Opinion
2:20-cv-2982
10-19-2021
BLUE FIRE CAPITAL, LLC, Plaintiff, v. PIES & PINTS DEVELOPMENT PARTNERS, LLC, et al., Defendants.
Kimberly A. Jolson, Magistrate Judge.
OPINION AND ORDER
JAMES L. GRAHAM, United States District Judge.
This matter is before the Court for consideration of cross-motions for judgment on the pleadings filed by Defendants Pies & Pints Development Partners, LLC and Robert Lindeman (ECF No. 20) and Plaintiff Blue Fire Capital, LLC (ECF No. 21). For the reasons that follow, Defendants’ motion is GRANTED, and Plaintiff’s motion is DENIED.
I. BACKGROUND
This diversity action concerns a business dispute between various entities and individuals associated with the Pies & Pints brand. Plaintiff Blue Fire Capital, LLC (“Blue Fire”), a Kentucky limited liability company (“LLC”), and Defendant Robert Lindeman’s Ohio LLC, R&M Advisors LLC (“R&M”) each hold a fifty percent interest in Delaware LLC Defendant Pies & Pints Development Partners, LLC (“PPDP”). (Am. Compl. ¶ 5, ECF No. 15 at 812.) Defendant PPDP holds a sixty percent interest in Pies & Pints Management Company, LLC (“PPMC”), and KSDB, LLC (“KSDB”), a West Virginia LLC, holds the remaining forty percent. (Id.) Until May 2020, KSDB had two members: Kimberly Shingledecker and David Bailey. (Id.) Prior to the filing of the Amended Complaint, Lindeman and Shingledecker purchased the entire interest of Bailey’s ownership interest in KSDB. (Answer ¶ 8, ECF No. 18 at 1109.) Shingledecker now owns 1 seventy-five percent of KSDB, and Lindeman owns twenty-five percent. (ECF No. 20 at 1118.)
Both PPDP and PPMC are governed by operating agreements. The PPDP Operating Agreement has an effective date of September 1, 2011. (Am. Compl., Ex. 1.) On September 1, 2011, PPDP members R&M and Plaintiff, took Action by Unanimous Written Consent of the Members and appointed Lindeman as the sole manager of PPDP. (Id., Ex. 2.)
The Amended and Restated Limited Liability Company Operating Agreement of PPMC became effective December 31, 2019 (the “Amended Operating Agreement”). (Id. ¶ 13, Ex. 4.) Under the Amended Operating Agreement, PPMC’s board consisted of four managers. (Id. at 906.) Section 6.1(c) of the Amended Operating Agreement permitted Plaintiff and R&M to each designate one manager, while KSDB was permitted to appoint two. (Id. at 906.)
Effective January 1, 2020, PPMC and Lindeman entered into an employment agreement for Lindeman to serve as PPMC’s President. (Id., Ex. 5.) Section 5.3 of the employment agreement specified that, “The termination of [Lindeman’s] employment with [PPMC] for any reason shall 2 not affect any rights that [Lindeman] has [as] a direct or indirect member of [PPMC] or manager of [PPMC].” (Id. at 937.)
On March 16, 2020, three of the PPMC managers, Michael Sloane, Bailey, and Shingledecker, took Action by Written Consent of the Managers Without a Meeting to terminate Lindeman’s employment as President of PPMC and hire Martin O’Dowd in his place. (Id., Ex. 6.)
On April 1, 2020, Lindeman, on behalf of PPDP, along with Shingledecker, on behalf of KSDB (the “PPMC Members”) took Action by Written Consent of the Members Without a Meeting in accordance with Section 6.3(b)(ii) of the Amended Operating Agreement to amend PPMC’s Amended Operating Agreement to the Second Amended and Restated Limited Liability Company Operating Agreement Dated April 1, 2020 (the “Second Amended Operating Agreement”) (Id., Ex. 7; ECF No. 4-3, Ex. C.) Per Section 6.3(b)(v) of the Second Amended Operating Agreement, the PPMC Members also removed all of the managers, except for Lindeman, thereby reducing the size of the board to one. (Id.) The board then terminated O’Dowd as President and hired Lindeman as President and Chief Executive Officer in his place. (Id.)
Contrary to Plaintiff’s assertion, Lindeman did not act unilaterally, as both Lindeman and Shingledecker took action on behalf of PPMC members PPDP and KSDB respectively.
On May 11, 2020, Lindeman and Shingledecker took further action and executed the Pies & Pints Management Company, LLC Action by Written Consent of the Managers Without a Meeting. (Id., Ex.10, ECF No. 15-10 at 1090.) Pursuant to Section 6.3(b)(ii) of the Second Amended Operating Agreement, Lindeman, on behalf of PPDP, and Shingledecker, on behalf of KSDB, amended and restated the Second Amended Operating Agreement to the Third Amended and Restated Operating Agreement Dated May 11, 2020 (the “Third Amended Operating 3 Agreement”), amended Lindeman’s March 31, 2020 employment agreement, and appointed Shingledecker as Vice President and Secretary of PPMC. (Id.)
The Court notes that this section of the Second Amended Operating Agreement pertains to amending, altering, or repealing any provision of the Second Amended Operating Agreement or the Certificate of Formation and requires Member approval by “a Majority Vote of the Members” but also acknowledges that PPDP and KSDB are PPMC’s only members.
The Third Amended Operating Agreement increased the number of managers on PPMC’s board from one to four. (Id., Ex. 9, ECF No. 15-9 at 1060.) Section 6.1(c) of the Third Amended Operating Agreement permits R&M and Plaintiff to each designate one manager, who have 1.5 votes each on matters and permits KSDB to appoint two managers, who have one vote each on matters. (Id.) Lindeman is R&M’s designated manager, Sloane is Plaintiff’s designated manager, and Lindeman and Shingledecker are KSDB’s two designated managers. (Id.)
Section 6.1(c)(iv) of the Third Amended Operating Agreement further states that:
Each of R&M’s and Blue Fire’s right to appoint a Manager as set forth in this Section 6.1(c) shall transfer as follows: (i) if all of R&M’s beneficial ownership in PPDP’s Percentage Interests is acquired by Blue Fire (i.e., Blue Fire becomes the sole equity owner of PPDP), Blue Fire shall succeed to R&M’s rights in this Section 6.1(c); and (ii) if all of Blue Fire’s beneficial ownership in PPDP’s Percentage Interests is acquired by R&M (i.e., R&M becomes the sole equity owner of PPDP), R&M shall succeed to Blue Fire’s rights in this Section 6.1(c); provided, however, that in the event either R&M or Blue Fire becomes the sole equity owner of PPDP, KSDB shall appoint only one KSDB Manager, who shall be Kimberly Shingledecker, who shall have three votes on all matters for which Managers shall be entitled to vote.(Id.)
On June 10, 2020, three of the PPMC Managers (Lindeman on behalf of both PPDP and KSDB and Shingledecker also on behalf of KSDB) took Action by Written Consent Without a Meeting. (Id., Ex. 11, ECF No. 15-11 at 1094.) In accordance with Sections 8.1 and 8.2 of the Third Amended Operating Agreement, the PPMC board passed a resolution concerning financial reporting to managers. (Id.) The board determined that PPMC’s financial obligations to its members are met with the current practices in place, and that it would not provide any additional financial reporting to managers. (Id.)
On August 21, 2020, Plaintiff filed its Amended Complaint. 4
Plaintiff seeks a declaratory judgment regarding the rights and obligations of the parties concerning the duties owed by Lindeman to Plaintiff in his capacity as the sole manager of PPDP and as a manager and President of PPMC, whether Lindeman breached the duties he owed Plaintiff, whether he acted legally and in good faith by amending the Second Amended Operating Agreement to the Third Amended Operating Agreement, and whether through that amendment, Lindeman breached the Second Amended Operating Agreement to Plaintiff’s detriment.
Specifically, Plaintiff claims that Lindeman, acting on behalf of nominal Defendant PPDP, breached the duties owed to Plaintiff by Defendants by:
(A) amending the Second Amended Operating Agreement to include a “poison pill” provision at Section 6.1(c)(iv) of the Third Amended Operating Agreement which grants Shingledecker three Manager votes upon Blue Fire buying out R&M’s interest in PPDP, thereby granting the KSDB Manager deadlock authority on PPMC matters requiring a Board vote in the event of such a buyout;
(B) deleting the “Buy-Sell” provision contained in Section 9.12 of the Second Amended Operating Agreement;
(C) deleting Section 6.1(e) of the Second Amended Operating Agreement which required PPMC to have quarterly Board meetings; and
(D) taking action to deprive Sloane, in his capacity as Plaintiff’s PPMC manager, of PPMC’s corporate information by refusing Plaintiff’s requests for financial information and by taking the Action by Written Consent of the Managers Without a Meeting on June 10, 2020, to further illegally deprive Plaintiff of PPMC’s corporate information.
Plaintiff also accuses Lindeman of breaching the fiduciary duties of loyalty and care and the duty of good faith and fair dealing. 5
The parties’ cross-motions are ripe for consideration.
II. STANDARD OF REVIEW
Both parties move this Court for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c). Motions for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c) are analyzed under the same standard as motions to dismiss filed pursuant to Rule 12(b)(6). Sensations, Inc. v. City of Grand Rapids, 526 F.3d 291, 295 (6th Cir. 2008). “For purposes of a motion for judgment on the pleadings, all well-pleaded material allegations of the pleadings of the opposing party must be taken as true, and the motion may be granted only if the moving party is nevertheless clearly entitled to judgment.” JPMorgan Chase Bank, N.A. v. Winget, 510 F.3d 577, 582 (6th Cir. 2007) (internal citation and quotation marks omitted). But legal conclusions or unwarranted factual inferences are not accepted as true. Id. at 581–82 (citing Mixon v. Ohio, 193 F.3d 389, 400 (6th Cir. 1999)). When considering a motion for judgment on the pleadings, a court reviews not only the complaint, but “matters of public record, orders, items appearing in the record of the case, and exhibits attached to the complaint.” Barany–Snyder v. Weiner, 539 F.3d 327, 332 (6th Cir. 2008).
To withstand a motion for judgment on the pleadings, “a complaint must contain direct or inferential allegations respecting all the material elements under some viable legal theory.” Commercial Money Ctr., Inc. v. Illinois Union Ins. Co., 508 F.3d 327, 336 (6th Cir. 2007). “The factual allegations in the complaint need to be sufficient to give notice to the defendant as to what claims are alleged, and the plaintiff must plead ‘sufficient factual matter’ to render the legal claim plausible, i.e., more than merely possible.” Fritz v. Charter Township of Comstock, 592 F.3d 718, 722 (6th Cir. 2010) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable 6 inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678. The factual allegations “must be enough to raise a right to relief above the speculative level. . . .” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).
III. DISCUSSION
A. Count Two: Breach of Fiduciary Duty and Duty of Good Faith and Fair Dealing
Plaintiff takes issue with the May and June 2020 PPMC actions that Lindeman took on behalf of PPDP. Specifically, Plaintiff alleges that Lindeman, acting as the sole manager of PPMC’s controlling member, PPDP, unilaterally amended PPMC’s Second Amended Operating Agreement on May 11, 2020 to wrongfully benefit himself at Plaintiff’s expense. Plaintiff further alleges that by causing PPMC to take action by Written Consent of the Managers Without a Meeting on June 10, 2020, Lindeman illegally deprived Plaintiff, as a PPMC manager, of PPMC’s corporate information. Plaintiff claims that these actions constitute a breach of the fiduciary duties Lindeman owes Plaintiff, along with the duty of good faith and fair dealing.
Defendants move for judgment on the pleadings arguing that Lindeman did not act unilaterally. Instead, Lindeman, along with all PPMC members and the majority of its managers, took action that was expressly permitted by the Second Amended Operating Agreement. Defendant further contends that Plaintiff fails to set forth sufficient allegations of breach or that Defendants improperly benefited from any of the amendments to the Second Amended Operating Agreement. Defendants also argue that under the Third Amended Operating Agreement and its predecessors, Plaintiff is not entitled to the same financial information that PPMC’s members are, and that PPMC has met its obligation to provide financial information to Plaintiff. 7
The Court agrees. As previously discussed supra, Lindeman did not act unilaterally, as both Lindeman and Shingledecker took action on May 11, 2020 on behalf of PPMC members PPDP and KSDB respectively.
Plaintiff also moves for judgment on the pleadings arguing that Lindeman caused PPMC to enter into transactions that improperly benefited Lindeman at Plaintiff’s expense and unfairly manipulated PPMC governance processes to retain control without a compelling justification.
Plaintiff also argues that Defendants admitted paragraph 32 of Plaintiff’s Amended Complaint in their Answer (ECF No. 8, ¶ 7), and “these admitted actions on their face violated Defendants’ fiduciary duties to Blue Fire.” (ECF No. 23 at 1162.) While Plaintiff is correct that Defendants admitted paragraph 32 in their Answer, this admission does not establish a breach of fiduciary duties. All it establishes is that:
On May 13, 2020, counsel for Defendant Lindeman provided counsel for Blue Fire with the following documents: (1) the Third Amended and Restated Limited Liability Company Operating Agreement of PPMC (the “Third Amended Operating Agreement”, attached hereto at Exhibit 9); (2) a Notice of Appointment of Manager notifying Defendant Lindeman that KSDB had appointed him as the “KSDB Manager” under the Third Amended Operating Agreement; (3) an Amended Employment Agreement employing Defendant Lindeman as the President of PPMC; and (4) a PPMC Action by Written Consent of the Managers Without a Meeting dated May 11, 2020 describing actions purportedly taken to amend the Second Amended Operating Agreement to become the Third Amended Operating Agreement, to employ Defendant Lindeman as the President of PPMC and appoint Ms. Shingledecker as the Vice President and Secretary of PPMC. A true and correct copy of the May 11, 2020 PPMC Action by Written Consent is attached hereto at Exhibit 10.(Am. Compl. ¶ 32.)
Given the numerous entities, managers, and members involved in this litigation, it is important to first distinguish who owes what to whom in what capacity.
Under Delaware law, unless an operating agreement restricts or eliminates fiduciary duties, a manager of an LLC owes default fiduciary duties to the LLC and its members. 6 Del. C. § 18-1101(c); CMS Inv. Holdings, LLC v. Castle, CV 9468-VCP, 2015 WL 3894021, at *18 (Del. Ch. June 23, 2015); see also Feeley v. NHAOCG, LLC, 62 A.3d 649, 660 (Del. Ch.2012).
Delaware law governs this case, because both PPDP’s and PPMC’s operating agreements contain a provision stating that the agreement shall be governed and construed in accordance with Delaware law. (Am. Compl., Exs. 1, 4, and 7-A.) Schulke v. Radio Prods., Ltd. v. Midwestern Broad. Co., 6 Ohio St. 3d 436, 438, 453 N.E.2d 683 (Ohio 1983) (holding that Ohio courts must apply the law of the state “chosen by the parties to govern their contractual rights and duties” unless two exceptions, both of which are inapplicable here, arise) (quoting Restatement (Second) of Conflict of Laws, § 187 (1971)).
Here, none of the operating agreements at issue restrict or limit any of the fiduciary duties owed by the managers covered under the agreements, so as a manager of both PPDP and PPMC, the traditional duties of loyalty and care apply to Lindeman. 8
Moreover, PPMC’s Third Amended Operating Agreement’s limitation of liability provision preserves a manager’s liability for a breach of loyalty to PPMC or its members.
Section 6.5(b) of the Third Amended Operating Agreement states:
Limitation of Liability. A Manager of the Company will not be personally liable to the Company or its Members for monetary damages for breach of fiduciary duties as a Manager, provided that the liability of a Manager (i) for any breach of the Manager’s loyalty to the Company or its Members, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or (iii) for any transaction from which the manager derived an improper personal benefit will not be eliminated or limited hereby.(ECF No. 15-9 at 1067) (emphasis added.)
The Third Amended Operating Agreement’s limitation of liability provision only contemplates a PPMC manager’s breach of fiduciary duties to PPMC or its members, PPDP and KSDB. As a manager of PPMC, Lindeman therefore only owes fiduciary duties to PPMC, and its members, PPDP and KSDB. Plaintiff is not a member of PPMC, and Lindeman therefore does not owe Plaintiff fiduciary duties in his capacity as a PPMC manager. Accordingly, the Court only considers whether based on the pleadings in this case, Lindeman breached his fiduciary duties to Plaintiff as PPDP’s sole manager.
Under Delaware law, “‘A claim for breach of fiduciary duty requires proof of two elements: (1) that a fiduciary duty existed and (2) that the defendant breached that duty.’” Henkel of Am., Inc. v. Bell, 825 F. App’x 243, 254 (6th Cir. 2020) (quoting Beard Research, Inc. v. Kates, 8 A.3d 573, 601 (Del. Ch. 2010)).
Having established that as PPDP’s sole manager, Lindeman owes Plaintiff fiduciary duties, the Court next determines whether Plaintiff has pleaded factual content that allows the Court to draw the reasonable inference that Lindeman breached any fiduciary duties owed to Plaintiff.
Where, as here, the parties have not supplanted the core default fiduciary duties by contract, an LLC manager owes the fiduciary duties of loyalty and care. Auriga Capital Corp. v. Gatz 9 Properties, 40 A.3d 839, 852 (Del. Ch. 2012). “The duty of loyalty mandates that the best interest of the corporation and its shareholders takes precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the stockholders generally,” while “the duty of care requires that managers avoid “conduct that constitutes reckless indifference or actions that are without the bounds of reason.” Triple H Family Ltd. P’ship v. Neal, No. 12294-VCMR, 2018 Del. Ch. LEXIS 262, at *46 (Ch. July 31, 2018) (cleaned up). “By default, limited liability company managers owe fiduciary duties akin to those owed by directors of a corporation.” Klein v. Wasserman, No. 2017-0643-KSJM, 2019 Del. Ch. LEXIS 191, at *11 (Ch. May 29, 2019).
1. The Alleged Poison Pill Provision
Plaintiff takes issue with Section 6.1(c)(iv) of the Third Amended Operating Agreement, which discusses what occurs “in the event either R&M or Blue Fire becomes the sole equity owner of PPDP.” (ECF No. 15-9 at 1060.) Plaintiff claims that because this provision grants “Shingledecker three Manager votes upon [] Blue Fire buying out R&M’s interest in PPDP,” it “thereby grant[s] the KSDB Manager deadlock authority on PPMC matters requiring a Board vote in the event of such a buyout.” (Am. Compl. ¶ 49(A).) As such, Plaintiff deems this provision a “poison pill provision,” and claims that this action, along with the others discussed infra, was taken “with the purpose of diminishing and/or depriving Blue Fire of its rights under [the Second Amended Operating Agreement].” (Id. ¶ 48.)
Poison pills are not uncommon in the Delaware corporate setting and were originally intended as an anti-takeover device. See Selectica, Inc. v. Versata Enters., No. 4241-VCN, 2010 Del. Ch. LEXIS 39, at *40–41, 52 (Ch. Feb. 26, 2010). In essence, it is something within a company’s “financial or legal structure that is intended to make it difficult for another company or for a group of shareholders to take control of it.” (Black’s Law Dictionary 11th ed. 2019). But 10 even assuming arguendo that Section 6.1(c)(iv) constitutes a poison pill, “[t]he mere adoption of a garden-variety pill is not in itself preclusive under Delaware law.” Selectica, 2010 Del. Ch. LEXIS 39, at *72. “In spite of their rather contentious early history and the various arguments made against their use, poison pills remain a common feature of the corporate landscape, and Delaware courts have repeatedly upheld their adoption as consistent with a board’s fiduciary duties and business judgment.” Id. at *40–41.
Plaintiff argues that Section 6.1(c)(iv) accomplishes two illegitimate purposes: (1) to discourage Plaintiff from exercising its rights under the PPDP “Buy-Sell” provision thereby improperly perpetuating Lindeman’s control of PPDP to Plaintiff’s detriment; and (2) to make it impossible for Plaintiff to gain control of PPMC by exercising its rights under the PPDP “Buy-Sell” provision to purchase the interest of Lindeman’s company, R&M, in PPDP because, by doing so, Plaintiff would simply be buying into a deadlock with KSDB on PPMC matters requiring a board vote. Plaintiff then concludes that the alleged poison pill provision accomplishes nothing more than allowing “Lindeman to keep his job as PPMC’s President and perpetuate his control of PPDP and PPMC.” (ECF No. 21 at 1141.)
Defendants respond that the provision does not directly benefit Lindeman, applies equally to Plaintiff and PPDP’s other member, R&M, and only protects the interests of KSDB, a non-party to these proceedings.
This case presents the unusual allegation of a poison pill in an LLC’s operating agreement, and neither party has provided any case law discussing this atypical issue to guide the Court’s analysis. When analyzing the validity of a poison pill as it applies to corporations, “Delaware case law calls for a two-part inquiry . . . asking first whether the board of directors of a corporation had reasonable grounds for identifying a threat to the corporate enterprise and second whether the 11 response was reasonable in relation to the threat posed.” In re Williams Cos. Stockholder Litig., 2021 Del. Ch. LEXIS 34, at *1 (Ch. Feb. 26, 2021).
But the reasonableness of the PPMC board’s adoption of the alleged poison pill and whether this action was consistent with the board’s fiduciary duties and business judgment is not the question Plaintiff presents to the Court. Instead, Plaintiff asks the Court to assess whether the provision at issue deprives Plaintiff of rights previously afforded to it under the Second Amended Operating Agreement, and if so, whether Lindeman’s action, on behalf of PPDP, in favor of the Third Amended Operating Agreement constitutes a breach of the fiduciary duties owed to Plaintiff.
The Court answers both questions in the negative.
Based on the Court’s review of the provision at issue and the Third Amended Operating Agreement as a whole, the Court finds that the provision does not constitute a deprivation of Plaintiff’s rights, and Lindeman therefore did not breach any fiduciary duties owed to Plaintiff. Defendants are correct in their assertion that the provision applies equally to Plaintiff and R&M. Whether Plaintiff or R&M buys out the other’s interest under Section 6.1(c)(iv) of the Third Amended Operating Agreement, they each obtain the other’s voting rights of 1.5 votes for a total of three votes, just as they did under the Second Amended Operating Agreement. While the revised provision under the Third Amended Operating Agreement changes the board’s governance structure in the event of a buyout, it does not alter the structure in such a way that makes it impossible for the sole equity owner of PPDP to overcome any alleged “deadlock authority.” 12
Further analogizing to a corporation and the influence of voting positions, Delaware courts have upheld poison pill provisions where proxy contests were made considerably more difficult, because these contests must either be mathematically impossible or realistically unattainable for a poison pill to meet the preclusiveness standard. See Selectica, 2010 Del. Ch. LEXIS 39, at *81. “[B]ecause the purpose of [a] poison pill was not to provide an impenetrable barrier to control acquisitions but to give the target board leverage over a potential acquirer, where a potential acquirer may secure board control . . . the pill [was] not [] considered preclusive.” Selectica, 2010 Del. Ch. LEXIS 39, at *74 (citing Moran v. Household Int’l , 500 A.2d 1346, 1357 (Del. 1985)).
First, nowhere in the Third Amended Operating Agreement does it state that any person or entity has “deadlock authority.” Additionally, the Third Amended Operating Agreement contains a deadlock resolution procedure where the Secretary submits “a typed statement of the issue upon which voting is deadlocked, identifying the options voted upon, indicating that a tie-breaking decision is needed from” a neutral third party, Wayne Young of Adkins & Young, PLLC. (ECF No. 15-9 at 1061.) While Shingledecker is PPMC’s Secretary and would make the submission to Young in the event of a deadlock, this provision does not provide her with any authority to settle the deadlock matter. That is a matter for the neutral third party to settle, and the deadlock resolution procedure further states that, “All actions under this section require full anonymity in which Manager voted which way. All Managers shall refrain from communicating with Mr. Young regarding a Deadlock Resolution Procedure anticipated or in progress.” (Id. at 1062.)
Plaintiff fails to specify, with any supporting facts, how Lindeman, acting on behalf of PPDP, put his interests above PPDP’s, or its members’, or acted with reckless indifference. Though Plaintiff claims that the alleged poison pill provision Lindeman took action in support of discourages Plaintiff from exercising its right to make a buy-sell offer to the other PPDP member, R&M, because Plaintiff would essentially be buying into an allegedly impossible deadlock situation with KSDB, the Third Amended Operating Agreement states differently. While the new provision makes it more difficult to obtain a majority board vote should either Plaintiff or R&M become the sole equity owner of PPDP, it does not present an impenetrable barrier or mathematical impossibility to achieving that result due to the Third Amended Operating Agreement’s deadlock procedure. “Preclusive measures are those that are ‘insurmountable or impossible to outflank,’” and those circumstances are not present in the instant case. Selectica, 2010 Del. Ch. LEXIS 39, at *72 (quoting In re Gaylord Container Corp. S’Holders Litig., 753 A.2d 462, 482 (Del. Ch. 2000)). 13
The Court therefore finds that Plaintiff states a generalized conclusion with no supporting facts, and a conclusory allegation with no supporting facts pleaded is a fatal defect under Twombly and Iqbal. For this reason, the Court finds that this portion of Plaintiff’s claim warrants dismissal.
2. Deletion of the Buy-Sell Provision
Plaintiff also claims that the Third Amended Operating Agreement’s deletion of the Second Amended Operating Agreement’s Section 9.12, which provided each PPMC member the right to offer to sell its entire interest in PPMC to the other member, deprives PPDP, and indirectly Plaintiff of that right and improperly ensures Lindeman’s effective control of PPMC to Plaintiff’s detriment. Plaintiff provides no further detail concerning this allegation and argues that this action is impermissible under Delaware law but fails to inform the Court as to why. Here too, the Court therefore finds that Plaintiff states a generalized conclusion with no supporting facts, and this portion of Plaintiff’s claim also warrants dismissal.
3. Deletion of the Quarterly Meeting Requirement
The Third Amended Operating Agreement also removed the quarterly meeting requirement provision, and instead, allows for board meetings to be held upon a majority vote of managers. Plaintiff claims it is prejudiced by the removal of the quarterly meeting requirement, because PPMC board meetings will only be held if its PPMC manager, Sloane, can convince either Lindeman or Shingledecker to agree to a board meeting, which Plaintiff insists is highly unlikely. Plaintiff then concludes that the new meeting provision accomplishes nothing more than perpetuating Lindeman’s control of PPMC and allowing him to operate without board oversight.
Plaintiff does not allege that its request for a board meeting was denied or point to any legal requirement for PPMC to hold quarterly meetings. Instead, Plaintiff claims that PPMC’s lead lender requested a meeting, which was denied. Such an allegation, however, fails to specify how 14 Lindeman and PPDP breached any fiduciary duties owed to Plaintiff, as a member of PPDP. As such, this portion of Plaintiff’s claim also warrants dismissal.
4. PPMC’s Corporate and Financial Information
Plaintiff further claims that Sloane has been illegally deprived of PPMC’s corporate and financial information. In support of this claim, Plaintiff argues that neither the Second nor Third Amended Operating Agreements limits members’ rights to inspect PPMC’s books and records and points to Section 8.1(a) of those agreements, which states, “The books of account and other Company records shall be available for inspection and copying by any Member.” (Ex. A, ECF No. 15-7 at 967–68; ECF No. 15-9 at 1068.) Plaintiff also points to Section 8.1(b) of those agreements, which states, “The books and records of the Company shall be available at the Company’s principal office for examination by a Member.” (Id.) Plaintiff is correct in its assertion.
But as Defendants point out, Plaintiff is not a member of PPMC, and Plaintiff therefore does not have any express rights to the books of account under PPMC’s operating agreements. Plaintiff counters that Defendants’ argument fails nonetheless, because as a PPMC manger, Sloane is entitled to full access to PPMC’s books and records. Plaintiff does not point to any applicable provision in the PPMC operating agreements allowing PPMC managers such access, and as previously discussed, Lindeman, in his capacity as President and PPMC manager, does not owe Plaintiff any fiduciary duties as a non-PPMC member. While PPDP, of which Plaintiff is a member, is a member of PPMC, it is Lindeman who is PPDP’s agent or duly authorized representative, not Plaintiff. For these reasons, Plaintiff has failed to plead sufficient factual content that allows the Court to draw the reasonable inference that Defendants are liable for the misconduct alleged, and this portion of Plaintiff’s claim also warrants dismissal. 15
5. Good Faith and Fair Dealing
Plaintiff also alleges that Lindeman breached the duty of good faith and fair dealing, because he had a duty to deal with Plaintiff in good faith.
The Court construes this portion of Plaintiff’s claim to allege that Lindeman violated the implied covenant of good faith and fair dealing inherent in the operating agreements at issue in this case. But “to state a claim for breach of the implied covenant, [a party] must allege a specific implied contractual obligation, a breach of that obligation by [the opposing party], and resulting damage to [the party]”and “[g]eneral allegations of bad faith conduct are not sufficient.” Klein, 2019 Del. Ch. LEXIS 191, at *21 (cleaned up). Here, Plaintiff fails to allege such, and instead, relies on general allegations of Lindeman’s bad faith conduct to support its claim. As a result, Plaintiff’s claim fails.
Moreover, “‘one generally cannot base a claim for breach of the implied covenant on conduct authorized by the agreement.’” Nemec v. Shrader, 991 A.2d 1120, 1125-26 (Del. 2010) (quoting Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 441 (Del. 2005)). Here, Lindeman was authorized to take the May and June 2020 actions that he did under the operating agreements at issue. Therefore, Plaintiff’s claim also fails for this reason.
In sum, Plaintiff’s factual allegations concerning Lindeman’s breaches of fiduciary duty and good faith and fair dealing are not enough to raise a right to relief above the speculative level. Consequently, Plaintiff’s claim for breach of fiduciary duty and duty of good faith and fair dealing fails. The Court therefore dismisses Count Two of Plaintiff’s Amended Complaint.
B. Count One: Declaratory Judgment
Plaintiff also seeks a declaratory judgment concerning the parties’ rights and obligations to each other, but “the Declaratory Judgment Act does not mandate that federal district courts 16 exercise jurisdiction over every declaratory judgment action.” Jack v. Grose, No. 2:16-cv-633, 2017 U.S. Dist. LEXIS 35505, at *23-24 (S.D. Ohio Mar. 13, 2017). “District courts possess discretion in determining whether and when to entertain an action under the Declaratory Judgment Act, even when the suit otherwise satisfies subject matter jurisdictional prerequisites.” Wilton v. Seven Falls Co., 515 U.S. 277, 282 (1995).
Courts in this circuit consider the five factors below in exercising their discretion:
(1) whether the judgment would settle the controversy;
(2) whether the declaratory judgment action would serve a useful purpose in clarifying the legal relations at issue;
(3) whether the declaratory remedy is being used merely for the purpose of “procedural fencing” or “to provide an arena for a race for res judicata”;
(4) whether the use of a declaratory action would increase the friction between our federal and state courts and improperly encroach on state jurisdiction; and
(5) whether there is an alternative remedy that is better or more effective.Devine Grp., Inc. v. Omni Hotels Corp., No. 1:18-cv-186 (WOB), 2019 U.S. Dist. LEXIS 111393, at *15-16 (S.D. Ohio July 3, 2019) (citing Western World Ins. Co. v. Hoey, 773 F.3d 755, 759 (6th Cir. 2014).
The Court finds that the third and fourth factors are not applicable here and considers the remaining three factors. In doing so, the Court declines to hear Plaintiff’s declaratory judgment claim, as this claim is duplicative of Plaintiff’s breach of fiduciary duty and duty of good faith and fair dealing claim. Whether Lindeman breached the fiduciary duties he owed Plaintiff and whether he acted in good faith have already been addressed by the Court’s breach of fiduciary duty and good faith and fair dealing analysis. For this reason, Count One of Plaintiff’s Amended Complaint is also dismissed. 17
IV. CONCLUSION
For the foregoing reasons, Defendants’ motion (ECF No. 20) is GRANTED, and Plaintiff’s motion (ECF No. 21) is DENIED. Consequently, Plaintiff’s claims are DISMISSED with prejudice. The Clerk is instructed to enter judgment in favor of Defendants and close the case.
IT IS SO ORDERED. 18