CSH Theatres, LLC v. Nederlander of San Francisco Associates

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
CSH THEATRES, LLC, )
)
Plaintiff/Counterclaim )
Defendant, )
v. )
)
NEDERLANDER OF SAN FRANCISCO )
ASSOCIATES, )
Defendant/Counterclaim )
) C.A. No. 9380-VCP
Plaintiff.
)
NEDERLANDER OF SAN FRANCISCO )
ASSOCIATES, )
)
Third Party Plaintiff, )
v. )
)
CSH CURRAN, LLC, CAROLE SHORENSTEIN )
HAYS and JEFF HAYS, )
Third Party Defendants, )
and )
)
SHORENSTEIN HAYS-NEDERLANDER )
THEATRES, LLC, )
)
Nominal Defendant. )
)
MEMORANDUM OPINION
Date Submitted: December 3, 2014
Date Decided: April 21, 2015
Raymond DiCamillo, Esq., Blake K. Rohrbacher, Esq., Susan M. Hannigan, Esq., Rachel
E. Horn, Esq., RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; David
B. Tulchin, Esq., Brian T. Frawley, Esq., Lauren R. Mendolera, Esq., SULLIVAN &
CROMWELL LLP, New York, New York; Attorneys for Plaintiff/Counterclaim
Defendant CSH Theatres, LLC and Third Party Defendants CSH Curran, LLC, Carole
Shorenstein Hays, and Jeff Hays.
Bruce L. Silverstein, Esq., Tammy L. Mercer, Esq., Matthew C. Bloom, Esq., YOUNG
CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; Matthew L.
Larrabee, Esq., Michael H. Park, Esq. Benjamin M. Rose, Esq., DECHERT LLP, New
York, New York; Attorneys for Defendant/Counterclaim Plaintiff and Third Party
Plaintiff Nederlander of San Francisco Associates.
Elizabeth Wilburn Joyce, Esq., Gregory T. Donilon, Esq., Seton C. Mangine, Esq.,
PINCKNEY, WEIDINGER, URBAN & JOYCE LLC, Wilmington, Delaware; Attorneys
for Nominal Defendant Shorenstein Hays-Nederlander Theatres, LLC.
PARSONS, Vice Chancellor.
In this case, the counterclaim plaintiff asks the Court to order specific performance
of an alleged oral agreement to renew a long-running lease of a theater to a limited
liability company (“LLC”). Breaches of fiduciary duty and the company‟s LLC
agreement also are alleged, along with alternatively pled promissory estoppel and
fraudulent inducement counts. The counterclaim and third-party defendants have moved
to dismiss, arguing that the claims suffer from a host of legal shortcomings.
After rejecting the defendants‟ laches argument, this Memorandum Opinion
analyzes the company‟s LLC agreement and considers whether certain of the defendants
conceivably breached their fiduciary duties. In that regard, the LLC agreement appears
to be ambiguous. Based on that conclusion and in light of the facts alleged, I decline to
dismiss the breach of fiduciary duty claims, with the exception of a conclusorily pled
waste claim. Next, I turn to the claims relating to an alleged oral agreement between the
parties. The defendants contend that the purported lease renewal agreement is too
indefinite to be enforced and is missing material terms. Based on the facts alleged,
however, I conclude that it is reasonably conceivable that the counterclaim plaintiff could
prove the existence and terms of the lease renewal agreement. The Memorandum
Opinion then addresses a statute of frauds defense, but concludes that the part
performance doctrine saves the breach of contract claim from dismissal.
Finally, I examine the alternatively pled promissory estoppel and fraudulent
inducement counts. The promissory estoppel claim survives largely for the same reasons
the breach of contract claim survives, but I dismiss the promissory estoppel claim against
one of the defendants who is not alleged to have played any role in the alleged promise.
1
Last, this Memorandum Opinion considers the fraudulent inducement count. This claim
is an impermissible bootstrap on the counterclaim plaintiff‟s breach of contract claim
and, in any event, is pled in an entirely conclusory fashion. Accordingly, I dismiss that
Count.
In sum, the motion to dismiss is granted in part and denied in part. Specifically,
Counts I and V are dismissed in part, and Count III is dismissed entirely. In all other
respects, the motion to dismiss is denied.
I. BACKGROUND1
A. The Parties and Other Actors
Nominal Defendant Shorenstein Hays-Nederlander Theatres LLC, a Delaware
LLC (“SHN” or the “Company”), is a theater company in the business of providing
venues for plays and other live performances in San Francisco. The Company began as,
and continues to be, a collaboration between two families: the Nederlanders and the
Shorensteins. Walter Shorenstein (“Mr. Shorenstein”) and James Nederlander founded
SHN‟s predecessor, a general partnership, in the mid-1970s. Mr. Shorenstein, a real
estate developer, managed the brick-and-mortar aspects of the business, while James
Nederlander and his brother Robert handled the scheduling and booking of shows, as well
1
The facts, which are assumed true for purposes of this motion to dismiss, are
drawn from the defendant‟s Amended Verified Counterclaims and Verified Third
Party Complaint (the “Counterclaim and Third Party Complaint” or “C & TP
Compl.”), together with its attached exhibits and integral documents.
2
as other aspects of theater management. Using this division of labor, the Company
operated quite successfully, at least until the events giving rise to this lawsuit.
The Shorenstein-Nederlander partnership was converted into SHN through a Plan
of Conversion and Operating Agreement signed on November 6, 2000 (the “LLC
Agreement”). Each family‟s fifty percent interest is owned by a business entity member
of SHN: Nederlander of San Francisco Associates (“Nederlander”) represents the
Nederlanders and CSH Theatres LLC (“CSH”) is the member on the Shorenstein side.
The LLC Agreement contemplates a four-member board of directors to govern SHN,
with each entity able to appoint two directors. CSH‟s representatives at all times relevant
to this lawsuit have been Carole Shorenstein Hays (“Mrs. Hays”) and her husband Jeff
Hays (“Dr. Hays”). Mrs. Hays, who is Mr. Shorenstein‟s daughter, indirectly owns CSH
as a trust beneficiary. Nederlander‟s appointees during the relevant period have been
Robert E. Nederlander, Sr. (“Mr. Nederlander”) and Raymond S. Harris. Dr. Hays, Mrs.
Hays, Mr. Nederlander, and Harris together comprise the “Board.”
The dispute in this case centers mainly on the Curran Theatre (the “Curran”), one
of three San Francisco theaters that has been operated by SHN.2 SHN and its predecessor
have leased the Curran since the inception of the original Shorenstein-Nederlander
partnership in the mid-1970s. As discussed infra, Mrs. Hays eventually purchased the
Curran through a new corporate entity, CSH Curran, LLC (“CSH Curran”).
2
The other two theaters are the Orpheum and the Golden Gate.
3
In terms of party alignment, CSH originally filed this suit against Nederlander
seeking a declaratory judgment. Nederlander counterclaimed against CSH and asserted
third-party claims against CSH Curran, Mrs. Hays, and Dr. Hays. The pending motion to
dismiss is directed against the Counterclaim and Third Party Complaint. For brevity and
convenience, in this Memorandum Opinion, I will refer to CSH, CSH Curran, Mrs. Hays,
and Dr. Hays collectively as “Defendants.”
B. The Facts
1. The Nederlanders and the Shorensteins
The Counterclaim and Third Party Complaint characterizes the relationship
between the now-adversary families as one of near-total trust. Each family had an
expertise, and each side “essentially exercised free rein over their respective
responsibilities.”3 In fact, the original “partnership was operated under a single-page
letter agreement for many years” before it was converted to an LLC.4 For most of its
existence, SHN apparently took a fairly lax approach toward business formalities and
operated largely under a sort of gentleman‟s agreement with deals formalized by
handshake rather than contract. In June 2010, however, Mr. Shorenstein passed away.
Mrs. Hays then assumed management and control of CSH, including its interests in SHN.
Around this time, she appointed herself and her husband as directors of SHN.
3
C & TP Compl. ¶ 27.
4
Id. ¶ 22.
4
The Counterclaim and Third Party Complaint characterizes Mrs. Hays as lacking
her father‟s business acumen. Indeed, that pleading alleges that Mrs. Hays viewed her
participation in SHN more as “an artistic hobby and as a means to promote her social
status” than as a business endeavor.5 The Counterclaim and Third Party Complaint
describes Mr. Nederlander as having naively trusted his former business associate‟s
daughter, only to have the rug pulled out from under him. The accuracy of these
characterizations aside, the Counterclaim and Third Party Complaint makes clear that the
relationship Mrs. Hays now has with Mr. Nederlander is far different from the essentially
seamless cooperation her father had achieved with the Nederlander family.
2. The Curran controversy
The events giving rise to this lawsuit began in 2010. Sometime in late 2009 or
early 2010, the owner of the Curran sought to sell that theater. Mr. Shorenstein entered
into negotiations to purchase it, but that effort bore no fruit. Mr. Nederlander assumed
the negotiating lead in January 2010 and successfully reduced the asking price from $30
million to under $20 million. Mr. Nederlander, however, still considered the price too
high. At the same time, he did not want a competing interest to acquire and operate the
theater. In that regard, Mr. Nederlander believed that “outside investors were readily
available to purchase the Curran for the revised sale price and lease the theatre back to
SHN for a percentage of the revenue.”6
5
Id. ¶ 31.
6
Id. ¶ 39.
5
Mr. Nederlander spoke with Mrs. Hays about the status of the Curran by telephone
during the third quarter of 2010. One of these telephone calls forms the crux of several of
Nederlander‟s claims.7 Nederlander alleges that Mrs. Hays rejected the idea of having
third-party investors acquire the Curran and wanted to buy the theater herself. During the
key call, Mrs. Hays allegedly asked Mr. Nederlander‟s permission to purchase the
Curran. He consented on the alleged condition that the “Hays Group”8 “agreed to
continue SHN‟s lease of the Curran for the life of the Company.” 9 Mrs. Hays allegedly
accepted this condition, and Mr. Nederlander consented to her purchasing the Curran
predicated on the lease-renewal promise.
According to the Counterclaim and Third Party Complaint, Mr. Nederlander never
would have given permission to Mrs. Hays to purchase the Curran absent this agreement.
With respect to the alleged promise to renew the lease, Nederlander alleges that
“Nederlander and the Hays Group understood that the essential terms and framework for
the lease continuation would be based on the terms of the existing lease, with price terms
7
The Counterclaim and Third Party Complaint does not indicate whether there was
only one relevant telephone call between Mr. Nederlander and Mrs. Hays or more
than one. Regardless, Nederlander‟s claims focus on one specific call in the third
quarter of 2010.
8
The Counterclaim and Third Party Complaint at times refers vaguely to the “Hays
Group,” but never defines that term. It appears to refer to the Hayses and their
controlled entities, but at times also may include business associates of the Hayses.
On other occasions, the term appears to refer to one of the Hayses without
specifying which one.
9
C & TP Compl. ¶ 42.
6
to be finalized as the years progressed, reflecting normal, gradual increases through the
years.”10 The Counterclaim and Third Party Complaint did not identify or include as
attachments any contemporaneous documentary evidence supporting the existence of
Mrs. Hays‟s alleged promise to renew the lease.
Mrs. Hays ultimately did acquire the Curran through a new business entity, CSH
Curran. One of her trusts, the CSH Doule Trust, created CSH-Doule, LLC, which is the
sole member of CSH Curran. Mrs. Hays and Tom Hart, a business associate of hers, co-
manage CSH Curran. CSH Curran executed the agreement to purchase the Curran on
November 30, 2010, for $16.6 million. On December 17, 2010, the Curran‟s former
owner informed SHN that CSH Curran was the new owner and, therefore, would be
SHN‟s new landlord. This arrangement produced no problems initially. CSH Curran and
SHN continued to operate under the existing lease of the Curran, which had a term
ending December 31, 2014. The parties, however, never were able to reduce the terms of
a renewal of that lease to a final written contract.
According to Nederlander, the subject of the lease renewal was discussed at every
SHN Board meeting after Mrs. Hays purchased the Curran at the end of 2010. The Board
appears to have kept no minutes of those meetings.11 The Hayses, however, allegedly
10
Id. ¶ 45.
11
Arg. Tr. 75 (counsel for SHN). No Board minutes were referenced in or attached
to the Counterclaim and Third Party Complaint.
7
“always put off renewal and told Nederlander not to worry about the matter.” 12 At a
January 2012 Board meeting, the Hayses stated that they would propose terms for the
new lease soon, but failed to do so until August 2012.13 On August 29, 2012, an
unidentified member of the Hays Group delivered to Nederlander an initial high-rent
offer. The Hays Group allegedly had prepared a high-rent offer, as well as a secondary
low-rent proposal to be deployed after Nederlander‟s anticipated counteroffer.14
Nederlander counteroffered on October 19, 2012, but thereafter the Hays Group did not
engage in any meaningful further negotiations.
During this same period, Mrs. Hays allegedly mismanaged SHN‟s operations.
More specifically, the Counterclaim and Third Party Complaint alleges that, from
September 2012 onward, Mrs. Hays blocked lucrative business opportunities, such as
sponsorships from Lexus, because they purportedly would detract from SHN‟s
reputation. According to Nederlander, Mrs. Hays in fact was more concerned with her
own reputation. At a January 2013 Board meeting, Mrs. Hays requested the opportunity
to act as sole president of SHN, as opposed to continuing the usual co-presidency
arrangement with one co-president from each of the Nederlander and Shorenstein
families. Nederlander agreed to a 60-day trial run. The Counterclaim and Third Party
12
C & TP Compl. ¶ 55.
13
Id. ¶¶ 53-54.
14
The Counterclaim and Third Party Complaint portrays these negotiations as
something of a formality, with all parties anticipating a similar final price, but
nevertheless proceeding in an offer-counteroffer-compromise fashion.
8
Complaint described this period as an “unmitigated disaster” for the Company, during
which SHN experienced “increased, frivolous spending with no corresponding benefit to
the Company.”15 Nederlander opposed an extension of Mrs. Hays‟s sole presidency.
3. Mrs. Hays’s “secret motives” revealed
On December 20, 2013—over a year after its initial lease counteroffer—
Nederlander again sent the Hays Group its lease terms. The Hays Group did not respond.
Instead, on January 28, 2014, the SHN Board met to discuss the lease renewal. At that
meeting, Dr. Hays requested an executive session of the Board in which he asserted that
CSH no longer could continue under the LLC Agreement and that “unless Nederlander
agreed to give control of SHN to Mrs. Hays, the Curran lease renewal was off the
table.”16 Despite having been unable for two years to finalize the new lease or cause Mrs.
Hays to engage in serious discussion of the disputed lease terms, Nederlander alleges that
it was “blindsided” by this “change of position and demands.”17 The Counterclaim and
Third Party Complaint asserts that the January 28, 2014 meeting was the first time
Nederlander “learned that Mrs. Hays had lied about her intention to continue leasing the
Curran to SHN or, alternatively, that she had changed her mind and no longer intended to
abide by the purchase-lease agreement” with Nederlander.18
15
Id. ¶ 34.
16
Id. ¶ 63.
17
Id. ¶ 64.
18
Id. ¶ 65.
9
According to Nederlander, the Hays Group‟s refusal to renew the lease did not
result from an inability to finalize terms, because “all that needed to be finalized . . . were
the rent schedules.”19 Instead, Nederlander alleges that the refusal revealed Mrs. Hays‟s
desire to seize control of SHN. Nederlander rejected her demands and insisted on
compliance with the oral agreement to renew the lease. On February 13, 2014, Harris
spoke with Hart, who confirmed that the Hays Group would not renew the Curran lease.
Hart also represented that the Hays Group had no current plans for the Curran.
Nederlander sent a letter to the Hays Group on February 18, 2014, in which it
“memorialized the history of the Curran purchase,” detailed the harm to SHN, and
accused the Hayses of breaching the LLC Agreement and their fiduciary duties.20 In
response, on February 21, 2014, CSH filed a Verified Complaint in this Court seeking a
declaratory judgment that CSH would not be in violation of the LLC Agreement if the
lease was not renewed (the “CSH Complaint”). Nederlander filed its initial Answer,
Verified Counterclaims and Verified Third-Party Complaint on April 28, 2014.
4. Competing for shows in San Francisco
Nederlander always had expected to conclude a new lease and had booked shows
at the Curran beyond the December 31, 2014 expiration date of the then-existing lease.
Once Nederlander realized that the Curran would not be an SHN venue after December
31, SHN needed to relocate those shows that it already had booked at the Curran to its
19
Id. ¶ 67.
20
Id. ¶ 71.
10
other venues. With little leverage, SHN “was forced to accept less favorable terms in the
revised agreement” for those shows.21 Overall, SHN expects to lose more than a million
dollars in profits as a result of the loss of the Curran lease. In addition, the Hayses
allegedly have blocked lucrative theater sponsorships for SHN.
The Curran, however, was not destined to sit idle. On June 2, 2014, CSH revoked
Mrs. Hays‟s appointment to the SHN Board. Notably, however, Dr. Hays remained on
the Board. Days later, Mrs. Hays allegedly “began soliciting shows for the Curran and
attempting to poach shows from SHN in direct competition with SHN.”22 According to
the Counterclaim and Third Party Complaint, Mrs. Hays met with the producer of A
Gentleman’s Guide to Love & Murder on or about June 6. That show had never played at
an SHN venue or been rejected by SHN. Additionally, at some later date, Mrs. Hays also
met with Charlotte Wilcox, the producer of Beautiful, in an effort to attract that show to
the Curran as well. The current post-Broadway production of Beautiful has neither run at
an SHN venue nor been rejected by SHN. Moreover, the Counterclaim and Third Party
Complaint alleges that during this same time period SHN was in negotiations with the
same producers as Mrs. Hays to show their plays. Dr. Hays, as a Board member,
received regular updates regarding SHN‟s operations, including show bookings.
Similarly, Mrs. Hays allegedly had knowledge as to which shows SHN was attempting to
book because of her service on the Board before June 2, 2014.
21
Id. ¶ 84.
22
Id. ¶ 90.
11
C. Procedural History
On July 29, 2014, Nederlander amended and filed the operative Counterclaim and
Third Party Complaint. Defendants moved to dismiss on August 12 and, after full
briefing, I heard argument on that motion, as well as co-pending motions to compel and
to strike, on December 3, 2014 (the “Argument”). At the Argument, I granted the motion
to strike. I also granted the motion to compel by oral decision on December 5, but
reserved judgment on the motion to dismiss.
In its Counterclaim and Third Party Complaint, Nederlander alleges six counts
against the various counterclaim and third-party defendants as follows:
 Count I for breach of fiduciary duty against Dr. Hays and
Mrs. Hays;
 Count II for breach of LLC Agreement against CSH;
 Count III for fraudulent inducement against CSH and Mrs.
Hays;
 Count IV for breach of contract against CSH and Mrs.
Hays;
 Count V for promissory estoppel against CSH, CSH
Curran, and the Hayses; and
 Count VI for declaratory judgment with respect to the
LLC Agreement.
Defendants assert that these claims23 suffer from numerous legal shortcomings and that
they all should be dismissed. Among their most powerful arguments are those averring
23
Nederlander‟s declaratory judgment count, Count VI of the Counterclaim and
Third Party Complaint, either is not at issue here, because it essentially is
12
that the statute of frauds bars any purported oral agreement and that any contract between
the parties lacks essential terms and is insufficiently definite to be enforced. Defendants
also contend that there was no reasonable reliance on Mrs. Hays‟s alleged promise, that
Nederlander‟s interpretation of the LLC Agreement is flawed, and that laches bars many
of the claims in the Counterclaim and Third Party Complaint.
II. STANDARD OF REVIEW
Pursuant to 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.‟”24 That is, when considering such a motion, a court must “accept all
well-pleaded factual allegations in the Complaint as true . . . 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.”25
This reasonable “conceivability” standard asks whether there is a “possibility” of
recovery.26 The court, however, need not “accept conclusory allegations unsupported by
duplicative of CSH‟s declaratory judgment count, or else is coextensive with
Count II. The parties did not address Count VI in their briefing. Accordingly, I
do not discuss Count VI further, and will treat it the same as Count II.
24
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 537
(Del. 2011) (footnote omitted).
25
Id. at 536 (citing Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002)).
26
Id. at 537 & n.13.
13
specific facts or . . . draw unreasonable inferences in favor of the non-moving party.”27
Moreover, failure to plead an element of a claim precludes entitlement to relief and,
therefore, is grounds to dismiss that claim.28
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.”29
III. ANALYSIS
A. Laches
Defendants assert that, even if Nederlander‟s claims had any merit, many of them
are barred by laches. Defendants contend, and Nederlander apparently does not dispute,
that each Count of the Counterclaim and Third Party Complaint would be governed by a
three-year statute of limitations.30 The Court of Chancery, of course, is not bound by
statutes of limitations and instead follows the equitable doctrine of laches. 31 Generally,
however, a “filing after the expiration of the analogous limitations period is
27
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)).
28
Crescent/Mach I P’rs, L.P. v. Turner, 846 A.2d 963, 972 (Del. Ch. 2000) (Steele,
V.C., by designation).
29
Allen v. Encore Energy P’rs, 72 A.3d 93, 96 n.2 (Del. 2013).
30
10 Del. C. § 8106.
31
TrustCo Bank v. Mathews, 2015 WL 295373, at *5 (Del. Ch. Jan. 22, 2015)
(discussing the difference between laches and statutes of limitations).
14
presumptively an unreasonable delay for purposes of laches.”32 In this case, Nederlander
filed its initial answer, counterclaims, and third-party complaint on April 28, 2014.
Presumptively, therefore, any of its causes of action that accrued before April 28, 2011,
would be barred by laches.
At the motion to dismiss stage, however, it is not always possible to determine
whether a claim is barred by laches. “The timeliness of claims may be determined on a
motion to dismiss if the facts pled in the complaint, and the documents incorporated
within the complaint, demonstrate that the claims are untimely.”33 Here, it is clear, for
example, that the allegedly improper competitive behavior, i.e., Mrs. Hays‟s attempts to
steal shows from SHN, took place after April 28, 2011. Accordingly, those claims, and
any others based on conduct post-dating April 28, 2011, are not barred by laches.
The larger question is whether the claims relating to the Curran lease renewal,
including those based on the alleged oral agreement made in the third quarter of 2010, are
time-barred. Based on the facts alleged, there are two potential agreements that
Nederlander could be trying to enforce: (1) that Mrs. Hays could acquire the Curran with
Nederlander‟s consent and had agreed to lease it to SHN for the duration of SHN‟s
existence for terms essentially in conformance with the existing lease; or (2) that Mrs.
Hays, with Nederlander‟s consent, could acquire the Curran and had agreed to negotiate
32
Levey v. Brownstone Asset Mgmt., LP, 76 A.3d 764, 769 (Del. 2013).
33
CertainTeed Corp. v. Celotex Corp., 2005 WL 217032, at *6 (Del. Ch. Jan. 24,
2005) (footnotes omitted).
15
in good faith with Nederlander the renewal of a lease for the Curran that would extend for
the duration of SHN. The latter formulation—which is not the version Nederlander
emphasized in its briefing—probably would be an unenforceable agreement to agree or,
alternatively, may have been satisfied by the parties‟ unsuccessful lease negotiations.34
Accordingly, I understand Nederlander to be alleging the first version of the agreement
and my analysis throughout this Memorandum Opinion is based on that conclusion.
Nederlander and Mrs. Hays allegedly entered into this oral agreement to renew the
lease—construed as just stated—sometime in the third quarter of 2010. No progress was
made on the negotiations until August 2012, when Mrs. Hays made her lease proposal.
Up until that time, Nederlander alleges that it raised the issue, but the Hayses continually
put off the subject of the lease renewal until a later date. Nederlander made a
counteroffer in September 2012 that included a lower rent term, but did not hear back
from the Hayses for over a year. During this time, Nederlander allegedly brought up the
issue of the lease renewal at each board meeting, but the Hayses would defer
consideration of it until later. This pattern suggests that Nederlander‟s counteroffer was
not so far from the Hayses‟ target number as to warrant a flat-out rejection, and it
reasonably can be inferred from these facts that the Hayses were giving Nederlander‟s
offer serious consideration. Nederlander again sent the Hayses its negotiating position in
34
See PharmAthene, Inc. v. SIGA Techs., Inc., 2008 WL 151855, at *13 (Del. Ch.
Jan. 16, 2008).
16
December 2013. Only thereafter, at a January 2014 board meeting, did Mrs. Hays reveal
that the lease would not be renewed.
Defendants argue that because the purported oral agreement allegedly occurred in
2010, the claims based on that agreement are more than three years old and therefore are
barred by laches. But, Nederlander‟s claim is for breach of contract. The facts alleged,
construed in the light most favorable to Nederlander, do not provide any basis for
inferring that Nederlander was on inquiry notice that Mrs. Hays would not renew the
lease until the fall of 2012 at the earliest. Thus, the alleged breach of the agreement—the
occurrence of which would trigger the running of the laches period—happened less than
three years before Nederlander filed its claims, making the claims timely. In any event,
based on the facts alleged, it is reasonably conceivable that Nederlander could prove that
tolling would be appropriate in this case. Generally, there are at least three theories of
tolling that can be invoked to avoid a laches defense: “(1) inherently unknowable
injuries; (2) fraudulent concealment; and (3) equitable tolling. Each of these doctrines
permits tolling of the limitations period where the facts underlying a claim were so
hidden that a reasonable plaintiff could not timely discover them.”35 Nederlander argues
that both the inherently unknowable injuries and the fraudulent concealment theories
apply here.
35
In re Dean Witter P’ship Litig., 1998 WL 442456, at *5 (Del. Ch. July 17, 1998),
aff’d, 725 A.2d 441 (Del. 1999).
17
I conclude that it is reasonably conceivable that Nederlander could show that the
statute of limitations should be tolled in this case. According to the Counterclaim and
Third Party Complaint, Nederlander first discovered on January 28, 2014, that Mrs. Hays
either had decided to renege on her promise to renew the Curran lease or else had not
intended to honor it in the first place. The Counterclaim and Third Party Complaint
alleges that, until that point, the Hays Group had strung Nederlander along on the
negotiations, continually putting the subject off for later discussion, an allegation that
conceivably could support tolling on the basis of fraudulent concealment.
It is possible that Nederlander may have had inquiry notice earlier, such as in
August 2012 when Mrs. Hays proposed a lease with a rent schedule significantly higher
than the rent schedule of the existing lease. The Counterclaim and Third Party Complaint
alleges, however, that Nederlander anticipated an initial high offer, but expected that it
would be reduced following its own counteroffer. Nederlander made that counteroffer in
September 2012.36 The Hayses did not respond to Nederlander‟s counteroffer until
January 2014, only a few months before the filing of Nederlander‟s initial counterclaim
and third-party complaint. As the record develops, Defendants may show that
36
The Counterclaim and Third Party Complaint does not specifically allege the
terms of Nederlander‟s offer or the Hayses counteroffer. C & TP Compl. ¶ 54.
Documents attached to Defendants‟ motion to dismiss, however, indicate that
Nederlander proposed a twenty-year lease term starting at $375,000 and increasing
to $500,000. Defs.‟ Mot. to Dismiss, Ex. D. The Hayses initially had proposed a
ten-year lease term with rent beginning at $500,000 and rising to $800,000. Defs.‟
Mot. to Dismiss, Ex. C. Given the centrality of the lease renewal to Nederlander‟s
claims, these documents are integral to the Counterclaim and Third Party
Complaint, and therefore are properly before the Court on the pending motion.
18
Nederlander was on at least inquiry notice well before January 2014. At this stage,
however, the record is insufficiently developed to allow a determination that, as a matter
of law, the claims relating to the Curran conclusively are barred by laches.
Nederlander may have acted foolishly or displayed poor judgment in not pressing
more promptly to secure a lease renewal for one of SHN‟s main venues. But, based on
the facts alleged, it is reasonably conceivable that Nederlander could show that Mrs.
Hays‟s or CSH‟s intentions in this regard were either inherently unknowable or
fraudulently concealed. Thus, I decline to dismiss Nederlander‟s claims based on the
alleged oral agreement for laches.
B. Breach of the LLC Agreement
Nederlander alleges that CSH breached the LLC Agreement, but the allegations
supporting this Count focus largely on the actions of Dr. Hays and Mrs. Hays, who were
not parties to that agreement. Among other alleged breaches, Nederlander asserts that the
Hayses were competing directly with SHN, misappropriated SHN‟s confidential
information, and used the Curran as a means of attempting to seize control of the
Company. These same allegations underlie the breach of fiduciary duty claims discussed
infra.37 Defendants counter that this behavior is not barred by the LLC Agreement.
37
Indeed, the parties‟ briefing sometimes conflated the analysis of the breach of the
LLC Agreement Count with the breach of fiduciary duty Count, making it difficult
to disentangle these distinct theories of alleged wrongdoing. This Section focuses
primarily on interpreting the LLC Agreement. The specific behavior underlying
the alleged breaches is addressed in the next Section.
19
1. Contract interpretation at the motion to dismiss stage
The interpretation of a contract is a question of law.38 “[D]efendants are not
entitled 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.‟”39 If there is more than one reasonable construction of contractual language, then
the contract is ambiguous.40 But, contractual language “is not ambiguous simply because
the parties disagree on its meaning.”41 Instead, the Court will apply standard principles
and canons of contract interpretation in construing the contract.
2. The LLC Agreement’s provisions
The pivotal provisions of the LLC Agreement, for present purposes, are found in
Article VII, entitled “Relationship Among Members.”42 As discussed below, these
provisions arguably are ambiguous, mostly because of imprecision in certain defined
38
Seidensticker v. Gasparilla Inn, Inc., 2007 WL 4054473, at *2 (Del. Ch. Nov. 8,
2007) (citing HIFN, Inc. v. Intel Corp., 2007 WL 1309376, at *9 (Del. Ch. May 2,
2007)); see also AHS N.M. Hldgs., Inc. v. Healthsource, Inc., 2007 WL 431051, at
*3 (Del. Ch. Feb. 2, 2007) (“Under general principles of contract law,
interpretation of contractual language is purely a question of law.”).
39
Kahn v. Portnoy, 2008 WL 5197164, at *3 (Del. Ch. Dec. 11, 2008) (quoting
VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 615 (Del. 2003)).
40
VLIW Tech., 840 A.2d at 615 (“Ambiguity exists „when the provisions in
controversy are reasonably or fairly susceptible of different interpretations.‟”
(quoting Vanderbilt Income & Growth Assocs. v. Arvida/JMB Managers, Inc., 691
A.2d 609, 613 (Del. 1996))).
41
E.I. du Pont de Nemours & Co. v. Allstate Ins. Co., 693 A.2d 1059, 1061 (Del.
1997).
42
CSH Compl., Ex. A [hereinafter “LLC Agreement”].
20
terms, and dismissal of this Count of the Counterclaim and Third Party Complaint
therefore is not appropriate.
Sections 7.02 and 7.03 impose limits on each Member‟s behavior. Section 7.02(a)
states:
The Shorenstein Entity and the Nederlander Entity hereby
agree to devote their efforts to maximize the economic
success of the Company and to avoid any conflicts of
interests between the Members. All actions of the Members
and their representatives with regard to the Company and
theater matters will be carried out in good faith and in a
prompt and expeditious manner.43
Section 7.02(b) reads:
Until the termination of the Company pursuant to this
Agreement, neither the Shorenstein Entity nor the
Nederlander Entity will stage any Production it controls (as
defined in Section 7.03) within 100 miles of San Francisco
unless (i) such Production has first played in one of the
Theatres; or (ii) such Production has been rejected for
booking at one of the Theatres by the other Member‟s
representative on the Board of Directors; or (iii) the Company
shares in the profits and/or losses of any booking pursuant to
an agreement mutually acceptable to the Members.44
Additionally, Section 7.03 states:
If either the Shorenstein Entity or the Nederlander Entity or
any Affiliate thereof has control over a Production, that
Production and the relevant Theatre will be accorded “most
favored nation” treatment by the other in theater licensing
arrangements. For purposes of this Section 7.03, “control
over production” means the Person having the ability to
43
Id. § 7.02(a).
44
Id. § 7.02(b).
21
determine where the Production plays and the terms and
conditions of said engagement.45
Section 7.06, subject to certain limitations, allows the Members to engage in
certain competitive activities. Section 7.06 reads, in pertinent part:
Subject to the other provisions of this ARTICLE VII,
including Section 7.02, any Member, any Affiliate of any
Member or any officer or director of the Company shall be
entitled to and may have business interests and engage in
business activities in addition to those relating to the
Company, and may engage in ownership, operation and
management of business and activities, for its own account
and for the account of others, and may . . . own interests in
the same properties as those in which the Company or the
other Members own an interest, without having or incurring
any obligation to offer any interest in such properties,
businesses or activities to the Company or any other Member,
and no other provision of this Agreement shall be deemed to
prohibit any such Person from conducting such other
businesses and activities.46
These provisions rely on various defined terms. The Members are the Shorenstein
Entity and the Nederlander Entity. 47 The Shorenstein Entity is defined as CSH Theatres,
LLC “together with any Permitted Transferees.”48 The Nederlander Entity is defined as
Nederlander of San Francisco Associates “together with any Permitted Transferees.”49
The following related definitions all appear in Section 1.01 of the LLC Agreement. A
45
Id. § 7.03.
46
Id. § 7.06.
47
Id. § 1.01.
48
Id. Preamble.
49
Id.
22
Permitted Transferee is “(a) an Affiliate of any Member or (b) in the case of a
Nederlander Entity, a Nederlander Controlled Entity or any member of the Nederlander
family.” Affiliate means a Person—“an individual or a corporation, all types of
partnership, trust, unincorporated organization, association, limited liability company or
other entity”—that “directly or indirectly through one or more intermediaries, Controls, is
Controlled by or is under common Control with the subject Person.” Control “means the
possession, direct or indirect, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, though contract, or otherwise.” Finally, Production “means plays, musicals, or
other events that typically play at any of the Theatres,” with the Theatres being defined as
“the Curran Theater, the Golden Gate Theater, the Orpheum Theater and any other
theater then operated by the Company.”
3. The LLC Agreement is ambiguous
The definitions just quoted reveal the problem: the family entities (the Members)
are defined to include Permitted Transferees, which itself is defined to include Affiliates.
Thus, according to Nederlander, any time the family entities are referred to in a provision
of the LLC Agreement, Affiliates definitionally are included. Mrs. Hays, because of her
alleged indirect control over CSH, is an Affiliate of CSH. Thus, Nederlander‟s position
is that Mrs. Hays is included in the definitions of Members and the Shorenstein Entity
and therefore is subject to the LLC Agreement‟s restrictions.
For Count II, the parties‟ briefing focused on the allegedly improper competition
by Mrs. Hays in booking shows. In seeking dismissal of that Count, Defendants
23
emphasize that there are no allegations in the Counterclaim and Third Party Complaint
that CSH, the actual party to the LLC Agreement, did anything improper. In this regard,
Defendants deny that the Shorenstein Entity includes Affiliates. Indeed, one subsection
of their brief is entitled: “„Shorenstein Entity‟ Means the Member [i.e., CSH], and Not
Any Affiliates.”50 For support, Defendants contend that the reference in the definition of
the Shorenstein Entity to the term Permitted Transferee contemplates some form of future
transfer from CSH to, for example, a successor entity within the defined set of Permitted
Transferees. That successor entity would assume the Shorenstein Entity‟s interest in
SHN. In other words, at any given point in time, the “Member” of SHN on the CSH side
would be either the initial Shorenstein Entity or a Permitted Transferee, but not both.
Defendants also point to the differences in the language in Sections 7.02(b) and 7.03.
The restriction imposed in Section 7.02(b) is limited to the Nederlander Entity and the
Shorenstein Entity, but in Section 7.03, the language is more expansive and includes “any
Affiliate thereof.” According to Defendants, this shows that the drafters of the LLC
Agreement knew how to impose obligations on specific entities and their affiliates when
they so chose, and their use of different language in Section 7.02(b) indicates that they
intended to define the Shorenstein Entity more narrowly.
It is a standard canon of construction that interpretations that render certain
contract language mere surplusage are to be avoided. “In upholding the intentions of the
parties, a court must construe the agreement as a whole, giving effect to all provisions
50
Defs.‟ Reply Br. 19.
24
therein, in order not to render any part of the contract mere surplusage, and, if possible,
reconcile all the provisions of the instrument.”51 Inartfully drafted documents, however,
may make it impossible to avoid rendering a specified term or terms superfluous and at
the motion to dismiss stage “any ambiguity must be resolved in favor of the nonmoving
party.”52 The LLC Agreement, read literally, defines the Shorenstein Entity to include
Affiliates. Thus, even if Defendants‟ interpretation is plausible, I cannot say that it is the
only reasonable one.
Resolving all ambiguities in favor of Nederlander as the nonmoving party, I must
recognize that the LLC Agreement could be construed to impose restrictions on Affiliates
of CSH, including Mrs. Hays. It is reasonably conceivable, therefore, that, when CSH‟s
Affiliates‟ behavior is included in the analysis,53 Nederlander could prove a breach of the
LLC Agreement, such as a violation of the duty imposed in Section 7.02(a) requiring the
Shorenstein Entity to work toward maximizing SHN‟s economic success. Thus, I decline
to dismiss Count II.
C. Breach of Fiduciary Duties
The breach of fiduciary duty claims in Count I are asserted against the Hayses and
focus on: (1) the competing shows; (2) the withholding of the Curran lease, (3) alleged
51
Commercial Bank v. Global Payments Direct, Inc., 2014 WL 3567610, at *8 (Del.
Ch. July 21, 2014) (internal quotations and footnotes omitted) (collecting cases).
52
Kahn v. Portnoy, 2008 WL 5197164, at *3.
53
Many of the relevant allegations of misconduct are discussed in the next Section.
25
misuse of confidential information; and (4) waste of assets. I address these claims in
turn.
1. What fiduciary duties does the LLC Agreement impose?
The LLC Agreement was executed on November 6, 2000. The law of fiduciary
duties in the alternative entity context, however, has been clarified substantially in the
last fifteen years.54 In the absence of language in an LLC agreement to the contrary, the
managers of an LLC owe traditional fiduciary duties of care and loyalty.55 The disputed
issue in this case is: taking into account the terms of the LLC Agreement and the
applicable default rules, what, if any, fiduciary duties did CSH or the Hayses owe to SHN
or Nederlander? Defendants argue that the fiduciary duties owed by the Hayses are
limited to those enunciated in the LLC Agreement. Relying on Feeley,56 Nederlander
argues in response that the LLC Agreement did not eliminate the duties of care and
loyalty.
54
Even in the last few years, the law of fiduciary duties in the alternative entity
context has been evolving. See, e.g., Auriga Capital Corp. v. Gatz Props., LLC,
40 A.3d 839, 849-56 (Del. Ch.) (stating that default fiduciary duties exist under
the Delaware LLC Act), aff’d, 59 A.3d 1206, 1218 (Del. 2012) (holding that the
comments in the court below about default fiduciary duties were “dictum without
precedential value”). Recently, the Delaware Legislature resolved that issue by
passing an amendment that provides for default fiduciary duties. 6 Del. C. §18-
1104 (“In any case not provided for in this chapter, the rules of law and equity,
including the rules of law and equity relating to fiduciary duties and the law
merchant, shall govern.”).
55
Feeley v. NHAOCG, LLC, 62 A.3d 649, 660 (Del. Ch. 2012).
56
See id. at 660-64 (concluding that the LLC Act, 6 Del. C. § 18-1101, imposes
default fiduciary duties and any attempt to limit or eliminate those duties must be
clear and unambiguous).
26
Limited liability companies are creatures of contract, and the Delaware Limited
Liability Company Act57 states that “[i]t is the policy of this chapter to give the maximum
effect to the principle of freedom of contract.”58 The drafters of an LLC agreement can
modify the traditional duties of care and loyalty or displace them altogether, but they
cannot eliminate the implied covenant of good faith and fair dealing.59 Thus, if the LLC
agreement does not modify or eliminate the traditional fiduciary duties, then those
fiduciary duties still apply.60 The starting point for determining what fiduciary duties
apply is the governing contract between the parties.61
The relevant provisions of the LLC Agreement were quoted in Section III.B.2
supra. Section 7.02(a) imposes a contractual duty on the Members to “maximize the
economic success of the Company and to avoid any conflicts of interests between the
57
6 Del. C. §§ 18-101 to 18-1109.
58
Id. § 18-1101(b).
59
Id. § 18-1101(c).
60
6 Del. C. § 18-1104; 2009 Caiola Family Trust v. PWA, LLC, 2014 WL 7232276,
at *8 (Del. Ch. Dec. 18, 2014) (“As a default rule, however, managing members of
LLCs owe traditional fiduciary duties of loyalty and care.”).
61
Cf. DV Realty Advisors LLC v. Policemen’s Annuity & Benefit Fund of Chi., 75
A.3d 101, 106-07 (Del. 2013) (quoting the “maximum freedom of contract”
language in the Delaware Revised Uniform Limited Partnership Act (“DRULPA”)
and stating that the “analysis here must focus on, and examine, the precise
language of the LPa that is at issue”); Allen v. Encore Energy P’rs, L.P., 72 A.3d
93, 100 (Del. 2013) (“[W]e begin our analysis by examining what duties the
Defendants owe to Encore‟s limited partners under this LPA‟s precise language.”);
see also Gerber v. Enter. Prods. Hldgs., LLC, 67 A.3d 400, 418 (Del. 2013);
Norton v. K-Sea Transp. P’rs L.P., 67 A.3d 354, 360 (Del. 2013).
27
Members,” and it also requires that “actions of the Members and their representatives
with regard to the Company and theater matters will be carried out in good faith and in a
prompt and expeditious manner.”62 Section 7.02(b) limits when Members may put on
competing shows within a 100-mile radius of San Francisco. Finally, Section 7.03
defines control over production as: “the Person having the ability to determine where the
Production plays and the terms and conditions of said engagement.”63 By contrast,
Section 7.06 allows the Members, any Affiliate, or any director or officer of SHN to
engage in competitive activities, subject to the preceding limitations. The question here,
then, is whether the Counterclaim and Third Party Complaint alleges facts sufficient to
allow a finding that it is reasonably conceivable that the Hayses violated their contractual
fiduciary duties as they are articulated under the LLC Agreement.64
2. Nederlander’s “consent”
Defendants first contend that any alleged fiduciary duty breaches arising from the
operation of the Curran are barred by Mr. Nederlander having consented to Mrs. Hays‟s
purchase of the Curran. I reject this ground for Defendants‟ motion to dismiss because it
requires resolution of disputed facts. The Counterclaim and Third Party Complaint
62
LLC Agreement § 7.02(a).
63
Id. § 7.03.
64
In the previous Section, I concluded that the LLC Agreement was ambiguous on
the issue of whether the term Members included Affiliates, an ambiguity resolved
at this motion to dismiss stage in favor of Nederlander. Accordingly, for purposes
of analyzing the breach of fiduciary duty Count, the Hayses are subject to the
same contractual duties as the Members.
28
alleges that Mr. Nederlander consented to the purchase of the Curran only on the
condition that it would be leased back to SHN. Nederlander ultimately may fail to prove
that allegation. At this procedural stage, however, I am required to take all non-
conclusory allegations as true and draw reasonable inferences in favor of Nederlander. In
accordance with that standard, there is no basis to conclude, as a matter of law, that Mr.
Nederlander consented unconditionally to the activity about which Nederlander
complains or that the condition he allegedly insisted upon was satisfied.
3. Section 7.07
Next, Defendants argue that Section 7.07 bars liability for any of the conduct
alleged by Nederlander. Section 7.07 of the LLC Agreement states, in relevant part:
No Member, officer, employee or director of the Company
. . . shall be liable, in damages or otherwise, to the Company
or any Member for any act or omission performed or omitted
to be performed by it pursuant to the authority granted by this
Agreement, except if such act or omission results from such
person‟s own bad faith or willful misconduct (or, in the case
of a Member, its gross negligence).
Relying upon Section 7.07, Defendants argue that Nederlander cannot plead a viable
claim unless it pleads scienter. I disagree.
Section 7.07 appears to provide exculpation for negligent or grossly negligent
actions, depending on the status of the actor. The Counterclaim and Third Party
Complaint, however, alleges intentional violations of the duties imposed by Section 7.02,
among other provisions. Violating the LLC Agreement by deliberately competing with
SHN for shows, for example, is not an “act or omission performed . . . pursuant to” the
LLC Agreement and therefore would not be conduct protected by Section 7.07.
29
Additionally, because of the ambiguity of the term Member and whether it includes
Affiliates, Section 7.07 arguably requires only that the Hayses have acted with gross
negligence for them to be liable. The allegations in the Counterclaim and Third Party
Complaint portray a deliberate course of conduct by the Hayses—and Mrs. Hays in
particular—to go into direct competition with SHN by hosting shows at the Curran.
Based on these allegations, Nederlander conceivably could prove at least gross
negligence. At this procedural stage, therefore, I cannot conclude that Section 7.07 bars
Nederlander‟s fiduciary duty claims.
4. The competing shows
With respect to the alleged breaches of fiduciary duty pertaining to competing
shows, Defendants argue that Mrs. Hays does not have “control over production” of those
shows, as defined in Section 7.03. According to Defendants, the LLC Agreement
distinguishes in this regard between producers and theater owners. Under this reading,
only a producer has “control over production,” and there are no allegations that Mrs.
Hays is a producer. Nederlander counters that “control over production” means that both
producers and theater operators have control over production. Assuming Defendants‟
contrary interpretation is a reasonable one, I find that it is not the only reasonable
interpretation.
“Control over production” means “the Person having the ability to determine
where the Production plays and the terms and conditions of said engagement.” 65 It
65
LLC Agreement § 7.03.
30
appears that neither a producer nor a theater owner unilaterally could set the terms of an
engagement and pick the venue. Even with the most overbearing producer, the theater
owner still would have to acquiesce to the terms; otherwise, the play would not be
performed at that venue. Under Defendants‟ reading of Section 7.03, therefore,
technically neither a producer nor a theater operator would have control over production
unless the producer also owned the theater. It is questionable whether this extremely
narrow interpretation is reasonable.
Nederlander‟s interpretation, on the other hand, finds additional support in Section
7.02(b). That provision states that “neither the Shorenstein Entity nor the Nederlander
Entity will stage any Production it controls” within 100 miles of San Francisco, unless
one of the three conditions is satisfied.66 Because the family entities appear to be in the
business of running theaters, rather than producing plays, the language and structure of
Sections 7.02 and 7.03 seemingly contemplate shows being under one of the entities‟
“control” even though the entity controls only the venue. Thus, I consider Nederlander‟s
reading of “control over production” to be reasonable. To the extent both parties‟
interpretations are reasonable, however, Section 7.03 is ambiguous, and dismissal
therefore would not be appropriate on the present truncated record.
Additionally, I note that if Mrs. Hays‟s alleged efforts to poach SHN‟s shows does
not fall squarely within the prohibition under Section 7.03, then such efforts conceivably
could violate the duty to maximize SHN‟s economic success imposed by Section 7.02 of
66
Id. § 7.02(b).
31
the LLC Agreement. It is reasonably conceivable, therefore, that Nederlander could
show that Mrs. Hays‟s effort to win shows away from SHN was inconsistent with
maximizing SHN‟s economic success and a violation of her duties to SHN.
5. Withholding the Curran lease
Whether the withholding of the Curran lease breached a fiduciary duty imposed by
the LLC Agreement largely depends on whether, because of contract or promissory
estoppel, Mrs. Hays had an obligation to lease the theater to SHN. As an alternative
theory, Nederlander contends that the Hayses violated their duty to maximize SHN‟s
economic success by threatening to withhold the lease unless Mrs. Hays was made sole
President of SHN and otherwise utilized excessive hardball tactics to effect change in the
company‟s leadership structure. Because, as shown infra, Defendants‟ motion to dismiss
the claims relating to the alleged oral agreement to renew the Curran lease must be
denied, I decline at this stage to dismiss Nederlander‟s claim for breach of fiduciary duty
and I need not address its alternative argument.
6. SHN’s confidential information
The Counterclaim and Third Party Complaint specifically names two shows that
Mrs. Hays attempted to poach for the Curran that were then being sought by SHN and
further alleges that, while serving on SHN‟s Board, she acquired and misused
confidential information as to the shows SHN was pursuing. These allegations state a
32
claim that Mrs. Hays misused SHN‟s confidential information.67 Furthermore, Section
7.02(a) required the Hayses to avoid conflicts of interest. That Dr. Hays continued to
serve on the Board while his wife was competing with SHN for the very same shows
appears, on its face, to make it reasonably conceivable that the Hayses may have
breached their contractual fiduciary duty to avoid conflicts of interest.
7. Waste
The waste claim, in contrast, falls short of being reasonably conceivable and must
be dismissed. “To recover on a claim of waste, a plaintiff must prove that the relevant
exchange was „so one sided that no business person of ordinary, sound judgment could
conclude that the corporation has received adequate consideration.‟”68 The Counterclaim
and Third Party Complaint alleges that the Hayses blocked lucrative theater sponsorships
in order to avoid detracting from Mrs. Hays‟s social status. These allegations are too
conclusory to survive a motion to dismiss. Disagreements among the SHN directors as to
what sponsorships should be attached to SHN‟s name and reputation are disputes about
how to best manage the Company‟s business. I do not consider it reasonably conceivable
that, based on the allegations in the Counterclaim and Third Party Complaint about the
sponsorships, Nederlander could prove that that transaction was so one-sided that no
reasonable businessperson would agree to it. Nederlander also alleges that Mrs. Hays
67
Id. § 7.09 (stating requirements for keeping SHN‟s confidential information
secret).
68
Zutrau v. Jansing, 2014 WL 2014 WL 3772859, at *17 (Del. Ch. July 31, 2014)
(quoting In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 74 (Del. Ch. 2006)).
33
mismanaged SHN during her 60-day trial period as sole President. An allegation of
mismanagement without more, however, is not sufficient to state a claim for waste.
Indeed, Nederlander in fact agreed to this brief trial run.
8. Conclusion
For the reasons stated, I dismiss Nederlander‟s claim in Count I for waste of
SHN‟s assets, but otherwise I decline to dismiss Count I.
D. The Curran Lease Renewal
I turn now to the most disputed Counts in the Counterclaim and Third Party
Complaint, all of which relate to the alleged oral agreement to renew the Curran lease.
Nederlander‟s breach of contract, promissory estoppel, and fraudulent inducement
Counts are pled in the alternative, and all three Counts generally arise from the same
factual allegations. Those allegations are reiterated below in the light most favorable to
Nederlander as the nonmoving party.
SHN had a portfolio of three theaters, one of which was the Curran Theatre. SHN
had leased the Curran for decades under the same lease, and that lease was set to expire
on December 31, 2014. The then-owner had listed the Curran for sale in 2010. Mr.
Nederlander looked into the property, but concluded the $20 million price was too high.
He preferred instead to have friendly third-party investors acquire the property and lease
it back to SHN. Mr. Nederlander had a phone conversation with Mrs. Hays in the third
quarter of 2010 during which this information was conveyed to her, to the extent she was
not already familiar with the situation because of her affiliation with SHN. Mrs. Hays,
however, proposed buying the Curran herself. Mr. Nederlander allegedly agreed to Mrs.
34
Hays‟s proposal, but only on the condition that she lease the Curran back to SHN for so
long as SHN exists.
The Counterclaim and Third Party Complaint avers that, after obtaining Mr.
Nederlander‟s consent, Mrs. Hays proceeded to purchase the Curran in late 2010. Both
parties allegedly assumed that the current lease would remain the operative contract and
the rent for the new lease would continue to increase gradually in accordance with the
existing rent schedule. According to the Counterclaim and Third Party Complaint, all
other material terms of the future lease would be copied from the current lease. In
reliance on this oral agreement, Nederlander continued booking plays at the Curran for
periods extending beyond the December 31, 2014 expiration of the lease. The
Counterclaim and Third Party Complaint also avers that, after 2010, Mrs. Hays strung
Nederlander along by including the topic of the Curran lease in numerous Board agendas,
but never allowing the negotiations to progress in any meaningful way. Finally, by her
actions at the January 2014 Board meeting, Mrs. Hays allegedly revealed for the first
time that she was reneging on the deal or else never had intended to abide by it in the first
place.
1. Breach of Contract
I first analyze whether these alleged facts conceivably could support the existence
of an enforceable agreement between Mrs. Hays and Nederlander. Defendants argue that
the alleged promise was not sufficiently clear and definite to be enforceable and that the
Statute of Frauds bars the agreement in any event. I address these arguments in turn.
35
a. Was the alleged promise sufficiently clear and definite?
“It is well settled Delaware law that three elements are necessary to prove the
existence of an enforceable contract: (1) intent of the parties to be bound, (2) sufficiently
definite terms, and (3) consideration.”69 Here, Nederlander alleges that Mrs. Hays
accepted the lease-back condition and in so doing manifested her intent to be bound. In
terms of consideration, I find it reasonably conceivable that Nederlander‟s consent
allowed what otherwise would have been a conflicted transaction to proceed. The LLC
Agreement requires the Members “to avoid any conflicts of interests between the
Members.”70 After purchasing the Curran, Mrs. Hays, through her affiliates, would be
standing on both sides of the lease, giving her interests as both lessee and lessor. This
leaves the issue of sufficiently definite terms. “[A]n enforceable contract must contain all
material terms of the agreement and material provisions that are indefinite will not be
enforced.”71 “If terms are left open or uncertain, this tends to demonstrate that an offer
and acceptance did not occur.”72
69
Gallagher v. E.I. duPont de Nemours and Co., 2010 WL 1854131, at *3 (Del.
Super. Apr. 30, 2010).
70
LLC Agreement § 7.02.
71
Gallagher, 2010 WL 1854131, at *3; see also PharmAthene, Inc. v. SIGA Techs.,
Inc., 2010 WL 4813553, at *7 (Del. Ch. Nov. 23, 2010); Ramone v. Lang, 2006
WL 905347, at *11 (Del. Ch. Apr. 3, 2006) (“[A] contract must contain all
material terms in order to be enforceable.”).
72
Ramone, 2006 WL 905347, at *11.
36
Defendants characterize the alleged oral promise as, at best, an unenforceable
agreement to agree. In that regard, they focus on the purported lack of material terms.
Even according to Nederlander‟s allegations, the rent schedule needed to be finalized.
Several cases support the proposition that the rent term is an essential provision in a
lease.73 Before December 31, 2014, the parties attempted to finalize the rent term, but
never settled on a number. It is tempting to conclude, as Defendants urge, that the
absence of a fixed rent price term is fatal to Nederlander‟s claims. In the face of the other
facts alleged, however, and cognizant that the precedents just cited all arrived at their
conclusions at either the post-trial or summary judgment stages, I conclude that it would
be premature to dismiss these claims based on the lack of a final rent term. In that regard,
I note, for example, that the parties operated under the same lease for over thirty years.
Many of the authorities cited by Defendants in support of their motion to dismiss
are distinguishable, at least under the facts as I must accept them at this procedural stage.
Painted in the best light for Nederlander, the breach of contract claim is less about
forming a new lease agreement from scratch and more about renewing the existing lease.
73
See Centreville Veterinary Hosp. v. Butler-Baird, 2007 WL 1965538, at *7 (Del.
Ch. July 6, 2007) (noting the case conflict in other jurisdictions as to what a court
should do where the rent term is missing, but ultimately not deciding the issue);
Heritage Homes of De La Warr v. Alexander, 2005 WL 2173992, at *3 (Del. Ch.
Sept. 1, 2005) (stating that settled law requires that, for a contract to enter into a
contract to be enforceable, all material and essential terms must be agreed upon,
and finding that the price of a house to be constructed was such a missing term),
aff’d, 900 A.2d 100 (Del. 2006) (TABLE); The Liquor Exchange v. Tsaganos,
2004 WL 2694912, at *4 (Del. Ch. Nov. 16, 2004) (describing rent and duration as
among “the most basic terms” missing from the supposed lease agreement).
37
Essentially, Nederlander alleges that the parties agreed to extend the term of an existing
lease based on the same material terms, including the existing rent schedule. There is
some support in the case law that an oral agreement to renew an existing contract requires
somewhat less in terms of proof of a contract‟s terms than an agreement to form a new
contract.74 Presumably, this would be because both parties to a contract renewal already
are familiar with the terms of the existing contract.
The SHN-Curran lease (the “Lease”)75 was effective from January 1, 1980, until
December 31, 2014, and was amended only once, on October 31, 1997. A new entity
associated with Mrs. Hays assumed the Lease and became SHN‟s landlord after Mrs.
Hays acquired the Curran in mid-December 2010. The Lease included a rent schedule,
which increased at regular intervals over the thirty-four-year term of the Lease from
$120,000 to $350,000 per year.76 The specified increases were nearly linear, and the rate
74
Cf. Harmon v. Del. Harness Racing Comm’n, 62 A.3d 1198, 1201-02 (Del. 2013)
(reversing trial court and reinstating jury verdict that found liability based on
failure to abide by oral agreement to rehire the plaintiff in a case pursued under a
promissory estoppel theory); Keating v. Bd. of Educ. of Appoquinimink Sch. Dist.,
1993 WL 460527, at *5-6 (Del. Ch. Nov. 3, 1993) (finding for the plaintiff and
enforcing, on a promissory estoppel theory, an oral undertaking to rehire the
plaintiff), aff’d, 650 A.2d 1305 (Del. 1994) (TABLE).
75
A copy of the Lease was included with Defendants‟ motion to dismiss. Affidavit
of Rachel E. Horn, Ex. B [hereinafter the “Lease”]. Consideration of this
document is appropriate on this motion to dismiss, because the Lease is not being
considered for the truth of what it asserts and because it is integral to the
Counterclaim and Third Party Complaint. See, e.g., Allen v. Encore Energy P’rs,
72 A.3d 93, 96 n.2 (Del. 2013); In re Gen. Motors S’holder Litig., 897 A.2d 162,
168-69 (Del. 2006).
76
Lease § 3.1(a).
38
of increase over time accelerated only slightly. In addition to the base rent, the landlord
received from SHN a percentage share of the gross receipts from performances at the
Curran. That revenue-sharing rate increased in a similar manner to the rent structure over
time.77
Based on the Lease‟s detailed rent structure, I find it reasonably conceivable that
Nederlander could show that, when Mr. Nederlander and Mrs. Hays made their oral
agreement in 2010, both parties intended that the rent under the anticipated lease
essentially would be an extrapolation of the rent schedule in the Lease for 2015 and
future years.78 As such, I conclude that the absence of a definitive rent schedule does not
warrant dismissal of Nederlander‟s contract claims as a matter of law.
The lease of a well-established theater in a major metropolitan area in the United
States also likely would include additional material terms beyond the rent. Defendants
contend that the Lease itself, a thirty-page document with numerous detailed provisions,
shows that there were other material terms missing. It appears from the Counterclaim
and Third Party Complaint and Nederlander‟s arguments, however, that Nederlander‟s
response to this problem is that the oral agreement between Mr. Nederlander and Mrs.
Hays contemplated that the parties essentially would adhere to the same terms specified
in the existing Lease. Absent an implicit agreement to that effect, I find that the oral
77
Id. § 3.2(a).
78
If the rent terms were plotted on a graph, a neutral observer would be able to
extrapolate the rent for subsequent years with a fair degree of precision, if that
observer assumed the same general rent structure would be used.
39
agreement would be too indefinite to be enforceable. Moreover, the Counterclaim and
Third Party Complaint alleges that the only dispute between the parties relates to the rent
term and, perhaps, the duration of the renewed lease. Based on the alleged agreement,
Nederlander asserts that the new lease was to continue for the duration of SHN‟s
existence. In the parties‟ actual negotiations, which had begun by at least October 2012,
CSH sought a ten-year lease, while Nederlander allegedly sought a term of twenty years.
When all of the evidence is in, this discrepancy may support a conclusion that there was
no enforceable oral agreement between Nederlander and Mrs. Hays.
Nevertheless, although Nederlander may fail to satisfy its burden of proof at trial, I
find it reasonably conceivable from the facts alleged in the Counterclaim and Third Party
Complaint that Nederlander could show that the parties reached an oral agreement to
renew the Lease based on the terms existing in that document for the duration of SHN‟s
existence under the common ownership of Nederlander and CSH. Those terms included
the rent schedule. In that regard, it conceivably could be shown that both parties
anticipated that the rent schedule and revenue sharing provisions simply would continue
to increase in line with the past increases. The allegation that the parties‟ initial offers
differed by a not-insignificant amount cuts against this conclusion, but does not, in light
of the other facts alleged, render Nederlander‟s theory inconceivable. Resolution of this
issue must await a more developed record.
b. Does the Statute of Frauds bar the alleged oral agreement?
Having concluded that the Counterclaim and Third Party Complaint adequately
alleges an oral agreement to renew the Curran Lease, I turn to whether the Statute of
40
Frauds nevertheless precludes enforcement of that agreement. The Delaware Statute of
Frauds prohibits enforcement of any agreement “upon any contract or sale of lands,
tenements, or hereditaments, or any interest in or concerning them, or upon any
agreement that is not to be performed within the space of 1 year from the making
thereof,” unless the agreement is in writing signed by the party to be charged.79 Although
at the time of the alleged agreement in 2010 the existing Lease still had four years to run
and the renewal was to be for the duration of SHN, an entity that could exist indefinitely,
the lease-renewal agreement does not fall within the one-year prohibition. “„The time
within which such a contract is to be performed is reckoned from the making of the
contract, not from the time performance is to begin.‟”80 In addition, “if a contract may be
performed within a year, the statute does not apply.”81 In theory, Mrs. Hays could have
purchased the Curran the day after making the agreement with Nederlander, signed
documents relating to the renewed lease on the second day, and SHN could have been
dissolved on the third day. As such, the agreement could be performed within one year,
79
6 Del. C. § 2714(a).
80
Aurigemma v. New Castle Care LLC, 2006 WL 2441978, at *2 (Del. Super. Aug.
22, 2006) (quoting 72 AM. JUR. 2d Statute of Frauds § 38).
81
Brandner v. Del. State Hous. Auth., 605 A.2d 1, 1 (Del. Ch. 1991); see also Guyer
v. Haveg Corp., 205 A.2d 176, 181 (Del. Super. 1964) (“Delaware Courts have
held that the statute of frauds does not apply to contracts of indefinite duration
requiring the performance of a specific act which may be performed within one
year even if performance within one year is unlikely.”), aff’d, 211 A.2d 910, 912
(Del. 1965) (“It has been the law in Delaware for many years that the Statute of
Frauds does not apply to a contract which may, by any possibility, be performed
within a year.”).
41
and the improbability of such a series of events—or, in this case, an actual factual record
to the contrary—is irrelevant to the analysis.82
A lease, however, is an interest in land and the agreement therefore is covered by
the Statute of Frauds.83 Nederlander has presented no evidence of any written document,
signed or unsigned, evidencing the alleged oral agreement. Indeed, Nederlander has not
produced any board minutes, emails, or other documents in any way corroborating the
existence of the lease-renewal agreement. As such, the Statute of Frauds prohibits
enforcement of this agreement, unless one of the exceptions to the Statute of Frauds
applies. Nederlander contends that two such exceptions apply here: (1) the part
performance exception; and (2) what I will refer to as the estoppel exception. I discuss
those exceptions next.
i. Part performance
Part performance is a well-recognized exception to the Statute of Frauds for
contracts involving interests in land.84 “Part performance may be deemed to take a
contract out of the provisions of the statute of frauds on the theory that acts of
performance, even if incomplete, constitute substantial evidence that a contract actually
82
Guyer, 211 A.2d at 912.
83
See, e.g., Hendry v. Hendry, 2006 WL 4804019, at *7 (Del. Ch. May 30, 2006)
(“The word „interest‟ as it applies to land has been defined to include leasehold
interests and rights.”); Bielo v. Del. Wild Lands, Inc., 1995 WL 106302, at *5-6
(Del. Ch. Feb. 8, 1995) (discussing a leasehold interest as covered by the Statute
of Frauds).
84
Indeed, the part performance exception applies only to oral contracts involving
interests in land. Aurigemma, 2006 WL 244197, at *3.
42
exists.”85 “For the part performance exception to apply, however, the performance must
be attributed solely to the oral agreement.”86 That is, the acts said to constitute part
performance must be unequivocal and “„must be of such a character that they can be
naturally and reasonably accounted for in no other way than by the existence of some
contract in relation to the subject matter in dispute.‟”87 “Furthermore, the part
performance exception . . . requires that the act of performance must be on the part of the
complainant,” and not the party to be charged.88
The part performance cases consistently hold that the part performance must
constitute “action that is explainable only as part performance of the alleged oral
contract,”89 and not actions “equally consistent” with some other scenario.90 This strict
requirement is in line with the policy underlying the Statute of Frauds, which is “to
85
Quillen v. Sayers, 482 A.2d 744, 747 (Del. 1984).
86
Taylor v. Jones, 2002 WL 31926612, at *4 (Del. Ch. Dec. 17, 2002).
87
Langbord v. Wilson, 1979 WL 175241, at *2 (Del. Ch. Oct. 30, 1979) (quoting
Rutt v. Roche, 87 A.2d 805, 808 (Conn. 1952)).
88
Teevan v. Kearns, 1993 WL 1626514, at *3 (Del. Super. Dec. 3, 1993); see also
Sussex Inv. Co. v. Clendaniel, 129 A. 919, 921 (Del. Ch. 1925) (“[T]he equity
which underlies the doctrine of part performance must be by the party seeking the
remedy.”).
89
E. Coast Resorts, Inc. v. Paroni, 1990 WL 201399, at *5 (Del. Ch. Dec. 3, 1990).
90
Langbord, 1979 WL 175241, at *7; see also Gebler v. Gall, 1986 WL 11108, at *3
(Del. Ch. Sept. 4, 1986) (“The course of conduct of plaintiffs disclosed by the
evidence is every bit as consistent with defendant‟s version of their mutual
understanding as it is with a claim that they had a legal right to the property or at
least to remain in the property rent-free.”).
43
protect defendants against unfounded or fraudulent claims that would require
performance over an extended period of time.”91
Here, Nederlander‟s “performance” was not partial, it was complete. He gave
permission to Mrs. Hays to purchase the Curran on the condition that she lease it back to
SHN. Defendants contend that this performance falls woefully short of what is required
for part performance. In particular, Defendants emphasize the case of Sargent v.
Schneller,92 which involved an alleged oral contract for the sale of a house. There, the
Court found insufficient evidence of part performance by the plaintiff, even though the
plaintiff: (1) had received a key to the property; (2) had done some yardwork; and (3)
paid some of the defendant‟s legal fees. But, Sargent is distinguishable. First, that case
was a post-trial opinion. It did not address, therefore, whether the plaintiff‟s allegations
would have sufficed to move beyond the pleadings stage. Second, the evidence in
Sargent of part performance was minimal: the yardwork consisted of a few hours on two
days; the legal fees amounted to only $68; and the defendant merely sent the plaintiff a
key to enable him to examine a property that was on the market.
The problem with Defendants‟ argument here is that they look only to
Nederlander‟s consent, which they contend proves nothing on its own. While this may be
91
Olson v. Halvorsen, 982 A.2d 286, 291 (Del. Ch. 2008), aff’d, 986 A.2d 1150(Del. 2009).
92
2005 WL 1863382 (Del. Ch. Aug. 2, 2005).
44
true, the “alleged . . . promise should not be viewed in a vacuum.”93 The Counterclaim
and Third Party Complaint alleges that SHN originally contemplated buying the Curran
because it feared that it would be acquired by a competitor. Finding the price too high,
Nederlander hoped that some friendly third-party investor would purchase the Curran and
lease it back to SHN. It was in this context that the alleged oral agreement was made.
Thus, taking as true the allegations in the Counterclaim and Third Party Complaint,
SHN‟s goal was to encourage a purchase by a new owner—whether SHN itself or a
friendly third party—that would lease the Curran Theatre back to SHN on favorable
terms. These allegations make it reasonably conceivable that the only way Nederlander
would have consented to Mrs. Hays‟s acquisition of the Curran was if she agreed to lease
it back to SHN. Furthermore, Mrs. Hays arguably needed Mr. Nederlander‟s consent in
order to complete the transaction because of the LLC Agreement‟s requirement that she
avoid conflicts of interests.94 That consent was given. Thus, although the evidence
ultimately may not bear out Nederlander‟s claim in this regard, it is at least conceivable
that it will.
Moreover, and perhaps more importantly, Defendants have not advanced a
convincing alternative explanation for Nederlander‟s consent. They simply assert that
Nederlander‟s performance was inadequate. The cases that have found putative part
performance inadequate to avoid the Statute of Frauds, however, have involved conduct
93
Konitzer v. Carpenter, 1993 WL 562194, at *9 (Del. Super. Dec. 23, 1993).
94
LLC Agreement § 7.02(a).
45
that is equally consistent with another explanation, such as that the defendant entered into
a lease rather than an installment purchase agreement. SHN had leased the Curran for
over thirty years and it is defined as one of SHN‟s three Theatres in the LLC Agreement.
Defendants have proffered no alternative explanation as to why Nederlander voluntarily
would have allowed a third party, like Mrs. Hays, to acquire the Curran without ensuring
that SHN still could lease the property on reasonable terms.
ii. Estoppel
Nederlander also contends that the alleged oral agreement is enforceable under a
second exception to the Statute of Frauds. Yet, briefing on this issue was unclear.
Nederlander suggested that the purported second exception either is or is similar to
promissory estoppel. From a jurisprudential standpoint, it would be rather odd if
promissory estoppel were an exception to the Statute of Frauds, because the two concepts
serve different purposes. Promissory estoppel technically is a substitute for consideration
that the courts employ to avoid injustice,95 while the Statute of Frauds doctrine concerns
itself with whether an otherwise valid agreement is rendered unenforceable because of
the lack of a signed writing. Generally speaking, a necessary predicate for the application
of promissory estoppel is the nonexistence of a contract between the parties. As such, it
seems debatable whether this exception actually exists or whether, instead, it is simply a
95
See Lord v. Souder, 748 A.2d 393, 404-05 & n.5 (Del. 2000) (Lamb, V.C., sitting
by designation, concurring) (distinguishing contract analysis from promissory
estoppel, under which there is no bargained-for exchange).
46
specific application of the promissory estoppel analysis, which is a separate inquiry from
whether an agreement complies with the Statute of Frauds.
There is some support in the case law, however, that the exception Nederlander
argues for actually does exist. In Taylor v. Jones, Justice Jacobs, writing as a Vice
Chancellor, stated that there are two exceptions to the Statute of Frauds: “(i) where the
agreement has been partially performed and (ii) where a party has been induced to act by
reliance on a promise.”96 With respect the latter, then-Vice Chancellor Jacobs stated that
“the second exception to the statute arises where there is conduct that amounts to a
promissory estoppel.”97 In Huntington Homeowners Ass’n, Inc. v. 706 Investments,98
Vice Chancellor Noble noted that: “„An oral promise or representation that certain land
will be used in a particular way, though otherwise unenforceable, is enforceable to the
extent necessary to protect expenditures made in reasonable reliance upon it.‟” 99 This
decision does not appear to create a broad exception to the Statute of Frauds, but rather it
contemplates a limited equitable remedy in the context of an otherwise unenforceable
promise relating to land.100
96
Taylor, 2002 WL 31926612, at *4.
97
Id.98
1999 WL 377827 (Del. Ch. May 28, 1999).
99
Id. at *3 (quoting Restatement of Property § 524).
100
Another case along the same lines, which was not cited by the parties, is Walton v.
Beale, 2006 WL 265489 (Del. Ch. Jan. 30, 2006), which spoke of an exception to
the Statute of Frauds that derives from equitable estoppel. That exception, which
the Court found applicable, requires the party invoking it to show “that they lacked
47
Because I find the part performance exception sufficient here to defeat
Defendants‟ argument that the alleged oral agreement is barred by the Statute of Frauds
and because Nederlander‟s promissory estoppel claim is addressed in the following
Section, I need not address this second exception any further.
c. Conclusion
In sum, I conclude that it is reasonably conceivable that the alleged oral agreement
to renew the Curran Lease, construed to be as I have described it, is sufficiently clear and
definite to be enforceable. In addition, I find that at least the part performance exception
to the Statute of Frauds plausibly saves the alleged oral agreement from being
unenforceable for lack of a writing. Accordingly, I deny Defendants‟ motion to dismiss
Count IV.
2. Promissory Estoppel
In the alternative, Nederlander avers that the Court should enforce Mrs. Hays‟s
representation that she would renew the Curran Lease under the doctrine of promissory
estoppel. Unlike a breach of contract claim, promissory estoppel has a higher burden of
proof and some different elements:
In order to establish a claim for promissory estoppel, a
plaintiff must show by clear and convincing evidence that: (i)
a promise was made; (ii) it was the reasonable expectation of
the promisor to induce action or forbearance on the part of the
knowledge or the means to obtain knowledge of the facts in question, relied on the
conduct of the party against whom the estoppel is claimed, and suffered a
prejudicial change of position as a result of that reliance.” Id. at *4 (citing
Heckman v. Nero, 1999 WL 182570, at *3 (Del. Ch. Mar. 26, 1999)).
48
promisee; (iii) the promisee reasonably relied on the promise
and took action to his detriment; and (iv) such promise is
binding because injustice can be avoided only by enforcement
of the promise.101
Several of the elements of promissory estoppel correspond to the requirements for
Nederlander‟s breach of contract claim. Defendants‟ main argument against the
promissory estoppel claim, for example, is that the alleged promise is insufficiently clear
and definite. I rejected that argument in Section III.D.1.a supra for reasons that apply at
least equally in the context of a clear and convincing evidence standard of proof. Thus,
the Counterclaim and Third Party Complaint adequately alleges a promise by Mrs. Hays
to renew the lease. Additionally, it is reasonable to infer from the facts alleged that Mrs.
Hays made that promise to induce Nederlander to grant her permission to purchase the
Curran. This leaves the remaining two elements, each of which Defendants also contest.
None of their objections, however, warrant dismissal at the pleadings stage.
Nederlander alleges that it relied on Mrs. Hays‟s promise both in granting
permission for her to purchase the Curran and in booking shows for SHN at the Curran
beyond the December 31, 2014 expiration of the Lease. Defendants challenge the
reasonableness of Nederlander‟s reliance for at least three reasons: (1) the lack of
essential terms makes any reliance unreasonable; (2) reliance upon a promise to enter into
a lease in the future is unreasonable as a matter of law; and (3) the Statute of Frauds
101
Lord, 748 A.2d at 399 (emphasis added).
49
renders reliance unreasonable as a matter of law. I do not find any of these arguments
persuasive.
First, I previously concluded that Nederlander conceivably could show that both
parties understood that the necessary terms for a new lease would be the same as or
similar to the terms of the existing Lease. Thus, for example, the existing Lease would
provide a basis for determining the rate of increase in future rents. Accordingly, the
Counterclaim and Third Party Complaint does not merely allege reliance on a “vague
assurance,”102 as Defendants contend. Second, I find unpersuasive Defendants‟ argument
about impermissible reliance on statements of future intent. Except in an immediate
exchange, virtually all agreements involve future action, e.g., “I promise to sell you this
car tomorrow when you come back with a certified check.” Here, Mrs. Hays allegedly
made an unconditional promise to renew the Lease. Thus, even assuming Delaware law
comports with the federal authorities cited by Defendants for the proposition that
“reliance upon a mere expression of future intention cannot be „reasonable,‟ because such
expressions do not constitute a sufficiently definite promise,”103 that simply is not the
situation here. Mrs. Hays‟s alleged promise was an unconditional promise to renew, not
a statement that she expected or intended to renew the Lease. Third, the Statute of Frauds
does not categorically render reliance upon an oral promise to renew a lease either
102
See Copeland v. Kramarck, 2006 WL 2521444, at *3 n.26 (Del. Ch. Aug. 23,
2006).
103
In re Phillips Petroleum Sec. Litig., 881 F.2d 1236, 1250 (3d Cir. 1989).
50
unreasonable or unenforceable. Indeed, as discussed in Section III.D.1.b.i supra,
Nederlander adequately has alleged that the part performance exception took the disputed
oral agreement outside of the Statute of Frauds. For the same reasons, I consider it
reasonably conceivable that Nederlander could show based on the facts alleged in the
Counterclaim and Third Party Complaint that it reasonably relied to its detriment on Mrs.
Hays‟s alleged oral promise notwithstanding the Statute of Frauds.
Defendants also weakly assert that there would be no injustice if Mrs. Hays‟s
promise were not enforced. This argument largely is premised on Defendants‟ previous
arguments for finding the alleged promise unenforceable. Having rejected those
arguments individually, I also reject the attempt to repackage and relabel them as
“injustice.”104
Finally, Defendants argue that the promissory estoppel claims fail as a matter of
law against CSH Curran, CSH Theatres, and Jeff Hays because the Counterclaim and
Third Party Complaint focuses only on Mrs. Hays‟s alleged promise. I have no trouble
concluding that CSH Curran should remain subject to this Count. After Mrs. Hays made
the alleged promise, she formed CSH Curran to acquire the Curran. If Nederlander
succeeds in proving its claim, Mrs. Hays should not be able to avoid her obligations
under the promise because she subsequently created a wholly controlled entity to effect
104
Defendants also aver that the true injustice here is that Mrs. Hays paid $16.6
million dollars for the Curran and that Nederlander seeks to have this Court tie her
hands indefinitely in the use of her property. But, this Memorandum Opinion
deals with whether the claims as alleged are legally deficient. Whether
Nederlander will be able to prove its claims remains to be seen.
51
the acquisition. As to CSH Theatres, Nederlander argues that Mrs. Hays was acting as an
agent of CSH Theatres when she made the promise.105 Ultimately, the facts may show
that Mrs. Hays acted solely on her own behalf. At this point, however, the Counterclaim
and Third Party Complaint alleges a sufficiently close relationship between Mrs. Hays
and the various CSH entities to make it reasonably conceivable that Nederlander could
show that Mrs. Hays acted pursuant to some sort of agency relationship. Accordingly, I
decline to dismiss this Count against CSH Theatres. Dr. Hays is another story. A person
is not liable simply because his spouse made a promise to do something. The
Counterclaim and Third Party Complaint contains no conspiracy or aiding and abetting
allegations or counts, and Nederlander offers no explanation as to why Dr. Hays should
be held accountable for Mrs. Hays‟s alleged promise. Thus, I decline to dismiss Count
V, except as against Dr. Hays.
3. Fraudulent Inducement
Nederlander also alleges, in the alternative, that the promise to renew the Curran
Lease constituted fraudulent inducement. There are five elements required to state a
claim for fraudulent inducement:
(1) a false representation of material fact; (2) the defendant‟s
knowledge of or belief as to the falsity of the representation
or the defendant‟s reckless indifference to the truth of the
representation; (3) the defendant‟s intent to induce the
plaintiff to act or refrain from acting; (4) the plaintiff‟s action
or inaction taken in justifiable reliance upon the
105
See Harmon, 62 A.3d at 1201 (describing recognized forms of authority pursuant
to which an agent can bind the principal).
52
representation; and (5) damages to the plaintiff as a result of
such reliance.106
I already have discussed the substance of elements three, four, and five in the course of
analyzing the promissory estoppel claims supra. I focus, therefore, only on the first two
elements. I also note that fraudulent inducement must be pled with particularity in
accordance with Court of Chancery Rule 9(b). Defendants contend that the Counterclaim
and Third Party Complaint fails to plead either the first or second elements of fraudulent
inducement with the requisite specificity.
Rule 9(b) states: “In all averments of fraud or mistake, the circumstances
constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge
and other condition of mind of a person may be averred generally.”107 Cases interpreting
the Rule 9(b) requirement have held that a complaint must allege “(1) the time, place, and
contents of the false representation; (2) the identity of the person making the
representation; and (3) what the person intended to gain by making the
representations.”108 The “particularity requirement must be applied in light of the facts of
the case, and less particularity is required when the facts lie more in the knowledge of the
opposing party than of the pleading party.”109 “Essentially, the plaintiff is required to
106
Haase v. Grant, 2008 WL 372471, at *2 (Del. Ch. Feb. 7, 2008) (footnotes
omitted).
107
Ct. Ch. R. 9(b).
108
Abry P’rs V, L.P. v. F & W Acq. LLC, 891 A.2d 1032, 1050 (Del. Ch. 2006).
109
H-M Wexford LLC v. Encorp, LLC, 832 A.2d 129, 146 (Del. Ch. 2003).
53
allege the circumstances of the fraud with detail sufficient to apprise the defendant of the
basis for the claim.”110
Here, the Counterclaim and Third Party Complaint alleges that, during a phone
conversation in the third quarter of 2010, Mrs. Hays represented to Mr. Nederlander that
she would renew the Curran Lease with SHN. As a result of this purported
misrepresentation, she gained Nederlander‟s consent and the ability to purchase the
Curran Theatre. Although the exact date is missing, the requirements of Rule 9(b) are
satisfied in that Defendants have been apprised of the circumstances of the alleged fraud
and the basis for Nederlander‟s claims.
The more difficult issue is whether Nederlander‟s Counterclaim and Third Party
Complaint sufficiently alleges the first two elements of the fraudulent inducement
standard. Nederlander alleges, alternatively, that when Mrs. Hays represented that she
would renew the Curran Lease, she either knew that representation was false when she
made it or later changed her mind. Only the former pleading, however, could support
Nederlander‟s fraudulent inducement claim as a matter of law, because such a claim
requires a misrepresentation of present fact.111 Furthermore, “Delaware law holds that a
plaintiff „cannot “bootstrap” a claim of breach of contract into a claim of fraud merely by
110
Abry P’rs V, 891 A.2d at 1050.
111
MicroStrategy Inc. v. Acacia Research Corp., 2010 WL 5550455, at *15 (Del. Ch.
Dec. 30, 2010).
54
alleging that a contracting party never intended to perform its obligations.‟”112 For these
reasons, the courts have imposed a particularly demanding requirement for alternatively
pled fraudulent inducement claims:
[W]hen a plaintiff pleads a claim of promissory fraud, in that
the alleged false representations are promises or predictive
statements of future intent rather than past or present facts,
the plaintiff must meet an even higher threshold. In this
situation, the plaintiff “must plead specific facts that lead to a
reasonable inference that the promisor had no intention of
performing at the time the promise was made.”113
Nederlander‟s pleadings lack the specific factual allegations required to support a
reasonable inference that Mrs. Hays never intended to comply with the alleged promise
and that, in fact, her statement was a lie when she made it. The allegation in the
Counterclaim and Third Party Complaint is completely conclusory: “These
representations were false when made.”114 In addition, Nederlander‟s own allegations
that the parties attempted over time to finalize the rent and duration terms of the renewed
lease undermine its fraudulent inducement theory. In that regard, I note that there are no
112
Narrowstep, Inc. v. Onstream Media Corp., 2010 WL 5422405, at *15 (Del. Ch.
Dec. 22, 2010) (quoting Iotex Commc’ns, Inc. v. Defries, 1998 WL 914265, at *4
(Del. Ch. 21, 1998)); see also MicroStrategy Inc., 2010 WL 5550455, at *17 (“In
other words, a plaintiff cannot state a claim for fraud simply by adding the term
„fraudulently induced‟ to a complaint or alleging that the defendant never intended
to comply with the agreement at issue at the time the parties entered into it.”).
113
MicroStrategy Inc., 2010 WL 5550455, at *15 (emphasis added) (quoting
Grunstein v. Silva, 2009 WL 4698541, at *13 (Del. Ch. Dec. 8, 2009)).
114
C & TP Compl. ¶ 118; id. ¶ 65 (“Mrs. Hays had lied about her intention to
continue leasing the Curran to SHN or, alternatively, that she had changed her
mind and no longer intended to abide by the purchase-lease agreement . . . .”).
55
allegations that Mrs. Hays‟s initial offer was so outrageous as to indicate that she never
intended to fulfill the promise. To the contrary, Nederlander alleges that it anticipated an
initial high-rent offer consistent with its view of how the contract negotiations would
progress. Thus, I conclude that Count III must be dismissed.
IV. CONCLUSION
For the foregoing reasons, Defendants‟ motion to dismiss is granted in part and
denied in part. Specifically, Count I is dismissed to the extent that it asserts a claim for
waste, Count III is dismissed in its entirety, and Count V is dismissed as against Dr.
Hays. In all other respects, the motion is denied.
IT IS SO ORDERED.
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