2009 Caiola Family Trust v. PWA, LLC, C.A. No. 8028-VCP (Del. Ch. Oct. 14, 2015) (Parsons, V.C.)

In this 91-page post-trial opinion addressing a dispute between members of a Delaware limited liability company formed to own and operate a residential apartment complex in Kansas, the Court of Chancery held that the non-managing member of the company had cause to remove the managing member for materially breaching the company’s operating agreement.

Dunes Point West Associates, LLC, a Delaware limited liability company (the “Company”), was formed in 2006 and soon thereafter purchased a large multifamily apartment complex in Lenexa, Kansas.  The plaintiffs, a Florida trust named 2009 Caiola Family Trust (“CFT”) and its trustee Louis Cortese, were the non-managing members of the Company and owned 90% of its total membership interests.  The Company’s managing member was PWA, LLC, a Kansas limited liability company that held the remaining 10% interest in the Company.  PWA’s managing member was an individual named Ward Katz, who was also the owner and CEO of the Company’s property manager, Dunes Residential Services, Inc. (“DRS”).

In 2012, the plaintiffs began to suspect that Katz and PWA had been mismanaging the Company.  As a result, the plaintiffs sued PWA and Katz, with the primary goal of removing PWA as the managing member.  The dispute culminated in a three-day trial in front of Vice Chancellor Parsons, who resolved the following issues: (1) whether the plaintiffs  had cause to remove PWA as the managing member for alleged breaches of the Company’s operating agreement; (2) whether the Company was entitled to money damages from PWA; (3) whether Katz breached his fiduciary duties owed to the Company; and (4) whether either party was entitled to attorney’s fees from the other party.

The Court found two bases to support the removal of PWA from its position as the managing member, noting that while the managing member of an LLC enjoys broad discretion in the management of the entity, it can be removed for cause if it fails to pay attention to the requirements of the LLC’s operating agreement.

First, the Court held that Katz (and therefore PWA) committed an “impermissible act” under the operating agreement for failing to be “actively involved” in the operations of the property manager’s business.

Second, the Court found that PWA materially breached the operating agreement by causing the Company to pay asset management fees from November 2009 to 2012 when the Company had insufficient net cash flow.  Plaintiffs’ claims for asset management fees paid prior to that period, however, were barred by laches.  The Court found that the plaintiffs had received sufficient financial information to put them on inquiry notice that there may have been insufficient net cash flow to support payment of those fees, but failed to bring their claims within the three-year statutory period.  Citing In re Dean Witter Partnership Litigation, the Court explained that the plaintiffs were on inquiry notice of the improper payments regardless of whether it took a financial expert to uncover all the facts of the defendants’ wrongdoing.

The Court also dismissed the plaintiffs’ claim that Katz breached his duty of loyalty by paying the asset management fees to benefit his business relationship with the asset manager, holding that the plaintiffs failed to prove the relationship was material to Katz. 

With respect to damages, the Court determined that PWA owed the Company $93,516, including interest, for the improperly paid portion of asset management fees that was not bared by laches.  The Court also awarded the plaintiffs 50% of their attorneys’ fees.  The Court explained that a 50% attorneys’ fee award was proper because the plaintiffs prevailed on the case’s chief issue—whether CFT had cause to remove PWA as the managing member—but did not achieve complete success because they recovered just 10% of their requested damages and employed a “kitchen sink” approach to the action, asserting nine bases for PWA’s removal but prevailing on just two.

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