Capano v. Capano, C.A. No. 8721-VCN (June 30, 2014)
By Eric Feldman and Sophia Lee Shin
Capano, et al. v. Capano, et al. is a consolidated case involving three brothers that came before the Delaware Court of Chancery, in which Joseph and Gerry Capano each filed a complaint against Louis Capano.
Facts
Louis, Joseph and their father, Louis Sr., were equal partners in a Delaware partnership, Capano Investments. Upon Louis Sr.’s death, the partnership structure changed such that Louis and his son controlled 48.5% of the partnership, Joseph and his son controlled 48.5%, and Gerry (as the beneficiary with voting control of CI Trust) controlled 3%. In 2000, the partnership was subsequently converted into a Delaware limited liability company, Capano Investments, LLC (“CI-LLC”), with the same membership and respective ownership interests as those of the partnership
In 2000, Louis and Gerry executed two documents that purportedly granted Louis an interest in CI Trust: (1) Gerry granted Louis the “Power to Direct”, an irrevocable proxy to direct CI Trust’s trustee (at the time, Daniel McCollom) to vote its interest in CI-LLC; and (2) Gerry granted Louis the “Option” to purchase Gerry’s interest in CI Trust, but only with the consent of CI Trust’s trustee, and at a purchase price of $100,000 and the forgiveness of a $100,000 advance. Both the Power to Direct and the Option were signed by Louis and Gerry and had “(SEAL)” printed next their signatures.
On December 1, 2001, Gerry and McCollom signed a document effecting the resignation of McCollom and appointing Gerry in his stead as the trustee of CI Trust. Shortly thereafter, two additional documents, both dated December 25, 2001, (1) appointed Louis as CI Trust’s trustee in Gerry’s stead (signed by Gerry and Louis) via the first document and (2) assigned all of Gerry’s right, title and interest in CI Trust to Louis via the second document (“Assignment of Interest”).
Gerry challenged the validity of both the Power to Direct and the Option, claiming that Louis had unduly influenced him by making him afraid that he would not be able to pay the settlement costs related to a criminal trial in which the family was involved at the time, and also that he does not recall having signed the documents. In addition, Gerry also claimed that the Option was never exercised, and even if it had been, both documents were null and void because McCollom, not Gerry, was CI Trust’s trustee at the time the document was allegedly signed.
In addition, Gerry alleged that he signed all three of the documents dated in December 2001 while inebriated, Louis backdated such documents, Louis never paid consideration for the Assignment of Interest, and the Assignment of Interest violated Delaware’s spendthrift trust laws.
In 2005, Louis attempted to assign his interest in CI Trust to Louis J. Capano, Jr. Investments L.P. II (“Louis L.P.”), and then executed written consents attempting to ratify the admission of Louis L.P. as a member of CI-LLC. However, CI-LLC’s operating agreement had a transfer restriction provision that required majority consent of the members to transfer interest in CI-LLC; Joseph alleged that no such consent was ever given. In 2013, Louis attempted to exercise his purported rights granted by the 2000 and 2001 documents by effectuating a merger between CI-LLC and an entity Louis controlled (the “Merger”), claiming that he now owned 51.5% of CI-LLC which was sufficient to approve the Merger, and in the process, cashed Joseph out of CI-LLC.
In 27 counts, Joseph and Gerry alleged that the assignment of Gerry’s interests to Louis was null and void, and therefore, the Merger was invalid. Louis moved to dismiss all of the claims, other than Joseph’s challenge to the fairness of the Merger, which the Court granted in part and denied in part.
The Court’s Holdings
Laches and Statute of Limitations Regarding Gerry’s Claims
The Court considered whether Gerry’s claims were barred by laches. It stated that, although a statute of limitations does not automatically bar a claim at equity, the court can consider and give great weight to the statute of limitations by analogy in considering a laches claim. Louis claimed that a three-year statute of limitations period applied, while Gerry claimed that the twenty-year period applied because the Power to Direct and the Option were signed under seal.
The Court held that the word “SEAL” was sufficient to qualify the Power to Direct and the Option as sealed documents. However, it held that fraud claims arising from sealed instruments have often been governed by the three-year limitations period, and that here, likewise, the fraud claims regarding the Power to Direct and the Option would be governed by the three-year limitations period and were therefore dismissed. In contrast, Gerry’s claims to enforce the contracts (as opposed to his fraud claims) were governed by the twenty-year period, and thus survived.
The Court held that the Assignment of Interest was not executed under seal, and as a result the three-year limitations period applied to the claims regarding this particular document. However, the Court also held that Gerry’s tolling claim with respect to the Assignment of Interest was valid given his alleged inebriation at the time of signing the document.
Gerry’s Transfer of Interest to Louis under the CI Trust
The validity of Louis’s claim that the CI Trust agreement permitted Gerry to transfer his interest to Louis turns on the agreement’s spendthrift provision, which requires that the CI Trust’s trustee approve the Assignment of Interest. Gerry alleged that McCollom, when McCollom was the trustee, did not give his consent to the Assignment of Interest. Even if the documents signed in December 2001 replacing Gerry as trustee of CI Trust were valid, Gerry’s inebriation at the time of signing the Assignment of Interest may also have precluded him from consenting to this alienation of interest. Therefore, the Court held that it could not determine whether the Assignment of Interest was valid.
Consequently, the Court also held that, because it was possible that Gerry’s assignment of interest to Louis was invalid, it was premature to dismiss Gerry’s claims regarding the effectiveness of the approval of the Merger at this stage.
Joseph’s Standing to Challenge the Power to Direct, the Option and the Assignment of Interest
The Court held that, based on the text of the CI Trust agreement, Joseph did not have standing to challenge the Power to Direct, the Option, or the Assignment of Interest because he was neither a party nor a beneficiary to the CI Trust agreement or any of the other documents. However, as a member of CI-LLC, he could challenge the validity of the transfers of interest from Gerry to Louis, and based on this right, he could also challenge the validity of the Merger.
Joseph’s Claim for Aiding and Abetting
In addition to Louis, various other entities and individuals related to Louis (including his son, Louis III) were included as defendants. Joseph alleged that the defendants, aside from Louis, aided and abetted Louis in his breach of his fiduciary duties. In response to the defendants’ motion to dismiss, the Court held that these claims could not be dismissed, stating that parent corporations can indeed be subjected to claims of aiding and abetting breaches of fiduciary duties by a subsidiary’s directors, and that neither Louis himself nor Louis III was acting as an agent of CI-LLC in respect of the conduct at issue and thus were not protected as such from aiding and abetting claims.