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Lion Co-Polymers Holdings, LLC v. Lion Polymers, LLC

Court of Appeals of Texas, First District

June 28, 2018

LION CO-POLYMERS HOLDINGS, LLC, Appellant
v.
LION POLYMERS, LLC, Appellee LION POLYMERS, LLC, Cross-Appellant
v.
LION CO-POLYMERS HOLDINGS, LLC, AFWEST CHEMICALS, LTD., AND VIJAY GORADIA, Cross-Appellees

          On Appeal from the 190th District Court Harris County, Texas Trial Court Case No. 2014-10394

          Panel consists of Chief Justice Radack and Justices Jennings and Lloyd.

          MEMORANDUM OPINION

          SHERRY RADACK CHIEF JUSTICE

         Appellant, Lion Co-Polymers Holdings, LLC (the "Company"), challenges the trial court's summary judgment granted in favor of appellee, Lion Polymers, LLC ("LP"), on LP's breach-of-contract claim against the Company. In six issues, the Company contends that the trial court erred in granting summary judgment and awarding damages and attorney's fees.

         In its conditional cross-appeal, LP contends that the trial court erred in granting summary judgment in favor of cross-appellee, the Company, on LP's claim against it for breach of the implied covenant of good faith and fair dealing; granting summary judgment in favor of cross-appellee, AFWest Chemicals, Ltd. ("AFWest"), on LP's claims against it for breach of contract, breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing, and unjust enrichment; and granting summary judgment in favor of cross-appellee, Vijay Goradia ("Goradia"), on LP's claims against him for breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing, and unjust enrichment.

         We modify the trial court's judgment and affirm as modified.

         Background [1]

         The Company, a Delaware Limited Liability Company, manufactures synthetic rubber used in the automotive and construction industries. The amended "LLC Agreement" (the "Agreement"), under which the Company was formed, provides that the Company's "members" share in the Company's profits through tiered distribution provisions, or "waterfalls," based on the type and quantity of "units," or fractional membership interests in the Company, that each member holds. For instance, the first tier of the distribution waterfall must be completely satisfied before the next tier receives any distributions, and so forth until the waterfall is satisfied or funds are exhausted.

         Specifically, the Agreement, at section 6.01, provides for a waterfall distribution of "Available Funds," as follows:

(a) Subject to Section 4.02(d)(ii) [applicable to holders of Class 1 Preferred Units] and after giving effect to Section 6.01(b), to the extent the Board determines that (i) the Company has funds on hand available for distribution to the Members (after payment of all then-due obligations of the Company and the establishment of reasonable reserves for the Company's liabilities, obligations, working capital and other anticipated needs, including any distribution required under Section 6.01(c)) (hereinafter "Available Funds") and (ii) it is appropriate to make any such distribution of Available Funds, then the Board shall (subject to any contractual or legal restraints that may be applicable to the Company, such as restraints under the Loan and Security Agreement and any other applicable debt covenants) declare and make distributions of Available Funds as follows:
(i) First, to the Holders of Class 4 Common Units…
(ii) Next, to the Holders of Class 1 Preferred Units…
(iii) Thereafter, to Holders of Class 2 Common Units, Class 3 Common Units and Class 4 Common Units pro rata in proportion to the number of such Units; provided, however:
. . . .
(B) Any distribution payable in respect of a Class 3 Common Unit pursuant to this Section 6.01 shall not be distributed in respect of such Class 3 Common Unit (but instead shall be distributed among the other Holders pursuant to the applicable provision of Section 6.01) until the cumulative amount of distributions foregone in respect of such Class 3 Common Unit pursuant to this Section 6.01(a)(iii) is equal to the Strike Price of such Class 3 Common Unit.
(b) Notwithstanding the provisions of Section 6.01, any Available Funds attributable to the receipt of DSM Amounts shall be distributed to the Holders of Class 2 Common Units pro rata in proportion to the number of Class 2 Common Units held.
(c) Notwithstanding the provisions of Sections 6.01(a)(iii), 6.01(b) and 6.02, if at the time of any distribution under Sections 6.01(a)(iii), 6.01(b) and 6.02, the Unreturned Class 5 Capital or the Unpaid Class 5 Return is greater than zero, then any amounts otherwise distributable to Holders of Class 2 Common Units or Class 3 Common Units pursuant to Section 6.01(a)(iii), 6.01(b) or 6.02 shall instead be distributed to Holders of Class 5 Common Units until (i) the Unreturned Class 5 Capital has been reduced to zero and then (ii) the Unpaid Class 5 Return has been reduced to zero.

Section 6.01(d) also provides for certain "Tax Distributions," as follows:

On each Tax Distribution Date, the Company shall, to the extent the Board determines such amounts to be available for distribution, make distributions to the Members in such amounts as the Board determines are sufficient to satisfy the Members' projected estimated income tax liability with respect to the Company's income allocable to their Units for such period, including an reallocation of amounts of income to a Member which may occur due to the allocations provided in Section 6.05(a). Such tax liability will be calculated as though each Member were an individual residing in the State of New York based upon the highest marginal income tax rates, taking into account U.S. federal, state, and local income taxes . . ., which the Board estimates are applicable, utilizing the respective rates for ordinary income or capital gains, depending on the characterization of the Company's estimated income for such period. Any distribution made to a member pursuant to this Section 6.01(d) shall be treated as an advanced distribution of, and shall reduce, the amounts next distributable to such Member pursuant to Section 6.01 or 6.02.

         Further, section 6.02 of the Agreement provides a distribution waterfall that governs how and to whom proceeds are to be paid after a "Recapitalization Transaction." The Agreement defines a Recapitalization Transaction as "the financing or refinancing of debt secured by the assets of the Company" in an amount in excess of $10, 000, 000 in the aggregate and followed by the distribution of all or a significant portion of such amounts to the members existing as of such date. Section 6.02, in pertinent part, provides:

(1) . . . [U]pon a Recapitalization Transaction, after adjusting the Capital Accounts for all distributions made under Section 6.01 and all allocations under this Article 6, all available proceeds distributable to the Members shall be distributed to the Members as follows:
(a) First, to the Holders of Class 4 Common Units in an amount equal to the amounts owed to such Holders . . .; provided that if the amount available to be distributed hereunder is not sufficient to repay such amounts, then such distribution shall be made to such Holders pro rata in accordance with the amounts owed.
(b) Next, to the Holders of Class 1 Preferred Units until their Unpaid Class 1 Return is eliminated; provided that if the amount available to be distributed hereunder is not sufficient to eliminate such Unpaid Class 1 Return, then such distributions shall be made to the Holders of Class 1 Preferred Units pro rata in accordance with the Unpaid Class 1 Return owed to each of them at the time of distribution.
(c) Next, to the Holders of Class 1 Preferred Units until their Unreturned Class 1 Capital is eliminated; provided that if the amount available to be distributed hereunder is not sufficient to eliminate such Unreturned Class 1 Capital, then such distributions shall be made to the Holders of Class 1 Preferred Units pro rata in accordance with their Unreturned Class 1 Capital as of the time of distribution.
(d) Thereafter, to the Holders of Class 2 Common Units, Class 3 Common Units, and Class 4 Common Units (but not the holders of Class 1 Preferred Units) pro rata in proportion to the number of such Units.

(Emphasis added.)

         In 2007, the Company admitted LP as a "Member of the Company," and, "[i]n exchange for the performance of services rendered or to be rendered to or for the benefit of the Company," issued to LP 1, 964, 492 "Class 3 Common Units." These Class 3 Common Units were intended to qualify as "profits interests," within the meaning of Revenue Procedures 93-27 and 2001-43, [2] and the Agreement provides that the parties intended that it be interpreted accordingly.

         It is undisputed that, in the summer of 2011, the Company obtained $300, 000, 000 in financing that allowed it to refinance its existing debt and to provide $150, 000, 000 in distributions to its members. The parties dispute whether the Company paid LP's its portion of the distributions in accordance with the applicable terms of the Agreement.

         LP, in its second amended petition, alleged that, on August 25, 2011, it received a letter from the Company stating that it intended to make a distribution to its members in September (the "2011 Distribution"). In the letter, the Company stated that it intended to deduct from its distribution to LP, for its Class 3 Common Units, a "Strike Price" of $1.00 per unit. According to the Agreement, the "strike price," with respect to a Class 3 Common Unit issued as of the effective date of the Agreement, June 29, 2007, as here, is its "Original Issue Price" of $1.00 per unit. LP alleged that, despite its request to the Company that it make the 2011 Distribution in accordance with the Agreement, the Company nevertheless improperly deducted, as a "strike-price deduction," $1, 964, 492 from its distribution to LP. LP noted that the Company distributed more than $1, 300, 000 of LP's funds to other unit holders, including to Goradia, the owner of AFWest, who had a controlling interest in the Company. LP brought a breach-of-contract claim against the Company, alleging that the Company breached the Agreement by failing to make distributions in accordance with its terms.[3] LP alleged that, after deducting the $45, 251.00 that LP received in the 2011 Distribution, it suffered damages of $1, 919, 241.30.

         The Company answered, generally denying LP's allegations and asserting various specific denials and affirmative defenses. The Company also brought a counterclaim against LP, seeking a declaration that its distributions to LP were in accordance with the terms of the Agreement and seeking a declaration of its rights under the Agreement.

         LP filed a summary-judgment motion, asserting that it was entitled to judgment as a matter of law on its breach-of-contract claim against the Company because the summary-judgment evidence established that the Company, in 2011, after a recapitalization transaction governed by the clear and unambiguous terms of section 6.02 of the Agreement, made a distribution to its members. However, the Company breached the Agreement by improperly withholding $1, 964, 492.30 from its distribution to LP. LP attached to its summary-judgment motion a copy of the Agreement; materials regarding procedures employed by the United States Department of the Treasury, Internal Revenue Service; certain financial records; discovery responses; numerous emails; and excerpts of the depositions of Goradia; David Wascom, a Certified Public Accountant; Richard Furlin, vice president of Goradia Capital and a member, Secretary, and Tax Matter Member of the Company; and the Company's expert witness, Bruce McGovern, a member of the faculty of South Texas College of Law.

         In its summary-judgment response, the Company argued that material fact issues precluded summary judgment on LP's breach-of-contract claim because the evidence established that the Company had complied with the unambiguous terms of the Agreement. The Company asserted that, based on its interpretation of the Agreement, specifically, section 6.01(a)(iii)(B), it properly withheld a $1.00 per unit strike price from the 2011 Distributions to its members, including LP.

         The Company asserted that, between January 2010 and June 2011, the Company made certain "Tax Distributions," pursuant to section 6.01(d) of the Agreement, to LP in the amount of $1, 603, 198. And, in September 2011, it made an additional tax distribution to LP in the amount of $313, 327. However, the Company did not deduct the strike price because it did not want LP to have to pay its tax liability with other funds. The Company instead chose to "offset the amounts due from [LP] from the next distribution that was not associated with [LP's] tax liability." Thus, in its 2011 Distribution, which constituted a "non-tax distribution," to LP, it deducted the strike price. The Company attached to its summary-judgment response a copy of the Agreement; several emails; the affidavit of Furlin; and excerpts of the depositions of Furlin, Goradia, Wascom and Stephen Lyttleton. Furlin, in his affidavit, explained:

The Company allocated taxable income or losses to [LP] related to its Class 3 units and it received cash distributions from the Company pursuant to section 6.01(d) of the [Agreement] to cover the tax liability it incurred when the Company generated taxable income. From January 2010 to June 2011, [LP] received $1, 603, 198.00 in section 6.01(d) distributions related to the Class 3 units. In September 2011, separate from the distribution in which the strike price was withheld, [LP] received an additional $313, 327.00 in section 6.01 distributions. Beyond that date, the Company paid out millions more in section 6.01(d) distributions to [LP]. The Company made these distributions to [LP] to enable it to pay tax liabilities associated with the taxable income allocated to [LP's] Class 3 ownership units. Without the distributions, [LP] would have to use other sources to satisfy its tax liability on the taxable income that had yet to be distributed. In lieu of reducing the section 6.01(d) distributions by the dollar amount of the outstanding Strike Price, the Company chose to offset the amounts due from [LP] from the next distribution that was not associated with [LP's] tax liability.
. . . .
. . . Based on the Board's Interpretation of the LLC Agreement and its sections 6.01(a)(iii)(B) and 11.01 the Company withheld a $1.00 strike price from the September 2011 distributions to Class 3 members, including [LP] . . . . When the refinancing occurred, the Company had not recovered the Strike Price owed by [LP] on the Class 3 units, despite [LP's] receipt of section 6.01(d) distributions. To recover the amount owed, the Company deducted the Strike Price from the September 2011 distribution. The Company initially escrowed the withheld funds, but eventually distributed the funds to the non-Class 3 unitholders on March 14, 2013.

         The trial court, without specifying its grounds, granted LP summary judgment on its breach-of-contract claim against the Company. In its final judgment, the trial court awarded LP actual damages in the amount of $1, 919, 241.30 and attorney's fees in the amount of $694, 136.12 through trial, with conditional fees for appeal.[4]

         Summary Judgment

         In its first and second issues, the Company challenges the trial court's rendition of summary judgment in favor of LP on its breach-of-contract claim.

         Standard of Review and Principles of Law

         The Agreement provides that it "shall be governed by, and construed in accordance with, the Laws of the State of Delaware applicable to contracts made and performed in [that] state, without regard to conflicts of law doctrines." We apply Texas procedural law, and we apply Delaware law on the issues of contract construction and interpretation. See Monsanto Co. v. Boustany, 73 S.W.3d 225, 229 (Tex. 2002); Allis-Chambers Energy, Inc. v. GSSF Master Fund, L.P., No. 05-07-00584-CV, 2008 WL 2170832, at *1 (Tex. App.-Dallas May 27, 2008, no pet.) (mem. op.).

         We review a trial court's summary judgment de novo. Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 661 (Tex. 2005); Provident Life & Accident Ins. Co. v. Knott, 128 S.W.3d 211, 215 (Tex. 2003). In conducting our review, we take as true all evidence favorable to the non-movant, and we indulge every reasonable inference and resolve any doubts in the non-movant's favor. Valence Operating, 164 S.W.3d at 661; Knott, 128 S.W.3d at 215. If a trial court grants summary judgment without specifying the grounds for granting the motion, we must uphold the judgment if any of the asserted grounds are meritorious. Beverick v. Koch Power, Inc., 186 S.W.3d 145, 148 (Tex. App.-Houston [1st Dist.] 2005, pet. denied).

         To prevail on a traditional summary-judgment motion, the movant must establish that no genuine issue of material fact exists and that it is entitled to judgment as a matter of law. See Tex. R. Civ. P. 166a(c); KPMG Peat Marwick v. Harrison Cty. Hous. Fin. Corp., 988 S.W.2d 746, 748 (Tex. 1999). When a plaintiff moves for summary judgment on its own claim, it must conclusively prove all the essential elements of its cause of action. Rhone-Poulenc, Inc. v. Steel, 997 S.W.2d 217, 223 (Tex. 1999). Once the movant produces sufficient evidence to establish its right to judgment, the burden shifts to the nonmovant to come forward with competent controverting evidence raising a fact issue. See Van v. Pena, 990 S.W.2d 751, 753 (Tex. 1999). A genuine issue of fact arises if reasonable and fair-minded jurors could differ in their conclusions in light of all of the summary judgment evidence. See Goodyear Tire & Rubber Co. v. Mayes, 236 S.W.3d 754, 755 (Tex. 2007).

         Under Delaware law, the elements of a breach-of-contract claim are the existence of a contract, the breach of an obligation imposed by that contract, and resulting damage to the plaintiff. VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 612 (Del. 2003). With regard to interpreting the provisions of a limited liability company agreement, as here, ordinary contract interpretation rules apply; the court's role is to effect the parties' intent based on the plain meaning of the agreement's terms. Zimmerman v. Crothall, 62 A.3d 676, 690-91 (Del. Ch. 2013); Senior Tour Players 207 Mgmt. Co. v. Golftown 207 Holding Co., 853 A.2d 124, 127 (Del. Ch. 2004); see also Monsanto, 73 S.W.3d at 229 ("Delaware law sets forth familiar principles for construing written agreements.").

         "Delaware adheres to the 'objective' theory of contracts, i.e., a contract's construction should be that which would be understood by an objective, reasonable third party." Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010). The contract is read as a whole, giving each provision and term effect, so as not to render any part of the contract mere surplusage. Id. "We will not read a contract to render a provision or term 'meaningless or illusory.'" Id. When the contract is ...


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