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Shachoy v. Conrades

Superior Court of Massachusetts, Suffolk, Business Litigation Session

March 11, 2019

Meredith Clark SHACHOY, Individual and Derivatively on Behalf of Longfellow Venture Partners I, LLC
v.
George H. CONRADES, Individually, as Trustee of the George H. Conrades Revocable Trust, and as Manager of Tech Square Trading (GP), LLC and Longfellow Venture Partners I, LLC, Nominal Defendant

          MEMORANDUM AND ORDER REGARDING ALLEGED AMENDED LLC AGREEMENT

          Kenneth W. Salinger, Justice of the Superior Court

          Meredith Shachoy claims that George Conrades agreed to an amendment of the initial Limited Liability Company Agreement of Longfellow Venture Partners I, LLC. Shachoy seeks to enforce a written Amended and Restated Limited Liability Agreement that provides that Shachoy is entitled to receive all of Longfellow’s income and gain up to an unspecified "Threshold Amount," and is entitled to ten percent of the company’s income and gain above that unspecified amount. The Court concludes that the written amended agreement is not enforceable under Delaware law because it is missing a material term and the Court cannot supply the missing term. It also concludes, however, that Shachoy can nonetheless press her claim in the alternative that Conrades orally agreed to a contract amendment granting Shachoy ten percent of Longfellow’s profits, even though the initial LLC Agreement provides that any modification of the contract must be in writing. The unenforceable written amendment and evidence regarding the negotiations leading up to the execution of that document may be relevant to and admissible in connection with Shachoy’s claim seeking to enforce the alleged oral contract amendment.

          1. The Written Amended and Restated LLC Agreement

         Whether the Amended and Restated LLC Agreement is enforceable is governed by Delaware law. Longfellow is a Delaware limited liability company. Massachusetts applies "the law of the State of incorporation to internal corporate affairs." Harrison v. NetCentric Corp., 433 Mass. 465, 469-72 (2001). In addition, the Amended Agreement provides in § 11.1 that "[t]his Agreement and the rights of the parties hereunder shall be governed by and interpreted in accordance with the laws of Delaware." This provision is enforceable. See Hodas v. Morin, 442 Mass. 544, 549-50 (2004) ("As a rule, ‘[w]here the parties have expressed a specific intent as to the governing law, Massachusetts courts will uphold the parties’ choice as long as the result is not contrary to public policy’ ") (quoting Steranko v. Inforex, Inc., 5 Mass.App.Ct. 253, 260 (1977)).

         Under Delaware law, "a valid contract exists when (1) the parties intended that the contract would bind them, (2) the terms of the contract are sufficiently definite, and (3) the parties exchange legal consideration." Osborn v. Kemp, 991 A.2d 1153, 1158 (Del. 2010). Whether the parties intended to be bound is an objective test; it does not turn on the parties’ subjective intent to be bound. Eagle Force Holdings, LLC v. Campbell, 187 A.3d 1209, 1229-30 (Del. 2018). Similarly, whether the contract terms are sufficiently definite is essentially a question of law. Id. at 1232. "Terms are sufficiently definite if they ‘provide a basis for determining the existence of a breach and for giving an appropriate remedy.’" Id., quoting Cateret Bancorp, Inc. v. Home Grp., Inc., 1988 WL 3010, at *9 (Del.Ch. 1988).

         The Amended and Restated LLC Agreement is unenforceable because it is missing a material term. "[A] contract must contain all material terms in order to be enforceable." Eagle Force Holdings, 187 A.3d at 1230, quoting Osborn, 991 A.2d at 1159. As the Delaware Supreme Court has explained:

[C]ommon sense suggests that parties to a sophisticated commercial agreement, let alone any agreement, would not intend to be bound by an agreement that does not address all terms that they considered material and essential to that agreement— a different inquiry than whether these terms are sufficiently definite. As such, all essential or material terms must be agreed upon before a court can find that the parties intended to be bound by it and, thus, enforce an agreement as a binding contract.

Eagle Force Holdings, supra .

          The term missing from the contract is a definition of "Threshold Amount." The contract defines this term by saying it has the meaning specified in Schedule B. But there is no Schedule B. Shachoy told the lawyers to leave it blank, and then failed to provide it before she and Conrades signed the contract. And Shachoy conceded in her sworn deposition testimony that she "never had an agreement with George Conrades as to what the threshold amount would be."

          The missing definition of "Threshold Amount" is material because without it there is no way to allocate Longfellow’s profits between Conrades and Shachoy, and there would be no way to allocate the company’s assets if Longfellow were ever to be liquidated. Section 4.2 provides that all of Longfellow’s income and gains shall be credited to Shachoy’s capital account (and all of its losses shall be debited to Conrades’ capital account) until Shachoy has received a sum equal to the undefined "Threshold Amount," and that thereafter the company’s income, gains, and losses would be allocated in proportion to each member’s ownership share of the company’s investments. Income and gains cannot be allocated if the term "Threshold Amount" is undefined. Similarly, § 9.3(b) provides that if the company were dissolved then its net assets (in excess of debts and liabilities) would be allocated to the members in proportion to their positive capital accounts. But there is no way to know what should be allocated to Shachoy’s capital account if the term "Threshold Amount" is undefined.

         Since the written contract amendment is missing a material term, under Delaware law there was no meeting of the minds and the contract is unenforceable. Eagle Force Holdings, 187 A.3d at 1230. And even if one could say that the circumstances showed that the parties intended to be bound by the written amendment, this contract would still be unenforceable because there is no way to determine what remedy Shachoy would be entitled to for Conrades’ alleged breach of contract without knowing the "Threshold Amount," and therefore the terms of the contract are not sufficiently definite. Id. at 1232.

          Under Delaware law, the Court may not consider extrinsic evidence and use it to create a reasonable "Threshold Amount." "Delaware follows the well-established principle that in construing a contract a court cannot in effect rewrite it or supply omitted provisions." Gertrude L.Q. v. Stephen P.Q., 466 A.2d 1213, 1217 (Del. 1983); accord Cincinnati SMSA Ltd. P’ship v. Cincinnati Bell Cellular Sys. Co., 708 A.2d 989, 992 (Del. 1998). There is a limited exception "[i]n cases where obligations can be understood from the text of a written agreement but have nevertheless been omitted in the literal sense"; in such a case "a court’s inquiry should focus on ‘what the parties likely would have done if they had considered the issue involved.’" Cincinnati SMSA, supra, quoting DuPont v. Pressman, 679 A.2d 436, 443 (Del. 1996). But there is no way to understand what the Threshold Amount should be from the text of the written amended LLC agreement, and therefore the Court may not supply the missing contract term.[1]

          2. The Alleged Oral Amendment to the LLC Agreement

          Shachoy’s alternative claim that Conrades entered into a binding oral amendment of the LLC Agreement that gives Shachoy ten percent of Longfellow’s profits is also ...


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