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Monier, Inc. v. Boral Lifetile, Inc., et al., No. 3117-VCN (Del. Ch. May 13, 2008)

May 13, 2008

Plaintiff, Monier, Inc. (“Monier”), and Defendant, Boral Lifetile, Inc. (“Boral”), are the sole members (together, the “Members”) and each fifty percent owners of Defendant MonierLifetile, LLC, a Delaware limited liability company (“MLT” or the “Company”). MLT is managed by a six-member management committee (the “Management Committee”), three members of which are appointed by Monier and three members of which are appointed by Boral. Under MLT’s Operating Agreement, MLT is required to distribute to the Members fifty percent of the net income of the MLT annually, unlesss the Management Committee approves greater or lesser distributions without dissenting vote.

The parties’ dispute concerned the Management Committee’s unanimous decision in February of 2000 (the “2000 Action”) that “[f]rom the year 2000, a dividend will be paid annually equal to the audited net profits of the Company.” This unanimous decision was recorded in the minutes of the meeting, which minutes were signed by the Secretary of MLT. As a result, for the year 2000, one hundred percent of the net profits were paid to the Members. In accordance with the 2000 Action, one hundred percent of the net profits of MLT were also paid to the Members for the years 2001, 2002, 2003 and 2004, without any additional debate, discussion or formal action taken by the Management Committee subsequent to the 2000 Action. In 2005, the prudence of the 2000 Action was questioned and the distribution policy going forward was discussed by the Management Committee, including recommendations, as reflected by Management Committee minutes, that MLT “return” to the pre-2000 fifty percent distribution arrangement. However, no formal Management Committee action was taken in response to such recommendations. Nonetheless, for the year 2005, less than fifty percent of net income was distributed to the Members and MLT did not make any distributions for 2006. Monier filed a complaint seeking, among other things, a declaratory judgment from the Court of Chancery determining the proper percentage of net income required to be distributed under MLT’s Operating Agreement, and Boral moved to dismiss such count of Monier’s complaint.

Monier argued that the 2000 Action constituted a binding and enforceable change in the distribution rate (at least until such time that the Management Committee unanimously agreed otherwise) on two theories. First, Monier argued that the change in distribution rate was a proper Management Committee action under the terms of the Operating Agreement, which provided the Management Committee with broad authority to adjust the rate as it deemed appropriate. Monier interpreted the Operating Agreement to permit the rate to be adjusted at any time provided that there was a unanimous vote from the Management Committee approving the adjustment. Monier therefore claimed that, pursuant to the 2000 Action, MLT was required to distribute one hundred percent of its net income to the Members annually until such time as the Management Committee unanimously approved otherwise. Second, Monier argued that, under the Operating Agreement, the 2000 Action was effectively a valid amendment of the Operating Agreement and, as a result, the default distribution rate was amended to one hundred percent of net profits.

Boral countered that the contractual “default” distribution rate in the Operating Agreement was fifty percent of net income, and that while the Management Committee could, with unanimous consent, change the distribution rate at a given time, such change could not be in perpetuity. Boral argued that a single dissenting vote at any time by any member of the Management Committee operated to invalidate the one hundred percent distribution policy and reinstate the “default” fifty percent distribution policy specified in the Operating Agreement. Boral also claimed that under the Operating Agreement an amendment was not effectively enacted, as one necessary element for a valid amendment was a form of a writing signed by both Boral and Monier. Boral maintained that this writing requirement was not met by the minutes reflecting the 2000 Action. In addition, Boral contended that the Management Committee lacked the requisite intent to amend the Operating Agreement since there was no explicit evidence of such intent, such as the drafting of formal resolutions to memorialize its actions regarding an amended distribution policy.

With respect to the effect and duration of the 2000 Action with regards to future distributions, the Court found that the Operating Agreement was ambiguous based on the Court’s finding that there were multiple reasonable interpretations of the terms of the Operating Agreement. The Court stated that “Monier’s construction of . . . the Operating Agreement may not ultimately be persuasive, but it is not unreasonable.” As a result, the Court denied Boral’s motion to dismiss.

The Court found it unnecessary to consider whether the 2000 Action constituted a valid amendment to the Operating Agreement. While, based solely on the allegations before it, the Court did question whether the parties had properly complied with the procedures for amending the Operating Agreement and whether the Management Committee had the intent to do so, the Court also made clear that it would not preclude Monier from arguing that subsequent conduct by the parties evidenced that an amendment to the Operating Agreement was effectively implemented.

The full opinion is available here