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Kelly v. Blum, Del. Ch. No. 4516-VCP (February 24, 2010) (Parsons, V.C.)

February 24, 2010

In this case, the Court denied the plaintiff’s motion for partial summary judgment and granted in part and denied in part the defendants’ 12(b)(6) motion to dismiss for failure to state a claim. Plaintiff Thomas Kelly (“Plaintiff”) brought this action on behalf of himself and derivatively on behalf of the company he started, Marconi Broadcasting Company, LLC (“Marconi” or the “Company”), which is a nominal defendant in this action, to challenge a merger (the “Merger”) between Marconi and MBC Acquisition, LLC (“MBC Acquisition”). Plaintiff’s complaint included eight causes of action (two of which were later withdrawn by Plaintiff, so the Court did not address those counts). Plaintiff moved for partial summary judgment declaring the Merger invalid for failure to comply with certain notice provisions of Marconi’s LLC Agreement and restoring Plaintiff to his position as a member and manager of Marconi. The defendants filed a Rule 12(b)(6) motion to dismiss each of the eight counts alleged in the complaint.

Plaintiff formed Marconi to seek and acquire radio broadcast rights and licenses. In 2006 and 2007, Plaintiff entered into various transactions to finance the purchase of a broadcast tower and FCC license, including a securities purchase agreement (the “SPA”), pursuant to which MBC Investment , L.P. (“MBC Investment”) contributed funds to Marconi in return for preferred equity units in Marconi, and Plaintiff contributed funds in exchange for common equity units in Marconi. Due to a lack of cash flow, Marconi entered into a loan and security agreement (the “2008 Loan Agreement”) with MBC Lender, LLC (“MBC Lender”). As part of this transaction, the members of Marconi executed a second amended LLC Agreement (the “2008 LLC Agreement”), pursuant to which MBC Investment held Class A common membership units, Plaintiff held Class B common membership units and MBC Lender held newly issued Class C common membership units. The 2008 LLC Agreement also required that all actions of Marconi be approved by managers holding a majority of the voting power and provided that Marconi could not enter into any merger, conversion, or consolidation agreements without the prior written approval of the Class A Member or Managers and the Class C Member or Managers. As part of the 2008 Loan Agreement, a pledge and security agreement (the “PSA”) was executed, whereby Marconi pledged all of its assets to MBC Lender as security for the 2008 Loan Agreement.

At a May 2008 board of Managers’ meeting (notice of such meeting only being sent to Plaintiff two days before the meeting was held), the Class A and Class C Managers (Blum, Breen and Kestenbaum) voted to terminate Kelly as President of Marconi. In a March 2009 board meeting, Blum proposed the Merger, which, among other things, would convert the existing Class A, Class B and Class C common interests into the right to receive $1 per class. The Members of Marconi affiliated with the defendants signed a written consent approving the Merger. On April 8, 2009, a document entitled the Written Action of the Members of Marconi Broadcasting Company, LLC (“Written Consent”) was delivered to Plaintiff via fax and email. The Written Consent was also delivered to Plaintiff via FedEx overnight delivery on April 9th. On April 17, 2009, the Merger was consummated.

Plaintiff sought a declaratory judgment that the Merger was void either because he did not receive adequate notice as required by the 2008 LLC Agreement or because the Merger closed too early. The Court found that the Merger was permitted and authorized under the 2008 LLC Agreement and that the defendants had complied with the notice requirements set forth therein. The 2008 LLC Agreement requires that any merger be approved in writing by the Class A and C Members or Managers, which approval was obtained. The 2008 LLC Agreement also requires that any written “consent that is not executed by any Member must be delivered to such Member no less than five (5) business days prior to the effective date of such consent.” Plaintiff claimed that the copy of the Written Consent was not delivered pursuant to the delivery requirements of the 2008 LLC Agreement because it was not delivered by any form of United States mail and that, in any event, the notice was delivered less than five business days prior to the Merger, thus voiding the Merger. The Court found that the defendants’ delivery of the Written Consent via fax and overnight commercial delivery were valid forms of delivery under the 2008 LLC Agreement and that the delivery of the fax on April 8th and overnight commercial delivery on April 9th satisfied the five business day notice requirement, since the Merger was consummated on April 17, 2009. Therefore, the Court denied Plaintiff’s motion for partial summary judgment on this issue.

Since the Court held that the Merger was not void, Plaintiff’s Class B common equity interest in the company was converted into the right to receive $1 on the effective date of the Merger. As a result of this ruling, Plaintiff was not a member of Marconi at the time of the filing of the complaint and, therefore, did not have standing to bring a derivative suit on behalf of Marconi. In order to bring a derivative action on behalf of a company, a plaintiff “‘must be a member or assignee of a limited liability company interest at the time of bringing’ any derivative action.” The Court did find, however, that Plaintiff had standing to bring a direct suit against defendants for breach of the fiduciary duties of loyalty and care for entering into a purportedly self-interested Merger.

The defendants’ claimed that they did not owe Plaintiff a fiduciary duty of loyalty because that duty was not expressly set forth in the 2008 LLC Agreement. An LLC agreement is a creature of contract, and the parties thereto “have the freedom to expand, restrict or eliminate fiduciary duties owed by managers to the LLC and its members and by members to each other.” See 6. Del. C. 18-1101(c). However, “in the absence of a provision explicitly altering such duties, an LLC’s managers and controlling members in a manager-managed LLC owe the traditional fiduciary duties that directors and controlling shareholders in a corporation would.” The Court found that the relevant provisions of the 2008 LLC Agreement did not, individually or collectively, contain sufficient specificity to allow the Court to read those provisions as “explicitly disclaim[ing or limiting] the applicability of default principles of fiduciary duty.” The managers and the controlling members, therefore, owed fiduciary duties to Plaintiff as a minority member. Drawing reasonable inferences in Plaintiff’s favor, the Court found that Plaintiff alleged sufficient facts to support his claim for breach of fiduciary duties by the managers and the members. The Court did note, however, that, since there was exculpatory language in the 2008 LLC Agreement limiting the monetary liability of the managers for breaches of fiduciary duties, which is permitted pursuant to Section 18-1101(e) of the LLC Act, “a serious threat of liability may only be found to exist if the plaintiff pleads a non-exculpated claim against the directors based on particularized facts.” The Court found that Plaintiff did allege sufficient facts that, if true, would support a finding of willful breach of the managers’ contractual and fiduciary duties.

In addition to his claim for breach of fiduciary duties, Plaintiff claimed that MBC Investment and MBC Lender breached their implied contractual covenant of good faith and fair dealing as to the 2008 LLC Agreement and PSA. The Court noted that under Section 18-1101(c) of the LLC Act, “the contracting parties to an LLC agreement may not waive the implied covenant of good faith and fair dealing…. Nevertheless, the implied covenant is ‘only rarely invoked successfully’ and may not ‘be invoked to override the express terms of the contract.’” The Court set forth the three factors for stating a claim for breach of the implied covenant of good faith and fair dealing: “[1] a specific implied contractual obligation, [2] a breach of that obligation by the defendant, and [3] resulting damage to the plaintiff,” and found that Plaintiff’s claim could not withstand a Rule 12(b)(6) motion to dismiss because Plaintiff did not allege any specific obligation that MBC Investment or MBC Lender breached or how such obligation was breached. Moreover, the Court found that Plaintiff’s claim relating to the PSA must fail because Plaintiff, in fact, had no contractual rights under the PSA. The Court also dismissed Plaintiff’s claim against MBC Investment for breach of the SPA because Plaintiff had no affirmative rights under that agreement and, therefore, lacked standing to sue thereunder.

Plaintiff also sued ELB Capital Management, LLC (“ELB”), alleging that ELB aided and abetted in the breaches of fiduciary duties alleged committed by Blum, Breen, Kestenbaum, MBC Investment and MBC Lender. The factors for stating a claim of aiding and abetting a breach of fiduciary duties are: “(1) the existence of a fiduciary relationship; (2) the fiduciary breached its duty; (3) a defendant, who is not a fiduciary, knowingly participated in the breach; and (4) damages to the plaintiff resulted from the concerted action of the fiduciary and the nonfiduciary.” Since the managers of Marconi (Blum, Breen and Kestenbaum) were also the officers of ELB, and because MBC Investment and MBC Lender were wholly-owned subsidiaries of ELB, the Court found that Plaintiff sufficiently alleged that ELB knowingly participated in the breaches and, therefore, sufficiently stated a claim for aiding and abetting a breach of fiduciary duties. The Court, therefore, denied the defendants’ motion to dismiss this claim.

The Court also denied the defendants’ motion to dismiss Plaintiff’s claim against Blum for defamation based on statements Blum allegedly made relating to Plaintiff’s competences and ability (or lack thereof) to run Marconi. The Court held that Plaintiff sufficiently alleged facts to demonstrate a reasonable inference that Blum’s statements defamed him, and, therefore, denied the defendants’ Rule 12(b)(6) motion to dismiss Plaintiff’s defamation claim.

The full opinion is available here