WHEN SOMEONE SHOWS YOU WHO THEY ARE, BELIEVE THEM THE FIRST TIME, OR RISK YOUR CLAIMS BEING TIME BARRED

By Scott Waxman and Adrienne Wimberly

In Winklevoss Capital Fund, LLC et al. v. Stephen Shaw, et al., C.A. No. 2018-0398-JRS, the Delaware Court of Chancery, in a Memorandum Opinion, granted a Motion to Dismiss counterclaims against individual Plaintiffs Tyler and Cameron Winklevoss and their investment firm (altogether “Plaintiffs”) because the claims were barred by laches. In an attempt to capitalize on the publicity from their depiction in the movie The Social Network, the Winklevoss twins, Tyler and Cameron, launched an investment firm, Winklevoss Capital Fund, LLC (WCF). The twins selected Treats! LLC, founded by Stephen Shaw, to be one of their first investments. Treats! LLC owns and operates Treats! magazine, a print and digital magazine depicting nude and semi-nude photographs of models and celebrities. In August 2012, WCF invested $1,310,000 in Treats! in exchange for 1,310,000 series A preferred units under a written Purchase Agreement and Amended LLC Agreement. WCF also loaned Treats! $20,000 as evidenced by a promissory note delivered in October 2012. However, the business relationship between the parties quickly soured as the twins refused to allow Shaw to publicly announce their investment in Treats! and the twins believed Shaw was mismanaging the company.

Ultimately, the twins filed suit in June 2018 against individual Defendant Stephen Shaw, The Westerman Trust u/t/d/, into which Shaw transferred his interest in Treats! in 2011, and Treats!, LLC itself (altogether “Defendants”). In their Complaint, Plaintiffs alleged that Defendants: 1) breached the Amended LLC Agreement by mismanaging the assets of Treats!; 2) breached the October 2012 Promissory Note by failing to pay the amount owed; and 3) breached their fiduciary duties based on Shaw’s and the Trust’s misappropriation of Treats!’s funds and/or assets. The Plaintiffs sought declaratory relief for a judicial judgment that they have no contractual obligations to Defendants to market or promote Treats!.

In response, Defendants filed an Answer and lodged five counterclaims (predominantly sounding in fraud) against Plaintiffs: two counts of common law fraud, fraudulent inducement, fraudulent misrepresentation, and promissory estoppel. Defendants alleged that the twins’ promise to publicly announce their investment in Treats! and use their brand to grow the company induced Shaw and Treats! to perform personal and professional favors for them. Plaintiffs and Counterclaim Defendants, WCF and the twins individually, sought dismissal of the counterclaims because the claims were time-barred. The Chancery Court agreed and dismissed the counterclaims, but did allow Defendants to raise the issues of fraud as affirmative defenses to the claims against them.

In making its determination, the Court recognized that the laches defense is difficult to adjudicate at the pleading stage, but insisted laches can be applied when the plaintiff cannot prove any set of facts to avoid it. The Court reasoned that to find otherwise would allow plaintiffs to use courts of equity to avoid applicable common law statutes of limitations. Thus, absent extraordinary circumstances, the Court held that a court of equity should deny a plaintiff relief when a suit is brought after the analogous statutory period. Here, Delaware’s three-year statute of limitations for fraud and promissory estoppel is applicable. Further, the Court noted that the clock begins when the misrepresentation is made unless one of the tolling doctrines applies. Here, the Court determined that the Defendant’s claims accrued no later than June 17, 2013 when, by Shaw’s own words, it became clear that the Winklevoss twins had no intention of promoting Treats!.

Next, the Court found that Defendants failed to show any extraordinary circumstances or unusual conditions that would excuse the late filing of the claims. The Court was not persuaded by Defendants’ argument that Shaw and his attorneys notified the twins numerous times of his claims. These contentions fell far short of the precedent requiring the claimant to take clear steps to pursue their claims by initiating an arbitration proceeding or filing a lawsuit in another forum before the statute of limitations expired. The Court also rejected Defendants argument that their untimely filing was due to a material and unforeseeable change in financial or personal circumstances. The Court maintained that the twins never wavered in their refusal to be bought out of the company for any less than their $1.3 million investment. Further, the twins’ refusal to promote the Treats! magazine never changed before or after the statutory period.

Next, the Court found that there were no prior proceedings (or any legal decision) that prevented Defendants from timely filing their counterclaims. The Court chastised Defendants for attempting to characterize Plaintiff’s action as a “prior proceeding” and noted that even if it were so characterized, that proceeding was also filed after the relevant statutory period. Finally, the Court held that there was no bona fide dispute as to the soundness of Defendants’ Claims at the time of filing. Therefore, the Defendants failed to show any extraordinary circumstances justifying acceptance of their untimely claims. Having determined that Defendants did not plead particularized facts sufficient to support their argument for equitable tolling, the Court dismissed the counterclaims as time-barred. The Court did see fit, however, to allow Defendants to raise fraud, fraudulent inducement, fraudulent misrepresentation, and unclean hands, based on the same facts, to defend against Plaintiffs’ claims.