MPT of Hoboken Trs, LLC v. HUMC Holdco, LLC

EFiled: Jul 22 2014 12:05PM EDT
Transaction ID 55766261
Case No. 8442-VCN
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
MPT OF HOBOKEN TRS, LLC, a :
Delaware Limited Liability Company, :
MPT OPERATING PARTNERSHIP, L.P., :
a Delaware Limited Partnership, and MPT :
OF HOBOKEN REAL ESTATE, LLC, :
a Delaware Limited Liability Company, :
:
Plaintiffs- :
Counterclaim Defendants, :
:
v. : C.A. No. 8442-VCN
:
HUMC HOLDCO, LLC, a New Jersey :
Limited Liability Company, and :
HUMC OPCO, LLC, a Delaware Limited :
Liability Company, :
:
Defendants- :
Counterclaim Plaintiffs. :
MEMORANDUM OPINION AND ORDER
Dated Submitted: March 24, 2014
Date Decided: July 22, 2014
Michael P. Kelly, Esquire, Andrew S. Dupre, Esquire, and Daniel J. Brown,
Esquire of McCarter & English, LLP, Wilmington, Delaware; and D. Scott Funk,
Esquire and Michael A. Ackal, III, Esquire of Gray Reed & McGraw, P.C.,
Houston, Texas, Attorneys for Plaintiffs-Counterclaim Defendants.
David P. Primack, Esquire of McElroy, Deutsch, Mulvaney & Carpenter, LLP,
Wilmington, Delaware; Louis A. Modugno, Esquire of McElroy, Deutsch,
Mulvaney & Carpenter, LLP, Morristown, New Jersey; and Thomas R. Ajamie,
Esquire, Wallace A. Showman, Esquire, and Courtney Scobie, Esquire of Ajamie
LLP, Houston, Texas, Attorneys for Defendants-Counterclaim Plaintiffs.
NOBLE, Vice Chancellor
The parties in this litigation formed and financed a Delaware limited liability
company (“LLC”) to acquire and operate the Hoboken University Medical Center
(the “Medical Center”). The present dispute generally involves whether the LLC’s
members breached its operating agreement, a convertible note it issued, or both.
Plaintiff MPT of Hoboken TRS, LLC (“MPT Hoboken”) and the other
Plaintiffs1 (collectively with MPT Hoboken, the “MPT Entities”) bring claims for
breach of contract, declaratory judgment, and attorneys’ fees against Defendants
HUMC Holdco, LLC (“Holdco”) and HUMC Opco, LLC (“Opco,” and together
with Holdco, the “HUMC Entities”). In addition, the HUMC Entities assert
counterclaims for breach of contract, fraud in the inducement, and
misappropriation against the MPT Entities.
The parties have moved for judgment on the pleadings under Court of
Chancery Rule 12(c) as to certain claims and one of the counterclaims. The MPT
Entities seek judgment in their favor that: (i) Opco is required, under the
convertible note, to make tax distributions to MPT Hoboken; and (ii) Holdco
violated Opco’s operating agreement, which vested management authority
exclusively in a manager, by creating a board of directors with purported
managerial rights. Conversely, the HUMC Entities seek dismissal of these claims,
contending that: (i) they have cured any alleged defaults by making the disputed
1
The other Plaintiffs are MPT Operating Partnership, L.P. (“MPT Operating”) and MPT of
Hoboken Real Estate, LLC (“MPT Real Estate”).
1
tax distributions; and (ii) any purported violation of Opco’s operating agreement is
immaterial. The HUMC Entities also seek dismissal of the MPT Entities’
allegations that they failed to use commercially reasonable efforts in a state
regulatory approval process. Finally, the MPT Entities seek dismissal of the
HUMC Entities’ counterclaim for fraud in the inducement as barred by various
contract provisions and for failure to plead fraud with particularity under Rule 9(b).
For the following reasons, the MPT Entities’ motion is granted in part and
denied in part, and the HUMC Entities’ motion is denied.
I. BACKGROUND2
A. The Parties
The MPT Entities are Delaware entities, each with its principal place of
business in Birmingham, Alabama. Holdco is a New Jersey LLC with its principal
place of business in Philadelphia, Pennsylvania, and Opco is a Delaware LLC
based in Hoboken, New Jersey.
MPT Hoboken and Holdco are the sole members of Opco. Currently, MPT
Hoboken owns 9.9% of the membership interests in Opco; Holdco owns the rest.
2
The Court draws from the generally undisputed allegations of the MPT Entities’ Verified
Complaint (the “Complaint”) and the HUMC Entities’ responses in the Answer and
Counterclaim (the “Answer” and the “Counterclaim,” respectively), unless otherwise noted, for
the relevant background facts.
The parties did not attach the governing documents to their pleadings. Nonetheless, the Court
may consider those agreements and documents at the pleadings stage because they are integral
to, and thereby incorporated into, the Complaint and the Counterclaim. See In re Santa Fe Pac.
Corp. S’holder Litig., 669 A.2d 59, 69-70 (Del. 1995).
2
B. The Letter Agreement
MPT Operating and Holdco entered into the Letter Agreement in February
2011 to govern their relationship and the formation of Opco to acquire the Medical
Center (the “Medical Center Transaction”). Briefly, in the Medical Center
Transaction, MPT Real Estate would acquire the Medical Center real estate and
lease it to MPT Hoboken. MPT Hoboken would then sublease the real estate to
Opco, which would also acquire the Medical Center operating assets.
The Letter Agreement provided that Opco would be owned 25% by MPT
Hoboken and 75% by Holdco.3 It also contemplated that MPT Hoboken’s 25%
interest could initially be represented in a convertible debt instrument, provided
that “the economic and other terms thereof shall be substantially the same as if an
equity instrument was utilized.”4
C. The Purchase and Sale Agreement and the Lease Agreement
The parties entered into the Purchase and Sale Agreement in May 2011 to
effect the terms of the Medical Center Transaction. The Purchase and Sale
Agreement provides, in part:
Section 14.5 Entire Agreement; Modification. This Agreement,
including the Exhibits and Schedules attached, and other written
agreements executed and delivered at the Closing by the parties,
constitute the entire agreement and understanding of the parties with
3
Opening Br. in Supp. of Pls.’ Mot. for J. on the Pleadings (“Pls.’ Opening Br.”) Ex. 1 (Letter
Agreement § 1).
4
Id. Attachment I, ¶ 1.
3
respect to the subject matter of this Agreement. This Agreement
supersedes any prior oral or written agreements between the parties
with respect to the subject matter of this Agreement. It is expressly
agreed that there are no verbal understandings or agreements which in
any way change the terms, covenants, and conditions set forth in this
Agreement, and that no modification of this Agreement and no waiver
of any of its terms and conditions shall be effective unless it is made
in writing and duly executed by the parties.5
In November 2011, Opco and MPT Hoboken entered into the Lease Agreement
through which Opco subleased the Medical Center real estate. The Lease
Agreement provides, in part:
Entire Agreement; Modifications. This Lease, together with all
exhibits, schedules and the other documents referred to herein,
embody and constitute the entire understanding between the parties
with respect to the transaction contemplated herein, and all prior to
contemporaneous agreements, understandings, representations and
statements (oral or written) are merged into this Lease.6
These contract provisions are implicated by the HUMC Entities’ counterclaim for
fraud in the inducement.
D. The Convertible Note
Also in November 2011, MPT Hoboken and the HUMC Entities executed
the Convertible Promissory Note and Agreement (the “Convertible Note”), the
convertible debt instrument that represented MPT Hoboken’s initial 25% interest
in Opco. Attached to the Convertible Note was a form of the Limited Liability
Company Agreement of HUMC Opco, LLC (the “Opco LLC Agreement”), which
5
Pls.’ Opening Br. Ex. 2 (Purchase and Sale Agreement § 14.5).
6
Pls.’ Opening Br. Ex. 4 (Lease Agreement § 37.4).
4
Holdco and MPT Hoboken would execute upon conversion of the latter’s Opco
debt into equity.
The Convertible Note provides for MPT Hoboken to receive a quarterly
“Interest Payment,”7 which is defined as the greater of the “Interest Rate” or the
“Distribution Payment.”8 The Distribution Payment is defined as
a payment equal to any distributions by the Company [i.e., Opco] of
cash or the Fair Market Value [of] any securities or other property that
the Holder [i.e., MPT Hoboken] would have received if the Holder
held the number [of] Units representing the Full Conversion
Percentage for each Payment Period. The Distribution Payment shall
be recomputed for each subsequent Payment Period and subject to
appropriate adjustment for any partial conversion by the Holder.9
The Full Conversion Percentage is effectively 25%, subject to adjustment to offset
any partial debt-to-equity conversion by MPT Hoboken.10 The Convertible Note
also provides that MPT Hoboken “shall not have the status as a member of the
Company by reason of the issuance or holding of this Note until the Units are
issued upon a Conversion.”11
E. Opco Makes Certain Tax Distributions to Holdco
In November 2011, Opco booked a “Gain on Bargain Purchase” and a
corresponding “Tax Distribution Payable.” Opco then made a tax distribution to
Holdco, its sole member at the time, against the Tax Distribution Payable. The
7
Pls.’ Opening Br. Ex. 3 (Convertible Note § 3(a)).
8
Id. § 1(f).
9
Id. § 1(b).
10
Id. § 1(e).
11
Id. § 10.
5
MPT Entities contend that, under the terms of the Convertible Note, this tax
distribution qualifies as a Distribution Payment (and was for an amount greater
than the Interest Rate) such that MPT Hoboken was entitled to receive, as an
Interest Payment, an amount equal to the tax distribution that it would have
received if it were a 25% member of Opco.
F. The Opco LLC Agreement
MPT Hoboken converted a portion of its Opco debt under the Convertible
Note into a 9.9% membership interest in Opco in March 2012. At that time, MPT
Hoboken and Holdco executed the Opco LLC Agreement.
Opco is a manager-managed LLC. The Opco LLC Agreement provides that
the “General Manager” (and in certain circumstances, the “Special Manager”) is to
manage the business and operations of Opco.12 The General Manager of Opco is
Holdco. The Special Manager, which may assume certain powers (including the
power to replace the General Manager) in the event of a “Major Default,” is MPT
Hoboken or its designee.13
Under the Opco LLC Agreement, Opco must distribute “Distributable Cash
Flow” to its members pro rata with their membership interests. If there is
sufficient Distributable Cash Flow, Opco must also make “Tax Distributions” to its
members. The Opco LLC Agreement defines Tax Distributions as “cash in an
12
Pls.’ Opening Br. Ex. 5 (Opco LLC Agreement §§ 3.1, 3.2).
13
Id. § 1.
6
amount sufficient for each Member to pay its federal, state and local income tax
payments resulting from its Membership Interest in the Company.” 14
G. The Board of Directors and the Bylaws
Section 3.16 of the Opco LLC Agreement permitted Opco to form “advisory
committees,” provided that those committees did not have any governance or other
managerial rights.15 Any document or instrument regarding the formation of an
advisory committee for Opco is subject to MPT Hoboken’s prior review and
written approval, which is not to be unreasonably withheld.
Recently, as alleged by the MPT Entities, Holdco caused Opco to establish
the Board of Directors (the “Board”), which adopted the Bylaws granting to the
Board purported managerial rights over Opco. The Bylaws provide that, “[e]xcept
as otherwise provided in the Organizing Documents [i.e., the Opco LLC
Agreement] or these Bylaws, the business of the Company shall be managed by its
Board of Directors.”16 MPT Hoboken allegedly did not review or give its written
approval of the instruments establishing the Board or the Bylaws.
14
Id. § 5.3.
15
Id. § 3.16 (“The Members acknowledge that the General Manager intends to establish and
maintain certain advisory committees for the Facility as may be required pursuant to the
certificate of need approval issued to the Company by the Department of Health and Senior
Services of the State of New Jersey, including, without limitation, a board of trustees and a
community advisory group. All of such committees shall be advisory in nature only, and shall
not have any governance rights or other managerial rights or authority with respect to the
Company.”).
16
Pls.’ Opening Br. Ex. 6 (Bylaws § 4.01) (“The Board is the governing body of the Company
with duties and responsibilities that include providing resources to ensure the delivery and
7
As alleged by the HUMC Entities, the Board is currently comprised of eight
members: three designees of Holdco, the mayor of Hoboken, New Jersey (or the
mayor’s designee), two designees of the City Council, the president of the Medical
Staff, and the Chairman of the Medical Center’s Community Advisory Group. The
Holdco designees have three votes each, and the other designees have one vote
each. Thus, the Holdco designees represent nine of the Board’s fourteen votes.
The Bylaws further provide that the Board must give Holdco at least thirty days’
notice before any proposed act becomes final and effective, and that Holdco
“reserves all rights and authority to (a) approve, modify, reject or return to the
Board for further evaluation any action taken by the Board, and (b) to compel the
Board to take action at the direction of the Member.”17
The Board arrangement was allegedly required to receive approval of the
New Jersey Department of Health and Senior Services (“DHSS”).18 It was also
described in Opco’s initial Certificate of Need application to DHSS. The HUMC
Entities assert that changing this arrangement now would cause Opco to violate the
terms of its DHSS application and other accreditation requirements.19
maintaining of quality patient care, patient safety, the charge, control and management of the
property, business, affairs and financial management of the Company, the establishment of
policy, promotion of performance improvement, quality review and utilization risk,
management/safety, medical staff credentialing, and the provision of organizational management
and planning.”).
17
Id.
18
Countercl. ¶ 59.
19
Id.
8
H. MPT Hoboken’s Notice to Convert the Remainder of its Opco Debt into Equity
In May 2012, MPT Hoboken notified the HUMC Entities that it intended to
convert the remainder of its Opco debt under the Convertible Note into equity. To
increase its ownership interest in Opco from 9.9% to 25%, MPT Hoboken required
DHSS approval. Accordingly, Opco submitted a new Certificate of Need
application. Under the Convertible Note, the parties were required to use
“commercially reasonable efforts” to secure DHSS approval.20
DHSS requested that Opco answer a follow-up questionnaire. These
additional questions allegedly related to whether MPT Hoboken, as the Special
Manager, would have any managerial or operational control over Opco in the event
of a Major Default.21 MPT Hoboken and the HUMC Entities were unable to
submit mutually-agreeable responses to the DHSS questionnaire by the deadline,
which meant that MPT Hoboken did not receive the approval necessary to convert
its Opco debt into equity.
I. Recent Developments outside the Pleadings
The MPT Entities filed the Complaint in March 2013. Several days later, in
April 2013, Opco apparently paid an amount equal to 25% of its earlier Tax
20
Convertible Note § 4(d) (“Following the Initial Conversion and notice by the Holder to the
Company and HUMC of any subsequent Conversion, the Parties shall use commercially
reasonable efforts to secure the approval, as soon as reasonably practicable, of the Hospital’s
Regulators for the issuance of the remaining Units to which the Holder shall be entitled to
acquire hereunder pursuant to such Conversion . . . including, without limitation, the approval by
DHSS of any change to the Hospital’s licenses, permits or certificate of need.”).
21
Countercl. ¶¶ 39-40.
9
Distributions to MPT Hoboken. This and similar tax distribution payments in
October and November 2013 were allegedly made “under protest with a complete
reservation of rights,”22 as the HUMC Entities have sued to recover them in the
Counterclaim. According to an affidavit from a purported member of the Opco
Board, “[a]s a result of these payments, MPT Hoboken has now received 25% of
the total tax distributions paid by Opco as of [January 14, 2014].”23
MPT Hoboken also notified the HUMC Entities in December 2013 of its
intent to convert the rest of its Opco debt under the Convertible Note into Opco
equity.24 Since then, the parties have apparently restarted the Certificate of Need
application process with DHSS.
II. ANALYSIS
A. The Procedural Standard of Review
The procedural standard of review for a motion for judgment on the
pleadings under Rule 12(c) is similar to that for a motion to dismiss under
Rule 12(b)(6).25 The Court accepts the non-moving party’s well-pled allegations
as true and views all reasonable inferences in the non-moving party’s favor.
A party’s Rule 12(c) motion for affirmative relief “may be granted only when no
material issue of fact exists and the movant is entitled to judgment as a matter of
22
Id. ¶ 24.
23
Lawler Aff. ¶ 3.
24
Id. ¶ 5.
25
See, e.g., McMillan v. Intercargo Corp., 768 A.2d 492, 500 (Del. Ch. 2000).
10
law.”26 Conversely, a motion to dismiss a claim under Rule 12(c) should be denied
unless the non-moving party “could not recover under any reasonably conceivable
set of circumstances susceptible of proof.”27
B. Contract Interpretation under Delaware Law
“[J]udgment on the pleadings . . . is a proper framework for enforcing
unambiguous contracts because there is no need to resolve material disputes of
fact.”28 Here, the relevant contracts are all governed by Delaware law,29 which
“adheres to the objective theory of contract interpretation.”30 “When the language
of a contract is plain and unambiguous, binding effect should be given to its
evident meaning.”31 “A dispute over a contract term does not, on its own, render
that term ambiguous.”32 “[A] contract is ambiguous only when the provisions in
controversy are reasonably or fairly susceptible of different interpretations or may
26
Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199, 1205
(Del. 1993).
27
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 536 (Del.
2011); see also Wallace ex rel. Cencom Cable Income P’rs II, Inc., L.P. v. Wood, 752 A.2d
1175, 1179-80 (Del. Ch. 1999) (“To award judgment on the pleadings in favor of the defendants,
[the Court] must find that plaintiffs have either utterly failed to plead facts supporting an element
of the claim or that under no reasonable interpretation of the facts alleged in the Complaint
(including reasonable inferences) could plaintiff state a claim for which relief might be
granted.”).
28
Lillis v. AT&T Corp., 904 A.2d 325, 329-30 (Del. Ch. 2006) (citations omitted).
29
See Letter Agreement § 8; Purchase and Sale Agreement § 13.1; Convertible Note § 12(a);
Lease Agreement § 37.11; Opco LLC Agreement § 13.1.
30
Sassano v. CIBC World Markets Corp., 948 A.2d 453, 462 (Del. Ch. 2008).
31
Allied Capital Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1030 (Del. Ch. 2006).
32
Barton v. Club Ventures Invs. LLC, 2013 WL 6072249, at *5 (Del. Ch. Nov. 19, 2013) (citing
City Investing Co. Liquidating Trust v. Continental Cas. Co., 624 A.2d 1191, 1198 (Del. 1993)).
11
have two or more different meanings.”33 “When the provisions in controversy are
fairly susceptible of different interpretations[,] . . . the interpreting court must look
beyond the language of the contract to ascertain the parties’ intentions.”34
C. Whether a Tax Distribution Qualifies as a Distribution Payment
1. The MPT Entities’ Motion
The MPT Entities have moved for judgment on the pleadings that the term
“any distributions” in the definition of Distribution Payment in the Convertible
Note includes Tax Distributions as defined in the Opco LLC Agreement. They
contend that this is the only reasonable interpretation of the term “any,” 35 and they
submit that it would be inappropriate for the Court to rewrite the Convertible Note
for “any” not to include Tax Distributions.36 In opposition, the HUMC Entities
contend that, in light of the other terms of the Convertible Note and the Opco LLC
Agreement, the undefined “any distributions” can only be interpreted as not
including Tax Distributions.37
The Court concludes that the term “any distribution” in the Convertible Note
is ambiguous because it is reasonably susceptible to at least two different
meanings. It is reasonable to interpret “any” as an all-encompassing term, much
33
Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del. 1992).
34
Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997).
35
Pls.’ Opening Br. 15-17.
36
Reply Br. in Supp. of Pls.’ Mot. for J. on the Pleadings (“Pls.’ Reply Br.”) 3-6.
37
Defs.-Counterpls.’ Br. in Opp’n to Pl.-Counterdefs.’ Mot. for J. on the Pleadings (“Defs.’
Answering Br.”) 3-6.
12
like “all.”38 From this perspective, proffered by the MPT Entities, “any
distributions” would include Tax Distributions. But, it is also reasonable to
interpret “any distributions,” in light of the other terms of the Convertible Note and
the Opco LLC Agreement,39 not to include Tax Distributions because the latter
were to compensate Opco members for income taxes solely due to their status as
members. That is, it is reasonable to construe the documents such that MPT
Hoboken is only entitled to Tax Distributions based on income tax liability
attributable to its membership interest in Opco, not for its debt that was convertible
into a membership interest. From this other perspective, as advocated by the
HUMC Entities, MPT Hoboken would not be entitled to pro rata payments of the
Tax Distributions made by Opco to Holdco for taxes based on Holdco’s
membership interest.
One interpretation may be more plausible than the other; however, at this
stage, neither is unreasonable. Because “any distributions” is ambiguous, there is
an issue of material fact as to the meaning of Distribution Payments in the
Convertible Note. The pleadings do not present conclusive evidence of the parties’
38
See Great Hill Equity P’rs IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155, 158 (Del.
Ch. 2013) (“[T]he only reasonable interpretation of the statute [8 Del. C. § 259(a)] . . . is that all
means all as to the enumerated categories, and that this includes all privileges, including the
attorney-client privilege.”).
39
See E.I. du Pont de Nemours & Co., Inc. v. Shell Oil Co., 498 A.2d 1108, 1113 (Del. 1985)
(“In upholding the intentions of the parties, a court must construe the agreement as a whole,
giving effect to all provisions therein. Moreover, the meaning which arises from a particular
portion of an agreement cannot control the meaning of the entire agreement where such inference
runs counter to the agreement’s overall scheme or plan.”) (internal citations omitted).
13
intent. Thus, the MPT Entities’ motion for judgment on the pleadings as to the
interpretation of this term is denied.
2. The HUMC Entities’ Motion
Separate from the issue of the proper interpretation of “any distributions,”
the HUMC Entities seek to dismiss the MPT Entities’ claims that they are in
default of the Convertible Note and other agreements for failing to make Tax
Distributions to MPT Hoboken. They assert, based on the affidavit submitted
outside the pleadings, that they have made the disputed distributions.40 The MPT
Entities, in response, contend that the submission of the affidavit should, under
Rule 12(c), convert this motion for judgment on the pleadings into one for
summary judgment under Rule 56, which would mean that they should have the
opportunity to conduct discovery. They seek limited discovery of certain issues
implicated by the affidavit, including whether all possible payments were timely
made and whether they are entitled to interest for any late payments.41 The HUMC
Entities, for their part, insist that no discovery is necessary because the MPT
40
Defs.-Counterpls.’ Opening Br. in Supp. of their Mot. for J. on the Pleadings (“Defs.’ Opening
Br.”) 10-11.
41
Answering Br. in Opp’n to Defs.-Counterpls.’ Mot. for J. on the Pleadings. (“Pls.’ Answer
Br.”) 5-10. Counsel for the MPT Entities submitted an affidavit under Rule 56(f) to this effect.
Funk Aff. ¶ 2. At oral argument, counsel recognized that it is likely that discovery would
confirm that all possible payments were made. That said, counsel still seeks the opportunity to
verify that issue in discovery. Tr. of Oral Arg. Cross Mots. for J. on the Pleadings (“Tr. of Oral
Arg.”) 26, 40.
14
Entities already have that kind of financial information under the Opco LLC
Agreement.42
This Court “generally will not grant relief if the substance of a dispute
disappears due to the occurrence of certain events following the filing of an
action.”43 The Court recognizes that the purported payments by Opco, as asserted
in the affidavit, could have rendered moot much of the MPT Entities’ allegations
related to Opco’s failure to pay.44 Nonetheless, it is procedurally improper, under
Rule 12(c), for the Court to rely on this affidavit—a document extraneous to the
pleadings—without first providing to the MPT Entities the opportunity to conduct
limited discovery into whether MPT Hoboken was timely and fully paid by
Opco.45 That the MPT Entities may already have access to certain financial
information under the Opco LLC Agreement does not change the Court’s
conclusion on this procedural issue.
The HUMC Entities’ motion to dismiss these claims is denied.
42
Defs.-Counterpls.’ Reply Br. in Supp. of their Mot. for J. on the Pleadings (“Defs.’ Reply Br.”)
3-7.
43
Multi-Fineline Electronix, Inc. v. WBL Corp. Ltd., 2007 WL 431050, at *8 (Del. Ch. Feb. 2,
2007).
44
The Court does not express a view on whether a payment made “under protest” cures a default.
45
Ct. Ch. R. 12(c) (“If, on a motion for judgment on the pleadings, matters outside the pleadings
are presented to and not excluded by the Court, the motion shall be treated as one for summary
judgment and disposed of as provided in Rule 56, and all parties shall be given reasonable
opportunity to present all material made pertinent to such a motion by Rule 56.”).
15
D. Whether the Board and Bylaws Conflict with the Opco LLC Agreement
The parties have cross-moved for judgment on the pleadings as to the MPT
Entities’ breach of contract and declaratory judgment claims that the Board and the
Bylaws violate the terms of the Opco LLC Agreement and the Convertible Note.
The MPT Entities seek judgment in their favor; the HUMC Entities seek to dismiss
the claims.
It is axiomatic under Delaware law that a Delaware LLC is governed by its
operating agreement.46 Under the Opco LLC Agreement, Opco is to be managed
by the General Manager (or, in certain circumstances, the Special Manager).
Because the Bylaws may provide certain management authority to the Board, they
may violate the Opco LLC Agreement.
1. The MPT Entities’ Motion
The MPT Entities contend that the HUMC Entities’ unilateral changes to the
management structure of Opco, by endowing the Board with management
authority beyond that of an advisory committee, are per se violations of the Opco
LLC Agreement.47 In response, the HUMC Entities insist that the Board is merely
advisory because Holdco, the General Manager, retains full management authority
46
See, e.g., Fisk Ventures, LLC v. Segal, 2008 WL 1961156, at *8 (Del. Ch. May 7, 2008), aff’d,
984 A.2d 124 (Del. 2009) (TABLE); see also 6 Del. C. § 18-402.
47
Pls.’ Opening Br. 23-27.
16
over Opco under the Bylaws. Thus, they argue, there is no functional distinction
between the Opco LLC Agreement and the Bylaws.48
The Bylaws facially conflict with the Opco LLC Agreement: the latter vests
exclusive management authority in the General Manager (Holdco), while the
former vests certain managerial rights in the Board. That said, the Opco LLC
Agreement expressly permits advisory committees under Section 3.16, so the facial
conflict is not dispositive of this issue. Rather, the issue is whether the Board
qualifies as an advisory committee.
In this context, the imprecise term “advisory committee” in the Opco LLC
Agreement is ambiguous because it is reasonably susceptible to two
interpretations.49 The Board structure could fall within one reasonable meaning of
advisory committee in that Holdco, as the General Manager, maintains its
management authority of Opco under the Bylaws through its majority voting
representation on the Board and its power to modify and compel any action of the
Board. But, a governance structure requiring Holdco to compel the Board to act
(or to modify the Board’s actions) could be outside the bounds of what a
reasonable interpretation of advisory committee would permit.
The pleadings and the incorporated documents do not contain dispositive
evidence of the parties’ intent in agreeing to the “advisory committee” term of the
48
Defs.’ Answering Br. 10-13.
49
See Rhone-Poulenc Basic Chems. Co., 616 A.2d at 1196.
17
Opco LLC Agreement. Thus, there is an issue of material fact—the meaning of
advisory committee—which precludes granting the MPT Entities’ Rule 12(c)
motion for judgment in their favor.50
2. The HUMC Entities’ Motion
The HUMC Entities assert that, because Holdco’s three representatives
control nine of fourteen votes on the Board, and because Holdco retains final
approval of the Board’s acts under the Bylaws, Holdco still exclusively manages
Opco. Hence, they submit, there is no conflict with the Opco LLC Agreement.51
Moreover, the HUMC Entities argue that this claim is not ripe because the MPT
Entities have not alleged any current or imminent harm due to the existence of the
Board or the Bylaws.52 The MPT Entities, in response, argue that this declaratory
judgment claim is ripe because there is a present dispute over the management of
Opco; they also contend that the Board and its purported authority under the
Bylaws are per se violations of the Opco LLC Agreement.53
This Court has the authority under 6 Del. C. § 18-110(a) to “hear and
determine . . . the right of any person to become or continue to be a manager of a
50
Because the HUMC Entities deny that the MPT Entities did not approve the Board and the
Bylaws, Answer ¶ 33, there is a dispute of material fact that would preclude granting the MPT
Entities’ Rule 12(c) motion as to whether Holdco’s allegedly unilateral creation of the Board and
the Bylaws was a breach of Section 3.16 of the Opco LLC Agreement for failure to obtain MPT
Hoboken’s prior written approval.
51
Defs.’ Opening Br. 13.
52
Defs.’ Reply Br. 10-14; Defs.’ Opening Br. 13-15.
53
Pls.’ Answering Br. 12-16.
18
limited liability company.”54 To exercise its statutory authority55 to hear a claim
seeking a declaratory judgment, the Court must find four elements:
(1) It must be a controversy involving the rights or other legal
relations of the party seeking declaratory relief; (2) it must be a
controversy in which the claim of right or other legal interest is
asserted against one who has an interest in contesting the claim; (3)
the controversy must be between parties whose interests are real and
adverse; (4) the issue involved in the controversy must be ripe for
judicial determination.56
The dispute here over whether the Bylaws grant to the Board managerial rights
beyond that of an advisory committee places a cloud over the management of Opco
as a Delaware LLC. For example, the Bylaws do not appear to contemplate how
Opco is to be governed in the event that MPT Hoboken exercises its power, under
certain circumstances, to remove Holdco as the General Manager of Opco.57 The
risk of future harm to the MPT Entities is sufficient to warrant resolution of this
claim now.58
Based on the allegations of the parties, the Court concludes that this dispute
is ripe for judicial determination. But, for the reasons set forth earlier, an issue of
54
See also Feeley v. NHAOCG, LLC, 2012 WL 966944, at *5 (Del. Ch. Mar. 20, 2012) (“Section
18-110 of the LLC Act grants this Court in rem jurisdiction to determine who validly holds
office as a manager of a Delaware limited liability company.”).
55
See 10 Del. C. § 6501.
56
XL Specialty Ins. Co. v. WMI Liquidating Trust,— A.3d —, 2014 WL 2199889, at *5 (Del.
May 28, 2014) (quoting Stroud v. Milliken Enters., Inc., 552 A.2d 476, 479 (Del. 1989));
57
Purchase and Sale Agreement § 3.8.
58
See KLM Royal Dutch Airlines v. Checchi, 698 A.2d 380, 382 (Del. Ch. 1997) (“Determining
whether the parties’ dispute is ready for decision requires consideration of, inter alia, the present
effects of the challenged conduct versus the future harm to be suffered by the plaintiff if
resolution is delayed, the likelihood of a change in the factual circumstances, and the legal issues
involved.”).
19
material fact—the meaning of “advisory committee”—precludes granting the
HUMC Entities’ Rule 12(c) motion to dismiss.
E. Whether the HUMC Entities Failed to Use Commercially Reasonable Efforts
The MPT Entities claim that, in violation of the Convertible Note, the
HUMC Entities failed to use commercially reasonable efforts to secure DHSS
approval of MPT Hoboken’s conversion of its remaining Opco debt into a
membership interest. They assert claims for breach of contract and for a
declaratory judgment. Specifically, the MPT Entities allege in the Complaint that
the HUMC Entities failed to use commercially reasonable efforts by:
a. Insisting on mischaracterizing the management rights of MPT
Hoboken, or lack thereof, under the LLC Agreement to DHSS;
b. Refusing to clarify the management rights of MPT Hoboken, or
lack thereof, by amending the LLC Agreement . . . ; and
c. Refusing to allow MPT Hoboken to meet with or have any
direct contact with DHSS . . . to clarify and explain the
management rights of MPT Hoboken, or lack thereof.59
The HUMC Entities deny these allegations60 and separately assert, in the
Counterclaim, that MPT Hoboken sought to submit “false and misleading” answers
to DHSS in violation of the Opco LLC Agreement.61 As a result of their
disagreements over how to answer various questions posed by DHSS, the parties
59
See, e.g., Compl. ¶ 27.
60
See, e.g., Answer ¶ 27.
61
See, e.g., Countercl. ¶¶ 42-43.
20
missed the deadline and thereby failed to obtain the approval necessary for MPT
Hoboken to convert its Opco debt into equity.
The HUMC Entities seek dismissal of these claims, contending that the MPT
Entities’ allegations were rendered moot or are not ripe in light of the new
application process with DHSS, which MPT Hoboken initiated in December
2013.62 In opposition, the MPT Entities maintain that their claims relate to the
earlier, unsuccessful application—not the ongoing approval process—and thus are
neither moot nor unripe.63
“According to the mootness doctrine, although there may have been a
justiciable controversy at the time the litigation was commenced, the action will be
dismissed if that controversy ceases to exist.”64 The recently-initiated approval
process does not moot the MPT Entities’ claims because they relate to the prior
application; the controversy continues to exist. In other words, that the parties are
currently seeking DHSS approval does not prevent the MPT Entities from seeking
damages or a declaratory judgment for the HUMC Entities’ purportedly failing to
use commercially reasonable efforts in the separate, unsuccessful approval process.
62
Defs.’ Reply Br. 7-9; Defs.’ Opening Br. 11-13; Lawler Aff. ¶ 5.
63
Pls.’ Answering Br. 10-12.
64
Gen. Motors Corp. v. New Castle Cty., 701 A.2d 819, 823 (Del. 1997) (recognizing that this
general rule has exceptions, including “situations that are capable of repetition but evade review
or matters of public importance”).
21
For this Court to issue a declaratory judgment, the dispute must be ripe.65 A
challenge to the current regulatory approval process with DHSS would not be ripe
because any decision by the Court would be an advisory opinion on the parties’
conduct during an ongoing approval process.66 But, again, the Court’s “common
sense assessment” of this issue is that the MPT Entities’ interest in seeking relief
related to the prior approval process outweighs the possible benefit of postponing
judicial review to allow the matter to develop with greater clarity.67 The
declaratory judgment aspect of this claim is not contingent on future developments;
it is ripe.
The HUMC Entities’ Rule 12(c) motion to dismiss these claims is denied.68
F. Whether the HUMC Entities Properly Alleged Fraud in the Inducement
In the Counterclaim, the HUMC Entities assert a claim for fraud in the
inducement. Specifically, the HUMC Entities allege that, “[i]n the course of
negotiating the HUMC transaction, MPT [i.e., the MPT Entities] represented to
Opco and Holdco that MPT did not intend to finance any transactions with Prime
65
XL Specialty Ins. Co., 2014 WL 2199889, at *5.
66
See Multi-Fineline Electronix, Inc., 2007 WL 431050, at *8 (quoting Energy P’rs, Ltd. v.
Stone Energy Corp., 2006 WL 2947483, at *7 (Del. Ch. Oct. 11, 2006)) (“Generally speaking, an
action is not ripe for adjudication when it is ‘contingent . . . [and requires] the occurrence of
some future event before the action’s factual predicate is complete.’”).
67
See XL Specialty Ins. Co., 2014 WL 2199889, at *6.
68
Separately, the Court notes that it may make sense to defer the resolution of this claim until the
conclusion of the current application process, if for no other reason than to permit the parties
(and thus the Court) to come to a more informed understanding of what commercially reasonable
efforts in this context would require.
22
[Healthcare Services, Inc. (“Prime”)] in New Jersey.”69 This representation was
“knowingly or recklessly false and misleading” because the MPT Entities allegedly
“intended to and did work with Prime in its attempted acquisition of Christ
Hospital” in Jersey City, New Jersey.70 According to the MPT Entities, they
reasonably relied on this representation when deciding to enter into the Medical
Center Transaction, and they have suffered damages as a result of this fraud.71
The MPT Entities seek judgment on the pleadings on this counterclaim on
two grounds: (i) as barred by purported anti-reliance clauses in the Purchase and
Sale Agreement and the Lease Agreement; and (ii) for failure to plead fraud with
particularity under Court of Chancery Rule 9(b).72 In opposing this motion, the
HUMC Entities assert that the integration clauses in the relevant agreements do not
sufficiently disclaim reliance on representations outside the agreements to be
deemed anti-reliance provisions.73 Moreover, to the extent that their claim was not
alleged with particularity, the HUMC Entities stated in their answering brief that
they “will move to amend their Counterclaim” to include an allegation reflecting
additional information that they provided as an interrogatory answer.74
69
Countercl. ¶ 13. Prime is a private company that operates hospitals and medical facilities.
70
Id. ¶ 65.
71
Id. ¶¶ 66-67.
72
Pls.’ Reply Br. 6-13; Pls.’ Opening Br. 17-22;
73
Defs.’ Answering Br. 6-9.
74
Id. 10.
23
Rule 9(b) requires that “the circumstances constituting fraud . . . shall be
stated with particularity.” This particularity pleading standard governs claims for
fraud in the inducement.75 “The factual circumstances that must be stated with
particularity refer to the time, place, and contents of the false representations; the
facts misrepresented; the identity of the person(s) making the misrepresentation;
and what that person(s) gained from making the misrepresentation.”76 More
succinctly, this standard requires some “detail about what was actually said, who
said it, where, [and] when.”77
The HUMC Entities’ conclusory allegations plainly do not satisfy the
pleading standard of Rule 9(b). Among other reasons, the allegations do not state
with particularity what misrepresentation was made, who made it, to whom it was
made, and when and where it was made.
The HUMC Entities’ stated intention to amend their Counterclaim does not
cure this pleading deficiency. A motion to amend a pleading in response to a
motion for judgment on the pleadings under Rule 12(c) is governed by
Rule 15(a).78 Rule 15(a) provides that leave of the Court to amend a pleading shall
75
See, e.g., Anvil Hldg. Corp. v. Iron Acq. Co., Inc., 2013 WL 2249655, at *4-6 (Del. Ch.
May 17, 2013).
76
Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P., 906 A.2d 168, 207-08 (Del. Ch. 2006),
aff’d sub nom., Trenwick Am. Litig. Trust v. Billett, 931 A.2d 438 (Del. 2007) (TABLE).
77
See Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126, 142 (Del. Ch. 2009).
78
The parties debated at oral argument whether a motion to amend a pleading in response to a
Rule 12(c) motion is governed by Rule 15(a) or Rule 15(aaa). Tr. of Oral Arg. 54-56, 69, 73.
Under the current Chancery Court Rules, Rule 15(aaa) does not reference Rule 12(c). But see
24
be “freely given when justice so requires.” “A court will not grant a motion to
amend, however, if the amendment would be futile. An amendment is futile if it
would not survive a motion to dismiss . . . .”79
Assuming, without deciding, that the HUMC Entities’ request is
procedurally proper, the Court concludes that leave to amend should not be given
because the amendment would be futile. The to-be-alleged interrogatory response
states, in its entirety:
The representation set forth in Paragraph 13 of the Counterclaim
Complaint was made to Mr. Garipalli during one or two meetings with
MPT personnel, which included Emmett McLean, Rosa Hooper, and
Steve King. The meeting or meetings took place in the second half of
2010, at the very outset of the relationship between Defendants and
Plaintiffs, before the parties had commenced working on the Bayonne
Medical Center transaction [which took place before the Medical
Center Transaction]. The representation was made to Mr. Garipalli by
Mr. McLean, and/or Ms. Hooper, and/or Mr. King. The witnesses
were Mr. Garipalli and Mr. McLean, and/or Ms. Hooper, and/or Mr.
King.80
Any amended pleading based on this additional information would still not satisfy
the particularity pleading standard of Rule 9(b). There would only be an allegation
Braddock v. Zimmerman, 906 A.2d 776, 783 (Del. 2006) (“Rule 15(aaa) was written to
accomplish that objective by requiring plaintiffs, when confronted with a motion to dismiss
pursuant to any of Ch. Ct. R. 12(b)(6), (c) or 23.1, to elect to either: stand on the complaint and
answer the motion; or, to amend or seek leave to amend the complaint before the response to the
motion was due.”); Taubenfeld v. Marriott Int’l, Inc., 2003 WL 22682323, at *2 (Del. Ch.
Oct. 28, 2003) (quoting Rule 15(aaa) as governing a motion to amend in response to a Rule 12(c)
motion).
79
Cartanza v. LeBeau, 2006 WL 903541, at *2 (Del. Ch. Apr. 3, 2006).
80
Pls.’ Answering Br. 10 (quoting Defs.-Counterpls.’ Resps. to Pls.’ First Set of Interrogs.
Directed to Defs. at Resp. to ¶ 9).
25
of a general statement made by one of three people at one or two meetings held at
an undisclosed location at some point during a six-month period. If the
representation was important enough to the HUMC Entities to rely on it when they
decided to enter into the Medical Center Transaction with the MPT Entities, then it
is not an inappropriate burden to require them to allege more—and with
particularity—to state a claim for fraud under Rule 9(b).
Accordingly, any motion by the HUMC Entities to amend their pleading is
denied, and the MPT Entities’ Rule 12(c) motion to dismiss this claim is granted.81
III. CONCLUSION
The MPT Entities are entitled to judgment on the pleadings dismissing the
HUMC Entities’ counterclaim for fraud in the inducement for failure to plead fraud
with particularity under Rule 9(b). The MPT Entities’ Rule 12(c) motion is
otherwise denied. The HUMC Entities’ Rule 12(c) motion is also denied.
IT IS SO ORDERED.
/s/ John W. Noble
Vice Chancellor
81
Based on this conclusion, the Court need not determine whether this counterclaim is barred by
the provisions of the Purchase and Sale Agreement or the Lease Agreement.
26