JJS, Ltd. v. Steelpoint CP Holdings, LLC
Not yet reported in official reporter, 2019 WL 5148016 (2019)
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Rule of Law:
A claim for breach of fiduciary duty can survive a motion to dismiss, even when related breach of contract claims fail, if the fiduciary claim is based on additional operative facts not addressed by the contract, such as allegations that a director's vote was secured through a personally beneficial and material side-deal.
Facts:
- In 2012, John Sarkisian and JJS, Ltd. formed Pro Performance Sports ('the Company').
- Beginning in 2013, Steelpoint Capital Partners invested in the Company, eventually becoming the senior preferred unitholder. A 2013 non-binding term sheet indicated an intent for separate class voting rights on major decisions.
- The formal Limited Liability Company Agreement (and its subsequent amendments) omitted the 'voting as a separate class' language for 'Major Member Decisions', instead requiring approval from the Series A Preferred Unitholder and a majority of a combined group of other unit classes.
- In May 2018, Implus Footcare, LLC offered to purchase the Company's assets for $40 million.
- The sale was structured so that the entire $40 million would go to Steelpoint as the senior preferred unitholder, leaving the common unitholders, including the plaintiffs, with no proceeds.
- Shortly before the Board of Managers voted on the Implus transaction, the Board authorized and distributed a $600,000 severance package to the Company’s CEO, Timothy Wiseman.
- In July 2018, the Board approved the Implus transaction by a 4-2 vote. The four votes in favor came from CEO Wiseman and the three managers nominated by Steelpoint. The two votes against came from plaintiff Sarkisian and another common unitholder appointee.
Procedural Posture:
- Plaintiffs JJS, Ltd., PPS Investors, Ltd. L.P., and John Sarkisian sued Defendants Steelpoint CP Holdings, LLC, Pro Performance Sports, LLC, and several individual managers in the Delaware Court of Chancery.
- The complaint alleged six causes of action, including breach of contract, breach of fiduciary duty, reformation of contract, and breach of the implied covenant of good faith and fair dealing.
- Defendants filed a motion to dismiss the entire complaint for failure to state a claim upon which relief can be granted, pursuant to Court of Chancery Rule 12(b)(6).
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Issue:
Does a claim for breach of fiduciary duty survive a motion to dismiss as duplicative of a contract claim when it is based on additional factual allegations, such as a large severance payment to a director who cast the deciding vote in a transaction, that suggest the transaction may fail the entire fairness standard of review?
Opinions:
Majority - McCormick, V.C.
Yes. A claim for breach of fiduciary duty can survive a motion to dismiss, even when based on the same general events as a failed contract claim, if it depends on additional facts that are broader in scope. Here, the plaintiffs' contract claims regarding voting rights are dismissed because the plain language of the LLC Agreement unambiguously required a combined vote, not a separate class vote for the common unitholders. The court found that because the drafters used the phrase 'voting as a separate class' in other sections of the agreement but omitted it from the section on Major Member Decisions, the omission was intentional. However, the fiduciary duty claim is not merely a duplicative repackaging of the contract claim. It rests on the additional, distinct allegation that the deciding vote on the board, cast by CEO Wiseman, was secured through a $600,000 severance package, which raises a reasonable inference that he was personally interested in the transaction. This allegation, combined with the fact that the other three approving managers were appointees of Steelpoint (whose interests diverged from the common unitholders), is sufficient at the pleading stage to rebut the business judgment rule and trigger the entire fairness standard of review. Because entire fairness review typically precludes dismissal, the motion to dismiss the fiduciary duty claim is denied.
Analysis:
This decision reinforces the critical distinction in Delaware law between contractual rights and overarching fiduciary duties. It demonstrates that even when a transaction is executed in compliance with the express terms of an LLC agreement, the fiduciaries approving it can still be held liable if the process was tainted by conflicts of interest. The case serves as a key example of how to plead a fiduciary duty claim that is not duplicative of a contract claim by identifying a 'common nucleus of operative facts' but relying on 'additional facts' (like a side payment to a key voter) that fall outside the contract's scope. This preserves a pathway for minority unitholders to challenge transactions that, while contractually permissible, appear unfair in substance and process.
