Opinion
SUCV2015-01120 BLS1
02-03-2017
Stephen D. Roger v. Centerline Holding Company et al No. 136527
Filed February 7, 2017
MEMORANDUM OF DECISION AND ORDER ON THE PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
Mitchell H. Kaplan, Justice of the Superior Court.
In this action, the plaintiff, Stephen D. Roger, seeks a declaratory judgment concerning his rights under two limited liability company agreements (the Agreement[s]) governing two Delaware limited liability companies: nominal defendants Centerline GP Holdings, LLC and Centerline GP Dispositions, LLC (respectively, GP Holdings and GP Dispositions, or, collectively, the GP companies). The GP companies each have two members: Roger and defendant Centerline Holding Company (CHC); Roger and CHC each hold a 50% interest in each of the companies. As relevant to this litigation, the Agreements are identical. Roger seeks a declaration that, under the Agreements, (i) management decisions require the vote of both members, and (ii) he has a right to access to all of the GP companies' records necessary to exercise his management rights.
It is not apparent why CCL Acquisitions II, LLC and CCL Dispositions II, LLC are parties to this action and no relief is ordered with respect to them.
PROCEDURAL ISSUES AND RELATED LITIGATION
This case is before the court on Roger's motion for summary judgment. CHC has filed an opposition to that motion and also a motion under Mass.R.Civ.P. 56(f) in which it asserts that: " this case remains in its early stages, and much work remains to be done before summary adjudication is remotely appropriate . . . the parties have not yet deposed any of the more than 12 witnesses that they have collectively identified as having knowledge material to the dispute . . ." The court disagrees.
First, it may be noted that this case was filed on April 16, 2015; on August 15, 2016, the court entered a scheduling order (jointly proposed by the parties) which called for fact discovery to be completed by March 31, 2017; to date, neither party has taken any depositions; and, notably, CHC elected not to take any discovery in the three months and one-half months that passed between the date the summary judgment motion was served on it and the date of the hearing on that motion. The Rule 56(f) motion might have been more convincing if it had been supported by discovery demonstrating that material, disputed facts existed.
The court finds that, as the case has developed, the issues presented by the Amended Complaint (the Complaint) can be resolved based upon a few clearly undisputed facts and a review of the Agreements. The controlling question raised by the Complaint is whether each of the two members of the GP companies can independently manage the business of the companies or whether management decisions require a majority vote of the members, which, under the present membership, requires the vote of both remaining members. While factual issues may exist regarding whether, in the past, CHC caused the GP companies to act without Roger's consent, Roger has explicitly stated that he does not seek damages as a result of any prior unilateral actions, nor is he asking that any prior act be rescinded or undone. The relief that Roger requests is entirely prospective. A resolution of any factual dispute concerning historic conduct is not material to any remaining material issues in this litigation.
The existence of a present dispute, i.e., an actual controversy, concerning the meaning of the Agreements is clearly established by the parties' pleadings. See Entergy Nuclear Generation Co. v. Dept. of Envt'l, Protection, 459 Mass. 319, 325, 944 N.E.2d 1027 (2011). Roger asserts " that all actions taken by the Members require the consent of a majority of the Members." CHC contends that: " Actions that may be taken by 'each of the Members' may still be taken by a member individually . Thus, to the extent that CHC has caused [the GP companies] to take actions in the ordinary course of their business, it has not violated any right of Roger." (Emphasis in CHC's pleading.)
The court notes that a related case between the same parties is pending in the Delaware Court of Chancery: Centerline Holding Co. v. Roger No. 12015-CB (the Delaware action). CHC filed the Delaware action on February 18, 2016. In it, CHC alleges that it (or certain employees of an affiliate of CHC) properly exercised rights granted them under the Agreements to purchase Roger's membership interests in the GP companies by notices delivered to him on December 9, 2015. Although Roger disputed the valuation of his interests set out in the notice, the Agreements require the parties to arbitrate valuation, if they disagree on the number. Among other relief CHC asked the Court of Chancery to declare that Roger no longer owns membership interests in the GP companies and to compel Roger to arbitrate the value (i.e., purchase price) of these interests. In his answer to CHC's complaint Roger asserted that CHC did not have right to call his interests and, in any event the notice was defective. Roger moved, in Delaware, to dismiss or stay the Delaware action, which was filed more than a year after the Massachusetts case. The Court of Chancery denied the motion, explaining that the issue presented in the Delaware action-whether CHC had acquired Roger's membership interests-was not raised by the Complaint in the Massachusetts case and did not have to be raised as a compulsory counterclaim in that case. It is this court's understanding that although the Delaware action has been pending for some time, CHC has apparently only recently filed a motion for judgment on the pleadings, and CHC's counsel informed the court at the hearing on Roger's motion for summary judgment that the motion for judgment on the pleadings is scheduled to be heard in the Court of Chancery on February 14, 2017.
While this court could decide the question of whether CHC has properly exercised a right to purchase Roger's membership interests, as the parties have addressed this issue in their summary judgment pleadings and it is certainly implicated by the pending motion, this court notes, as did the Chancellor in the Delaware action, that the Massachusetts complaint was not amended to address the purchase notice delivered to Roger after his action was commenced. This court will, therefore, defer to the Court of Chancery, which is scheduled to decide this issue in only two weeks.
At oral argument on the summary judgment motion, this court asked whether any ruling it might enter regarding Roger's rights as a member of the GP companies would be academic, if the Court of Chancery held that his interests had been acquired by CHC. His counsel responded that the issue of who controlled the GP companies might affect the value of Roger's interests. The court then asked CHC's counsel whether CHC planned to argue in an arbitration that Roger's alleged limited ability to participate in the management of the GP companies reduced the value of his interests, i.e., that some manner of discount for lack of control should be applied. Counsel asked for time to consult with his client on this question and report back to the court.
CHC did, thereafter, file a report with the court, but the report did not answer the question raised at oral argument. Rather, it went on for multiple pages explaining that the GP companies were holding companies. And, even though the GP companies held majority interests, directly or indirectly, in the downstream operating companies, the operating agreements of these subsidiary companies deprived the GP companies of the ability to control management of the operating companies. The degree of management and control that the GP companies can exert over any downstream affiliates is manifestly not an issue before this court. Rather, the question is whether, as a member of the GP companies, Roger has or had a right to participate in management of the GP companies equivalent to that of CHC and whether his consent is necessary for any management decision. As CHC did not answer the question of whether it would assert its interpretation of the Agreements in an arbitration concerning the value of Roger's membership interests, this court finds that the resolution of the dispute concerning each member's right to participate in the management of the GP companies is necessary, even if the Court of Chancery finds that CHC has properly exercised its rights to acquire Roger's interests.
FACTUAL BACKGROUND
The following undisputed facts are drawn from the summary judgment record.
Roger was an executive officer of Centerline Capital Group, Inc. (CCG), which was an indirect subsidiary of CHC, from 2003 until December 11, 2013. CHC, through its subsidiaries, developed affordable housing projects that provided tax benefits to institutional investors. The affordable housing projects were owned by lower tier local partnerships. CHC and its affiliated companies were referred to as the Centerline Group.
GP Holdings was formed in 2003 and GP Dispositions in 2005, in each case to hold, directly or indirectly, general partner interests in local affordable housing projects that CHC or its affiliates had acquired when the underlying project's general partner had defaulted on its obligations. The original members of the GP companies were employees of the Centerline Group. The Agreement governing GP Holdings and GP Dispositions was amended and restated several times, and, by the end of 2008, each company had five members, none of which was Roger. By May 1, 2011, several members had withdrawn, Roger had become a member, and Roger and an individual named Robert Levy, were the sole remaining members, each owning 50% of the membership interests.
In November 2013, a private investor, who the parties refer to as the " Hunt Companies, " acquired the Centerline Group (which included CHC) and, as part of that acquisition, Robert Levy assigned his membership interests in the GP companies to CHC. At that point, the two 50% members of the GP Companies were Roger and CHC. As noted above, Roger's employment with a Centerline Group company terminated on December 11, 2013. On December 9, 2015, Roger received notice that his membership interests were being called. Also as explained above, the question of whether that notice caused Roger no longer to be a member of the GP companies will soon be addressed in the Delaware action.
The current versions of the Agreements were last amended and restated as of December 31, 2008. The provisions necessary to address the issues raised in this litigation are found in Article III: Rights, Duties and Liabilities of the Members. The relevant sections are as follows:
3.1(a) Each of the Members shall have the right to and are hereby vested with the full, exclusive and complete right, power and discretion to operate, manage and control the affairs of the Company and to make all decisions affecting the Company affairs.
3.1(b) The Members shall have full, exclusive and complete discretion to manage and control the business and affairs of the Company, to make all decisions affecting the business and affairs of the Company and to take all such actions as they deem necessary or appropriate to accomplish the purpose of the Company as set forth herein. The Members shall be the sole persons with the power to bind the Company, except and to the extent that such power is expressly delegated to any other person by the Members. No such delegation shall cause any Member to cease to be a Member of the Company. There shall not be a " manager" (within the meaning of the Delaware Act) of the Company.
3.1(c) The Members shall have the right to designate one or more persons as officers of the Company to carry out any powers of the Members to the fullest extent permitted by law. Until removed from office by the action of the Members, each of the Members shall be officers of the Company holding the office of Executive Vice President. Any action of the foregoing officers, acting singly, shall bind the Company.
3.1(f) Except as provided in Section 5.2 and Section 6.6, all actions to be taken by, or which require the approval or consent of, the Members hereunder shall be taken only with the consent of the Members holding a majority of the Membership Interests held by the members obtained at a meeting held in person or by telephone upon two days written notice to all of the members. The Members may act without a meeting if the action taken is approved in advance in writing by a majority of the Members; provided however, that if any Member shall deliver to the Company in writing a request for written notice of any actions to be taken by the Members without a meeting, then any such action shall not constitute an approved action of the Company unless each member has obtained two days prior written notice of the purpose request for consent to such action. Notice of the foregoing may be provided by U.S. mail, overnight delivery, hand delivery, email or facsimile.
Section 5.2 provides that all members must consent to dissolution. Section 6.6 is a savings clause if any provision of the Agreement is found invalid. Neither addresses any issue relevant to this case.
The Agreements have traditional merger clauses establishing that the Agreements are integrated and supersede any prior understandings of the parties.
DISCUSSION
Under Delaware law, " [l]imited liability company agreements are contracts and must be interpreted as such." RED Capital Inv., L.P. v. RED Parent, LLC, Id. (Del.Ch. Feb. 11, 2016). In consequence, the " [Agreements are] interpreted using standard rules of contract interpretation which require a court to determine from the language of the contract the intent of the parties. Waggoner, 581 A.2d at 1134. In discerning the intent of the parties, the [Agreements] should be read as a whole and, if possible, interpreted to reconcile all of the provisions of the document. Warner Communications, Inc. v. Chris-Craft Indus., Inc., Del.Ch., 583 A.2d 962, 967, aff'd, Del.Supr., 567 A.2d 419 (1989)." Kaiser Aluminum Corp. v. Matheson, 681 A.2d 392, 395 (Del.Supr. 1996). Further, " [i]f no ambiguity is present, the Court must give effect to the clear language of the [Agreements]. Johnston v. Tally Ho, Inc., Del.Super., 303 A.2d 677, 679 (1973). A contract is not rendered ambiguous simply because the parties do not agree upon its proper construction. Rather, a contract is ambiguous only when the provisions in controversy are reasonably or fairly susceptible of different interpretations or may have two or more different meanings." Rhone-Poulene Basic Chems. Co. v. American Motorists Ins. Co., Del.Supr., 616 A.2d 1192, 1196 (1992)." Id.
In the present case, as it relates to the rights of the Members to manage the GP companies, the Agreements have only one reasonable interpretation.
CHC argues that because Section 3.1(a) provides that " [e]ach of the Members shall have the right to and are hereby vested with the full, exclusive and complete right, power and discretion to operate, manage and control the affairs of the Company and make all decisions affecting the Company affairs" it is apparent that " each member individually has the right to manage [the GP companies]. Consent of a majority is not required." (Emphasis in CHC brief.) CHC goes on to assert that " any possible doubt" that the Agreements must be interpreted in this manner " is dispelled by Section 3.1(c)." It then quotes the following sentences from that Section: " Until removed from office by the action of the Members, each of the Members shall be officers of the Company holding the office of Executive Vice President. Any action of the foregoing officers, acting singly, shall bind the Company."
CHC's interpretation is untenable. First, each Member cannot possibly have an exclusive right individually to manage and bind the GP companies. When the Agreements were last restated, the GP companies each had five members, each with a 20% interest in the companies. In Section 3.1(b), the Agreements expressly state that there will be no " manager." Five Members cannot possess exclusive rights individually to bind the Companies. Such a provision would be internally inconsistent. And, notably, the very next section of the Agreements provides that: " The Members shall have full, exclusive and complete discretion to manage and control the business and affairs of the Company, to make all decisions affecting the business and affairs of the Company and to take all such actions as they deem necessary or appropriate to accomplish the purpose of the Company as set forth herein." (Emphasis added.) In other words, these management rights reside exclusively and collectively in the Members. Section 3.1(f) then explains how the Members will make their management decisions: " all actions to be taken by . . . the Members hereunder shall be taken only with the consent of the Members holding a majority of the Membership Interests held by the members obtained at a meeting held in person or by telephone upon two days written notice to all of the members." The Section goes on to provide a mechanism for the Members to act without a meeting, as long as there is advance notice of the proposed action and no Member objects.
CHC's reliance on Section 3.1(c) to support its contention that each Member individually can make any management decision by himself is misguided. Section 3.1(c) is the type of language commonly used to address the right of third parties to rely on the act of a Member to bind the Company, i.e., a third party need not ask for a certificate establishing the Members' vote before it can rely upon the act of a Member to bind the Company.
While Section 3.1(a) may be inartfully drafted when it refers to " each" member having an " exclusive" right, in context it is clear that each Member has the right to manage the affairs of the GP companies, subject to the equivalent rights of the other Members to participate in management and the clearly stated directive that: the Members exercise their rights by voting and a vote of the majority of the interests is required for the Members to act. The interpretation proffered by CHC would allow each Member, regardless of the percentage interests in the GP companies that he owned, to independently bind the Company. Two or more Members could take mutually inconsistent actions at the same time. CHC's proposed interpretation of the Agreements is not a " reasonable" one and not consistent with the other clearly stated sections of Article III.
Roger also seeks a declaration concerning his right to review the GP companies' records. The court need not address the question of whether CHC permitted him appropriate access to records in the past. On a prospective basis, he is entitled to review all records pertaining to any proposed action that the Members may wish to take so that he can make an informed judgment in voting his interests.
ORDER
For the foregoing reasons the plaintiff's motion for summary judgment is ALLOWED as follows: the Court declares that: (i) all decisions affecting the business and affairs of GP Holdings and GP Distributions and all actions necessary or appropriate to accomplish the purpose of these companies requires the consent of the Members holding a majority of the Membership Interests in each company, such consent to be obtained in the manner set out in Section 3.1(f) of the Agreements; and (ii) Roger shall be provided with access to all records of GP Holdings and GP Decisions, on reasonable notice, necessary for him to exercise his management rights, so long as he is a Member of the companies. Final judgment to enter declaring these rights.