CHANCERY COURT GRANTS DEFENDANT’S MOTION ON THE PLEADINGS WHERE NAMED DEFENDANTS DID NOT OWE ANY OF THE CONTRACTUAL OR FIDUCIARY OBLIGATIONS PLAINTIFF TRIED TO ENFORCE

By: Scott Waxman and Samantha Beatty

In Ross v. Institutional Longevity Assets LLC, C.A. No. 2017-0186-TMR (Del. Ch. Feb. 26, 2019), the Chancery Court, in a motion for judgement on the pleadings, found that the plain language of a limited liability company’s operating agreement was sufficient to affirm the notion that the plaintiff had failed to establish a set of facts to support his breach of contract and breach of fiduciary duty claims. The Court found that (i) where the language of a contract is clear, the parties’ disagreement will not render a contract ambiguous; (ii) where a plaintiff has not identified gaps in the language of a contract, there can be no evidence that an implied covenant of good faith has been breached, and (iii) where a fiduciary duty claim arises out of the same conduct as a contract claim, the fiduciary claim is superfluous.

In 2017, Alan J. Ross, a member of the limited liability company International Pooled Benefits LLC (“IPB”), brought action against Institutional Longevity Assets, LLC (“ILA”) and MRB Pooled Benefits, LLC (“MRB”), the two other members of IPB, and the managing members of those entities (together the “Defendants”) regarding the commercialization of a patent covering a method for pooling insurance policies. The claims, which were for breach of contract and breach of fiduciary duties, alleged (1) that the Defendants failed to provide documents that they were obligated to provide under the operating agreement of IPB (the “Operating Agreement”); (2) that the Defendants failed to implement certain foundational requirements Ross claims to be necessary to patent monetization, which amounts to a breach of the implied covenant of good faith and fair dealing under the Operating Agreement; and (3) that in light of these failures, the Defendants have breached their fiduciary duties of care and loyalty. The Court’s resolution of these claims in favor of the Defendants’ motion for judgement on the pleadings turned solely on the Court’s interpretation of the Operating Agreement.

With respect to Ross’ claim that the Defendants failed to provide documents that the Operating Agreement obligated them to provide, the Court found that where the terms and language of the agreement are unmistakably clear, only the words of the contract are to be used to determine its meaning. Parties’ disagreement will not, alone, render a contract ambiguous, rather, the language itself must be reasonably open to multiple and different meanings. Although Ross alleged that the Defendants were obligated to prepare and send financial statements to the members each year, the terms of the Operating Agreement unambiguously refer to IPB as the responsible party for such obligation, not the Defendants. As the Operating Agreement was presented as the basis for his claim, the Court found that the Defendants carried their burden to show that Ross could prove no sets of facts in support of his claim.

The Court found that the question of whether or not the Defendants violated the Implied Covenant of good faith is also a matter of contract interpretation, as the Implied Covenant only applies where a contract lacks specific language governing an issue, creating a gap in the contract. The Court held that the Implied Covenant only applies to developments that could not be anticipated by the parties, not developments that the parties simply failed to consider. Accordingly, when the complaint did not identify any gap in the contract, and the contract therefore addresses the issues raised in the claim, there can be no claim for breach of the Implied Covenant. While Ross contended that the Defendants failed to carry out the steps he considers necessary to successful patent exploitation, the Court held that he failed to identify any contractual gaps in the Operating Agreement, nor was it clear from the express language of the Operating Agreement that the parties would have agreed to require such actions if they could only have been anticipated. Thus, Defendants again carried their burden to show that Ross could prove no sets of facts in support of his claim.

Relying on his allegations that the Defendants both failed to provide required documents and violated the Implied Covenant of good faith under the Operating Agreement as evidence, Ross further contended that the Defendants breached their fiduciary duties of care and loyalty. But, the language of the of the Operating Agreement itself, as the Court pointed out, provides that the [Defendants] will not be liable to the IPB or any other member for the performance or omission to perform any act or duty on behalf of the company if performed in good faith. Even still, the Court made clear that courts will dismiss breach of fiduciary duty claims where they overlap with breach of contract claims and arise from the same underlying conduct. Because the alleged wrongdoing Ross pointed to consists of the same acts he alleged constituted Defendant’s breach of contract, making the claims identical, the Court found that Ross could prove no set of facts in support of his claim that would entitle him to relief.

Because the facts Ross alleged in his complaint in support of his claims were directly contradicted by the plain language of the Operating Agreement alone, the Court found that the Defendants had sufficiently carried their burden to show that Ross could prove no set of facts that would entitle him to relief, entitling Defendants to a judgement as a matter of law on their motion for judgement on the pleadings.