COURT OF CHANCERY
OF THE
STATE OF DELAWARE
MORGAN T. ZURN LEONARD L. WILLIAMS JUSTICE CENTER
VICE CHANCELLOR 500 N. KING STREET, SUITE 11400
WILMINGTON, DELAWARE 19801-3734
July 9, 2020
Sean J. Bellew, Esquire Sean A. Meluney, Esquire
Bellew LLC Matthew D. Beebe, Esquire
Red Clay Center at Little Falls Benesch, Friedlander, Coplan & Aronoff LLP
2961 Centerville Road, Suite 302 222 Delaware Avenue, Suite 801
Wilmington, Delaware 19808 Wilmington, Delaware 19801
David B. Anthony, Esquire
Berger Harris LLP
1105 North Market Street, Suite 1100
Wilmington, Delaware 19801
RE: DG BF, LLC, et al., v. Michael Ray, et al.,
C.A. No. 2020-0459-MTZ
Dear Counsel:
Plaintiffs DG BF, LLC (“DG BF”) and Jeff A. Menashe (collectively,
“Plaintiffs”) seek a declaratory judgment confirming their interpretation of the
operating agreement for American General Resources LLC (“AGR” or “the
Company”). Plaintiffs contend that Menashe, as Series D Manager, must consent to
amending AGR’s operating agreement in order for Defendants Michael Ray and
AGR (collectively, “Defendants”)1 to issue Series E financing that would give Series
1
The Complaint is also brought against Vladimir Efros, a Manager and Member of AGR,
but Count VII, which seeks declaratory judgment, is only alleged against Nominal
Defendant AGR and Defendant Ray. Compl. at 7, 42. Plaintiffs have not explained this
DG BF, LLC, et al., v. Michael Ray, et al.,
C.A. No. 2020-0459-MTZ
July 9, 2020
Page 2 of 15
E unitholders preference over Series D unitholders in liquidation. For the following
reasons, I deny Plaintiffs’ request for a declaratory judgment.
I. Background
Plaintiff DG BF is a signatory to AGR’s Sixth Amended and Restated Limited
Liability Agreement (the “Operating Agreement”) and Series D Unit Purchase
Agreement (the “Purchase Agreement”).2 Plaintiff Menashe is a Managing Member
of DG BF and, pursuant to the Purchase Agreement, a Member and the Series D
Manager of AGR.3 Nominal Defendant AGR is a multi-million-dollar cannabis and
CBD business.4 Defendant Ray is a Manager and Member of AGR, and the Chief
Executive Officer of Bloom Farms, an entity composed of AGR subsidiaries that are
active in the cannabis and CBD industry.5
On June 11, 2020, Plaintiffs filed their Complaint, motion to expedite, and
motion for a status quo order.6 The Complaint consists of the following eight counts:
(I) breach of fiduciary duty, (II) breach of the Operating Agreement,
distinction, but I follow their lead and define “Defendants” as only Ray and AGR for
purposes of this opinion.
2
Compl. ¶ 9.
3
Id. ¶ 10.
4
Id. ¶ 1.
5
Id. ¶¶ 10–11.
6
D.I. 1–3.
DG BF, LLC, et al., v. Michael Ray, et al.,
C.A. No. 2020-0459-MTZ
July 9, 2020
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(III) breach of the implied covenant of good faith and fair dealing, (IV) anticipatory
breach of the Operating Agreement, (V) fraud and concealment, (VI) fraudulent
inducement, (VII) declaratory judgment, and (VIII) equitable accounting.
I heard oral argument on the motion to expedite and motion for a status quo
order on June 26.7 Applying the standard for a temporary restraining order, I granted
a TRO enjoining the closing, but not the shopping, of the Series E financing, pending
a decision on Count VII regarding what the Operating Agreement requires for
approving Series E financing with a liquidation preference above Series D
unitholders. I expedited Count VII in view of the timeline AGR estimated for
closing the Series E financing. The parties briefed their positions on Count VII, and
I heard argument on July 6. 8 I entered a final order implementing the TRO that same
day.9
7
D.I. 28.
8
D.I. 34.
9
D.I. 32, 33 (order issued July 6, 2020, and corrected order issued July 7, 2020). While I
initially set a bond at $100,000, the parties disputed the mechanics of the bond, which led
to the observation that the Operating Agreement waived any requirement for the posting
of a bond in connection with any temporary or permanent award of injunctive relief. D.I.
1, Ex. A § 17.1 [hereinafter, the “Operating Agreement”]. No bond is required to effectuate
the TRO.
DG BF, LLC, et al., v. Michael Ray, et al.,
C.A. No. 2020-0459-MTZ
July 9, 2020
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II. Analysis
Plaintiffs titled their opening brief “Plaintiffs’ Opening Brief in Support of the
Court’s Granting Relief Under Plaintiffs’ Claim for Declaratory Relief Concerning
Series E Financing.”10 Plaintiffs did not propose a standard under which their
motion should be adjudicated. In my view, Plaintiffs’ opening brief most closely
resembles a motion for judgment on the pleadings; I apply that standard.11
The Court will grant a motion for judgment on the pleadings pursuant to Court
of Chancery Rule 12(c) when there are no material issues of fact and the movant is
entitled to judgment as a matter of law.12 When considering a Rule 12(c) motion,
the Court must assume the truthfulness of all well-pled allegations of fact in the
complaint and draw all reasonable inferences in the plaintiff’s favor.13 The Court
must therefore accord parties opposing a Rule 12(c) motion the same benefits as a
plaintiff defending a motion under Rule 12(b)(6).14
10
D.I. 19.
11
Defendants suggested that Plaintiff’s brief should be viewed through the lens of Court
of Chancery Rule Rule 56(h). I find Rule 56(h) inapplicable.
12
Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199,
1205 (Del. 1993).
13
Id.
14
Kahn v. Roberts, 1994 WL 70118, at *1, (Del. Ch. Feb. 28, 1994).
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The parties do not dispute that Plaintiffs have satisfied the procedural
requirements for a declaratory judgment.15 The parties agree that the relevant
provisions of the Operating Agreement are unambiguous.16 Finally, the parties agree
that issuing a Series E offering that is senior to Series D in liquidation would require
amending the Operating Agreement.17
A. Because Issuing Senior Units Requires Amending The Operating
Agreement, The Series D Manager’s Consent Rights Must Be Considered.
Limited liability companies are “creatures of contract,” and their operating
agreements are governed by the objective theory of contracts and related contractual
interpretation principles.18 “The principles governing contract interpretation are
well settled. Contracts must be construed as a whole, to give effect to the intentions
of the parties. Where the contract language is clear and unambiguous, the parties’
intent is ascertained by giving the language its ordinary and usual meaning.” 19
15
10 Del. C. § 6501 (“[T]he declaration . . . shall have the force and effect of a final
judgment or decree.”); see Energy P’rs, Ltd. v. Stone Energy Corp., 2006 WL 2947483, at
*6 (Del. Ch. Oct. 11, 2006) (“The Declaratory Judgment Act enables the courts to advance
the stage at which a matter traditionally would have been justiciable.”).
16
D.I. 19, Ex. A at 53.
17
D.I. 19 at 15 (citing D.I. 13 ¶ 5 (“While Plaintiffs’ interpretation of the Operating
Agreement is incorrect, on this point the Company agrees. If the Series E financing is
going to close, Section 13.2 of the Operating Agreement will need to be amended.”)).
18
See Kuroda v. SPJS Hldgs., L.L.C., 971 A.2d 872, 880–81 (Del. Ch. 2009).
19
Nw. Nat’l Ins. Co. v. Esmark, Inc., 672 A.2d 41, 43 (Del. 1996) (citations omitted).
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“When interpreting a contract, a court must give effect to all of the terms of the
instrument and read it in a way that, if possible, reconciles all of its provisions.”20
“[A] court will prefer an interpretation that harmonizes the provisions in a contract
as opposed to one that creates an inconsistency or surplusage.”21 “Contract terms
themselves will be controlling when they establish the parties’ common meaning so
that a reasonable person in the position of either party would have no expectations
inconsistent with the contract language.”22
My analysis begins with Section 5.3(c) of the Operating Agreement, titled
“Action; Matters Requiring Board Approval.” Section 5.3(c)(vi) enumerates actions
that require Board of Managers’ prior written consent or majority vote. The
introductory paragraph states:
20
GRT, Inc. v. Marathon GTF Tech., Ltd., 2012 WL 2356489, at *4 (Del. Ch.
June 21, 2012).
21
Id.
22
Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997).
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Notwithstanding anything herein to the contrary, and without limiting
the generality of Section 5.1 and Section 5.2 above or the powers
allowed to the Board by the Act, neither the Company nor any of its
Subsidiaries shall either directly or indirectly, by amendment, merger,
consolidation or otherwise, do any of the following without (in addition
to any other vote or consent required by the Act or this Agreement)
the prior written consent or vote of a majority of Board of Managers,
and any such act or transaction entered into without such consent or
vote shall be null and void ab initio, and of no force and effect:23
Section 5.3(c)(vi) continues to enumerate thirteen such actions, including:
(B) subject to Section 14.2(b) and Section 14.2(c) below, amend, alter
or repeal any provision of the Certificate of Formation or this
Agreement in a manner that adversely affects the powers, preferences,
rights or interests of the Preferred Members and the Preferred Units;
[and]
(C) create, or authorize the creation of, or issue or obligate itself to
issue, any Units or other Equity Security(ies) having rights, powers,
preferences or privileges senior to or on parity with the Series D
Units[.]24
Subsection (C) permits the creation and authorization of an issuance of units senior
to the Series D units with the Board of Managers’ approval. But it does not do so in
a vacuum: contrary to Defendants’ argument, that permission is subject to two other
constraints in the Operating Agreement. First, Section 5.3(c)(vi)’s introductory
paragraph subjugates Subsection C to “any other vote or consent required by the Act
23
Operating Agreement § 5.3(c)(vi) (emphasis added).
24
Id. § 5.3(c)(vi)(B)−(C).
DG BF, LLC, et al., v. Michael Ray, et al.,
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or this Agreement.” And second, because the issuance of senior units requires
amending the Operating Agreement “in a manner that adversely affects the powers,
preferences, rights or interests of the Preferred Members,”25 which includes the
Series D unitholders,26 Subsection (B) directs the Company to look to Section
14.2(b) for additional limitations.
Section 14.2(b) sets forth the Series D Manager’s consent rights. Sections
14.2(b)(ii)–(iii), of particular relevance here, state,
Notwithstanding anything to the contrary contained in this Agreement,
the written consent of the Series D Manager shall be required if any
amendment, restatement or modification to this Agreement, or waiver
of any provision herein, would:
...
(ii) remove or have the effect of removing any rights expressly granted
to the holders of the Series D Units; [or]
(iii) adversely affect the powers, preferences, or rights of the Series D
Units in a manner that is disproportionate to the affect [sic] on the other
series or class of Preferred Units[.]27
25
The parties do not dispute that the proposed Series E financing would adversely affect
the Series D unitholders, but instead focus their debate on Section 14.2(b) and to what
extent the Series D unitholders would be adversely affected by the Series E financing.
26
Operating Agreement § 1.1 (“‘Preferred Members’ shall mean the Members holding
Preferred Units. ‘Preferred Units’ shall mean (i) the Series Seed Units, (ii) the Series A-1
Units, (iii) the Series A-2 Units, (iv) the Series B Units, (v) the Series C Units, and (vi) the
Series D Units, referred to in Section 4.1(a) hereof, having the rights, preferences and
privileges set forth in this Agreement.”).
27
Id. §§ 14.2(b)(ii)–(iii).
DG BF, LLC, et al., v. Michael Ray, et al.,
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Because issuing Series E units under Section 5.3(c)(vi)(C) requires amending the
Operating Agreement under Section 5.3(c)(vi)(B), the amendment must comply with
Section 14.2(b). The Company cannot issue Series E units without considering the
Series D Manager’s consent rights in Section 14.2(b). I turn next to whether Section
14.2(b)’s consent rights are triggered by the planned Series E issuance and
amendment of the Operating Agreement.
B. The Consent Rights of Section 14.2(b)(ii) Only Apply To The Removal Of
Expressly Granted Rights; Series D Unitholders Do Not Have An Express
Right To Liquidation Priority In Perpetuity.
As clarified at argument, Plaintiffs believe that amending the Operating
Agreement to grant Series E unitholders a liquidation preference over Series D
unitholders is akin to removing a “right expressly granted to the holders of the Series
D Units,” which triggers the Series D Manager’s consent rights under Section
14.2(b)(ii).28 Plaintiffs do not argue that the issuance would have a disproportionate
effect on the Series D units under Section 14.2(b)(iii).29 Correspondingly, my
analysis focuses on Section 14.2(b)(ii). Inspired by Section 14.2(b)(ii)’s terms, the
28
Id. § 14.2(b)(ii).
29
Hrg. Tr. at 10−11, 45−47.
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parties spar over whether Series D’s liquidation position is a “right”; whether it is
being “removed”; and whether it was “expressly granted.”
“LLC agreements are creatures of contract, which should be construed like
other contracts.”30 “The construction of an LLC agreement, therefore, begins with
the language of the agreement.”31 When this Court has found the language of a
contract clear and unambiguous, it has refused to expand the contract’s scope to
include rights not expressly granted.32 Indeed, where “the relevant contracts
30
Mickman v. Am. Intern. Processing, LLC, 2009 WL 2244608, at *2 (Del. Ch. July 28,
2009) (citing Arbor Place, LP v. Encore Opportunity Fund, LLC, 2002 WL 205681, at *3
(Del. Ch. Jan. 29, 2002)).
31
Id. (citing Arbor Place, 2002 WL 205681, at *3).
32
See Waggoner v. Laster, 581 A.2d 1127, 1135 (Del. 1990) (finding a “general reservation
clause . . . insufficient to expressly reserve authority in the board to establish [voting]
preferences”); Huatuco v. Satellite Healthcare, 2013 WL 6460898, at *4-5 (Del. Ch. Dec.
9, 2013) (limiting members of defendant LLC to “any and all rights expressly granted” in
the LLC Agreement – of which judicial dissolution was not one); Aspen Advisors LLC v.
United Artists Theatre Co., 843 A.2d 697, 705 (Del. Ch. Jan. 16, 2004) (noting that “[b]y
their plain terms, the Warrants gave the plaintiffs no right to participate in the Exchange
Agreement”); Siegman v. Palomar Med. Techs., Inc., 1998 WL 118201, at *4 (Del. Ch.
Mar. 9, 1998) (holding the defendant company powerless to issue preferred stock in series
because such authority was not “expressly granted” in its certificates of incorporation).
Defendants also raise the argument that Delaware corporate law requiring the rights of
preferred equity holders to be “strictly construed” should apply to the Operating
Agreement. See Berkely v. Omneon, 2011 WL 2923884, at *4 (Del. Super. Jul. 21, 2011)
(citing Fletcher Int’l Ltd. v. ION Geophysical Corp., 2011 WL 1167088, at *4 (Del. Ch.
Mar. 24, 2011)); Telcom-SNI Inv’rs, LLC v. Sorrento Networks, Inc., 2001 WL 1117505,
at *7 (Del. Ch. Sept. 7, 2001) (same). Because the plain language of the Operating
Agreement requires a triggering Series D right to be “expressly granted,” I need not reach
this argument in my analysis.
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July 9, 2020
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expressly grant the [parties] certain rights . . . the court cannot read the contracts as
also including an implied covenant to grant [a party] additional unspecified rights in
the event that other transactions are undertaken.”33 “To do so would be to grant the
[parties], by judicial fiat, contractual protections that they failed to secure for
themselves at the bargaining table.”34 “Sophisticated parties entering unambiguous
LLC agreements are presumed to understand the consequences of the language they
have chosen, and are bound thereby . . . .”35
Under Section 14.2(b)(ii), a right must be expressly granted in order for its
removal to trigger the Series D Manager’s consent right. Section 13.2 expressly
grants the Series D unitholders the right to be above all other units within the current
equity structure. Under Section 13.2, entitled “Liquidating Distributions,” the Series
D unitholders are second in line in the liquidating distribution above the Series A,
B, and C unitholders.
33
Aspen Advisors LLC, 843 A.2d at 707 (citations omitted).
34
Id.
35
Huatuco, 2013 WL 6460898, at *5 (citing Progressive Int’l Corp. v. E.I. DuPont de
Nemours & Co., 2002 WL 1558382, at *1 (Del. Ch. July 9, 2002)).
DG BF, LLC, et al., v. Michael Ray, et al.,
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July 9, 2020
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In the event of any Liquidation Event, after paying or making provision
for payment of all of its liabilities (including but not limited to
establishing such reserves as the Board shall determine to be necessary
or appropriate), the remaining assets and funds of the Company
available for distribution to its Members shall be distributed in the
following manner and order of priority:
. . . second, 100% to the Series D Members if they shall not have
converted their Series D Units into Common Units, ratably among them
based upon their aggregate Unreturned Capital Contributions, until
each Series D Member has received distributions with respect to its
Series D Units in an amount equal to the aggregate Unreturned Capital
Contributions with respect to such Series D Member’s Series D Units
outstanding immediately prior to such distribution, taking into account
all distributions previously made to such Series D Member pursuant to
this Section 13.2(b). . .36
Plaintiffs are correct that “Section 13.2 of the Operating Agreement provides
a contractual right of priority to Series D holders over all other classes in the event
of liquidation”37 and that Series D unitholders have an “expressly granted right to be
the first equity holders to receive distributions.”38 But Section 13.2 does not
expressly grant that position in perpetuity, forever, or in all future equity issuances.
Plaintiffs’ argument for a right to perpetual priority requires an overly expansive
reading of the word “second.” Further, reading the Operating Agreement as a whole,
36
Operating Agreement § 13.2.
37
D.I. 19 at 4.
38
Id. at 6.
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C.A. No. 2020-0459-MTZ
July 9, 2020
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Section 5.3(c)(vi) contemplates a senior issuance. In this context, the absence of
clear language granting Series D the permanent right to be the senior series leads to
the conclusion that no such right was expressly granted.
By comparison, the Operating Agreement expressly grants other rights to the
Series D unitholders:
Section 5.3(a)(ii): “[T]he holders of a majority of the Series D
Units, voting or consenting as a separate class, shall have the right to
appoint to appoint one (1) Manager (the “Series D Manager”), who
shall initially be Jeff Menashe[.]”39
Section 5.3(d): “The Lead Series B Holder (if applicable) and the
Lead Series D Holder (if applicable) will each have the right to have
one individual present at all meetings of the Board (the “Board
Observer(s)”), appointed by the Lead Series B Holder (if applicable)
and the Lead Series D Holder (if applicable), respectively.”40
Section 5.5: “The Board shall have the right to appoint such
committees. . . [each] committee shall include the Series D Manager if
the Series D Manager so elects to serve on such Board committee.”41
Section 17.3(b): “If the Company provides to any holder of Series
D Units rights, preferences or privileges that are more favorable than
the rights, preferences and privileges established in favor of the Lead
Series D Holder by this Agreement, then, in any such case, the Lead
Series D Holder shall automatically receive the benefit of those more
favorable terms[.]”42
39
Operating Agreement § 5.3(a)(ii).
40
Id. § 5.3(d).
41
Id. § 5.5.
42
Id. § 17.3(b).
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July 9, 2020
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These rights are much more specifically described than the perpetual right to be
second that Plaintiffs seek.
The right for Series D unitholders to maintain priority over all other classes,
in perpetuity, in the event of liquidation is not expressly granted. I cannot imply
words into the Operating Agreement that Plaintiffs failed to bargain for.43 Therefore,
although I find that Section 5.3(c)(vi) requires the Company to look to Section
14.2(b), and that Section 14.2(b) grants the Series D Manager consent rights in
certain situations, I conclude that Section 14.2(b)(ii) is not triggered here. The
Operating Agreement did not expressly grant any underlying right that would
purportedly be removed by amending the Operating Agreement to accommodate a
Series E issuance.
43
GRT, Inc., 2012 WL 2356489, at *7 (“[A] party may not come to court to enforce a
contractual right that it did not obtain for itself at the negotiating table.”); W. Willow-Bay
Court, LLC v. Robino-Bay Court Plaza, LLC, 2007 WL 3317551, at *9 (Del. Ch. Nov. 2,
2007), aff’d, 985 A.2d 391 (Del. 2009), as corrected (Nov. 30, 2009) (“The presumption
that the parties are bound by the language of the agreement they negotiated applies with
even greater force when the parties are sophisticated entities that have engaged in arms-
length negotiations.”); see also Majkowski v. Am. Imaging Mgmt. Servs., LLC, 913 A.2d
572, 588 (Del. Ch. 2006) (“[C]ourts will not bend contract language to read meaning into
the words that the parties obviously did not intend.”); Allied Capital Corp. v. GC-Sun
Hldgs., L.P., 910 A.2d 1020, 1030 (Del. Ch. 2006) (“Absent some ambiguity, Delaware
courts will not distort or twist contract language under the guise of construing it. When the
language of a contract is clear and unequivocal, a party will be bound by its plain meaning
because creating an ambiguity where none exists could, in effect, create new contract
rights, liabilities and duties to which the parties had not assented.”).
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III. Conclusion
For the following reasons, I deny Plaintiffs’ motion for a declaratory
judgment. Section 14.2(b)(ii) does not require AGR to seek approval from the Series
D Manager in order to amend the Operating Agreement and issue Series E financing
with a preference over Series D unitholders in the liquidation distribution.
The TRO is terminated, and Defendants are permitted to move forward in
closing the Series E financing. The parties shall submit briefing on any potential
damages incurred as a result of the TRO, including attorneys’ fees.
To the extent an order is required to implement this decision, IT IS SO
ORDERED.
Sincerely,
/s/ Morgan T. Zurn
Vice Chancellor
MTZ/ms
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