Opinion
C.A. No. 11612-VCMR
07-13-2017
In re GENERAL HOME STORE LLC, a Delaware limited liability company
POST-TRIAL ORDER
WHEREAS, Petitioners seek dissolution of General Home Store, LLC, a Delaware limited liability company, ("General Home Store" or "GHS") under 6 Del. C. § 18-802;
WHEREAS, the parties have stipulated to the dissolution of General Home Store, and the Court has appointed Patricia L. Enerio as a liquidating trustee (In re General Home Store, LLC, C.A. No. 11612-VCMR (Del. Ch. Mar. 6, 2017) (ORDER));
WHEREAS, the remaining issues in this case are (1) who owns the 50% membership interest in General Home Store designated as "Maris Ventures" in the General Home Store operating agreement; (2) are Petitioners entitled to an accounting of General Home Store at Respondent's expense; and (3) who is responsible for $70,745.09 in attorneys' fees from litigation in New York related to the General Home Store bank account (the "New York Litigation") and attorneys' fees in this litigation;
WHEREAS, the Court held a trial in this case on February 1 and 2, 2017 and has reviewed the parties' stipulations, 109 exhibits, and the testimony of five live witnesses;
Citations to testimony presented at trial are in the form "Tr. # (X)" with "X" representing the surname of the speaker, if not clear from the text. After being identified initially, individuals are referenced herein by their surnames without regard to formal titles such as "Dr." No disrespect is intended. Exhibits are cited as "JX #." Unless otherwise indicated, citations to the parties' briefs are to post-trial briefs, and citations to the oral argument transcript refer to the post-trial oral argument.
NOW, THEREFORE, THE COURT HEREBY FINDS AND ORDERS:
1. The Starec Trust and Bonnie Krupinski are the two 50% members of General Home Store. The General Home Store liquidating trustee, Patricia Enerio, has the authority and discretion to decide whether to conduct an accounting for General Home Store, and this Court will defer to her judgment as to whether an accounting is necessary. General Home Store will bear the expense of any accounting. This Court does not address the question of who is responsible for the attorneys' fees in the New York Litigation because that question is under advisement in the New York court. In this case, each party shall bear its own attorneys' fees.
2. Ira Statfeld and Krupinski formed General Home Store on March 14, 2005 to operate a home goods store in East Hampton, New York. JX 11. Krupinski and Statfeld are both managers of General Home Store. JX 12. In the early years of the business, Statfeld was involved in the daily management of the store "from selling, to the cash register, to stocking, to cleaning." Tr. 38 (Statfeld). In 2013, he moved to Miami Beach, Florida (id.), and Krupinski took a more active role in managing General Home Store.
3. In 2002, Statfeld and his life partner Michael Recanati formed the Starec Trust, an Alaska trust. Id. at 32-33. The purpose of the trust was to replicate a marriage, and at the time of the formation of General Home Store, Statfeld considered all of his and Recanati's assets to be held in the trust for his and Recanati's benefit. Id. at 33. Statfeld and Recanati's son Raphael Statfeld Recanati was a contingent beneficiary of the Starec Trust. Id. The Starec Trust's current trustees are Statfeld, Michele Kahn, and Eric Goldberg. Id. at 34. The Peak Trust Company is an administrative trustee of the Starec Trust. Recanati passed away on July 9, 2015 (JX 44), and Esther Cohen is the substitute administrator of his estate (JX 5, at 15).
4. On July 26, 2005, Krupinski signed the General Home Store operating agreement as a member and as a manager. On August 12, 2005, Statfeld signed the agreement for himself as a manager and for "Maris Ventures" as a member. JX 12. The General Home Store operating agreement lists the two 50% members of General Home Store as Bonnie Krupinski and "Maris Ventures." Id. The parties agree that "Maris Ventures" is an unregistered trade name and not an entity that can hold property. But they disagree about who or what entity "Maris Ventures" references.
5. The evidence shows that the Starec Trust owns the "Maris Ventures" 50% membership interest in General Home Store. Statfeld testified that he signed for "Maris Ventures" as a trustee of the Starec Trust because "Maris Ventures" is a trade name of the Starec Trust, and the Starec Trust is "the other 50-percent partner in this LLC." Tr. 41 (Statfeld). Further, Recanati's estate, through its substitute administrator Cohen, testified in a deposition that General Home Store is a Starec Trust investment. JX 5, at 58. And Krupinski testified that when General Home Store was formed, she did not care how the other 50% membership interest was held because Statfeld, Recanati, Krupinski, and Krupinski's husband were all friends. Tr. 259-60 (Krupinski).
6. In 2010, Statfeld and Krupinski's relationship started to become strained. Statfeld discussed with Krupinski the possibility of purchasing her interest in General Home Store. Id. at 49-51 (Statfeld). As such, they hired Empire Valuation Consultants to perform an appraisal of General Home Store. JX 20. The appraisal report is addressed to both Krupinski and Statfeld, and it states, "[a]s of the Valuation Date, GHS had two members, Bonnie Krupinski and Starec Trust, each of which held a 50% membership interest in the Company." Id. at 3.
7. The General Home Store financial records support Statfeld's testimony and the characterization in the appraisal report. General Home Store records indicate that the Starec Trust made the capital contributions to General Home Store for the "Maris Ventures" 50% interest. The General Home Store general ledger and financial statements for 2013, 2014, and 2015 show that "Starec Trust Norad" has a capital account comprising 50% of General Home Store's capital. JX 38 (General Home Store 2013 financial statements); JX 43 (General Home Store 2014 financial statements); JX 68 (General Home Store 2015 financial statements); JX 93, at GHS_000411 (General Home Store general ledger). Further, the General Home Store tax returns for 2013, 2014, and 2015 list "Starec Trust Norad" as a 50% owner of General Home Store. JX 37 (General Home Store 2013 tax return); JX 42 (General Home Store 2014 tax return); JX 67 (General Home Store 2015 tax return). Krupinski was the General Home Store manager in charge of tax matters, and she signed the General Home Store tax returns, which listed "Starec Trust Norad" as the other 50% member of General Home Store. Tr. 275 (Krupinski).
8. Starec Trust trustees Kahn and Goldberg signed an affidavit stating that "Starec Trust Norad" is an incorrect name for the Starec Trust that refers to the Starec Trust's Northern Advantage account at Northern Trust. JX 63. Kahn also testified at trial that "Starec Trust Norad" is an incorrect name for the Starec Trust, but she was not concerned with the incorrect name on the tax documents because the tax identification number associated with "Starec Trust Norad" was the correct number for the Starec Trust. Tr. 203 (Kahn).
9. The Starec Trust's records similarly show that it held a 50% interest in General Home Store. In connection with litigation regarding the internal affairs of the Starec Trust in Alaska, Statfeld submitted an affidavit, dated June 21, 2011, and attached certain Starec Trust documents. A list of 2010 Starec Trust investments submitted to the Alaska court lists an "Investment in GHS" of $131,000. JX 30, Ex. 13. And a list of 2011 Starec Trust investments lists an "Investment in GHS Ventures" and an "Investment in GHS Designs" of $100,000 each. Id. Statfeld testified that GHS Ventures and GHS Designs were entities he established for the Starec Trust to ensure that the Starec Trust could meet any General Home Store capital calls. Tr. 96 (Statfeld). Further, a list of cash inflows and outflows from March 16, 2011 through April 6, 2011, which was submitted to the Alaska court, shows cash outflows to "Duval & Stachenfeld - GHS," "GHS Ventures Inc.," and "GHS Designs Inc." JX 30, Ex. 29. These records show that the Starec Trust considered itself a member of General Home Store. Further, the Starec Trust's accountant James Graff testified that the trust received Schedule K-1s for General Home Store income and losses. Tr. 359 (Graff). And the Starec Trust reported General Home Store income and losses on its own tax returns at least from 2006 through 2013. JX 99. No income or loss from General Home Store was passed through to Statfeld or Recanati on their personal income tax returns. Tr. 197 (Kahn). Thus, I find that the Starec Trust and Krupinski are the two 50% members of General Home Store.
10. Krupinski argues that because Statfeld signed the General Home Store operating agreement for "Maris Ventures," the operating agreement unambiguously shows that Statfeld is a 50% member of General Home Store, and this Court cannot examine extrinsic evidence. Resp't's Answering Br. 2-4. "It is an elementary canon of contract construction that the intent of the parties must be ascertained from the language of the contract." Citadel Hldg. Corp. v. Roven, 603 A.2d 818, 822 (Del. 1992). "Only when there are ambiguities may a court look to collateral circumstances." Id. While I cannot examine extrinsic evidence unless the General Home Store operating agreement is ambiguous, both parties' positions in this case require the Court's interpretation of the ambiguous term "Maris Ventures." The Court must examine extrinsic evidence to determine to whom the parties intended to refer through the name "Maris Ventures." The parties agree that "Maris Ventures" is not an entity, but they disagree about which entity or individual it references. As discussed above, the evidence shows that the Starec Trust owns the "Maris Ventures" membership interest in General Home Store.
11. Respondent cites Genmar Corp. v. Genmar Industries, Inc., 1991 WL 3914, at *3 (Del. Ch. Jan. 14, 1991), and argues that Petitioners must prove the Starec Trust's exclusive and prior use of the name "Maris Ventures" in the market in order to establish ownership of that trade name. Resp't's Opening Br. 25 (citing Genmar Corp., 1991 WL 3914, at *3). But Petitioners do not seek the exclusive right to use the trade name "Maris Ventures" in commerce. Rather, the issue in this case is which party owns the 50% interest in General Home Store that is designated by the term "Maris Ventures" in the General Home Store operating agreement. Genmar, thus, does not apply.
12. Because the evidence establishes that the Starec Trust owns a 50% interest in General Home Store, I need not address the parties' arguments about whether Krupinski acquiesced in the Starec Trust's General Home Store membership. Similarly, I need not address Respondent's argument that acquiescence does not apply because the Starec Trust has unclean hands for failing to register the name "Maris Ventures."
To the extent that the parties' briefing asks this Court to address standing, that issue was resolved on summary judgment. See In re General Home Store, LLC, C.A. No. 11612-VCMR (Del. Ch. Nov. 16, 2016) (ORDER). --------
13. Petitioners also seek an order requiring that an accounting of General Home Store be performed at Respondent's expense in light of certain financial irregularities at General Home Store. The evidence presented at trial showed certain potential irregularities. For example, the General Home Store balance sheets for 2013, 2014, and 2015 show that the Starec Trust and Krupinski took distributions of personal merchandise from the company (JX 38; JX 43; JX 68), but Statfeld testified that neither he nor the Starec Trust took such a distribution, and Krupinski testified that she did not take distributions of merchandise. Tr. 86 (Statfeld); id. at 286-88 (Krupinski). Robert White, the General Home Store accountant, testified that these entries were adjustments for missing inventory. Tr. 397-98 (White). Similarly, the 2013 General Home Store balance sheet shows that Krupinski and the Starec Trust received $20,750 in capital draws (JX 38), which they never received. Tr. 87 (Statfeld); id. at 297-98 (Krupinski). Further, Statfeld and the Starec Trust argue that the amount owed on a $72,000 loan from the Starec Trust to General Home Store was inappropriately reduced on the 2014 General Home Store balance sheet by $19,075. Part of the reduction ($9,075) is Statfeld's expenses from a trip to Paris during which he attended the Maison Objets home goods show. The expenses were recorded as personal expenses rather than business expenses such that they reduced the outstanding loan, which Statfeld asserts was inappropriate. JX 43, at GHS_000064. The other $10,000 of the reduction is recorded on the General Home Store balance sheet as Statfeld's personal American Express charges, which Statfeld also challenges. Id. And in July 2016, while Krupinski had control of the General Home Store American Express card, the bill was over $70,000, which was higher than it had ever been before. Tr. 104 (Statfeld).
14. Statfeld and the Starec Trust also presented evidence showing that Krupinski executed two five-year lease renewals for General Home Store and paid certain increases in rent on General Home Store's behalf to landlord BB Equities, in which Krupinski and her husband, Ben Krupinski, had an interest. Id. at 308-10 (Krupinski). Further, on March 31, 2016, Ben Krupinski signed a General Home Store check to pay the Krupinskis' personal mortgage. When the General Home Store bookkeeper noticed the check, the Krupinskis reimbursed General Home Store for the erroneously drawn amount. JX 75; Tr. 301 (Krupinski). Finally, the 2013 General Home Store balance sheet shows a temporary $14,000 loan to BB Equities for the installation of a new heating unit in the property leased by General Home Store. JX 38, at GHS_000005. Neither Krupinski nor Statfeld expressly authorized this loan. The store had lost heat, and Krupinski ordered BB Equities to replace the heating unit. When the bill arrived, a General Home Store employee "handled it in the fashion that she handled it" without involving Krupinski or Statfeld. Tr. 299 (Krupinski).
15. As a result of these potential financial irregularities, Statfeld and the Starec Trust request that Krupinski pay for a General Home Store accounting. Petitioners do not assert any claim against Krupinski, however. And absent a finding of liability on a claim, I will not order that Krupinski pay for a General Home Store accounting when she and Statfeld were both managers of the company. See Addy v. Piedmonte, 2009 WL 707641, at *23 (Del. Ch. Mar. 18, 2009) ("Plaintiff requests equitable and other relief, in some cases alternatively, in the form of money damages, an accounting, an equitable lien, specific performance, and imposition of a constructive or resulting trust. Addy's requests for such relief are not claims in and of themselves, but types of remedies dependent on the viability and outcome of the underlying causes of action, such as those for breach of contract and equitable fraud." (emphasis added)). General Home Store will pay for any accounting that is conducted as part of winding up the company. As to whether an audit or the litigation of further claims against the General Home Store managers is appropriate, the liquidating trustee has the power and discretion to make those decisions under paragraphs 6 and 7 of this Court's order appointing the liquidating trustee. In re General Home Store, LLC, C.A. No. 11612-VCMR, ¶¶ 6-7 (Del. Ch. Mar. 6, 2017) (ORDER). At post-trial oral argument, the liquidating trustee recommended that she review the records and determine whether an accounting is necessary. Oral Arg. Tr. 46-47. I agree that deferring to the liquidating trustee is the best approach. The liquidating trustee is competent to decide—in light of the amounts in question, the company's resources, and her business judgment—whether to file any action, hire an auditor, or take neither step. The Court will continue to be available to supervise the liquidation process.
16. Petitioners also request that Krupinski contribute $70,745.09 to General Home Store for the attorneys' fees General Home Store incurred in the New York Litigation related to a General Home Store bank account. Petitioners argue that Krupinski is personally responsible for those attorneys' fees. They have made and briefed a similar motion in the New York court, which has not yet rendered a decision on that issue. Because the question of who must pay the attorneys' fees in the New York Litigation is before the same New York court that addressed the merits of that case, I decline to address it here and will defer to the New York court.
17. As to the attorneys' fees in this case, each party shall bear its own costs. Respondent does not clearly request fee shifting. But she cites Delaware law on bad faith litigation conduct and argues that Respondent should not be liable for the New York litigation fees because Petitioners acted in bad faith by not producing the Starec Trust agreement in this case. Petitioners argue that their failure to produce the Starec Trust agreement in discovery did not constitute bad faith because that agreement was confidential under Alaska law. In order to warrant the Court's departure from the American Rule requiring each party to bear its own costs and fees, Petitioners must show that Respondent "'unnecessarily required the institution of litigation, delayed the litigation, and asserted frivolous motions,' or, put another way, [that Respondent's] bad faith has 'made the procession of the case unduly complicated and expensive.'" Fairthorne Maint. Corp. v. Ramunno, 2007 WL 2214318, at *9 (Del. Ch. July 20, 2007) (quoting Johnston v. Arbitrium (Cayman Islands) Handels, 720 A.2d 542, 546 (Del. 1998); ATR-Kim Eng Fin. Corp. v. Araneta, 2006 WL 3783520, at *23 (Del. Ch. 2006)). Petitioners have a colorable argument under Alaska law for why they were not required to produce the Starec Trust agreement (See Alaska Stat. Ann. § 13.36.079), and they did not conceal the existence of the trust agreement, so their failure to produce it did not rise to the level of bad faith. Each party shall bear its own costs in this case.
18. For these reasons, the Starec Trust and Bonnie Krupinski are the two 50% members of General Home Store. The liquidating trustee will decide whether an accounting at General Home Store's expense is necessary in winding up the General Home Store business. I defer to the New York court on the question of who is responsible for the attorneys' fees in the New York Litigation. And each party shall bear its own costs for this litigation.
/s/ Tamika Montgomery-Reeves
Vice Chancellor
Dated: July 13, 2017