Long et al v. Lowe's Companies, Inc. et al

Filing 34

ORDER and OPINION: Denying Motion for Summary Judgment 22 ; Denying Motion for Partial Summary Judgment 25 ). See, formal Opinion. It is further ORDERED that this matter is referred to Magistrate Judge Thomas M. Coffin for settlement con ference. The parties are ordered to contact Paul Bruch, Judge Coffin's courtroom deputy, at 541-431-4111 or [e-mail] by 4/14/2017 to schedule a settlement conference. Signed on 3/29/2017 by Judge Ann L. Aiken. (rdr) Modified on to correct a transcription error 3/31/2017. (rdr)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF OREGON
EUGENE DIVISION
STANTON F. LONG and J. DAVID GIBBS,

Case No. 6:16-cv-00932-AA
OPINION AND ORDER

Plaintiffs,
vs.
LOWE'S COMPANIES, INC., ALACRITY
HOME SERVICES, LLC, and ALACTRITY
RENOVATION SERVICES, LLC,
Defendants.

AIKEN, Judge:
In this action, plaintiffs Stanton Long and David Gibbs and defendants Lowe's
Companies, Inc., Alacrity Home Services, LLC, and Alacrity Renovation Services, LLC, file
cross-motions for partial summaty judgment in a dispute about defendants' duty to defend and
indemnify plaintiffs.

BACKGROUND
Plaintiffs are former owners and officers of several companies, including Alacrity
Services, LLC ("Alacrity"), Coterminus Solutions, LLC, Genesis Solutions Design, LLC
("Genesis"), Gibbs & Long, LLC, and Klipspringer Holdings, Inc. Comp!.

~~

6-7 (doc. 1-1).

On May 7, 2013, plaintiffs sold these companies (collectively, "the Contributors") to defendant
Alacrity Home Services, LLC ("AHS"), a wholly owned subsidiary of defendant Lowe's ·

PAGE 1 - OPINION AND ORDER

Companies, Inc. ("Lowes"). Id.

~

11; Gibbs

Deel.~

12 (doc. 24). The sale was governed by a

Contribution Agreement, which contains an indemnification clause and· identifies which
liabilities defendants agreed to assume. Compl.

~~

11-13. Plaintiffs seek a declaratory judgment

that defendants assumed liability in a dispute with a third party and, therefore, owe a duty under
that agreement to defend and indemnify plaintiffs.
The third party litigation at issue involves the former corporate president of Genesis.
Warren Erickson worked for Alacrity until 2006, when he became Genesis' President. Gibbs
Deel.

~

8. He served in that capacity until April 2013. Id. While Mr. Erickson remained

equivocal as to whether he would file suit at the time the parties negotiated the Contribution
Agreement, plaintiffs included a description of Mr. Erickson's theory of liability in their
disclosures to defendants. Id.

~

10. Defendants did not expressly disavow assuming liability

over Mr. Erickson's litigation before the paiiies memorialized the Contribution Agreement. Id.

~

16.
On Febrnary 16, 2016, Mr. Erickson sued the Contributors and plaintiffs in the U.S.
District Court for the Northern District of Georgia, alleging breach of contract and of a
confidential relationship under Ga. Code Ann. § 23-2-58. Snider Deel.

~

6 & Ex. E ~~ 136-47

Dec. 15, 2016 (doc. 26). Mr. Erickson argued his employment contract entitled him to a twenty
percent equity share in Genesis. Id. Ex. E ~ 4. Mr. Erickson also claimed the Contributors and
plaintiffs wrongfully transferred corporate assets and plaintiffs violated their fiduciary duties by
mismanaging and undercapitalizing Genesis and by selling diluted shares of stock. Id.

~~

91-

111 & 148-62. Finally, Mr. Erickson also brought claims against plaintiffs in their personal
capacity for aiding and abetting. Id.

PAGE 2- OPINION AND ORDER

~~

112-35. Defendants refused to defend or indemnify

plaintiffs in the Erickson lawsuit. Comp!.

~

21. Plaintiffs filed suit in this Court, seeking a

declaration that defendants have a duty to defend and indemnify them in that lawsuit.
There are two possible contractual sources for defendants' duties to defend and
indemnify plaintiffs' third-party litigation with Mr. Erickson.
Agreement. Id.

~

The first is the Contribution

22. The second is an operating agreement of the holding corporation parties

created to transfer Contributors' assets.

Id.

To transfer corporate ownership and assets,

plaintiffs and defendants created Alacrity Renovation Services, LLC ("ARS") on January 10,
2013. Gibbs Deel.

~

5. Under the Contribution Agreement, the Contributors received a forty-

nine percent share in ARS and AHS received a fifty-one percent share in ARS. Comp!.

~

11.

Plaintiffs se1ved as corporate officers for ARS until AHS exercised its option to purchase the
Contributors' shares and membership interests in ARS on December 8, 2014. Gibbs

Deel.~

14.

Under the First Amended and Restated Limited Liability Company Agreement ("ARS Amended
Operating Agreement"), ARS agreed to indemnify its officers for acts or omissions in their work
for ARS.

Comp!.~

16.

In the parties' motion for summaty judgment, they only seek an adjudication of plaintiffs'
first claim that defendants are obligated to defend and indemnify them in their suit with Mr.
Erickson. They do not move for summary judgment on the claim that Lowe's is the alter ego of
AHS and ARS. They also do not move for the Court to consider the claim that defendants
unlawfully interfered with plaintiffs' contractual relations.
STANDARDS

Summary judgment is appropriate if "there is no genuine dispute as to any material fact
and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). The moving
patty has the burden of establishing the absence of a genuine issue of material fact. Id.; Celotex

PAGE 3 - OPINION AND ORDER

Corp. v. Catrett, 477 U.S. 317, 323 (1986). If the moving party shows the absence of a genuine

issue of material fact, the nonmoving party must go beyond the pleadings and identify facts
which show a genuine issue for trial.

Id at 324. "Summary judgment is inappropriate if

reasonable jurors, drawing all inferences in favor of the nonmoving party, could return a verdict
in the nonmoving party's favor." Diaz v. Eagle Produce Ltd. P 'ship, 521 F.3d 1201, 1207 (9th
Cir. 2008).
Delaware substantive law controls the parties' contract dispute. "When a federal court
sitting in diversity hears state law claims, the conflicts laws of the fornm state are used to
determine which state's substantive law applies." 389 Orange St. Partners v. Arnold, 179 F.3d
656, 661 (9th Cir. 1999). Under Oregon law, the patties may choose which state's substantive
law controls their dispute subject to limitations that do not appear applicable here. See Or. Rev.
Stat. § 15.350(1). Section 10.10 of the Contribution Agreement and Section 12.7 of the ARS
Amended Operating Agreement chose to apply Delaware law. Snider Deel. Ex. B at 51 & Ex. D
at 34 Dec. 15, 2016.
Under Delaware law, the duty to defend is "broader than the duty to ultimately
indemnify." Am. Ins. Grp v. Risk Enter. Mgmt., Ltd, 761 A.2d 826, 830 (Del. 2000). Although
both duties generally arise from the same contractual source, Cont'l Cas. Co. v. Alexis 1 duPont
Sch. Dist., 317 A.2d 101, 103 (Del. 1974) (explaining the duty to defend arises under contract

where the defendant "assumed liability" over claims asserted against the plaintiff), defendants
are obligated to defend plaintiffs even if defendants only assumed liability over one claim in the
Erickson litigation. See Id at 104 ("If even one count or theory of plaintiffs complaint lies
within the coverage of the policy, the duty to defend arises."; Am. Legacy Found., RP v. Nat'/
Union Fire Ins. Co. ofPittsburgh, Pa., 623 F.3d 135, 139 (3d Cir. 2010) (applying Delaware law

PAGE 4 - OPINION AND ORDER

and stating that so "long as one count or claim is covered under the policy, the duty to defend is
triggered").
DISCUSSION

I.

The Contribution Agreement

The patties' primary dispute is over whether the Contribution Agreement obligates
defendants to defend and indemnify plaintiffs in the Erickson lawsuit. Two provisions of the
Contribution Agreement, §§ 2.03 and 2.04, determine the answer to that question. Section 2.03
provides:
Contribution of Assumed Liabilities. Subject to the tetms and conditions set
forth herein, at the Closing, Contributors shall assign and the Company shall
assume and agree to pay, perfotm, and discharge all the liabilities related to the
Business (collectively, the "Assumed Liabilities"), but Company shall not be
liable for Excluded Liabilities as defined in Section 2.04:

(a) all trade accounts payable of Contributors to third parties in connection with
the Business that remain unpaid and are not delinquent as of the Closing Date and
that either are reflected on the Balance Sheet Date or arose in the ordinary course
of business consistent with past practice since the Balance Sheet Date;
(b) all Liabilities in respect of the Assigned Contracts bnt only to the extent that
such Liabilities were incuned in the ordinary course of business; and
(c) those Liabilities of Contributors set fotth on Section 2.03(c) of the Disclosure
Schedules, including all liabilities related to the Allstate Agreements.
Snider Deel. Ex.Bat 14 Dec. 15, 2016 (emphasis in original). Section 2.04 provides:
Excluded Liabilities. The Company shall not assume and shall not be
responsible to pay, perform or discharge any Liabilities of Contributors or any
Affiliates of a Contributor of any kind or natnre other than the Assumed
Liabilities (the "Excluded Liabilities"). The Excluded Liabilities shall remain
the sole responsibility of Contributors, and Contributors shall, and shall cause
each of its Affiliates to, pay and satisfy in due course all Excluded Liabilities
which they are obligated to pay and satisfy. Without limiting the generality of the
foregoing, the Excluded Liabilities shall include, but not be limited to, the
following:

PAGE 5 - OPINION AND ORDER

(c) any Liabilities relating to or arising out of the Excluded Assets;

(i) any Liabilities under the Excluded Contracts or any other Contracts, including
Intellectual Properties Licenses, (i) which are not validly and effectively assigned
to the Company pursuant to this Agreement; (ii) which do not conform to the
representations and wananties with respect thereto in this Agreement; or (iii) to
the extent such Liabilities arise out of or relate to a breach by Contributors of such
Contracts prior to Closing[.]
Id. Ex.Bat 15.

To determine whether summary judgment is appropriate, the Comi must answer two
questions. First, is the Erickson lawsuit an assumed liability under § 2.03? Second, if the
lawsuit is not clearly an assumed liability, is it an excluded liability under§ 2.04?
A.

Assumption ofLiability under§ 2.03 of the Contribution Agreement

Initially, plaintiffs argue that § 2.03 unambiguously provides that ARS assumed liability
arising out of the Erickson litigation. In the alternative, plaintiffs argue§ 2.03 is ambiguous and
extrinsic evidence is necessary to resolve the scope of ARS' assumed liabilities.

Fmiher,

plaintiffs argue the extrinsic evidence shows that defendants assumed liabilities arising out of the
Erickson litigation. Defendants respond that § 2.03 is clear and the Court does not need to rely
on extrinsic evidence to conclude defendants did not assume the liabilities arising out of the
Erickson litigation. Defendants also argue that plaintiffs fail to satisfy the condition precedent
giving rise to a duty to defend and indemnify since plaintiffs failed to properly disclose the
Erickson litigation under the terms of the Contribution Agreement.
1.

Paro! Evidence Is Admissible

Delaware's parol evidence rnle bars the consideration of extrinsic evidence where
contracts are clear in recognition of "the salutary principle that once the parties to an agreement

PAGE 6 - OPINION AND ORDER

fix the language which reflects their understanding, evidence which suggests a different meaning
should not be received." Mesa Partners v. Phillips Petroleum Co., 488 A.2d 107, 113 (Del. Ch.
1984). This also reflects Delaware law's adherence to "the objective theory of contracts" where
"[c]ontract terms themselves will be controlling when they establish the paiiies' common
meaning so that a reasonable person in the position of either party would have no expectations
inconsistent with the contract language." Salamone v. Gorman, 106 A.3d 354, 367-68 (Del.
2014) (quoting Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010) and Eagle
Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997)).

When a contract is "cleai· and unambiguous" and subject to only one reasonable
interpretation, parol evidence of the paiiies' course of dealings is inadmissible and courts will
construe contracts as a matter of law. GMG Capital Invs., LLC v. Athenian Venture Partners l
L.P., 36 A.3d 776, 783 (Del. 2012) ("[T]he pai·ol evidence rule bars the admission of evidence

from outside the contract's four comers to vary or contradict . . . unambiguous language.").
Without an initial finding of ambiguity, "extrinsic evidence may not be used to interpret the
intent of the patiies, to vary the terms of the contract or to create an ambiguity." Id. (quoting
Eagle Indus., Inc., 702 A.2d at 1232). However, "where reasonable minds could differ as to the

contract's meaning, a factual dispute results and the fact-finder must consider admissible
extrinsic evidence." Id.; see ConAgra Foods, Inc. v. Lexington Ins. Co., 21 A.3d 62, 69 (Del.
2011) (explaining that contracts are ambiguous when "multiple and different interpretations may
reasonably be ascribed to it").
In dete1mining whether the contract is ambiguous, the Court initially notes that §§ 2.03
and 2.04 suggest assumed and excluded liabilities could overlap since both provisions contain
broad, inclusive language. For example, § 2.03 provides that ARS "shall assume and agree to

PAGE 7 - OPINION AND ORDER

pay, perfo1m and discharge all the liabilities related to the Business" unless the liability falls
under one of the categories of "Excluded Liabilities." Similarly, § 2.04 does not clearly delimit
the categories of excluded liability since it provides that "Excluded Liabilities" are "not limited
to" the examples enumerated in §§ 2.04(a)-(l).

Without more clearly defined terms, the

Contribution Agreement is ambiguous because it is vulnerable to conflicting reasonable
interpretations. See United Rentals, Inc. v. RAM Holdings, Inc., 937 A.2d 810, 836 (Del. Ch.
2007) ("[C]onflicting provisions ofthis contract render it decidedly ambiguous.'').
In addition, the Comt finds the absence of bridge language between § 2.03 and §§
2.03(a)-(c) creates ambiguity. Here, a reasonable person could either read§§ 2.03(a)-(c) as the
exclusive "liabilities relating to the Business" that ARS assumes or as clarifying language to
ensure that there is no mistake that ARS assumes the liabilities covered under§§ 2.03(a)-(c) in
addition to other liabilities. Because the colon separating§ 2.03 and§§ 2.03(a)-(c) is pregnant
with conflicting meanings, the Court sets aside the parol evidence rule and will consider extrinsic
evidence to dete1mine whether the pa1ties present a genuine dispute over material fact for the
jury to resolve. See Mesa Partners, 488 A.2d at 114 (setting aside the parol evidence rnle is
appropriate even ifthe court is only able to identify a "slim reed" of ambiguity).
2.

The Scope of§ 2. 03 Cannot Be Resolved on SummaiJ' Judgment

Now that the Court has concluded extrinsic evidence is necessary to resolve the parties'
conflicting interpretations of the Contribution Agreement, the Comt considers the merits of the
parties' contract construction to determine whether there is a disputed question of material fact
for the jury.

Plaintiffs argue that § 2.03's broad, sweeping language suggests defendants

assumed all of Genesis' disclosed liabilities. Moreover, plaintiffs argue that § 2.03 contains no
technical terms and so the Court should imbue the clause "all liabilities relating to the Business"

PAGE 8 - OPINION AND ORDER

with its full and ordinary meaning. AT&T Co1p. v. Lillis, 953 A.2d 241, 252 (Del. 2008)
("[W]hen interpreting a contract ... we are constrained by a combination of the parties' words
and the plain meaning of those words where no special meaning is intended.") (quoting Lorillard

Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 739 (Del. 2006)). Plaintiffs use extrinsic
evidence to suggest they had a reasonable expectation that ARS would assume liability from the
Erickson litigation because it relates to Genesis' business operations.
Defendants argue that §§ 2.03(a)-(c) qualifies and limits the liabilities ARS assumed.
Under this reading, defendants argue liability from the Erickson litigation is not assumed because
plaintiffs failed to properly disclose the liability under § 2.03(c).

Here, plaintiffs disclosed

liability resulting from the Erickson liability in§ 4.16 of the Disclosure Schedules instead of in§
2.03 of the Disclosure Schedules.
Plaintiffs' respond defendants' understanding that§§ 2.03(a)-(c) is an exhaustive list of
assumed liabilities is "nonsensical in light of'§ 2.04. PL Reply Mot. Sunun. J. 6 (doc. 32). In§
2.04, the paiiies delimit and define excluded liabilities.

Plaintiffs contend the specific

enumeration of excluded liabilities supports their argument that § 2.03 is a broad and inclusive
provision.

Defendants reply that plaintiffs' willingness to read §§ 2.03(a)-(c) as merely

illustrative examples of the liabilities defendants agreed to assume essentially renders §§
2.03(a)-(c) meaningless and threatens to violate principled contract constrnction.

Hexion

Specialty Chems. v. Huntsman Co1p., 965 A.2d 715, 741 (Del. Ch. 2008) (describing the maxim
in contract interpretation that "a contract should be read so as not to render any term
meaningless"). Plaintiffs rejoin that§§ 2.03(a)-(c) still serve a purpose and resolve any doubt
that defendants assume liability over trade accounts, assigned contracts, and disclosed liabilities.

PAGE 9 - OPINION AND ORDER

Plaintiffs also offer extrinsic evidence, which consists of the parties' negotiations and
previous drafts of the Contribution Agreement. Defendants' initial draft Contribution Agreement
provided that§§ 2.03(a)-(c) would be the only liabilities ARS assumed. On February 28, 2013,
the parties redrafted and broadened § 2.03 so ARS assumed "all liabilities related to the
Business." Therefore, while it is clear that§§ 2.03(a)-(c) initially articulated an exhaustive list
of the liabilities ARS assumed, it is not clear that this interpretation remains viable after the
parties amended and finalized their Contribution Agreement.
The Coutt finds the patties put forward competing reasonable interpretations of the
Contribution Agreement. In light of the need for extrinsic evidence to resolve scope of§ 2.03
and the existence of multiple reasonable inferences as to whether ARS assumed liability over the
Erickson litigation, summary judgment is inappropriate. Jack Rowe Assocs., Inc. v. Fisher
Corp., 833 F.2d 177, 183 (9th Cir. 1987) (holding that where a party uses "parol evidence [to]
tender . . . a material question of fact . . . sutnmary judgment [i]s premature"); see also
Brinderson-Newberg Joint Venture v. Pac. Erectors, Inc., 971 F.2d 272, 281 (9th Cir. 1992)
(directing the district couti to enter sutnmary judgment because California law barred the
admission of parol evidence and the only disputed questions of fact arose from extrinsic
evidence).
3. Whether Plaintifft Met the Condition Precedent Giving Rise to

Defendants' Duties to Defend and IndemnifY Is a Question ofFact
Defendants argue that even if § 2.03 could encompass liability resulting from the
Erickson litigation, ARS is not obligated to defend and indemnify plaintiffs on the basis that
plaintiffs failed to disclose the Erickson litigation as a potential liability in § 2.03 of the
disclosure schedules. This argument is premised on the contract interpretation that §§ 2.03(a)-

PAGE 10 - OPINION AND ORDER

(c) articulate the exclusive list of assumed liabilities. As explained above, the scope of§ 2.03
calUlot be resolved on summary judgment.

Even if the Comt were to accept defendants'

interpretation of§ 2.03, however, summary judgment would still be inappropriate because the
failme to disclose the Erickson litigation in § 2.03 of the Disclosme Schedules may be a de
minimis breach.
It is undisputed that the Erickson litigation was not disclosed in § 2.03 of the Disclosme

Schedules. But it is also undisputed that the Erickson litigation was disclosed elsewhere, in §
4.16 of the Disclosure Schedules. Snider Deel. Ex. L at 7 Dec. 15, 2016. Was locating the
disclosure in a separate part of the Disclosure Schedules a material breach? This open question
is important to resolve because "a non-material breach" does not prevent a patty from "enforcing
a valid contract right." Costantini v. GJP Developers, 2015 WL 5122992,

* 9 (Del. Ch. Aug. 24,

2015); see also DeMarie v. Neff, 2005 WL 89403, *4 (Del. Ch. 2005) ("[A) nonmaterial--or de
minimis-breach will not allow the non-breaching patty to avoid its obligations under the
contract."). On this point, plaintiffs suggest their comse of dealings indicate that if there were a
breach, it would be de minimis. For example, ARS is not disclaiming thirty-five other liabilities
it assumed, even though those liabilities, like the Erickson litigation, were disclosed in § 4.16 of
the Disclosure Schedules. Gibbs Deel.
disputes.

'il'il 19-20 &

Ex. 3. The jury will resolve these factual

See Qualcomm Inc. v. Tex. Instruments Inc., 875 A.2d 626, 630 (Del. 2005)

(explaining that the materiality of the breach is a question of fact).

B.

Exclusion ofLiability Under§ 2.04 ofthe Contribution Agreement

This section considers whether § 2.04 of the Contribution Agreement clearly excludes
liability resulting from the Erickson litigation. Even though § 2.03 is ambiguous, defendants
could prevail on their motion for summary judgment if liabilities related to the Erickson

PAGE 11 - OPINION AND ORDER

litigation are clearly excluded liabilities under § 2.04, which lists specific types of liabilities that
do not give rise to a duty to defend and indemnify plaintiffs.
The parties agree that plaintiffs never assigned Mr. Erickson's employment contract to
ARS. The Contribution Agreement states in various clauses that contracts that plaintiffs do not
assign to ARS cannot give rise to a duty to defend and indemnify. For example, unassigned
contracts are Excluded Contracts and Excluded Assets under§ 2.02(a). Furthermore,§ 2.04(c)
and § 2.04(i) respectively provide that Excluded Assets and Excluded Contracts do not give rise
to assumed liabilities.

See § 2.04(c) (excluding liability "relating to or arising out of the

Excluded Assets"); § 2.04(i) (excluding liability "under the Excluded Contracts"). Plaintiffs
argue that they could not assign Mr. Erickson's employment contract since it expired by its tenns
in 2012, prior to the negotiating and consummating the Contribution Agreement, but expired
contracts regularly give rise to liability. As a technical matter, plaintiffs' failure to assign the
employment contract renders it an excluded liability.
Even so, whether defendants had a duty to defend and indemnify plaintiffs in the
Erickson litigation cannot be resolved on sununary judgment. Plaintiffs' failure to assign the
Erickson contract is a technical error, similar to plaintiffs' error in disclosing the Erickson
litigation as a potential liability in § 4.16 rather than § 2.03.

Whether that enor excuses

defendants' perfo1mance of duties under the contract depends on whether the enor was material
or de minimis. See De1'1farie, 2005 WL 89403 at *4. The purpose of contractual provisions
requiring disclosure or assignment is to ensure that a patty is on notice of the liabilities it is
agreeing to assume. Here, it is likely a jury would find that plaintiffs' disclosure of the Erickson
litigation in § 4.16 effectively notified defendants of that litigation as a potential liability. From
there, a jury could easily find that the failure to assign the contract was a de minimis breach -

PAGE 12 - OPINION AND ORDER

and that defendants retained the obligation to defend and indemnify plaintiffs notwithstanding
their technical noncompliance with contract provisions.
Even if it were appropriate to grant summary judgment to defendants based on § 2.04,
summary judgment would not be warranted as to all claims in the Erickson litigation; it would
only be warranted as to those claims that arise out of Mr. Erickson's employment contract. Mr.
Erickson asserted the following claims against plaintiffs: breach of corporate fiduciary duties,
aiding and abetting breach of corporate fiduciary duties, breach of a confidential relationship
under Ga. Code Ann. § 23-2-58, breach of contract, and unlawful transfer of corporate assets
under Ga. Code Ann.§ 18-2-70. Snider Deel. Ex. E Dec. 15, 2016.
Mr. Erickson's breach of contract claim plainly arises out of the employment contract.
Mr. Erickson's claim for an unlawful transfer of c01porate assets also arises out of the
employment contract. Mr. Erickson identifies his employment contract as the source of the
ownership right asserted over the twenty percent equity interest in Genesis. Plaintiffs fail to
explain why Mr. Erickson's unlawful transfer claim would arise out of "a set of rights and
obligations that are independent of any contract[.]" Parfi Holding AB v. Mirror Image Internet,

Inc., 817 A.2d 149, 157 (Del. 2002); see US. Capital Funding VL Ltd v. Patterson Bankshares,
Inc., 137 F. Supp. 3d 1340, 1365 & 1368 (S.D. Ga. 2015) (illustrating that an ownership claim in
the asset transfe1Ted is a necessary element of the claiin and contractual rights serve as the basis
of a fraudulent conveyance claim).
Fiduciary duties, however, do not arise out of contractual obligations. In Pmji, 817 A.2d
at 151, the Delaware Supreme Comt considered whether a contract's arbitration clause that
provided arbitration for all claims "arising out of or in connection with" the agreement covered
the plaintiffs fiduciary duty claims. The Delaware Supreme Court explained, even "resolv[ing]

PAGE 13 - OPINION AND ORDER

any doubt as to arbitrability in favor of arbitration," plaintiffs fiduciary duty claims were beyond
the scope of the arbitration clause. Id at 156. Even though "some or all of the same facts that
relate to the transactions that provided the basis for its contract claims," fiduciary duties provide
"a set of rights and obligations that are independent of any contract[.]" Id at 157. Applying
Parfi, the Court concludes that Mr. Erickson's fiduciary duty claims do not arise out of or relate
to his employment contract.
Defendants respond that Parfi does not control because "the analysis in that case is based
on Delaware's Corporations Act," which does not apply to limited liability companies. Def.'s
Resp. Mot. Summ. J. 12 (doc. 30). Yet defendants do not cite any law supporting this distinction
nor do they explain why the difference in corporate form would lead the Delaware Supreme
Court to treat limited liability companies differently. Delaware's Limited Liability Company
Act "permits the contractual elimination of default principles of fiduciary duty," but it does not
necessarily follow that fiduciary duties flow from exclusively from the patiies' contractual
obligations. Douzinas v. Am. Bureau of Shipping, Inc., 888 A.2d 1146, 1150 (Del. Ch. 2006).
To the contrary, fiduciary duties ring in tort and arise out of common law, regardless of
defendants' corporate form. See In re Rural Metro Corp., 88 A.3d 54, 98 (Del. Ch. 2014) ("A
breach of fiduciary duty is an equitable tort."), decision clarified on denial of reargument sub
110111.

In re Rural Metro Corp. Stockholders Litig. (Del. Ch. Mar. 19, 2014); Gotham Partners,

L.P. v. Hallwood Realty Partners, L.P., 817 A.2d 160, 176 (Del. 2002) (explaining that even
when a contract "supplant[s] common law fiduciary duty principles," the "default duty ofloyalty
and fair dealing" plays a role in dete1mining whether there has been a breach); Feeley v.
NHAOCG, LLC, 62 A.3d 649, 661 (Del. Ch. 2012) (explaining fiduciary duties arise out of
equitable considerations and apply to Limited Liability Companies because a "fiduciary

PAGE 14 - OPINION AND ORDER

relationship" arises out of any "situation where one person reposes special trust in and reliance
on the judgment of another or where a special duty exists on the part of one person to protect the
interests of another") (quoting Metro Ambulance, Inc. v. E. Med. Billing, Inc., 1995 WL 409015,
*2 (Del. Ch. July 5, 1995)); see also Myron T. Steele, Judicial Scrutiny of Fiduciaiy Duties in

Delaware Limited Partnerships and Limited Liability Companies, 32 Del. J. Corp. L. 1, 5-6
(2007) (explaining "no relevant Delaware statute names, numbers, or defines any fiduciary duty"
and "the continued importance of the common law of corporations is not the result of
happenstance, but reflects a policy choice made by the Delaware General Assembly") (quoting
Leo E. Strine, I.fCorporate Action Is Lawfiil, Presumably There Are Circumstances in Which It's

Equitable to Take That Action: The Important Corollmy to the Rule of Schnell v. Chris-Craft 4
(Regents Lecture, UCLA School of Law, Mar. 31, 2005)). 1 Fmther, nothing in Gatz Properties,

LLC v. Auriga Capital Corp., 59 A.3d 1206, 1212 (Del. 2012), appears to overturn Delaware's
long-standing precedent holding fiduciary duties arise out of equity and common law.
Therefore, the Comt finds that defendants' arguments impennissibly "speculat[e] as to future
changes in the law." See Orkin v. Taylor, 487 F.3d 734, 741 (9th Cir. 2007) (explaining because
a federal court, which sits in a diversity action, must "approximate state law as closely as
possible in order to make sure that the vindication of the state right is without discrimination," a
court must "take state law as it exists without speculating as to future changes in the law").
Moreover, Douzinas is distinguishable.

There, the Comt of Chancery found the

arbitration clause covered the plaintiffs claims because the clause at issue was significantly
broader than the patties' arbitration clause in Pmji. The arbitration clause at issue in Douzinas
covered "any dispute arising under or related to this Agreement (whether arising in contract, tort
1

Myron Steele is the former Chief Justice of the Supreme Court of Delaware, while Leo Strine is
the cmrent Chief Justice of that court.
PAGE 15 - OPINION AND ORDER

or otherwise, and whether arising at law or in equity)." Douzinas, 888 A.2d at at 1148. By
contrast, § 2.04 is directed at liability that arises out of an unassigned contract. Because §
2.04(c) and § 2.04(i) more closely resemble the narrow clause considered in Parfi than the broad
clause at issue in Douzinas, the Court finds defendants' argument unconvincing.
Finally, the Court finds that Mr. Erickson's claim for breach of a confidential relationship
under Ga. Code Ann. § 23-2-58 does not arise out of the employment contract. Georgia law
treats Mr. Erickson's rights under Ga. Code Ann. § 23-2-58 as if they arose under a fiduciary
duty. See In re Tri-State Cremat01y Litig., 215 F.R.D. 660, 682 n.12 (N.D. Ga. 2003) ("The
Georgia Court of Appeals has indicated that it considers the terms 'fiduciary relationship' and
'confidential relationship' to be synonymous.") (quoting Bowen v. Hunter, Maclean, Exley &

Dunn, 525 S.E.2d 744, 748 (Ga. Ct. App. 1999)); see also US. Capital Funding VI, Ltd v.
Patterson Bankshares, Inc., 137 F. Supp. 3d 1340, 1374 (S.D. Ga. 2015).

Moreover, Mr.

Erickson need not identify a contractual duty in order to assert a claim under Ga. Code Ann. §
23-2-58. Wright v. Apartment Inv. & Mgmt. Co., 726 S.E.2d 779, 786 (Ga. Ct. App. 2012)
("[A] confidential relationship may be found whenever one patty is justified in reposing
confidence in another, [so] the existence ofa confidential or fiduciary relationship is generally a
factual matter for the jury to resolve.") (quoting Bienert v. Dickerson, 624 S.E.2d 245, 249 (Ga.
Ct. App. 2005)); Bedsole v. Action Outdoor Advert. JV, LLC, 750 S.E.2d 445, 452 (Ga. Ct. App.
2013) ("Generally the relationship between an employer and employee is that of anus-length
bargaining. This is not to say, however, that under a particular fact situation a confidential
relationship can never exist between an employer and his employee.") (quoting Cochran v.

lvfurrah, 219 S.E.2d 421, 424 (Ga. 1975)); see Ga. Code Ann.§ 23-2-58.

PAGE 16- OPINION AND ORDER

In their reply brief, defendants for the first time present an additional argument as to why

Mr. Erickson's litigation is an excluded liability. Defendants' argument that § 2.04(a) clearly
excludes liability goes as follows. Section 2.04(a) provides that ARS does not assume any
liability "arising or incurred in connection with the negotiation, preparation, investigation and
performance" of the Contribution Agreement. Snider Deel. Ex.Eat 10 Dec. 15, 2016. Because
Mr. Erickson's suit appears to center on Genesis' valuation before plaintiffs sold it to defendants,
the gravamen of the Erickson litigation arose "in connection with the negotiation" of the
Contribution Agreement and § 2.04(a) would exclude liability. Therefore, since ARS did not
assume liability, defendants insist ARS is not obligated to defend and indemnify plaintiffs.
However, defendants waived this argument by raising it for the first time in their third brief to
the Court on the parties' cross-motion for summary judgment. Bazuaye v. INS., 79 F.3d 118,
120 (9th Cir. 1996) ("Issues raised for the first time in the reply brief are waived."); Hoffinan v.
Foremost Signature Ins. Co., 989 F. Supp. 2d 1070, 1087 (D. Or. 2013) ("The district court need

not consider arguments raised for the first time in a reply brief") (quoting Zamani v. Carnes, 491
F.3d 990, 997 (9th Cir. 2007)).

Mr. Erickson's employment contract was never assigned and thus is an excluded liability.
Defendants are not entitled to summary judgment on that ground, however, because there is a
question of material fact whether the failure to assign the contract was a material breach.
Fmiher, even if the breach was material, the employment contract's status as an excluded
liability would absolve defendants only of their duty to indemnify plaintiffs for damages
stemming from Counts IV and V of Mr. Erickson's complaint.

PAGE 17 - OPINION AND ORDER

II.

The ARS Amended Operating Agreement

Plaintiffs argue that even if the Contribution Agreement does not require ARS to defend
and indemnify plaintiffs from Mr. Erickson's suit, then § 7.1 of the ARS Amended Operating
Agreement does. Section 7.1 provides:
Each Covered Person shall be indenmified by the Company against any losses,
judgments, liabilities, claims, damages, costs, expenses (including reasonable
legal fees and other expenses actually incurred in investigating or defending
against any such losses, judgments, liabilities or claims and expenses actually
incun-ed enforcing this Agreement) and amounts paid in settlement of any claim
(approved in advance and in good faith by the Board) sustained by any of them by
reason of any act or omission or alleged act or omission in connection with the
activities of the Company (including any subsidiaries thereof) unless there is a
final judicial dete1mination by a court of competent jurisdiction to which all rights
of appeal have been exhausted or expired that the Covered Person did not act
reasonably and in good faith in his or her efforts to actively manage the business
in a prudent and professional manner.
Snider Deel. Ex. D at 27 Dec. 15, 2016. Plaintiffs contend § 7.1 obligates defendants to defend
and indenmify them in Mr. Erickson's lawsuit because Mr. Erickson alleged that plaintiffs
violated their fiduciary duties by undervaluing Genesis' assets in preparation for its sale to
defendants.
Defendants respond that plaintiffs allege no facts from which a jury could reasonably
conclude that plaintiffs acted "in connection with the activity of the Company [ARS] (including
any subsidiaries thereof)." They explain that the conduct at issue predates plaintiffs' sale of
Genesis since all of Mr. Erickson's allegations relate to actions plaintiffs took as members of
Genesis and not as members of ARS.
The Cou1t finds defendants' rationale convincing since Mr. Erickson does not make any
specific allegations regarding plaintiffs' misconduct after his depa1ture in April 2013 and
plaintiffs' deal with defendants closed in May 2013. Snider Deel. Ex. Eat 23 Dec. 15, 2016;
Pis.' Mot. Summ. J. 10. See Bernstein v. TractManager, Inc., 953 A.2d 1003, 1011 (Del. Ch.
PAGE 18 - OPINION AND ORDER

2007) ("[T]he conduct complained of must occur at a time when one is a corporate officer or
director."). Because plaintiffs were not members of ARS at the time of their alleged misconduct,
the ARS Amended Operating Agreement does not obligate ARS to defend or indemnify
plaintiffs.
CONCLUSION

The Court DENIES plaintiffs' motion for summary judgment (doc. 22) and DENIES
defendants' motion for summary judgment (doc. 25).
IT IS SO ORDERED.
Dated thisd.C/ day of March 2017.

Ann Aiken
United States District Judge

PAGE 19- OPINION AND ORDER