Matthew v. Laudamiel, et al.
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE STEWART MATTHEW, Plaintiff, v. CHRISTOPHE LAUDAMIEL, ROBERTO CAPUA, ACTION 1 SRL, FLà KT WOODS GROUP SA and SEMCO LLC, Defendants. CHRISTOPHE LAUDAMIEL, ROBERTO CAPUA, ACTION 1 SRL, Counterclaim Plaintiffs, v. STEWART MATTHEW, Counterclaim Defendant. : : : : : : : : : : : : C.A. No. 5957-VCN : : : : : : : : : : : MEMORANDUM OPINION Date Submitted: March 1, 2012 Date Decided: June 29, 2012 Thad J. Bracegirdle, Esquire of Wilks, Lukoff & Bracegirdle, LLC, Wilmington, Delaware, Attorney for Plaintiff and Counterclaim Defendant. Gregory V. Varallo, Esquire and Scott W. Perkins, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware, and Roger E. Barton, Esquire and Randall L. Rasey, Esquire of Barton Barton & Plotkin LLP, New York, New York, Attorneys for Defendants and Counterclaim Plaintiffs Christophe Laudamiel, Roberto Capua, and Action 1 srl. NOBLE, Vice Chancellor I. INTRODUCTION In ( this action, Plaintiff/Counterclaim Defendant Stewart Matthew asserts various claims for damages against former business associates, including his former fellow members and Board of Managers members claims relate to the dissolution of Aeosphere, which he argues was wrongfully undertaken by the other Managers in order to remove him from a cutting-edge and potentially lucrative fragrance business. The former members and Managers of Aeosphere (besides Matthew) Defendants/Counterclaim Plaintiffs Christophe (Laudamiel and Capua, , and Action 1 srl (Laudamiel, Defendants bring their Verified Capua, and Action 1, Verified ) against Matthew. The Verified Counterclaims relate to actions Matthew took or did not take in his capacity as a Manager or co- s motion for partial summary judgment on Count I and Count V of his Second Amended Verified Complaint (the Complaint . 1 II. PARTIES Matthew was a member, Manager, and co-CEO of Aeosphere. Laudamiel was also a member, Manager, and co-CEO of Aeosphere. Action 1, an Italian business entity, was a member of Aeosphere. Capua was a Manager of Aeosphere and the majority owner of Action 1. III. BACKGROUND1 A. Aeosphere, a Delaware limited liability company , was founded by Matthew and Laudamiel in June 2008 with a commercial focus on the development and marketing of fragrance technologies and systems. Matthew had previously worked in corporate finance, and Laudamiel was an accomplished perfumer. In May 2009, Action 1 invested 1.55 million euros in Aeosphere and, in return, 300 preferred membership units. Matthew and Laudamiel each held 35% of the C voting equity in the form of 350 each. At the time of Action 1's investment, the members entered into the Amended and Restated Limited Liability Company Agreement of Aeos 1 Unless otherwise noted, the factual background is taken from allegations in the Complaint that were admitted by the Defendants in their Verified Answer to the Second Amended Complaint. Additional explanation of the events that have brought the parties together in this venue may be found in Matthew v. Laudamiel Matthew I 2 , 2 which governed their rights and obligations as members of Aeosphere. Under the LLC Agreement, Aeosphere was to be managed by a Board Manager. 3 At all times relevant to Matthew's claims, the Board consisted of Matthew, Laudamiel, and Capua. The two claims for which Matthew seeks partial summary judgment relate to an alleged breach of the LLC Agreement by the Manager Defendants, and one of the affirmative defenses asserted by the Manager Defendants in response relates to es of the LLC Agreement. The primary LLC Agreement provisions at issue concern the circumstances under which an Emergency Board Meeting may be called, the responsibility of a Manager to attend a properly called Board meeting, and the Board vote required to authorize the dissolution and winding up of Aeosphere. Section 5.2.3 of the LLC Agreement set forth the requirements for calling a Board meeting. It provided, in part: 5.2.3 Board Meetings; Emergency Meetings. Meetings of the Board may be called by any Board Member and the Board shall meet not[] less often than quarterly. All meetings will be held upon two (2) weeks notice to each Board Member . . . Notwithstanding the foregoing, a Board Member may call an emergency meeting of the Board upon twentydelivered personally or by telephone, telegraph or facsimile (with 2 3 Compl., Ex. H. Id. at § 5.2.1. 3 confirmation of delivery) if such Board Member believes in goodfaith that such meeting is necessary to preserve a Company right or to avoid a Company liability or adverse consequence to the Company. A notice must specify the purpose of any meeting and contain a detailed agenda. Notice of a meeting need not be given to any Board Member who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof . . . Subject to Section 5.2.6 [t]he presence of a majority by number of all Board Members will constitute a quorum and will be required for the conduct of any meeting of the Board. . . . Board Members may participate in a meeting through the use of conference telephone . . . Once a quorum is present, the Board may only act through Majority Vote; or by such greater percentage as required by this Agreement. attend Board meetings and vote on proposed actions and it provided: 5.1.2 Managers shall use their best efforts to attend all properly called meetings of the Board. If this Agreement or [the Delaware Limited Liability Company Act, 6 Del. C. ch. 18] requires a Manager to vote in order to approve or disapprove any action, such Manager shall act with diligence and shall not unreasonably delay approving or disapproving any such action. It is further recognized and agreed between the Company and the Members that damages at law will be an insufficient remedy to the Company and the Members in the event a manager does not act with diligence in respect of any matter in which a Manager is required to vote hereunder. Therefore, in the event a Manager breaches such duty, the Company and the Members will have the right to pursue an action for injunctive relief and specific performance from any court of competent jurisdiction. Section 5.2.6, which governed the Board vote required to approve certain actions, provided in part: 5.2.6 Required Vote. (a) Except as otherwise set forth in this Section 5.2.6, the vote of both [Matthew] and [Laudamiel] is required to approve any 4 actions which require approval by the Board, provided, that if [Matthew] and [Laudamiel] are deadlocked, [Capua] shall cast the tiebreaking vote; provided further however that if either [Matthew] or [Laudamiel] is no longer on the Board, any two Board Members may approve any action that requires approval by the Board. (b) For so long as [Matthew] and [Laudamiel] serve on the Board, unanimous approval of the Board is required for the Company to: (i) amend, mo employment agreements] (ii) undertake the sale, lease, disposal, transfer, hypothecation or other disposal of all, or any material portion, of the assets of the Company or (iii) wind up of the Company. Finally, § 9.1 provided that Aeosphere would be disposed of, and its affairs wound up upon . . . the approval of the Board or the Majority Vote of the Holders of the Comm pursuant to § 9.3, events; and, Section 9.1, the Company [would] continue solely for the purpose of winding up its affairs in an or B. By May of 2010, Aeosphere was in poor financial condition,4 and Matthew and Laudamiel no longer had a productive professional relationship. Attempts to 4 it is clear from the undisputed facts that, if Aeosphere continued burning cash at the rate it had in 5 resolve the disputes between Matthew and Laudamiel were unsuccessful. On , 5 Capua delivered notice of an May 3, 2010, in an email emergency Board meeting to be held by conference call on May 4, 2010 (the In the body of the Notice Email, Capua stated that the Emergency Board Meeting was being held Laudamiel], and most importantly due to the catastrophic financial situation of our 6 An agenda was attached to the Notice Email Agenda listed nine items that the Board members were expected to vote on at the Emergency Board Meeting. The first i wind7 the Agenda included terminating Other items on mployees, closing all of its offices, distributing its intellectual property rights, informing its vendors of the -1 forms to its members, and informing its accountants of the decision to dissolve Aeosphere.8 Matthew does not appear to previous months, it would have soon been rendered insolvent, absent an infusion of investment capital. 5 Aff. of Stewart Matthew, Ex. A. 6 Id. 7 Id. 8 Id. 6 dispute that the Notice Email was sent at least 24 hours before the Emergency Board Meeting was held. After Capua sent the Notice Email, Maury Bricks , counsel,9 sent an email to Capua, Laudamiel, and Matthew regarding the Emergency Board Meeting. 10 In this email, Bricks stated that certain items , could not be addressed at an Emergency Board Meeting, the subject matter of which was limited by § 5.2.3 of the LLC Agreement. 11 Furthermore, Bricks stated that dissolution required the unanimous vote of the holders of Common Units or the unanimous vote of the Board.12 Shortly after Bricks sent his email, Kurt Heyman, an attorney who represented Matthew, sent an email to Gianluigi Esposito, an attorney who Heyman believed represented both Capua and Laudamiel.13 In his email, Heyman stated that Aeosphere could not be dissolved in the dissolution.14 Emer The Emergency Board Meeting was held on May 4, 2010. Laudamiel and Capua, along with their personal attorneys, attended the Emergency Board 9 Aff. of Stewart Matthew, Ex. D (Minu Aff. of Stewart Matthew, Ex. B. 11 Id. 12 Id. 13 Aff. of Stewart Matthew, Ex. C. 14 Id. 10 7 Meeting; Matthew did not attend. The Minutes,15 which were signed by Laudamiel and Capua, reflect that Laudamiel and Capua condition and the disagreements between Matthew and Laudamiel, and then they voted to dissolve and wind up Aeosphere. Laudamiel and Capua also voted to terminate all of A damiel, close its offices, and notify its creditors of the dissolution.16 Laudamiel, in his capacity as a Manager, was designated to oversee the winding up and liquidation of Aeosphere.17 On May 11, 2010, Laudamiel filed a certificate of cancellation with the Delaware Secretary of State.18 IV. CONTENTIONS Matthew moves for partial summary judgment on Count I and Count V of the Complaint. Count I is a claim against the Manager Defendants19 for breach of the LLC Agreement. Matthew contends that the Manager Defendants breached the LLC Agreement by causing Aeosphere to be dissolved and wound up without his consent, which he asserts was required.20 Count V is a conversion claim. Matthew 15 See supra note 9. Id. 17 Id. 18 Aff. of Stewart Matthew, Ex. E. 19 Although, in the Complaint, Count I is brought against all of the Defendants, the specific claim 16 dissolution and winding up is brought only against Laudamiel and Capua. See in Supp. of His Mot. for -2, 10. 20 The Complaint lists other alleged breaches of the LLC Agreement for which Matthew has not sought partial summary judgment, including his claim that Laudamiel and Capua breached the 8 argues that by wrongfully dissolving Aeosphere, the Manager Defendants converted his Common Units. According to Matthew, the undisputed facts of this case establish that the Manager Defendants are liable for a breach of the LLC Agreement and conversion of his Common Units. The Manager Defendants argue that Matthew is not entitled to partial summary judgment. First, the Manager Defendants contend that their actions did not constitute a breach of the LLC Agreement. Second, according to the Manager Defendants, even if they breached the LLC Agreement, Matthew committed material breaches first,21 and, therefore, their breach was excused. At the very least, the Manager Defendants argue, they have raised disputed issues of material fact regarding whether Matthew committed material breaches of the LLC Agreement before they took the acts of which he complains. Third, the Manager Defendants argue that, by refusing to attend the Emergency Board Meeting, LLC Agreement by calling the Emergency Board Meeting without proper justification. Matthew sought partial summary judgment on Count I only under the theory that Laudamiel and Capua, See Opening Br. 1Reply Br -3; id. at 3-4 (stating that, even if the Court found an issue of material fact related to whether the Emergency Board s] motion for Oral Argument -13. 21 In their brief, the Manager Defendants also argued that Matthew breached the implied covenant of good faith and fair dealing by refusing to approve or disapprove contracts, by resources to the ScentOpera, and by refusing to attend the Emergency Board Meeting, and that these breaches of the implied covenant excused their alleged breach of the LLC Agreement. counterclaim that was based, in part, on these same allegations, concluding that none of these allegations stated an implied covenant counterclaim. See Matthew I, 2012 WL 605589, at *17*20. 9 Matthew waived his right to vote on the issues addressed at that meeting; thus, their vote to dissolve Aeosphere did not violate the terms of the LLC Agreement. Fourth, the Manager Defendants contend that Matthew is not entitled to partial summary judgment because he has not proven that any damages resulted from the alleged breach of contract or alleged conversion of his Common Units. Fifth, according to the Manager Defendants, under § 7.1 of the LLC Agreement, they cannot be held liable for any losses or damages suffered by Matthew unless he proves that the losses or damages were the result of fraud, gross negligence, intentional misconduct, or a knowing violation of law. Sixth, and finally, the Manager Defendants argue that Matthew may not be granted partial summary judgment on his conversion claim because it is based on a dissolution violated the LLC Agreement and, hence, violated Delaware law. Therefore, according to the Manager Defendants, because Matthew is not entitled to partial summary judgment on Count I, he cannot prevail on Count V, either. In response, Matthew contends that the Manager breach the LLC Agreement and, regardless, that their argument to the contrary was partial summary judgment. Matthew also argues that the Manager Defendants have not supported their contentions that he committed a prior breach of the LLC Agreement with a factual showing and, instead, rely solely upon allegations contained in the Verified 10 Counterclaims, which he claims are insufficient given the current procedural posture. Even accepting these allegations as true, though, Matthew claims that his alleged breaches would not rise to a level that would excuse the Manager , Matthew argues that the Manager waiver argument fails as a matter of law and that he is not required to prove damages in order to prevail on partial summary judgment. V. ANALYSIS A. Legal Standards To prevail on a motion for summary judgment, a moving party must demonstrate that there are no genuine issues of material fact in dispute and that he is entitled to judgment as a matter of law.22 When examining the record, the Court must draw every reasonable inference in the non- 23 The moving party bears the initial burden of demonstrating the absence of any genuine issue of fact, and any doubt regarding the existence of such an issue will be resolved against the movant.24 If the moving party introduces facts which, if not denied, entitle him to summary judgment, the burden shifts to the opposing party to dispute the facts.25 22 Ct. Ch. R. 56(c); In re Oracle Corp., 867 A.2d 904, 926 (Del. Ch. 2004), (Del. 2005). 23 In re Oracle Corp., 867 A.2d at 926. 24 Scureman v. Judge, 626 A.2d 5, 10 (Del. Ch. 1992). 25 , 402 A.2d 382, 385 (Del. Ch. 1979). 11 , 872 A.2d 960 In order to decide this motion for partial summary judgment, the Court must interpret several provisions of the LLC Agreement. When the issue before the Court involves the interpretation of a contract, summary judgment is appropriate 26 only if the contract in question is unambiguous. understood by an objective, reasonable third-party.27 Delaware adheres to the Where contract language is clear and unambiguous, the ordinary and usual meaning of the chosen words will generally establish the parties' intent. 28 controversy are reasonably or fairly susceptible [to] different interpretations or 29 contractual terms to impart ambiguity where ordinary meaning leaves no room for 30 easonable person in the position of the 31 and Winding Up B. The Court contention that the Manager Defendants breached the LLC Agreement by dissolving and winding up Aeosphere 26 United Rentals, Inc. v. RAM Hldgs., Inc., 937 A.2d 810, 830 (Del. Ch. 2007). , 2005 WL 1038997, at *5 (Del. Ch. Apr. 29, 2005). 28 W. Willow-Bay Court, LLC v. Robino-Bay Court Plaza, LLC, 2007 WL 3317551, at *9 (Del. Ch. Nov. 2, 2007), aff'd, 985 A.2d 391 (Del. 2009). 29 Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del. 1992) (citation omitted). 30 Id. (citation omitted). 31 Id. (citation omitted). 27 12 without proper Board approval. Matthew presents a straightforward argument that Aeosphere was improperly dissolved and wound up. Section 9.1 of the LLC Agreement set forth the events upon which Aeosphere could have been dissolved and wound up. The only such event potentially applicable in this instance approval of the Board. 32 According to Matthew, the dissolution and winding up of Aeosphere could not have been properly authorized by the Board, as the Manager Defendants claim, because § 5.2.6(b)(iii) provided that, so long as both Matthew and Laudamiel served on the Board, oard is required . . . all three Managers, not merely unanimous approval of a two-Manager quorum. Therefore, under his reading of the LLC Agreement, the vote taken at the Emergency Board Meeting was insufficient to approve the dissolution and winding up of Aeosphere because only Laudamiel and Capua voted. Matthew also argues that, even if § 5.2.6(b) is found to not apply to a vote to dissolve or wind up Aeosphere, the general provision covering Board votes, § 5.2.6(a), rendered the purported approval improper. Section 5.2.6(a) provided that, generally, the votes of both Matthew and Laudamiel were required to approve 32 inapplicable because Matthew held 50% of the Common Units, and there are no allegations that he voted, in his capacity as a holder of Common Units, in favor of the dissolution and winding up. 13 they were Thus, according to Matthew, his vote was needed to approv § 5.2.6(a). The Manager Defendants contend that they did have the power to dissolve and wind up Aeosphere. First, they argue that the decision to dissolve Aeosphere did not require unanimous approval of the Board pursuant to § 5.2.6(b) because that provision referred to winding up Aeosphere, not dissolving it. Second, to the extent that § 5.2.6(b) applied to , the Manager Defendants assert necessarily require the approval of each of the three Managers. Instead, for purposes of § 5.2.6(b) referred to the unanimous approval of all the Managers present at a Board meeting at which a quorum of the Managers was present. Pursuant to § 5.2.3, [d] thus, Laudamiel and Capua constituted a quorum. In support of their argument that did not require the vote of all three Managers, the Manager Defendants point to § 5.2.1, which stated that additional Managers Manager Defendants, this demonstrates that, when the was used without a 14 specific reference to all three Managers, the action in question did not necessarily require the approval of all three Managers. In response, Matthew contends that the Manager Defendants did not raise this argument until oral argument, and, as a result, the Court should not consider it. He also contends without a reference to or that in some other to § 5.2.6(b). As his counsel explained at dissolution without unanimous approval but then wait for everyone to agree how to wind it up. Without dissolution there is no winding up. And it only makes sense that those two go hand-in- 33 dissolution and winding up of Aeosphere is based upon the contention that a unanimous vote of all three Managers was required pursuant to § 5.2.6(b)(iii) to dissolve and wind up Aeosphere. But, a plain language reading of the unambiguous language of § 5.2.6(b)(iii) reveals that it spoke only ability to wind up Aeosphere, not dissolve it. While the dissolution of an LLC and 33 Tr. 39-40. 15 the process of winding it up are closely related, they are distinct concepts and the terms are not synonymous.34 Matthew seemingly this LLC Agreement provision, which can be read to require unanimous Board approval to wind up, but not dissolve, Aeosphere. Indeed, such an arrangement, where it is easier, perhaps, to dissolve an LLC than to wind it up, does seem strange. One problem that could arise in such a case is that an LLC properly dissolved by a majority of its managers would need to seek the assistance of the Court to wind up because it lacks unanimous approval of the managers to do so.35 Regardless of the advisability of such a provision, the plain language of § 5.2.6(b) required unanimous approval to wind up Aeosphere, but not to dissolve it. Even if 34 Basically, an LLC is wound up after it has been dissolved. See 6 Del. C. §§ 18-801-18-804. There is an argument an was trying to convey at oral argument that, in the LLC Agreement, dissolution and winding up were viewed as two steps of one process and, therefore, the same standard for Board approval must have applied to both. Sections 9.1 and 9.3 could be viewed as supporting this argument. One might contend that process of dissolution, asset disposal, and winding up automatically followed, without the possibility of (or need for) any further Board votes. If this argument is accepted as true, it is difficult to envision how the decisions (or decision) to dissolve and wind up Aeosphere could have been subject to different standards of approval. Even considering such an argument, the LLC Agreement would still be, at least, ambiguous regarding whether § 5.2.6(b) applied to a vote to dissolve Aeosphere the first step in such a process because it refers specifically and unambiguously to a vote on winding up the Company. If the Court were to conclude, following this line of argument, that the LLC Agreement was ambiguous with regard to the applicability of § 5.2.6(b) to a vote on dissolution, Matthew would not be entitled to partial summary judgment on his breach of the LLC Agreement claim based upon this provision. This is the same conclusion the Court ultimately reaches in the primary text of this Memorandum Opinion after considering whether Matthew has shown that § 5.2.6(b) should be reformed. 35 Alternatively, this might be the aim of such a provision, since a Court-supervised wind up process might serve to protect the interests of members in the minority who oppose a wind up plan supported by the majority. 16 Matthew is correct and this wa need first to determine that the LLC Agreement needs to be reformed to require unanimous Board approval in order to dissolve Aeosphere before it could award damages to Matthew for breach of this (as-of-yet illusory) provision. mutual mistake, or (ii) a unilateral mistake by the plaintiff, combined with knowing silence by the defendant. 36 The uncontested facts before the Court do not satisfy either of these standards.37 Therefore, Matthew has not shown that his vote was needed to dissolve Aeosphere under § 5.2.6(b).38 In the alternative, Matthew argues that even if § 5.2.6(b) does not apply to a vote on whether to dissolve Aeosphere, his vote was still required under § 5.2.6(a). Implicit in this argument is the contention that participate in the Emergency Board Meeting39 did not Matthew and 36 Amstel Assocs., L.L.C. v. Brinsfield-Cavall Assocs., 2002 WL 1009457, at *5 (Del. Ch. May 9, 2002) (citation omitted). 37 To prove mutual mistake, the plaintiff must show that both parties were mistaken about a material term of the written agreement and show by clear and convincing evidence that the parties' actual, oral agreement was not accurately reflected in their executed written contract. Id. The uncontested facts currently on the record do not support such a showing. With regard to a possible unilateral mistake, there are no uncontested facts on the record to support the requisite Manager Defendants. 38 The Court agrees with Matthew that the Manager Defendants did not timely raise the argument that § 5.2.6(b) did not apply to a vote to dissolve Aeosphere. Nonetheless, Matthew simply did not meet his burden of showing that the undisputed facts on the record, which include the language of § 5.2.6(b), entitle him to judgment as a matter of law regarding this claim. 39 For purposes of this motion, the Court will assume that the Emergency Board Meeting was properly called because Matthew does not seek partial summary judgment on his claim that it was improperly called. Of course, if Matthew were to show that the Emergency Board Meeting 17 Laudamiel that Capua broke with a tie-breaking vote. 40 This issue cannot be resolved on summary judgment with the record currently before the Court. The question of whethe in making business decisions, in his roles as a Manager and a co-CEO, -breaking power is an issue that is central to some of the Verified Counterclaims, and it would be more properly decided with the aid of a more robust factual record.41 In sum, Matthew is not entitled to partial summary judgment on the claim that the Manager Defendants breached the LLC Agreement by dissolving Aeosphere without proper authority because he has not shown that a Board vote on Aeospher was governed by § 5.2.6(b) or, if the vote was governed by § 5.2.6(a), that his dissolution. 40 41 In the context of the Verified Counterclaims, Matthew has argued that assuming the actions -breaking power. See Opening Br. in Supp. of his Mot. to Dismiss Counts II, IV, and V of the Am. Verified Countercls. of Defs. Christophe Laudamiel, Roberto Capua, and Action 1 srl 10-11. Unsurprisingly, the Defendants have argued that they had no such power. See Br. of Defs. Counts II, IV, and V of their Am. Verified Countercls. 7-8. Assuming that the same arguments g, in the context of conclusion opposite from that which they argued for in the context of the Verified Counterclaims. Of course, these arguments may be inapplica Board Meeting, but, without a more detailed factual record, it is too early for the Court to make this determination. Although the Manager Defendants did not raise this issue in opposition to on for partial summary judgment, the Court should not ignore it. It is implicated by the facts and arguments presented by Matthew, and its resolution could have collateral effects on other aspects of this litigation. 18 While Matthew has not met the summary judgment standard with regard to his claim that Aeosphere breached the LLC Agreement As described above, the parties disagree about approved at the Emergency Board Meetin interpretation all three Board members is the only reasonable interpretation. Generally, under § 5.2.6(a), actions requiring Board approval needed only to Capua could cast a tie-breaking vote. The other subsections of § 5.2.6 set forth different combinations of Manager votes that served as Board approval for certain, specified actions. For example, unanimous approval was required to wind up Aeosphere;42 the vote of any two of the three Managers was required to approve certain actions;43 other actions required the vote of Capua and any one of the other two Managers;44 and actions in which a Manager had a personal interest needed to 42 LLC Agreement § 5.2.6(b)(iii). Id. at § 5.2.6(c). 44 Id. at § 5.2.6(d). 43 19 45 These different approval schemes made certain actions easier to approve, made others more difficult to approve, and ensured that certain Managers either approved or did not vote on specific actions. The actions for which § up of Aeosphere. A reasonable person in the position of the parties would not interpret the LLC Agreement as providing that these actions could have been more easily approved than the typical action requiring Board approval, but the interpretation has this effect § 5.2.6(b), if all three of the Managers were present at a Board meeting, all three would need to approve the decision to wind up Aeosphere. But, according to the Manager Defendants, if only two Managers were present at a meeting a quorum those two Managers could approve the decision to wind up Aeosphere, even if either Matthew or Laudamiel did not vote. Therefore, in the second scenario, the Manager Defendants interpretation of § 5.2.6(b) actually results in 45 Id. at § 5.2.6(f). 20 general standard for Board approval set forth in § 5.2.6(a) because it would allow Laudamiel and Capua, alone, to approve an action without meeting cast a tie-breaking vote. While this distinction may seem minor and merely procedural, 46 the fact that the Manager De § 5.2.6(b) would, even if only in a technical sense, render it easier to meet than § 5.2.6(a) points to the unreasonableness of this interpretation. The only reasonable interpretation of § 5.2.6(b) is that it required the approval of all three Managers to approve the enumerated actions. 47 As a result, unless the Manager Defendants prevail on one of their affirmative defenses or Matthew is unable to prove that he suffered any damages, the Manager Defendants will be liable for a breach of § 5.2.6(b)(iii) of the LLC Agreement. C. The Manager Defendants argue that, even if their approval of the decision to wind up Aeosphere constituted a breach of the LLC Agreement, the breach was 46 By requiring a deadlock between Matthew and Laudamiel before Capua can cast a tie-breaking vote, § 5.2.6(a) ensures that both Matthew and Laudamiel have the opportunity to vote on and, presumably, explain their views on a matter. This process could sway (at least in theory) Capua one way or the other; therefore, the deadlock requirement should not be readily discounted. This view that the deadlock requirement was important is buttressed by the fact that the parties bothered to include it in § 5.2.5(a). Had it been seen as merely a procedural matter lacking in substance and import, the general requirement for Board approval could have been the approval of any two of the three Managers, which was the standard for Board approval of certain actions under § 5.2.6(c). 47 meaning of the unanimity requirement in § 5.2.6(b) was not timely raised. 21 material breaches of the LLC Agreement. The Manager Defendants allege that Matthew committed numerous breaches of the LLC Agreement before the Emergency Board Meeting. For example, the Manager Defendants allege that Matthew, in his roles as a Manager and a co-CEO, in breach of the LLC Agreement, refused either to approve or to disapprove certain contracts that required his approval. Examples of these contracts include Christoph d perfumer. 48 Additionally, the Manager Defendants have alleged that Matthew breached the LLC Agreement by improperly approving various contracts that also roval, including contracts to hire a headhunter and a personal assistant and contracts related to the ScentOpera. 49 The Manager Defendants contend that even if they have not proven their affirmative defense of a prior material breach, they have, at the very least, raised a disputed issue of material fact that requires trial. In response, Matthew argues that, on a motion for summary judgment, the Manager Defendants may not simply rely upon the allegations of the Verified Counterclaims as support for these alleged breaches. Furthermore, according to 48 49 Countercls. ¶¶ 31-34. Id. at ¶ 30. 22 Matthew, defense would still fail because the breaches alleged are not material. As previously recognized by this Court: Substantial failure to live up to the material terms of a valid contract nullifies that contract. A party may terminate or rescind a contract because of substantial nonperformance or breach by the other party. Not all breaches will authorize the other party to abandon or refuse further performance. To justify termination, it is necessary that the failure of performance on the part of the other go to the substance of the contract. Modern courts, and the Restatement (Second) of Contracts, recognize that something more than mere default is ordinarily nece s performance in the typical situation, subscribing to the general rule that where the performance of one party is due before that of the other party, such as s performance requires a period of time, an uncured failure of performance by the former can suspend or s duty of performance only if the failure is material or substantial.50 In sum, although a material breach excuses performance of a contract, a nonmaterial or de minimis breach will not allow the non-breaching party to avoid its obligations under the contract. 51 50 DeMarie v. Neff, 2005 WL 89403, at *4 (Del. Ch. Jan. 12, 2005) (emphasis in original) (internal quotations and citations omitted). Citing the portion of DeMarie quoted above, Matthew also argues that his alleged breaches must be immateri -requisite for any valid DeMarie, 2005 WL 89403, at *4). The Court rejects this argument because DeMarie did not limit the ability of one party to void a contract due to another See DeMarie, 2005 WL 89403, at *4. 51 DeMarie, 2005 WL 89403, at *4. 23 Therefore, the two key questions are (1) whether the factual allegations of the Verified Counterclaims may be used to raise an issue of material fact sufficient burden under the summary judgment standard material breaches nce under the LLC Agreement. The Court concludes that the factual allegations contained in the Verified Counterclaims may be used to raise an issue of material fact and that they have raised issues of material fact related to and the materiality of those alleged breaches. Matthew first argues that the Court need not even consider the Manager contention that their prior breach affirmative defense raises an issue of material fact because it is based solely upon the factual allegations set forth in the Verified Counterclaims. A verified pleading can be used as an affidavit if the facts stated therein are true to the party's own knowledge. 52 Concerning the acts and deeds of others, verified pleadings must contain an affirmation by the filing party that the information is believed by the party to be true. 53 In this case, the The factual allegations underlying this argument were set forth in the Manager 52 Taylor v. Jones, 2002 WL 31926612, at *2 n.6 (Del. Ch. Dec. 17, 2002) (citing Bruce E.M. v. Dorthea A.M., 455 A.2d 866, 869 (Del. 1983)). 53 Id. 24 erified Counterclaims.54 The portions of the Verified Counterclaims relevant to this argument concern the acts of Matthew. Therefore, the verification portion of the Verified Counterclaims, which recites that the allegations of the Verified Counterclaims true and correct to the best of [Laudamiel's and 55 ] knowledge Counterclaims to be used as an affidavit. is sufficient to allow the Verified In his reply to the Verified Counterclaims, Matthew generally denies these factual allegations.56 As a result, the facts are in dispute. Alternatively, Matthew contends that, even if the Court were to accept the truth of the Manager Defendant LLC Agreement, such breaches were not material and, therefore, could not excuse that Matthew engaged in a pattern of conduct that made the governance structure set forth in the LLC Agreement unworkable. At the core of this pattern of conduct were the actions that the Manager Defendants allege constitute breaches of the LLC Agreement. In this sense, the Manager Defendants seem to argue that the 54 55 See Countercls. ¶¶ 30-34. Id. 56 ims of Defendants Christophe Laudamiel, Roberto Capua and Action 1 srl ¶¶ 30-34. 25 ter than the sum of the parts. Within the context of a disclosure claim, it is commonly stated that the determination of materiality is a mixed question of law and fact. 57 This is so because the determination of materiality involves the application of a legal standard to a particular set of facts.58 The same may be said about assessing the materiality of a breach of contract. The Supreme Court, citing the United States Suprem question of fact, which is not generally suited for disposition by summary judgment 59 factual disputes concerning the occurrence or materiality of [an] alleged breach itself may prevent summary 60 The Court cannot, on the record before it, determine as a matter of law whether the alleged breaches were material. The nature of the alleged breaches requires the Court to consider a broader factual context than what is currently reflected in the undisputed facts in order to determine whether the alleged breaches were material. In other words, the alleged breaches, on their faces, are neither so 57 , 742 A.2d 845, 850 (Del. 1999). See Branson v. Exide Elecs. Corp., 645 A.2d 568 (Del. 1994) (TABLE). 59 Id. (citing TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 450 (1976)). See also Pfeffer v. Redstone, 965 A.2d 676, 685 (Del. 2009) (stating that the issue of materiality is predominately a question of fact). 60 10B CHARLES ALAN WRIGHT ET AL., FEDERAL PRACTICE AND PROCEDURE § 2730.1 (3d ed. 2012). 58 26 severe, nor so insignificant, that the Court can assess their materiality without the aid of a fuller s Board, the impact 61 severity of other brea Since the Manager Defendants have raised contested issues of fact that are, potentially, material, Matthew has not carried his burden and is not entitled to partial summary judgment on Count I. D. The Conversion Claim Matthew is not entitled to partial summary judgment on Count V. in support of his conversion claim is based on the premise and winding up violated Delaware law because these actions were approved in a manner that violated the LLC Agreement. Therefore, since Matthew has not prevailed on partial summary judgment on his claim that Laudamiel and Capua are liable for a breach of the LLC Agreement related to their dissolution and winding up, he cannot prevail on his conversion claim, either. 61 assessment of materiality. 27 VI. CONCLUSION as to Count I and Count V is denied.62 IT IS SO ORDERED. 62 It is not anticipated that the issues resolved in this Memorandum Opinion will be relitigated. 28
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