VILA v. BVWEBTIES LLC, 4308-VCS (Del.Ch. 10-1-2010)

ebTies was premised on building around Vila's name and reputation. WebTies cannot do that now. That Hill and his staff say that WebTies can be profitable under a different website name and without content involving the Vila IP further makes Vila's point, and cuts against Hill's argument opposing dissolution. What Hill wishes to do is to pursue a business having nothing to do with the basic purpose for which WebTies was formed and to do so over the objection of one of its two managers.

See, e.g., Def. Op. Post-Tr. Br. at 1 (WebTies has operated "successfully since its formation in February 2000" and "[p]revious disagreements as to the management of the Company have been minor and, in any event, have been resolved without affecting the operations of the Company.").

See, e.g., JX-3 (email from Hill to Sawitsky (March 13, 2008)) ("[Vila's] paranoia [that Hill will selfishly damage the Vila IP] . . . has made it almost impossible to move [WebTies] forward. . . .") (emphasis added).

Of course, the existence of a deadlock would not necessarily justify a dissolution if the LLC Agreement provided a means to resolve it equitably. But the LLC Agreement does not contain a buy-sell arrangement or any other provision (such as one providing for the appointment of an agreed-upon third manager) to resolve the deadlock. Rather, the LLC Agreement contemplates that a member or manager may seek judicial dissolution. This is what Vila has done, and he has succeeded in proving that dissolution is warranted.

Fisk Ventures, LLC, 2009 WL 738957, at *5; see also Haley, 864 A.2d at 88 ("If an equitable alternative to continued deadlock had been specified in the LLC Agreement, arguably judicial dissolution . . . might not be warranted.").

LLC Agreement § 10.02 ("The LLC shall be dissolved upon . . . the entry of a decree of judicial dissolution under the [Delaware Limited Liability Company] Act.").

C. Hill's Counterclaims

Hill spent most of his energy defending against dissolution. But he also asserted several counterclaims for breach of the express and implied terms of the LLC Agreement and for breach of fiduciary duty against Vila. His pleading in support of his counterclaims was almost entirely cursory. With the exception of one specific allegation of fact related to a distribution to Vila to which, as we shall see, Hill acquiesced, Hill simply lobs conclusory allegations. Illustrative is paragraph ten of the eleven "paragraph" fact section supporting his counterclaims, which states in whole: "Vila has wrongfully competed against the Company in violation [of] paragraph 12.02 of the LLC agreement, which prohibits outside ventures that are `in direct competition with the business and activities of the LLC.'" I put paragraph in quotation marks because only one of the paragraphs has more than one sentence, paragraph six, which has two. Coming into trial, Hill did little to flesh out these cursory allegations and that remained the case throughout the trial.

Ans. Countercl. at 4 ¶ 10.

Although Hill did not explicitly plead these counterclaims as a secondary "Vila is a bad guy" defense to the dissolution, his arguments in favor of them have that flavor. For the sake of completeness, therefore, let me briefly reiterate my prior finding as to Vila's loyalty to WebTies.

My review of the record persuades me that Vila hoped to make WebTies a successful company that would take advantage of his reputation in the home improvement field. Hill resisted over a course of several years. Reasonable businesspersons could disagree on what was best for WebTies, but what is important for present purposes is that Vila's point of view was one that was well motivated and rational, and Vila did not seek dissolution as a bad faith stratagem to injure WebTies.

With that context in mind, I turn to the resolution of Hill's counterclaims. I do so tersely because Hill's evidence in support of those counterclaims largely consisted of only his own inadequate, cursory testimony.

1. Breach Of The LLC Agreement

In his first counterclaim, Hill alleges that Vila breached § 6.01 of the LLC Agreement when he withdrew $100,000 without the assent of Hill as required by § 3.02 of the LLC Agreement. Section 6.01 states in pertinent part that "[e]xcept as provided in Section 6.02 [(governing distributions at dissolution)] and at such times as the Managers shall determine in their discretion, all LLC funds, which are available for distribution, shall be distributed. . . ." At trial, Hill testified that although he initially opposed the distribution, he later "acquiesce[d]" to the distribution. Having acquiesced to the distribution as a manager using his authority under § 3.02 of the LLC Agreement, Hill cannot challenge the distribution now and his counterclaim fails. Furthermore, Hill did nothing at trial to prove that it was inequitable, given Vila's capital and other contributions to WebTies, for Vila to receive the $100,000.

At the same time Hill seeks to peg liability on Vila for allegedly breaching § 6.01, he bases his previously discussed defense to dissolution that no paralyzing deadlock exists on his ultimate agreement to the $100,000 withdrawal. See Def. Op. Post-Tr. Br. at 6, 18 (arguing that no deadlock exists because although Hill initially objected to the $100,000 distribution, he later "acquiesced.").

LLC Agreement § 6.01.

Tr. at 145 (Hill) ("Q: [D]id you acquiesce on the hundred thousand dollars?" A: I did.").

See, e.g., Julin v. Julin, 787 A.2d 82, 84 (Del. 2001) ("Acquiescence is an equitable defense which is assertable against a party who remains inactive for a considerable period of time, or who recognizes the validity of the complained of act or who acts in a manner inconsistent with the subsequent repudiation and thus leads the other party to believe the act has been approved."); see also 13 WILLISTON ON CONTRACTS § 39:27 (waiver of a contractual right may be express or implied by a party's conduct; "[u]nder the doctrine of `implied waiver,' a waiver of contractual rights may be found to exist where the conduct or acts of the party charged with waiver have either: (1) clearly manifested an intention to waive the contract provision or term allegedly waived or (2) reasonably induced the nonwaiving party to rely upon an apparent waiver of such term or provision. . . .").

In his second counterclaim for breach of contract, Hill alleges that Vila breached § 12.02 of the LLC Agreement by purportedly engaging in several activities that constitute impermissible direct competition with WebTies. Section 12.02 states that managers of WebTies may "engage in and possess interests in other business ventures and investment opportunities, provided, however, that no such other business venture or investment opportunity . . . shall be in direct competition with [WebTies]." Specifically, Hill contends that Vila's 2007 deal with the Home Shopping Network to sell Bob Vila branded tools constituted competition with BobVila.com in contravention of § 12.02.

Def. Op. Post-Tr. Br. at 18.

LLC Agreement § 12.02 (emphasis in original).

This contention comes with ill grace. Hill and Vila together own 98% of WebTies and are its only managers. Hill himself approved this transaction and entered into an agreement entitling him to 10% of the commissions on the sales of the Home Shopping Network tool line he now complains impermissibly competed directly with BobVila.com. By their joint conduct, Hill and Vila, as WebTies' managers, waived any contractual right of WebTies to prevent Vila — and Hill — from doing this deal. Although this conduct arguably injured BobVila.com, Hill's complicity in this conduct and the personal benefit he accepted from it estops him from complaining on behalf of WebTies and WebTies' only other owner, HI Nominee Trust, has affirmatively disclaimed any interest in joining issue on the claims in this litigation. In addition, Hill's sketchy trial testimony does not persuade me that the Home Shopping Network deal directly competed with BobVila.com or that it otherwise harmed WebTies. In fact, the publicity that might be generated by use of the Bob Vila name on the Home Shopping Network could have increased web traffic to BobVila.com, a site premised on providing home improvement advice.

JX-87 (chart showing distributions to Hill under Home Shopping Network deal (June 24, 2009)); Tr. at 41-43 (Vila).

See Realty Growth Inv. v. Council of Unit Owners, 453 A.2d 450, 456 (Del. 1982) ("Waiver is the voluntary and intentional relinquishment of a known right."); Components, Inc. v. Western Elec. Co., 267 A.2d 579, 582 (Del. 1970) (party can waive contractual or statutory rights); 13 WILLISTON ON CONTRACTS § 39:14 (generally, a party may waive — by words or conduct — any contractual right or obligation, and a party who intentionally permits the other party to openly breach a contractual obligation is estopped from later seeking judicial enforcement of the waived contractual obligation); McElroy v. B.F. Goodrich Co., 73 F.3d 722, 724 (7th Cir. 1996) (The rule that one may waive his contractual rights "rest[s] on an idea no more complicated than that any competent adult can abandon a legal right and if he does so he has lost it forever.").

See, e.g., Kahn v. Household Acquisition Corp., 591 A.2d 166, 176 (Del. 1991) (quoting 3 JOHN NORTON POMEROY, EQUITY JURISPRUDENCE AND EQUITABLE REMEDIES § 804, at 189, 245 (1941)) (internal citations omitted) ("Estoppel and acquiescence are related doctrines of equity. `[E]stoppel is the effect of the voluntary conduct of a party whereby he is absolutely precluded . . . from asserting rights which might perhaps have otherwise existed, . . . as against another person, who has in good faith relied upon such conduct, and has been led thereby to change his position for the worse. . . .' Similarly, "[a]cquiescence in the wrongful conduct of another by which one's rights are invaded may often operate, upon the principles of and in analogy to estoppel, to preclude the injured party from obtaining many distinctively equitable remedies to which he would otherwise be entitled.'"); HENRY M. HERMAN, 2 COMMENTARIES ON THE LAW OF ESTOPPEL AND RES JUDICATA 1191-92 (F.D. Linn Company 1886) ("[I]f one has knowledge of an act, or it is done with his full approbation, he can not afterwards have relief. He is estopped by his acquiescence, and can not undo that which has been done. . . . When a man with full knowledge . . . and of all the material circumstances of the case, freely and advisedly does anything which amounts to the recognition of a transaction, or acts in a manner inconsistent with its repudiation . . . there is acquiescence, and the transaction, although originally impeachable, becomes unimpeachable in equity.").

Hill's final two claims for breach of § 12.02 of the LLC Agreement can also be dispensed with tersely, due to the lack of evidence supporting them. Hill argues that Vila competed with WebTies by attempting to create a television show, entitled "Our Green House," that would have its own proprietary website that would compete with BobVila.com. But the sketchy record evidence that Hill presented indicates that this project never made it out of the initial planning stages, the production companies responsible for the project were dissolved in the spring of 2009, and the project was abandoned. Hill's sparse evidence comes well short of showing that this exploration was necessarily of a website that would in fact directly compete with BobVila.com as expressly required by the LLC Agreement. As important, to receive relief for breach of contract, a plaintiff must prove that it suffered damages as a result of the alleged breach. At trial, Hill proffered no evidence supporting the contention that WebTies suffered any damages as a result of this preliminary planning.

JX-30 (email from Dreyfous to Vila (March 26, 2009)), JX-31 (email from Dreyfous to Vila (March 26, 2009)).

LLC Agreement § 12.02.

In order to prevail on a breach of contract claim, a plaintiff must prove by a preponderance of the evidence: (1) the existence of a contractual obligation; (2) a breach of that obligation; and (3) as a result of that breach, the plaintiff suffered damages. H-M Wexford LLC v. Encorp. Inc., 845 A.2d 1031, 1035-39 (Del. 2004).

Hill emphasizes the fact that Grant admitted at her deposition that any published website for "Our Green House" would compete with BobVila.com. Dep. Tr. at 73-75 (Grant). But this admission is obviated by her clarification that Vila "has not gone ahead to create ["Our] [G]reen [House"] as a web entity because it would compete [with BobVila.com]. Id. at 75. Put differently, Vila was cognizant of his contractual obligations under § 12.02 and refrained from creating any competing website. This case can be further contrasted from cases in which a contracting party unequivocally manifests an intention to breach his contractual obligations in the future (i.e., his actions constitute an anticipatory repudiation). Compare PAMI-LEMB I Inc. v. EMB-NHC, L.L.C., 857 A.2d 998, 1014 (Del. Ch. 2004) (finding anticipatory repudiation where contracting party "unequivocally" manifested to promissee that he would not perform under the contract); with RESTATEMENT (SECOND) OF CONTRACTS § 250 cmt. b ("Mere expression of doubt as to . . . willingness or ability to perform is not enough to constitute a repudiation [of a contractual promise to perform].").

Similar flaws plague Hill's final breach of contract claim. Hill claims that Vila is developing or has developed an iPhone application ("App") that would involve sponsorship of wood products that were appropriate for green home improvement projects with advice from Bob Vila, and that a user's ability to bypass BobVila.com and download the App directly from the Apple iTunes Store would constitute impermissible direct competition under § 12.02. Again, the evidence offered by Hill was sparse and although it is conceivable that this application would directly compete with BobVila.com, it is also conceivable that it could and would have been structured in a way that actually helped BobVila.com. What does emerge with clarity, however, is that the App never got out of the initial development stages and therefore there has been no App released by Vila or his companies. Thus, Hill failed to allege or establish any damage to WebTies.

Tr. at 38-39 (Vila); id. at 127 (Grant) (testifying that the iPhone App is nothing more than "a concept on paper.").

2. Breach Of The Implied Covenant Of Good Faith And Fair Dealing

Hill also contends that Vila breached the implied covenant of good faith and fair dealing in the LLC Agreement. Although his pleading lumps together all of his previously discussed cursory allegations and says they all support claims for breach of the express and implied terms of the LLC Agreement, and for breach of fiduciary duty, his briefs focus his implied covenant claim on two issues.

First, Hill argues that Vila breached the implied covenant of good faith and fair dealing by bringing this action. As I have already found, Vila did not violate any implied provision of the LLC Agreement by pressing a non-frivolous, indeed winning action, for dissolution. Dissolution is a remedy expressly contemplated by the LLC Agreement.

LLC Agreement § 10.02. To the extent that Hill also seeks to pluck my equitable heartstrings by pointing to compensation schemes for WebTies' employees that are tied to WebTies' performance, his argument is without force. Vila is no more obligated to fold in the face of Hill's views than Hill is obligated to fold in the face of Vila's. In winding up WebTies' affairs, both Hill and Vila will, as members of WebTies, have to face the economic consequences of addressing any contractual rights of the employees. Those rights provide no basis to conclude that Vila's pursuit of this action is somehow impliedly barred by the LLC Agreement.

Likewise, Hill's assertion that Vila breached an implied term of the LLC Agreement by refusing to accept supposed offers to purchase WebTies is without merit. Specifically, Hill claims that Vila refused to consider a sale of WebTies to Ripplewood Holdings, an LLC that sent a letter to Hill in late 2007 expressing an interest in making an offer to acquire WebTies for the purchase price of "approximately" $8 million. Hill also claims that Vila refused to talk to Eric Thorkilsen, an entrepreneur who had expressed an interest in acquiring WebTies.

JX-50 (letter from Ripplewood to Hill (October 16, 2007)).

JX-70 (emails from Thorkilsen to Hill (January 22, 2009)).

The problem with this counterclaim is that Hill offers no proof to support his contention that Vila acted disloyally. That is, Hill makes no showing that Ripplewood or Thorkilsen made firm offers that Vila refused to consider in bad faith, or that $8 million was a fair price. In fact, the evidence is to the contrary. Vila, based on a valuation done by Grant, believed that the $8 million price was far too low if Ripplewood wanted the Vila IP and a license to use it. Moreover, the record does not support the proposition that either Ripplewood or Thorkilsen wished to purchase WebTies at the $8 million figure without the Vila IP, an asset that does not belong to WebTies. Finally, Hill cites no law for the proposition that Vila, as an equity owner, was under a contractual duty to consider selling his interest in WebTies at a price that he viewed as suboptimal, particularly when that price involved Vila giving up his ownership of the Vila IP. This claim is without merit.

Thorkilsen told Hill in an email that on the basis of the dispute between Hill and Vila, he was no longer interested in an acquisition. JX-70 (email from Thorkilsen to Hill (May 29, 2009)).

Tr. at 85 (Vila) ("[I]f [Ripplewood] wants to buy the website with the license to operate using the Bob Vila name . . . a number of [$]30 million would not be . . . out of whack."); id at 91 (Vila).

Id. at 84 (Vila) ("[Ripplewood] quickly disappeared . . . when they realized that what was being offered to them by [Hill] did not include my trademarks or license to use my name.").

Indeed, our law imposes no such general duty and the LLC Agreement implies nothing to the contrary. See Bershad v. Curtiss-Wright Corp., 535 A.2d 840, 845 (Del. 1987) (Stockholders may act in their own self interest and "a stockholder is under no duty to sell its holdings in a corporation, even if it is a majority shareholder, merely because the sale would benefit the minority."); see also Nemec v. Shrader, 991 A.2d 1120, 1126 (Del. 2010) (citing Dunlap v. State Farm Fire Cas. Co., 878 A.2d 434, 441 (Del. 2005)) (A court "will only imply contract terms when the party asserting the implied covenant [of good faith and fair dealing] proves that the other party has acted arbitrarily or unreasonably, thereby frustrating the fruits of the bargain that the asserting party reasonably expected."); Dunlap v. State Farm Fire Cas. Co., 878 A.2d 434, 441 (Del. 2005) ("One generally cannot base a claim for breach of the implied covenant [of good faith and fair dealing] on conduct authorized by the agreement.").

3. The Breach Of Fiduciary Duty Counterclaim Fails As Superfluous

Hill has also brought claims for breach of fiduciary duty against Vila, based on the same conduct that was the focus of his express breach of contract claims.

They fail for essentially the same reasons. As to the $100,000 distribution, Hill admittedly acquiesced in the distribution as a manager, is estopped from challenging it now, and has failed to prove that the distribution was in any way unfair to WebTies in light of Vila's various contributions to the firm. As to the alleged competition with WebTies, the LLC Agreement explicitly allowed Vila to engage in other business activities so long as they did not directly compete with WebTies. Because this restriction on direct competition is an explicit provision of § 12.02 of the LLC Agreement, Hill's vague attempt to broaden the provision by pointing to traditional corporate law principles is an improper attempt to supplant the primacy of the LLC Agreement in the alternative entity context. As our Supreme Court has plainly stated, "[i]t is a well-settled principle that where a dispute arises from obligations that are expressly addressed by contract, that dispute will be treated as a breach of contract claim. . . . [A]ny fiduciary claims arising out of the same facts that underlie the contract obligations would be foreclosed as superfluous." Here, the fiduciary duty claims Hill makes are factually identical to his claims for breach of § 12.02 of the LLC Agreement.

Kahn v. Household Acquisition Corp., 591 A.2d 166, 176 (Del. 1991) (quoting 3 JOHN NORTON POMEROY, EQUITY JURISPRUDENCE AND EQUITABLE REMEDIES § 804, at 189, 245 (1941)).

See 6 Del. C. § 18-1101(b) ("It is the policy of this chapter to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.").

Nemec, 991 A.2d at 1129 (citing Blue Chip Capital Fund, 906 A.2d 827, 833 (Del. Ch. 2006); Gale v. Bershad, 1998 WL 118022, at *5 (Del. Ch. March 4, 1998)) (emphasis added).

Even were that not the case, Hill has not proven his claims. As to the Home Shopping Network issue, Hill seeks to condemn Vila for conduct that Hill himself engaged in as a willing participant, and thus may not challenge. As to the other instances of alleged wrongdoing, Hill presented only vague testimony showing that Vila was engaged in a course of activity that could have, if it had resulted in an actual business deal, possibly constituted direct competition with WebTies. This evidence is too sketchy to form a reliable basis to find that Vila breached any fiduciary duty to WebTies, particularly given that the activities could also have taken a shape that was beneficial to WebTies, and also given that the activities were occurring at a time when Hill had arrogated unto himself without any legal basis the unilateral right to shape WebTies' business strategy. And, as with the contract theory, Hill fails to produce any evidence from which one could conclude that WebTies was harmed by Vila's conduct. In that regard, Hill made no showing at trial and no argument in his briefs that the other parties were interested in working directly with WebTies or that Vila somehow usurped an "LLC opportunity" that WebTies was equipped to take.

IV. Remedy: Vila's Application For The Appointment Of A Liquidating Trustee Is Granted But His Post-Trial Motion For A Permanent Injunction Is Denied When Vila filed this suit, his complaint contained one count — an application for the dissolution of WebTies and the appointment of a liquidating trustee tasked with winding up WebTies' affairs and liquidating its assets. At no point did Vila move to amend his complaint to allege a claim for breach of the License Agreement. Then, after trial, Vila made a motion to permanently enjoin WebTies from using the Vila IP.

Compl. ¶¶ 18-20.

Although Vila may have a strong claim for injunctive relief under the License Agreement, raising the issue after trial for dissolution is unfair and inappropriate, especially when there is still pending litigation in Massachusetts dealing with the License Agreement. Most important to me as a judge is that the failure to raise this issue pretrial leaves me unsure about the consequences of an injunction, and thus the balance of the harms.

Hill v. Vila, No. 09-3842 (Mass. Super. Ct.) (the Massachusetts Action).

Although it seems overwhelmingly likely that Hill has caused WebTies to engage in unauthorized activity using the Vila IP for over a year now, it could be that there are some uses of the Vila IP that Vila himself could not prevent, irrespective of the License Agreement. If, for example, Vila authorized WebTies to enter into a contract with a third-party premised on WebTies' ability to use the Vila IP and that contract had a durational provision extending beyond September 2009, Vila's ability to claw back his IP and require WebTies to violate a contract he himself approved is something that would seem to be the basis for colorable dispute. Although the trial record admittedly contains no such contract, the point is that that absence could be because Vila did not ask for an injunction until the trial was over.

In my view, the prudent direction is to appoint a liquidating trustee for WebTies with the broadest possible fiduciary powers to wrap up its affairs in a responsible manner that preserves value for the members while honoring the legal obligations WebTies owes to others, including to Vila. For his part, Hill refused to tender a name to serve as liquidating trustee, maintaining that dissolution should not be required. Meanwhile, Vila tendered the name of Martin G. Mand, a business executive and arbitrator, who has successfully handled this role before when appointed by this court. When pressed by me to come up with another name, Hill again failed to do so but did indicate that he had no objection to Mand.

Pl. Pre-Tr. Br. Ex. AC (resume of Martin G. Mand); see also Fulk v. Washington Servs. Assocs., 2002 WL 1402273 (Del. Ch. May 10, 2002) (appointing Martin G. Mand as Receiver/Custodian following an order dissolving a joint venture corporation under DGCL § 273).

I am comfortable with appointing Mand as liquidating trustee. But, given the ongoing legal strife, the need for him to decide about whether and when WebTies should discontinue using the Vila IP and make other decisions that could be controversial and result in further proceedings in this and other courts, I believe it important that he have his own counsel from the outset. Therefore, I intend to issue an order appointing Mand as liquidating trustee and having him retain James L. Holzman of the law firm of Prickett, Jones Elliott, P.A. as his counsel. As the first order of business, Mand and Holzman shall take the first crack at an order of appointment and attempt to gain the assent of Hill and Vila as to form. That order shall extend to Mand the broadest authority consistent with the Delaware Limited Liability Company Act to decide how to dissolve WebTies and wrap up its affairs, accomplish his duties, and shall limit, to the extent consistent with the Act, the extent to which this court can second-guess his decisions. In other words, Mand should be empowered broadly to act under a business judgment rule standard if the Act so permits.

See, e.g., 6 Del. C. § 18-406 (providing that a liquidating trustee shall be exculpated from liability for a decision involving the disposition of the LLC's assets made in good faith reliance on the LLC's records, reports, and information).

Finally, given the lengthy pendency of this dispute and the reality that Hill has long known that he was unilaterally directing WebTies to pursue a strategy over the objections of Vila, Mand shall propose a plan that winds up WebTies' affairs promptly. Hill and his team have had ample opportunity to make offers to buy Vila out, and have had more than enough breathing room to make future plans. Vila has had the same chance. Neither Hill nor Vila appear to place a high value on WebTies, but they have failed to reach an agreement on how to part, this ongoing struggle being the last thing that still binds these former close friends together.

Given these realities, pleas by either Hill or Vila for a lengthy winding-up or auction process will not be indulged. Although Mand should assess the Vila IP issue in the first instance, given the trial record and the clarity of the License Agreement giving Vila the right to terminate it for "any reason or no reason," attempts by Hill to slow up the process by claiming that WebTies "owns" the Vila IP and that it should be the subject of sale in an auction as one of WebTies' assets will come with little grace and could risk an application by Mand and Vila for remedies.

V. Conclusion

For the foregoing reasons, Vila's claim for judicial dissolution of BVWebTies LLC is meritorious and BVWebTies LLC shall be DISSOLVED. Hill's counterclaims are DISMISSED. Vila's request for a mandatory injunction is DENIED. Martin G. Mand will be liquidating trustee of BVWebTies LLC and his counsel, James L. Holzman, shall present an implementing order, upon notice as to form to Hill and Vila, within ten days.