Del Giudice et al v. Harlan et al
Filing
87
MEMORANDUM OPINION AND ORDER re: 25 MOTION to Amend/Correct filed by Bernice Wollman, Warren Rubin, Weichert Enterprise II, LLC, Joseph Lambert, Michael Del Giudice. For the foregoing reasons, the Court grants Defendant's motion to amend as to the proposed Third and Sixth Causes of Action but denies Defendants motion to amend as to the proposed Fourth, Fifth, and Seventh Causes of Action. Plaintiff may file, by November 16, 2016, a Third Amended Complaint that conforms to this decision. This Memorandum Opinion and Order resolves docket entry no. 25. SO ORDERED., ( Amended Pleadings due by 11/16/2016.) (Signed by Judge Laura Taylor Swain on 11/02/2016) (ama)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------------------------x
MICHAEL DEL GIUDICE et al.,
Plaintiffs,
-v-
No. 15 CV 7330-LTS-JCF
W. SCOTT HARLAN et al.,
Defendants.
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MEMORANDUM OPINION AND ORDER
Plaintiffs Michael Del Giudice, Weichert Enterprise II, LLC, Joseph Lambert,
Warren Rubin, and Bernice Wollman (collectively, “Plaintiffs”) bring this action against W.
Scott Harlan, James Maiz, Shane Litts, and Willie Zapalac (collectively, “Defendants”),
asserting claims for breach of contract. The Court has jurisdiction of this action pursuant to 28
U.S.C. § 1332.
Before the Court is Plaintiffs’ motion pursuant to Federal Rule of Civil Procedure
15 for leave to file a Third Amended Complaint (“TAC”). The Court has considered the parties’
submissions carefully and, for the reasons stated below, Plaintiffs’ motion for leave to amend is
granted in part and denied in part.
BACKGROUND
The following facts drawn from the proposed Third Amended Complaint (docket
entry no. 26, Exhibit B (“TAC”)) are taken as true for purposes of the instant motion. Material
drawn from the Fourth Amended and Restated Operating Agreement of Rockland Capital, LLC
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(the “OA”) (docket entry no. 26, Declaration of Joseph Lambert, ¶ 1 & Ex. A (the OA)), which
is integral to the TAC, is cited to that agreement.
Rockland Capital, LLC (“Rockland” or the “Company”) is a limited liability
company incorporated in Delaware. At all times relevant to this litigation, Rockland was
governed by the OA.
The OA stipulates how Rockland’s Board of Directors is to distribute Rockland’s
profits to each member on an annual basis. (OA § 1.) The members of Rockland are divided
into three classes: Class A-1, Class A-2, and Class B. (Id. at § 1.) After each fiscal year, Class
A-1 members are entitled to receive the “Class A-1 Preference Amount,” which is a sum
determined by the Board after consideration of a recommendation made by the Preference
Committee. (Id.) Class A-2 and Class B members are then entitled to distribution of any
remaining monies on a “pro rata [basis] in accordance with their Percentage Interests [in
Rockland], until the cumulative cash received by the Class A-2 Members and Class B Members
equals 49% of the cumulative cash distributed.” (Id. at § 6.1(b).) Defendants are Class A-1
Members and Directors of Rockland, and Plaintiffs are or were Class A-2 and Class B Members
of Rockland. (TAC ¶¶ 2-8.)
On July 30, 2015, Plaintiffs commenced this action, alleging principally that
Defendants breached the OA in the course of setting the Class A-1 Preference Amount, and
distributing that amount to the Class A-1 Members, for certain fiscal years. (See docket entry
no. 1, Complaint.) Plaintiffs now seek to amend the operative Second Amended Complaint
(“SAC”) (docket entry no. 16) to add causes of action relating to alleged facts that post-date the
SAC.
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Proposed Third Cause of Action Relating to Non-Compete Provision
On October 12, 2015, after the initial Complaint was filed, Defendant Litts sent a
Notice of Default to Plaintiff Del Giudice, alleging that Del Giudice had violated the noncompete provision of the OA. (SAC ¶ 35.) The letter asserted that Del Giudice’s “involvement
with both Carnegie Hudson Resources and Corinthian Capital Group and [Del Giudice’s]
participation in their respective transactions that fall within the definition of Competitive
Business (as defined in the Operating Agreement) clearly violate the . . . Operating Agreement,”
and gave Del Giudice fifteen days to cure the violation to avoid having his interests in Rockland
canceled and redeemed. (Id.) On November 4, 2015, Plaintiffs filed the operative Second
Amended Complaint, which included a Third Cause of Action labeled “Declaratory Judgment to
Determine No Default of Operating Agreement by Michael Del Giudice” that challenges the
validity of the Notice of Default that Del Giudice received. Subsequently, on November 6,
2015, Defendant Harlan, as President of Rockland, canceled all of Del Giudice’s ownership
interests in Rockland and redeemed them for $1 each. (SAC ¶ 38.) The proposed TAC amends
the Third Cause of Action to seek damages as a result of this cancellation and redemption,
replacing the declaratory judgment count relating to the Notice of Default. (TAC ¶¶ 34-41.)
Proposed Fourth Cause of Action Relating to 2016 Class A-1 Distributions
On January 19, 2016, Defendants adopted, by written consent, a distribution of
$3,387,000 as the Class A-1 Preference Amount for the 2015 Fiscal Year, which amount was
distributed to the Class A-1 Members on January 22, 2016. (TAC ¶ 43.) Plaintiffs claim that
setting the Class A-1 Preference Amount at this level violated the terms of Rockland’s
Compensation Policy (OA Ex. C) and the OA. (TAC ¶¶ 45-47.)
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Plaintiffs allege that the Compensation Policy “requires a recommendation to the
Board by the Preference Committee, of the Class A-1 Preference Amount.” (TAC ¶ 45.) The
Compensation Policy also refers only to a Compensation Committee, and does not contain any
reference to the Preference Committee. (See OA Ex. C.) However, the conflict of interest
recusal provision of the OA itself provides, in connection with Class A-1 Preference Amount
determination, that conflicts of interest of a Member or Director are waived “so long as [the
Class A-1 Preference Amount] is calculated in accordance with the Compensation Policy.” (OA
§ 7.6(c)(iii).) Plaintiffs allege that, because no recommendation by the Preference Committee
was made, the Compensation Policy was violated and the Class A-1 Members were required to
recuse themselves from determinations of the 2015 Fiscal Year Class A-1 Preference Amount.
Plaintiffs further allege that the Class A-1 Preference Amount for the 2015 Fiscal
Year should have been set at the “50th percentile” – an apparent reference to the Compensation
Policy’s requirement that Class A-1 Members’ salaries, which are set by the Compensation
Committee, must be “no less than the 50th percentile and no more than the 75th percentile of
employees with similar roles at similarly situated private equity firms.” (OA Ex. C.) Plaintiffs
allege that the 50th percentile amount was $2,344,000, that Rockland’s performance was “below
expectations”, and that Defendants therefore improperly allocated themselves $1,043,000 more
than permitted by the Operating Agreement when they set the Class A-1 Preference Amount
above the 50th percentile amount in January 2016. (Id. at ¶¶ 44-45, 47.)
Plaintiffs’ proposed Fourth Cause of Action is for breach of contract, based on
these facts.
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Proposed Fifth Cause of Action Relating to Indemnification
On November 20, 2015, Defendants “set a reserve in the Rockland 2016 Budget
for paying the [Defendants’] legal expenses.” (Id. at ¶ 50.) In the TAC’s proposed Fifth Cause
of Action, Plaintiffs allege that “[s]ection 7.10(b) of the Operating Agreement expressly
prohibits Rockland Capital, LLC from paying litigation expenses of any member or officer
defending an action, suit or proceeding commenced against him by the Company or any other
Member of the company,” and that Defendants’ actions therefore violated the OA. (Id. at ¶ 51.)
Plaintiffs further assert that Defendants engaged in “willful misconduct,” which would preclude
them from receiving any indemnification. (Id. at ¶ 54.) Section 7.10(b) refers specifically to
advance payments of litigation expenses, however, and Plaintiffs do not, in any event, allege that
Rockland has actually paid any amount to Defendants or their counsel in connection with the
litigation of this action.
Proposed Sixth Cause of Action Relating to New York Office
The OA states generally that the Company “shall establish a place or places of
business within or without the State of Delaware as determined by the Members.” (OA § 2.3.)
The OA also provides that Rockland “shall maintain at its principal places of business in The
Woodlands, Texas, and New York, New York, and such other places as the Board [of Directors
of Rockland] shall determine, books of account for the Company.” (OA § 11.1(a).) Similar
language appears in Section 11.2 of the OA. Plaintiffs’ proposed Sixth Cause of Action asserts
that Defendants adopted a resolution, effective September 30, 2015, to close Rockland’s New
York office in violation of Sections 11.1 and 11.2 of the OA. (TAC ¶ 57.)
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Proposed Seventh Cause of Action Relating to Company Information
On December 23, 2015, Lambert “requested that defendant Scott Harlan provide
the names and contact information for each of the limited partners” of two Rockland funds. (Id.
at ¶ 60.) Lambert was not provided this information upon his request. Plaintiffs’ proposed
Seventh Cause of Action asserts that this information “is required to be available to each of the
Members and Directors of each entity,” and that Defendants’ failure to provide it to Lambert was
a breach of the OA. (TAC ¶¶ 59-60.)
DISCUSSION
Federal Rule of Civil Procedure 15 provides that the court may “permit a party to
serve a supplemental pleading setting out any transaction, occurrence, or event that happened
after the date of the pleading to be supplemented.” Fed. R. Civ. P. 15(d). It also provides that
“leave to amend shall be freely given when justice so requires.” Fed. R. Civ. P. 15(a); see also
Foman v. Davis, 371 U.S. 178, 182 (1962). If the plaintiff has “at least colorable grounds for
relief,” justice requires granting leave to amend. Ryder Energy Distribution Corp. v. Merrill
Lynch Commodities Inc., 748 F.2d 774, 783 (2d Cir. 1984) (citation omitted).
The Second Circuit has held that “absent evidence of undue delay, bad faith or
dilatory motive on the part of the movant, undue prejudice to the opposing party, or futility, Rule
15’s mandate must be obeyed.” Monahan v. New York City Dep’t of Corrections, 214 F.3d 275,
283 (2d Cir. 2000). “The party opposing a motion to amend bears the burden of establishing that
an amendment would be futile . . . . A proposed amendment to a pleading would be futile if it
could not withstand a motion to dismiss pursuant to Rule 12(b)(6)” of the Federal Rules of Civil
Procedure. Ballard v. Parkstone Energy, LLC, No. 06 CV 13099, 2008 WL 4298572, at *3
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(S.D.N.Y. Sept. 19, 2008) (internal quotation marks and citations omitted). Thus, “[l]eave to
amend may be denied on grounds of futility if the proposed amendment fails to state a legally
cognizable claim or fails to raise triable issues of fact.” AEP Energy Servs. Gas Holding Co. v.
Bank of America, N.A., 626 F.3d 699, 726 (2d Cir. 2010) (citation omitted).
Under the Rule 12(b)(6) standard, the Court accepts as true the non-conclusory
factual allegations in the complaint and draws all reasonable inferences in the plaintiff’s favor.
Roth v. Jennings, 489 F.3d 499, 501 (2d Cir. 2007). When determining the sufficiency of a
claim under Rule 12(b)(6), “a district court may consider the facts alleged in the complaint,
documents attached to the complaint as exhibits, and documents incorporated by reference in the
complaint.” DiFolco v. MSNBC Cable LLC, 622 F.3d 104, 111 (2d Cir. 2010) (citations
omitted); see also Chambers v. Time Warner, Inc., 282 F.3d 147, 152-53 (2d Cir. 2002)
(documents integral to the complaint may be considered). Here, because the OA is repeatedly
referenced and cited in the TAC, the Court considers it integral to the TAC and appropriate for
consideration in connection with this motion practice.
Third Cause of Action
Plaintiffs have proposed amending the Third Cause of Action, which in the SAC
is one that seeks a declaratory judgment, to one that seeks damages arising from Harlan’s
cancellation and redemption of Del Giudice’s ownership interests. Defendants’ response that
these additional allegations are unnecessary is unavailing, as the new allegations substantively
change the operative facts and the relief sought. Plaintiffs’ motion is granted with respect to the
Third Cause of Action.
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Fourth Cause of Action
Plaintiff’s request for leave to add the proposed Fourth Cause of Action set forth
in the TAC is denied as futile. The OA contains a provision that generally waives claims for
breach of fiduciary duty against Members or Directors in connection with the determination of
the Class A-1 Preference Amount, “so long as such amount as approved is calculated in
accordance with the Compensation Policy.” The Compensation Policy applies to determinations
of “the current market salary and bonuses of the Class A-1 Members,” it does not by its terms
address the Class A-1 Preference Amount or the Preference Committee.1 Rather, it contains
requirements for how the Compensation Committee sets the annual “salary recommendation” to
the Board for the Class A-1 Members.
Plaintiffs’ first argument is that the Compensation Policy “require[d] a
recommendation to the Board by the Preference Committee, of the Class A-1 Preference
Amount,” and because no such recommendation was made here, “the Class A-1 Members [were]
required to recuse themselves when the Board determine[d] the Class A-1 Preference Amount.”
(See TAC ¶ 45.) This argument fails for two reasons. First, the requirement of a Preference
Committee recommendation of the Class A-1 Preference Amount is contained in the OA, not the
Compensation Policy. The Compensation Policy was therefore not violated based on the facts
1
In their reply papers, Plaintiffs cite extensively to facts contained in a
supplemental declaration by Lambert, which are not contained in the TAC itself,
arguing that the reference to “bonuses” in the opening paragraph of the
Compensation Policy is actually a reference to the Class A-1 Preference Amount.
As noted above, the Court’s consideration of facts in connection with this motion
is limited to the factual allegations contained in the TAC and its integrated
documents, and it is inappropriate at this time for Plaintiffs to supplement that
record with fact declarations. Moreover, Plaintiffs’ reliance on extrinsic evidence
to vary the plain language of the OA and the Compensation Policy appears to be
foreclosed by the OA’s integration clause. (OA § 12.9.)
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Plaintiffs allege, and therefore the OA’s waiver provision would not apply. Second, Plaintiffs’
argument fails because the OA does not contain a mandatory recusal provision. Rather, it
permits claims for breaches of fiduciary duty against Members or Directors if the Class A-1
Preference Amount is not calculated in accordance with the Compensation Policy. Plaintiffs
have advanced no claim for breach of fiduciary duty here.
Plaintiffs’ second argument is that the Class A-1 Preference Amount for 2015
could not have been set higher than the 50th percentile “since Rockland Capital’s performance
clearly has not met the Company’s expectations.” (See TAC ¶ 45.) This argument is similarly
unavailing. Plaintiffs’ premise is that the Compensation Policy’s calculation methodology,
which by its terms applies to the Compensation Committee’s calculation of salaries, is applicable
to the calculation of the Class A-1 Preference Amount through the waiver provision. Assuming
without deciding that this is the case, Plaintiffs do not plead facts that indicate that the Class A-1
Preference Amount for 2015 was set in violation of the Compensation Policy’s calculation
methodology. The Compensation Policy’s calculation methodology is discretionary, permitting
any figure “no less than the 50th percentile and no more than the 75th percentile” of similarly
situated private equity employees. (See OA Ex. C.) The Compensation Policy does not cabin
this discretion in cases of poor performance. Accordingly, even crediting Plaintiffs’
interpretation of the Compensation Policy’s applicability to calculation of the Class A-1
Preference Amount, they have not plead facts showing plausibly that the Compensation Policy’s
methodology was not followed.
The proposed Fourth Cause of Action therefore fails to state a claim upon which
relief may be granted and Plaintiffs’ motion is denied insofar as it seeks to add the proposed
Fourth Cause of Action.
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Fifth Cause of Action
Plaintiffs’ proposed Fifth Cause of Action alleges that Defendants have breached
the OA’s indemnification and advancement provisions by setting a legal expense reserve in
Rockland’s 2016 budget. Plaintiffs do not allege that Rockland is actually paying the legal
expenses of any Defendant, and accordingly have not alleged plausibly that any Defendant has in
fact been indemnified or advanced his litigation costs. Plaintiffs therefore do not state a claim
for breach of the OA’s indemnification provisions, and their motion for leave to add the
proposed Fifth Cause of Action is denied as futile.2
Sixth Cause of Action
Plaintiffs’ proposed Sixth Cause of Action asserts that Defendants violated
Sections 11.1(a) and 11.2(a) of the OA by closing Rockland’s New York office. The plain
language of those contractual provisions requires Rockland to “maintain at its principal places of
business in The Woodlands, Texas, and New York, New York,” certain books and records.
Because this provision arguably requires Rockland to maintain a place of business in New York,
Plaintiffs’ allegations that Rockland closed its New York office, and accordingly no longer
maintains any books or records at that location, suffice to state a claim for breach of the OA.
Plaintiffs’ motion for leave to add the proposed Sixth Cause of Action is therefore granted.
2
This holding is without prejudice to the litigation of any party’s claim to
indemnification by Rockland after the final disposition of this litigation. See SunTimes Media Grp., Inc. v. Black, 954 A.2d 380, 401-08 (Del. Ch. 2008) (“It is
generally premature to consider indemnification prior to the final disposition of
the underlying action.”)
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Seventh Cause of Action
Plaintiffs’ proposed Seventh Cause of Action alleges breach of the OA based on
Defendant Harlan’s refusal to provide Plaintiff Lambert with certain information about the
limited partners of two Rockland funds. Plaintiffs do not, however, identify any provision of the
OA that requires production of that information. Plaintiffs’ memorandum of law in support of
their motion (docket entry no. 27 (“Pl. Mem.”)) refers to the operating agreements of the funds
(not the OA), but the TAC contains no allegations about the funds’ operating agreements from
which this Court could find that Plaintiffs have plausibly stated a claim for breach of contract.
Plaintiffs also point to Section 17-305 of the Delaware Limited Partnership Act
(the “DLPA”) in support of the proposed Seventh Cause of Action. Plaintiffs also do not cite the
DLPA in the TAC. Even were the Court to construe the claim as invoking that statute, Section
17-305(e) plainly requires that “[a]ny action to enforce any right arising under this section shall
be brought in the Court of Chancery.” This Court accordingly does not have jurisdiction to
entertain Plaintiffs’ claim under that Delaware statute, and leave to add the proposed Seventh
Cause of Action is denied.
CONCLUSION
For the foregoing reasons, the Court grants Defendant’s motion to amend as to the
proposed Third and Sixth Causes of Action but denies Defendant’s motion to amend as to the
proposed Fourth, Fifth, and Seventh Causes of Action. Plaintiff may file, by November 16,
2016, a Third Amended Complaint that conforms to this decision.
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This Memorandum Opinion and Order resolves docket entry no. 25.
SO ORDERED.
Dated: New York, New York
November 2, 2016
/s/ Laura Taylor Swain
LAURA TAYLOR SWAIN
United States District Judge
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