Yucaipa American Alliance Fund I

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
---------------------------------------------------
Yucaipa American Alliance Fund I, LP :
and Yucaipa American Alliance :
(Parallel) Fund I, LP, :
: C.A. No. 9151 – VCP
Plaintiffs, :
:
v. :
:
SBDRE LLC, Black Diamond :
Commercial Finance L.L.C., Spectrum :
Commercial Finance L.L.C., BDCM :
Opportunity Fund II, LP, Black :
Diamond CLO 2005-1 Ltd., and :
Spectrum Investment Partners, L.P., :
:
Defendants. :
:
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MEMORANDUM OPINION
Submitted: June 16, 2014
Decided: October 31, 2014
Martin S. Lessner, Esq., Michael R. Nestor, Esq., Emily V. Burton, Esq., Matthew C.
Bloom, Esq., YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington,
Delaware; Attorneys for Plaintiffs.
Adam G. Landis, Esq., Rebecca L. Butcher, Esq., K. Tyler O‘Connell, Esq., LANDIS
RATH & COBB LLP, Wilmington, Delaware; Adam C. Harris, Esq., Robert J. Ward,
Esq., David M. Hillman, Esq., SCHULTE ROTH & ZABEL LLP, New York, New
York; Attorneys for Defendants.
PARSONS, Vice Chancellor.
This case involves a dispute among the major lenders to a now-bankrupt company
known as Allied Systems Holdings, Inc. Resolving the parties‘ competing positions
requires navigating a maze of relevant documents: a senior credit agreement, the third
amendment to that credit agreement, the related security agreement, and the limited
liability company agreement of SBDRE LLC, a Delaware limited liability company
(―LLC‖) formed by the defendant Black Diamond to acquire and realize upon the
lenders‘ collateral.
The Court of Chancery is at least the sixth court to become involved in this
controversy. An opening skirmish between the plaintiffs and a non-party to this case
seeking a declaratory judgment about the validity of a purported fourth amendment to the
credit agreement dragged on for two years in Georgia before those parties settled. Then,
litigation in New York between the parties currently before me resulted in an opinion
invalidating the same disputed fourth amendment. The Appellate Division of New
York‘s Supreme Court affirmed that holding and the New York Court of Appeals denied
further review. Meanwhile, parallel litigation moved forward in the United States
Bankruptcy Court for the District of Delaware (the ―Bankruptcy Court‖). That litigation
continues. An appeal from a significant decision of the Bankruptcy Court currently is
pending before the United States District Court for the District of Delaware (the ―District
Court‖). Amidst all of this litigation, the parties also attempted unsuccessfully to mediate
their dispute.
In this case, the plaintiffs initially sought a status quo order. I denied the motion
for a status quo order on December 20, 2013. This action is currently before me on
1
Defendants‘ motion to dismiss or stay the complaint. For the reasons that follow, I
conclude that a covenant not to sue in the third amendment to the credit agreement bars
the plaintiffs from bringing several of the fourteen counts asserted in the complaint and
portions of other counts. As for the claims that have survived the motion to dismiss in
whole or in part, I find that resolution of those claims should be stayed pending
completion of the litigation in the Bankruptcy Court.
I. BACKGROUND1
A. The Parties
Allied Systems Holdings, Inc. (―Allied‖) operated a car-hauling and car-delivery
business. Allied is currently in bankruptcy proceedings. The dispute in this case
revolves around Allied‘s debt.
Yucaipa American Alliance Fund I, LP and Yucaipa American Alliance (Parallel)
Fund I, LP (together, ―Plaintiffs‖ or ―Yucaipa‖) are investment funds. Plaintiffs held a
majority equity interest in Allied when it entered bankruptcy. Before the bankruptcy,
Yucaipa also had purchased a majority of the relevant Allied debt.
Defendants BDCM Opportunity Fund II, LP, Black Diamond CLO 2005-1 LTD,
and Spectrum Investment Partners, L.P. (together, ―Black Diamond‖) are also investment
funds. Black Diamond owns a significant amount of the relevant Allied debt.
1
Unless otherwise noted, the facts recited herein are drawn from the well-pled
allegations of the Amended Verified Complaint (―Complaint‖), together with its
attached exhibits, and are presumed true for the purposes of Defendants‘ motion to
dismiss. The factual record is largely undisputed.
2
Defendant Black Diamond Commercial Finance L.L.C. and Spectrum Commercial
Finance, LLC (together, the ―Black Diamond Agents‖) are entities created by Black
Diamond to serve important roles under the credit agreement governing the Allied debt.
Defendant SBDRE LLC (―SBDRE‖) is a Delaware LLC created by Black
Diamond to realize upon assets acquired from the Allied estate following a successful
credit bid.
Black Diamond, the Black Diamond Agents, and SBDRE collectively comprise
the ―Defendants‖ in this case.
B. Facts
Allied emerged from its first bankruptcy in May 2007. Under the plan of
reorganization, Yucaipa became the controlling stockholder. Yucaipa held no Allied debt
at that time. Allied had a $265 million senior secured priority credit facility (the ―Allied
Debt‖) from a collection of lenders (the ―Lenders‖). The Allied Debt is governed by the
Amended and Restated First Lien Secured Super-Priority Debtor in Possession and Exit
Credit and Guaranty Agreement (the ―Credit Agreement‖) and the related Amended and
Restated Pledge and Security Agreement (First Lien) (the ―Security Agreement‖).
As defined in the Credit Agreement, one or more Lenders holding more than 50%
of the total Allied Debt can act as the ―Requisite Lender.‖ The Requisite Lender has the
authority, in the event of a default by Allied, either to exercise the Lenders‘ rights or to
cause the Lenders to forbear from exercising their rights under the Credit Agreement.
Basically, this case is about Yucaipa‘s thwarted attempt to become the Requisite Lender.
Under the Credit Agreement, however, Yucaipa was not an ―Eligible Assignee‖—one to
3
whom the Lenders could assign their debt—and, therefore, Yucaipa could not become a
Lender, much less the Requisite Lender.
After two amendments of no importance here, a majority of the Lenders agreed to
Amendment No. 3 to Credit Agreement and Consent (the ―Third Amendment‖) on April
17, 2008. The Third Amendment allowed Yucaipa to acquire some Allied Debt from the
other Lenders. But, the Third Amendment imposed onerous restrictions on Yucaipa,
such as limiting it to acquiring no more than 25% of the term loan debt—one of three
kinds of debt recognized under the Credit Agreement—requiring Yucaipa to make capital
contributions to Allied in proportion to the debt it acquired, stripping any Yucaipa-held
debt of voting rights, and subjecting Yucaipa to a broadly-worded covenant not to sue.
Indeed, under the Third Amendment, Yucaipa assumed the unique status of a ―Restricted
Sponsor Affiliate‖ and was not permitted to become a Lender. Given the 25% cap on the
amount of Allied Debt Yucaipa could acquire, it also could not become Requisite Lender
under the Third Amendment.
In February 2009, ComVest Investment Partners III, L.P. (―ComVest‖) acquired
roughly 55% of the Allied Debt. Later that year, a majority of the Lenders approved a
fourth amendment to the Credit Agreement (the ―Fourth Amendment‖). The Fourth
Amendment lifted all restrictions on Yucaipa‘s acquisition of Allied Debt. Following
approval of the Fourth Amendment, Yucaipa purchased ComVest‘s lending position,
thereby acquiring 55.2% of the Allied Debt. The Complaint alleges that on August 21,
2009, Yucaipa became the Requisite Lender. As such, Yucaipa purportedly gained the
ability to cause the Lenders to forbear from exercising their rights in the event of a
4
default by Allied. Given Allied‘s struggles following its exit from its first bankruptcy,
Yucaipa apparently saw this as a valuable power. Nonetheless, in May 2012, Black
Diamond filed an involuntary petition for bankruptcy against Allied in the Bankruptcy
Court, and Allied entered bankruptcy a second time only five years after its first
bankruptcy. The second bankruptcy proceeding is still pending.
Unfortunately for Yucaipa, the New York courts declared the Fourth Amendment
void. That ruling had an important impact on the current bankruptcy litigation. The
Bankruptcy Court declared Black Diamond the Requisite Lender. Thereafter, the vast
majority of Allied‘s assets were sold to Jack Cooper Holdings Corp. (the ―Jack Cooper
Sale‖). That sale closed on December 20, 2013, and was funded on December 27, 2013.
While the Jack Cooper Sale was in the works, Black Diamond, acting as Requisite
Lender, made a credit bid (the ―Credit Bid‖) for the remaining assets of Allied (the
―Assets‖). On September 17, 2013, the Bankruptcy Court approved the Credit Bid.
In that context, the Black Diamond Agents formed SBDRE on August 20, 2013, to
receive and hold the Assets that the Lenders anticipated acquiring from the Credit Bid.
One part of the dispute currently before this Court involves the relationship between the
Amended and Restated Limited Liability Company Agreement of SBDRE LLC (the
―LLC Agreement‖) and the Credit Agreement. After the formation of SBDRE, on
November 8, 2013, Black Diamond circulated a memorandum (the ―Memo‖) to the
Lenders. The Memo disclosed that the Black Diamond Agents, who were named in the
LLC Agreement as the managing members of SBDRE, would hold the Lenders‘ pro rata
Class A Membership Interests in SBDRE for the benefit of the Lenders.
5
More importantly, the Memo described the contemplated issuance of new
membership interests in SBDRE (the ―New Issuance‖). Following the New Issuance,
SBDRE would have Class B and Class C Membership Interests. SBDRE issued $10
million in new Class B Membership Interests that were to receive 66.6% of the voting
rights in and rights to distributions from SBDRE. The Lenders were allowed to buy up to
their pro rata share of Class B Membership Interests if they subscribed to the New
Issuance by November 15, 2013, one week after the Memo was circulated. Thus, for
example: a Lender holding 10% of the Allied Debt would have a 10% Class A
Membership Interest and had the opportunity during the New Issuance to purchase up to
10% of the Class B Member Interests for $1 million. In exchange for backstopping the
New Issuance, Black Diamond granted itself all of the new Class C Membership
Interests, which represented 3% of the aggregate Membership Interests in SBDRE.
Because neither Yucaipa nor any of the other Lenders participated in the New
Issuance, Black Diamond now controls all of the Class B and Class C Membership
Interests in addition to its pro rata share of the Class A Membership Interests. In total,
Black Diamond holds approximately 70% of the aggregate Membership Interests in
SBDRE. As a result of the New Issuance, the Class A Membership Interests control
30.3% of the vote and receive 30.3% of any distribution from SBDRE. The Complaint
alleges that the Assets are worth more than $5 million, and that the New Issuance,
therefore, unfairly diluted the Lenders‘ rights. Further, Yucaipa complains that it only
was allowed to acquire 9.9% of the Class B Membership Interests, meaning that the New
6
Issuance was not a true pro rata issuance in that Yucaipa had purchased 55.2% of the
Allied Debt from ComVest.
Finally, there is a dispute about fees and expenses relating to the current Allied
bankruptcy. On December 3, 2013, Black Diamond informed the Lenders that the Black
Diamond Agents would reimburse Black Diamond, the Black Diamond Agents, and the
other Lenders their reasonable fees and expenses related to Allied‘s bankruptcy from the
proceeds of the Jack Cooper Sale, pursuant to Section 10.2 of the Credit Agreement. On
December 19, after a Bankruptcy Court hearing on the matter, Black Diamond and the
Black Diamond Agents caused those reimbursements to be made. The Complaint
alleges, however, that Black Diamond refused to reimburse Yucaipa and instead has
caused Yucaipa‘s fees and expenses to be held in escrow.
C. Procedural History
The procedural history of this and the other related litigation constitutes an
important part of the background of the pending motion. This Section, therefore, recites
that history in some detail.
1. The New York Litigation
Black Diamond filed suit against Yucaipa in New York state court in 2012 seeking
a declaratory judgment that the Fourth Amendment was invalid (the ―New York
Litigation‖). The New York Supreme Court issued an opinion on March 8, 2013, in
which it concluded that: (1) the previous Georgia litigation settlement did not bind Black
Diamond; (2) the Fourth Amendment was invalid ab initio because, pursuant to Section
10.5 of the Credit Agreement, enacting the Fourth Amendment required the unanimous
7
consent of all Lenders, which was not given; and (3) based on the invalidity of the Fourth
Amendment, Yucaipa was not the Requisite Lender.2
The First Department of the New York Supreme Court‘s Appellate Division
affirmed the Supreme Court‘s opinion in all relevant respects. The Appellate Division‘s
opinion, however, modified the trial court‘s opinion in that it held there was a triable
issue of fact as to whether Black Diamond waived the ability to challenge Yucaipa‘s
status as Requisite Lender.3 The New York Court of Appeals denied further review on
April 3, 2014.4
Despite the remaining issue of whether Black Diamond waived the ability to
challenge Yucaipa‘s Requisite Lender status, the New York Litigation is concluded for
all purposes relevant to this action. Even if Black Diamond did waive its right to
challenge Yucaipa‘s claim to Requisite Lender status, Defendants represented to this
Court that Defendant Spectrum, which also participated in the New York Litigation,
objects to Yucaipa serving as Requisite Lender.5 The Appellate Division held that
2
BDCM Opportunity Fund II, LP v. Yucaipa Am. Alliance Fund I, LP, 2013 WL
1290394 (N.Y. Sup. Ct. Mar. 8, 2013).
3
BDCM Opportunity Fund II, LP v. Yucaipa Am. Alliance Fund I, LP, 978
N.Y.S.2d 10, 13 (N.Y. App. Div. 2013).
4
BDCM Opportunity Fund II, LP v. Yucaipa Am. Alliance Fund I, LP, 8 N.E.3d
849 (N.Y. 2014).
5
Oral Arg. On Defs.‘ Mot. to Dismiss or Stay and Mot. to Stay Disc. (June 16,
2014) (―Yucaipa MTD Arg.‖) Tr. 132-33.
8
Spectrum did not waive its rights to challenge Yucaipa‘s status.6 Thus, because the New
York courts determined that the Fourth Amendment required unanimous consent, any
waiver by Black Diamond is irrelevant.
2. The Bankruptcy Action
Black Diamond brought an involuntary petition for bankruptcy against Allied in
the Bankruptcy Court on May 17, 2012 (the ―Bankruptcy Action‖). The Bankruptcy
Action and related adversary proceedings remain pending before the Bankruptcy Court.7
The Bankruptcy Court issued two rulings relevant to this case and several notable issues
remain under advisement. Defendants place significant weight on a collateral estoppel
argument and, in the alternative, seek a stay of this case. The Bankruptcy Court‘s rulings
are vital to both arguments.
First, and most importantly for present purposes, the Bankruptcy Court issued an
oral ruling on February 27, 2013, granting a motion to dismiss Yucaipa‘s cross-claims in
the Bankruptcy Action.8 The Bankruptcy Court, as one of its alternative holdings, ruled
that the Third Amendment‘s covenant not to sue barred Yucaipa‘s claims.9 I discuss this
6
BDCM Opportunity Fund, 978 N.Y.S.2d at 13.
7
The Official Comm. of Unsecured Creditors of Allied Sys. Hldgs., Inc. (In re Allied
Sys. Hldgs., Inc.), Ch. 11 Case No. 12-11564 (CSS), Adv. No. 13-50530-CSS
(Bankr. D. Del.) [hereinafter Allied Bankr.].
8
Allied Bankr. Mot. to Dismiss (Feb. 27, 2013) (―MTD‖) Arg. Tr. 103-10.
9
Id. at 107 (―[T]hese are really two rulings. It‘s granting the motion to dismiss on
the covenant not to sue, granting the motion to dismiss in connection with the
statute of limitations.‖).
9
holding in greater detail below in connection with Defendants‘ argument that Yucaipa is
collaterally estopped from re-litigating the meaning of the covenant not to sue.10 Second,
the Bankruptcy Court granted summary judgment in favor of Black Diamond, an
intervenor in that case, finding them to be the Requisite Lenders under the Credit
Agreement.11
Unlike the New York Litigation, the Bankruptcy Court‘s rulings remain the
subject of further proceedings. Yucaipa appealed at least the summary judgment ruling
to the District Court.12 The appeal apparently was stayed for a period while the parties
attempted mediation.13 Additionally, Defendants in this case, along with other Allied
creditors, are pursuing equitable subordination claims against Yucaipa in the Bankruptcy
Action.14 Yucaipa has suggested to this Court that most of the parties in the Bankruptcy
10
See infra Section II.B.2.
11
Allied Bankr. Summ. J. Op. (Aug. 7, 2013), at 3; Allied Bankr. Summ. J. Arg. Tr.
(July 30, 2013) 126-27.
12
Allied Bankr. Notice of Appeal (Aug. 21, 2013) (appealing the Allied Bankr.
Summ. J. Op.). But see Yucaipa MTD Arg. Tr. 43-45 (counsel for defendants:
asserting that Yucaipa appealed both the Requisite Lender ruling and the dismissal
of its cross-claims). In any event, my decision does not depend on whether
Yucaipa also appealed the motion to dismiss.
13
See In re Allied Sys. Hldgs., Inc., No. 1:13-cv-01580 (D. Del.) (minimal docket
activity). Counsel for Defendants have indicated that the bankruptcy-related
mediation recently was declared at an impasse. Yucaipa MTD Arg. Tr. 44-45.
14
See Transmittal Aff. of K. Tyler O‘Connell in Supp. of Defs.‘ Mot. to Dismiss or
Stay the Am. Compl. Ex. 4.
10
Action have reached a settlement and only need approval by the Bankruptcy Court.15
Defendants dispute that representation, however, and contend that the settlement
agreement is stale.16 In any case, Defendants stated that they would not settle their
equitable subordination claims against Yucaipa even if the other creditors did settle.17
Nothing in the record to date indicates that the Bankruptcy Court has approved a
settlement of any of the relevant claims.
3. The current Court of Chancery litigation
Plaintiffs filed their initial Verified Complaint on December 11, 2013, together
with a Motion to Expedite and a Motion for Entry of a Status Quo Order (the ―Status Quo
Motion‖). After full briefing, the Court heard argument on the Status Quo Motion and
rendered an oral ruling on December 20, 2013, denying the motion.18 Plaintiffs then
amended their complaint and, on February 14, 2014, filed the current operative
Complaint.
Defendants moved to dismiss or stay this action shortly thereafter. The parties
completed their briefing on that motion on May 5, 2014.19 In the midst of that briefing,
15
Yucaipa MTD Arg. Tr. 101. See also Transmittal Aff. of Matthew C. Bloom Ex.
2.
16
Yucaipa MTD Arg. Tr. 56.
17
Id. at 128-29.
18
Status Quo Arg. Tr. 77-94.
19
Briefing on the motion to dismiss consisted of Defendants‘ Opening Brief (―Defs.‘
Opening Br.‖), Plaintiffs‘ Opposition Brief (―Pls.‘ Opp‘n Br.‖), and Defendants‘
Reply Brief (―Defs.‘ Reply Br.‖).
11
Defendants moved to stay discovery pending resolution of their motion to dismiss. The
Court heard oral argument on both of Defendants‘ motions on June 16 (the ―Argument‖).
At the conclusion of the Argument, the Court took the motion to dismiss or stay under
advisement, but granted the motion to stay discovery.20 This Memorandum Opinion
resolves the motion to dismiss or stay.
4. An overview of litigated and unlitigated issues
As indicated in the preceding portions of this Memorandum Opinion, the parties to
this case have engaged in and continue to engage in extensive litigation elsewhere. Thus
far, the results of that related litigation are as follows: (1) the New York Litigation has
been concluded and the New York courts found that the Fourth Amendment to the Credit
Agreement was invalid ab initio; and (2) the Bankruptcy Action is continuing and to date
(a) the Bankruptcy Court has dismissed Yucaipa‘s cross-claims, finding that the Third
Amendment bound Yucaipa and that the Third Amendment‘s covenant not to sue barred
Yucaipa‘s claims;21 (b) the Bankruptcy Court has found that Defendants are the Requisite
Lenders;22 (c) Yucaipa has appealed at least determination (b) and that appeal remains
20
Yucaipa MTD Arg. Tr. 133-36.
21
Allied Bankr. MTD Arg. Tr. 105-06.
22
Allied Bankr. Summ. J. Op. 3.
12
pending;23 and (d) Defendants are pursuing equitable subordination claims against
Plaintiffs in the Bankruptcy Action.24
As demonstrated in the following portions of this Memorandum Opinion, a
number of Plaintiffs‘ arguments in this Court either are contingent upon a not-yet-issued
final determination by the Bankruptcy Court or are duplicative of claims pending before
the Bankruptcy Court, or were decided against Yucaipa in a previous proceeding. In
sum, Yucaipa lost in the New York Litigation and exhausted its appeals, and Yucaipa
also lost at least twice in the Bankruptcy Court, though its appeal from that court remains
pending. It is against that backdrop that this Court must analyze Yucaipa‘s claims here.
D. Parties’ Contentions
Yucaipa asserts fourteen separate counts in its 227-paragraph Complaint. The
counts mostly can be grouped into four overarching categories: (1) claims related to
Yucaipa‘s debt ownership (Counts I-III); (2) claims based on the alleged inconsistency of
the SBDRE LLC Agreement with the Credit Agreement (Counts IV-VI); (3) claims
regarding the New Issuance (Counts VII-IX); and (4) claims pertaining to the disputed
fee reimbursements (Counts X-XII). Count XIII for aiding and abetting the foregoing
and Count XIV for UCC violations cut across the four substantive categories. The
specific nature of Yucaipa‘s claims is identified briefly below:
23
See supra notes 12-13.
24
See supra note 14.
13
 Count I seeks a declaratory judgment that Yucaipa
validly owns 55.2% of the Allied Debt and that Black
Diamond cannot disregard that fact.
 Count II seeks a declaratory judgment that, under
Section 18-110 of the Delaware LLC Act (―DLLCA‖),
Yucaipa has elected itself managing member of
SBDRE.
 Count III seeks a declaratory judgment that, under
Section 18-111 of the DLLCA, Yucaipa has elected
itself managing member of SBDRE.
 Count IV accuses Defendants of breach of contract
based on SBDRE‘s LLC Agreement impermissibly
modifying the Lenders‘ rights under the Credit
Agreement.
 Count V asserts that Defendant Black Diamond, as
Requisite Lender, owes the Lenders fiduciary duties
and breached those duties by granting itself extra
powers in SBDRE‘s LLC Agreement.
 Count VI alleges that, by forming SBDRE and
imposing its LLC Agreement on the Lenders,
Defendants breached the implied covenant of good
faith and fair dealing in the Credit Agreement.
 Count VII avers that the New Issuance constituted a
breach of the Credit Agreement.
 Count VIII accuses Black Diamond of breaching
fiduciary duties it owed to the other Lenders, which
stem from its status as Requisite Lender, by adopting
and implementing the New Issuance.
 Count IX asserts that Defendants breached the implied
covenant of good faith and fair dealing in the Credit
Agreement by adopting and implementing the New
Issuance.
14
 Count X claims that Defendants breached the Credit
Agreement by reimbursing their own and other
Lenders‘ fees and expenses or, alternatively, by
treating Yucaipa‘s fee requests differently.
 Count XI avers that Black Diamond breached the
fiduciary duties it owes as Requisite Lender by
eliminating third-party oversight of its and its Agents
expense reimbursements.
 Count XII alleges that the fee reimbursements made by
Defendants in the absence of third-party oversight
violated the implied covenant of good faith and fair
dealing in the Credit Agreement.
 Count XIII accuses the Black Diamond Agents of
aiding and abetting Black Diamond‘s breaches of
fiduciary duties.
 Count XIV asserts that the New Issuance and Black
Diamond‘s self-serving management of SBDRE
violated various requirements of Article 9 of the UCC
governing the handling of collateral.
Defendants counter that all of Yucaipa‘s claims are barred by a covenant not to
sue in the Third Amendment to the Credit Agreement. In the alternative, Defendants
argue that any claims this Court does not dismiss should be stayed pending resolution of
the ongoing litigation in the Bankruptcy Court. Relatedly, Defendants contend that
Yucaipa is collaterally estopped from making a number of its arguments because of
rulings adverse to it in the New York Litigation and in the Bankruptcy Action. Besides
these primary challenges to the sufficiency of Plaintiffs‘ claims, Defendants also advance
a number of more targeted arguments related to some of Plaintiffs‘ specific theories, such
as arguments disputing the applicability of UCC Article 9 to the Assets.
15
II. ANALYSIS
To have any of its claims heard in this Court, Yucaipa must survive Defendants‘
challenge to the legal sufficiency of its claims and also surmount their arguments for
staying this case pending resolution of the Bankruptcy Action. After reciting the
standards of review, this Section analyzes the parties‘ arguments. Ultimately, I conclude
that the covenant not to sue bars a large portion of this action. As for the remaining
Counts in the Complaint, I find that a stay is appropriate.
A. Standards of Review
1. Motion to Dismiss
Pursuant to Court of Chancery Rule 12(b)(6), this Court may grant a motion to
dismiss for failure to state a claim if a complaint does not assert sufficient facts that, if
proven, would entitle the plaintiff to relief. As recently reaffirmed by the Supreme Court,
―the governing pleading standard in Delaware to survive a motion to dismiss is
reasonable ‗conceivability.‘‖25 That is, when considering such a motion, a court must:
25
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 537
(Del. 2011) (footnote omitted).
16
accept all well-pleaded factual allegations in the Complaint as
true, accept even vague allegations in the Complaint as ―well-
pleaded‖ if they provide the defendant notice of the claim,
draw all reasonable inferences in favor of the plaintiff, and
deny the motion unless the plaintiff could not recover under
any reasonably conceivable set of circumstances susceptible
of proof.26
This reasonable ―conceivability‖ standard asks whether there is a ―possibility‖ of
recovery.27 The court, however, need not ―accept conclusory allegations unsupported by
specific facts or . . . draw unreasonable inferences in favor of the non-moving party.‖28
Failure to plead an element of a claim precludes entitlement to relief and, therefore, is
grounds to dismiss that claim.29
Generally, the Court will consider only the pleadings on a motion to dismiss under
Rule 12(b)(6). ―A judge may consider documents outside of the pleadings only when: (1)
the document is integral to a plaintiff‘s claim and incorporated in the complaint or (2) the
document is not being relied upon to prove the truth of its contents.‖30 In this case, a
number of documents are in play for purposes of Defendants‘ motion to dismiss. Most of
26
Id. at 536 (citing Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002)).
27
Id. at 537 & n.13.
28
Price v. E.I. duPont de Nemours & Co., Inc., 26 A.3d 162, 166 (Del. 2011) (citing
Clinton v. Enter. Rent-A-Car Co., 977 A.2d 892, 895 (Del. 2009)).
29
Crescent/Mach I P’rs, L.P. v. Turner, 846 A.2d 963, 972 (Del. Ch. 2000) (Steele,
V.C., by designation).
30
Allen v. Encore Energy P’rs, 72 A.3d 93, 96 n.2 (Del. 2013).
17
these items were submitted by the Plaintiffs as attachments 31 or were discussed by
Plaintiffs.32
The Credit Agreement, the Security Agreement, the Third Amendment, and the
SBDRE LLC Agreement indisputably are integral documents to the Complaint.
Additionally, the New York Litigation and the Bankruptcy Action are inextricably
intertwined with this case, and I consider the rulings in these actions to be integral to the
Complaint as well.33 To provide but one example, Black Diamond‘s Requisite Lender
31
The initial complaint included: (a) the Bankruptcy Court‘s oral ruling approving
the Credit Bid; (b) the New Issuance Memo circulated by Black Diamond; and (c)
the SBDRE LLC Agreement. Upon amending and filing the current Complaint,
Plaintiffs also attached: (a) the Credit Agreement; (b) the Security Agreement; (c)
a December 19 oral ruling of the Bankruptcy Court relating to the disputed fee
reimbursements; and (d) Black Diamond and Yucaipa‘s filings in the Bankruptcy
Court related to the disputed fees.
32
The Complaint discusses the history of both the Third Amendment and the Fourth
Amendment. Compl. ¶¶ 22-23. The Complaint describes the related New York
Litigation and the Bankruptcy Action, including the Bankruptcy Court‘s summary
judgment order. Id. ¶¶ 27-37. The Complaint also briefly discusses the
relationship of the New York Litigation to the Bankruptcy Court‘s rulings. Id. ¶¶
125-27. In their briefing, Plaintiffs described the history of the New York
Litigation. Pls.‘ Opp‘n Br. 4-5. In the course of describing the Bankruptcy
Action, Plaintiffs mention Defendants‘ intervention and assertion of the equitable
subordination claim and also note the proposed settlement. Id. at 6-7. Plaintiffs
further describe their pending appeal of the Bankruptcy Court‘s rulings that the
Third Amendment is the operative amendment to the Credit Agreement and that
Black Diamond is the Requisite Lender. Id. at 7-8.
33
See Orman v. Cullman, 794 A.2d 5, 15-16 (Del. Ch. 2002) (describing standard of
review on a motion to dismiss and describing consideration of documents outside
the four corners of the complaint). I also take judicial notice of the related
opinions in the New York Litigation and the Bankruptcy Action. See Del. R.
Evid. 201(a), 202. See also In re Gen. Motors S’holder Litig., 897 A.2d 162, 168-
69 (Del. 2006) (describing appropriate situations when trial courts can consider
18
status comes from its invalidating the Fourth Amendment in New York and then winning
summary judgment in the Bankruptcy Action. Several counts in the Complaint allege
that Black Diamond breached fiduciary duties it owed as Requisite Lender. As discussed
below, the related litigation is important because of its collateral estoppel effect and
because it demonstrates why staying this matter is appropriate.
2. Motion to Stay
Ordering a stay ―is an inherent power of the trial court, which is concomitant to
the control vested in a trial court, to manage its affairs and to achieve the orderly
disposition of its business.‖34 As such, ―[t]he granting of a motion to stay is not a matter
of right, but rather rests within the sound discretion of the court.‖35 In assessing which of
multiple actions challenging the same conduct should proceed, Delaware courts often
apply the McWane doctrine, also known as the first-filed rule.
matters outside the complaint on a motion to dismiss); Wal-Mart Stores, Inc. v.
AIG Life Ins. Co., 86 A.2d 312, 320 & n.28 (Del. 2004) (noting the propriety of
judicial notice of publicly filed documents and collecting cases).
34
State v. Harris, 616 A.2d 288, 291 (Del. 1992) (citing Gebhart v. Ernest
DiSabatino & Sons, Inc., 264 A.2d 157, 159 (Del. 1970)); accord Taylor v. LSI
Logic Corp., 689 A.2d 1196, 1201 (Del. 1997) (noting that the Court of Chancery
has ―the inherent power . . . to control its own docket, manage its affairs, achieve
the orderly disposition of its business and promote the efficient administration of
justice.‖).
35
In re The Bear Stearns Cos. S’holder Litig., 2008 WL 959992, at *5 (Del. Ch.
Apr. 9, 2008) (citing Adirondack GP, Inc. v. Am. Power Corp., 1996 WL 684376,
at *6 (Del. Ch. Nov. 13, 1996) (―The court should inform its analysis with
considerations of comity and the necessities of an orderly and efficient
administration of justice.‖)).
19
―It has long been held in Delaware that, ‗as a general rule, litigation should be
confined to the forum in which it is first commenced, and a defendant should not be
permitted to defeat the plaintiff‘s choice of forum in a pending suit by commencing
litigation involving the same cause of action in another jurisdiction of its own
choosing.‘‖36 Thus, ―[u]nder the [McWane] first-filed rule, this Court freely exercises its
broad discretion to grant a stay ‗when there is a prior action pending elsewhere, in a court
capable of doing prompt and complete justice, involving the same parties and the same
issues.‘‖37
Under McWane, however, the parties and issues need not be identical. ―Instead,
the courts examine whether the ultimate legal issues to be litigated will be determined in
the first-filed action, and thus, repeatedly have held that McWane requires only a showing
of ‗[s]ubstantial or functional identity.‘‖38 Similar issues are those that arise out of a
36
Transamerica Corp. v. Reliance Ins. Co. of Ill., 1995 WL 1312656, at *3 (Del.
Super. Aug. 30, 1995) (quoting McWane Cast Iron Pipe Corp. v. McDowell-
Wellman Eng’g Co., 263 A.2d 281, 283 (Del. 1970)).
37
Bear Stearns, 2008 WL 959992, at *5 (quoting McWane, 263 A.2d at 283).
38
McQuaide v. McQuaide, 2005 WL 1288523, at *4 (Del. Ch. May 24, 2005)
(quoting AT & T Corp. v. Prime Sec. Distrib., Inc., 1996 WL 633300, at *2 (Del.
Ch. Oct. 24, 1996)); see also Chadwick v. Metro Corp., 856 A.2d 1066 (Table),
2004 WL 1874652, at *2 (Del. 2004) (―Under McWane and its progeny, a judge,
in the exercise of his or her discretion, may stay or dismiss a later-filed suit where
a first-filed suit is pending in a court capable of administering prompt and
complete justice, and involves substantially similar parties and issues.‖);
Transamerica Corp., 1995 WL 1312656, at *3.
20
―common nucleus of operative facts.‖39 Likewise, parties are considered substantially the
same for purposes of McWane ―where related entities are involved but not named in both
actions, referring to the exclusion as ‗more a matter of form than substance.‘‖40
B. Does the Covenant Not to Sue Bar this Action?
1. The Covenant
Section 2.7(e) of the Third Amendment creates a new Section 10.6(j) in the Credit
Agreement.41 Part of the new Section 10.6(j) is the covenant not to sue (the ―Covenant‖).
As demonstrated by its language below, the Covenant is exceptionally broad:
To the fullest extent permitted by applicable law, no
Restricted Sponsor Affiliate [which includes Plaintiffs] shall
assert, and each Restricted Sponsor Affiliate immediately and
automatically upon becoming a Lender, hereby irrevocably (i)
waives, any claim or cause of action against any Lender, any
Agent and their respective Affiliates, directors, employees,
attorneys, agents or sub-agents (whether or not the claim is
based on contract, tort or duty imposed by any applicable
legal requirement or otherwise) arising out of, in connection
with, as a result of, or in any way related to, this Agreement
or any Credit Document or any agreement or instrument
contemplated hereby or thereby or referred to herein or
therein, the transactions contemplated hereby or thereby, any
Loan or the use of the proceeds thereof or any act or omission
or event occurring in connection therewith except to the
extent caused by such Lender’s or Agent’s gross negligence
or willful misconduct on or after the date such Restricted
Sponsor Affiliate becomes a Lender hereunder as determined
39
Schnell v. Porta Sys. Corp., 1994 WL 148276, at *4 (Del. Ch. Apr. 12, 1994).
40
McQuaide, 2005 WL 1288523, at *4 (quoting FWM Corp. v. VKK Corp., 1992
WL 87327, at *1 (Del. Ch. Apr. 27, 1992)).
41
The Credit Agreement, which includes the Covenant, is governed by New York
law. Credit Agreement § 10.14.
21
by a court of competent jurisdiction by a final and non-
appealable judgment, (ii) waives, releases and agrees not to
sue upon any such claim or any such cause of action, whether
or not accrued and whether or not known or suspected to exist
in its favor and (iii) waives any claim or cause of action
against any Agent or any Lender and their respective
Affiliates, directors, employees, attorneys, agents or sub-
agents on any theory of liability for special, indirect,
consequential or punitive damages, arising out of, in
connection with, as a result of, or in any way related to this
Agreement, or any other Credit Document or any agreement
or instrument contemplated hereby or thereby, any Loan or
the use of proceeds thereof or any act or omission or event
occurring in connection therewith. (Emphases added).
Yucaipa focuses the Court‘s attention on the portion emphasized with italics (the ―Carve
Out‖). Defendants point instead to the language emphasized with underlining (the ―Prior
Determination Requirement‖).
Determining the meaning of the Covenant requires referencing a series of cross-
defined terms. A ―Restricted Sponsor Affiliate,‖ as defined in Section 2.1 of the Third
Amendment, means ―Sponsor and its Affiliates (other than Borrowers or any of their
Subsidiaries).‖ The term Sponsor means ―collectively, Yucaipa American Alliance Fund
I, LP and Yucaipa American Alliance (Parallel) Fund I, LP‖42—i.e., Plaintiffs herein.
The parties to the Third Amendment presumably used the new term Restricted Sponsor
Affiliate, rather than just Sponsor, because the Third Amendment modified the
definitions of ―Eligible Assignee‖ and ―Term Loan Exposure,‖ among other provisions,
to account for possible debt acquisition by the Restricted Sponsor Affiliate, i.e., Yucaipa.
42
Credit Agreement § 1.1.
22
The Covenant, therefore, applies to Yucaipa. Indeed, the Covenant by its terms applies
only to Yucaipa and ―Affiliates‖ of Yucaipa, as defined in the Credit Agreement.
Nothing in the record indicates that any party other than Yucaipa ever satisfied the
definition of Restricted Sponsor Affiliate.
Finally, I note that the Credit Agreement contained a more limited exculpatory
clause applicable to all ―Lenders.‖ That term, as used throughout this Memorandum
Opinion, applies to those parties that signed the Credit Agreement as Lenders or who
became a party to the Credit Agreement by means of an assignment from a Lender.
Section 9.3(b) of the Credit Agreement states: ―No Agent nor any of its officers, partners,
directors, employees or agents shall be liable to Lenders for any action taken or omitted
by any Agent under or in connection with any of the Credit Documents except to the
extent caused by such Agent‘s gross negligence or willful misconduct.‖ This exculpatory
provision plainly is narrower than the Covenant. Overall, the intention of the drafters of
the Third Amendment seems clear: if Yucaipa acquired any of the Allied Debt, it would
be ―Restricted‖ in the sense that Yucaipa would have to surrender a number of rights
otherwise held by a Lender.
2. The Bankruptcy Court’s holding
Based on the rulings of the Bankruptcy Court, Defendants argue that Plaintiffs are
collaterally estopped from re-litigating the Covenant. This Court, therefore, needs to
examine closely what the Bankruptcy Court held. Yucaipa, in the 59-page amended
answer, counterclaim, and cross-claim that it filed in the Bankruptcy Action, alleged four
23
main claims against Defendants, who are Yucaipa‘s co-creditors in the Bankruptcy
Action:
 Count I sought a declaratory judgment that several
portions of the Third Amendment are invalid and that
Yucaipa validly holds the Allied Debt it purchased
from ComVest;
 Count II sounded in unjust enrichment; Yucaipa
averred that strict enforcement of the Third
Amendment against Yucaipa would unjustly enrich the
Debtor (Allied) and the other Lenders;
 Count III asserted that the other Lenders are estopped
from arguing that the Third Amendment controls
because they did not object to the Fourth Amendment;
and
 Count IV requested injunctive relief preventing the
Petitioning Creditors (Black Diamond) from acting as
Requisite Lender and appointing their Agents—a
defined term under the Credit Agreement—to act in
ways harmful to Yucaipa.43
In late February 2013, the Bankruptcy Court dismissed Yucaipa‘s cross-claims on the
basis of the Covenant and, in the alternative, a statute of limitations defense.44
The Bankruptcy Court observed that ―for all material aspects [it] adopt[ed] the
petitioning creditors‘ arguments virtually in toto.‖45 Referring specifically to the
Covenant, the Bankruptcy Court found the Covenant ―very clear‖ and did not find the
43
Transmittal Aff. of Rebecca L. Butcher in Further Supp. of Defs.‘ Mot. to Dismiss
or Stay the Am. Compl. Ex. 2, at 42-50.
44
Allied Bankr. MTD Arg. Tr. 103-10.
45
Id. at 104.
24
―carve out to be particularly troubling.‖46 As to the Carve Out and the Prior
Determination Requirement, the Bankruptcy Court held:
I agree that the carve out as written deals with the narrow
situation of a finding at some time post signing of the
covenant by a court that there‘s been willful misconduct or
gross negligence. And . . . I don‘t think that is done in the
auspices of a lawsuit directly related between the parties, it
has to come from somewhere else. It‘s a little vague, but I
think it‘s fair to say it has to be a narrow exception.47
In addition, the Bankruptcy Court noted the absence of any allegations of fraud or
wrongdoing in connection with the enactment of the Third Amendment or the Covenant
that might provide a basis upon which to invalidate the Covenant.
3. Collateral estoppel
Collateral estoppel, also known as issue preclusion, prevents a party who litigated
an issue in one forum from later re-litigating that issue in another forum. Although more
narrow than res judicata, which also is known as claim preclusion, issue preclusion
materially can alter the course of litigation. Under Delaware law, ―the ‗preclusive effect
of a foreign judgment is measured by [the] standards of the rendering forum.‘‖ 48 Here,
because the Bankruptcy Court rendered the relevant opinion, I look to the law of the
United States Court of Appeals for the Third Circuit. In the Third Circuit, ―[i]ssue
preclusion applies when ‗(1) the issue sought to be precluded [is] the same as that
46
Id. at 105.
47
Id.
48
Acierno v. New Castle Cty., 679 A.2d 455, 459 (Del. 1996) (quoting Columbia
Cas. Co. v. Playtex F.P., Inc., 584 A.2d 1214, 1217 (Del. 1991)).
25
involved in the prior action; (2) that issue [was] actually litigated; (3) it [was] determined
by a final and valid judgment; and (4) the determination [was] essential to the prior
judgment.‘‖49
In its February 2013 decision, the Bankruptcy Court dismissed Plaintiffs‘ cross-
claims with prejudice on the basis of the Covenant and denied leave to amend.50 This
was a final and valid judgment.51 The parties actually litigated the applicability of the
Covenant. Both sides briefed the issue and dealt with it at length during oral argument.
The ruling as to the Covenant also was essential to the judgment of the Bankruptcy
Court.52 The only element of collateral estoppel potentially open to debate is whether the
issue presented here is the same as in the Bankruptcy Action.
49
In re Graham, 973 F.2d 1089, 1097 (3d Cir. 1992) (quoting In re Braen, 900 F.2d
621, 628-29 n.5 (3d Cir. 1990)). See also Leyse v. Bank of Am., Nat’l Ass’n, 538
Fed. App‘x 156, 158-59 (3d Cir. 2013) (identical statement of the standard).
50
Allied Bankr. MTD Arg. Tr. 110.
51
See Free Speech Coal., Inc. v. Att’y Gen. of U.S., 677 F.3d 519, 541 (3d Cir. 2012)
(―We have stated that ‗[f]inality for purposes of issue preclusion is a more pliant
concept than it would be in other contexts,‘ and that finality ‗may mean little more
than that the litigation of a particular issue has reached such a stage that a court
sees no really good reason for permitting it to be litigated again.‘‖) (quoting In re
Brown, 951 F.2d 564, 569 (3d Cir. 1991)) (internal quotations omitted);
RESTATEMENT (SECOND) OF JUDGMENTS § 13 (1982) (―[F]or purposes of issue
preclusion . . . ‗final judgment‘ includes any prior adjudication of an issue in
another action that is determined to be sufficiently firm to be accorded conclusive
effect.‖).
52
Although the parties did not brief this point, the Third Circuit recently took a side
in the circuit split over the preclusive effect of alternative judgments, such as the
one rendered by the Bankruptcy Court. The dispute centers on whether an
alternative holding is ―necessary‖ to the judgment. Some courts give preclusive
26
Defendants advance the Covenant as the first of several arguments in their
Opening Brief. According to Defendants, ―because all of the claims in the Amended
Complaint are barred by the Covenant Not to Sue, the Amended Complaint should be
dismissed in its entirety.‖53 Yucaipa responds in three ways, one of which is clearly
precluded by the Bankruptcy Court‘s ruling, another of which is either precluded or
incorrect, and the third of which does not appear to be precluded by the prior ruling.
Yucaipa first points to the Carve Out and reasons that because it is alleging willful
misconduct, that is sufficient to avoid the effect of the Covenant. As discussed in the
preceding subsection, the Bankruptcy Court specifically addressed this argument and
found that the Prior Determination Requirement trumped the Carve Out. Alleging willful
misconduct is not enough: Yucaipa must show the existence of a final, non-appealable
judgment finding gross negligence or willful misconduct by Black Diamond before
Yucaipa can bring suit. This holding implies that some other party, such as another
Lender, must bring suit and obtain a final, non-appealable judgment before Yucaipa
could file its own lawsuit.
effect to neither holding; some courts give preclusive effect to both holdings; and
a small minority of courts applies a middle ground and examines the carefulness
of the alternative determination before deciding whether to give it preclusive
effect. The Third Circuit came down firmly on the side of giving preclusive effect
to both holdings. See generally Jean Alexander Cosmetics, Inc. v. L’Oreal USA,
Inc., 458 F.3d 244, 249-55 (3d Cir. 2006) (describing the circuit split, the
rationales of each position, and the basis for the Third Circuit‘s conclusion).
53
Defs.‘ Opening Br. 30.
27
Second, Yucaipa argues that the claims involving SBDRE and its LLC Agreement
fall outside the scope of the Covenant. The Bankruptcy Court dismissed Yucaipa‘s cross-
claims based on the ―plain meaning‖ of the Covenant, suggesting it read the Covenant
broadly.54 The Covenant, for example, bars all claims:
arising out of, in connection with, as a result of, or in any way
related to this Agreement, or any other Credit Document or
any agreement or instrument contemplated hereby or thereby,
any Loan or the use of proceeds thereof or any act or
omission or event occurring in connection therewith.55
Yucaipa has alleged claims relating to: (1) its debt ownership; (2) the SBDRE LLC
Agreement; (3) the New Issuance; and (4) the disputed fees. The language of the
Covenant, as interpreted by the Bankruptcy Court, covers all of Yucaipa‘s claims.
Determining the amount of Allied Debt that Yucaipa holds requires interpretation
of the Credit Agreement and its related amendments. Yucaipa purchased a majority of
the Allied Debt pursuant to the Fourth Amendment. The Fourth Amendment, however,
was found to be void in the New York Litigation and Yucaipa is collaterally estopped
from relitigating that issue.56 The Bankruptcy Court later held that the Third Amendment
is the operative amendment. Under the Third Amendment, Yucaipa: (1) is quantitatively
limited in the amount of Allied debt it can acquire; (2) is required to make capital
54
Allied Bankr. MTD Arg. Tr. 105.
55
Third Amendment § 2.7(e).
56
BDCM Opportunity Fund II, LP v. Yucaipa Am. Alliance Fund I, LP, 978
N.Y.S.2d 10, 13 (N.Y. App. Div. 2013); see also supra Section I.C.1.
28
contributions to Allied in proportion to its debt acquisitions; and (3) is not entitled to
voting rights for the debt it buys. Any determination of Yucaipa‘s debt ownership would
require analyzing these and other provisions of the Credit Agreement. As such, a lawsuit
to determine Yucaipa‘s debt holdings is, at least, ―related to‖ the Credit Agreement and,
therefore, comes within the scope of the Covenant.
For similar reasons, Yucaipa‘s claims relating to SBDRE also are covered by the
language of the Covenant. SBDRE relates to the Credit Agreement in several ways.
First, SBDRE is a sub-agent of the Black Diamond Agents, which serve defined roles
under the Credit Agreement.57 Second, SBDRE was created to receive and realize upon
the Assets that formerly secured the Credit Agreement and were directly the subject of
the Security Agreement.58 Third, Yucaipa only has rights in SBDRE because of
Yucaipa‘s status as a Restricted Sponsor Affiliate. That status derives from the Credit
Agreement and its amendments.
The claims relating to the New Issuance alternatively allege breach of the Credit
Agreement, breach of the implied covenant of good faith and fair dealing in the Credit
57
See Credit Agreement § 9.7.
58
On a related note, Count XIV, alleging violations of Article 9 of the UCC, relates
to SBDRE, because SBDRE holds the Assets. More fundamentally, Yucaipa
alleges that the Assets are collateral or proceeds of collateral. If the Assets were
collateral, then they comprised collateral securing the Credit Agreement and also
were subject to the Security Agreement. If the assets were proceeds, then they still
relate to the Credit Agreement, because the Credit Bid that resulted in the proceeds
was a transaction contemplated by Section 9.8(b) of the Credit Agreement, which
describes the Lenders‘ ability to realize upon the collateral. As such, Count XIV
also is covered by the Covenant.
29
Agreement, and breach of Black Diamond‘s fiduciary duties as Requisite Lender. Any
claim directly alleging a breach of the Credit Agreement undoubtedly falls within the
Covenant‘s scope and any claims against the Requisite Lender also relate to the Credit
Agreement. The Requisite Lender is a creation of the Credit Agreement and does not
exist outside of it. Any analysis of the Requisite Lender‘s duties vis-à-vis the Lenders
requires an interpretation of the Credit Agreement and falls within the plain language of
the Covenant.
Finally, the disputed fees directly relate to the Credit Agreement and are covered
by the Covenant. In its Complaint, Yucaipa states that the fees violated Section 10.2 of
the Credit Agreement and Section 7.2 of the Security Agreement.59
In sum, all of the Counts in Yucaipa‘s Complaint are covered by the Covenant.60
Under the Bankruptcy Court‘s interpretation of the Covenant, which has collateral
estoppel effect here, Yucaipa cannot sue Black Diamond in the absence of a final, non-
appealable determination that Black Diamond acted with gross negligence or willful
misconduct.61 There is no such ruling. Accordingly, Defendants‘ argument that
59
See Compl. ¶¶ 107-08.
60
That is, each claim advanced by Yucaipa qualifies as ―arising out of, in connection
with, as a result of, or in any way related to, this [Credit] Agreement or any Credit
Document or any agreement or instrument contemplated hereby or thereby or
referred to herein or therein, the transactions contemplated hereby or thereby, any
Loan or the use of the proceeds thereof or any act or omission or event occurring
in connection therewith.‖ Credit Agreement § 10(j).
61
Yucaipa does not allege gross negligence, but there is no dispute that all of
Yucaipa‘s claims assert willful misconduct.
30
Yucaipa‘s claims are barred by the Covenant and that the entire Complaint should be
dismissed initially appears persuasive.
Plaintiffs, however, advance a third argument.62 According to Yucaipa,
interpreting the Covenant in this manner would be ―commercially unreasonable‖ or
would produce an absurd result. Plaintiffs most clearly stated their position at oral
argument: ―public policy does not permit an intentional prospective waiver of a tort like
this.‖63 They contend that adopting Defendants‘ interpretation of the Covenant would
allow Black Diamond to ―declare all of Yucaipa‘s Allied Debt void at any time, without
any Court order, and Yucaipa would have no recourse whatsoever.‖64 At the motion to
dismiss stage, I find it reasonably conceivable that Yucaipa could show that the outer
boundaries of the Covenant are ambiguous, even after giving collateral estoppel effect to
the Bankruptcy Court‘s ruling, and that public policy would prevent the wholesale
adoption of the broad interpretation Defendants advance.
For instance, a logical premise of the Bankruptcy Court‘s holding is that another
Lender actually could bring the claim Yucaipa seeks to assert against Defendants. As
such, in any instance where Yucaipa suffers a distinct harm not shared by any other
person or entity that reasonably could bring suit, it would be impossible to satisfy the
62
Plaintiffs devoted only one paragraph to this argument in their Answering Brief.
Pls.‘ Opp‘n Br. 20-21. They pressed it somewhat more at the Argument. See
Yucaipa MTD Arg. Tr. 31-32, 36, 39-40.
63
Yucaipa MTD Arg. Tr. 39.
64
Pls.‘ Opp‘n Br. 20-21.
31
Prior Determination Requirement. Covenants not to sue are valid and enforceable under
New York law.65 But, agreements prospectively limiting a party‘s liability resulting from
that party‘s intentional misconduct are void as against public policy.66
This Court will not revisit the Bankruptcy Court‘s interpretation of the Covenant
and the relationship between the Carve Out and the Prior Determination Requirement.
Yucaipa received a full and fair opportunity to litigate that issue to the extent it was
presented in the Bankruptcy Action and cannot re-litigate it here. Yucaipa advances a
reasonably conceivable argument, however, that in situations where it alleges a unique
65
See, e.g., Joao v. Cenuco, Inc., 376 F. Supp. 2d 380, 382 (S.D.N.Y. 2005)
(―Covenants not to sue are expressly permitted under New York law. . . . If two
parties sign a covenant not to sue each other, then a dispute arising out of the
conduct covered by that agreement cannot provide the basis for a justiciable
controversy, and the case must be dismissed.‖); Kamfar v. New World Rest. Gp.,
Inc., 347 F. Supp. 2d 38, 50 (S.D.N.Y. 2004) (―Covenants not to sue, requiring
that the obligor forbear from bringing any current or future claims against the
obligee, are valid in New York.‖); Sommer v. Fed. Signal Corp., 593 N.E.2d 1365,
1370 (N.Y. 1992) (―Absent a statute or public policy to the contrary, a contractual
provision absolving a party from its own negligence will be enforced.‖); Klapper
v. Graziano, 970 N.Y.S.2d 355, 360 (Sup. Ct. 2013) (―[P]arties are free to enter
into contractual agreements which limit liability and such agreements will be
binding upon the parties provided the language is sufficiently clear and
unambiguous.‖).
66
See, e.g., Kalisch-Jarcho, Inc. v. City of New York, 448 N.E.2d 413, 416 (N.Y.
1983) (―But an exculpatory agreement, no matter how flat and unqualified its
terms, will not exonerate a party from liability under all circumstances. Under
announced public policy, it will not apply to exemption of willful or grossly
negligent acts.‖); Schwartz v. Martin, 919 N.Y.S.2d 217, 219 (App. Div. 2011)
(―[A]n enforceable release will not insulate a party from grossly negligent
conduct.‖); Goldstein v. Carnell Assocs., Inc., 906 N.Y.S.2d 905, 905 (App. Div.
2010) (stating that ―the public policy of this State dictates that ‗a party may not
insulate itself from damages caused by grossly negligent conduct,‘‖ and collecting
cases) (quoting Sommer, 593 N.E.2d at 1370).
32
harm—meaning no other Lender could sue and the Prior Determination Requirement
could not be satisfied—construing the Carve Out so broadly that it would fail to provide
an escape hatch for Yucaipa in those circumstances arguably would produce a prohibited
result. The Bankruptcy Court was not called upon to interpret the Covenant in a situation
such as Yucaipa alleges here. On the whole, I find it reasonably conceivable that
Yucaipa could show that, even after giving collateral estoppel effect to the Bankruptcy
Court‘s holding, Defendants‘ interpretation of the Covenant, in the limited circumstances
posited above, could produce a result contrary to public policy.67
4. Which Counts are dismissed?
As discussed, the Covenant‘s reach extends quite far. All fourteen Counts in the
Complaint come within its ambit. There is no indication in the record of any final, non-
appealable judicial determination that any of the Defendants engaged in willful
misconduct. As such, the Prior Determination Requirement is not satisfied. Based on the
preceding analysis, any Count alleging a harm for which another Lender could have
brought suit is barred by the Covenant, as interpreted in the Bankruptcy Action. I will
not dismiss, however, any Count in which Yucaipa sufficiently has alleged that it
67
See Colton v. N.Y. Hosp., 414 N.Y.S.2d 866, 872 (Sup. Ct. 1979) (―The proper
approach is to hold, as we hold here, that a covenant not to sue and a release are
both contracts governed by the same principle of contract law, the intention of the
parties.‖); see also XO Commc’ns, LLC v. Level 3 Commc’ns, Inc., 948 A.2d 1111,
1123 (Del. Ch. 2007) (―‗A contract should not be interpreted to produce a result
that is absurd, commercially unreasonable or contrary to the reasonable
expectations of the parties.‘‖) (quoting Superb Gen. Contracting Co. v. City of
New York, 833 N.Y.S.2d 64, 66-67 (App. Div. 2007)).
33
sustained a unique wrong not suffered by other Lenders, i.e., situations in which the Prior
Determination Requirement cannot be satisfied.
I decline to dismiss Count I.68 Even assuming some other party might have
standing to bring this claim, it is unrealistic to assume anyone other than Yucaipa would
seek a declaratory judgment as to the percentage of the Allied Debt held by Yucaipa.
Counts II and III depend on resolution of Count I and those Counts raise similar standing
concerns. Accordingly, they will not be dismissed for related reasons. Additionally,
Yucaipa advances a reasonably conceivable argument that it could establish that these
claims are outside the scope of the Covenant because they stem from willful misconduct
taken by Defendants that affects only Yucaipa. For example, while all Lenders are
subject to Black Diamond‘s management of SBDRE, Yucaipa alone has claims that it
should be the managing member of SBDRE because it purchased a majority of the Allied
Debt.
Counts IV-VI are dismissed. These Counts allege that SBDRE‘s LLC Agreement
runs afoul of the Lenders‘ rights as established in the Credit Agreement. 69 But, these
alleged wrongs are not unique to Yucaipa. Any other Lender could bring these claims if
68
Section I.D supra listed and briefly described the fourteen Counts in Yucaipa‘s
Complaint.
69
These Counts appear to be asserted in the alternative, because the ―imposition‖ of
the LLC Agreement could not be a breach of contract, a breach of fiduciary duty,
and a breach of the implied covenant of good faith and fair dealing. More likely,
Defendants could be liable under only one of these theories, depending on the
facts proved.
34
they feel wronged by SBDRE‘s LLC Agreement. To date, it appears that no one else has
brought such a claim. Accordingly, the Prior Determination Requirement applies here
and these Counts are dismissed.
Counts VII-IX are dismissed in part. These Counts assert that the New Issuance
violated the Lenders‘ rights.70 As with Counts IV-VI, all Lenders suffered the same
alleged wrong of dilution or other impairment of rights held under the Credit Agreement,
and any of the other Lenders could have brought suit, but did not. In one sense, however,
Yucaipa suffered the distinct wrong of only being able to participate in the New Issuance
at 9.9%, rather than its alleged full ownership of 55.2%. Thus, Yucaipa arguably had its
stake diluted more than the other Lenders. Accordingly, Counts VII-IX of the Complaint,
are dismissed such that Yucaipa cannot allege a general challenge to the New Issuance,
but without prejudice to Yucaipa‘s ability to pursue those Counts to the extent they
challenge the specific wrong allegedly suffered by Yucaipa as a result of the reduction of
its participation in the New Issuance to 9.9%.71
70
Similar to Counts IV-VI, these Counts allege breach of contract, breach of
fiduciary duty, and breach of the implied covenant of good faith and fair dealing,
respectively.
71
Specifically, for example, Count VII would include a claim that the New Issuance
violated the Credit Agreement to the extent that Yucaipa was not allowed to
participate pro rata at its alleged 55.2% level of ownership. The precise level of
Yucaipa‘s ownership, and the related amount of extra dilution Yucaipa suffered, is
entangled with resolution of Count I. Count VIII similarly would be restricted to
the unique harm Yucaipa suffered and effectively would read: Black Diamond
breached its fiduciary duties as Requisite Lender by not allowing Yucaipa to
participate in the New Issuance at its 55.2% level of ownership. The same
limitations apply to Count IX.
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For the reasons discussed in the next Section, I decline to reach the issue of
whether the Covenant precludes Counts X-XIII. Finally, Count XIV is dismissed. Any
other Lender could have brought this claim, but did not. As such, the Covenant bars
Yucaipa from pursuing Count XIV at this time.
In sum, Counts IV-VI and Count XIV are dismissed with prejudice. Counts VII-
IX are dismissed with prejudice in part and may be pursued solely in accordance with the
limitations stated in this Section. Finally, I deny the motion to dismiss as to Counts I-III,
Counts VII-IX (as narrowed), and Counts X-XIII.
C. Is a Stay Appropriate?
Of the Counts not dismissed on the basis of the Covenant, I conclude that all of
those Counts are intimately intertwined with the litigation in the first-filed Bankruptcy
Action. The Bankruptcy Action involves substantially similar parties and issues and the
Bankruptcy Court, despite being a court of limited jurisdiction, is capable of rendering
prompt and complete justice. Resolution of the claims pending before the Bankruptcy
Court could moot every non-dismissed aspect of this case and terminate this litigation.
To the extent any Counts of Yucaipa‘s Complaint require further proceedings after the
conclusion of the Bankruptcy Action—such as the New Issuance Counts—I consider it
likely that the issues then-presented will be narrowed significantly and will be
substantially more well-defined than they currently are. For these reasons, I conclude
that all remaining aspects of this proceeding should be stayed.
Count I seeks a declaratory judgment that Yucaipa validly owns 55.2% of the
Allied Debt. Relatedly, Counts II and III seek a declaratory judgment that Yucaipa has
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elected itself managing member of SBDRE. Defendants advance a colorable argument
that Yucaipa is collaterally estopped from pursuing the key issues underlying these
claims because those issues were decided adversely to Yucaipa in the context of the
Bankruptcy Court‘s summary judgment decision on the Requisite Lender issue.72
Yucaipa disagrees. Regardless, it is uncontested that Yucaipa‘s appeal of the Bankruptcy
Court‘s summary judgment opinion remains pending. All of the issues presented by
Counts I-III could be resolved in the context of the Bankruptcy Action.73 A decision
here, however, could result in inconsistent judgments. Furthermore, to the extent
Yucaipa succeeds in having the Bankruptcy Court‘s summary judgment ruling reversed
on appeal, Counts II and III, which appear contingent on the resolution of Count I, likely
would become moot.
Counts VII, VIII, and IX relate to the New Issuance and state claims most properly
presented to this Court. Distilled to their essence, the New Issuance Counts allege that
Black Diamond, through the Black Diamond Agents, diluted the other Lenders‘
Membership Interests in SBDRE, a Delaware LLC, in a self-dealing transaction designed
to seize control of a majority of SBDRE‘s Membership Interests and distribution rights.
72
See Allied Bankr. Summ. J. Op. 3; Allied Bankr. Summ. J. Arg. Tr. 126-27.
73
A creditor is a claimant upon the bankrupt estate. 11 U.S.C. §§ 101(5) & (10)
(West 2014). Yucaipa, as a creditor, is a claimant on the bankrupt Allied estate.
In determining distributions from the estate‘s assets, the Bankruptcy Court likely
will decide how much debt Yucaipa holds and the priority of that debt. See id.
§§ 502(b), 726; see also id. § 506(a)(1). If Yucaipa is equitably subordinated,
however, the Bankruptcy Court may not reach this specific issue.
37
Aside from Count VIII, Defendants do not even seek dismissal of these Counts of the
Complaint on any ground other than the Covenant.
As I concluded in the preceding Section of this Memorandum Opinion, these
Counts are barred in large part by the Covenant. Only substantially narrower versions of
the New Issuance Counts remain.74 Indeed, depending on the outcome of Count I, which
is being stayed, Counts VII-IX could be moot.75 I also note that these are only damages
claims and there is no indication in the record that it would be difficult or impossible to
collect on a judgment against Black Diamond. Based on all of these factors, I conclude
that these narrowed Counts VII-IX should be stayed.
Counts X-XII, relating to the disputed fees, provide textbook examples of
instances where a stay under McWane is appropriate. Yucaipa, according to its own
Complaint, brought the fee reimbursement issue to the Bankruptcy Court‘s attention.76
This issue relates entirely to the Bankruptcy Action and the Bankruptcy Court appears to
have taken it under advisement. Resolving the disputed fee issue here would be
wastefully duplicative and create a risk of inconsistent judgments. Therefore, I am
convinced that Counts X-XII, regarding the disputed fee reimbursements, should be
stayed pending resolution of the first-filed Bankruptcy Action.
74
See supra note 71.
75
If Count I is resolved such that Yucaipa‘s holdings of the Allied Debt do not
exceed 9.9%, Yucaipa would have suffered no distinct wrong in the New Issuance.
76
Compl. ¶¶ 111, 116, 118-20.
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Finally, I stay Count XIII as well. That Count alleges that the Black Diamond
Agents aided and abetted Black Diamond‘s breaches of fiduciary duties. Having
determined to stay Counts VIII and XI, which involve the underlying alleged breaches of
fiduciary duty by Black Diamond, there is no point in proceeding with the dependent
Count XIII at this time.
III. CONCLUSION
The parties to this case previously litigated the Covenant issue in the Bankruptcy
Court. The Bankruptcy Court‘s ruling precludes Yucaipa from re-litigating that
determination here. As a result, the principles of issue preclusion support dismissal of
Counts IV, V, VI, and XIV, and I hereby dismiss those Counts with prejudice. The
Bankruptcy Court, however, does not appear to have faced the issue of whether the
Covenant bars claims for willful misconduct uniquely harmful to Yucaipa. I conclude
that Yucaipa conceivably could show that interpreting the Covenant to bar Yucaipa from
suing in such situations would be contrary to public policy in New York, whose law is
controlling here. Therefore, I deny Defendants‘ motion to dismiss Counts I-III and X-
XIII, and grant in part and deny in part Defendants‘ motion to dismiss Counts VII-IX, as
specified in Section II.B.4 supra.
As to Defendants‘ motion to stay, I find that the remaining portions of the
Complaint require determination of issues properly before the Bankruptcy Court and
currently pending resolution in that forum. Determination of those issues could terminate
all remaining litigation here. In any event, the Bankruptcy Court‘s rulings, particularly as
to Yucaipa‘s debt holdings, are likely to eliminate, or at least narrow, the issues before
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this Court. For these reasons, I grant Defendants‘ motion to stay these proceedings as to
Counts I-III, VII-IX (as narrowed), and X-XIII, until completion of the Bankruptcy
Action or further order of this Court.
IT IS SO ORDERED.
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