IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE ASB ALLEGIANCE REAL ESTATE FUND, ) EBREF HOLDING COMPANY, LLC, and ) DWIGHT LOFTS HOLDINGS, LLC, ) ) Plaintiffs, ) ) v. ) C.A. No. 5843-VCL ) SCION BRECKENRIDGE MANAGING ) MEMBER, LLC, SCION 2040 MANAGING ) MEMBER, LLC, and SCION DWIGHT ) MANAGING MEMBER, LLC, ) ) Defendants. ) OPINION Date Submitted: June 18, 2012 Date Decided: July 9, 2012 John L. Reed, Scott B. Czerwonka, DLA PIPER LLP (US), Wilmington, Delaware; Bruce E. Falby, Bruce S. Barnett, Justin A. Brown, DLA PIPER LLP (US), Boston, Massachusetts; Attorneys for Plaintiffs. Gregory P. Williams, Kelly E. Farnan, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Kenneth T. Brooks, Richard J. Zecchino, HONIGMAN MILLER SCHWARTZ AND COHN LLP, Lansing, Michigan; Attorneys for Defendants. LASTER, Vice Chancellor. By opinion dated May 16, 2012, affiliates of ASB Capital Management, LLC (collectively ―ASB‖) obtained reformation of three limited liability company agreements (the ―LLC Agreements‖) governing real estate joint ventures with affiliates of The Scion Group, LLC (collectively ―Scion‖). See ASB Allegiance Real Estate Fund v. Scion Breckenridge Managing Member, LLC, 2012 WL 1869416 (Del. Ch. May 16, 2012) (the ―Merits Decision‖). The LLC Agreements contain fee-shifting provisions. Having prevailed, ASB is entitled to fees and costs in the amount of $3,267,355.31, comprising fees of $2,738,178.45 and costs of $529,176.86. I. FACTUAL BACKGROUND By letter dated September 20, 2010, ASB notified Scion that unless Scion agreed to correct the erroneous LLC Agreements by close of business on September 21, ASB would file suit. Each joint venture was a Delaware limited liability company. Each of the LLC Agreements was governed by Delaware law. Any fiduciary duty or implied covenant claims would be governed by Delaware law. The three joint ventures were factually interconnected: ASB and Scion used the earliest of the three LLC Agreements as a template for the subsequent deals. Given these facts, logic and efficiency cried out for a single forum, preferably with a decision-maker knowledgeable about Delaware law. Scion eschewed the efficient course. The next day, Scion preemptively filed suit over just one of the disputed joint ventures in the United States District Court for the Eastern District of Wisconsin, the site of the property Scion managed for that entity. On September 22, 2010, ASB filed this case. Unlike Scion, ASB placed at issue the entirety of the dispute, named all relevant parties, and sought reformation of all three LLC 1 Agreements. Neither ASB nor Scion has operations in Delaware, so ASB could not be accused of picking its home forum. Scion then filed two additional complaints in two other federal courts: the United States District Court for the Northern District of Illinois and the United States District Court for the Middle District of Florida. Each complaint sought to enforce a single LLC Agreement. In each case, Scion filed in the local federal court where the subject property was located. Each of Scion‘s three complaints pled substantially identical counts. Scion now insists it had ―a right to a federal forum‖ to resolve the questions of Delaware law posed by the litigation and contends that three federal actions were necessary because no single federal forum could exercise personal jurisdiction over the ASB parties. See Defs.‘ Objections 17. If Scion truly wanted a single federal forum, then the Illinois district court could have provided it; the extensive dispute-related activities of Keyvan Arjomand, a former ASB representative who worked out of ASB‘s Chicago office, would have given that court jurisdiction over the ASB entities. And if Scion truly wanted a federal forum, Scion could have tried the case in Florida district court in February 2012; instead, Scion agreed to stay the Florida action so that trial could proceed here in March 2012. Contrary to its protestations, Scion filed multiple lawsuits to make the litigation as difficult and expensive as possible for ASB, hoping to create leverage that would force a settlement more favorable to Scion than the merits of its position warranted. Scion‘s tactics caused four courts and the parties to engage in overlapping, redundant, and otherwise unnecessary activities. Motions to stay were filed, briefed, and 2 decided in each of the federal cases. Motions to dismiss were filed, briefed, and decided in all four cases. Motions for summary judgment were filed, briefed, and decided in all four cases. Multiple courts heard motions on discovery and pre-trial issues. As the cases proceeded, renewed motions to stay were filed, briefed, and decided. At least two emergency applications were made to this Court for an expedited decision to help avoid a multi-jurisdictional train wreck. After the issuance of the Merits Decision, the parties dismissed the federal cases by stipulation. ASB now seeks $3,267,355.31 in fees and costs. The sum includes not only fees and costs relating to ASB‘s affirmative claims for relief in this case, but also Scion‘s counterclaims and the federal cases. II. LEGAL ANALYSIS Section 9.9 of the LLC Agreements governs ASB‘s entitlement to fees and costs. It provides: In the event that any of the parties to this Agreement undertakes any action to enforce the provisions of this Agreement against any other party, the non-prevailing party shall reimburse the prevailing par[ty] for all reasonable fees and costs incurred in connection with such enforcement, including reasonable attorneys‘ fees . . . . JX 82; accord JX 48; JX 76. When determining the scope of recovery under such a provision, ―[c]ourts focus principally on enforcing the parties‘ agreement to make the prevailing party whole.‖ Aveta Inc. v. Bengoa, 2010 WL 3221823, at *6 (Del. Ch. Aug. 13, 2010). ―Absent any qualifying language that fees are to be awarded claim-by-claim or on some other partial basis, a contractual provision entitling the prevailing party to fees will usually be applied in an all-or-nothing manner.‖ W. Willow-Bay Court, LLC v. 3 Robino-Bay Court Plaza, LLC, 2009 WL 458779, at *8 (Del. Ch. Feb. 23, 2009). Having found ASB‘s fee request to be reasonable, I award all. A. The Summer Leasing Claims Scion contends that ASB cannot recover fees and costs relating to counterclaims in which Scion asserted that ASB breached its fiduciary duties and violated the implied covenant of good faith and fair dealing by failing to maximize summer leasing revenue for Dwight Lofts. As a threshold matter, Scion itself sought to hold ASB ―contractually liable to [Scion] for all reasonable fees and costs [Scion] incurs in connection with enforcing its rights under the LLC Agreement‖ relating to the summer leasing claims. Countercl. at 109, 111. Having asserted its own right to contractual fee shifting, Scion cannot now flip-flop and deny the same right to ASB. Regardless, these causes of action fall within Section 9.9. Scion‘s breach of fiduciary duty counterclaim sought to enforce the Dwight Lofts LLC Agreement. According to Scion, ASB‘s fiduciary duties arose out of its alleged status as de facto Managing Member under that agreement. In its submissions to this Court, Scion invoked Section 5.1.1 of the Dwight Lofts LLC Agreement as the basis for imposing fiduciary duties on ASB. See Countercl. ¶¶ 204, 206; Counter-Pl.‘s Opening Pre-Trial Br. 74-75; see also Merits Decision at *18-19. Scion thus sued ―to enforce the provisions of [the Dwight Lofts LLC] Agreement.‖ As the ―non-prevailing party,‖ Scion must ―reimburse the prevailing par[ty]‖ for its fees and costs. 4 Scion‘s implied covenant claim likewise sought to enforce the Dwight Lofts LLC Agreement, albeit by invoking an implied term. Under Delaware law, an implied covenant claim does not sound in tort. It is contractual.1 The implied covenant seeks to enforce the parties‘ contractual bargain by implying only those terms that the parties would have agreed to during their original negotiations if they had thought to address them. Under Delaware law, a court confronting an implied covenant claim asks whether it is ―clear from what was expressly agreed upon that the parties who negotiated the express terms of the contract would have agreed to proscribe the act later complained of as a breach of the implied covenant of good faith—had they thought to negotiate with respect to that matter.‖ Katz v. Oak Indus., Inc., 508 A.2d 873, 880 (Del. Ch. 1986) (Allen, C.); accord Pressman, 679 A.2d at 443. ―While this test requires resort to a counterfactual world—what if—it is nevertheless appropriately restrictive and commonsensical.‖ Schwartzberg v. CRITEF Assocs. Ltd. P’ship, 685 A.2d 365, 376 (Del. Ch. 1996) (Allen, C.). The temporal focus is critical. Under a fiduciary duty or tort analysis, a court examines the parties as situated at the time of the wrong. The court determines whether 1 Wood v. Baum, 953 A.2d 136, 143 (Del. 2008) (―The implied covenant of good faith and fair dealing is a creature of contract . . . .‖); accord Tekstrom, Inc. v. Savla, 918 A.2d 1171, 2007 WL 328836, at *7 (Del. 2007) (ORDER) (―The covenant of good faith and fair dealing arises under contract.‖); E.I. DuPont de Nemours and Co. v. Pressman, 679 A.2d 436, 444-48 (Del. 1996) (recognizing implied covenant claim in employment context and specifying contractual remedies available for breach); Tackett v. State Farm Fire & Cas. Inc. Co., 653 A.2d 254, 264 (Del. 1995) (holding that implied covenant claim against insurer for ―bad faith‖ denial of claim by insured sounds in contract). 5 the defendant owed the plaintiff a duty, considers the defendant‘s obligations (if any) in light of that duty, and then evaluates whether the duty was breached. Temporally, each inquiry turns on the parties‘ relationship as it existed at the time of the wrong. The nature of the parties‘ relationship may turn on historical events, and past dealings necessarily will inform the court‘s analysis, but liability depends on the parties‘ relationship when the alleged breach occurred, not on the relationship as it existed in the past. An implied covenant claim, by contrast, looks to the past. It is not a ―free-floating duty unattached to the underlying legal documents.‖ Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 441 (Del. 2005) (alteration and internal quotation marks omitted). It does not ask what duty the law should impose on the parties given their relationship at the time of the wrong, but rather what the parties would have agreed to themselves had they considered the issue in their original bargaining positions at the time of contracting. See Nemec v. Shrader, 991 A.3d 1120, 1127 (Del. 2010) (addressing implied covenant claim by supposing ―the parties to the Stock Plan specifically addressed the issue at the time of the contract‖); Amirsaleh v. Bd. of Trade of N.Y., Inc., 2009 WL 3756700, at *4 (Del. Ch. Nov. 9, 2009) (―The parties‘ reasonable expectations are determined by inquiring whether the parties would have bargained for a contractual term proscribing the conduct that allegedly violated the implied covenant had they foreseen the circumstances under which the conduct arose.‖). ―Fair dealing‖ is not akin to the fair process component of entire fairness, i.e., whether the fiduciary acted fairly when engaging in the challenged transaction as measured by duties of loyalty and care whose contours are mapped out by Delaware precedents. It is rather a commitment to deal ―fairly‖ in the sense of 6 consistently with the terms of the parties‘ agreement and its purpose. Likewise ―good faith‖ does not envision loyalty to the contractual counterparty, but rather faithfulness to the scope, purpose, and terms of the parties‘ contract. Both necessarily turn on the contract itself and what the parties would have agreed upon had the issue arisen when they were bargaining originally. The retrospective focus applies equally to a party‘s discretionary rights. The implied covenant requires that a party ―‗refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits‘ of its bargain.‖ Dunlap, 878 A.2d at 442 (quoting Wilgus v. Salt Pond Inv. Co., 498 A.2d 151, 159 (Del. Ch. 1985)). When exercising a discretionary right, a party to the contract must exercise its discretion reasonably.2 The contract may identify factors that the decision-maker can consider,3 and it may provide a contractual standard for 2 See, e.g., Desert Equities, Inc. v. Morgan Stanley Leveraged Equity, II, L.P., 624 A.2d 1199, 1206 (Del. 1993) (―[W]hile . . . the Partnership Agreement provides the General Partner discretionary authority to exclude a limited partner from participation in an investment when participation would have a material adverse effect, the General Partner is obliged to exercise that discretion in a reasonable manner.‖ (citation omitted)); Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126, 146–47 (Del. Ch. 2009) (―When a contract confers discretion on one party, the implied covenant requires that the discretion be used reasonably and in good faith.‖); Chamison v. HealthTrust, Inc., 735 A.2d 912, 922 (Del. Ch. 1999) (finding indemnitor breached the implied covenant of good faith and fair dealing by exercising its ―broad discretion‖ to choose indemnitee‘s counsel unreasonably), aff’d, 748 A.2d 407 (Del. 2000); Wilm. Leasing, Inc. v. Parrish Leasing Co., 1996 WL 560190, at *2-3 (Del. Ch. Sept. 25, 1996) (holding that discretionary right to remove general partner must be exercised reasonably). 3 See, e.g., Gelfman v. Weeden Investors, L.P., 792 A.2d 977, 985 (Del. Ch. 2001) (interpreting provision of limited partnership agreement that defined ―sole discretion‖ as authorizing general partner to consider ―in each case, the relative interests of each party 7 evaluating the decision.4 Express contractual provisions always supersede the implied covenant, but even the most carefully drafted agreement will harbor residual nooks and crannies for the implied covenant to fill.5 In those situations, what is ―arbitrary‖ or to such conflict, agreement, transaction or situation and the benefits and burdens relating to such interest, any customary or accepted industry practices, and any applicable generally accepted accounting principles,‖ ―to consider only such interests and factors as it desires,‖ and to ―have no duty or obligation to give any consideration to any interest of or factors affecting the Partnership, the Operating Partnership, the Limited Partners or the Assignees‖ (emphasis omitted)); Gotham P’rs, L.P. v. Hallwood Realty P’rs, L.P., 2000 WL 1476663, at *6 (Del. Ch. Sept. 27, 2000) (interpreting similar provision). 4 See, e.g, Lonergan v. EPE Hldgs., LLC, 5 A.3d 1008, 1020 (Del. Ch. 2010) (interpreting provision of limited partnership agreement providing that ―any resolution or course of action by [Holdings GP] or its Affiliates in respect of such conflict of interest shall be permitted and deemed approved by all Partners, and shall not constitute a breach of this Agreement or of any agreement contemplated herein or therein, or of any duty stated or implied by law or equity, if the resolution or course of action in respect of such conflict of interest is (i) approved by Special Approval, (ii) approved by the vote of a majority of the Units excluding Units owned by [Holdings GP] and its Affiliates, (iii) on terms no less favorable to [Holdings] than those generally being provided to or available from unrelated third parties or (iv) fair and reasonable to [Holdings], taking into account the totality of the relationships between the parties involved (including other transactions that may be particularly favorable or advantageous to the Partnership‖); Brickell P’rs v. Wise, 794 A.2d 1, 2-5 (Del. Ch. 2001) (interpreting similar provision). 5 See Gerber v. Enter. Prods. Hldgs., LLC, 2012 WL 34442, at *9-11 (Del. Ch. Jan. 6, 2012) (holding that provision in limited partnership agreement which stated that a transaction receiving ―Special Approval‖ from an audit committee would be ―permitted and deemed approved by all Partners, and shall not constitute a breach of th[e limited partnership agreement] or of any agreement contemplated . . . therein, or of any duty stated or implied by law or equity‖ remained subject to review for compliance with the implied covenant of good faith and fair dealing); Lonergan, 5 A.3d at 1021 (―The plaintiff correctly contends that the implied covenant constrains the Special Approval process.‖); Brinckerhoff v. Tex. E. Prods. Pipeline Co., 986 A.2d 370, 390 (Del. Ch. 2010) (noting that ―Special Approval‖ as defined by partnership agreement ―must have been given in compliance with the implied covenant of good faith and fair dealing‖); see also Amirsaleh, 2008 WL 4182998, at *1 (―No contract, regardless of how tightly or precisely drafted it may be, can wholly account for every possible contingency.‖). 8 ―unreasonable‖—or conversely ―reasonable‖—depends on the parties‘ original contractual expectations, not a ―free-floating‖ duty applied at the time of the wrong. See Nemec, 991 A.2d at 1128 (considering whether ―at the time of contracting, both parties would reasonably have expected [the plaintiffs] to participate in the buy out‖); Paul M. Altman & Srinivas M. Raju, Delaware Alternative Entities and the Implied Contractual Covenant of Good Faith and Fair Dealing Under Delaware Law, 60 Bus. Law. 1469, 1480-81 (2005) (―Delaware cases generally support the proposition that the Implied Covenant requires that such discretion must be exercised in good faith and consistent with the reasonable expectations of the parties.‖). There are references in Delaware case law to the implied covenant turning on the breaching party having a culpable mental state analogous to the scienter requirement of fraud and other intentional torts. See Amirsaleh, 2009 WL 3756700, at *5 n.24 (collecting cases). Proving a breach of contract claim does not depend on the breaching party‘s mental state.6 A scienter requirement might seem to uproot the implied covenant 6 See NACCO Indus., Inc. v. Applica, Inc., 997 A.2d 1, 35 (Del. Ch. 2009) (noting Delaware‘s recognition of efficient breach); Hifn, Inc. v. Intel Corp., 2007 WL 2801393, at *13 (Del. Ch. 2007) (―[T]o the extent that [plaintiff] is contending that [defendant‘s] subjective motivations for wanting out of the contract give rise to an inference that it acted in bad faith, that argument fails under settled law.‖); Gilbert v. El Paso Co., 490 A.2d 1050, 1055 (Del. Ch. 1984) (holding that when party enforces conditions that ―are expressed, the motivation of the invoking party is, in the absence of fraud, of little relevance‖), aff’d, 575 A.2d 1131 (Del. 1990). See generally Restatement (Second) of Contracts ch. 16, introductory n. (1981) (―The traditional goal of the law of contract remedies has not been compulsion of the promisor to perform his promise but compensation of the promisee for the loss resulting from breach. ‗Willful‘ breaches have not been distinguished from other breaches . . . .‖). 9