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Bernstein v. Tractmanager

Court of Chancery of Delaware
Dec 20, 2007
C.A. No. 2763-VCL (Del. Ch. Dec. 20, 2007)

Opinion

C.A. No. 2763-VCL.

Submitted: December 6, 2007.

Decided: December 20, 2007.

Joel Friedlander, Esquire, John M. Seaman, Esquire, BOUCHARD MARGULES FRIEDLANDER, P.A., Wilmington, Delaware, Attorneys for the Plaintiff.

Ian Connor Bifferato, Esquire, Chad J. Toms, Esquire, BIFFERATO GENT1LOTTI LLC, Wilmington, Delaware; Thomas J. Fleming, Esquire, OLSHAN GRUNDMAN FROME ROSENZWEIG WOLOSKY LLP, New York, New York, Attorneys for the Defendant.


MEMORANDUM OPINION AND ORDER


The plaintiff, Jonathan Bernstein, has moved pursuant to Court of Chancery Rule 59(f) for reargument of a portion of this court's November 20, 2007 Memorandum Opinion denying his motion for summary judgment, and granting defendant TractManager, Inc.'s motion for summary judgment. Bernstein claims that the court misapplied the law in reaching its decision. For the reasons stated below, the court denies Bernstein's motion.

Bernstein v. TraciManager, Inc., No. 2763, 2007 WL 4179088 (Del. Ch. Nov. 20, 2007).

I.

The standard applicable to a motion for reargument is well settled. To succeed, "`the moving party [must] demonstrate that the Court's decision was predicated upon a misunderstanding of a material fact or a misapplication of the law.'" Such motions "are not a mechanism for litigants to relitigate claims already considered by the court. Rather Rule 59 relief is available to prevent injustice and will be granted only when the moving party demonstrates that the court's decision rested on a misunderstanding of the law." Further, the misunderstanding or misapplication must be such that `"the outcome of the decision would be affected.'"

Deloitte Touche U.S.A., L.L.P. v. Lamela, No. 1542, 2006 WL 345007, at *2 (Del.Ch. Feb. 7, 2006) (quoting Goldman v. Pogo.com, Inc., No. 18532, 2002 WL 1824910, at *1 (Del. Cb. July 16, 2002)); see also Miles, Inc. v. Cookson America, Inc., 677 A.2d 505, 506 (Del. Ch. 1995).

American Legacy Found. v. Lorillard Tobacco Co., 895 A.2d 874, 877 (Del.Ch. 2005); In re ML/EQ Real Estate P `ship Litig., 2000 WL 364188, at *1 (Del.Ch. Mar. 22, 2000).

Deloitte Touche, 2006 WL 345007, at *2 (citing Stein v. Orloff, No. 7276, 1985 WL 21136, at *2 (Del.Ch. Sept. 26, 1985)).

II.

In his motion for reargument, Bernstein fails to raise arguments that are in any way different than the arguments already considered by the court. Therefore, Bernstein's motion will be dismissed. Nonetheless, the court will briefly address the substance of Bernstein's arguments.

A. Application Of TractManager, Inc.'s Bylaws To Managers Of TractManager, LLC

Bernstein first challenges the court's holding that TractManager, Inc.'s bylaws do not apply to acts Bernstein took as a manager of TractManager, LLC. He argues that Delaware statutes deem a pre-conversion LLC and post-conversion corporation to be "the same entity." Therefore, Bernstein concludes, the word "corporation" in TractManager, Inc.'s bylaws should be read to include TractManager, LLC, and apply to actions he took as its manager.

Bernstein also argues that TractManager, Inc.'s counsel somehow conceded that the word "corporation" in TractManager, Inc.'s bylaws should be read to include TractManager, LLC.
Bernstein refers to the following language:

THE COURT: But [the bylaws do not] say "LLC," either. So if-if a claim arises at the time that the — what is now a corporation was an LLC, you're conceding that for purposes of reading the word "corporation," it would — you would read it to include the predecessor LLC.
MR. FLEMING: I do, Your Honor. I do think that's-
THE COURT: LLC['s], by and large, as we all know, generally they don't have things called boards of directors. . . .

Hr'g Tr. 55-56, July 20, 2007. The court does not consider counsel's truncated response a concession. In fact, TractManager, Inc.'s counsel specifically argued that "there's little reason" that "the word `director' should just be rewritten with the word `manager' . . ." Hr'g Tr. 55.

Bernstein overlooks that, although a pre-conversion LLC and post-conversion corporation are treated as the same entity for purposes of Delaware law, there are significant differences between an LLC and a corporation. Indeed, if it were otherwise, there would be little reason for an LLC to convert into a corporation. Thus, this court held that "[l]imited liability companies and corporations differ in important ways, most pertinently in regard to indemnification: mandating it in the case of corporate directors and officers who successfully defend themselves, but leaving the indemnification of managers or officers of limited liability companies to private contract."

Bernstein, 2007 WL 4179088, at *3 (comparing 8 Del. C. § 145 with 6 Del. C. § 18-108).

There is nothing inconsistent with treating a pre-conversion LLC and a post-conversion corporation as the same entity, while also respecting differences resulting from the change in entity form. TractManager, LLC's Operating Agreement governs Bernstein's advancement rights for acts he took as a manager of the LLC, and Bernstein offers no new arguments why the court should infer that TractManager, Inc. intended to expand those rights.

B. "By Reason Of The Fact"

Bernstein then challenges the court's holding that he was not sued "by reason of the fact" he was a director of TractManager, Inc. First, with respect to acts occurring after the conversion, Bernstein argues that "[t]he Opinion overlooks legal authority regarding the meaning of the bylaw phrase `or in any other capacity while serving as a director, officer, employee, or agent.'" Specifically, Bernstein cites to Professor Ernest L. Folk III's 1972 commentary to 8 Del. C. § 145(f), in which Professor Folk opines:

Pl.'s Br. ¶ 8.

[The language of 8 Del. C. § 145(f), which provides that statutory indemnification and advancement rights are non-exclusive of other indemnification and advancement rights an individual may have, "both as to action in such person's official capacity and as to action in another capacity while holding such office"] may well change the implication of Mooney v. Willys-Overland Motors, [ 204 F.2d 888, 896 (3d Cir. 1953)], that a corporation could not indemnify expenses incurred by a director or officer if he is sued in his capacity of a controlling stockholder, at least where there is no ground for linking the misconduct challenged in the main action to an official capacity.

Ernest L. Folk, III, The Delaware General Corporation Law-A Commentary and Analysis 102 (1972).

Bernstein argues that, likewise, TractManager, Inc.'s bylaws provide advancement for acts a director takes in an official capacity or "any other capacity." Therefore, he concludes, he is entitled to advancement for acts taken as TractManager, Inc.'s attorney, even if there is "no ground linking the misconduct challenged in the main action to an official capacity."

While Professor Folk's 35-year old commentary provides some support for Bernstein's position, Bernstein cannot point to any case in which a court has expanded advancement and indemnification rights in such an extreme way. The court sees no reason to do so now. Instead, the court reiterates that Bernstein's "reading [of TractManager, Inc.'s bylaws] renders meaningless the words `by reason of the fact' [he is or was a director or officer]. . . . [T]he phrase `or any other capacity' is better read as clarifying the term `proceeding by reason of the fact he or she is or was a director or an officer of the corporation.'"

Bernstein, 2007 WL 4179088, at * 6.

Bernstein further argues that the court overlooked the import of Grace Brothers, Limited v. Uniholding Corporation. Bernstein argues that, under Grace Brothers, the allegations in the New York action could have established a breach of fiduciary duty claim against him as a director, even though the allegations only concerned acts he took as an attorney. Therefore, Bernstein argues, he is being sued "by reason of the fact" that he is a director of TractManager, Inc., and is entitled to advancement for defending those claims.

No. 176122000, 2000 WL 982401 (Del.Ch., July 12, 2000).

Putting aside whether Bernstein's interpretation of Grace Brothers is even accurate, his argument is unpersuasive. Bernstein would have this court create a new test for what it means to be sued "by reason of the fact" that one is a director — namely that it means the allegations against an individual could establish a claim of breach of fiduciary duties owed as a director. This is not the law of Delaware. An individual is not sued "by reason of the fact" that he or she is a director simply because certain allegations against the individual arguably give rise to breach of fiduciary duty claims. Rather, as noted in the Opinion, a director is entitled to advancement "if there is a nexus or causal connection between any of the underlying proceedings . . . and one's official capacity, without regard to one's motivation for engaging in that conduct."

See Hoover Indus. v. Chase, 14 Del. J. Corp. L. 332, 337-38 (Del. Ch. 1988) (stating "[i]t may be that every deliberate or intentional wrong visited upon a corporation by a person who serves as a director at the time of the wrong, constitutes a breach of the director's duty of loyalty").

This is especially so where, as here, the director's actions are governed by an independent set of fiduciary duties, such as legal ethics.

Homestore v. Tafeen, 888 A.2d 204, 215 (Del. 2005).

As this court held, the counterclaims brought against Bernstein in the New York action relating to post-conversion activity were, in essence, "that Bernstein drafted legal documents and agreements in violation of legal ethics rules, advised his client to enter into those agreements, and attempted to recover legal fees to which he was not entitled." Bernstein's corporate powers were not "critical," "instrumental," "necessary," or used in any meaningful sense to commit these acts. Therefore, "[t]hese claims bear no nexus to Bernstein's status as a director or officer." Under its bylaws, TractManager, Inc. may sue Bernstein, an attorney who also sits as a director, for acts he took as an attorney, and may do so without triggering advancement rights.

Bernstein, 2007 WL 4179088, at *6.

Perconti v. Thornton Oil Corp., No. 18630, 2002 WL 982419, at *7 (Del.Ch. May 3, 2002).

Id.

Brown v. Liveops, Inc., 903 A.2d 324, 329 (Del. Ch. 2006).

Bernstein, 2007 WL 4179088, at *6.

Finally, Bernstein argues that the Opinion overlooks that the New York court dismissed all the claims brought against him. He argues that "record shows the absence of any genuine dispute about the appropriateness of Bernstein's conduct prior to 2003," it is clear that "what motivates the entire New York action is Bernstein's conduct as a director and officer in 2004, when . . . `[u]sing his post as president and director, Bernstein sought to engineer the removal of Thomas Rizk.'" The court does not agree that the outcome of the New York action changes the fact that the post-conversion counterclaims were based on allegations of conduct Bernstein engaged in as an attorney, rather than as a director. It may be, as Bernstein will doubtless contend, that he is entitled to indemnification under the LLC's Operating Agreement for fees and expenses incurred in defending the claims relating to pre-conversion conduct. That question is, however, for another day.

Pl.'s Br. ¶ 12.

III.

For the reasons stated herein, Bernstein's motion for reargument is DENIED. IT IS SO ORDERED.


Summaries of

Bernstein v. Tractmanager

Court of Chancery of Delaware
Dec 20, 2007
C.A. No. 2763-VCL (Del. Ch. Dec. 20, 2007)
Case details for

Bernstein v. Tractmanager

Case Details

Full title:JONATHAN BERNSTEIN, Plaintiff, v. TRACTMANAGER, INC., a Delaware…

Court:Court of Chancery of Delaware

Date published: Dec 20, 2007

Citations

C.A. No. 2763-VCL (Del. Ch. Dec. 20, 2007)