Phillip M. Issac and James R.Freedman v. IFTHC, LLC

• Court: Court of Chancery of Delaware
• Decided: June 18, 2018
• Docket: 2017-0821-TMR
• Status: Published

Opinion

COURT OF CHANCERY OF THE STATE OF DELAWARE

TAMIKA R. MONTGOMERY-REEVES Leonard Williams Justice Center VICE CHANCELLOR 500 N. King Street, Suite 11400 Wilmington, Delaware 19801-3734

Date Decided: June 18, 2018

David E. Wilks, Esquire John A. Sensing, Esquire Scott B. Czerwonka, Esquire Jennifer Penberthy Buckley, Esquire Wilks, Lukoff & Braceridge, LLC Potter Anderson & Corroon LLP 4250 Lancaster Pike, Suite 200 1313 North Market Street Wilmington, DE 19806 Wilmington, DE 19801

RE: Phillip M. Issac and James R. Freedman v. IFTHC, LLC et al., Civil Action No. 2017-0821-TMR

Dear Counsel:

This case arises from Defendants’ failure to pay Plaintiffs accrued but unpaid

salary. This letter opinion addresses Plaintiffs’ motion for partial judgment on the

pleadings and Defendants’ motion for partial summary judgment. For the reasons

stated herein, both motions are denied.

I. BACKGROUND

In a meeting on March 31, 2015 (the “Meeting”), the board of directors (the

“Board”) of IF Technologies, Inc. (“IF Technologies”)—then composed of

Defendants William Lomicka, Stephen Sautel, Robert Saunders, and Sean Smith—

approved a transaction with RemitDATA, Inc. (“RemitDATA”) pursuant to which

IF Technologies sold substantially all of its assets in exchange for RemitDATA stock Phillip M. Issac et al. v. IFTHC, LLC et al. C.A. No. 2017-0821-TMR June 18, 2018 Page 2 of 14

(the “Transaction”).1 As part of the Transaction, IF Technologies then dissolved and

transferred its liabilities and RemitDATA stock to Defendant IFTHC, LLC

(“IFTHC”). 2 IF Technologies’ stockholders became unitholders of IFTHC

following the Transaction. 3

At the Meeting, the Board received disclosure schedules (the “Disclosure

Schedules”)4 to an asset purchase agreement IF Technologies entered into in

connection with the Transaction. 5 The Disclosure Schedules provide that IFTHC is

liable for “the accrued but unpaid salaries [of Plaintiffs] reflected on the Balance

Sheet [then totaling approximately $284,000 6]” and “an additional $180,000 in

accrued but unpaid salaries as of May 31, 2009, consisting of $40,000 to [Plaintiff

Phillip M. Issac] and $140,000 to [Plaintiff James R. Freedman].” 7 Plaintiffs were

1 Pls.’ Answering Br. 5; Am. Compl. ¶ 31. 2 Id. 3 Am. Comp. ¶ 36. 4 Id. Ex. E, Schedules 4.8, 4.22. 5 Id. ¶ 30. 6 Id. Ex. D, Balance Sheet as of March 31, 2015. 7 Id. Ex. E, Schedules 4.8, 4.22. Phillip M. Issac et al. v. IFTHC, LLC et al. C.A. No. 2017-0821-TMR June 18, 2018 Page 3 of 14

the managers of IF Technologies and its predecessor entities for eight years

preceding the Transaction. 8

Also in the Meeting and in connection with the Transaction, the Board

approved an amendment to IFTHC’s operating agreement (the “Operating

Agreement”). Section 13.2 of the Operating Agreement provides that in the event

of a dissolution, the “steps to be accomplished” are (A) “a proper accounting” of

IFTHC’s “assets, liabilities and operations[;]” (B) mailing of notices to creditors;

and (C) payment of “all of the debts, liabilities and obligations of [IFTHC.]” 9 After

the Meeting, and after speaking to Plaintiffs, IFTHC’s legal counsel revised Section

13.2(C) to add the following parenthetical: “(including, without limitation, the

compensation obligations owed to [Plaintiffs] in the aggregate amount of $464,000,

and all expenses incurred in liquidation)” (the “Parenthetical”). 10

On April 3, 2015, the Board distributed an information statement (the

“Information Statement”) 11 to IF Technologies’ stockholders seeking their approval

of the Transaction and agreement to be bound by the Operating Agreement following

8 Pls.’ Answering Br. 5. 9 Am. Compl. Ex. F, § 13.2. 10 Id. ¶ 34 (emphasis added). 11 Id. Ex. I. Phillip M. Issac et al. v. IFTHC, LLC et al. C.A. No. 2017-0821-TMR June 18, 2018 Page 4 of 14

the Transaction. 12 The version of the Operating Agreement attached to the

Information Statement contained the Parenthetical to Section 13.2(C).13 The

stockholders, including three of the Board’s four directors who were also

stockholders,14 later approved the Transaction by written consent,15 and the

Transaction closed on August 15, 2017. 16

On August 31, 2017, Plaintiffs requested payment of their accrued salaries

from IFTHC’s board of directors (the “IFTHC Board”), which is composed of the

same Defendant directors as the Board. 17 On September 20, 2017, the IFTHC Board

responded that “the documentation, which we must rely on, supports that at least

some [of the monies distributed to IFTHC], if not all, should flow through the

12 Id. ¶ 36. 13 In addition, an attachment to the Information Statement listed “hypothetical . . . pre- allocation expenses” for “Founders[’] Accrued Salaries” as $464,000. Id. Ex. J, Attachment K. 14 Id. Ex. K. 15 Id. ¶ 40. 16 Id. ¶ 42. 17 Id. ¶ 43. Phillip M. Issac et al. v. IFTHC, LLC et al. C.A. No. 2017-0821-TMR June 18, 2018 Page 5 of 14

waterfall to partially mitigate the losses incurred by investors[,]” and refused to pay

Plaintiffs.18

Plaintiffs filed this action on November 15, 2017. Plaintiffs seek

approximately $470,000 from Defendants for accrued salaries purportedly due to

them under the Operating Agreement and the Kentucky Wages and Hours Act (the

“Act”). 19 In addition, Plaintiffs seek both an award of liquidated damages in the

same amount and attorneys’ fees under the Act. 20

On January 19, 2018, Defendants filed their motion for partial summary

judgment pursuant to Court of Chancery Rule 56(c) as to Plaintiffs’ claim for

liquidated damages and attorneys’ fees under the Act. Plaintiffs filed their motion

for partial judgment on the pleadings pursuant to Court of Chancery Rule 12(c) as

to their claim for breach of the Operating Agreement for their unpaid salaries and

for attorneys’ fees on February 20, 2018.

18 Id. Ex. L. 19 Ky. Rev. Stat. Ann. § 337.385 (West 2018); Am. Compl. ¶¶ 58-61. Plaintiffs live and work in Kentucky. Am. Compl. ¶¶ 2-3. 20 Am. Compl. ¶¶ 58-61. Phillip M. Issac et al. v. IFTHC, LLC et al. C.A. No. 2017-0821-TMR June 18, 2018 Page 6 of 14

II. PARTIAL JUDGMENT ON THE PLEADINGS ANALYSIS

Plaintiffs move for partial judgment on the pleadings as to their claim for

breach of the Operating Agreement and for attorneys’ fees. “This court will grant a

motion for judgment on the pleadings pursuant to Court of Chancery Rule 12(c)

when there are no material issues of fact and the movant is entitled to judgment as a

matter of law.”21 “When considering a Rule 12(c) motion, the court must assume

the truthfulness of all well-pled allegations of fact in the complaint and draw all

reasonable inferences in favor of the plaintiff.” 22 The Court must “therefore accord

plaintiffs opposing a Rule 12(c) motion the same benefits as a plaintiff defending a

motion under Rule 12(b)(6). As on a Rule 12(b)(6) motion, however, a court

considering a Rule 12(c) motion will not rely upon conclusory allegations of

wrongdoing or bad motive unsupported by pled facts.”23 “Although ‘all facts of the

pleadings and reasonable inferences to be drawn therefrom are accepted as true . . .

neither inferences nor conclusions of fact unsupported by allegations of specific

21 McMillan v. Intercargo Corp., 768 A.2d 492, 499 (Del. Ch. 2000) (citing Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund II, L.P., 624 A.2d 1199, 1205 (Del. 1993)). 22 Id. (citing Desert Equities, 624 A.2d at 1205; Weiss v. Samsonite Corp., 741 A.2d 366, 371 (Del. Ch. June 14, 1999), aff’d, 746 A.2d 277 (Del. 1999)). 23 Id. (citing Kahn v. Roberts, 1994 WL 70118, at *5 (Del. Ch. Feb. 28, 1994)). Phillip M. Issac et al. v. IFTHC, LLC et al. C.A. No. 2017-0821-TMR June 18, 2018 Page 7 of 14

facts . . . are accepted as true.’ That is, ‘[a] trial court need not blindly accept as true

all allegations, nor must it draw all inferences from them in plaintiffs’ favor unless

they are reasonable inferences.’” 24 “In analyzing a motion to dismiss, the court may

consider, for carefully limited purposes, documents integral to or incorporated into

the complaint by reference. This same standard logically applies on a Rule 12(c)

motion as well.”25

The pending motion for partial judgment on the pleadings requires me to

examine numerous agreements between the parties. “Delaware law adheres to the

objective theory of contracts, i.e., a contract’s construction should be that which

would be understood by an objective, reasonable third party.” 26 “When interpreting

a contract, this Court ‘will give priority to the parties’ intentions as reflected in the

four corners of the agreement,’ construing the agreement as a whole and giving

effect to all its provisions.”27 The terms of the contract control “when they establish

the parties’ common meaning so that a reasonable person in the position of either

24 Id. (citing In re Lukens Inc. S’holders Litig., 757 A.2d 720, 727 (Del. Ch. 1999)). 25 Id. (citing In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 69-70 (Del. 1995)). 26 Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010). 27 Salamone v. Gorman, 106 A.3d 354, 368 (Del. 2014) (quoting GMG Capital Invs., LLC v. Athenian Venture P’rs I, L.P., 36 A.3d 776, 779 (Del. 2012)). Phillip M. Issac et al. v. IFTHC, LLC et al. C.A. No. 2017-0821-TMR June 18, 2018 Page 8 of 14

party would have no expectations inconsistent with the contract language.”28

Standard rules of contract interpretation state that “a court must determine the intent

of the parties from the language of the contract.” 29 “In giving sensible life to a real-

world contract, courts must read the specific provisions of the contract in light of the

entire contract.” 30

Plaintiffs argue that the Parenthetical to Section 13.2(C) of the Operating

Agreement, which IF Technologies’ stockholders approved, provides that Plaintiffs’

accrued salaries are “debts and liabilities” of IFTHC that must be paid immediately

as a result of IF Technologies’ dissolution.31 Defendants respond that the

Parenthetical is unenforceable because the Board did not approve it, and the

stockholders of IF Technologies were not informed of this fact when they approved

the Operating Agreement with the Parenthetical.32 As a result, Defendants argue

28 Id. (quoting Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997)). 29 Id. (quoting Twin City Fire Ins. Co. v. Del. Racing Ass’n, 840 A.2d 624, 628 (Del. 2003)). 30 Chi. Bridge & Iron Co. N.V. v. Westinghouse Elec. Co. LLC, 166 A.3d 912, 913-14 (Del. 2017). 31 Pls.’ Opening Br. 1. 32 Defs.’ Answering Br. 2. Phillip M. Issac et al. v. IFTHC, LLC et al. C.A. No. 2017-0821-TMR June 18, 2018 Page 9 of 14

that “serious doubts remain concerning the validity and enforceability” of the

Parenthetical.33 I agree with Defendants that Plaintiffs do not establish as a matter

of law that IFTHC has a contractual obligation to pay Plaintiffs’ accrued salaries by

pointing to the Parenthetical. Defendants have raised a question of fact as to whether

the Parenthetical is operative because IF Technologies’ stockholders and the Board

may have approved different versions of the Operating Agreement.

Plaintiffs also contend that Section 13.2(C), even without the Parenthetical,

requires payment of their accrued salaries. Section 13.2(C), without the

Parenthetical, provides for the payment of “all of the debts, liabilities and obligations

of [IFTHC]” before any distributions to IFTHC’s unitholders.34 Plaintiffs argue that

the Disclosure Schedules circulated to the Board before the Meeting and the

Information Statement sent to IF Technologies’ stockholders listed Plaintiffs’

accrued salaries as “debts and liabilities” of IFTHC. 35 Thus, Plaintiffs contend that

Defendants understood that Plaintiffs’ accrued salaries are “debts and liabilities” of

IFTHC. 36

33 Id. 34 Am. Compl., Ex. F § 13.2. 35 Pls.’ Opening Br. 3-4. 36 Id. at 22-23. Phillip M. Issac et al. v. IFTHC, LLC et al. C.A. No. 2017-0821-TMR June 18, 2018 Page 10 of 14

Defendants respond by pointing to a purchase agreement IF Technologies

entered into in connection with a merger in 2011 (the “2011 Purchase

Agreement”).37 Plaintiff Freedman signed the 2011 Purchase Agreement on behalf

of IF Technologies. 38 The 2011 Purchase Agreement specifies that Plaintiffs’

accrued salaries “[are] to be paid from future profits with approval by the Board of

Directors.”39 Defendants argue that nothing about the Operating Agreement alters

the 2011 Purchase Agreement language or affects the promise that the accrued

salaries, even assuming they are debts and liabilities, would only be paid from IF

Technologies’ profits. 40 Thus, Defendants assert that they owe Plaintiffs nothing for

their accrued salaries because IF Technologies was never profitable. 41 I need not

resolve at this stage the effect of the 2011 Purchase Agreement. It does, however,

convince me that there are factual disputes as to whether Plaintiffs’ accrued salaries

37 Am. Answer, Ex. A; Defs.’ Answering Br. 4. 38 Am. Answer, Ex. A. 39 Id. (quoting Am. Answer Ex. 1, Ex. C). 40 Defs.’ Answering Br. 4. 41 Am. Answer, Ex. A. Phillip M. Issac et al. v. IFTHC, LLC et al. C.A. No. 2017-0821-TMR June 18, 2018 Page 11 of 14

are “debts and liabilities” of IFTHC as set forth in Section 13.2(C) of the Operating

Agreement. 42

Because there are factual disputes as to whether Plaintiffs’ accrued salaries

are “debts and liabilities” of IFTHC as set forth in Section 13.2(C) of the Operating

Agreement, I deny Plaintiffs’ motion for partial judgment on the pleadings. 43

III. PARTIAL SUMMARY JUDGMENT ANALYSIS

Defendants move for partial summary judgment as to Plaintiffs’ claim for

liquidated damages and attorneys’ fees under the Act. Summary judgment will be

“granted if the pleadings, depositions, answers to interrogatories and admissions on

file, together with the affidavits, show that there is no genuine issue as to any

42 In addition, Defendants contend that an accounting and notice to creditors must first be performed in accordance with the “series of steps” in Section 13.2 of the Operating Agreement before any “debts and liabilities” are paid. Defs.’ Answering Br. 7. Defendants also argue that Section 13.3 of the Operating Agreement, which refers to an “order of priorities” in Section 13.2, reinforces their interpretation that Section 13.2 must be performed sequentially. Id. at 11-12. Plaintiffs respond that Section 13.2 does not provide any order of priorities and Section 13.3 does not apply to this transaction. Pls.’ Opening Br. 30. I need not resolve this dispute as it does not affect my analysis or change the outcome of this decision. 43 Plaintiffs add that three of the Board’s directors signed written consents in their capacity as IF Technologies stockholders acknowledging that they “carefully read and understand[] the scope and effect of the provisions of this Written Consent and the attachments to the Information Statement.” Pls.’ Opening Br. 22-23 (quoting Am. Compl. Ex. K). This fact, however, does not change my analysis at this stage. Phillip M. Issac et al. v. IFTHC, LLC et al. C.A. No. 2017-0821-TMR June 18, 2018 Page 12 of 14

material fact and that the moving party is entitled to a judgment as a matter of law.”44

The movant bears the initial burden of demonstrating that there is no question of

material fact.45 When the movant carries that burden, the burden shifts to the

nonmoving party “to present some specific, admissible evidence that there is a

genuine issue of fact for a trial.”46 When considering a motion for summary

judgment, the evidence and the inferences drawn from the evidence are to be viewed

in the light most favorable to the nonmoving party. 47 Even so, the non-moving party

may not rely on allegations or denials in the pleadings to create a material factual

dispute.48

The Act provides that “bona fide executives” are not permitted to recover

liquidated damages and attorneys’ fees unless “the context and equities of a

particular case require that an employee be entitled to [those] remedies[.]” 49

44 Twin Bridges Ltd. P’ship v. Draper, 2007 WL 2744609, at *8 (Del. Ch. Sept. 14, 2007) (citing Ct. Ch. R. 56(c)). 45 Deloitte LLP v. Flanagan, 2009 WL 5200657, at *3 (Del. Ch. Dec. 29, 2009). 46 Id. 47 Ct. Ch. R. 56(e); Judah v. Del. Trust Co., 378 A.2d 624, 632 (Del. 1977); Fike v. Ruger, 754 A.2d 254, 260 (Del. Ch. 1999), aff’d, 752 A.2d 112 (Del. 2000). 48 Fike, 754 A.2d at 260. 49 Ky. Rev. Stat. Ann. § 337.385. Phillip M. Issac et al. v. IFTHC, LLC et al. C.A. No. 2017-0821-TMR June 18, 2018 Page 13 of 14

Kentucky courts have held that the “context” and “equities” of a “bona fide

executive’s” recovery is a fact specific inquiry. 50

The parties do not dispute that the Act is applicable to Plaintiffs’ claims or

that Plaintiffs facially are “bona fide executives” as defined in the Act.51 Plaintiffs

argue that they are entitled to discovery to determine the “context” and “equities” of

Plaintiffs’ employment.52 Plaintiffs then list several categories of discovery relevant

to determining the “context” and “equities” of the accrual of Plaintiffs’ salaries and

Defendants’ decision to withhold them. 53 Defendants respond that discovery is not

needed because the material facts are “already in Plaintiffs’ possession” and the

other categories of discovery listed by Plaintiffs are “immaterial to the Court’s

analysis[.]” 54

As stated above, Kentucky courts have held that determining whether a “bona

fide executive” is nonetheless entitled to the remedies available to employees under

50 Fox v. Lovas, 2012 WL 1567215, at *2 (W.D. Ky. May 1, 2012). 51 Pls.’ Answering Br. 1; Defs.’ Reply 4. 52 Pls.’ Answering Br. 13. 53 Id. at 13-14. 54 Defs.’ Reply 12. Phillip M. Issac et al. v. IFTHC, LLC et al. C.A. No. 2017-0821-TMR June 18, 2018 Page 14 of 14

the Act is a fact specific inquiry. 55 In addition, Plaintiffs argue and Defendants admit

that “[n]o Kentucky state court has articulated a test for when the ‘context requires

otherwise.’” 56 Plaintiffs have raised a number of material factual disputes

surrounding the “context” and “equities” of Defendants’ withholding of Plaintiffs’

accrued salaries. Thus, because there is a dispute as to material facts, I deny

Defendants’ motion for partial summary judgment in order to allow discovery into

these issues.

IV. CONCLUSION

Because there are factual disputes that I cannot resolve at this stage, Plaintiffs’

motion for partial judgment on the pleadings and Defendants’ motion for partial

summary judgment are DENIED.

IT IS SO ORDERED.

Sincerely, /s/Tamika Montgomery-Reeves Vice Chancellor TMR/jp

55 Fox, 2012 WL 1567215, at *2. 56 Defs.’ Reply 5.