ASB Allegiance Real Estate Fund, et al. v. Scion Breckenridge Managing Member, LLC, et al., C.A. No. 5843-VCL (Del. Ch. July 9, 2012) (Laster, V.C.)

In this case, the Court, analyzing fee-shifting provisions in three separate limited liability company agreements (the “LLC Agreements”) in the context of breach of contract and breach of the implied covenant of good faith and fair dealing claims, found that the plaintiff entities (collectively “ASB”) were entitled to recover fees and costs incurred in litigating the case before the Court and three other related federal cases filed by the defendants, affiliates of The Scion Group, LLC (collectively “Scion”).

The plaintiff entities are governed by the respective LLC Agreements, each of which contained erroneous provisions.  ASB notified Scion that the erroneous LLC Agreements needed to be corrected and, if they were not, that ASB would file suit.  In response, Scion filed suit in the United States District Court for the Eastern District of Wisconsin seeking to enforce one of the LLC Agreements with respect to one of the plaintiff entities.  The following day, ASB filed suit in the Court of Chancery, which suit addressed all three plaintiffs and sought reformation of all three LLC Agreements at issue.  Scion then filed two additional suits, substantially identical to the first suit, in separate federal courts seeking the enforcement of the other two LLC Agreements.  In an earlier decision, the Court of Chancery granted ASB’s request for reformation of the LLC Agreements and the federal cases were dismissed by stipulation.   Each LLC Agreement contained a fee-shifting provision, which provided that, if any party undertook to enforce any provision of the LLC Agreement against the other party, the non-prevailing party was responsible for “all reasonable fees and costs incurred in connection with such enforcement, including reasonable attorneys’ fees. . . .”  Relying on those provisions, ASB sought to recover its fees and expenses incurred in litigating the Court of Chancery case and each of the three federal cases.

Scion argued that the fee-shifting provisions did not permit ASB to recover fees and costs relating to Scion’s claims for breach of fiduciary duty and violation of the implied covenant of good faith and fair dealing.  The Court, however, found that the causes of action did fall within the scope of the fee-shifting provisions.  With respect to Scion’s breach of fiduciary duty claim against ASB, the Court noted that Scion invoked certain provisions of the Dwight Lofts Holdings, LLC (“Dwight Lofts”) LLC Agreement as evidence that ASB owed fiduciary duties to Scion.  In invoking those provisions, the Court found that “Scion thus sued ‘to enforce the provisions of [the Dwight Lofts LLC] Agreement,’” and, therefore, as the non-prevailing party, Scion was responsible for reimbursing ASB for its fees and costs on defending the breach of fiduciary duty claims.

Scion’s implied covenant claim related to ASB’s alleged failure to maximize summer leasing revenues for Dwight Lofts.   In analyzing the fee-shifting provisions’ applicability to Scion’s implied covenant claim, the Court emphasized that an implied covenant claim is contractual in nature.  In noting the differences between breach of duty and implied covenant claims, the Court noted that “fair dealing” is “a commitment to deal ‘fairly’ in the sense of consistently with the terms of the parties’ agreement and its purpose,” and “good faith” requires “faithfulness to the scope, purpose, and terms of the parties’ contract.”   The Court further noted that, because an implied covenant claim is, in fact, a breach of contract claim, that proving such a breach of contract claim “does not depend on the breaching party’s mental state” (though the Court went on, in dicta, to provide examples of how a breaching party’s mental state could prove a breach of the implied covenant in circumstances involving fraud).  Because Scion’s implied covenant counterclaims against ASB sought to enforce an implied term of the Dwight Lofts LLC Agreement, the Court found that the fee-shifting provisions would entitle ASB to reimbursement of fees and expenses incurred in defending against the counterclaims.

Scion also claimed that ASB was not entitled to recover its fees or expenses incurred solely with respect to the federal cases because ASB did not properly plead attorneys’ fees as required under Federal Rule of Civil Procedure 9(g).  The Court found, however, that “the procedural rules that could have applied in the federal cases do not govern ASB’s contractual right of recovery in this case.”   The Court found that all four cases formed a single controversy and Scion’s refusal to stay the federal cases while the reformation case was pending in the Court of Chancery necessitated ASB’s incurring additional fees to defend those actions and preserve its right to obtain reformation.  Had Scion been successful in one of the federal cases, it would have preclusive effect in the proceeding pending before the Court of Chancery and, therefore, the Court ruled that fees incurred by ASB in the federal cases were fees incurred “’in connection with’ an action to enforce the LLC Agreements, and those fees and costs therefore are covered by” the fee-shifting provisions.  Upon applying an analysis under Rule 1.5(a) of the Delaware Lawyers’ Rules of Professional Conduct, the Court found that the legal fees incurred by ASB in this matter were reasonable.

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