REJV5 AWH Orlando, LLC v. AWH Orlando Member, LLC

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
417 S. State Street
JOSEPH R. SLIGHTS III Dover, Delaware 19901
VICE CHANCELLOR Telephone: (302) 739-4397
Facsimile: (302) 739-6179
Date Submitted: February 23, 2018
Date Decided: February 28, 2018
John M. Seaman, Esquire Richard P. Rollo, Esquire
Abrams & Bayliss LLP Richards, Layton & Finger, P.A.
20 Montchanin Road, Suite 200 920 North King Street
Wilmington, DE 19807 Wilmington, DE 19801
Re: REJV5 AWH Orlando, LLC v. AWH Orlando Member, LLC
C.A. No. 2017-0708-JRS
Dear Counsel:
On February 1, 2018, the Court issued an oral ruling (the “Ruling”) granting
Plaintiff, REJV5 AWH Orlando, LLC’s, Amended Motion for Partial Judgment on
the Pleadings (the “Motion”) as to Counts I, II, III and V of the Verified First
Amended Complaint (the “Complaint”), and reserving judgment on Count IV.1 The
Court also granted Defendant, AWH Orlando Member, LLC, leave to amend its
1
Dkt. 93; Dkt. 76. Count I seeks specific performance; Count II seeks various declaratory
judgments regarding the parties’ contractual rights; Count III seeks injunctive relief;
Count IV seeks attorney’s fees and Count V seeks relief for breach of contract. Dkt. 20 at
14–21.
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Amended Answer and Counterclaim (“Amended Answer”) to address certain
deficiencies in its pleading identified in the Ruling.2 Rather than amend, Defendant
filed the Application for Certification of an Interlocutory Appeal or, Alternatively,
For Entry of Partial Final Judgment Pursuant to Rule 54(b) (the “Application”)
sub judice on February 12, 2018.3 Plaintiff filed its opposition on February 22, 2018,
and Defendant filed a reply on February 23, 2018.4 For the reasons that follow, the
Application is DENIED.
Thus far, this litigation has proceeded on an expedited schedule. Plaintiff filed
its initial complaint on October 3, 2017.5 I granted the parties’ stipulation governing
expedited briefing of Plaintiff’s motion for judgment on the pleadings on
November 17, 2017.6 Plaintiff amended its complaint on November 21, 2017.7
2
Dkt. 93 at 21–23; Dkt. 76.
3
Dkt. 78.
4
Dkt. 89; Dkt. 91.
5
Dkt. 1.
6
Dkt. 19.
7
Dkt. 20.
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I granted a Status Quo Order on November 22, 2017.8 Defendant answered the
complaint that same day.9 Plaintiff initially filed a motion for judgment on the
pleadings as to the Complaint on December 4, 2017, but subsequently amended that
motion to conform to the Defendant’s Amended Answer, which was filed on
December 12, 2017.10 The parties presented argument on the Motion on January 22,
2018, and in keeping with the expedited schedule that has governed this litigation,
the Court issued the Ruling on February 1, 2018.11
The parties’ dispute centers on the Limited Liability Agreement entered into
by and between Defendant and Plaintiff’s predecessor-in-interest on May 19, 2015
(the “LLC Agreement”).12 The LLC Agreement contemplates a venture by which
the parties will pursue a hotel re-development project (the “Project”). Plaintiff
argues the LLC Agreement grants it an unqualified right to remove Defendant as
8
Dkt. 23.
9
Dkt. 26.
10
Dkt. 32; Dkt. 36; Dkt. 37; Dkt. 78.
11
Dkt. 72; Dkt. 77; Dkt. 93.
12
Dkt. 47, Ex. A to Opening Br. in Supp. of Pl.’s Am. Mot. for Partial J. on the Pleadings.
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Manager if Defendant fails to complete the Project by a designated Completion
Deadline.13 Defendant disagrees and relies on several affirmative defenses raised in
the Amended Answer to support an argument that Plaintiff cannot remove Defendant
as Manager when Plaintiff’s own conduct causes Defendant’s failure to complete
the Project by the Completion Date.
In the Ruling, I held that Plaintiff is entitled to remove Defendant as Manager
of the Project under the express terms of the LLC Agreement. I also granted
Defendant leave to amend the Amended Answer to plead that Plaintiff’s violation of
the implied covenant of good faith and fair dealing should prevent it from exercising
its removal rights.14 As noted, Defendant has opted to forego any amendments in
favor of filing the Application.
I. Certification of an Interlocutory Appeal
Delaware Supreme Court Rule 42(b)(i) provides that “[n]o interlocutory
appeal will be certified by the trial court or accepted by [the Delaware Supreme]
13
Unless otherwise defined herein, capitalized terms have the meaning ascribed to them in
the LLC Agreement.
14
Dkt. 93 at 22.
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Court unless the order of the trial court decides a substantial issue of material
importance that merits appellate review before a final judgment.” Instances where
the trial court certifies an interlocutory appeal “should be exceptional, not routine,
because [interlocutory appeals] disrupt the normal procession of litigation, cause
delay, and can threaten to exhaust scarce party and judicial resources.”15 For this
reason, “parties should only ask for the right to seek interlocutory review if they
believe in good faith that there are substantial benefits that will outweigh the certain
costs that accompany an interlocutory appeal.”16 When certifying an interlocutory
appeal, “the trial court should identify whether and why the likely benefits of
interlocutory review outweigh the probable costs, such that interlocutory review is
in the interests of justice. If the balance is uncertain, the trial court should refuse to
certify the interlocutory appeal.”17
15
Supr. Ct. R. 42(b)(ii).
16
Id.
17
Supr. Ct. R. 42(b)(iii).
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The existing Status Quo Order maintains Defendant as the Manager pending
the resolution of this expedited litigation.18 The Court is scheduled to hear argument
on the parties’ cross-motions for summary judgment relating to unadjudicated
aspects of this dispute on April 5, 2018.19 The litigation is active and ongoing and
the parties show no signs of easing off the gas pedal. What Defendant proposes now
is a piecemeal approach to the litigation that will not advance the interests of justice
but will increase costs and burdens.20 Moreover, as discussed below, it is clear that
the seven appeal issues (each an “Appeal Issue” and collectively, the “Appeal
Issues”) that Defendant raises do not meet the strictures of Delaware Supreme Court
Rule 42 to warrant certification of an interlocutory appeal.21
18
Dkt. 23. See also Dkt. 41 at 37–41.
19
Dkt. 61; Dkt. 80.
20
Krahmer v. Christie’s Inc., 2006 WL 4782303, at *1 (Del. Ch. June 15, 2006) (denying
certification upon noting that “[c]ertification would likely result in the piecemeal appeal of
factually and legally related issues and would be contrary to the interest of justice and the
orderly procession of matters before this court.”).
21
Specifically, the Appeal Issues are: (1) whether the Court correctly interpreted and
applied the prevention doctrine; (2) whether the Court correctly decided the pleading
requirements to state an implied covenant claim; (3) whether the Court correctly interpreted
certain provisions of the LLC Agreement; (4) whether the Court correctly interpreted LLC
Agreement Section 10.1; (5) whether the Court correctly applied its interpretation of
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A. The Court’s Ruling on the Prevention Doctrine
The Defendant argues that the Court improperly construed and applied the so-
called “prevention doctrine.”22 Whether true or not, this aspect of the Ruling does
not justify interlocutory review. The Ruling did not extend or restrict the prevention
doctrine under Delaware law but rather simply applied the doctrine to the facts as
pled and to the contractual language at issue. Specifically, the Court held that the
express terms of the LLC Agreement defined those instances where the contractual
bases for removal of the Manager would account for, or would be conditioned upon,
the reasons why the Manager was unable to perform as required to avoid removal.
Removal based on failure to complete the project by the Completion Date is clearly
unconditional.23 Accordingly, applying the clear terms of the parties’ agreement,
Section 10.1; (6) whether the Court correctly adjudicated the issue of alleged routine delays
by Plaintiff; and (7) whether the Court erroneously determined an issue of waiver. Dkt. 78
¶ 11.
22
“If a promisor prevents or hinders the occurrence or fulfillment of a condition to the duty
of performance, the condition is excused. . . . The prevention doctrine thus operates as an
exception to the general rule that one has no duty to perform under a contract containing a
condition precedent until the condition occurs.” 13 Williston on Contracts § 39:4 (4th ed.).
23
“[Plaintiff] may, by written notice to [Defendant], remove the Person acting as Manager
should any of the following events occur (each a “Removal Event”): . . . (vi) the
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the Court determined that the prevention doctrine did not apply.24 This holding
neither “determine[d] a substantial issue” nor “established a legal right” under
Supreme Court Rule 42(b).
B. The Court’s Construction of the LLC Agreement
As a general matter, issues of contract interpretation are not worthy of
interlocutory appeal.25 The third, fourth and fifth Appeal Issues identified in the
Application all address this Court’s construction of discrete provisions of the LLC
Agreement. Accordingly, these three issues do not meet any Rule 42(b)(iii) criteria
and are not fit for interlocutory appeal.
Completion Date has not occurred on or before September 1, 2017; . . .
LLC Agreement § 6.5(a)(vi).
24
Dkt. 93 at 10–11 (finding that Plaintiff’s unconditional right of removal cannot be altered
by the prevention doctrine).
25
Lexington Ins. Co. v. Almah LLC, 167 A.3d 499 (Del. 2016) (TABLE) (denying
interlocutory appeal upon noting the “dispute turn[s] on issues of contract interpretation”);
Robino-Bay Court Plaza, LLC v. West Willow-Bay Court, LLC, 941 A.2d 1019 (Del. 2007)
(TABLE) (declining to grant interlocutory appeal of this court’s construction of the
operative contract); McKnight v. USAA Cas. Ins. Co., 872 A.2d 959 (Del. 2005) (TABLE)
(declining interlocutory appeal where “the trial court applied well-established principles of
contract interpretation and thus the case did not involve a matter of first impression”);
Renco Gp., Inc. v. MacAndrews AMG Hldgs. LLC, 2015 WL 1830476, at *2 n.3 (Del. Ch.
Apr. 20, 2015) (“The Court’s contract interpretation, even if wrong, would not seem to
warrant interlocutory appeal.”).
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While Defendant seeks to characterize its sixth Appeal Issue as something
other than a challenge to the Court’s construction of the LLC Agreement, the
characterization does not reflect the essence or impact of the Ruling. Specifically,
Defendant argues that the Court erroneously determined as a matter of law that
certain delays in the progress of the Project attributable to Plaintiff were “routine.”26
The Court made no such finding. The Ruling states the delays did not appear to
extend beyond those contemplated by the approval regime set forth in the LLC
Agreement, not that they were routine (or not routine).27 Here again, the Court was
simply interpreting what it viewed as clear and unambiguous terms of the LLC
Agreement. This exercise in contract construction does not implicate any of the
criteria in Rule 42(b)(iii) to warrant interlocutory appeal.
26
Dkt. 78 ¶ 11(F).
27
Dkt. 93 at 17 (“At the outset, I have to note that Plaintiff’s implied covenant position
raises red flags since it is difficult to conceive that sophisticated parties engaged in the
business of commercial construction, which is inherently fluid, failed to contemplate
delays, especially in light of the approval mechanism instituted in Section 6.1(c) through
(d) . . .”) (emphasis added).
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C. The Court’s Refusal to Find Waiver
Defendant urged the Court to find that certain of Plaintiff’s arguments had not
been properly raised in the briefs and were, therefore, waived. The Court disagreed.
The determination of whether vel non an argument is waived is highly contextual
and ultimately a matter within this Court’s discretion; as such, it is classically not an
issue for interlocutory appeal.28
D. The Court’s Holding Regarding the Implied Covenant
Finally, the second Appeal Issue, which Defendant attempts to tie to
Rule 42(b)(iii)(B),29 posits that the Court’s “holding that bad faith is necessary to
state an implied covenant claim conflicts with other Court of Chancery decisions.”30
Specifically, Defendant asserts the Ruling requires Defendant to plead a culpable
28
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 2012 WL 3201139, at
*14 n.112 (Del. Ch. Aug. 7, 2012) (noting that although “as a general matter, arguments
not briefed are deemed waived, this is a principle of discretion”); Monsanto Co. v. Aetna
Cas. & Surety Co., 1991 WL 215621, at *1 (Del. Ch. Sept. 25, 1991) (ORDER) (denying
certification of interlocutory appeal of “[o]rders merely reflect[ing] my discretionary
decision to refuse to entertain an application for injunctive relief which I concluded was
meritless on its face in light of prior binding rulings”).
29
Dkt. 78 ¶ 13.
30
Id. ¶¶ 11(b), 13.
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mental state in order to plead bad faith sufficient to invoke the implied covenant
defense.31 Once again, Defendant has mischaracterized the Ruling. What the Court
actually observed and held is that:
[O]ur Supreme Court held that the Court should view whether the
covenant of good faith has been breached through the lens grounded by
our entity law, which is to say that the [Defendant] must plead facts that
support a reasonable inference that the [Plaintiff] failed to act in a
manner that it reasonably believed was in the best interests of the
Company.32
“[T]he use of the qualifier ‘reasonably’ imposes an objective standard of good
faith.”33 The Court observed that even under the clarified good faith standard, “a
breach of the implied covenant of good faith ‘implicitly indicates bad faith
conduct.’”34 Therefore, when one fails to act in a manner that one reasonably
31
Id. ¶ 13.
32
Dkt. 93 at 18. See Brinckerhoff v. Enbridge Energy Co., Inc., 159 A.3d 242, 246 (Del.
2017) (holding that the implied covenant should not be measured against a standard that
would require a plaintiff to plead a version of bad faith “that ruled out all legitimate
explanations for the defendants’ actions except for bad faith—a pleading hurdle borrowed
from one of the most demanding corporate law standards, that of ‘waste’”).
33
Brinckerhoff, 159 A.3d at 260.
34
Dkt. 93 at 18–19 (quoting Amirsaleh v. Bd. of Trade of City of N.Y., Inc., 2009
WL 3756700, at *4 (Del. Ch. Nov. 9, 2009)).
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believed, or should have believed, was in the best interest of the Company, one is
failing to act in good faith and, consequently, one is acting in bad faith. The Ruling
recognizes that good faith and bad faith are two sides of the same coin. Contrary to
Defendant’s characterization, the Ruling did not (and does not) require Defendant to
plead a culpable mental state (i.e. the waste standard) to state a claim for breach of
the implied covenant.35 Stated differently, the Court did not hold Defendant to the
bad faith standard struck down in Brinckerhoff v. Enbridge Energy Co., Inc.36 To
the contrary, the Court acknowledged that Delaware’s pleading standard for the
implied covenant requires pled facts that support a reasonable inference that a party
failed to act in a manner reasonably believed to be in the best interests of the
Company.37
35
Notably, Plaintiff independently came to the conclusion that Defendant mischaracterized
the Ruling regarding pleading the implied covenant of good faith. See Pl.’s Opp. to Def.’s
Appl. for Certification of Interlocutory Appeal and for Entry of Partial J. Pursuant to
R. 54(b), Dkt. 89 ¶¶ 27–28.
36
2016 WL 1757283 (Del. Ch. Apr. 29, 2016), rev’d, 159 A.3d 242 (Del. 2017).
37
Dkt. 93 at 18 (emphasis added).
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Under these circumstances, I cannot certify that the likely benefits of
interlocutory review outweigh the probable costs. Accordingly, the application for
certification of an interlocutory appeal under Rule 42 is refused.
II. Partial Final Judgment
Court of Chancery Rule 54(b) provides this Court with discretion to enter a
final judgment on individual claims if the party seeking that relief is able to
demonstrate certain procedural imperatives.38 The Court should exercise its
discretion to grant a partial final judgment sparingly, however, and should reserve
such relief for the infrequently “harsh case.”39 The reluctance to enter partial final
judgments is a product of Delaware’s policy against piecemeal litigation.40
Therefore, to demonstrate that a partial final judgment is warranted, the requesting
party bears the burden to show that: (1) the action involves multiple claims or parties;
38
In re Tri-Star Pictures, Inc. Litig., 1989 WL 112740, at *1 (Del. Ch. 1989).
39
Id.40
Hill Int’l, Inc. v. Opportunity P’rs L.P., 119 A.3d 30, 36 (Del. 2015) (“In addressing the
third element—whether there is just reason for delaying the appeal—the Court of Chancery
exercised appropriate caution in taking note of our long established policy against
piecemeal appeals. We reiterate our policy against piecemeal appeals . . .”).
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(2) at least one claim or the rights and liabilities of at least one party has been finally
decided; and (3) there is no just reason for delaying an appeal.41 Defendant has met
its burden as to the first two requirements, but has failed to meet its burden as to the
third requirement.42
The Ruling adjudicated certain contract interpretation issues relating to the
LLC Agreement, particularly Section 6.5(a)(vi). It did not, however, adjudicate
damages and attorneys’ fees associated with the Motion. Nor did it address other
issues relating to the LLC Agreement that have been raised in the counterclaim.43
Once these outstanding claims and issues have been resolved, the parties may seek
to appeal those rulings. Bearing in mind Delaware’s clear policy against piecemeal
litigation, I am satisfied that the rulings should be appealed together, not in a
41
Id.42
Plaintiff does not oppose Defendant’s motion for a Rule 54(b) partial final judgment, but
the parties substantially disagree as to the form of order. Compare Dkt. 89 ¶¶ 3–6, 17–22
with Dkt. 91. See also Dkt. 91, Ex., at ¶¶ 3–4.
43
See, e.g., Dkt. 36; Dkt. 37.
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sequence of Defendant’s choosing.44 Accordingly, Defendant’s motion for a partial
final judgment under Rule 54(b) is denied.
IT IS SO ORDERED.
Very truly yours,
/s/ Joseph R. Slights III
44
Kent Cty. Levy Ct. v. Upfront Enters., 935 A.2d 256, n.1 (Del. 2007) (TABLE) (“[T]he
policy underlying the final judgment rule is one of efficient use of judicial resources
through disposition of cases as a whole, rather than piecemeal. . . . The policy against
piecemeal litigation applies forcefully to this ongoing and evolving litigation.”).