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Kuroda v. SPJS Holdings, L.L.C., Del Ch. No. 4030-CC, Chancellor Chandler (April 15, 2009)

April 15, 2009

In this case, the Court granted in part and denied in part the Defendants’ 12(b)(6) motion to dismiss for failure to state a claim. Plaintiff Kuroda served as an investment advisor for a group of investment vehicles, one of which was an investment fund (the “Master Fund”) for which Defendant SPJS Holdings, L.L.C. (“SPJS”) served as general partner. SPJS was governed by an LLC Agreement executed by Kuroda and another nonparty, as non-managing members, and by Defendants Liberty Square Asset Management, L.L.C. (“Liberty Square”) and WGL Capital Corp. (“WGL Capital”), as managing members. The Plaintiff provided direct and indirect investment advisory services to the Defendants. A disagreement between the Plaintiff and Defendants Liberty Square and WGL Capital and the principals thereof, led to the Plaintiff’s resignation as investment advisor for the Defendants and desire to negotiate his withdrawal as non-managing member of SPJS. As a result of the failed negotiations for the Plaintiff’s withdrawal, the Plaintiff filed this action, which included claims for: (i) breach of contract against Liberty Square and WGL Capital; (ii) breach of contract for improper tax allocation; (iii) tortious interference with contract; (iv) tortious interference with prospective economic advantage; (v) breach of the implied covenant of good faith and fair dealing; (vi) conversion; (vii) unjust enrichment; and (viii) civil conspiracy. The Court denied the Defendants’ motion to dismiss the breach of contract claim against Liberty Square and WGL Capital, but granted the Defendants’ motion with respect to the remaining counts.

During the negotiations for the Plaintiff’s withdrawal as a non-managing member of SPJS, the Plaintiff sought payment of the incentive allocations that were purportedly owed to him under the parties’ agreements, as well as the immediate payment of all specific amounts held for his benefit in his capital accounts at the Master Fund and SPJS. The Plaintiff instead was only paid 90% of the amount of the then-current balance in his capital account at SPJS. The Plaintiff’s breach of contract claim against Liberty Square and WGL Capital alleged that the failure of such Defendants to pay the full amount held in the capital account violated the LLC Agreement under which the Defendants were bound. In their motion to dismiss, the Defendants argued that they could not be liable for SPJS’ alleged breach of the LLC Agreement. The Defendants pointed to language in the LLC Agreement that mirrors Section 18-303 of the Delaware Limited Liability Company Act (the "Act"), which states which states in pertinent part that “the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the Company, and no Member shall be obligated personally for any such debt, obligation or liability of the Company solely by reason of being a Member.” The Defendants argued that this language makes clear that they cannot be personally liable for the payment owing by SPJS of the amounts held in the capital account. The Plaintiff countered that the language in the LLC Agreement and Section 18-303 of the Act applies solely to a member’s liability to third parties and not other members, an argument which the Court noted was supported by case law. The Court looked at the language in the relevant provision of the LLC Agreement and the Act which states that a member is not liable “solely by reason of being a Member” and determined that one could reasonably interpret that such language does not “limit liability for reasons other than status as a member.” The Plaintiff also pointed to a provision in the LLC Agreement which stated that a member could be liable to another member for any “action or inaction”, which the Plaintiff argues would include a breach of the LLC Agreement,” if such action or inaction arose from or was attributable to “the gross negligence, willful misconduct or bad faith of the [member].” The Court, in analyzing these provisions, found that an ambiguity existed regarding whether a managing member can be liable for the breach of an LLC Agreement and that the Defendants’ interpretation of these provisions was not the only reasonable interpretation. Interpreting the ambiguous provisions in the light most favorable to the Plaintiff, as the Court must do on a motion to dismiss, the Court held that the Plaintiff did adequately state a claim upon which relief could be granted and, therefore, dismissed the Defendants’ motion with respect to this claim.

The Plaintiff’s second breach of contract claim asserted that the Defendants issued a federal Schedule K-1 that improperly assigned the Plaintiff taxable income in violation of the LLC Agreement since he never received the funds specified in the Schedule K-1. However, the Plaintiff did not allege that he actually paid taxes on the money. Therefore, the Court granted the Defendants’ motion to dismiss this claim because the Plaintiff failed to allege facts that demonstrated the issuance of the Schedule K-1 resulted in damages to the Plaintiff, which is an essential element in a breach of contract case. The Plaintiff’s claim of tortious interference with contract also failed to survive the Court’s 12(b)(6) level of scrutiny. In order for the Plaintiff’s tortious interference with contract claim to survive, the Plaintiff would have needed to allege sufficient facts to demonstrate the Defendant principals of SPJS, Liberty Square and WGL Capital acted outside of the scope of their authority. The Court found that the Plaintiff’s complaint with respect to this count only contained conclusory allegations and failed to state any factual allegations that would reasonably support a conclusion that the Defendants acted outside the scope of their authority. As such, the Defendants’ motion was granted on this count.

The remainder of the Plaintiff’s claims included in the Defendants’ motion to dismiss also failed to survive the Court’s review and were therefore dismissed. The Court dismissed the Plaintiff’s claim for tortious interference with prospective economic advantage because, while the Plaintiff claimed he suffered damages as a result of the Defendants’ actions, the damages alleged suffered by the Plaintiff were indirectly related to the Plaintiff’s interest in a non-party entity formed outside of the transactions in question. The Court noted that direct claims for tortious interference with prospective economic advantage “are available only where the member has suffered damage that is independent of any damage suffered by the limited liability company.” Because the Plaintiff only alleged he was harmed through his interest in the non-party company and failed to allege any factual allegations that he was individually harmed, this claim was dismissed. The Plaintiff’s breach of implied covenant of good faith and fair dealing was also dismissed by the Court “because Plaintiff has failed to articulate a contractual benefit he was denied as a result of [D]efendant’s breach of an implied provision of the contract.” The Plaintiff’s claim was based on the fact that the Defendants failed to pay him money that was due, an obligation that is expressly covered by the LLC Agreement. In dismissing this claim, the Court noted that “the implied covenant cannot be invoked to override express provisions of a contract.” The payment of the money at issue is this case is a contractual obligation under the LLC Agreement, and therefore, the proper cause of action would be one for breach of contract rather than the breach of the implied covenant of good faith and fair dealing.

The Plaintiff’s conversion claim also failed to survive the Defendants’ motion to dismiss because the Court found that the claim in tort was duplicative of the breach of contract claim, namely that the Defendants are required to return the remaining 10% being held in the Plaintiff’s capital account at SPJS. The payment of amounts in the capital account is governed by the LLC Agreement, and where “the plaintiff’s claim arises solely from a breach of contract, the plaintiff ‘generally must sue in contract, and not in tort.’” Because the Plaintiff failed to allege tortious conduct independent of the contractual duty and failed to demonstrate that the conversion claim fell within the exception to the general rule that “an action for conversion will not lie to enforce a claim for the payment of money,” the Court granted the Defendants’ motion. Similarly, the Court dismissed the Plaintiff’s action for unjust enrichment because the Plaintiff failed to show that his claim arose independent from the contractual relationship between the parties. The Plaintiff’s own complaint expressly demonstrated the existence of a contractual relationship between the parties, and therefore, the Court held that the terms of the contract should govern the resolution of the Plaintiff’s claims. Finally, the Plaintiff’s claim for civil conspiracy was also dismissed by the Court for failure to state a claim. In order for the Plaintiff to allege a civil conspiracy, he must first “allege the elements of an underlying wrong that would be actionable in the absence of a conspiracy.” Because the Plaintiff failed to adequately allege the required elements of his other claims in tort that would have constituted the underlying wrong (as evidenced by the dismissal of such related underlying claims), his action for civil conspiracy likewise failed, and therefore, the Court dismissed this claim.

In concluding, the Court noted that it was not surprised that the non-contractual claims failed to state a claim. The Plaintiff’s case centered around the argument that he was entitled to the money that was owed to him pursuant to the terms of the contract, and when parties have a contract governing a specific claim, the available remedy is for breach of contract.

The full opinion is available here