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PPF Safeguard, LLC, et al. v. BCR Safeguard Holding, LLC., C.A. No. 4712-VCS (Del. Ch. July 29, 2010)

July 29, 2010

The Court of Chancery granted the defendants’ motion to dismiss this action in accordance with the mandatory arbitration and forum selection provisions of a Delaware LLC agreement and related employment and confidentiality agreements. At issue were claims among members and officers of a Delaware limited liability company relating to breach of the company’s LLC agreement, breach of fiduciary duties (and aiding and abetting the same), breach of the implied covenant of good faith and fair dealing and tortious interference with parties’ obligations pursuant to the LLC agreement. The Court dismissed the action because the plaintiffs’ claims implicated the mandatory arbitration provision in the LLC agreement and/or the mandatory Louisiana forum selection clauses in the related employment and confidentiality agreements.

Plaintiff PPF Safeguard, LLC (“PPF”), defendant BCR Safeguard Holding, LLC (“BCR”) and two other limited liability companies that were not party to this case formed Safeguard Storage Properties LLC (the Company”) to own and operate self-storage properties in various U.S. states. PPF held 94% of the interests in the Company, and management of the company was divided between BCR, as the administrative member of the Company, and a management committee. BCR’s sole member, Bruce C. Roch, Jr. (“Roch”), was a member of the Company’s management committee as well as the Company’s president and CEO. Under the Company’s LLC Agreement, BCR’s appointees to the management committee (who, at the time in dispute, were Jack Chaney (“Chaney”) and Roch) at all times had to be executive officers of the Company. PPF had certain voting rights in respect of major decisions and transactions with affiliates, as well as a buy-sell provision. The LLC agreement expressly mandated arbitration in the event that any member allegedly usurped the Management Committee’s authority. The LLC Agreement also contained a general, non-mandatory  Delaware forum selection clause. Roch and Chaney’s employment agreements with the Company each contained an exclusive Louisiana forum selection clause, as did Roch’s confidentiality agreement with the Company.

The relationship among the parties became strained. Roch and Chaney’s employment agreements expired by their own terms, and the parties could not agree on the terms of extensions of the same. BCR took the position that Roch and Chaney continued to serve as at-will employees since the management committee had not properly removed them, and therefore both Roch and Chaney were eligible to continue to serve on the management committee. PPF then invoked its buy-sell provision in the LLC agreement, and litigation ensued in multiple forums.

In this action, PPF claimed that Roch and BCR, knowing that their time with the Company was coming to an end, (i) took self-interested actions (including improper reimbursements to Roch for personal expenses and excessive payments to organizations to which Roch belonged), (ii) caused the Company to exceed its agreed-upon budget and improperly suspended agreed-upon projects, (iii) failed to ensure that the Company pay for its routine expenses and make necessary capital calls, (iv) reallocated and terminated certain employees, and (v) generally interfered with the proper functioning of the management committee by having Roch and Chaney continue to serve on the management committee after their employment agreements had expired. In addition, Roch allegedly failed to commit adequate time to his role as CEO. Accordingly, the plaintiffs alleged that BCR breached the Company’s LLC agreement, breached its fiduciary duties to the Company as its administrative member and breached the implied covenant of good faith and fair dealing. The plaintiffs also alleged that Roch tortuously interfered with BCR’s obligations under the LLC agreement, and aided and abetted BCR’s breaches of fiduciary duties.

The Court dismissed plaintiffs’ action because the bulk of plaintiffs’ claims implicated both the mandatory Louisiana forum selection clauses in Roch’s employment agreement and confidentiality agreement, as well as the mandatory arbitration clause in the LLC agreement. The Court noted Delaware’s deference to mandatory arbitration provisions, and that Delaware courts will respect parties’ contractual choice of forum. Although the Court noted that the plaintiffs had gone to great lengths to frame the issues such that the mandatory forum and arbitration clauses would not be implicated, the Court pointed to several claims by the plaintiffs (e.g., improper reimbursements to Roch, Roch’s time commitment to the Company, Roch’s removal of confidential information from the Company, the formal end of  Roch and Chaney’s  employment) which implicated Louisiana law under the employment agreements and Roch’s confidentiality agreement. In addition, the issue of member deadlock when the Company’s members became unable to agree on the appointment of new officers implicated both the Louisiana forum selection clauses of the employment agreements and the arbitration clause of the LLC agreement. The claim that BCR unilaterally kept Roch and Chaney on the management committee following the end of their employment agreements also implicated the LLC agreement’s mandatory arbitration provision since one member of the Company allegedly took action that was within the province of the management committee. The Court noted that, even if certain portions of the plaintiffs’ claims did not squarely fall within the mandatory arbitration provision or the Louisiana forum selection clauses, the Court would not keep such claims in Delaware and run the risk of entangling itself in matters most of which clearly had been entrusted to arbitrators and Louisiana courts.

The full opinion is available here