addition to his interests in
Stonemar MM and Cookeville Corridor, Gould is alleged to control Defendant,
Stonemar Realty Management, LLC (“Stonemar Realty”).15
Kimco is owned by non-party, Kimco Realty Corporation (“Kimco Realty”),
a publicly-traded real estate investment trust.16 As noted, Kimco was a co-investor,
along with Stonemar Cookeville, in Cookeville Retail.17 Apart from this investment,
Kimco Realty had “other commercial dealings” with Gould, including malls in
Kentucky and Mississippi.18
Eightfold’s ownership structure is something of a mystery in the Complaint.19
What is clear, however, is that Eightfold would eventually take Kimco’s place as a
preferred investor in Cookeville Retail.20 77 Charters does not allege Eightfold is
owned or controlled by Gould.
Compl. ¶¶ 3, 6–7, 10, 20. Gould is alleged to be the “sole owner” of Cookeville Corridor.
14
Compl. ¶ 10.
15
Compl. ¶ 23.
16
Compl. ¶¶ 19, 35, 63.
17
Compl. ¶ 19.
18
Compl. ¶ 35.
19
See, e.g., Compl. ¶ 63 (“It is unclear . . . whether Kimco Realty [] owns an interest in
Eightfold.”).
20
Compl. ¶¶ 11, 36, 63.
7
The following chart depicts the relationships between the parties circa 2007:21
The Basic Investment Structure
The parties structured their investments in Cookeville Retail so that
77 Charters would be a passive investor, while Gould and the entities under his
control would oversee all of Jackson Plaza’s operations.22 With this structure as the
21
Compl. ¶¶ 1–22.
22
Compl. ¶ 24.
8
backdrop, Cookeville Retail purchased Jackson Plaza for ~$29,000,000 on August 9,
2007.23 Of this purchase price, Cookeville Retail borrowed $24,380,000
(the “Loan”).24
Cookeville Retail’s Limited Liability Company Agreement provided that
Stonemar Cookeville and Kimco would distribute returns on investments according
to a waterfall.25 At the Cookeville Retail level, any distributions would be allocated,
first, to Kimco’s preferred membership interests until it had received a specified
preferred return of at least 9% on its capital contributions (the “Preferred Interest”).26
Then, excess returns would be distributed to Stonemar Cookeville and its members
(including 77 Charters) who were, essentially, the residual equity holders in Jackson
Plaza.27
In anticipation of Cookeville Retail’s purchase of Jackson Plaza, Gould,
acting through Stonemar MM and Stonemar Cookeville, caused Cookeville Retail
to enter into a management and leasing agreement (the “Management Agreement”)
with Stonemar Realty where it was agreed that Stonemar Realty alone would manage
23
Compl. ¶ 21.
24
Compl. ¶ 22.
25
Compl. ¶ 49; Compl. Ex. C § 8.2.
26
Compl. ¶ 49; Compl. Ex. C § 8.2.
27
Compl. ¶ 49.
9
Jackson Plaza’s day-to-day operations.28 According to 77 Charters, this arrangement
caused it to be so far removed from Jackson Plaza’s business that it had no
knowledge of the Management Agreement or Cookeville Retail’s operating
agreement.29
The Relevant Contracts
The principal agreements governing the relationship between 77 Charters,
Kimco, Gould and the entities he controlled are the Limited Liability Company
Agreement of Cookeville Retail Holdings LLC (the “CRA”) and the Limited
Liability Company Operating Agreement of Stonemar Cookeville Partners, LLC
(the “SCA”).30 I summarize the key provisions of both agreements below.
1. The CRA
Two parties, Kimco and Stonemar Cookeville, executed the CRA in August
2007.31 In keeping with Stonemar Cookeville’s manager-managed structure,
Section 4.1(a) provides, “Manager [(Stonemar Cookeville)] shall manage the affairs
of the Company and shall have sole authority to bind and take any action on behalf
28
Compl. ¶ 23.
29
Compl. ¶ 25.
30
See Compl. Ex. C (the “CRA”); Compl. Ex. B (the “SCA”).
31
CRA (recitals). The CRA defines Cookeville Retail’s “Members” as Kimco and
Stonemar Cookeville. CRA § 1.1 (definitions of “Members,” “Developer Member” and
“Kimco Member”).
10
of the Company.”32 In performing this role, the CRA obligates Stonemar Cookeville
to manage Cookeville Retail “as would a prudent manager under similar
circumstances” and “[to] conduct the ordinary business and affairs of the Company
in accordance with good industry practice.”33 At Section 4.7, the CRA expressly
acknowledges that Cookeville Retail had entered into the Management Agreement
with Stonemar Realty whereby Stonemar Realty would be paid “a monthly fee not
to exceed 4% of collected rents” in exchange for its services.34
While Kimco and Gould were frequently co-investors in real estate projects,
Section 4.9, captioned “Other Business Activities,” preserves each Member’s ability
to invest and even compete with other parties to the CRA.35 Section 4.9 provides:
each Member, Manager or Affiliate36 thereof may engage in and
possess interests in other business ventures . . . independently . . .
including ones in direct or indirect competition with the Company, with
32
Compl. ¶ 23; CRA § 4.1.
33
CRA § 4.1(c). If, however, a matter were subject to a vote of Cookeville Retail’s
members, Section 4.1(d) directs “Members” to “take into account the interests of the
Company’s creditors as well as the interests of its Members” when deciding how to vote.
CRA § 4.1(d).
34
CRA § 4.7.
35
CRA § 4.9.
36
The CRA defines an “Affiliate” to mean “with respect to a Person, another Person,
directly or indirectly, through one or more intermediaries, controlling, controlled by, or
under common control with the Person in question.” CRA § 1.1 (definition of “Affiliate”).
The CRA defines a “Person” to mean “an individual or any entity of any type.” Id.
11
no obligation to offer to the Company . . . the right to participate
therein.37
The CRA limited Kimco and Stonemar Cookeville’s ability to transfer their
respective membership interests without the other’s consent. Section 3.2, captioned
“Dispositions of Membership Interests,” provides, “No Member may Transfer all or
any portion of its Membership Interest, except with the consent of the other
Member,” which may be “given or withheld in the other Member’s sole and absolute
discretion.”38 Along the same lines, under Article 12 of the CRA, captioned “Buy-
Sell Option,” either member could give “notice to the other Member . . . stating
therein the aggregate dollar amount (the “Valuation Amount”) which the Offeror
would be willing to pay for all . . . of the assets of” Cookeville Retail. 39 Upon
receiving this notice, the other member would have the option of either (i) selling
“its entire Membership Interest” or (ii) purchasing “the entire Membership Interest
of the Offeror” based on the valuation proposed by the offering-member.40
37
CRA § 4.9.
38
CRA § 3.2(ii), (iii).
39
CRA § 12.1(b).
40
CRA § 12.1(c).
12
2. The SCA
Stonemar MM and Stonemar Cookeville’s minority members (including
77 Charters) executed the SCA in August 2007.41 The SCA’s recitals explain the
agreement was “entered into . . . by and among” Stonemar MM as the “Managing
Member” and “the other Persons who have executed this Agreement . . . (each, a
‘Member’ and, together with the Managing Member, the ‘Members’).”42
As structured, Stonemar MM is both a “Member” and the “Managing Member”
under the SCA.
To memorialize Stonemar MM’s role as managing member, Section 6.1 of the
SCA states, “[t]he business and affairs of the Company shall be managed by and
under the exclusive direction of the Managing Member [(Stonemar MM)] and all
powers of the Company may be exercised exclusively by the Managing Member.”43
Section 10.2, captioned “Liability and Indemnification,” provides, “[t]o the fullest
extent permitted by applicable law . . . no Person44 acting in its capacity as a Member
41
SCA (recitals and signature page).
42
SCA (recitals).
43
SCA § 6.1.
44
Like the CRA, the SCA broadly defines a “Person” to include “any individual,
corporation, . . . limited liability company . . . or other entity.” SCA § 1.17.
13
(including the Managing Member and its Affiliates) shall be personally liable to the
Company or its members for money damages.”45
Like the CRA, the SCA makes clear that members may compete with each
other and with the company. Section 10.4 provides:
Each Member acknowledges that: (i) the other Members (including the
Managing Member) and their respective Affiliates46 have or may have
other business interests . . . some of which may be in conflict or
competition with the business of the Company . . . , and (ii) the
Members and their Affiliates may engage in or possess an interest in
any other business or venture of any kind. . . . Except as provided for
herein, neither the Company nor any Member shall have any right, by
virtue of this Agreement, in such activities, or the income or profits
derived therefrom, and the pursuit of such activities, even if competitive
with the business of the Company, shall not be deemed wrongful or
improper.47
The “business of the Company” with which Stonemar Cookeville’s members are
entitled to compete is not defined in the SCA. The agreement, however, does define
Stonemar Cookeville’s “purpose” as “mak[ing] direct or indirect investments in
commercial real estate properties.”48 In particular, Stonemar Cookeville’s “initial
45
SCA § 10.2(a).
46
The SCA defines “Affiliate” to include “any Person or group of Persons . . . that directly
or indirectly through one or more intermediaries controls or is controlled by or is under
common control with [a] particular Person.” SCA § 1.3.
47
SCA § 10.4.
48
SCA § 2.3.
14
investment” was meant to facilitate the acquisition of an indirect interest in Jackson
Plaza.49
The Kimco Interest Sale
From 2007 until 2013, Jackson Plaza operated under the structure described
above, with Kimco receiving preferred distributions and the non-preferred investors
receiving any distributions in excess of the Preferred Interest’s guaranteed rate of
return.50 But, on July 1, 2013, Kimco sold the Preferred Interest to Cookeville
Corridor (the “Kimco Interest Sale”).51 This transaction was part of Kimco’s broader
divestment of its real-estate interests, which implicated multiple properties where
Gould and Kimco were co-investors.52
Ostensibly to avoid Jackson Plaza’s sale at a depressed price, Gould caused
Cookeville Corridor to pay Kimco $4,500,000 for its preferred stake in two separate
properties.53 Of this purchase price, $1,995,283 was allocated to the Preferred
Interest, with the balance going to an unrelated property in Kentucky.54 Through the
49
SCA § 2.3.
50
Compl. ¶¶ 23–24.
51
Compl. ¶¶ 2, 31–32.
52
Compl. ¶ 37.
53
Compl. ¶¶ 2–3, 31–32.
54
Compl. ¶¶ 2, 31–32.
15
Kimco Interest Sale, Gould positioned himself (albeit temporarily) to be in complete
control of Cookeville Retail by joining the Preferred Interest with Stonemar
Cookeville’s non-preferred, managing interest.55
When Cookeville Corridor acquired the Preferred Interest, Gould had already
identified Eightfold as a suitable preferred investor to carry on in Kimco’s stead.56
Immediately after Cookeville Corridor purchased the Preferred Interest, Gould
caused Cookeville Retail, Stonemar Cookeville and Cookeville Corridor, along with
Eightfold, to amend the CRA by entering into the Amended and Restated Limited
Liability Company Operating Agreement (the “Amended CRA”) on July 1, 2013.57
Under the Amended CRA, Eightfold and Cookeville Corridor were admitted as
members of Cookeville Retail.58
According to 77 Charters, the Amended CRA had a more sinister purpose than
simply replacing Kimco with Eightfold. Specifically, it is alleged that Gould’s stated
purpose of “preventing the sale of Jackson Plaza” was just a “guise” for his true plan
to “reward himself through a Rube Goldberg contraption.”59 According to 77
55
Compl. ¶¶ 37–38; CRA (recitals).
56
Compl. ¶ 38.
57
Compl. ¶ 43; Compl. Ex. D.
58
Compl. ¶ 43; Amended CRA § 1.2.
59
Compl. ¶ 3.
16
Charters, the Amended CRA was the foundation for the “contraption” that allowed
Gould to extract value from Cookeville Retail at 77 Charters’ expense.60 For
example, Gould used his newfound control of Cookeville Retail to enhance the
Preferred Interest’s annual returns from 9% to 12.5%.61 Gould also caused Stonemar
Cookeville, as managing member, to be subjected to a lower standard of care in the
Amended CRA than was embedded within the original CRA.62
With Kimco’s exit, it is alleged that Gould seized an opportunity to restructure
Cookeville Retail’s distribution scheme at 77 Charters’ expense.63 Of Kimco’s total
capital account balance at the time of the Kimco Interest Sale ($3,927,016),
Cookeville Corridor kept $1,931,733 (the “Retained Interest”),64 while passing on
the remainder ($1,995,283) to Eightfold (the “Eightfold Interest”).65 Even though
Eightfold received only a portion of the Preferred Interest, Eightfold paid Cookeville
60
Compl. ¶ 49.
61
Compl. ¶¶ 43, 49. Here, I note the parties dispute the Preferred Interest’s rate of return
under the CRA. Compare Defs.’ Opening Br. in Supp. of Mot. to Dismiss First Am.
Verified Compl. (“DOB”) at 35 n.10 (7%), with Compl. ¶ 49 (9%). I do not resolve this
dispute as Defendants concede “there may have been differences between the agreements’
‘waterfall’ structures.” DOB at 34.
62
Compl. ¶ 51.
63
Compl. ¶¶ 32, 38–39, 49.
64
The Complaint vaguely describes the retained capital account balance as “a retained right
to potential distributions to the extent, if any.” Compl. ¶ 38 (sic).
65
Compl. ¶¶ 32, 38–39.
17
Corridor $1,995,283 for the Eightfold Interest (the same price Cookeville Corridor
paid for the entire Preferred Interest).66 Under this new structure, the Retained
Interest entitled Cookeville Corridor to receive a portion of Cookeville Retail’s
preferred distributions with Eightfold.67
As a minority investor in Stonemar Cookeville, 77 Charters was not a party to
either the CRA or the Amended CRA.68 Given this status, despite the transformative
nature of the Kimco Interest Sale and Eightfold’s admission as a new preferred
investor, 77 Charters alleges it had no notice of the Kimco Interest Sale or Stonemar
Cookeville’s consent to the transaction.69
77 Charters’ Books and Records Action and the Jackson Plaza Sale
By May 2016, roughly three years after the Kimco Interest Sale, 77 Charters
eventually became “concerned” enough about its investment to make informal
requests for documents from Stonemar Cookeville.70 Frustrated with the response,
77 Charters formalized its request for information with a demand under 6 Del. C.
66
Compl. ¶¶ 32, 38–39.
67
Compl. ¶ 49. To effectuate the Kimco Interest Sale, Gould, acting as managing member
of Stonemar MM, caused Stonemar Cookeville to consent to the transaction under
Section 3.2 of the CRA. Compl. ¶¶ 31–32, 40.
68
Compl. ¶¶ 33, 44.
69
Compl. ¶ 33.
70
Compl. ¶ 54.
18
§ 18-305.71 Still dissatisfied with Stonemar Cookeville’s response, 77 Charters filed
a books and records action on February 14, 2018.72 That action ended on June 12,
2018, with 77 Charters’ voluntary dismissal as part of a settlement that allowed
77 Charters to inspect certain Stonemar Cookeville documents.73
Shortly after this settlement, and without 77 Charters’ advance knowledge, on
June 27, 2018, Cookeville Retail sold Jackson Plaza to a third party for a purchase
price of $30,200,000 (the “Jackson Plaza Sale”).74 Gould signed a written consent
on behalf of Stonemar MM, Stonemar Cookeville and Cookeville Corridor
authorizing the transaction.75
77 Charters learned of the Jackson Plaza Sale in a letter from Gould in which
Gould advised that the sale proceeds were “insufficient to return any funds to
77 Charters.”76 The first $24,926,268 of the sale proceeds were used to repay the
Loan with the remaining $4,768,045 going to Cookeville Retail.77 Gould’s letter
71
Compl. ¶ 54.
72
Compl. ¶ 55. See 77 Charters, Inc. v. Stonemar Cookeville P’rs, LLC, C.A. No. 2018-
0126-AGB.
73
Compl. ¶ 56.
74
Compl. ¶ 57.
75
Compl. ¶ 59.
76
Compl. ¶ 63.
77
Compl. ¶¶ 64, 70.
19
stated that this balance was then distributed to “Kimco Realty Corp.”78
Notwithstanding this representation, 77 Charters alleges, on information and belief,
that this sum actually went to Eightfold and Cookeville Corridor (in unspecified
proportions).79 No distribution was made to Stonemar Cookeville.80
Procedural Posture
77 Charters filed its original complaint on February 18, 2019.81 After
Defendants filed a motion to dismiss, 77 Charters responded by amending its
pleading with the now-operative Complaint.82 In the Complaint, 77 Charters alleges
Gould caused entities under his control to engage in ten “Wrongful Acts,” which can
be grouped into four categories:83
 Business opportunity claims: causing Stonemar Cookeville to agree
to the Kimco Interest Sale and admitting Eightfold as a member while
“seiz[ing] the opportunity of the Stonemar Cookeville members to
purchase [the Preferred Interest] pursuant to Stonemar Cookeville’s
option to buy and as otherwise available as a business opportunity to
Stonemar Cookeville members”;84
78
Compl. ¶ 63.
79
Compl. ¶¶ 2, 66.
80
Compl. ¶¶ 2, 67.
81
D.I. 1.
82
D.I. 10; D.I. 25.
83
Compl. ¶ 93.
84
Compl. ¶ 93(b)–(c).
20
 Wrongful charter amendment: causing Stonemar Cookeville to enter
the Amended CRA, which included terms more beneficial to
Cookeville Corridor and Eightfold than were provided to Kimco under
the CRA;85
 Jackson Plaza Sale: causing Stonemar Cookeville to agree to both the
Jackson Plaza Sale for an unfair price and the subsequent “improper
distributions of proceeds from the sale of Jackson Plaza”;86
 Management Agreement: Causing Stonemar Cookeville to enter into
the Management Agreement on behalf of Cookeville Retail and,
pursuant to those agreements, “engaging in transactions which were not
arms’ length transactions” and were not entirely fair.87
Based on these Wrongful Acts, 77 Charters brings (i) breach of contract
claims against Cookeville Corridor, Eightfold and Stonemar MM (Counts VII
and X),88 (ii) direct and derivative breach of fiduciary duty claims against Stonemar
MM, Stonemar Cookeville and Gould (Counts I–III),89 (iii) aiding and abetting
breach of fiduciary duty claims against Gould, Eightfold and Stonemar MM (Counts
IV and XI),90 (iv) a civil conspiracy claim against Gould, Stonemar MM, Cookeville
Corridor and Eightfold (Count V),91 (v) an unjust enrichment claim against Gould,
85
Compl. ¶ 93 (d)–(f).
86
Compl. ¶ 93 (g)–(h).
87
Compl. ¶ 93(a).
88
Compl. ¶¶ 127–32, 144–60.
89
Compl. ¶¶ 81, 89–109.
90
Compl. ¶¶ 110–17, 153–60. Count XI is pled in the alternative.
91
Compl. ¶¶ 118–20.
21
Stonemar MM, Cookeville Corridor and Eightfold (Count VI),92 (vi) a tortious
interference with business relations claim against Gould, Cookeville Corridor and
Eightfold (Count VIII)93 and (vii) a claim seeking a judgment declaring the
Amended CRA is void (Count IX).94
On September 6, 2019, Defendants filed the Motion in which they seek an
order dismissing all counts of the Complaint with prejudice under Court of Chancery
Rule 12(b)(6).95
II. ANALYSIS
In considering a motion to dismiss under Court of Chancery Rule 12(b)(6),
the Court applies a well-settled standard:
(i) all well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are ‘well-pleaded’ if they give the opposing party
notice of the claim; (iii) the Court must draw all reasonable inferences
in favor of the non-moving party; and (iv) dismissal is inappropriate
unless the Plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of proof.96
92
Compl. ¶¶ 121–26.
93
Compl. ¶¶ 133–39.
94
Compl. ¶¶ 140–43.
95
D.I. 40.
96
Savor, 812 A.2d at 896–97 (citations omitted).
22
On top of the convoluted structure of 77 Charters’ pleading, and the sheer
breadth of its claims, outright mistakes in the Complaint (which 77 Charters
characterizes as “scriveners errors”) have made deciding the Motion extraordinarily
difficult.97 Against the backdrop of the Complaint’s disorganization, I begin my
analysis with the first argument 77 Charters makes in its Answering Brief—that it
has well-pled Defendants wrongfully “usurp[ed] [a] business opportunity.”98 Even
for this opening scene, however, 77 Charters has forgotten its lines. Notwithstanding
its repeated characterization of its allegations as “business opportunity” claims, at
oral argument, 77 Charters’ counsel changed course and argued that what
77 Charters has actually alleged is “[what] I would say in the classic sense [is] self-
dealing.”99
While the Complaint has done as much to obscure as it has to expose a claim,
giving 77 Charters the benefit of all reasonable inferences, I am satisfied the
Complaint gives Defendants fair notice of a reasonably conceivable claim that
97
See, e.g., Compl. ¶¶ 133, 140 (The Complaint has two Count VIIIs.); Compl. ¶ 140
(The second Count VIII (i.e., Count IX) is labeled “Tortious Interference” when it is a
claim seeking declaratory judgment.); Compl. ¶¶ 144, 151 (Count X—which is brought
only against Cookeville Corridor and Eightfold—alleges “Stonemar MM caused Stonemar
Cookeville and Cookeville Retail to agree to terms of payment and to pay Stonemar
Realty . . . in excess of what was permitted.”); Pl.’s Answering Br. in Opp’n to Mot. to
Dismiss First Am. Verified Compl. (“PAB”) at 72 (referencing yet another mistake).
98
PAB at 21; Compl. ¶¶ 32, 34, 93(c).
99
See Compl. ¶¶ 3, 32, 93(c); Tr. at 33.
23
Stonemar MM and Gould breached their fiduciary duties by engaging in self-dealing
when adopting the Amended CRA. Based on this conclusion, I also find 77 Charters
has well pled the prima facie elements of civil conspiracy against Cookeville
Corridor—as well as a claim seeking reformation of the Amended CRA.
All remaining claims, however, must be dismissed for failure to state viable claims.
77 Charters Has Well Pled a Breach of Fiduciary Duty Against Gould
and Stonemar MM (Counts I, II and III)
In Counts I, II and III, 77 Charters alleges Gould and Stonemar MM
(the “Fiduciary Defendants”), as well as Stonemar Cookeville, breached their
fiduciary duties by engaging in the Wrongful Acts.100 Both Stonemar Cookeville
and Cookeville Retail are Delaware LLCs and, as such, the Act permits their
respective members to “expand or restrict” the “member’s or
manager’s . . . duties.”101 Given the centrality of the operating agreement in
governance disputes involving alternative entities, “it is frequently impossible to
decide fiduciary duty claims without close examination and interpretation of the
governing instrument of the entity giving rise to what would be, under default law,
100
Compl. ¶¶ 89–109.
101
6 Del. C. §§ 18-1101(c), 18-1104; CHS Theatres, LLC v. Nederlander of San Francisco
Assocs., 2015 WL 1839684, at *11 (Del. Ch. Apr. 21, 2015); Douzinas v. Am. Bureau of
Shipping, Inc., 888 A.2d 1146, 1149–50 (Del. Ch. 2006).
24
a fiduciary relationship.”102 And, because a LLC agreement is a contract, its
interpretation is generally subject to ordinary contract law principles.103
Without language in an LLC agreement to the contrary, the managers of a
Delaware LLC owe traditional fiduciary duties of care and loyalty.104 “Although
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.”105 Indeed, it is
now settled in this court that the removal of default fiduciary duties through an LLC
agreement must be accomplished with clear and unambiguous language.106
With these settled principles in mind, the first step in my analysis of each of
the fiduciary duty claims is to construe the terms of the CRA and SCA against the
backdrop of the applicable default rules to discern (i) which, if any, of the
Defendants would owe fiduciary duties, (ii) whether default fiduciary duties have
102
Douzinas, 888 A.2d at 1149–50; Fisk Ventures, LLC v. Segal, 2008 WL 1961156, at *1
(Del. Ch. May 7, 2008) (observing that “[c]ontractual language defines the scope, structure,
and personality of limited liability companies”).
103
Domain Assocs., L.L.C. v. Saha, 2018 WL 3853531, at *18 (Del. Ch. Aug. 13, 2018).
104
6 Del. C. § 18-1104; CHS Theatres, 2015 WL 1839684, at *11.
105
Ross Hldg. & Mgmt. Co. v. Advance Realty Gp., LLC, 2014 WL 4374261, at *15
(Del. Ch. Sept. 4, 2014).
106
CelestialRX Invs., LLC v. Krivulka, 2017 WL 416990, at *16 (Del. Ch. Jan. 31, 2017)
(citing Feeley v. NHAOCG, LLC, 62 A.3d 649, 664 (Del. Ch. 2012)).
25
been waived or modified by contract and (iii) whether the Complaint well pleads a
breach of those duties.
1. It Is Reasonably Conceivable Stonemar MM and Gould Owe Default
Fiduciary Duties
There appears to be no question that Stonemar MM owes default fiduciary
duties as managing member of Stonemar Cookeville.107 As for Gould (Count I),
although he is neither member nor manager of Stonemar Cookeville or Cookeville
Retail, this court has held, under certain circumstances, that second-tier controllers
may owe limited fiduciary duties.108 USACafes recognizes remote controllers
(such as Gould) will owe limited fiduciary duties if they “exert control over the assets
of that entity.”109 The Complaint adequately pleads a remote controller scenario by
alleging that Gould personally undertook all the Wrongful Acts as Stonemar MM’s
107
Feeley, 62 A.3d at 660 (“Numerous Court of Chancery decisions hold that the manager
of an LLC owes fiduciary duties.”).
108
See In re USACafes, 600 A.2d 43. Under a “traditional approach,” only Stonemar MM
would owe fiduciary duties to Stonemar Cookeville which, in turn, would owe fiduciary
duties to Cookeville Retail. Gotham P’rs, L.P. v. Hallwood Realty P’rs, L.P.,
2000 WL 1476663, at *20 (Del. Ch. Sept. 27, 2000); Metro Ambulance, Inc. v. E. Med.
Billing, 1995 WL 409015, at *3 (Del. Ch. July 5, 1995) (noting that those who traditionally
have been recognized to owe fiduciary duties are those who occupy a special relationship
of trust with another who relies upon his judgment, such as trustees, executors, directors
and officers).
109
Bay Ctr. Apartments Owner, LLC v. Emery Bay PKI, LLC, 2009 WL 1124451, at *9–
10 (Del. Ch. Apr. 20, 2009) (applying “USACafes-type liability” in a LLC context); Feeley,
62 A.3d at *667 (holding USACafes duties do not include the duty of care and have only
been extended to “classic self-dealing” transactions) (quoting In re USACafes, 600 A.2d
at 49).
26
manager.110 Defendants appear to concede as much by not challenging whether
Gould owes default fiduciary duties in their briefs.111
Turning to Count II, in a turn that would make Fielding Mellish proud,
77 Charters attempts to bring a derivative breach of fiduciary duty claim against
nominal Defendant, Stonemar Cookeville, while, at the same time, purporting to
bring claims on behalf of Stonemar Cookeville.112 77 Charters’ counsel conceded at
oral argument that he “didn’t know” of a case where this court had sanctioned a
plaintiff derivatively “representing” an entity while “going after” the same entity as
defendant in the same case.113 Enough said. Count II must be dismissed.114
110
See, e.g., Compl. ¶ 37 (“Gould [] caused Cookeville Retail to transfer to Kimco cash
and rent receivables.”), ¶ 38 (“Gould caused Cookeville Corridor to transfer to Eightfold
all of its membership interests in Cookeville Retail.”), ¶ 40 (“Gould, as managing member
of Stonemar MM, caused Stonemar Cookeville to approve the transfer by Cookeville
Corridor.”), ¶ 43 (“Gould, acting on behalf of (i) Stonemar MM as managing member of
Stonemar Cookeville; and (ii) Cookeville Corridor caused Cookeville Retail to enter into
[the Amended CRA].”).
111
See DOB at 45–46 (making other arguments).
112
Compl. ¶¶ 90, 99, 102, 106.
113
Tr. at 38–39. Defendants raised this issue in their Opening Brief, arguing Stonemar
Cookeville’s “position in this litigation is properly one of neutrality.” DOB at 44. In its
Answering Brief, 77 Charters attempted to clarify that its claim against “nominal defendant
Stonemar Cookeville” is based on its status as a “vehicle through which” Stonemar MM
and Gould “engaged in their wrongful conduct.” PAB at 55–56; Compl. ¶ 99. Giving
77 Charters all reasonable inferences, I see no basis in law or pled facts to impose a
fiduciary duty upon Stonemar Cookeville, much less to infer that it breached such duty.
114
Tr. at 39. Once one accepts the nebulous fiduciary duty framework established in
USACafes—which is focused on “the individuals” who ultimately “control” an alternative
entity—it makes little sense for 77 Charters to bring claims against nominal Defendant,
27
2. The SCA Modifies Default Fiduciary Duties
The next step in the analysis is to decide whether the SCA or the CRA clearly
and unambiguously modifies or waives the Fiduciary Defendants’ default fiduciary
duties.115 Because Delaware law recognizes the primacy of contract when
addressing governance issues in the alternative entity space, 77 Charters may not
saddle Defendants with common law fiduciary duties if doing so would contradict
the plain language of the relevant LLC agreement.116 On the other hand, if the parties
have not unambiguously disavowed common law fiduciary duties, I must look to
corporate law principles by analogy when determining whether and to what extent
fiduciary duties are owed.117
Under normal circumstances, one would look to the operating agreement of
the entity from which the fiduciary duties would naturally flow to determine whether
Stonemar Cookeville. See Lewis v. AimCo Prop., L.P., 2015 WL 557995, at *5 (Del. Ch.
Feb. 10, 2015) (noting that USACafes is concerned with practical “control” over alternative
entities).
115
See Feeley, 62 A.3d at 664 (“Drafters of an LLC agreement must make their intent to
eliminate fiduciary duties plain and unambiguous.”) (citation omitted).
116
See 6 Del. C. §§ 18-1101(c), (e); Fisk Ventures LLC, 2008 WL 1961156, at *8 (“In the
context of [LLCs], which are creatures . . . of contract, those duties or obligations [among
parties] must be found in the LLC Agreement or some other contract.”); Related Westpac
LLC v. JER Snowmass LLC, 2010 WL 2929708, at *8 (Del. Ch. July 23, 2010) (“When . . .
parties . . . 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.”).
117
Obeid v. Hogan, 2016 WL 3356851, at *6 (Del. Ch. June 10, 2016).
28
default duties had been modified.118 It is not so simple here, however, because
applying USACafes-type fiduciary duties “puts [fiduciaries] in the situation of
having potentially conflicting and irreconcilable fiduciary duties.”119 On this record,
it is unclear whether the Fiduciary Defendants should look to the SCA or the CRA
as the source of the applicable standard of conduct.
Stopping short of grappling with whatever cognitive dissonance USACafes
may engender, at this juncture, it is enough to say second-tier controllers “cannot be
held liable for breach of fiduciary duty in a situation where the [core fiduciary
(i.e., Stonemar MM)] because of its compliance with [its contractual fiduciary
duties], does not owe such liability.”120 In other words, given that Stonemar
Cookeville and Cookeville Retail are creatures of contract, 77 Charters cannot agree
contractually to lower Stonemar MM and its affiliates’ standard of care in the SCA
and then resurrect heightened standards of care for the Fiduciary Defendants based
118
6 Del. C. § 18-1101(c); see, e.g., Bay Ctr., 2009 WL 1124451, at *8.
119
Bay Ctr., 2009 WL 1124451, at *9 n.44 (alteration in original and quotation omitted);
Gelfman v. Weeden Inv’rs, L.P., 792 A.2d 977, 992 n.24 (Del. Ch. 2001); Feeley, 62 A.3d
at 671 (observing that the Delaware Supreme Court could reject USACafes by holding “that
when parties bargain for an entity to serve as the fiduciary, that entity is the fiduciary, and
the parties cannot later circumvent their agreement by invoking concepts of control or
aiding and abetting,” but ultimately deferring to USACafes as “stare decisis”).
120
Gotham P’rs, L.P. v. Hallwood Realty P’rs, L.P., 795 A.2d 1, 34 (Del. Ch. 2001), rev’d
on other grounds, 817 A.2d 160 (Del. 2002).
29
upon the CRA, an agreement to which 77 Charters and the Fiduciary Defendants are
not parties.121
With this in mind, I approach the fiduciary duty analysis in three steps. First,
I address Defendants’ argument that Section 10.2 of the SCA exempts the Fiduciary
Defendants from monetary liability.122 Second, I consider whether Section 10.4 of
the SCA clearly and unambiguously eschews the corporate opportunity doctrine.
Finally, I review 77 Charters’ effort to require Stonemar MM to share corporate
opportunities based upon the CRA, even if the SCA waives the corporate
opportunity doctrine.
Section 10.2(a) of the SCA exempts any “Person acting in its capacity as a
Member (including the Managing Member and its Affiliates)” from personal liability
“to the Company or its members for money damages.” 123 As noted, the SCA
provides that Stonemar MM is both “Member” and “Managing Member” of
Stonemar Cookeville.124
121
Fisk Ventures LLC, 2008 WL 1961156, at *8; Related Westpac, 2010 WL 2929708,
at *8.
122
See DOB at 18.
123
SCA §§ 1.17, 10.2; 6 Del. C. § 10-1101(e) (authorizing such a provision).
124
SCA (recitals).
30
Predictably, the parties interpret the scope of Section 10.2’s exculpation
differently. Defendants contend it exempts the Fiduciary Defendants from the threat
of monetary liability acting in any “capacity.”125 If true, all counts in the
Complaint—save Count 9—would be barred as each seeks money damages.126 For
its part, 77 Charters concedes Section 10.2(a) exempts Stonemar MM from the threat
of monetary damages when acting as a member, but, when wearing its managing
member hat, 77 Charters argues the SCA does not shield Stonemar MM and its
affiliates from money damages.127
Reading the SCA holistically, multiple provisions in the agreement support
77 Charters’ reading.128 First, the SCA defines Stonemar MM as both a “Member”
and as the “Managing Member.”129 Second, Section 10.2(b), itself, differentiates
between Stonemar MM acting as a “Member” and as the “Managing Member” when
125
See DOB at 18–20.
126
DOB at 18–20 (citing Compl. ¶¶ 69–70, 94).
127
PAB at 18.
128
See Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010) (holding that
contracts must be read “as a whole” to “give each provision and term effect, so as not to
render any part of the contract mere surplusage”) (internal quotation omitted); SCA § 5.1
(discussing each “Member’s” capital account); SCA § 6.1 (discussing Stonemar MM’s role
as managing member).
129
“This . . . Agreement of Stonemar Cookeville Partners . . . is entered into . . . by and
among Stonemar MM . . . (the ‘Managing Member’) and the other Persons who have
executed this Agreement . . . (each, a ‘Member.’”. SCA (Recitals).
31
it describes the circumstances under which parties to the SCA could seek
indemnification.130 That the SCA’s drafters “knew how” to and, in fact, did
distinguish between Stonemar MM’s role as a “Member” and as “Managing
Member” (yet they chose not to in Section 10.2(a)) lends credence to 77 Charters’
proffered interpretation.131
77 Charters’ interpretation is reasonable. Accordingly, even if Defendants’
interpretation is also reasonable (which I do not decide), Section 10.2(a) is not a
basis to bar the claims in the Complaint, at least not at this stage.132
Turning to the parties’ second dispute, I am satisfied the SCA unambiguously
eschews the corporate opportunity doctrine.133 The contractual provision most
directly on point is Section 10.4, captioned “Duties and Conflicts,” where the parties
acknowledge:
130
SCA § 10.2(b). Generally, Stonemar Cookeville would indemnify its members from
liability incurred “in connection with” its business. But Stonemar Cookeville would not
indemnify a member if it were sued by another member—unless a member was suing
Stonemar MM “in its capacity as the Managing Member.” Id. (emphasis supplied).
131
Norton v. K-Sea Transp. P’rs L.P., 67 A.3d 354, 360, 364 (Del. 2013) (interpreting a
contract according to its “plain meaning” when read “as a whole” and declining to infer
that the challenged language resulted from “sloppy drafting” when the agreement’s drafters
“knew how to impose an affirmative obligation when they so intended”).
132
See Appriva S’holder Litig. Co., LLC v. EV3, Inc., 937 A.2d 1275, 1280, 1289
(Del. 2007) (stating a court, in deciding a Rule 12(b)(6) motion to dismiss, “cannot choose
between two differing interpretations of ambiguous documents” where “the provisions in
controversy are reasonably susceptible to different interpretations”).
133
DOB at 24–26.
32
the other Members (including the Managing Member [Stonemar
MM]) and [its] respective Affiliates have or may have other business
interests [] and investments, some of which may be in conflict or
competition with the business of the Company . . . . and pursuit of
such activities, even if competitive with the business of the Company,
shall not be deemed wrongful or improper.134
77 Charters contends Section 10.4 is vague and not intended to govern
situations “like the Kimco Interest Sale.”135 It says the section applies only to
investments in “other similarly situated shopping centers.”136 On the other hand,
Defendants argue the provision evidences the parties’ clear and unambiguous choice
to reject the corporate opportunity doctrine, thereby permitting Cookeville
Corridor’s acquisition of the Preferred Interest.137
Defendants’ reading of Section 10.4 is the only reasonable interpretation.
Returning to the plain language of Section 10.4, 77 Charters consented to Stonemar
MM and its Affiliates having “business interests” and “investments” that are “in
conflict” or in “competition with the business of” Stonemar Cookeville.138 In turn,
Section 2.3 states Stonemar Cookeville’s “sole object and purpose” is to “make
134
SCA § 10.4 (emphasis supplied).
135
PAB at 27.
136
Id.
137
DOB at 24–46.
138
SCA § 10.4; 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”).
33
direct or indirect investments in commercial real estate properties,” particularly “to
acquire, hold, own and/or dispose of a limited liability company interest in”
Cookeville Retail.139
The plain import of Section 10.4 is that 77 Charters unambiguously agreed to
waive the corporate opportunity doctrine. This waiver, when read in conjunction
with Section 2.3, allows Stonemar MM and its affiliates to “conflict” and “compete”
with Stonemar Cookeville’s business of investing in commercial real estate,
including its investment in Cookeville Retail.140 The only reasonable interpretation
of this provision is that Stonemar MM and its affiliates have no obligation to share
additional opportunities to invest in Cookeville Retail should such opportunities
become available.141
Finally, while not entirely clear from its Answering Brief, 77 Charters
attempts to bypass the SCA and re-animate the corporate opportunity doctrine by
arguing “Gould and Stonemar MM were required to consider the interests of
Stonemar Cookeville (and its members) in approving the Kimco Interest Sale,
pursuant to . . . the CRA.”142 To support this proposition, 77 Charters cites
139
SCA § 2.3.
140
SCA § 10.4.
141
SCA § 2.3.
142
PAB at 21–22, 28, 31.
34
Section 4.1(d) of the CRA, obligating Stonemar Cookeville to “discharge its duties
in a good and proper manner . . . as would a prudent manager under similar
circumstances” and to “take into account the interests of [Cookeville Retail’s]
creditors as well as the interests of its Members [(i.e., Kimco and Stonemar
Cookeville)].”143
77 Charters’ Frankensteinian effort to reanimate contractually snuffed
corporate opportunity liability fails for three reasons.144 First, 77 Charters cannot
use the CRA to resurrect a duty to present corporate opportunities to Stonemar
Cookeville when 77 Charters unambiguously waived this duty in the SCA.145
Second, even if I were inclined to read the SCA and the CRA together to determine
the scope of the Fiduciary Defendants’ “USACafes-type” fiduciary duties,
Section 10.4 of the SCA specifically and unambiguously disavows the corporate
opportunity doctrine.146 This provision’s “specific language . . . controls over
general language . . . and where specific and general language conflict, the specific
143
CRA § 4.1(c), (d).
144
At the outset, I note it is disingenuous for 77 Charters to argue it relied on the CRA’s
terms since it pleads it had no knowledge of the CRA’s terms until 2016. Compl. ¶ 33.
145
Gotham P’rs, 795 A.2d at 34 (refusing to allow a USACafes-type fiduciary duty claim
against a second-tier controller where the core fiduciary (in this case Stonemar MM)
complied with the constitutive agreement to which it was a party).
146
SCA § 10.4.
35
provision [] qualifies the meaning of the general one.”147 Third, Section 4.9 of the
CRA provides that Cookeville Retail’s members and their respective affiliates have
the right directly and indirectly to compete with Cookeville Retail.148 In other words,
far from bringing corporate opportunities back to life, the CRA, like the SCA, makes
clear that the corporate opportunity doctrine does not dwell in the realm of Stonemar
Cookeville’s governance regime.149
*****
Construing both the SCA and the CRA according to their plain meaning, the
parties unambiguously eschewed the corporate opportunity doctrine while leaving
other default aspects of the duty of loyalty intact.150 And, while the SCA exempts
147
DCV Hldgs., Inc. v. ConAgra, Inc., 889 A.2d 954, 961 (Del. 2005); Ivize of Milwaukee,
LLC v. Compex Litig. Supp., LLC, 2009 WL 1111179, at *9 (Del. Ch. Apr. 27, 2009)
(“[W]ell settled rules of contract construction require that, in a conflict between provisions,
the more specific language should control.”).
148
CRA § 4.9.
149
Compare CRA § 4.9 (“each Member, Manager or Affiliate . . . may engage in and
possess interests in other business ventures . . . including ones in direct or indirect
competition with the Company.”), with SCA § 10.4. (“Each Member acknowledges that:
(i) the other Members (including the Managing Member) and their respective
Affiliates . . . may have other business interests . . . some of which may be in conflict or
competition with the business of the Company.”).
150
See Science Accessories Corp. v. Summagraphics Corp., 453 A.2d 957, 963 (Del. 1980)
(“The doctrine of corporate opportunity is [but] a species of the duty of a fiduciary to act
with undivided loyalty.”); Skye Mineral Inv’rs, LLC v. Clarity Copper, 2020 WL 881544,
at *22 (Del. Ch. Feb. 24, 2020) (interpreting similar language to eschew the corporate
opportunity doctrine while leaving open the possibility that a breach “exceeds the scope of
behavior the corporate opportunity doctrine prohibits”).
36
its members from monetary liability, it does not unambiguously exempt
Stonemar MM and its affiliates from the threat of monetary liability for
Stonemar MM’s actions as Stonemar Cookeville’s managing member.
3. 77 Charters Has Well Pled a Narrow Breach of USACafes-type
Fiduciary Duties Against the Fiduciary Defendants
Having decided the SCA and the CRA leave parts of the duty of loyalty intact,
I turn next to whether 77 Charters has well pled that the Fiduciary Defendants
breached their fiduciary duties by engaging in the Wrongful Acts.151 At the outset,
I note it is reasonably conceivable the Wrongful Acts implicate conduct while
Stonemar MM was wearing its managing member “hat” since they involve acts only
the managing member was authorized to take under the SCA.152 Accordingly,
Section 10.2(a) is not a defense for Stonemar MM or Gould at the pleading stage.
77 Charters urges the Court to infer the Fiduciary Defendants breached their
fiduciary duties when Cookeville Corridor acquired the Preferred Interest without
first offering it to 77 Charters.153 Here, the relevant question is whether Cookeville
Corridor’s acquisition of the Preferred Interest was in “conflict” or “competition”
151
Compl. ¶¶ 89–95, 103–09.
152
See SCA §§ 6.1–6.2 (the managing member “exclusively” exercised “all powers of the
Company.”); see, e.g., Compl. ¶ 92 (alleging Stonemar MM breached its fiduciary duties
by “causing Stonemar Cookeville to agree to the Kimco Interest Sale”).
153
Compl. ¶¶ 93(b)–(c), 106.
37
with Stonemar Cookeville’s business of holding limited liability company interests
in Cookeville Retail.154 Literally, the answer must be yes. To the extent Stonemar
Cookeville was a potential bidder for the Preferred Interest, once Kimco decided to
sell, the Fiduciary Defendants competed with Stonemar Cookeville when they made
their bid.
As already discussed at some length, however, the SCA unambiguously
forecloses the notion that the Fiduciary Defendants had a common law duty to
present the Preferred Interest to Stonemar Cookeville before Cookeville Corridor
acquired it.155 This is true even assuming arguendo that Stonemar Cookeville had
an interest or expectancy in the Preferred Interest.156 Any other reading would
undermine the purpose of a contractual waiver of the corporate opportunity doctrine
which applies precisely when an entity has such an interest or expectancy. 157
154
SCA §§ 2.3, 10.4.
155
See CelestialRX, 2017 WL 416990, at *17–18 (interpreting similar language to
“eschew[] the corporate opportunity doctrine”); Kahn v. Ichan, 1998 WL 832629, at *3
(Del. Ch. Nov. 12, 1998) (interpreting similar language and holding “where a partnership,
by virtue of an unambiguous clause in its partnership agreement [] authorizes competition
with the partnership,” its partners are “on notice that the partners intend to compete directly
with the partnership”).
156
See Compl. ¶ 32 (alleging Stonemar Cookeville had an “interest and/or expectancy” to
purchase the Preferred Interest “pursuant to Article 12” and “section 3.2” of the CRA).
157
See Broz v. Cellular Info. Sys., Inc., 673 A.2d 148, 154–55 (Del. 1996) (stating the
corporate opportunity doctrine applies when a fiduciary usurps an opportunity within the
corporation’s line of business, that the corporation is financially able to exploit, in which
38
Accordingly, as already stated here, it is not reasonably conceivable that Cookeville
Corridor’s acquisition of the Preferred Interest, standing alone, constitutes a breach
of fiduciary duty.
This, however, does not end the analysis. As Defendants concede, the Kimco
Interest Sale was not a simple “pass through” transaction.158 77 Charters has not just
alleged Gould acquired the Preferred Interest. Rather, the Complaint alleges, albeit
obliquely, that Gould acquired the Preferred Interest and then used his total voting
control over Cookeville Retail to amend the CRA for his own benefit.159
A reasonable inference that flows from this allegation is that, before the Kimco
Interest Sale, Gould and 77 Charters’ interests were aligned as non-preferred
investors in Cookeville Retail.160 But, when Gould acquired the Preferred Interest
through Cookeville Corridor, he selfishly amended the CRA and shifted economic
value toward Cookeville Corridor and away from 77 Charters.161 For example,
77 Charters alleges the Amended CRA exempted Gould (and entities under his
control) from traditional fiduciary duties to a greater extent than the CRA and then
the corporation has an interest or expectancy and, by taking, the fiduciary is placed in a
position inimicable to his fiduciary duties).
158
Tr. at 15.
159
Compl. ¶¶ 93(d), 99–100, 106.
160
Compl. ¶¶ 37–38, 45, 49.
161
See Compl. ¶¶ 31, 37–39, 46, 49, 93, 106.
39
provided preferred investors a higher guaranteed return under the waterfall than they
were entitled to before (12.5% versus 9%).162
While the scope of USACafes-type liability is limited, “it surely entails the
duty not to use control over [an entity] to advantage the [controller] at the expense
of” the controlled-entity.163 Such a circumstance is well pled here, albeit just so.
The Complaint supports a reasonable inference Gould (i) acquired the Preferred
Interest, (ii) executed the Amended CRA to increase the Preferred Interest’s
economic value at 77 Charters’ expense and (iii) sold a slice of the augmented
162
Compl. ¶¶ 49, 51; DOB at 34–35 (conceding “there may have been differences between
the agreements’ ‘waterfall’ structures”). At this juncture, I note the parties dispute whether
the standards of care provided in the CRA and the Amended CRA were materially
different. Compare Amended CRA § 8.1(b) (“The obligations of [Stonemar Cookeville]
as Managing Member under this agreement are not fiduciary obligations to the extent such
obligations can be waived under applicable law.”), and Amended CRA § 8.3
(“[T]he Stonemar Member shall at all times act in good faith . . . [and] carry out all of its
obligations under this Agreement in accordance with the Standard of Care.”), and
Amended CRA Schedule C (defining “Standard of Care” to include “the usual and
customary standard of care, skill, prudence and diligence employed by asset managers in
accordance with the exercise of sound and prudent business judgment”), and Amended
CRA § 8.6.5 (“[N]o direct or indirect officer, director, shareholder, partner, employee or
agent of any Member of the Company shall have any liability of any kind or nature under
this agreement.”), with CRA § 4.1(c) (requiring Stonemar Cookeville to “discharge its
duties in a good and proper manner as provided for in this Agreement, as would a prudent
manager under similar circumstances). I am persuaded it is reasonably conceivable the
Amended CRA attempted to diminish the Fiduciary Defendants’ standard of care.
Defendants appear to acknowledge as much by arguing the Amended CRA (but not
analogous provisions in the CRA) bar 77 Charters’ claims against Gould. See DOB at 46
(citing Amended CRA § 8.6.5).
163
See In re USACafes, 600 A.2d at 49; Bay Ctr., 2009 WL 1124451, at *10; Feeley,
62 A.3d at *672–73 (observing USACafes “has not been extended beyond duty of loyalty
claims” and holding USACafes duties did not include the duty of care).
40
Preferred Interest to Eightfold while retaining a piece for himself.164 In a world
where 1+1 ≠ 3, the fact that Cookeville Corridor purchased the Preferred Interest
from a third party (Kimco) for $1,995,283 and then, days later, sold less than the full
Preferred Interest to another third party (Eightfold) for the exact same amount, is
circumstantial evidence that the Amended CRA enriched the Preferred Interest to
benefit Cookeville Corridor while harming 77 Charters.165
Defendants make two arguments in response, neither of which is persuasive.
First, they point to Section 3.3 of the CRA, which authorizes Stonemar Cookeville
and the holder of the Preferred Interest to amend the CRA and admit new members
to Cookeville Retail, as a basis to argue the allegedly problematic amendments to
the CRA were contractually authorized.166 Yet it is beyond dispute that “inequitable
action does not become permissible simply because it is legally possible.”167 The
contractual authority to amend the CRA does not immunize the Fiduciary
Defendants from a claim that they did so inequitably.
164
Compl. ¶¶ 37–39, 46.
165
Compl. ¶¶ 37–38. Defendants, of course, may well demonstrate otherwise with the
benefit of discovery and a less deferential procedural posture.
166
DOB at 32–33.
167
Schnell v. Chris-Craft Indus., Inc., 285 A.2d 437, 439 (Del. 1971).
41
Second, Defendants contend 77 Charters’ 2007 investment in Jackson Plaza
was so far underwater by 2018 that 77 Charters could not have been harmed by the
Amended CRA because, even if the Kimco Interest Sale had never happened,
77 Charters still would have received nothing for its investment.168 In an effort to
explain how it has been harmed, 77 Charters alleges Gould was less motivated to
secure a return for Cookeville Retail’s non-preferred investors (including
77 Charters) when he sold Jacksonville Plaza because he could look to his slice of
the Preferred Interest to generate a return.169 At this juncture, I must be mindful that
“allegations regarding damages can be pled generally.”170 While it is a close call,
reading the Complaint as a whole and giving 77 Charters the benefit of all reasonable
inferences, I am satisfied it is reasonably conceivable the Fiduciary Defendants
amended the CRA in a breach of fiduciary duty and that 77 Charters was damaged
thereby.
168
DOB at 34–35. Under the waterfall, Defendants contend 77 Charters still would have
been ~$2 million short of receiving any distributions had the Kimco Interest Sale never
occurred. See id. at 35.
169
See Compl. ¶¶ 49, 60–62 (“Gould and Stonemar MM[] did not seek the best price
available for the sale of Jacksonville Plaza and sought to liquidate solely for purposes of
obtaining returns for themselves at the expense of the long-term investment potential” for
the non-preferred investors.).
170
Horton v. Organogenesis Inc., 2019 WL 3284737, at *4 (Del. Ch. July 22, 2019)
(quoting In re Ezcorp Inc. Consulting Agmt. Deriv. Litig., 2016 WL 301245, at *30
(Del. Ch. Jan. 25, 2016)).
42
For example, it is reasonably conceivable that 77 Charters could prove at trial
that it was harmed when its non-preferred investment was further-subordinated to
the Preferred Interest in the Amended CRA. While the parties do not meaningfully
address the issue, the fact that the Amended CRA bumped up the Preferred Interest’s
annual returns supports an inference that 77 Charters received diminished
distributions (and thereby suffered damage) in between 2013 and 2018.171
Accordingly, the Motion must be denied to the extent it seeks dismissal of Counts I
and III.
4. 77 Charters’ Other Breach of Fiduciary Duty Theories Fail
77 Charters’ excursive narrative of Wrongful Acts appears to be the
foundation for other alleged fiduciary breaches.172 To begin, 77 Charters suggests
that even if the Fiduciary Defendants did not breach their fiduciary duties by
executing the Amended CRA, they still may be found liable for their decision to sell
the mall as a totally-independent breach of fiduciary duty.173 In this regard,
77 Charters maintains that because “Defendants knew that Stonemar Cookeville
would not recover any distributions and would lose substantially all of its assets from
the Jackson Plaza Sale and knew that Cookeville Retail did not engage in a fair
171
Compl. ¶ 49.
172
Compl. ¶¶ 93(g), 107.
173
Compl. ¶¶ 93(g), 107; PAB at 50–51.
43
process or obtain the best available price for the sale of Jackson Plaza, none of the
Defendants reasonably believed they were acting in the best interests of the
Stonemar Cookeville [sic] or its members when agreeing to sell Jackson Plaza.”174
To be clear, 77 Charters cannot build a breach of fiduciary duty claim upon
the notion that, because a fiduciary decided to liquidate an enterprise at a time when
residual interest holders would receive nothing, ipso facto or ipso jure, the fiduciary
breached her duties. Those who manage an enterprise do not “become guarantor[s]
of success.”175 With that canon in mind, I begin the analysis, as I must, with
reference to the SCA.176 That agreement makes clear, at Section 6.1, that Stonemar
MM had the exclusive authority to cause Stonemar Cookeville to consent to the
Jackson Plaza Sale without the consent of the members.177 Apart from this
provision, the parties point to nothing in the SCA that would modify Stonemar MM’s
default fiduciary duties in the sale context.
174
Compl. ¶ 62.
175
Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P., 2006 WL 4782378, at *3 (Del. Ch.
Aug. 10, 2006).
176
Douzinas, 888 A.2d at 1149–50.
177
SCA § 6.1. (“The business and affairs of the Company shall be managed by and under
the exclusive direction of the Managing Member and all powers of the Company may be
exercised exclusively by the Managing Member.”); see also SCA § 6.2.
44
Even if I were to review the decision to sell the mall to an arms-length third-
party buyer with enhanced scrutiny (a proposition 77 Charters vaguely advances but
I do not embrace), “[I] [would] not substitute [my] business judgment for that of
[Stonemar MM], but [instead] [would] determine if [Stonemar MM’s] decision was,
on balance, within a range of reasonableness.”178 Assuming, arguendo, this is the
correct standard of review, 77 Charters has not pled the factual predicates to support
a breach of fiduciary duty claim when considering the Jackson Plaza Sale in
isolation.179 First, the Complaint feebly asserts “the documents executed for the
Jackson Plaza Sale did not include a fiduciary-out or go-shop provision.”180
77 Charters cites no cases requiring fiduciaries to take these steps as a matter of
law.181 More to the point, the Complaint lacks any factual allegations concerning
178
Paramount Comm. Inc. v. QVC Network, Inc., 637 A.2d 34, 45 (Del. 1994);
In re Cogent, Inc. S’holders Litig., 7 A.3d 487, 487 (Del. Ch. 2010) (holding that when a
fiduciary decides to sell a company, she incurs a duty to “pursue the best transaction
reasonably available”).
179
In its Answering Brief, 77 Charters invents an allegation that the Fiduciary Defendants
were motivated to sell because they wanted to avoid a “zombie company” situation where
“the entity is profitable” but “growth opportunities and prospects for exit are not high
enough to generate . . . return[s].” PAB at 51. The problem with this theory is that it is not
pled in the Complaint. As such, I do not address it.
180
Compl. ¶ 60.
181
Barkan v. Amsted Indus., Inc., 567 A.2d 1279, 1286 (Del. 1989) (“[T]here is no single
blueprint that a board must follow to fulfill its duties.”).
45
Jackson Plaza’s true value, much less allegations that a “better” process would have
yielded more for the mall property.182
Second, 77 Charters argues the Jackson Plaza Sale was a self-dealing
transaction for Gould since the transaction released his personal guarantee on the
Loan.183 Yet 77 Charters has not pled Gould faced any threat of having to make
good on his guarantee.184 To the contrary, Gould’s guarantee obligations were
triggered only if he committed certain bad acts such as fraud, waste or failure to pay
taxes, and 77 Charters has not alleged that any of these triggers occurred.185 This is
182
Compl. ¶¶ 63–64 (Jackson Plaza sold for $24,926,263 in September 2018.);
In re Cogent, 7 A.3d at 497 (rejecting bald allegations that the purchase price obtained for
an asset was “too low” as adequate support for a breach of fiduciary duty claim). This is
not to say 77 Charters cannot prove the mall was worth more than it sold for as a basis to
support damages for its other breach claims. The holding here is that it has not well pled a
separate breach of fiduciary claim arising from the sale of the mall alone. Stated
differently, 77 Charters may be able to use evidence that Gould sold Jackson Plaza for too
little to prove that it suffered damages when the CRA was amended even though it has not
well pled that the Jackson Plaza Sale was an independent, substantive wrong.
183
Compl. ¶ 65.
184
Cf. Revlon, Inc. v. McAndrews & Forbes Hldgs., Inc., 506 A.2d 173, 182 (Del. 1986)
(noting directors were “aware” of “subsequent threats of suit” against them that were
extinguished by a transaction into which they steered their company).
185
Transmittal Aff. of John A. Sensing (D.I. 27) Ex. 1, ¶ 1. In re Morton’s Rest. Gp., Inc.
S’holders Litig., 74 A.3d 656, 658–59 n.3–4 (Del. Ch. 2013) (noting the Court may
consider documents incorporated by reference in the Complaint when deciding a motion
to dismiss).
46
no surprise as the Complaint alleges Jackson Plaza sold for millions more than the
outstanding principal balance on the Loan.186
This court has dismissed breach of fiduciary duty claims at the pleading stage
where a fiduciary received a “side-deal” in a M&A transaction—not available to
stockholders generally—but the fiduciary’s personal benefit was a “reasonable
condition[]” for the transaction.187 Here, Gould’s personal guarantees were released
simply because Cookeville Retail’s lenders had to be paid off when Jackson Plaza
sold.188 Under such circumstances, it is not reasonable to infer Gould “extracted” a
personal benefit “at the expense” of Cookeville Retail.189 The Jackson Plaza Sale,
therefore, cannot form the basis for a standalone breach of fiduciary duty as the
Complaint lacks the factual predicates for such a claim.
In yet another attempt to state a viable breach of fiduciary duty claim,
77 Charters makes a string of allegations that, if anything, would be breach of
contract claims, not claims for breach of fiduciary duty. In this regard, 77 Charters
alleges the Fiduciary Defendants caused Stonemar Cookeville to “agree to improper
186
See Compl. ¶ 64 (alleging $4,768,045 was left over “after satisfaction” of the Loan and
closing costs).
187
Kahn v. Stern, 2017 WL 3701611, at *12–13 (Del. Ch. Aug. 28, 2017).
188
Compl. ¶ 64.
189
Kahn, 2017 WL 3701611, at *12.
47
distribution of proceeds from the sale of Jackson Plaza” and “enter into the
Management and Leasing Agreements” which were not “arms’ length transactions
and were not entirely fair” to the company.190
To the extent these factual predicates support cognizable legal claims, they
are breach of contract claims. “When, as the parties here did, they cover a particular
subject in an express manner, their contractual choice governs and cannot be
supplanted by the application of inconsistent fiduciary duty principles.”191 The SCA
and the CRA expressly and specifically address distributions as well as the
Management Agreement.192 If 77 Charters believes the Fiduciary Defendants were
Remainder of Page Intentionally Left Blank
190
Compl. ¶ 93(a), (g).
191
Related Westpac, 2010 WL 2929708, at *8.
192
See CRA § 4.7 (incorporating the “Property Management Agreement” which entitled
Stonemar Realty to “receive a monthly asset management fee equal to the difference
between 4% of collected rents, less the monthly management fee.”); CRA Article 8
(discussing “Distributions”); SCA Article VII (same).
48
paid too much under the Management Agreement or received more than their fair
share of distributions, its rights and remedies are solely contractual.193 Yet it has
not asserted that claim, and it is too late to do so now.194
The remaining “Wrongful Acts” recited in the Complaint read more like a
punch list of grievances than factual predicates for viable legal claims. For example,
paragraph 30 insinuates Kimco’s capital contributions may have been used for some
purpose other than improvements to Jackson Plaza.195 Yet 77 Charters pulls back
from pleading a claim to this effect, purportedly because it is “without sufficient
193
Related Westpac LLC, 2010 WL 2929708, at *8. 77 Charters seems to acknowledge
this in the Complaint where it alleges, “[t]he payment and other terms of the Management
and Leasing Agreements breach the express requirements of Sections 4.5, 4.7 and 4.9 of
the [CRA].” See Compl. ¶ 23. Yet, mysteriously, 77 Charters omits a formal breach of
contract claim for breach of these provisions in the Complaint. See Compl. ¶¶ 144–52
(alleging breach of contract on other grounds). In this regard, it is necessary to address the
jumble that is paragraph 151 of the Complaint. Paragraph 151 comprises part of the
mislabeled Count X for “Breach of Contract against Cookeville Corridor and Eightfold.”
Compl. ¶¶ 114, 151. Notwithstanding that 77 Charters elected not to name Stonemar MM
as a defendant in this count, paragraph 151 alleges “Stonemar MM caused Stonemar
Cookeville and Cookeville Retail to” breach the CRA by “agree[ing] to terms of payment”
in the Management Agreement that exceeded “what was permitted in” the CRA. Compl.
¶ 151. Even if I were inclined to find that Stonemar MM was somehow on notice that
Count X was pointed in its direction, Count X would fail against Stonemar MM for the
same reason it fails against the other Count X Defendants. As discussed above, and in
more detail below, Stonemar MM was not a party to the CRA. See CRA (recitals).
194
Ct. Ch. R. 15(aaa).
195
Compl. ¶¶ 30, 93(e), (i).
49
information to determine” whether any Defendant actually misallocated funds.196
Similarly, 77 Charters finds it suspicious that the Loan’s principal balance was not
paid down after it was extended in 2007.197 But it acknowledges that “more
information is needed to determine whether Defendants engaged in any improper
conduct with respect to the Jackson Plaza Loan.”198
These portions of the Complaint fail to put Defendants “on notice of the claim
brought against [them].”199 Indeed, these are not claims at all; they are insinuations
followed by veiled requests for information. As such, while some portions of the
Complaint have stated viable claims, 77 Charters has not well pled any cause of
action arising out of the Loan, the Management Agreement, capital distributions
after the Jackson Plaza Sale or the use to which Gould put 77 Charters’ capital
contributions.
196
Comp. ¶ 30; see also Compl. ¶ 67 (“an accounting is necessary to determine the amount
of proceeds from the Jackson Plaza Sale should be made available [sic] to the general
equity members of Stonemar Cookeville.”).
197
Compl. ¶¶ 72, 93(e), (i).
198
Compl. ¶¶ 72–73.
199
Doe v. Cahill, 884 A.2d 451, 458 (Del. 2005) (emphasis supplied); Kuroda v. SPJS
Hldgs., L.L.C., 971 A.2d 872, 885 (Del. Ch. 2009) (“The Court is not required to accept
mere conclusory allegations as true.”).
50
*****
The determination that 77 Charters has stated a viable, albeit narrow, claim
against the Fiduciary Defendants based upon the self-dealing aspects of the
Amended CRA has the following implications:
 Counts IV, V and XI for aiding and abetting breach of fiduciary duty
and civil conspiracy must be dismissed as to the Fiduciary
Defendants.200
 Count VII for breach of the implied covenant of good faith and fair
dealing (the “implied covenant”) must be dismissed as to
Stonemar MM.201
 Given that 77 Charters’ breach of fiduciary duty claim based on the
Amended CRA will proceed, the Motion must be denied to the extent
200
See Compl. ¶¶ 110–20, 154–60; CMS Inv. Hldgs., LLC v. Castle, 2015 WL 3894021,
at *22 n.123 (Del. Ch. June 23, 2015) (“Delaware law generally does not permit a claim
against a fiduciary for aiding and abetting a breach of fiduciary duties, because liability in
such a situation would be primary (i.e., an actual breach of fiduciary duty).”); OptimisCorp
v. Waite, 2015 WL 5147038, at *57 (Del. Ch. Aug. 26, 2015) (“In the fiduciary duty
context, conspiracy is treated essentially as coterminous with aiding and abetting. It would
make little sense, therefore, particularly given the vicarious liability that attaches to
conspiracy, for a lower standard to apply to conspiracy than aiding and abetting. In those
instances where a fiduciary takes actions that would amount to aiding and abetting by a
non-fiduciary, that conduct amounts to a direct breach of fiduciary duties. Presumably, the
same would be true of a conspiracy: an actor’s entry into a conspiracy to facilitate another
actor’s breach of fiduciary duty to an entity to which the first actor owed a fiduciary would
itself be a breach of the first actor’s fiduciary duties.”).
201
See Ross v. Institutional Longevity Assets LLC, 2019 WL 960212, at *6 (Del. Ch.
Feb. 26, 2019) (“To allow a fiduciary duty claim to coexist in parallel with an implied
contractual claim, would undermine the primacy of contract law over fiduciary law.”).
51
it seeks dismissal of the mislabeled Count IX—asking the Court to
invalidate the Amended CRA.202
77 Charters Has Not Well Pled Breach of Contract or Implied Covenant
Claims (Counts VII and X)
In Counts VII and X, 77 Charters brings breach of contract and implied
covenant claims against Cookeville Corridor and Eightfold based on alleged
breaches of the CRA and the SCA.203 Under Delaware law, “the elements of a
breach of contract claim are: (1) a contractual obligation; (2) a breach of that
obligation by the defendant; and (3) a resulting damage to the plaintiff.”204
The construction of a contract is a question of law, and Defendants have no
right to dismissal under Rule 12(b)(6) unless “the interpretation of the contract on
which their theory of the case rests is the only reasonable construction as a matter of
law.”205 If there is more than one “reasonable construction” of contractual language,
202
See Compl. ¶¶ 140–43. Southpaw Credit Opportunity Master Fund, L.P. v. Roma Rest.
Hldgs., Inc., 2018 WL 658734, at *5 (Del. Ch. Feb. 1, 2018) (stating that “a corporate
action taken in violation of equitable principles is voidable”) (quotation omitted).
203
See Compl. ¶¶ 127–32, 153–60. As noted above, Count VII is dismissed as to Stonemar
MM in light of my finding that 77 Charters has well pled a breach of fiduciary duty claim
against it based on the Wrongful Acts. See Ross, 2019 WL 960212, at *6 (disallowing a
fiduciary duty claim to proceed in parallel with an implied covenant claim based on the
same wrongful acts).
204
H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 140 (Del. Ch. 2003).
205
CSH Theatres, LLC, 2015 WL 1839684, at *8.
52
then the contract is ambiguous, and Defendants’ Motion cannot be granted.206 Of
course, “[a] contract is not rendered ambiguous simply because the parties do not
agree upon its proper construction.”207 Instead, the court determines whether
ambiguity exists by applying standard canons of contract interpretation.208
Before 77 Charters even gets in the starting blocks for its contract-based
claims, it must contend with the fact that neither Cookeville Corridor nor Eightfold
were parties to the CRA or the SCA.209 “Delaware does not recognize breach of
contract claims against non-parties to the contract.”210 The same is true for implied
covenant claims.211 77 Charters attempts to escape this shortcoming by pleading
“Cookeville Corridor and Eightfold . . . became parties to [the CRA] pursuant to
section 3.2(a)(iv) upon the transfer of Kimco’s interest in Cookeville Retail to
Cookeville Corridor.”212
206
Id., at *8.
207
Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196
(Del. 1992).
208
CSH Theatres, 2015 WL 1839684, at *8.
209
See SCA (recitals); CRA (recitals).
210
Mesirov v. Enbridge Energy Co., Inc., 2018 WL 4182204, at *10 (Del. Ch. Aug. 29,
2018).
211
See Skye Mineral, 2020 WL 881544, at *17.
212
Compl. ¶ 145.
53
Section 3.2(a)(iv) provides, in relevant part
A person to whom a Membership Interest is Transferred may be
admitted to the Company as a member only with the consent of the
other Member . . . In connection with any Transfer . . . and any
admission of an assignee of a Membership Interest . . . the Member
making such transfer and the assignee shall furnish the other Member
with such documents regarding the Transfer as the other Member may
request . . . including a copy of the Transfer instrument [or] a
ratification or joinder by the assignee of this Agreement.213
Based on this language, I gather 77 Charters’ theory is that Cookeville Corridor and
Eightfold became members of Cookeville Retail not by virtue of their execution of
the Amended CRA, but through execution of a “joinder agreement” to the CRA and
then subsequent execution of the Amended CRA.214
For their part, Defendants point to Section 3.3 of the CRA, which allows new
members to be admitted to Cookeville Retail as members and their “admission” to
be “reflect[ed] . . . in an amendment to this Agreement.”215 Based on this provision,
Defendants contend it is not automatic that Cookeville Corridor and Eightfold would
have to join the CRA to become members of Cookeville Retail.216
213
CRA § 3.2(a)(iv) (emphasis supplied).
214
Compl. ¶¶ 43, 145.
215
CRA § 3.3; DOB at 60.
216
DOB at 60–61.
54
77 Charters’ interpretation is not reasonably conceivable.217 The Amended
CRA, which 77 Charters incorporates into the Complaint, clearly states “[a]s of the
Effective Date, each of [Eightfold] and [Cookeville Corridor] are hereby admitted
as a Member” of Cookeville Retail.218 It is not reasonable, therefore, to infer these
entities were already Cookeville Retail members by virtue of a joinder agreement.
As Eightfold and Cookeville Corridor were never parties to the CRA or the SCA,
Counts VII and X must be dismissed as to these Defendants.
77 Charters Has Not Well Pled Unjust Enrichment (Count VI)
In Count VI, 77 Charters brings an unjust enrichment claim against Gould,
Stonemar MM, Cookeville Corridor and Eightfold, alleging these Defendants were
unjustly enriched by the Wrongful Acts.219 “The elements of unjust enrichment are
(i) an enrichment, (ii) an impoverishment, (iii) a relation between the enrichment
and impoverishment, (iv) the absence of justification, and (v) the absence of a
remedy provided by law.”220
217
See Compl. ¶ 49 (discussing the Amended CRA); Amended CRA § 1.2.
218
See Compl. ¶ 43; Amended CRA § 1.2.
219
Compl. ¶¶ 121–26.
220
Bakerman v. Sidney Frank Importing Co., Inc., 2006 WL 3927242, at *18 (Del. Ch.
Oct. 10, 2006).
55
The unjust enrichment theory was originally developed “as a theory of
recovery to remedy the absence of a formal contract.”221 Accordingly, courts have
appropriately resisted attempts to bring unjust enrichment claims when, as here, “the
complaint alleges an express, enforceable contract [] controls the parties’
relationship . . . even when the enforceable contract gives rise to a fiduciary
relationship between the parties.”222 This is especially true in the alternative entity
context where parties have agreed to an operating agreement to “govern the parties’
rights.”223
Given that 77 Charters has not alleged that the “validity” of the CRA or the
SCA is “in doubt or uncertain,” there is no role for an unjust enrichment claim.224
Here, 77 Charters has pled Stonemar MM, Stonemar Cookeville, Cookeville Retail,
Cookeville Corridor and Eightfold all “had a valid contractual agreement in the form
221
Id.
222
Id.
223
Related Westpac, 2010 WL 2929708, at *7. Perhaps as an acknowledgment of this
barrier to Count VI, 77 Charters purports to bring Count VI in the alternative to “fiduciary
principles.” Compl. ¶ 126.
224
Bakerman, 2006 WL 3927242, at *18.
56
of” the CRA and the SCA.225 77 Charters cannot “bypass” these agreements with
an unjust enrichment claim.226 Count VI, therefore, must be dismissed.227
77 Charters Has Not Well Pled Aiding and Abetting or Civil Conspiracy
Claims against Eightfold (Counts IV and V)
In Count IV, 77 Charters alleges aiding and abetting breach of fiduciary duty
against Eightfold.228 To state a claim of aiding and abetting, a plaintiff must plead
facts in support of four elements: (1) the existence of a fiduciary relationship,
(2) a breach of a fiduciary duty, (3) defendant’s knowing participation in that breach
and (4) damages proximately caused by the breach.229 I addressed the first two
elements in my previous findings that the Complaint states a reasonably conceivable
claim of breach of fiduciary duty against the Fiduciary Defendants. As is often the
case in aiding and abetting litigation, given the Court’s finding that 77 Charters has
225
Compl. ¶¶ 128–29.
226
Related Westpac, 2010 WL 2929708, at *7. Even though Gould is not a party to the
SCA or CRA, this court has resisted efforts to “bypass” an operating agreement by bringing
unjust enrichment claims against the owners of an entity that was a party to the relevant
operating agreement. See id.
227
This conclusion applies with even greater force for Eightfold because, even
though Eightfold was not a party to the CRA, for reasons noted elsewhere in this
Opinion, 77 Charters has not well pled Eightfold engaged in any unjust or
inequitable behavior whatsoever. See Cantor Fitzgerald, L.P. v. Cantor, 724 A.2d 571,
585 (Del. Ch. 1998) (stating a claim for unjust enrichment requires an “unjust retention”
of a benefit) (emphasis supplied).
228
Compl. ¶¶ 110–17. Count IV as to Gould is addressed elsewhere in this Opinion.
229
Malpiede v. Townson, 780 A.2d 1075, 1096 (Del. 2001).
57
pled breach claims, the parties focus their arguments on whether 77 Charters has
adequately pled “knowing participation” by the alleged aiders and abettors.230
An adequate pleading of “knowing participation” requires the plaintiff to well
plead scienter.231 “To establish scienter, the plaintiff must demonstrate that the aider
and abettor had actual or constructive knowledge that their conduct was legally
improper,” and that he acted with “an illicit state of mind.”232 “This Court has
consistently held that ‘evidence of arm’s-length negotiation with fiduciaries negates
a claim of aiding and abetting, because such evidence precludes a showing that the
defendants knowingly participated in the breach by the fiduciaries.’”233 “[T]he
requirement that the aider and abettor act with scienter makes an aiding and abetting
claim among the most difficult to [plead and] prove.”234
230
See DOB at 48–49.
231
See RBC Capital Mkts., LLC v. Jervis, 129 A.3d 816, 861–62 (Del. 2015) (quoting
Malpiede, 780 A.2d at 1097).
232
Id. at 862 (internal quotation omitted).
233
In re NYMEX S’holder Litig., 2009 WL 3206051, at *13 n.116 (Del. Ch. Sept. 30, 2009)
(quoting In re Frederick’s of Hollywood, Inc. S’holders Litig., 1998 WL 398244, at *3 n.8
(Del. Ch. July 9, 1998) and citing In re Shoe-Town, Inc. S’holders Litig., 1990 WL 13475,
at *8 (Del. Ch. Feb. 12, 1990)).
234
RBC Capital Mkts., 129 A.3d at 862 (citing cases).
58
Nothing in the Complaint suggests Eightfold was anything other than an
arm’s-length, third-party purchaser of the Eightfold Interest.235 77 Charters’
conclusory assertion that Eightfold was “involved” or “aware” of the CRA or the
SCA does not suggest “complicity of any kind . . . let alone ‘knowing participation’
by [defendant] in a breach of fiduciary duty . . . .” 236 Nothing in the Complaint
supports an inference Eightfold acted to “create or exploit conflicts of interest” or
“agree[]” with the Fiduciary Defendants that they would breach their fiduciary duties
by executing the Amended CRA to harm 77 Charters.237 By itself, being a
counterparty to a transaction with a fiduciary does not an aiding and abetting claim
make.
77 Charters attempts to salvage an inference of knowing participation by
pointing to what it describes as the “suspicious … timing and terms” of the Amended
CRA.238 I struggle to follow this logic. Against the backdrop of Eightfold’s
235
See Compl. ¶ 11 (Eightfold is not affiliated with any other Defendant), ¶ 38 (Eightfold
acquired the Preferred Interest from Cookeville Corridor).
236
In re Frederick’s, 1998 WL 398244, at *4.
237
Malpiede, 780 A.2d at 1097–98.
238
PAB at 61. 77 Charters relies on Microsoft Corp. v. Amphus, Inc., 2013 WL 5899003,
at *14–15 (Del. Ch. Oct. 31, 2013), for the proposition that “[t]he knowledge element of
an aiding and abetting or conspiracy claim can be satisfied, in certain instances, by
participation in a transaction with suspicious terms and timing.” PAB at 61. Whatever this
generalized statement may mean, Microsoft is distinguishable. In that case, a fiduciary
“deliberately played down” the value of intellectual property so that he could acquire it for
himself and immediately sell it to a third party. The court held Microsoft had well pled an
aiding and abetting claim against the third-party purchaser where it had “commenced
59
substantive right to negotiate terms that benefit itself, I see nothing in the Complaint
supporting an inference Eightfold knew it was “advocat[ing]” for or “assist[ing]” the
Fiduciary Defendants’ breach of fiduciary duty.239 I also struggle to see any cause
for suspicion in the timing of the Jacksonville Plaza Sale, which occurred five years
after the Kimco Interest Sale.240 Count IV must be dismissed to the extent it is
brought against Eightfold.
In similar fashion, 77 Charters brings a civil conspiracy claim against
Eightfold in Count V based upon the same allegedly wrongful conduct.241 Count V,
as pled, is functionally the same as 77 Charters’ aiding and abetting claim.242
“The elements for civil conspiracy under Delaware law are: (1) a confederation or
patent litigation” to help the fiduciary extract the intellectual property, “conducted
meaningful due diligence” into the fiduciary’s acquisition of the intellectual property and
“knew” the fiduciary had acquired the intellectual property for inadequate consideration.
Id. In contrast, 77 Charters’ generalized allegation that “Eightfold was involved” in the
Kimco Interest Sale fails to support an inference of knowing participation. Compl. ¶ 23.
239
Malpiede, 780 A.2d at 1097.
240
See Compl. ¶ 31 (The Kimco Interest Sale occurred on July 1, 2013.), ¶ 57 (The Jackson
Plaza Sale occurred on June 27, 2018.).
241
See Compl. ¶¶ 118–20.
242
See Allied Capital Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1039 (Del. Ch. 2006)
(recognizing the “functional identity” of the two claims).
60
combination of two or more person; (2) an unlawful act done in furtherance of the
conspiracy; and (3) actual damage.”243
For the same reasons discussed above, the Complaint lacks any substantive
allegation regarding Eightfold’s conduct sufficient to support a reasonable inference
that it formed a combination with another Defendant or committed an unlawful act
in furtherance of a conspiracy. Count V must be dismissed to the extent it is brought
against Eightfold.
77 Charters Has Not Well Pled Tortious Interference with Business
Relation (Count VIII)
In Count VIII, 77 Charters brings a claim against Gould, Cookeville Corridor
and Eightfold for tortious interference with business relationship.244 The factual
predicate for this claim is Stonemar Cookeville’s alleged “reasonable business
opportunity to have it or its members purchase” the Preferred Interest and its interest
in “continued ownership of Jackson Plaza.”245 “To survive dismissal, a claim for
tortious interference with business relations must allege: ‘(a) the reasonable
probability of a business opportunity, (b) the intentional interference by defendant
243
AeroGlobal Capital Mgmt., LLC v. Cirrus Indus., Inc., 871 A.2d 428, 437 n.8
(Del. 2005).
244
Compl. ¶¶ 133–39.
245
Compl. ¶¶ 134–36.
61
with that opportunity, (c) proximate causation, and (d) damages.’”246 Such claims
must be “considered in light of a defendant’s privilege to compete or protect his
business interests in a fair and lawful manner.”247 In other words, competition is not
tortious unless it is in some way “wrongful.”248
Here, 77 Charters has not well pled it had a reasonable probability of a
business opportunity in either the Preferred Interest or perpetual ownership of
Jackson Plaza.249 As noted, both the CRA and the SCA unambiguously allow
Stonemar Cookeville and Cookeville Retail’s members to compete with each
company’s business.250 It is, therefore, not reasonably conceivable that buying and
selling the Preferred Interest, alone, was in some way wrongful. Similarly,
77 Charters has not well pled it had a reasonable expectation in “continued
246
Malpiede, 780 A.2d at 1099 (quoting DeBonaventura v. Nationwide Mut. Ins. Co.,
428 A.2d 1151, 1153 (Del. 1981), aff’d, 428 A.2d 1151 (Del. 1981)).
247
DeBonaventura, 419 A.2d at 947; Orthopaedic Assocs. of Southern Del., P.A. v. Pfaff,
2018 WL 922020, at *2 (Del. Super. Ct. Feb. 9, 2018).
248
DeBonaventura, 419 A.2d at 947; Orthopaedic Assocs., 2018 WL 922020, at *2.
249
Count VIII also fails to state a claim for the independent reason that 77 Charters has not
well pled it was “prepared to enter into a business relationship.” See Organovo Hldgs.,
Inc. v. Dimitrov, 162 A.3d 102, 122 (Del. Ch. 2017).
250
SCA § 10.4; CRA § 4.9.
62
ownership” of Jackson Plaza as the CRA specifically contemplated a potential sale
of the mall.251 For these reasons, Count VIII must be dismissed.
77 Charters Has Stated a Viable Civil Conspiracy Claim Against
Cookeville Corridor (Count V)
In Count V, 77 Charters asserts a civil conspiracy claim against Cookeville
Corridor based on its alleged conspiracy with Gould and Stonemar MM “to commit
the Wrongful Acts.”252 Civil conspiracy is “not an independent cause of action” and,
as such, the gravamen “of an action in civil conspiracy is not the conspiracy itself
but the underlying wrong which would be actionable absent the conspiracy.” 253
As noted, “[t]he elements for civil conspiracy under Delaware law are:
(1) a confederation or combination of two or more person; (2) an unlawful act done
in furtherance of the conspiracy; and (3) actual damage.”254
To repeat, nothing about Cookeville Corridor’s acquisition of the Preferred
Interest, by itself, could constitute an independent “Wrongful Act.” On the other
251
Compl. ¶ 135; CRA § 4.1(b)(1) (providing a mechanism by which Stonemar Cookeville
and Kimco could approve the sale of the property); SCA § 2.3 (recognizing that the purpose
of Stonemar Cookeville is to invest and sell property); CRA § 2.5 (same).
252
Compl. ¶¶ 118–20. I address Count V as to Eightfold, Stonemar MM and Gould
elsewhere in this Opinion.
253
Kuroda, 971 A.2d at 892; Anderson v. Airco, Inc., 2004 WL 2827887, at *3 (Del. Super.
Ct. Nov. 30, 2004).
254
AeroGlobal, 871 A.2d at 437 n.8; Anderson, 2004 WL 2827887, at *3.
63
hand, I have found it reasonably conceivable that Gould and Stonemar MM breached
their fiduciary duties by amending the CRA in a self-dealing transaction. This
independent breach of fiduciary duty could support a civil conspiracy claim.255
As for the first element, 77 Charters has pled Cookeville Corridor is a wholly-
owned entity Gould used to amend the CRA.256 While neither party addresses this
issue in its briefs, nothing in Delaware law bars a claim that a corporate parent
conspired with a wholly-owned subsidiary to commit a wrongful act.257 Given that
“the knowledge and actions of a corporation’s human decision-makers and agents
may be imputed to it,” the Complaint supports a reasonable inference Gould and
Cookeville Corridor agreed wrongfully to execute the Amended CRA.258
255
See OptimisCorp, 2015 WL 5147038, at *56 (“[B]reach of fiduciary duty . . . can form
the basis of a civil conspiracy.”).
256
Compl. ¶¶ 10, 43.
257
See Allied Capital, 910 A.2d at 1044. In Allied Capital, then-Vice Chancellor Strine
rejected the notion “that a parent and its subsidiary cannot conspire with one another
because they don’t possess two separate corporate consciousnesses (i.e., that they have but
one mind) and are thus incapable of agreement.” Id. Instead, he held, “[t]he fact that a
corporation owns all of the equity of another corporation and that both corporations have
the same directors and officers does not mean the separate corporations cannot collaborate
on a common illegal scheme. It is precisely because the corporations have, as a
presumptive matter, a separate legal existence irrespective of their common control, that
doctrines like conspiracy and aiding and abetting may have a policy purpose.” Id.; see also
Skye Mineral, 2020 WL 881544, at *10–11 (discussing Allied Capital).
258
In re Dole Food Co., Inc. S’holder Litig., 110 A.3d 1257, 1262 (Del. Ch. 2015); Stone
& Paper Inv’rs, LLC v. Blanch, 2019 WL 2374005, at *7 (Del. Ch. May 31, 2019) (“In the
case of an entity, an individual defendant’s knowledge must be attributed to the entities he
controlled and used to effectuate his breaches of duty.”) (internal quotation omitted).
64
The same result follows for the second element—an unlawful act in
furtherance of the conspiracy. 77 Charters pleads Cookeville Corridor acted to
amend the CRA.259 Given that 77 Charters has well pled a breach of fiduciary duty
against Gould and Stonemar MM based upon self-dealing aspects of that agreement,
it is reasonably conceivable that Cookeville Corridor committed an unlawful act in
furtherance of the conspiracy. Finally, I have found 77 Charters has well pled it was
damaged by the Amended CRA based upon Cookeville Corridor’s enhanced rights
vis-à-vis Cookeville Retail’s non-preferred investors. The Motion to Dismiss
Count V, therefore, must be denied as to Cookeville Corridor.
III. CONCLUSION
For the foregoing reasons, Defendants’ Motion to Dismiss is GRANTED in
part and DENIED in part. Defendants’ Motion to Dismiss Counts II, IV, VI–VIII
and X–XI is GRANTED. Defendants’ Motion to Dismiss Counts I, III and the mis-
labeled Count IX (seeking declaratory judgment) is DENIED. As for Count V,
Defendants’ Motion to Dismiss is GRANTED as to Eightfold, Gould and
Stonemar MM but DENIED as to Cookeville Corridor.
IT IS SO ORDERED.
259
Compl. ¶¶ 43–49.
65