Opinion
C.A. No. 18690-NC
Date Submitted: June 12, 2001 Supplemental Briefing Completed: January 4, 2002
June 17, 2002
Kurt M. Heyman, Esquire, Patricia L. Enerio, Esquire, THE BAYARD FIRM, Wilmington, DE.
Elizabeth M. McGeever, Esquire, PRICKETT, JONES ELLIOTT, Wilmington, DE.
Dear Counsel:
This action arises out of the troubled relationship between the two founders and managers of Defendant The Carlyle Johnson Machine Company, a Delaware limited liability company (the "Company"). Plaintiff Donald H. Kennett ("Kennett") challenges the actions of Defendant Michael E. Gamache ("Gamache").
Kennett filed this action on February 23, 2001. On April 23, 2001, he filed his First Amended and Supplemental Complaint (the "Complaint").
First, Kennett alleges that Gamache violated the Company's Operating Agreement by admitting new Class A members to the Company without the approval required by § 10.2 of the Operating Agreement. Second, Kennett seeks redress concerning the alteration of the scope of his responsibilities under his Employment Agreement with the Company. Third, Kennett claims that Gamache terminated the Employment Agreement without first obtaining the approval necessary. Finally, Kennett asks the Court to protect him against the efforts of Gamache and his allies to deprive him of his ownership and management interests in the Company.
I. BACKGROUND
The Company engages in the manufacturing of power transmission products. Originally the Company was run by Gamache as President, manager, and 50% Class A voting member of Carlyle, and by Kennett as Vice-President, manager, and 50% Class A voting member of Carlyle.
The Complaint alleges that Gamache unilaterally transferred a total of 15% of the Class A membership interests to his brother, Brian Gamache ("B. Gamache") (5%), and to Barton Bauers ("Bauers") (10%). The transfer, if valid, reduced the interests held by Gamache and Kennett each from 50% to 42.5% and added new members (B. Gamache and Bauers) to the group of Class A (voting) members. Kennett asserts that the transfer of membership interests did not receive the approval required under the Operating Agreement.
Under § 10.1 of the Operating Agreement for the transfer of all or part of a Class A membership interest to be valid against the Company, the transfer must be approved by vote or written consent of a majority interest of the Class A members, not including the transferring member.
§ 10.2 of the Operating Agreement provides that a transfer of a Class A membership interest without the approval of the holders of a majority interest, not including the transferring member, gives no right to the transferee to participate in the management of the Company.
Kennett also complains of modifications to his employment relationship with the Company. Kennett and the Company entered into the Employment Agreement in April 1996. By § 3.1 of that agreement, Kennett was designated as Vice-President of the Company and his duties were defined to ". . . involve responsibilities for sales. . . ." On October 30, 2000, without Kennett's consent, Gamache distributed a memorandum to all Company employees reallocating some of Kennett's sales responsibilities to another employee. Kennett asserts that the modification of the scope of his employment was undertaken in violation of the approval requirements of § 5.1(b)(iii) of the Operating Agreement and § 8.2 of the Employment Agreement.
According to § 5.1(b)(iii) of the Operating Agreement, the modification of an employment relation between the Company and a manager must first be approved by the majority interest of the Class A members. § 8.2 of the Employment Agreement stipulates that any amendment of the agreement requires a separate agreement between the parties in a fully executed writing.
The same day, October 30, 2000, Gamache notified Kennett of the non-renewal of his Employment Agreement with the Company and indicated that the agreement would expire on April 26, 2001. Kennett also posits that Gamache failed to abide by the terms of § 7.1 of the Employment Agreement.
§ 7.1 of the Employment Agreement requires the approval of the managers to terminate the relationship.
Finally, on March 13, 2001, Defendant Gamache circulated a memorandum to all Class A members of the Company calling for additional capital. Kennett asserts that the capital call lacked the approval necessary pursuant to § 7.2 of the Operating Agreement.
§ 7.1 of the Operating Agreement generally proscribes capital contributions or loans to the Company unless a majority of the Class A members determines that additional capital contributions are necessary.
II. THE CONTENTIONS
Kennett separates his claims into three counts. The first count alleges that the transfer of membership interests to B. Gamache and Bauers and the modification of the Employment Agreement violated the Operating Agreement. The second count asserts that the modification and termination of the Employment Agreement violated that agreement. The third count seeks injunctive relief against the transfer of the membership interests, the capital call, termination of the Employment Agreement and any effort to remove him as a member or manager of the Company. He does not allege any specific effort to remove him as a member or a manager; he speculates from the identified conduct as to the ultimate purpose of Gamache and his allies.Defendants have moved to dismiss (1) for Kennett's failure to join necessary and indispensable parties; (2) for lack of subject matter jurisdiction over the second count of the Complaint; (3) for failure to state a claim upon which relief can be granted as to the second count of the Complaint; and (4) for failure of the third count to set forth a claim that is ripe for judicial consideration. I now turn, as necessary, to the various arguments asserted by Defendants.
III. FAILURE TO JOIN NECESSARY AND INDISPENSABLE PARTIES
At the center of Kennett's claim are the alleged wrongful transfers of membership interests in the Company to B. Gamache and Bauers. Kennett contends that the transfers could not have taken place under the Operating Agreement without his consent and that his consent was never given. B. Gamache and Bauers, however, are both residents of Connecticut and have no connection to Delaware except possibly as owners of interests in a Delaware limited liability company. Kennett concurs with the Defendants that this Court cannot exercise personal jurisdiction over either of them. Defendants, thus, contend that B. Gamache and Bauers are necessary and indispensable parties under the standards of Court of Chancery Rule 19, and, because they cannot be joined as defendants, the Complaint must be dismissed pursuant to Court of Chancery Rule 12(b)(7). Furthermore, Defendants point out that the Company's principal place of business is in Connecticut where Gamache is also subject to personal jurisdiction. Thus, I turn to a review of the requirements of Court of Chancery Rule 19.
By Court of Chancery Rule 19(a):
A person . . . shall be joined as a party in the action if (1) in the person's absence complete relief cannot be accorded among those already parties, or (2) the person claims an interest relating to the subject of the action and is so situated that the disposition of the action in the person's absence may (i) as a practical matter impair or impede the person's ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of the claimed interest.
The Complaint squarely raises the question of whether B. Gamache and Bauers are owners of membership interests in the Company. Indeed, the Complaint seeks a declaration that "the attempted transfer of Class A membership or economic interests and the addition of new Class A members . . . were null and void." Relief that defines the rights, if any, of B. Gamache and Bauers in the Company cannot be conclusively granted if B. Gamache and Bauers are not parties to this action. Thus, the standards of Court of Chancery Rule 19(a)(1) are met.
Compl. ¶ 39.
With respect to the provisions of Court of Chancery Rule 19(a)(2), B. Gamache and Bauers, as the purported owners of interests in the Company, "claim an interest relating to the subject of the action." Accordingly, if the Court were to resolve the question of whether Gamache and the Company could issue membership interests to B. Gamache and Bauers in a manner adverse to them, the relief would "as a practical matter impair or impede [B. Gamache and Bauers'] ability to protect that interest." Moreover, because any decision here would not be binding on B. Gamache or Bauers, there would be "a substantial risk" that B. Gamache and Bauers would seek to impose inconsistent or multiple obligations on the Company by asserting in a different forum their purported rights as members in the Company. In short, B. Gamache and Bauers are necessary parties under Court of Chancery Rule 19(a)(2), as well.
At oral argument on this motion, Kennett sought to amend his Complaint by abandoning the request that the transfer of membership interests be rescinded and by asking, instead, that the Court declare that Gamache and the Company could not transfer the interests. Although I will address considerations involving the scope of potential relief in greater detail below, regardless of how one tries to define the relief sought, the question, in substance, nonetheless remains: do B. Gamache and Bauers have membership interests in the Company? As set forth above, this question cannot be fairly and finally answered without the presence of B. Gamache and Bauers.
To the extent that Kennett may have sought to convert his claim to one for damages arising out of an improper transfer of his membership interest ( see Transcript of Oral Argument, pp. 27-30), that might lead to the conclusion that B. Gamache and Bauers are not necessary parties but it, in turn, would raise serious doubts about this Court's subject matter jurisdiction.
Once a potential party is determined to be "necessary" under Court of Chancery Rule 19(a), the Court must then turn to the question of whether the party is indispensable within the meaning of Court of Chancery Rule 19(b). Specifically, because B. Gamache and Bauers are "necessary" parties, I must assess whether "in equity and good conscience" this action should be allowed to proceed with only the existing parties or whether it should be dismissed because the absent persons are indeed "indispensable." Court of Chancery Rule 19(b) sets forth a list of four non-exclusive factors to consider in making this determination:
1. to what extent a judgment rendered in the person's absence might be prejudicial to the person or to those already parties;
2. the extent to which, by protective provisions in the judgment, by the shaping of relief, or other measures, the prejudice can be lessened or avoided;
3. whether a judgment rendered in the person's absence will be adequate; and
4. whether the plaintiff will have an adequate remedy if the action is dismissed for non-joinder.
See RJ Assocs., Inc. v. Health Payors' Org., L.P., Del. Ch., C.A. No. 16873, mem. op. at 20, Jacobs, V.C. (July 16, 1999) (emphasizing the "pragmatic" nature of this inquiry).
First, any judgment determining that the transfers were ineffective would be prejudicial to the interests of B. Gamache and Bauers because, presumably, the Company could no longer deal with them as members. Moreover, any such conclusion would represent a judicial determination that they do not have the property rights ( i.e., the membership interests) which presumably they claim. However, any determination by this Court would not be binding on them; litigation in another forum would be necessary to resolve and define their rights, if any, as to any interest in the Company; and there is no assurance that the outcomes in the two fora would be consistent.
Second, the Court must consider what could be done to reduce the perceived risk of prejudice. Kennett has stressed the importance of this option and, because I accept the general notions that a plaintiff is entitled to select his forum and that motions under Court of Chancery Rule 19 seeking dismissal of an action must be granted only with great care, this possibility has been given detailed consideration. The problem for which Kennett has offered no solution, and for which I have found no solution, is relatively simple: any resolution of these claims that will have any useful purpose necessarily involves a determination of the rights of B. Gamache and Bauers in the Company. I cannot devise a framework that allows for relief that would assist Kennett (assuming, of course, that he is so entitled) without also resolving, if only by implication, significant rights of B. Gamache and Bauers.
Third, a judgment without the participation of B. Gamache and Bauers might be adequate if one assumes a judgment that leaves open the substantial likelihood of additional litigation can be adequate. The judgment could protect Kennett's interests because it could (at least pending other litigation) define the rights and duties between the Company and him and between Gamache and him. The lurking additional litigation, however, calls into question the adequacy of any judgment that this Court could enter.
Fourth, there is an adequate forum available to resolve all of the claims presented by Kennett if this action is dismissed. Gamache, B. Gamache, Kennett, and Bauers are all residents of Connecticut, where the Company is located. Thus, a convenient, practical, and effective option is available to Kennett in the event that this proceeding does not go forward: litigation in Connecticut. Most importantly, all of the transferees can be joined in that forum. If the transferees were found in several jurisdictions, then the absence of one forum for comprehensive resolution would weigh against concluding that the absentees are indispensable.
One final and important consideration is whether Gamache can adequately represent the interests of B. Gamache and Bauers here and, thus, substantially reduce the risk of prejudice to them. "It is settled law that an action may continue without an absent party if that party's interest is fully represented therein." Gamache, in his alleged ongoing confrontation with Kennett, needs the support of B. Gamache and Bauers (in particular) to assert and maintain control over the Company. That is a powerful incentive for Gamache to protect the interests not only of his brother but also of Bauers. In addition, it would appear that Gamache, B. Gamache and Bauers all have a common view of the pertinent facts.
RJ Assocs., Inc. v. Health Payors' Org., L.P., mem. op. at 20; Joyce v. Cuccia, Del. Ch., C.A. No. 14953, mem. op. at 24-26, Jacobs, V.C. (May 14, 1997).
On the other hand, Gamache's common interest relates to control of the Company through his current alliance with both his brother and Bauers. Gamache does not assert the same self-interest in equity rights in the Company as one would expect from his brother or Bauers. Indeed, while Gamache apparently does not dispute the transfer of a portion of his interests to his brother and Bauers, a finding against Kennett would, in essence, also confirm that the transfers of Gamache's interest to B. Gamache and Bauers were effective, thereby diminishing Gamache's percentage of ownership in the Company from 50% to 42.5% as well. In short, the interests of Gamache and the interests of B. Gamache and Bauers are not identical. Although there is a potential for inconsistent positions, however, those interests are generally aligned.
Cf. Brinati v. TeleSTAR, Del. Ch., C.A. No. 8118, mem. op. at 7-8, Berger, V.C. (Sep. 3, 1985) (finding that commonly situated shareholders could adequately represent the interests of other shareholders, all having the same status).
Sharing of the same position and having the same understanding of the facts underlying a dispute are not necessarily sufficient for a finding that the interests of the absentees will be adequately protected by the present party. For example, in Southern New Castle County Alliance, Inc. v. New Castle County, a citizens group challenged the County's approval of a record plan for construction of a major real estate development. The citizens group named one of the developers as the defendant, but it did not join the record owner of the land on which the development was to be constructed. It sought to justify omission of the record owner by arguing that the developer-defendant as equitable owner of the project shared an interest identical to that of the record owner. The record owner wanted to sell, the developer wanted to build, and neither could achieve its objectives without the land use approval at issue. This identity of interest, it was argued by the citizens group, compelled the conclusion that the record owner would be adequately protected by the developer-defendant. This Court rejected the "implicit presumption that the interests of the record and equitable owners of subdivided, to-be-developed property will invariably [be] identical." Instead, the Court concluded that, because of the importance of the contractual arrangement among the parties and the differential impacts that might result as a result of the litigation on the developer and the land owner, the opposite presumption was the more realistic.
Del. Ch., C.A. No. 18752, let. op., Jacobs, V.C. (July 20, 2001).
The citizens group also failed to join a second developer involved in the project. See id. at 2.
Id. at 10.
While Southern New Castle County Alliance, Inc. v. New Castle County was set in the arena of land use litigation, the basic principles of Court of Chancery Rule 19 do not vary. Here, as in Southern New Castle County, the defendant and the absentees share a common interest, but there is a significant potential tension between those interests. For instance, although it may be that the sibling relationship between Gamache and B. Gamache could be viewed as limiting the potential for divergence, the record reflects that Bauers is an independent investor whose interests may diverge from those of Gamache and his brother in the same sense that the interests of a real estate developer and the record landowner may also diverge.
In the cases upon which Plaintiff relies, the potential for such divergence was substantially less. For example, in RJ Associates, the absentees' interests, while "only tangentially implicated," would have been adequately protected because the absentee was an "affiliate" of one of the parties. Similarly, in Joyce v. Cuccia, the absentee and the existing party were "identically situated."
RJ Assocs., Inc. v. Health Payors' Org., L.P., mem. op. at 18, 20.
Joyce v. Cuccia, mem. op. at 25.
In sum, because both of the transferees (B. Gamache and Bauers) are not parties and because their interests may diverge from those of Gamache, I conclude that, on balance, Gamache does not provide adequate protection for the interests of the absentees. However, since it is not unreasonable to conclude that they share, and will continue to share, a common interest, this factor does not weigh heavily against Kennett.
Court of Chancery Rule 19(b), thus, imposes on the Court the duty of weighing these several factors. The prejudice that might befall B. Gamache and Bauers in their absence and in the event of an adverse ruling and the lack of practical means for framing any relief to alleviate that risk militate in favor of concluding that B. Gamache and Bauers are indeed indispensable parties. Whether Gamache is an adequate representative for his brother and Bauers is, at best, problematic. Finally, perhaps the clearest and strongest of all of the considerations is that Connecticut offers a reasonably available forum where complete relief among all interested parties can be provided. Thus, after balancing all of these considerations, I conclude that in "equity and good conscience," Kennett's claim, even under those revisions to the scope of relief proposed by Kennett, should not go forward here.
This conclusion does not necessarily end the Court's inquiry because Kennett seeks relief other than a determination of the validity of the alleged transfers to B. Gamache and Bauers. Most, if not all, of the other issues are dependent upon the determination of whether Kennett continues to hold a 50% interest in the Company. They pose a question that is fundamentally another formulation of the question as to whether B. Gamache and Bauers hold equity interests in the Company. To the extent that a claim necessarily turns on whether Kennett has retained his 50% interest, that claim also must be dismissed because of the absence of B. Gamache and Bauers. It makes no sense to reach those issues which are derivative of the principal issue, that is, the interests of B. Gamache and Bauers, which cannot be determined because of the import of Court of Chancery Rule 19. The claims, for which a determination of whether Kennett retains his 50% interest would be outcome predictive, include (i) modification of the Employment Agreement by the October 2000 directive without a majority vote of the Class A interests and (ii) the capital call without a majority vote of the Class A membership interests.
There are, however, two claims which arguably do not turn on Kennett's percentage membership interests. First, he alleges that the Employment Agreement was terminated without the necessary approval of the managers. Second, he alleges that Gamache, in essence, is conspiring to deprive him of his interests and status in the Company. Although it may well be that these claims also depend upon Kennett's ownership percentage, I will consider whether these claims otherwise should also be dismissed.
IV. SUBJECT MATTER JURISDICTION
Kennett seeks a declaration or a declaratory judgment that the nonrenewal or termination of his Employment Agreement without approval of the managers violated the Employment Agreement. This Court, of course, may grant declaratory judgments, but the Delaware Declaratory Judgment Act does not expand this Court's subject matter jurisdiction. Accordingly, it is necessary to look to the underlying claims to determine whether they are legal or equitable in nature. If the ultimate remedy would be, for example, damages, a legal remedy, subject matter jurisdiction would be lacking. The parties do not disagree that the Employment Agreement is governed by the laws of the State of Connecticut. Under Connecticut law, the remedy for breach by an employer of a contract for personal services, such as the one between Kennett and the Company, is damages, a legal remedy. Specific performance, or other injunctive relief, is generally not available because of the difficulties associated with supervising and enforcing any such employment arrangement. This is particularly applicable to someone in a senior management role of a small enterprise, such as Kennett's position with the Company. Thus, any claim for breach of the Employment Agreement (and for that matter, any demotion under the Employment Agreement) would be remediable only through an award of damages. It follows that there is an adequate remedy at law and no equitable remedy available to Kennett. Accordingly, this Court lacks subject matter jurisdiction over any claims based on allegedly improper termination of the Employment Agreement.
For these purposes, I need not join the debate whether Gamache attempted to effectuate a "termination" or a "non-renewal" of the Employment Agreement.
10 Del. C. Ch. 65; see also Heathergreen Commons Condo. Ass'n v. Paul, 503 A.2d 636, 642 (Del.Ch. 1985).
"[T]he jurisdiction of this Court to grant declaratory relief in a particular case . . . is dependent upon whether equity would independently have jurisdiction over the controversy, without reference to the declaratory judgment statute." Clark v. Teeven Holding Co., Inc., 625 A.2d 869, 879 (Del.Ch. 1992).
See Wm. Rogers Mfg. Co. v. Rogers, 20 A. 467, 468 (Conn. 1890); Burns v. Gould, 374 A.2d 193, 197 (Conn. 1977); Lark v. Post-Network Stations, Connecticut, Inc., 1994 WL 684718, at *6 (Conn.Super. 1994). For an analysis of Delaware law on this subject, see generally, Bali v. Christiana Health Care Servs., Inc., Del. Ch., C.A. No. 16433, mem. op., Lamb, V.C. (June 16, 1999).
Kennett urges this Court to retain jurisdiction of his claim under the Employment Agreement by invoking the so-called "clean-up doctrine." Because the balance of Kennett's claims are being dismissed by the Court, and, thus, there are no remaining equitable claims upon which this Court's jurisdiction may be premised, there is no basis for retaining jurisdiction over any legal claim.
See Travelers Cas. Surety Co. of Am. v. Colonial Sch. Dist., Del. Ch., C.A. No. 18161, mem. op. at 10, Jacobs, V.C. (Mar. 16, 2001); Pepsi-Cola Bottling Co. of Salisbury, Md. v. Handy, Del. Ch., C.A. No. 1973, mem. op. at 13, Jacobs, V.C. (Mar. 15, 2000).
V. RIPENESS
The final aspect of Kennett's challenge is a plea for relief from what he perceives to be a plan, orchestrated by Gamache with the assistance of B. Gamache and Bauers, to drive him out of the Company. His allegations about this grand scheme, except for the specific claims that I have already addressed, are largely speculative and, thus, add nothing to the mix of issues which this Court could resolve because the issue simply is not yet ripe, at least on the pleadings before me, for judicial determination.
In examining [a ripeness] question, a court must consider the legitimate interest of the plaintiff in a prompt resolution of the question presented and the hardship that further delay may impose. All that is required, therefore, is that the court make a common sense determination that the plaintiff's interest in a swift resolution of the case outweighs the court's interest in postponing review until the question arises in some more concrete and final form.
Shevock v. Orchard Homeowners Ass'n, Inc., 621 A.2d 346, 349 (Del. 1993).
While Kennett has identified certain actions by Gamache that are certainly hostile to Kennett's interests, even when those allegations are considered collectively, they do not frame an issue for current judicial consideration of whether Gamache's overall conduct is somehow actionable. There simply is no allegation of any specific effort to remove him as manager or member. Thus, I conclude that the quite general allegations regarding Gamache's scheme to displace Kennett are not yet ripe for judicial review.
VI. CONCLUSION
For the foregoing reasons, I am satisfied that Defendants' Motion to Dismiss should be granted. However, in his most recent submittal, Kennett has asserted that "discovery has overtaken the pleadings in connection with Count III" and has asked for leave to amend his pleadings to assert a claim for a declaration that he remains a manager in response to Defendants' assertion that he was removed as manager in 1998. I will defer entry of an order in accordance with the letter opinion for a period of fifteen calendar days from the date hereof. In that period, Kennett may file his motion for leave to amend if he so chooses.