Whittington v. Dragon Group L.L.C., Del. Ch., C.A. No. 2291-VCP (June 11, 2009) (Parsons, V.C.)

At issue before the Court of Chancery was whether plaintiff was entitled to seek an order that he was a member of the Delaware LLC in question. Notwithstanding that plaintiff might have had some basis on the merits for the requested relief, Vice Chancellor Parsons held that plaintiff’s claims were timebarred under the doctrine of laches. Despite being under notice that defendants did not consider him to be a member of the LLC, plaintiff unreasonably delayed in filing the complaint by waiting well over two years and probably over three years. At this late stage, recognizing plaintiff’s membership interest in the LLC would also result in unreasonable prejudice to defendants. It would be inequitable to allow plaintiff to reap the benefits of defendants’ investments in the LLC without plaintiff having accepted any of the attendant risks.

In this long-running familial dispute over ownership of the Dragon Group L.L.C. (the “LLC”), a real estate investment vehicle, plaintiff, Frank C. Whittington, II (the “Plaintiff”), initially brought suit on July 20, 2006, against Defendants, the LLC and four sibling members of the LLC (collectively the “Defendants”). Plaintiff sought to enforce the terms of an agreement in principle (the “AIP”) settling previous litigation (the “2001 Litigation”). In the AIP, the parties agreed that in exchange for certain payments and releases by Plaintiff, Plaintiff would receive interests in a limited liability company, Whittington Ltd. (“Ltd.”) and that Plaintiff would also receive interests in the LLC that would be proportionate to Plaintiff’s interest in Ltd. The parties, however, never came to final agreement as to the terms of the operating agreement nor Plaintiff’s percentage interest in the LLC. Notably, in response to a 2002 Offering Memorandum (the “Offering Memorandum”), whereby each member was to pledge his or her shares in Ltd. to secure loan obligations of the LLC, Plaintiff purported unilaterally to change his ownership interest in the LLC from 17.77% to 24%. Defendants considered Plaintiff’s response to be a counteroffer and a rejection of his membership interest in the LLC.  Further, Defendants took the position that since Plaintiff failed to pledge his shares as required by the Offering Memorandum, Plaintiff was never validly admitted as a member of the LLC. Several judicial pronouncements followed, including a letter opinion dated March 4, 2003, where the court ordered that the terms of the operating agreement would be those established at the inception of the LLC adjusted to reflect Plaintiff’s percentage interest therein. Plaintiff, however, never took any action prior to the present suit to be included as a member of the LLC.

In response to Plaintiff’s requested relief to find his membership interest under the operating
agreement to be 23.65 percent and entitlement to a proportionate share of all profits from the LLC, Defendants raised as defenses that the statute of limitations and also the doctrine of laches barred Plaintiff’s claims. The opinion revolved around factual issues as to exactly when Plaintiff should have been aware that Defendants did not consider him to be a member of the LLC. Plaintiff argued that he first learned of Defendants’ position that he was not a member of the LLC some two years before the suit in April 2004, when he erroneously received a K-1 for the LLC. In the letter that followed, Defendants informed Plaintiff that the K-1 was sent in error since he was not a member of the LLC. Defendants countered by pointing to facts that allegedly put Plaintiff on notice three years before the present suit that he was not a member. Namely, on July 7, 2003, in rejecting Plaintiff’s settlement offer (the “2003 Settlement Offer”) whereby Plaintiff offered to have all of his interests in the entities, including the membership interests in the LLC, bought out by Defendants, Defendants had notified Plaintiff (or at least Plaintiff’s attorney) of their position that he was not a member of the LLC. Alternatively, Defendants pointed to an August 2003 annual shareholders meeting whereby Plaintiff was excluded from portions of the meeting concerning discussions relating to the LLC since he did not have an interest in the LLC. This meeting put Plaintiff on well over two year’s notice of Defendants position that he was not a member of the LLC.

The Court initially noted that Plaintiff did state some plausible arguments that he was a member of the LLC under the AIP with an ownership interest as high as 23.65 percent.  But that it was unnecessary to decide on the merits since the Defendants’ laches defense precluded the claims.  The Court began its analysis by noting that although the present suit was not an action at law but under equity that Plaintiff’s claims would be time-barred under the analogous statute of limitations. Plaintiff's cause of action accrued when in response to Plaintiff’s 2003 Settlement Offer, Defendants adamantly refused to recognize Plaintiff’s membership interest in the LLC. Accordingly, since Plaintiff’s cause of action accrued more than three years before the present suit it would be timebarred under the statute of limitations. But since the statute of limitations was not controlling in equity, the Court looked further to the doctrine of laches.

While the Court held that Plaintiff’s cause of action accrued three years prior to the filing of the
complaint, for purposes of discussion, the Court examined whether even if Plaintiff’s claims accrued before the three year mark, whether laches would preclude recovery under a shorter time period. With respect to the laches defense, the Court noted that unlike the statute of limitation analysis, the doctrine of laches does not impose a specific time period by which Plaintiff had to bring a cause of action. On the contrary, the Court noted that since the laches inquiry focuses principally on whether it was inequitable to permit a claim to be enforced, the doctrine of laches “permits the Court to hold plaintiff to a shorter period if, in terms of equity, the plaintiff should have acted with greater alacrity, and when the plaintiff’s failure to seek equitable relief with alacrity threatens prejudice to the other party.” The Court noted, in this respect, that Plaintiff essentially sought specific performance of the AIP, which is specialized request for a mandatory injunction. Further, Defendants would suffer undue prejudice, the other requirement for a shortened time period. Defendants would essentially be required to share with Plaintiff the rewards borne from the risks Defendants undertook over a three year period including the pledging of their Ltd. stock to secure the LLC’s liabilities and making capital contributions to the LLC, risks that Plaintiff did not share. Plaintiff meanwhile would have reserved an option right to leisurely pursue the present claims in the LLC only if Defendants investments proved successful. As such, it was acceptable for the Court to impose a shorter period of time than three years to bar Plaintiff’s suit for unreasonable delay.

Applying the doctrine of laches to the present facts, the Court found that Plaintiff was on inquiry
notice at least three years before the present suit. The Court noted that inquiry notice does not
require actual discovery of the reason for injury but exists when a plaintiff becomes aware of facts sufficient to put a person or ordinary intelligence and prudence on inquiry which, if pursued, would lead to discovery of the injury. Plaintiff was put on such inquiry notice when Defendants rejected the 2003 Settlement Offer. The rejection of the settlement should have prompted Plaintiff to pursue inquiry as to whether Defendants intended to honor their obligations under the AIP.  Even accepting Plaintiff's assertion, Plaintiff was on actual notice by at least two and a half years when he was informed that the K-1 was sent to him in error and that he was not a member of the LLC. As such, given that Plaintiff waited anywhere from 27 to 35 months after his claims had accrued, as a matter of equity, the Court held that Plaintiff’s claims were to be dismissed as time-barred under the doctrine of laches.

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