Koloni Reklam, Sanayi, Ticaret LTD/STI v. Viacom, Inc. et al
MEMORANDUM. Signed by Judge Sue L. Robinson on 2/23/2017. (nmfn)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
KOLONI REKLAM, SANAYI, TICARET
VIACOM, INC. and KEVIN KAY,
Civ. No. 16-285-SLR
Plaintiff Koloni Reklam, Sanayi, Ticaret LTD/STI is a minority member of Bellator
Sport Worldwide LLC ("Bellator"), a Delaware limited liability company. (D.I. 1 ~ 4; D.I.
9, Ex. A) Plaintiff asserts that defendant Viacom, Inc. ("Viacom") is the controlling
member of Bellator. (Id. at ~~ 14-15) Defendant Kevin Kay is a Bellator manager
(collectively with Viacom, "defendants"). (Id.
6, 14-15) On April 21, 2016, plaintiff
filed a complaint in this court asserting five claims against Viacom, and one claim
against Kay: (1) breach of the LLC operating agreement; (2) breach of the implied
covenant of good faith and fair dealing; (3) breach of common law fiduciary duties (also
against Kay); (4) an accounting; and (5) unjust enrichment. (D.I. 1 ~~ 32-53)
Currently before the court is defendants' motion to dismiss pursuant to Federal
Rules of Civil Procedure 12(b)(6) and 23.1. (D.I. 6) The court has subject matter
jurisdiction over this action pursuant to 28 U.S.C. § 1332(a). For the reasons discussed
below, defendants' motion to dismiss is granted.
Viacom is a global mass media company with interests in cinema and cable
television, including Spike TV, MTV, Comedy Central, and Paramount Pictures. (D.I. 1
Bellator was formed on September 3, 2008 to promote mixed martial arts. (Id. at
11119, 10) It currently has four members, including MTV Networks ("MTVN"). (Id. at 11
14) MTVN holds a 97% interest in Bellator, plaintiff holds a 1% interest, and the two
remaining members-neither of which are related to Viacom-hold the remaining
interest. (Id. at 1J 14)
MTVN's interest in Bellator is held through MMA HoldCo Inc., a subsidiary of
Viacom International Inc. (D.I. 8 at 2 n. 1) Viacom International Inc. is a subsidiary of
Viacom Inc., the defendant in this action. See CBS Operations Inc., General Statement
of Acquisition of Beneficial Ownership (Sch. 13D/A) (Feb. 7, 1997). 1 Thus, Viacom
holds no direct interest in Bellator. Kay is currently president of Spike TV and a
member of Bellator's management committee. (D.I. 11116)
Plaintiff invested in Bellator in March 2009. (Id. at 11 11) MTVN first invested in
Bellator in December 2010 and, through a series a purchases, acquired its controlling
interest in Bellator by June 2014. (Id. at 1111 12-13)
Relevant Contract Provision
Bellator is governed by its Third Amended and Restated Operating Agreement
(the "Operating Agreement"). (D.I. 9, Ex. A) The Operating Agreement itself is
The court may take judicial notice of matters of public record, including public
documents filed with the Securities and Exchange Commission. In re Chemed Corp.,
S'holder Derivative Litig., 2015 WL 9460118, at *1 n. 2 (D. Del. Dec. 23, 2015).
governed by Delaware law. (Id. at § 11.11) The parties to the Operating Agreement
are Bellator and its members. (Id. at p. 1 & App'x A) Because Viacom is not a member
of Bellator, it is not a party to the Operating Agreement. (Id.)
Since October 2014, Bellator has been managed by a three-member committee
(the "Management Committee"). (D.I. 8 at 3) Pursuant to the Operating Agreement, "all
powers to control and manage the Business and affairs of [Bellator] shall be exclusively
vested in the Management Committee," except as otherwise provided. (D.I. 9, Ex. A§
4.3) MTVN has the power to designate each member of the Management Committee
as long as it holds at least a 15% interest in Bellator. (D.I. 9, Ex. A§ 4.1 (b))
In accordance with 6 Del. C. § 18-1101 (c), 2 the Operating Agreement eliminates
all fiduciary duties for members. Specifically, Section 4.11 provides that "[a] member
shall not have any duties, fiduciary or otherwise, to [Bellator] or to the other Members,
other than the contractual obligations of such Members set forth herein." (Id. at § 4.11)
As for a manager's fiduciary duties, Section 4.1 (g) states:
Each Manager shall perform his duties as a Manager in good faith, in a
manner he reasonably believes to be in the best interests of the
Company, and with such care as an ordinarily prudent person in a like
position would use under similar circumstances. A person who so
performs his duties shall not have any liability by reason of being or
having been a Manager of the Company.
(Id. at§ 4.1 (g)) Finally, Section 4.11 of the Operating Agreement disclaims all fiduciary
duties between members. Specifically, Section 4.11 states, "[a] member shall not have
6 Del. C. § 18-1101 (c) allows a limited liability company agreement to "expand
restrict[ ] or eliminate" the fiduciary duties of a member, manager, or other person that
otherwise has duties in law or equity or is bound by the agreement, except the limited
liability company agreement may not eliminate the implied contractual covenant of good
faith and fair dealing.
any duties, fiduciary or otherwise, to [Bellator] or to the other Members, other than the
contractual obligations of such Members set forth herein." (Id. at§ 4.11)
Section 7.2(b) provides that each member has the right to reasonable access
and to inspect the books and records listed in Sections 7.1 (a) and 7.2(a) "for any
purpose reasonably related to such Member's interest as a member of [Bellator]." (Id.
at§ 7.2(b)) Section 7.2(c) requires Bellator, at the end of each fiscal quarter, to deliver
to members the company's balance sheets, income statements, and cash flow
statements. (Id. at§ 7.2(c))
On July 13, 2015, plaintiff filed a complaint in a California state court naming
Viacom and Does 1-20 as defendants. (D.I. 8 at 5 & Ex. B) The California complaint
asserted the same causes of action, supported by the same allegations, as those set
forth in the complaint in this action. (D.I. 8 at 5) Defendants filed a motion to stay or
dismiss the case, which plaintiff opposed. (Id.) In its briefing on that motion, Viacom
notified plaintiff that it was not, and had never had been, a member of Bellator. (Id.)
Specifically, Viacom stated that "MMA HoldCo Inc., a subsidiary of Viacom International
Inc., holds the majority of the members' interests in Bellator." (D.I. 8, Ex. Bat p. 2)
On October 30, 2015, the California court dismissed the action recognizing that it
was barred by the Delaware forum selection clause in the Operating Agreement. (D.I. 8
at 5) On January 22, 2016, plaintiff re-filed the same complaint in the Delaware
Superior Court, except adding Kay as a defendant. (Id.) On March 9, 2016, defendants
filed a motion to dismiss, after which plaintiff dismissed that action, recognizing
belatedly that the Delaware Superior Court lacked subject matter jurisdiction to
adjudicate the equitable claims asserted. (Id.) On April 21, 2016, plaintiff re-filed the
same complaint in this court. (Id.)
STAND ARD OF REVIEW
To survive a motion to dismiss under Fed. R. Civ. P. 12(b)(6), plaintiff must plead
facts sufficient to "state a claim to relief that is plausible on its face." Ashcroft v. Iqbal,
556 U.S. 662, 677-78 (2009) (quoting Bell At/. Corp. v. Twombly, 550 U.S. 544, 570
(2007)). "Detailed factual allegations" are not required under Fed. R. Civ. P. 8, but
"[t]hreadbare recitals of the elements of a cause of action, supported by mere
conclusory statements, do not suffice." Id. at 678. When considering a Rule 12(b)(6)
motion, the court accepts "as true the factual allegations in the complaint and all
reasonable inferences that can be drawn therefrom." Trump Hotels & Casino Resorts,
Inc. v. Mirage Resorts Inc., 140 F.3d 478, 483 (3d Cir. 1998).
Defendants have moved to dismiss all five counts in the complaint: breach of the
Operating Agreement; breach of the implied covenant of good faith and fair dealing;
breach of fiduciary duties; an accounting; and unjust enrichment. (D. I. 6) Plaintiff
asserts all five counts against Viacom and only the breach of fiduciary duty claim
against Kay. Each claim will be discussed in turn.
Breach of Contract and Breach of the Implied Covenant
Count I of the complaint alleges that Viacom breached the Operating Agreement
by failing to comply with the reporting obligations of Section 7.2(c), and by causing
information related to Bellator's operations to be withheld from minority members. (D.I.
Count 111 alleges that Viacom breached the covenant of good faith and fair
dealing implied in the Operating Agreement by "unfairly dealing with Plaintiff and by
acting in bad faith toward Plaintiff .... " (D. I. 1 1J 46)
Plaintiff's claims fail, because Viacom is not a party to the Operating Agreement.
It is a well-settled principal of contract law that "only a party to a contract may be sued
for breach of that contract." Wallace ex rel. Cencom Cable Income Partners II, Inc., L.P.
v. Wood, 752 A.2d 1175, 1180 (Del. Ch. 1999). Similarly, "the implied covenant only
applies to the parties of a contract." DiRienzo v. Lichtenstein, 2013 WL 5503034, at *35
(Del. Ch. Sept. 30, 2013); Global Recycling Solutions, LLC v. Greenstar N.J., LLC, 2011
WL 4501165, at *5 (D. Del. Sept. 28, 2011) (dismissing claims for breach of contract
and breach of the implied covenant because Greenstar was not a party to the contract).
The Operating Agreement demonstrates on its face that Viacom is not a signatory to
that contract. Accordingly, counts I and Ill against Viacom must be dismissed.
The court is not persuaded by plaintiff's argument that these claims survive under
a veil piercing theory. (D.I. 11 at 4-6) Viacom, Viacom International, and MMA HoldCo
Inc. are separate entities, and "Delaware law respects corporate formalities" absent
"extremely limited circumstances," which are not present here. O'Leary v. Telecom
Res. Serv., LLC, 2011 WL 379300, at *7 (Del. Super. Jan. 14, 2011 ). As the Delaware
Superior Court explained:
Fraud is one circumstance under which a parent company can be held
liable for a subsidiary's action. Another circumstance is when the
subsidiary is merely an instrumentality or alter ego of the parent
corporation. The degree of control that would be required to "pierce the
veil" and hold the parent corporation liable would be a degree of control
by the parent corporation that the subsidiary no longer has legal or
independent significance of its own. The key to this degree of control is
an absence of corporate formalities separating the parent and the
subsidiary, "such as where the assets of the two entities are commingled,
and their operations intertwined."
Id. (quoting Mobil Oil Corp. v. Linear Films, Inc., 718 F. Supp. 260, 266 (D. Del. 1989)).
Plaintiff has not alleged such control over MMA HoldCo by Viacom that the court should
pierce the corporate veil not only of MMA HoldCo but Viacom International as well.
Indeed, plaintiff fails to mention MMA HoldCo Inc., Viacom International, or their
relationship to Viacom in the complaint, much less plead facts showing control.
In its answering brief, plaintiff contends that four allegations demonstrate that
Viacom "dominates the activities" of MMA Holdco: (1) plaintiff sought and received
financial statements from Viacom, bypassing MMA Holdco; (2) plaintiff confronted
Viacom, not MMA Holdco, about alleged diversion of revenues; (3) Viacom allegedly
instructed management to withhold information on operations; and (4) the previous
management at Bellator was allegedly terminated at Viacom's direction. (D.I. 11 at 5-6
(citing D.I. 1 ilil 20, 22, 26, 29)) As an initial matter, plaintiff cannot manufacture an
agency relationship by confronting Viacom rather than MMA HoldCo. The remaining
allegations are conclusory assertions of control unsupported by well-pleaded facts from
which the court can reasonably infer that Viacom took the alleged actions. Conclusory
allegations are insufficient grounds for piercing the corporate veil. See Mobil Oil Corp.
v. Linear Films, Inc., 718 F. Supp. 260, 272 (D. Del. 1989) (rejecting plaintiff's argument
that one corporation directed the alleged infringement by the another corporation,
because it was "simply a conclusion without factual basis."); O'Leary, 2011 WL 379300,
at *8 (disregarding plaintiff's conclusory averments that a parent company ratified and
approved the acts of a subsidiary constituting a breach of the contract). Accordingly,
counts I and Ill of plaintiff's complaint are dismissed for failure to state a claim. 3
Breach of Fiduciary Duty and an Accounting
Count II of the complaint alleges that Viacom and Kay breached their fiduciary
duties owed to plaintiff by withholding from minority members information concerning
Bellator's operations, and by depriving Bellator of substantial revenue from in-show
sponsorships. (D.I. 8 at 8; D.I. 1
,.m 20-22, 23-27)
Plaintiff's claim against Viacom fails,
because Viacom is not a member or manager of Bellator and, therefore, does not owe
any fiduciary duties to Bellator or its members.
Kay argues that the fiduciary duty claim against him fails because it is derivative
and plaintiff failed to plead demand futility. (D.I. 8 at 9-10) Under Delaware law,
whether a fiduciary duty claim is direct or derivative turns on: "(1) who suffered the
alleged harm (the corporation or the suing stockholders, individually); and (2) who would
receive the benefit of any recovery or other remedy (the corporation or the stockholders,
individually)?"4 Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del.
2004); see also NAF Holdings, LLC v. Li & Fung (Trading) Ltd., 118 A.3d 175, 179 (Del.
2015) (explaining that the Tooley analysis applies to fiduciary duty claims).
Plaintiff has asked for discovery to determine whether an agency relationship
exists between Viacom and MMA HoldCo. (D.I. 11 at 8) Plaintiff has not shown that
this information cannot be obtained through a books and records request under Section
7.2(b) of the Operating Agreement. See, e.g., Seinfeld v. Verizon Commc'ns, Inc., 909
A.2d 117, 124 n. 45 (listing several cases where stockholders were granted the right to
inspect books and records for possible waste and mismanagement).
Although federal law governs the pleading standard, Delaware law governs the
underlying substantive requirements governing the adequacy of plaintiff's derivative
claim, including the pre-suit demand requirement. See Kamen v. Kemper Fin. Servs.,
Inc., 500 U.S. 90, 95-97 (1991 ).
Plaintiff's claim against Kay based on loss of substantial revenue is derivative,
because any loss is suffered directly by Bellator, and secondarily by all members on a
pro rata basis in proportion to their ownership. See Hartse/ v. Vanguard Grp., Inc., 2011
WL 2421003, at *18-20 (Del. Ch. June 15, 2011) (holding that fiduciary duty claims
based on a diminution in value of stock was derivative because all stockholders suffered
on pro rata basis), aff'd, 38 A.3d 1254 (Del. 2012); Feldman v. Cutaia, 951 A.2d 727,
734-35 (Del. 2008) (mismanagement resulting in a decrease in the value of stock is a
derivative claim); Thornton v. Bernard Tech., Inc., 2009 WL 426179, at *3 (Del. Ch. Feb.
20, 2009) (allegations of waste and self-dealing transactions are generally derivative
instead of direct). Because this claim is derivative, plaintiff was obligated under Fed. R.
Civ. P. 23.1 to plead demand futility, which it did not. Accordingly, plaintiff's derivative
claim against Kay based on the loss of substantial revenue is dismissed.
Plaintiff appears to have also inartfully pied a claim for breach of fiduciary duty
against Kay based on the failure to provide "regular financial updates" and "information
concerning the operation of Bellator" to minority members. (D.I. 8 at 8; D.I. 1111120-22)
Normally, non-disclosure claims are direct claims where the defendant has failed to
disclose material information he had a duty to disclose. See, e.g., Freedman v. Adams,
2012 WL 1345638, at *16 n. 154 (Del. Ch. Mar. 30, 2012). However, Delaware law
"does not allow fiduciary duty claims to proceed in parallel with breach of contract
claims unless" there is an "independent basis for the fiduciary duty claims apart from the
contractual claims." C/M Urban Lending GP, LLC v. Cantor Commercial Real Estate
Sponsor, L.P., 2016 WL 768904, at *3 (Del. Ch. Feb. 26, 2016) (quoting Renea Grp.,
Inc. v. MacAndrews AMG Hldgs. LLC, 2015 WL 394011, at *7 (Del. Ch. Jan. 29, 2015)).
The Operating Agreement addresses plaintiff's rights to financial statements and
other information. (D.I. 9, Ex. A at§§ 7.1 & 7.2) Plaintiff has not identified any
independent duty giving rise to Kay's fiduciary duty to disclose the information at issue.
Accordingly, plaintiff's breach of fiduciary duty claim against Kay based on nondisclosure is dismissed, because it should be brought as a breach of contract claim.
See Nemec v. Shrader, 991 A.2d 1120, 1129 (Del. 2010) ("It is a well-settled principle
that where a dispute arises from obligations that are expressly addressed by contract,
that dispute will be treated as a breach of contract claim,'' and "any fiduciary claims
arising out of the same facts that underlie the contract obligations would be foreclosed
as superfluous"); CIM Urban Lending, 2016 WL 768904, at *3 (dismissing breach of
fiduciary duty claim as duplicative of the contract claim).
Count IV alleges that the same conduct giving rise to Viacom's breaches of
fiduciary duty also resulted in an unjust enrichment. (D.I. 1 ~ 24) Specifically, Viacom
was unjustly enriched by retaining in-show sponsorship revenue rightfully owed to
Bellator. (Id.) Count IV is derivative in nature for the same reasons that the breach of
fiduciary duty claim is derivative: the claim seeks recovery for the loss of income to
Bellator. See Metro. Life Ins. Co. v. Tremont Grp. Holdings, Inc., 2012 WL 6632681, at
*9 (Del. Ch. Dec. 20, 2012) (holding that unjust enrichment and fiduciary duty claims
were derivative in nature because the injury of diminution in the company's value,
"damaged the [stockholders] only to the extent of their proportionate interest" in the
company). Because plaintiff has failed to make a demand or plead demand futility,
count IV is dismissed pursuant to Fed. R. Civ. P. 23.1.
In count V, plaintiff claims entitlement to an accounting pursuant to Section 7.2(b)
of the Operating Agreement. (D.I. 11J1J 51-53) This claim fails, because the Operating
Agreement does not provide a right to an accounting. Section 7.2(b) in particular only
entitles members to access and inspect the books and records of Bellator subject to
certain limitations. (D.I. 9, Ex. A§ 7.2(b)). In its answering brief, plaintiff attempts to replead its accounting claim as a remedy for breaches of fiduciary duty. (D.I. 11 at 13)
"[l]t is axiomatic that the complaint may not be amended by the briefs in opposition to a
motion to dismiss." Hughes v. United Parcel Serv., Inc., 639 F. App'x 99, 104 (3d Cir.
2016). Accordingly, count Vis dismissed for failure to state a claim.
Defendants have asked that dismissal be with prejudice. (D.I. 12 at 2) The court
questions whether dismissal should be with prejudice considering that this is plaintiff's
third attempt to go forward on the same complaint, and plaintiff has not corrected a key
deficiency of which it was made aware on the first try. Nevertheless, this is the first time
a court has addressed the substantive allegations in the complaint. Accordingly,
defendants' motion to dismiss (D.I. 6) is granted, and the complaint is dismissed without
prejudice. An appropriate order will be entered.
J.1' , 2017
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