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Sunrise Ventures, LLC v. Rehoboth Canal Ventures, LLC, C.A. No. 4119-VCS (March 4, 2010)

March 4, 2010

In this case, the Court of Chancery rejected a Motion for Reargument, finding that (1) the inclusion of a testimonium clause in the limited liability company agreement to form Sunshine Ventures, LLC (the “Company”) (the “LLC Agreement”) stating that the “parties have set their Hand and Seal” to the document, without the inclusion of the word “seal” next to the signature line of all the signatories to the LLC Agreement did not create a document under seal and thereby secure the extended twenty-year statute of limitations, and (2) no fiduciary relationship existed until the LLC Agreement was executed.

In 2004, Lawrence J. DiSabatino (“DiSabatino”) and James J. Kiernan (“Kiernan”) and the entities they each controlled entered into the LLC Agreement to create the Company to engage in real estate development. Discord between the members ensued, and in January of 2010, the Court of Chancery issued a memorandum opinion in which it dismissed the claims brought by DiSabatino, the Company, and DiSabatino Ventures, LLC (collectively, the “Plaintiffs”) on the grounds that the Plaintiffs had exceeded the three-year statute of limitations without any tolling of the statute and that the Plaintiffs had failed to state a claim regarding any claims that were not time-barred. Among the claims dismissed by the Court were the Plaintiffs’ breach of fiduciary duty claim against Kiernan and another defendant and breach of the LLC Agreement regarding development of certain real estate.

In this litigation, the Plaintiffs moved for reargument, claiming that the LLC Agreement was a sealed document and therefore entitled to a twenty-year statute of limitations and that DiSabatino and Kiernan were bound by fiduciary duties to one another prior to the execution of the LLC Agreement. The Plaintiffs further argued that DiSabatino was not on inquiry notice regarding certain environmental reports dating back to 2002 that pertained to development of certain real estate, and therefore the Court should toll the statute of limitations. The development of the real estate was an aspect of the negotiations when the Company was formed, and terms of the LLC Agreement required that all reports be delivered to DiSabatino upon formation of the Company.

The Court first rejected the Plaintiffs’ argument that the LLC Agreement was under seal because the Plaintiffs did not properly raise the argument at any point prior to the Motion for Reargument. The Court further reasoned that even if the Plaintiffs had timely raised the claim, it was without merit under the case of Whittington v. Dragon Group, LLC (2009 WL 4894305 (Del. Dec. 18, 2009)). Whittington held that a document signed by an individual need only include the word “seal” next to the signature in order to be a document under seal, thereby securing the extended twenty-year statute of limitations. The Court in this case applied Whittington and found that the inclusion of a testimonium clause that stated that the “parties have set their Hand and Seal” to the document did not sufficiently establish that the LLC Agreement was under seal because the word “seal” did not appear next to each individual’s signature. The Court also implied that it would not uphold a document as under seal where the word “seal” appeared next to only one of the signature lines rather than next to the signature lines of all signatories to the contract, particularly where the word “seal” appeared only next to the signature of an individual who signed on behalf of an entity.

The Court also rejected the Plaintiffs’ Motion for Reargument as it related to the fiduciary obligations of DiSabatino and Kiernan. The Plaintiffs argued that Kiernan owed a fiduciary obligation, in addition to his contractual obligation, to DiSabatino, as a member of the Company, prior to the execution of the LLC Agreement to produce certain reports regarding the land to be developed by the Company. The Court found that a joint venture had not been established because no agreement had been executed indicating the parties were engaged in a joint venture. Rather, DiSabatino and Kiernan had been engaged in arms-length negotiations regarding the establishment of the Company. As such, Kiernan was under no fiduciary obligation to produce information for DiSabatino’s review. Furthermore, because the LLC Agreement included a clause that required Kiernan to produce all reports, the Plaintiffs were on inquiry notice regarding the existence of such reports and should have demanded their production prior to the expiration of the statute of limitations.

The full opinion is available here