PJT Holdings, LLC v. Costanzo

• Court: Court of Chancery of Delaware
• Decided: May 15, 2025
• Docket: C.A. No. 2023-0665-JTL
• Status: Published

Opinion

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

PJT HOLDINGS, LLC, ) ) Plaintiff, ) ) v. ) C.A. No. 2023-0665-JTL ) DANIEL COSTANZO, ) BENJAMIN COSTANZO, and ) BRIAN FITZPATRICK, ) ) Defendants, ) ) and ) ) PBM GROUP HOLDINGS, LLC, ) a Delaware limited liability company, ) ) Nominal Defendant. )

POST-TRIAL OPINION

Date Submitted: March 21, 2025 Date Decided: May 15, 2025

Daniel M. Silver, Benjamin A. Smyth, Maliheh Zare, McCARTER & ENGLISH, LLP, Wilmington, Delaware; Attorneys for Plaintiff.

Delia Clark, COOPER LEVENSON, P.A., Wilmington, Delaware; Justin D. Santagata, COOPER LEVENSON, P.A., Atlantic City, New Jersey; Attorneys for Defendants Daniel Costanzo, Benjamin Costanzo, and Brian Fitzpatrick.

LASTER, V.C. An investor and three sweat-equity operators planned to launch a chain of fast-

casual restaurants. They formed a member-managed Delaware limited liability

company, and each became a member. After a falling out, the three sweat-equity

members invoked a provision in the LLC agreement to expel the investor member.

The investor sued for breach of the LLC agreement and sought a declaration

that his expulsion was invalid. The sweat-equity members counterclaimed for

determinations that they acted properly and that the investor had breached the LLC

agreement.

The sweat-equity members proved they had at least two valid grounds to expel

the investor. In doing so, they proved that the investor breached the LLC agreement.

The investor must indemnify the sweat-equity members for their expenses, including

attorneys’ fees, caused by his breach.

I. FACTUAL BACKGROUND

The facts are drawn from the post-trial record, which includes eighteen

stipulations of fact, 300 exhibits, depositions from eight witnesses, and live testimony

from two witnesses.1 This decision has relied judiciously on the testimony of Peter

Trematerra, because his testimony changed significantly between his deposition and

trial. This decision has exercised similar care when weighing the testimony of

Christopher Russo, a consultant who solicited an investment from Trematerra during

1 Citations in the form “[Name] Tr.” refer to witness testimony from the trial

transcript. Citations in the form “[Name] Dep.” refer to witness testimony from a deposition transcript. Citations in the form “JX __ at __” refer to trial exhibits. the events giving rise to this litigation,2 and documents Russo prepared after disputes

arose.3 Having evaluated the credibility of witnesses and weighed the evidence, the

court makes the following findings by a preponderance of the evidence.

A. The Founders Meet Trematerra.

Daniel Costanzo, Benjamin Costanzo,4 and Brian Fitzpatrick (the “Founders”)

operate a restaurant in Palm Beach Gardens, Florida, called “Plant Based Mafia” (the

“Original Restaurant”). The Original Restaurant is a mafia-themed Italian

restaurant that only uses plant-based ingredients. The Founders and a silent partner

own the Original Restaurant through Plant Based Mafia LLC (the “Original LLC”).

Trematerra is a wealthy real estate developer. In 2021, he ate at the Original

Restaurant, loved the food, and liked the mafia theme. Trematerra suggested that

with his money and connections, the Founders could launch a chain of restaurants.

The Founders and Trematerra agreed to launch three restaurants in Florida.

Trematerra would provide the capital, and the Founders would provide the sweat

equity. The Founders also would contribute their “Plant Based Mafia” intellectual

property.

2 See JX 178.

3 See, e.g., JX 4; JX 20; JX 181; JX 259; JX 270.

4 I normally identify individuals by their last names without honorifics. In this

case, two defendants have the same last name. Going forward, this decision refers to Daniel Costanzo as “Daniel” and his brother, Benjamin Costanzo, as “Benjamin.” Neither usage implies familiarity or intends disrespect.

2 B. The Governing Documents

As the vehicle for their venture, the Founders and Trematerra formed PBM

Group Holdings, LLC (the “Company”). Its four members were the three Founders

and PJT Holdings, LLC (the “Investor”). Trematerra controlled the Investor. For

simplicity, this decision generally refers to Trematerra, even when the Investor is

technically the pertinent actor.

The Company’s limited liability company agreement (the “LLC Agreement”)5

established a member-managed structure, stating:

The management of the Company is fully reserve to its Members in proportion to the Members’ respective Percentage Interests; the members shall have the sole and exclusive control of the management, business and affairs of the Company, and the Members shall make all decisions and take all actions for the Company not otherwise provided for in this Agreement.6

The LLC Agreement authorized the members to take action at meetings by the

affirmative vote of the holders of a majority of the member interest (the “Majority

Action Requirement”).7 Trematerra held a 50% member interest. The Founders held

the other 50%, which they divided equally. The LLC Agreement provided that “[s]o

long as [Trematerra] owns fifty (50%) percent or more of the Membership Interests

in the Company, in the event of any deadlock of the Members, [Trematerra] shall

5 JX 27 [hereinafter OA].

6 Id. § 6.01.

7 Id. § 8.01(a).

3 have the deciding vote to break the deadlock” (the “Tiebreaking Vote”).8 The members

could take action without a meeting, but only by unanimous written consent.9

The LLC Agreement contained an expulsion mechanism that allowed a

member to be expelled for contractually specified reasons by the unanimous vote of

the other members (the “Expulsion Provision”).10 The LLC Agreement also contained

an indemnification provision that requires any member who breached the LLC

Agreement to indemnify the Company and the non-breaching members for any losses

resulting from the breach (the “Indemnification Provision”).11

The Founders and Trematerra also entered into a Contribution and

Investment Agreement (the “Contribution Agreement”).12 The LLC Agreement

incorporated the Contribution Agreement by reference.13

In return for their 50% equity interest, the Founders agreed in the

Contribution Agreement to contribute the intellectual property they developed for the

8 Id.

9 Id. § 8.05(a).

10 Id. § 15.04.

11 Id. § 18.11.

12 See JX 26 [hereinafter CA].

13 See OA ¶ C.

4 Original Restaurant, including its brand. The Founders claimed to have spent nearly

$1,000,000 developing the intellectual property, plus many hours of their own time.14

In return for his 50% interest, Trematerra agreed in the Contribution

Agreement to make an initial equity investment of $200,000 (the “Initial Capital

Contribution”), due at closing. He also committed to provide additional capital

totaling $3,300,000 (the “Additional Capital Contributions”). The Contribution

Agreement recognized that both were equity investments.15

The LLC Agreement provided that if a member failed to make a capital

contribution when due, then the member became a “Defaulting Member.”16 An

expelled member also became a Defaulting Member.17 The LLC Agreement specified

14 Daniel Tr. at 25–26. Although that figure seems high, nothing in the record

contradicts it. At trial, Trematerra inexplicably testified that the Founders never contributed intellectual property to Company. Trematerra Tr. at 454–58, 504–05. Yet there is an agreement documenting the transfer and giving Trematerra a security interest, which he signed. See JX 39.

15 CA ¶ C (“[Trematerra] shall be assigned and receive fifty (50%) percent [sic]

membership interest in the Company in exchange for an investment of equity capital in the Company in the initial amount of $200,000.00 and a committed capital investment up to 3,500,000.00 [sic] as provided in the [LLC Agreement].”). The LLC Agreement also identified Trematerra’s contributions as equity investments. See OA ¶¶ C, D.

16 OA § 15.01.

17 Id. § 15.04.

5 potential remedies that the remaining members could impose on a Defaulting

Member, including forfeiture of the Defaulting Member’s interest.18

The parties dispute the nature of Trematerra’s obligations to make the Initial

Capital Contribution and the Additional Capital Contributions. This decision

addresses those disputes in the Legal Analysis. In any event, Trematerra never made

a lump-sum contribution at closing equal to the Initial Capital Contribution. Nor did

any of the Founders demand that he do so. They allowed him to pay expenses as they

came due. By the time the parties’ relationship soured, Trematerra had not yet paid

expenses equal to the Initial Capital Contribution. The Company also never made a

formal capital call on Trematerra for an Additional Capital Contribution.

C. The Vendors

Well before executing the governing documents, the parties began working

with Russo, a restaurant industry expert. Russo estimated that starting up three

Florida-based restaurants would cost around $3.5 million. That figure formed the

basis for Trematerra’s capital commitments.

The parties now disagree on whether they planned on three new restaurants

or one to three new restaurants. The plan was three. But that number was not set in

stone, nor did the LLC Agreement or the Contribution Agreement condition anyone’s

obligations on a particular business plan.

The Company also retained other vendors, including:

18 Id. § 15.01(g).

6 • Push, Inc, a marketing and branding consultant;

• Gravity Architecture and Design, LLC, an architectural firm owned by Ray Schaefer;

• Nartowicz International Culinary Consulting, LLC, a culinary consulting firm owned by Jay Nartowicz;

• Plave Koch PLC, a law firm specializing in intellectual property; and

• Saraga/Lipshy, PL, a law firm that addressed more general business issues.

During 2022 and 2023, the Founders and Trematerra worked with the vendors,

who billed the Company for their services. The Founders assert that Trematerra did

not pay the full amounts of their invoices in timely fashion, instead paying late and

only the amounts he thought warranted for the work. The Founders contend that

Trematerra’s payment practices jeopardized the Company’s relationships with the

consultants and harmed the Company. This decision analyzes that assertion in the

Legal Analysis.

D. The Pivot To California

Although the members originally planned to launch the new restaurants in

Florida, the real estate market “was very tight.”19 After looking at various locations

around the country, the members decided in late 2022 to focus on Southern

California. They identified a location in Beverly Hills, targeted a second location in

Huntington Beach, and were evaluating a third location in downtown Los Angeles.

19 Russo Dep. 123.

7 With the members’ consent, Russo signed a letter of intent for the Beverly Hills

location in January 2023. Russo then engaged DLA Piper LLP to represent the

Company in negotiating a lease (the “Lease”). The Founders authorized Trematerra

to oversee the negotiations with the landlord (the “Landlord”). Trematerra provided

the Founders with regular updates and a chance to review drafts.

E. Trematerra Proposes A Restructuring.

Opening in Southern California meant higher startup costs than in Florida.

Materials and services generally cost more in Southern California. Not only that, but

not all of the Founders would relocate to Southern California, so the budget had to

include additional managerial expense. Russo estimated that opening one restaurant

in California would require $1.35 million. Building out three restaurants and funding

their expenses for ninety days would require $4,282,975.20

The new estimate for three restaurants was more than Trematerra had agreed

to invest. On January 27, 2023, Trematerra, the Founders, and Russo met at

Trematerra’s home in Singer Island, Florida. Trematerra proposed to increase his

commitment to $5 million in exchange for 70% of the Company (the

“Restructuring”).21 The parties dispute whether Trematerra said he would not go

20 JX 18.

21 The Founders assert that Trematerra initially demanded 90% of the Company. See Trematerra Dep. 59. Trematerra disputes that, but agrees he asked for 70%. Either way, he refused to go forward unless the Founders agreed to change the deal.

8 forward without the Restructuring. At a minimum, he implied it. The members

discussed the Restructuring but did not reach agreement.

During February 2023, negotiations with the Landlord moved forward. The

members did not make any progress on the Restructuring.

F. Trematerra Signs The Lease.

At the beginning of March 2023, the Founders sent Trematerra a confusing

series of communications. On March 3, Daniel emailed Trematerra that they were

“going to respectfully decline your offer to dilute our ownership by 50%” and wanted

to “stick with [the] original deal.”22 Daniel then alternatively offered to sell

Trematerra another 25% of the Company’s equity for $10 million or sell him the entire

business for $30 million.23

Hours later, Benjamin sent Trematerra a different counteroffer. That

counteroffer proposed having Trematerra cover the full cost of opening three

restaurants in California in exchange for a 90% ownership stake in the first two

restaurants, a 70% stake in the next three stores, then 50% ownership after that,

plus 25% of the Founders’ cash flows until Trematerra’s investment had been repaid.

That counteroffer contemplated salaries for the Founders and protection for them

against further dilution.24 No agreement was reached.

22 JX 141 at 1.

23 Id. at 2.

24 See JX 139.

9 On March 4, 2023, Daniel texted a list of “deal points” to Russo.25 Russo relayed

them to Trematerra.26 During a Zoom call later that day, Daniel became angry with

Trematerra. After the meeting, Trematerra sent the Founders the following text:

“Gentlemen, I wish you the best of luck. I will not be abused and disrespected in this

manner [sic] let’s figure out what we have to do for you to move forward for you [sic]

to buy out my percentage of the company.”27

By making that statement, particularly after earlier implying (at a minimum)

that he would not fulfill his commitments to the Company without the Restructuring,

Trematerra repudiated his obligations under the LLC Agreement. That might seem

to have ended the relationship, but Benjamin and Russo asked Trematerra to stay

involved and promised he would not have to deal directly with Daniel. No agreement

was reached.

On March 5, 2023, DLA Piper sent the Landlord a final redline and signature

version of the Lease. The Landlord agreed to the terms. Trematerra, however, raised

a new issue. The Lease gave the Company an initial period of 195 days before it had

to begin paying rent. Trematerra did not think the restaurant could become

operational in that time, so he proposed extending the initial period to 240 days.

25 JX 154 at 247–50; Daniel Tr. at 84–88.

26 Trematerra Tr. at 493.

27 JX 142.

10 Russo texted the Founders about Trematerra’s request for 240 days. The

Founders reacted angrily, believing that Trematerra had gone rogue and jeopardized

the Lease by asking for more time.

At 8:28 am on March 8, 2023, Daniel texted Trematerra: “Lets [sic] go grab a

f*****g beer, bury the hatchet, go to war and build PBM into one [sic] the successful

brand we know it can be. We don’t just need money Peter, [sic] we need leadership

and we need your leadership now more than ever.”28

But the Founders were also contemplating a Plan B. They expected Trematerra

to refuse to sign the Lease or fund the Company unless they agreed to the

Restructuring.29 The Founders wanted a “contingency plan,” so they began evaluating

whether they could invoke the Expulsion Provision or claim that Trematerra had

defaulted on his capital commitments.30 Thirty minutes after texting Trematerra,

Daniel texted his legal advisor, “We are thinking about regrouping, calling on our

default clause, [and] kicking [Trematerra] out of the LLC . . . .”31

Thirty minutes after that, Trematerra responded to Daniel’s “bury the hatchet”

message with the following text: “[W]e are trying to negotiate one last point on the

lease. I don’t want to waste potentially $50,000 worth of rent before the restaurant is

28 JX 154 at 31.

29 See Daniel Tr. 97–98; JX 154 at 376–78.

30 See JX 154 at 423; Daniel Tr. 100–03.

31 JX 154 at 423.

11 completed. I need you [sic] Ben and Brian to send me the [acknowledgement] that the

percentages have been changed to 70 :: 30% [sic] etc.”32 Trematerra thus again

implied that he would only fulfill his commitments if the Founders agreed to the

Restructuring.

Daniel asked Trematerra for a meeting between just the two of them, noting

that “[s]igning the lease means nothing if you and I haven’t cleared the air.”33 Minutes

later, at 9:25 am, Daniel wrote “[a]s far as the percentage [sic] we need a simple

amendment to the current operating agreement” and that Trematerra could have his

lawyer “send that this morning.”34 Trematerra declined to meet with Daniel or to call

him that day, offering only “Maybe tomorrow.”35

Over the course of the rest of the day, the Landlord accepted Trematerra’s

request for 240 days before rent began. Trematerra signed the Lease and a personal

guaranty (the “Personal Guaranty”). The rent payments totaled $1.75 million over

ten years. That was well within the $3.3 million of Additional Capital Contributions

that Trematerra had committed to make to the Company, while still leaving $1.55

million to build out the restaurant. Developing a single restaurant would have

departed from the original plan to develop three restaurants, but the three-

32 Id. at 32.

33 Id.

34 Id.

35 Id.

12 restaurant plan was just that—a plan. It was not part of the LLC Agreement or the

Contribution Agreement, and no one’s contractual obligations were conditioned on it.

Trematerra contends that he signed the Lease because he believed Daniel had

agreed in principle to the Restructuring through his 9:25 am text.36 But because of

the Majority Action Requirement, Trematerra did not have the right to decide

unilaterally whether or not to execute the Lease. Trematerra and the Founders had

made the decision to go forward with a restaurant at the Beverley Hills location.

Trematerra could not refuse to implement that decision. If Trematerra had called a

meeting of the members to reconsider the plan, then a majority of the members could

have decided on a different course. If a deadlock had ensued, then Trematerra could

have broken the deadlock with the Tiebreaking Vote, but he could not make decisions

unilaterally on behalf of the Company.

Although no one realized it at the time, the Lease mistakenly identified the

Original LLC as the tenant rather than the Company.

G. The Founders Reject The Restructuring.

Over the next five days, little happened. Then on March 13, 2023, Trematerra

sent the Founders a document titled “Assignment of Membership Interest” (the

“Assignment”).37 It only changed the equity allocation so that Trematerra owned 70%

and the Founders owned 30%. It included none of the Founders’ terms. The

36 See Trematerra Tr. 404.

37 JX 6.

13 Assignment contained an integration clause, making clear that upon execution, it

would reflect the parties’ entire agreement.38

After receiving the Assignment, Daniel texted Trematerra:

Peter our deal will most likely take 2-3 days to complete. The 70-30 has been agreed on however there’s some language we need addressed that confirms the investment changes you spoke about and why you want the 70-30 change.

Don’t let our deal change hold up the rest of the contracts that need to move forward.

Right now we need to negotiate and operate in good faith while you and Russo drive this train forward. We can’t stand to miss a day, let alone 2- 3 weeks.39

That message is difficult to parse. Daniel seemed to be saying that the Founders had

agreed to the reallocation of equity conditioned on the deal points they had asked and

that would need to be added to the Assignment.

Trematerra texted back promptly:

Unfortunately, I cannot do that. I have too much money at risk. This is a simple addendum that was sent. All of the terms and conditions of the agreement are in effect. If you need to return you [sic] to call my attorney I would have him do so today we cannot wait any longer. Otherwise we need to let this location go.40

By stating that “[a]ll of the terms and conditions of the agreement are in effect,”

Trematerra sought to take advantage of the Founders’ relative lack of sophistication.

38 Id. § 6.2.

39 JX 154 at 2.

40 Id.

14 He expected them to sign the Assignment, at which point he would cite the

integration clause to argue that the document reflected their entire agreement.

Later that evening, Trematerra told Daniel again that if the Founders did not

agree to the Restructuring, then he would cancel the Lease.41 Trematerra did not

have the right to do that. Trematerra and the Founders had made the decision to go

forward with a restaurant at the Beverley Hills location. Because of the Majority

Action Requirement, Trematerra could not unilaterally cancel the Lease. Here again,

Trematerra could have called a meeting of the members and proposed to cancel the

Lease. If members holding a majority interest agreed, then Trematerra could have

acted. If a deadlock had ensued, then Trematerra could have broken the deadlock

with the Tiebreaking Vote. What Trematerra could not do was act unilaterally on

behalf of the Company.

On March 14, 2023, the Founders notified Trematerra that they would not

proceed with the Restructuring, stating: “After careful consideration and lengthy

conversations with our business advisor . . . we are not comfortable re-trading the

50/50 deal we agreed to.”42 The Founders also told Trematerra that they would not

proceed in California:

We do not think it makes sense at this time to go to California despite knowing how successful we will be out there. You’ve expressed to us several times that you’re not comfortable with California and that you

41 See JX 154 at 46–47.

42 JX 155 at 1.

15 had always believed we’d launch in Florida. So with that said, we strongly feel Florida is where we should launch.43

Trematerra sent the following response:

Team ; [sic] I have invested well over $250,000 at this time plus my resources. Additionally, my time, travel, efforts etc. [sic] I will cancel the California transaction today .until [sic] we can get a path [t]hat is an agreeable [sic] I cannot spend any more time on this venture. Let me know when you have something that you think is viable in Florida.. [sic]44

Trematerra agreed at trial that the $250,000 was exaggerated.45 His statement that

he “cannot spend any more time on this venture” constituted a repudiation of his

obligations under the LLC Agreement.

With the Founders having told Trematerra they were not willing to proceed in

California, Trematerra told the Landlord on March 14, 2023, that he could not

proceed with the Lease. While understandable as a way to mitigate the Company’s

liability under the Lease and his own liability under the Personal Guaranty,

Trematerra did not have the right to do that. He needed to call a meeting of the

members, attempt to reach agreement on a plan forward, and (if necessary) exercise

the Tiebreaking Vote.

The Landlord was not happy with the news. He pointed out that they had spent

weeks negotiating the Lease, and he had agreed to the late request for a 240-day

43 Id. at 2.

44 Id. at 1.

45 Trematerra Tr. 536–37.

16 grace period, yet Trematerra had cancelled the day after signing. The Landlord

threatened to enforce the lease as written but offered to settle for about $197,000.46

Trematerra hired counsel and engaged in negotiations with the Landlord.

On March 15, 2023, Trematerra and the Founders went back and forth with

more proposals. Russo texted the Founders that it would be difficult to restart in

Florida because they had “wasted a lot of people’s time” and burned “a lot of bridges”

by previously rejecting Florida locations.47 Daniel texted Trematerra that “[the

Founders] can still do LA and just open[] it up as one store” and that they “could stick

with the deal that [they] have on the table.”48 Trematerra refused, saying that “the

basis of the deal has changed.”49 Trematerra asked for a buyout.50 His refusal

constituted another repudiation of his obligations under the LLC Agreement.

Trematerra did not have the right to refuse to comply with his obligations

under the LLC Agreement because he personally thought that “the basis of the deal

has changed.” Trematerra made capital commitments to the Company. Those capital

commitments were not conditioned on a particular business plan. Trematerra had to

fulfill his capital commitments if the Company called on him. Here too, he could have

46 JX 159 at 2.

47 JX 154 at 286.

48 JX 154 at 36.

49 Id.

50 JX 154 at 37–42.

17 called a meeting of the members, tried to convince the Founders to go in a different

direction, and broken any deadlock with the Tiebreaking Vote, but he could not decide

unilaterally not to move forward.

H. The Founders Expel Trematerra.

During the balance of March and early April 2023, the Founders made a series

of proposals to Trematerra.51 The Founders also sought to create sources of leverage

to improve their negotiating position vis-à-vis Trematerra.

As one source of leverage, Daniel asked Push and Nartowicz to assert that the

Company had breached their consulting agreements because Trematerra had failed

to pay their invoices in full and on time. Daniel did so to “try to create grounds where

[he] could hold Peter in default under the [LLC Agreement],”52 which would give the

Founders the ability to invoke the Expulsion Provision. It didn’t work. Gravity and

Nartowicz wrote letters to Trematerra and Russo saying that the Company had no

further obligations to them.53 The Company owed Push money, but the Founders had

agreed with Trematerra that Push failed to perform and did not deserve full

payment.54

51 E.g., JX 160; JX 161; JX 163; JX 300.

52 Daniel Tr. 294–95; see JX 104 at 4; JX 158.

53 JX 175; JX 184.

54 JX 58 at 168; Russo Dep. 28–32, 163; see also JX 154 at 146–47.

18 The Founders also looked for alternative investors who might help buy out

Trematerra or, at a minimum, relieve their dependence on him. In May 2023, they

met with Arthur Benjamin, who they thought could replace Trematerra. After

meeting with Founders on May 31, 2023, Arthur Benjamin put the Founders in touch

with his “legal strategist,” Albert Santoro.55 Santoro’s checkered past includes being

disbarred by the State of New York after pleading guilty to the federal felony charge

of operating “unlicensed money transmitting business in violation of 18 USC [sic]

§ 1960.”56 Santoro was readmitted to the New York bar on June 15, 2023.57

In early June 2023, Arthur Benjamin, Santoro, and the Founders worked

together on how to get rid of Trematerra. They decided that the Founders would

invoke the Expulsion Provision “to remove [Trematerra] from the company and then,

after that, try to negotiate a deal with him.”58 They believed that expelling

Trematerra would allow them to negotiate from a position of strength.

On June 7, 2023, the Founders executed a resolution that purported to invoke

the Expulsion Provision and expel Trematerra (the “Expulsion Resolution”).59 The

Expulsion Resolution cited nine reasons (the “Original Reasons”):

55 JX 10 at 1–2.

56 JX 23 at 2.

57 JX 228.

58 Daniel Tr. at 183.

59 JX 210.

19 1) [Trematerra] has not made “additional investments of equity capital in the Company” as provided for in the [LLC Agreement] and which was a material inducement for the disinterested members to enter into the [LLC Agreement] with [Trematerra]; and

2) [Trematerra] has made multiple unilateral material business decisions without express, actual and/or apparent authority, and without consulting with the other Members; and

3) [Trematerra] has willfully, and without good cause, refused to pay vendors of [the Company], including, but not limited to, [Push] (more than $15,000.00), [Gravity] (more than $6,000.00), [and] Jay Nartowicz (more than $9,000.00) thereby hurting necessary and important business relationships with said vendors and subjecting [the Company] to potential tort and other damages, in addition to the expending [sic] significant legal fees to defend any such suits; and

4) [Trematerra] without authority, and without the consent of the other Members, negotiated a lease agreement in the name of [the Company] in Los Angeles, California (hereinafter “LA Lease”) to the detriment of [the Company]; and

5) [Trematerra] without authority, and without the consent of the other Members, unilaterally modified said LA Lease by making material (but not easily visually observed) changes to the lease that were not disclosed to the leasing agent nor landlord thereby setting off a negative chain of events that permanently damaged and disparaged the reputation of [the Company] and [the Original LLC]; and

6) [Trematerra] then defaulted in the payment of said LA Lease thereby subjecting [the Company] to extensive and expensive exposure to litigation from the landlord and leasing agent of said LA Lease location; and

7) [Trematerra’s] actions regarding the LA Lease caused extensive material financial harm to [the Company] that is still yet to be determined but in no event is less than five million dollars ($5,000,000.00US); and

8) [Trematerra] . . . engaged in threatening and extortive behavior towards the other Members of [the Company]; and

20 9) Such other tortious, harmful, damaging, unlawful, and/or illegal conduct that will be further memorialized in a civil action currently being prepared by counsel.60

Trematerra contends that the Original Reasons could not support his expulsion. This

decision addresses those reasons in the Legal Analysis.

The same day, the Founders sent a cease-and-desist letter to Trematerra

telling him that the Founders had expelled him and were preparing to file suit against

him and his affiliates.61

The members’ legal representatives later exchanged a series of

communications. The discussions went nowhere.

I. This Litigation

On June 28, 2023, Trematerra filed this litigation. He sought a declaration that

the Expulsion Resolution was invalid, asserted that the Founders breached the LLC

Agreement by adopting the Expulsion Resolution, and asked for damages under the

Indemnification Provision. The Founders counterclaimed for declaratory judgments

that the Expulsion Resolution was valid, that Trematerra had breached the LLC

Agreement, and that they were entitled to damages under the Indemnification

Provision.

Trematerra contemporaneously reached a settlement with the Landlord. In

return for a payment of $36,000, he obtained a global release of claims for himself,

60 Id. at 1–2.

61 JX 211.

21 the Company, and the Founders.62 Neither the Company nor the Founders have

incurred any expense for the Lease.63

During discovery, the Founders served interrogatory responses identifying

more reasons why Trematerra had breached the LLC Agreement (the “Additional

Reasons”). This decision addresses those reasons in the Legal Analysis.

The parties cross-moved for summary judgment. The court granted the

motions in part. The parties proceeded to trial.

II. LEGAL ANALYSIS

The outcome of the case turns on whether the Founders validly expelled

Trematerra. As the parties who relied on the Expulsion Provision to take

Trematerra’s property, the Founders bore the burden of proving compliance with its

terms. That allocation also avoided forcing Trematerra to prove a negative.

A. Compliance With The Expulsion Provision

Whether the Founders validly invoked the Expulsion Provision presents an

issue of contract interpretation. The Founders bore the burden of proving that at least

one of the Original Reasons or Additional Reasons justified expulsion.

1. Contract Interpretation Principles

The Expulsion Provision appears in the LLC Agreement, which is governed by

Delaware law. Under Delaware law, “[w]hen interpreting a contract, the role of a

62 JX 236 at 2.

63 Daniel Tr. 305; Trematerra Tr. 421; See JX 146 at 26.

22 court is to effectuate the parties’ intent.”64 Absent ambiguity, the 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.”65

“Unless there is ambiguity, Delaware courts interpret contract terms according

to their plain, ordinary meaning.”66 The “contract’s construction should be that which

would be understood by an objective, reasonable third party.”67 “Absent some

ambiguity, Delaware courts will not destroy or twist [contract] language under the

guise of construing it.”68 “If a writing is plain and clear on its face, i.e., its language

conveys an unmistakable meaning, the writing itself is the sole source for gaining an

understanding of intent.”69

“In upholding the intentions of the parties, a court must construe the

agreement as a whole, giving effect to all provisions therein.”70 “[T]he meaning which

64 Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 739 (Del. 2006).

65 In re Viking Pump, Inc., 148 A.3d 633, 648 (Del. 2016) (internal quotation

marks omitted).

66 Alta Berkeley VI C.V. v. Omneon, Inc., 41 A.3d 381, 385 (Del. 2012).

67 Salamone v. Gorman, 106 A.3d 354, 367–68 (Del. 2014) (internal quotation

68 Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins., 616 A.2d 1192, 1195

(Del. 1992).

69 City Investing Co. Liquidating Tr. v. Cont’l Cas. Co., 624 A.2d 1191, 1198

(Del. 1993).

70 E.I. du Pont de Nemours & Co. v. Shell Oil Co., 498 A.2d 1108, 1113 (Del.

1985).

23 arises from a particular portion of an agreement cannot control the meaning of the

entire agreement where such inference runs counter to the agreement’s overall

scheme or plan.”71 “[A] court interpreting any contractual provision . . . must give

effect to all terms of the instrument, must read the instrument as a whole, and, if

possible, reconcile all the provisions of the instrument.”72

“Contract language is not ambiguous merely because the parties dispute what

it means. To be ambiguous, a disputed contract term must be fairly or reasonably

susceptible to more than one meaning.”73 If the language of an agreement is

ambiguous, then the court “may consider extrinsic evidence to resolve the

ambiguity.”74 Permissible sources of extrinsic evidence may include “overt statements

and acts of the parties, the business context, prior dealings between the parties, [and]

business custom and usage in the industry.”75 A court may consider “evidence of prior

agreements and communications of the parties as well as trade usage or course of

dealing.”76 “When the terms of an agreement are ambiguous, ‘any course of

performance accepted or acquiesced in without objection is given great weight in the

71 Id.

72 Elliott Assocs., L.P. v. Avatex Corp., 715 A.2d 843, 854 (Del. 1998).

73 Alta Berkeley, 41 A.3d at 385 (footnote omitted).

74 Salamone, 106 A.3d at 374.

75 Id. (alteration in original) (internal quotation marks omitted).

76 Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1233 (Del.

1997).

24 interpretation of the agreement.’”77 “[T]he private, subjective feelings of the

negotiators are irrelevant and unhelpful to the Court’s consideration of a contract’s

meaning, because the meaning of a properly formed contract must be shared or

common.”78

2. The Expulsion Requirements

The Expulsion Provision states:

A Member may be expelled from the Company by unanimous vote of all other Members (not including the Member to be expelled) if that Member (a) has willfully violated any provision of this Agreement; (b) committed fraud, theft, or gross negligence against the Company or one or more Members of the Company, (c) engaged in wrongful conduct that adversely and materially affects the business or operation of the Company or (d) met any other condition that allows a member to be expelled under the Act.79

Although the Expulsion Provision identifies four categories of conduct that justify

expulsion, the fourth refers to “any other condition that allows a Member to be

expelled under the Act,” a term that refers to the Delaware Limited Liability

Company Act (the “LLC Act”).80 The LLC Act does not contain a default provision

authorizing members to expel other members. The Founders must therefore prove

that they satisfied one of the first three grounds.

77 Sun-Times Media Gp., Inc. v. Black, 954 A.2d 380, 398 (Del. Ch. 2008) (quoting Restatement (Second) of Contracts § 202 (Am. L. Inst. 1981).

78 United Rentals, Inc. v. RAM Hldgs., Inc., 937 A.2d 810, 835 (Del. Ch. 2007)

(footnote omitted).

79 OA § 15.04.

80 OA ¶ A.

25 a. The Fraud, Theft, And Gross Negligence Requirements

Category (b) is the easiest to address and informs the interpretation of the

other categories. It authorizes expulsion when a member has “committed fraud, theft,

or gross negligence against the Company or one or more members of the Company.”

“Where a word has attained the status of a term of art and is used in a technical

context, the technical meaning is preferred over the common or ordinary meaning.”81

“When established legal terminology is used in a legal instrument, a court will

presume that the parties intended to use the established legal meaning of the

terms.”82

The plain meaning of “committed fraud” means conduct that would constitute

fraud at common law (the “Fraud Requirement”). Stated more generally, it

means “[a]n intentional perversion of truth for the purpose of inducing another in

reliance upon it to part with some valuable thing belonging to him or to surrender a

legal right.”83

81 Penton Bus. Media Hldgs., LLC v. Informa PLC, 252 A.3d 445, 461 (Del. Ch.

2018) (internal quotation marks omitted) (quoting Viking Pump, Inc. v. Liberty Mut. Ins., 2007 WL 1207107, at *13 (Del. Ch. Apr. 2, 2007)).

82 Id.

83 Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624

A.2d 1199, 1208 n.16 (Del. 1993) (internal quotation marks omitted) (citing BLACK’S LAW DICTIONARY 337 (5th ed. 1983)); accord Fraud, BLACK’S LAW DICTIONARY (12th ed. 2024) (“A knowing misrepresentation or knowing concealment of a material fact made to induce another to act to his or her detriment.”).

26 The plain meaning of “committed . . . theft” means conduct that would

constitute theft at common law (the “Theft Requirement”). Theft requires the “taking

or appropriating of something belonging to another” and “a culpable mental state.”84

The plain meaning of “committed . . . gross negligence” is equally

straightforward. In civil cases not involving business entities, the Delaware Supreme

Court has defined gross negligence as “a higher level of negligence representing ‘an

extreme departure from the ordinary standard of care.’”85 This test “is the functional

equivalent” of the test for “[c]riminal negligence.”86 By statute, Delaware law defines

“criminal negligence” as follows:

A person acts with criminal negligence with respect to an element of an offense when the person fails to perceive a risk that the element exists or will result from the conduct. The risk must be of such a nature and degree that failure to perceive it constitutes a gross deviation from the standard of conduct that a reasonable person would observe in the situation.87

84 Travis v. Escape Hosp., LLC, 2020 WL 1170768, at *3 (Del. Super. Ct. Feb.

28, 2020). Cf. 11 Del. C. § 841(a) (“A person is guilty of theft when the person takes, exercises control over or obtains property of another person intending to deprive that person of it or appropriate it.”).

85 See, e.g., Browne v. Robb, 583 A.2d 949, 953 (Del. 1990) (quoting William

Prosser, Handbook of the Law of Torts 150 (2d ed. 1955)).

86 Jardel Co. v. Hughes, 523 A.2d 518, 530 (Del. 1987).

87 11 Del. C. § 231(a).

27 Under this framework, gross negligence “signifies more than ordinary inadvertence

or inattention,” but it remains “a degree of negligence, while recklessness connotes a

different type of conduct akin to the intentional infliction of harm.”88

In cases involving business entities, however, gross negligence has acquired its

own, special meaning and requires conduct akin to recklessness.89 By statute,

Delaware has defined recklessness as a situation where “the person is aware of and

consciously disregards a substantial and unjustifiable risk that the element exists or

will result from the conduct.”90 The risk “must be of such a nature and degree that

disregard thereof constitutes a gross deviation from the standard of conduct that a

reasonable person would observe in the situation.”91 For purposes of its entity law,

88 Jardel, 523 A.2d at 530.

89 In re Lear Corp. S’holder Litig., 967 A.2d 640, 652 n.45 (Del. Ch. 2008) (“[T]he

definition [of gross negligence in corporate law] is so strict that it imports the concept of recklessness into the gross negligence standard . . . .”); Albert v. Alex. Brown Mgmt. Servs., Inc., 2005 WL 2130607, at *4 (Del. Ch. Aug. 26, 2005) (“Gross negligence has a stringent meaning under Delaware corporate (and partnership) law, one which involves a devil-may-care attitude or indifference to duty amounting to recklessness.” (internal quotation marks omitted)); Tomczak v. Morton Thiokol, Inc., 1990 WL 42607, at *12 (Del. Ch. Apr. 5, 1990) (“In the corporate context, gross negligence means reckless indifference to or a deliberate disregard of the whole body of stockholders or actions which are without the bounds of reason.” (internal quotation marks omitted)); Solash v. Telex Corp., 1988 WL 3587, at *9 (Del. Ch. Jan. 19, 1988) (Allen, C.) (explaining that to be grossly negligent, a decision “has to be so grossly off- the-mark as to amount to reckless indifference or a gross abuse of discretion.” (internal quotation marks omitted)).

90 11 Del. C. § 231(e).

91 Id.; see id. § 231(a).

28 Delaware law requires conduct more serious than what would be necessary to secure

a conviction for criminal negligence.92 The plain meaning of “committed . . . gross

negligence” therefore means to have acted recklessly (the “Recklessness

Requirement”).

b. The Willful Breach Requirement

Category (a) authorizes expulsion when a member has “willfully violated any

provision of this agreement.” To violate a contractual provision means to breach it

(the “Willful Breach Requirement”).

In the XRI decision, this court addressed what constituted the “willful breach”

of an LLC agreement where the parties have not defined that term, but where the

agreement juxtaposed the concept of willful breach with the concept of gross

negligence.93 In XRI, those terms appeared in the definition of “Disabling Conduct.”

Proof of Disabling Conduct would foreclose an otherwise covered person from

receiving indemnification.94

The XRI decision noted that courts and scholars have proposed a range of

standards for evaluating willful breach.95 Under a strict view, the breaching party

92 In re McDonald’s Corp. S’holder Deriv. Litig., 291 A.3d 652, 689 (Del. Ch.

2023).

93 XRI Inv. Hldgs LLC v. Holifield, 2024 WL 3517630, at *21 (Del. Ch. July 24,

2024).

94 Id. at *20.

95 Id. at *21–22.

29 must have known that the conduct would constitute a breach and have acted

purposefully to breach the contract. Under an even stricter view, the breaching party

must have specifically intended to harm the counterparty such that the breach

constituted an intentional tort.96

At the other end of spectrum, the Hexion decision held that a party commits a

knowing and intentional breach when the party knowingly and intentionally acts,

regardless of whether the party knows that action will constitute a breach.97 The

Hexion decision rejected the argument that the breaching party must also know its

conduct constitutes a breach as “simply wrong.”98 For support, the court looked to

criminal law:

Momentarily drawing the analogy to criminal law . . . makes this immediately clear: it is the rare crime indeed in which knowledge of the criminality of the act is itself an element of the crime. If one man intentionally kills another, it is no defense to a charge of murder to claim that the killer was unaware that killing is unlawful. Similarly, if a man takes another’s umbrella from the coat check room, it may be a defense to say he mistakenly believed the umbrella to be his own (a mistake of fact). It is no defense to say he had not realized that stealing was illegal, nor is it a defense that it was not his “purpose” to break the law, but simply to avoid getting wet. . . . [A] mistake of law virtually never excuses a violation of law.99

96 See generally Michael B. de Leeuw & Brian J. Howard, What Is a Willful

Breach of Contract?, N.Y. L. J. (Apr. 3, 2006).

97 Hexion Specialty Chems., Inc. v. Huntsman Corp., 965 A.2d 715, 746–48 (Del.

Ch. 2008).

98 Id.

99 Id. at 746–47.

30 The Hexion decision interpreted an acquisition agreement, and since then, parties to

acquisition agreements have often contracted around that interpretation by defining

a term like willful breach to require that the breaching party know its intentional

conduct constitutes a breach.100

Scholars have suggested still more framings. Professor Richard Craswell

argues that a willful breach cannot be defined solely in terms of a mental state

because it represents a legal conclusion that a breach is sufficiently serious to

warrant increasing the damages amount and deterring similar conduct.101 Professors

Oren Bar-Gill and Omri Ben-Shahar similarly argue a willful breaches is one where

100 See, e.g., In re Anthem-Cigna Merger Litig., 2020 WL 5106556, at *5 (Del.

Ch. Aug. 31, 2020) (noting that “[t]he Merger Agreement defined that term as conduct that both constituted a material breach and which the breaching party subjectively knew would constitute a material breach.”), aff’d, 251 A.3d 1015 (Del. 2021); Genuine Parts Co. v. Essendant Inc., 2019 WL 4257160, at *3 n.17 (Del. Ch. Sept. 9, 2019) (“The Agreement defines ‘Willful Breach’ as ‘a breach of, or failure to perform any of the covenants or other agreements contained in this Agreement, that is a consequence of an act or failure to act by the breaching party . . . with actual knowledge that such Person’s act or failure to act would, or would reasonably be expected to, result in or constitute a breach of or failure of performance under the Agreement.’” (omission in original)). That does not mean they always do. A study of 1,000 merger and acquisition agreements finds that although the vast majority tie damages to a concept of willful breach, less than one-third of public deals and under one tenth of private deals define the term. See generally Theresa Arnold, Amanda Dixon, Madison Whalen Sherrill, Hadar Tanne & Mitu Gulati, The Cost of Guilty Breach: Willful Breach in M&A Contracts, 62 Bos. Coll. L. Rev. 32, 34, 45 (2021) (reviewing 1,000 M&A agreements and finding that over sixty percent tie damages to whether the breach was willful, but less than one-third of public and private deals define “willful” or “willful breach”).

101 See Richard Craswell, When is a Willful Breach “Willful”? The Link Between

Definitions and Damages, 107 Mich. L. Rev. 1501, 1502–07 (2009).

31 an additional remedy is warranted, but frame the concept as a breach that reveals

the counterparty to be “the type of transactor who readily chisels and acts in a

dishonest way, and has likely exercised such bad faith in other occasions without

being sanctioned.”102 Professors Steve Thel and Peter Siegelman argue that a willful

breach harms the non-breaching party more than its benefits the breaching party,

thus creating a deadweight loss. Under this view, a willful breach is one that cannot

be justified as an efficient breach.103

The XRI decision interpreted an LLC agreement that juxtaposed “willful

breach” with a breach resulting from “gross negligence.”104 Both terms modified

concept the of “breach,” not the act or omission giving rise to the breach. The terms

seemed to be targeting scenarios in which the counterparty knew (willfulness) or

consciously disregarded (gross negligence in the sense of recklessness) that its

conduct would constitute a breach and yet went forward anyway. From that baseline,

the XRI decision concluded that a willful breach for purposes of the LLC agreement

meant that a party intentionally acted while knowing that the conduct would

constitute breach. Put differently, the LLC agreement used the “willful” modifier to

102Oren Bar-Gill & Omri Ben-Shahar, An Information Theory of Willful Breach, 107 Mich. L. Rev. 1479, 1483 (2009).

See Steve Thel & Peter Siegelman, Willfulness Versus Expectation: A 103

Promisor-Based Defense of Willful Breach Doctrine, 107 Mich L. Rev. 1517, 1519–20, 1531 (2009).

104 XRI, 2024 WL 3517630, at *23.

32 require that the counterparty both act intentionally and know that its action would

cause a breach.105

The same reasoning applies here. As in XRI, the LLC Agreement juxtaposes

the concepts of “willful breach” and “gross negligence.”106 As in XRI the LLC

Agreement is not addressing willful conduct generally. The LLC Agreement instead

envisions a scenario in which the counterparty knows that its conduct would

constitute a breach and yet goes forward anyway.

c. The Wrongful Conduct Requirement

That leaves category (c), which involves “wrongful conduct that adversely and

materially affects the business or operation of the Company” (the “Wrongful Conduct

Requirement”). The threshold requirement is “wrongful conduct.” That wrongful

conduct must also have “adversely and materially affect[ed] the business or operation

of the Company.”

No Delaware decision has addressed what “wrongful conduct” means. But

many decisions—too many to cite—use the term in a generic and capacious sense to

mean conduct that could give rise to a remedy at law or in equity. That approach

comports with the plain meaning of the term “wrongful.” Black’s Law Dictionary

defines “wrongful” as “[c]haracterized by unfairness or injustice,” and “[c]ontrary to

105 Id.

106 See XRI, 2024 WL 3517630, at *23; OA § 15.04.

33 law” and “unlawful.”107 Dictionaries of standard English offer meanings like “unjust

or unfair,” or “having no legal right; unlawful.”108 Those expansive definitions

encompass both acts involving wrongful intent, such as a subjective intent to cause

harm, and acts that are inherently wrongful, such as violations of law. The term is

thus broader than “intentional misconduct,” which focuses on whether the party “(1)

acted intentionally to harm those to whom he owes the duty or (2) intentionally or

consciously ignored his duties, thereby causing harm to those to whom he owes the

duty to refrain from intentional misconduct.”109

Perhaps because of the expansive meaning of “wrongful conduct,” the

Expulsion Provision requires wrongful conduct that “adversely and materially affects

the business or operation of the Company.” That phrase is a deconstructed version of

the phrase “material adverse effect,” which has achieved the status of a term of art

in acquisition agreements.110

107 Wrongful, BLACK’S LAW DICTIONARY (12th ed. 2024).

108 Wrongful, DICTIONARY.COM, https://www.dictionary.com/browse/ wrongful (last visited May 9, 2025); see also Wrongful, MERRIAM-WEBSTER DICTIONARY, https://www.merriam-webster.com/dictionary/wrongful (last visited May 9, 2025) (defining “wrongful” as “Wrong, unjust,” “unlawful” and “having no legal claim”).

109 Dawson v. Pittco Cap. P’rs, L.P., 2012 WL 1564805, at *28 n.303 (Del. Ch.

Apr. 30, 2012); accord A & J Cap., Inc. v. L. Off. of Krug, 2019 WL 367176, at *12 (Del. Ch. Jan. 29, 2019), aff’d, 222 A.3d 143 (Del. 2019).

110 See Akorn, Inc. v. Frensenius Kabi AG, 2018 WL 4719347, at *85 (Del. Ch.

Oct. 1, 2018), aff’d, 198 A.3d 724 (Del. 2018); accord Snow Phipps Gp., LLC v. KCAKE Acq., Inc., 2021 WL 1714202, at *38 (Del. Ch. Apr. 30, 2021) (“Put differently, the materiality standard at issue asks whether the business deviation significantly alters 34 “In any M & A transaction, a significant deterioration in the selling company’s

business between signing and closing may threaten the fundamentals of the deal.”111

“Merger agreements typically address this problem through complex and highly

negotiated ‘material adverse change’ or ‘MAC’ clauses, which provide that, if a party

has suffered a MAC within the meaning of the agreement, the counterparty can

costlessly cancel the deal.”112 Despite the attention that contracting parties give to

these provisions, agreements typically do not define what is “material.”113 “What

the buyer’s belief as to the business attributes of the company it is purchasing.”); see Williams Cos., Inc. v. Energy Transfer LP, 2021 WL 6136723, at *25–26 (Del. Ch. Dec. 29, 2021) (applying Akorn meaning of “in all material respects” qualifier to a covenant in a merger agreement); AB Stable VIII LLC v. Maps Hotels and Resorts One LLC, 2020 WL 7024929, at *73 (Del. Ch. Nov. 30, 2020) (same); Dermatology Assocs. of San Antonio v. Oliver St. Dermatology Mgmt. LLC, 2020 WL 4581674, at *26–29 (Del. Ch. Aug. 10, 2020) (applying Akorn meaning of “in all material respects” qualifier to a representation in a merger agreement); Channel Medsystems, Inc. v. Bos. Sci. Corp., 2019 WL 6896462, at *17 (Del. Ch. Dec. 18, 2019) (same); see also Anthem-Cigna, 2020 WL 5106556, at *134 n.426 (distinguishing common law “material breach” standard from “in all material respects” standard).

111 Akorn, 2018 WL 4719347, at *47.

112 Robert T. Miller, The Economics of Deal Risk: Allocating Risk Through MAC

Clauses in Business Combination Agreements, 50 Wm. & Mary L. Rev. 2007, 2012 (2009) (footnote omitted); accord Andrew A. Schwartz, A “Standard Clause Analysis” of the Frustration Doctrine and the Material Adverse Change Clause, 57 UCLA L. Rev. 789, 820 (2010) (“[T]he MAC clause allows the acquirer to costlessly avoid closing the deal if the target’s business suffers a sufficiently adverse change during the executory period.”); see Jeffrey Manns & Robert Anderson IV, The Merger Agreement Myth, 98 Cornell L. Rev. 1143, 1153 (2013) (“The MAC/MAE Clause gives teeth to the closing conditions in specifying what type of events would entitle the acquiring company to call the deal off if events occur between signing and closing that make the deal less advantageous than expected.”).

113 Akorn, 2018 WL 4719347, at *48.

35 constitutes an MAE, then, is a question that arises only when the clause is invoked

and must be answered by the presiding court.”114

Outside the acquisition context, adding a materiality qualifier to a provision

“strives to limit [the contract term] to issues that are significant in the context of the

parties’ contract, even if the breaches are not severe enough to excuse a

counterparty’s performance” under the common-law doctrine of frustration of

purpose.115 The law governing MAEs in the acquisition context is a specific

application of the general rule that materiality must be “significant in the context of

the parties’ contract.”

The Wrongful Conduct Requirement therefore requires a fact-specific

determination that the harm from the wrongful conduct is sufficiently material to

warrant expulsion. Under the Expulsion Provision, the Wrongful Conduct

Requirement is the only basis for expulsion that expressly requires harm to the

Company.

114 Y. Carson Zhou, Essay, Material Adverse Effects as Buyer-Friendly Standard, 91 N.Y.U. L. Rev. Online 171, 173 (2016), http://www.nyulawreview.org/ sites/default/files/NYULawReviewOnline-91-Zhou.pdf (noting that in the typical MAE provision, the core concept of materiality is “left undefined”); see Frontier Oil Corp. v. Holly Corp., 2005 WL 1039027, at *34 (Del. Ch. Apr. 29, 2005) (“The parties chose to use the term ‘Material Adverse Effect’ and it is the Court’s function to discern what they intended. . . . The notion of an MAE is imprecise and varies both with the context of the transaction and its parties and with the words chosen by the parties.”).

115 Akorn, 2018 WL 4719347, at *86.

36 The parties disagree on whether the other requirements implicitly require

harm. Both sides cite the A&J case.116 There, the court interpreted a removal

provision that required a showing of grossly negligent or fraudulent conduct but said

nothing about harm. The court held that this phrase “necessarily incorporate[d] an

appreciation that the proscribed conduct must either be harmful or cause harm to

justify removal.”117 The court offered four reasons for that conclusion:

First, the operative agreements do not state that the Class B Manager may be removed for grossly negligent or fraudulent conduct; they state, instead, that removal will be justified, among other reasons, for “gross negligence” or “fraud.” Second, and more to the point, the contractually imposed standards of conduct necessarily incorporate an appreciation that the proscribed conduct must either be harmful or cause harm to justify removal. If there is no risk of harm to the Company as a result of the Manager’s actions, then there can be no deviation from the standards of care or conduct contemplated by the definitions of gross negligence, intentional misconduct, fraud or deceit. Third, Krug has not cited any case in support of his construction of the contractual removal standards that would justify divorcing the proscribed conduct from anticipated or actual harm caused by the conduct and he does not appear to disagree that the parties likely incorporated the elements of the standards as commonly known in our law. And finally, even if harm (foreseeable or actual) were divorced from the contractual standards as Krug would have it, as explained below, the preponderance of evidence does not support the contention that A & J [sic] violated any of the standards of conduct in connection with any of the alleged grounds for removal.118

116 A & J Cap., Inc. v. L. Off. of Krug, 2019 WL 367176 (Del. Ch. Jan. 29, 2019),

aff’d, 222 A.3d 143 (Del. 2019).

117 Id. at *11–12.

118 Id. (footnotes omitted).

37 Those reasons are unpersuasive for purposes of this case, where the Expulsion

Provision requires a showing of harm for the Wrongful Conduct requirement but not

for other requirements.

Taking the A&J reasons in reverse order, the fourth reason acknowledges that

the analysis is dictum. Because none of the standards of conduct were violated, the

A&J decision did not have to reach the issue of whether the removal provision also

required harm.

The third reason—the absence of prior precedent—should not be dispositive

when the language of a contract is clear and unambiguous. “Delaware is a

contractarian state that holds parties’ freedom of contract in high regard,”119 and

particularly so for alternative entity agreements.120 If parties frame a removal

provision not to require a showing of harm, then a court should enforce that language.

The second reason is an example of ipse dixit: reasoning that the terms

incorporate a harm requirement because “the contractually imposed standards of

119 Sunder Energy, LLC v. Jackson, 332 A.3d 472, 487 (Del. 2024); accord Stream TV Networks, Inc. v. SeeCubic, Inc., 279 A.3d 323, 355 (Del. 2022) (“Delaware is a contractarian state.”).

120 See 6 Del. C. § 18-1101(b) (“It is the policy of this chapter to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.”); Holifield v. XRI Inv. Hldgs LLC, 304 A.3d 896, 924 (Del. 2023) (agreeing with litigant that “Delaware is a contractarian state, particularly when it comes to construing LLC agreements.”).

38 conduct necessarily incorporate an appreciation that the proscribed conduct must

either be harmful or cause harm to justify removal.” The paragraph then asserts that

“[i]f there is no risk of harm to the Company as a result of the Manager’s actions, then

there can be no deviation from the standards of care or conduct contemplated by the

definitions of gross negligence, intentional misconduct, fraud or deceit.” But that is

not so. A party can be grossly negligent and lucky such that no harm results.

Members might not want a grossly negligent manager, even if that manager had been

lucky enough to avoid any consequences. Or the members might not want a manager

who took funds through intentional misconduct, fraud, or deceit, even if the taking

was immaterial or the manager restored the funds so there was no harm.

Finally, the first reason—distinguishing between “gross negligence” or “fraud”

and “grossly negligent or fraudulent conduct”—makes little sense. Try to imagine

“gross negligence” or “fraud” divorced from any conduct. Even a grossly negligent

decision involves a type of conduct: the making of the decision, including a potential

decision not to act. And there can be conduct without harm.

The strongest reason embedded in the A&J analysis suggests that when

parties use a well-known term like fraud that has common law elements, then

satisfying the contract term requires satisfying all of the common law elements. And

if the common-law claim requires harm, then the contractual standard should require

harm. That argument has some force, but it invites the question of what the contract

means by “fraud.” Did the parties mean the common law cause of action with all its

elements? Or did they mean a fraudulent representation? Just as members might not

39 want a grossly negligent but lucky manager, they also might not want a liar whom

others happened not to believe (defeating the element of reliance).

This decision therefore does not follow A&J for purposes of requiring a showing

of harm where the LLC Agreement does not expressly require it. To be sure, conduct

justifying expulsion often will include harm, if only as a factor distinguishing de

minimis missteps from conduct warranting removal. But particularly where one base

for expulsion requires harm (the Wrongful Conduct Requirement) and others do not,

the plain language of the Expulsion Provision does not warrant implying a need to

show harm for the other expulsion requirements.

3. The Original Reasons

The Founders expelled Trematerra based on the nine Original Reasons.

Trematerra contends that the Original Reasons could not support his expulsion. This

section addresses the Original Reasons in their order of significance, rather than

their order of appearance.

a. The Refusal To Invest Additional Capital

The first Original Reason asserted that Trematerra “has not made ‘additional

investments of equity capital in the Company’ as provided for in the [LLC

Agreement].”121 Stated more formally, the Founders claimed that Trematerra failed

to supply the Additional Capital Contributions when due. That reason invokes the

121 JX 210 at 1.

40 Willful Breach Requirement by claiming that Trematerra had a contractual

obligation to do something and failed to do it.

At first blush, the first Original Reason cannot satisfy the Willful Breach

Requirement because the Founders cannot show that any Additional Capital

Contribution was ever due. If the Company had called on Trematerra to provide more

capital beyond the Initial Capital Contribution, then Trematerra would have had to

provide it. If Trematerra had refused, then he would have breached the LLC

Agreement. At that point, the Founders could have invoked the Willful Breach

Requirement. But the Company never made a capital call on Trematerra.

Normally, that could end the analysis, but Trematerra repudiated his

obligations under the LLC Agreement. “Under Delaware law, repudiation is an

outright refusal by a party to perform a contract or its conditions entitling the other

contracting party to treat the contract as rescinded.”122 “A statement not to perform

unless terms different from the original contract are met also constitutes a

repudiation.”123

Trematerra repudiated his obligations under the LLC Agreement on March 4,

2023, when he wished the Founders “the best of luck” and asked for a buyout.124

122 CitiSteel USA, Inc. v. Connell Ltd. P’ship, 758 A.2d 928, 931 (Del. 2000).

(internal quotation marks omitted).

123 Id.

124 JX 142.

41 Trematerra repudiated his obligations under the LLC Agreement again on March 13,

2023, when Trematerra told the Founders multiple times that he would not go

forward with the Lease if they did not agree to the Restructuring.125 He repudiated

his obligations yet again when he told the Founders that he would cancel the Lease

and not “spend any more time on this venture” until they could find a new “path [t]hat

is . . . agreeable.”126 And he repudiated his obligations a final time on March 15, 2023,

when he refused to move forward with one restaurant in California and asked for a

buyout.127

To save himself from the consequences of his actions, Trematerra offers a more

aggressive argument. Relying on language discussed below, he asserts that he could

invest capital “in such amounts and at [his] discretion.”128 As he sees it, that meant

he had no actual obligation to commit capital unless he wanted to. Assuming that

obligation was discretionary (and as discussed below, it was not), Trematerra had to

exercise his discretion in compliance with the implied covenant of good faith and fair

dealing.129 He thus had a real obligation to provide capital, and he repudiated that

obligation.

125 See JX 154 at 2, 46–47.

126 JX 155.

127 JX 154 at 37–42.

128 Trematerra Tr. 195–96; see also infra Part II.A.4.a.

129 Terrell v.Kiromic Biopharma, Inc., 297 A.3d 610, 620 n.37 (Del. 2023) (“[W]hen a contract confers discretion on one party, the implied covenant requires 42 Trematerra knew that the Company faced expense that he would need to fund.

He and the Founders had decided to develop a store at the Beverley Hills site. After

Trematerra secured the Lease, he was obligated to fund the development of a store

at that location using the Additional Capital Contribution he had agreed to provide.

Trematerra could not rely on the fact that the original business plan contemplated

building out three stores rather than one, because the original business plan was not

part of the governing documents.

Trematerra could have called a meeting and tried to convince the Founders to

adopt his view, terminate the Lease, and abandon California. If that meeting ended

in deadlock, then Trematerra could have used the Tiebreaking Vote to defeat the

capital call. That course of action, however, would have led to a breach of duty. The

LLC Agreement did not eliminate fiduciary duties, and it contemplated that

Trematerra exercised the Tiebreaking Vote as a member-manager. Like a director,

Trematerra therefore owed fiduciary duties when exercising the Tiebreaking Vote,

and he could not have vetoed a capital call selfishly and to the detriment of the

Trematerra asserts that once the Founders told Trematerra that they did not

want to start their restaurant business in California, he properly viewed the business

as over. He did not have the power to make that decision unilaterally.

that the discretion be used reasonably and in good faith.” (internal quotation marks omitted)).

43 Trematerra’s repudiation of his obligations to make the Additional Capital

Commitments satisfies the Willful Breach Requirement. At a minimum, it satisfies

the Recklessness Requirement. The first Original Reason justified expelling

Trematerra.

b. The Lease Issues

The Expulsion Resolution includes four Original Reasons relating to the Lease.

Although the first three fall short, the fourth justified Trematerra’s expulsion.

One Original Reason in the Expulsion Resolution asserted that Trematerra

“without authority, and without the consent of the other Members, negotiated” the

Lease.130 Another Original Reason asserted that Trematerra “without authority, and

without the consent of the other Members, unilaterally modified” the Lease “by

making material (but not easily visually observed) changes to the [L]ease that were

not disclosed to the leasing agent nor landlord.”131 The latter Original Reason refers

to conduct that occurred during the negotiation of the Lease, making it an example

of the former Original Reason.

Neither Original Reasons justified expulsion. By claiming that Trematerra

acted without authority, both Original Reasons invoked the Willful Breach

Requirement. But the Founders authorized Trematerra to negotiate the Lease. He

did not breach any provision in the LLC Agreement by carrying out that decision.

130 JX 210 at 2.

131 Id.

44 A third Original Reason asserts that Trematerra’s “actions regarding the

[Lease] caused extensive material financial harm to [the Company] that is still yet to

be determined but in no event is less than five million dollars.”132 But causing harm

to the Company does not justify expulsion. The Expulsion Provision focuses on types

of conduct. It does not authorize the other members to expel a member simply because

a decision turned out poorly. In the end, the decision to terminate the Lease did not.

Trematerra settled with the Landlord with no liability for the Company or the

Founders.

The last Lease-related Original Reason, however, is a different story. It

asserted that Trematerra “defaulted in the payment of the [Lease] thereby subjecting

[the Company] to extensive and expensive exposure to litigation from the

[L]andlord.”133 That assertion targeted Trematerra’s unilateral termination of the

Lease, and it invoked the Recklessness Requirement.

Trematerra acted recklessly in cancelling the Lease. When assessing

contractual or statutory compliance, Delaware requires that parties observe legal

formalities, even when a party could have satisfied them.134 The Majority Vote

132 Id.

133 Id.

134 See Espinoza v. Zuckerberg, 124 A.3d 47, 50 (Del. Ch. 2015) (explaining need

for a controlling stockholder should not be “immune from the required formalities that come with [its] power”); id. at 57 (“[E]ven if a controlling stockholder manifests a clear intent to ratify a decision outside of a stockholder meeting, the ratification 45 Requirement specified the requirements for the Company to take action. As a party

to the LLC Agreement, Trematerra knew that he could not act unilaterally on the

Company’s behalf. Nor did the Tiebreaking Vote give him that power. Trematerra

could only exercise the Tiebreaking Vote at a meeting, and only after deadlock

existed.

The restrictions in the LLC Agreement on member action by written consent

made it all the more clear that Trematerra could not act unilaterally. Under the

Delaware General Corporation Law, directors may act without a meeting only by

unanimous written consent.135 Under the default rules of the LLC Act, members and

managers may act without a meeting by written consent from managers having “not

less than the minimum number of votes that would be necessary to authorize or take

such action at a meeting at which all managers entitled to vote thereon were present

and voted.”136 So under the default rule, Trematerra could have acted by written

consent, but the LLC Agreement opted out of the default rule and required unanimous

written consent.137 The parties consciously chose a governance regime in which

Trematerra could not act unilaterally.

will not be effective unless it complies with the technical requirements of Section 228.”).

135 8 Del. C. § 141(f).

136 6 Del. C. § 18-404(d).

137 OA § 8.05(a).

46 Once the Founders had said they did not want to launch in California,

Trematerra could have called a meeting of members to agree on a path forward. After

learning about the Lease and its favorable terms, the Founders likely would have

agreed to move forward in California, as they later proposed. If Trematerra wanted

to cancel the Lease, then he could have proposed that course of action during the

meeting. If he and the Founders deadlocked, then Trematerra could have exercised

the Tiebreaking Vote. Armed with a decision that satisfied the Majority Voting

Requirement, Trematerra could have cancelled the Lease. He could not simply make

that decision for himself. At a minimum, Trematerra consciously disregarded the

need for formal action at a meeting.

Trematerra responds that he properly sought to mitigate the damages that the

Company would face, as well as his own exposure under the Personal Guaranty. But

the issue is one of authority, and Trematerra lacked the authority to terminate the

Lease. Trematerra was also wrong to view the Lease only as a liability. Because of

the favorable terms he secured, it was also an asset.

Trematerra also argues that he later achieved a settlement with the Landlord

under which the Company and the Founders owe nothing. For the reasons discussed

previously, the Recklessness Requirement does not require harm. In any event, when

the Founders acted, Trematerra had not yet achieved a settlement, and the Founders

reasonably perceived that Trematerra’s actions had harmed the Company.

47 Separately and independently, Trematerra acted recklessly as a business

matter. Having negotiated the Lease, Trematerra knew it favored the Company.

Because it was so valuable, he threatened the Founders with cancelling the Lease

unless they agreed to the Restructuring. Yet when the Founders refused to agree to

the Restructuring, Trematerra immediately cancelled the Lease. There was no reason

to act rashly. The Company did not owe any rent under the Lease for 240 days. Any

rational person acting in good faith would have called a meeting of members to

discuss how to proceed. Instead, Trematerra cancelled the Lease just one day after

signing it, thereby generating a dispute with the Landlord and depriving the

Company of a valuable asset.

Trematerra’s unilateral termination of the Lease satisfied the Recklessness

Requirement. The Founders were justified in expelling him on that basis.

c. The Willful Failure To Pay Vendors

The third Original Reason asserts that Trematerra “willfully, and without good

cause, refused to pay vendors . . . , including, but not limited to, [Push] (more than

$15,000.00), [Gravity] (more than $6,000.00), [and] Jay Nartowicz (more than $9,000)

thereby hurting necessary and important business relationships,” thereby subjecting

the Company “to potential tort and other damages, in addition to the expending [sic]

significant legal fees to defend any such suits.”138 That assertion could implicate the

138 JX 210 at 2.

48 Willful Breach Requirement or the Wrongful Conduct Requirement, but it does not

satisfy either.

The third Original Reason does not satisfy the Willful Breach Requirement

because for that requirement to apply, the Founders needed to point to a specific

provision that Trematerra violated. Nothing in the LLC Agreement requires payment

of any bill no matter what.

The third Original Reason could satisfy the Recklessness Requirement if

Trematerra withheld payment under circumstances where he knew that doing so

carried a material risk of harming the Company. Trematerra had a reasonable basis

to believe he was justified in withholding payment for partial performance or non-

performance. He did not act recklessly.

The third Original Reason could satisfy the Wrongful Conduct Requirement if

Trematerra intentionally failed to pay vendors to harm the Company. The evidence

does not support that theory.

The Wrongful Conduct Requirement also requires proof that the wrongful

conduct “adversely and materially affect[ed] the business or operation of the

Company.” The Founders failed to prove that Trematerra’s payment decisions had

that effect. Push has said it would work with the Founders again.139 Nartowicz “no

longer want[ed] anything further to do with [the Company],”140 but he remains

139 Daniel Tr. 279.

140 JX 253.

49 willing to work with Trematerra.141 That distinction indicates that Trematerra was

not the problem. Gravity also wanted to quit because of Daniel, not Trematerra.142

d. The Non-Specific Reasons

Three other Original Reasons are not sufficiently specific to support expulsion.

The second Original Reason asserts that Trematerra “made multiple unilateral

material business decisions without express, actual and/or apparent authority, and

without consulting with the other Members.”143 That reason does not identify any

specific decisions that Trematerra made, and Daniel conceded at trial that other

Original Reasons cover more specifically anything that the second Original Reason

might encompass.

The ninth Original Reason is similarly non-specific. It refers to “[s]uch other

tortious, harmful, damaging, unlawful, and/or illegal conduct that will be further

memorialized in a civil action currently being prepared by counsel.”144 That item does

not identify a basis for expulsion. It alludes to potential reasons.

141 Trematerra Tr. 369–70; JX 15 at 14.

142 JX 83 at 1–2; Russo Dep. 138–40.

143 JX 210 at 2.

144 Id.

50 The eighth Original Reason asserts that Trematerra “engaged in threatening

and extortive behavior towards the other Members of [the Company].”145 The

Expulsion Notice says only that. Brevity can be a virtue. Here, it is a defect.

4. The Additional Reasons

Besides relying on the Original Reasons, the Founders identified more reasons

during this litigation that they claimed justified Trematerra’s expulsion. None of

them do the trick.

A party who terminates a counterparty on specific grounds can defend the

termination decision on alternative grounds if the party can satisfy the after-

acquired-evidence doctrine.146 Under that doctrine, the party must have learned

about the justification after the termination, and the justification must independently

support termination.147 Learning about the justification after the termination is

necessary because if the terminating party knew about the justification before the

termination and did not rely on it, then the party presumptively waived reliance on

that justification by not citing it at the time of termination.148 And if the justification

145 Id.

146 See generally Stephen J. Humes, Annotation, After-Acquired Evidence of

Employee’s Misconduct as Barring or Limiting Recovery in Action for Wrongful Discharge, 34 A.L.R. 5th 699 (1995 & Supp.).

147 Davenport Gp. MG, L.P. v. Strategic Inv. P’rs, Inc., 685 A.2d 715, 723 (Del.

Ch. 1996).

148 See Tatum v. Fairstead Affordable LLC, 2023 WL 8923400, at *3–4 (Del.

Ch. Dec. 22, 2023) (“[The after-acquired doctrine] does not authorize an employer to learn about misconduct, make a business decision not to act on it, treat an employee 51 would not provide an independent basis for termination, then it becomes merely

cumulative or confirmatory.149 Reliance on after-acquired evidence is most persuasive

when the terminated party concealed the evidence.150 From a policy standpoint, the

after-acquired evidence doctrine seeks to prevent a wrongdoer from benefitting from

concealing evidence of its wrongdoing.

The limitations on the use of after-acquired evidence help reconcile its use with

the “mend-the-hold” doctrine. That doctrine “bars a party who rejects a contract on

certain specified grounds from changing position after litigation is filed when those

grounds for rejection do not pan out.”151 As the Supreme Court of the United States

explained long ago, “Where a party gives a reason for his conduct and decision

touching any thing [sic] involved in a controversy, he cannot, after litigation has

begun, change his ground, and put his conduct upon another and a different

consideration. He is not permitted thus to mend his hold. He is estopped from doing

as having resigned, accept the benefits of that mode of departure, then reverse course months later.”); Metro Storage Int’l LLC v. Harron, 275 A.3d 810, 879 (Del. Ch. 2022).

149 See McKennon v. Nashville Banner Pub. Co., 513 U.S. 352, 363 (1995) (“Where an employer seeks to rely upon after-acquired evidence of wrongdoing, it must first establish that the wrongdoing was of such severity that the employee in fact would have been terminated on those grounds alone if the employer had known of it at the time of the discharge.”).

150 Metro Storage, 275 A.3d at 879.

151 Liberty Prop. Ltd. P’ship v. 25 Mass. Ave. Prop., LLC., 2008 WL 1746974, at

*14 (Del. Ch. Apr. 7, 2008); see Friel v. Jones, 206 A.2d 232, 235 (Del. Ch. 1964).

52 it . . . .”152 From a policy standpoint, the mend-the-hold doctrine seeks to limit

unnecessary litigation by ensuring that a party cannot advance seriatim reasons for

its actions, particularly when the reasons it cited contemporaneously fall short.153

a. Failing To Make The Initial Capital Contribution

The Founders assert that Trematerra willfully breached the LLC Agreement

by failing to make the Initial Capital Contribution at closing. Trematerra plainly had

an obligation to contribute $200,000 to the Company upon executing the LLC

Agreement, which he failed to do. But the Founders never demanded that Trematerra

fulfill that obligation; they were content to let him pay the bills as they came due.

The breach also is not after-acquired evidence, because the Founders knew about it

all along. Trematerra’s failure to make the Initial Capital Contribution therefore does

not justify expulsion.

Section 3.2 of the Contribution Agreement expressly contemplated that

Trematerra would contribute the Initial Capital Contribution at closing, just as one

would expect. The operative language stated: “At the Closing, [Trematerra] will

deliver . . . [Trematerra’s] Initial Capital Contribution.”154 The LLC Agreement, by

152 Ry. Co. v. McCarthy, 96 U.S. 258, 267 (1878).

153 See Harbor Ins. v. Cont’l Bank Corp., 922 F.2d 357, 363 (7th Cir. 1990)

(Posner, J.) (observing that when “[a] party . . . hokes up a phony defense to the performance of his contractual duties and then when that defense fails (at some expense to the other party) tries on another defense for size [he] can properly be said to be acting in bad faith.”).

154 CA § 3.2(b)(i).

53 contrast, contained internally inconsistent provisions addressing Trematerra’s

capital contributions. Section 4.01(a) of the LLC Agreement tracked the Contribution

Agreement by stating, again as one would expect, that each member would make its

initial capital contributions “[c]ontemporaneously with the execution of this

Agreement.”155

But in an introductory section to a provision establishing that no member

would need to contribute capital beyond its express commitments, Section 4.02

purported to authorize Trematerra to contribute “[Investor] Committed Capital” at

any time with no deadline. That defined term encompassed both the Initial Capital

Contribution and the Additional Capital Contributions. The operative language

stated: “Except for the [Investor] Committed Capital to be made at such amounts and

at the discretions [sic] of [Trematerra], no Member shall be required to make any

Capital Contributions other than those specifically described by this Agreement,

unless agreed to in writing by the contributing Member or required by Delaware Law”

(the “No Additional Capital Exception”).156

Based on the No Additional Capital Exception, Trematerra contends that he

never had any obligation to commit any amount of capital to the Company by any

deadline.157 He claimed to be “under the impression that the money had to be put in

155 OA § 4.01.

156 OA § 4.02.

157 Trematerra Tr. 357–58.

54 under [his] discretion when bills were due.”158 In other words, even when a bill was

due, he could decide not to contribute the capital necessary to pay it. But that would

make his capital commitments illusory. At other times he testified inconsistently with

that position, accepting that he had an obligation to fund the restaurants as

contemplated by the governing agreements. For example, Trematerra (i) never

thought he could choose not to fund a restaurant and (ii) knew that developing even

a single restaurant would require more funding than the Initial Capital

Contribution.159 Daniel testified that the Founders never would have given up their

intellectual property for just the Initial Capital Contribution.160

The Founders acknowledge that the governing agreements are ambiguous.

When shown only the No Additional Capital Exception, Daniel agreed with opposing

counsel’s leading question asking him to acknowledge that the language “means that

[Trematerra] can put [his] capital into the company in such amounts and at its

discretion; correct?”161

The record lacks any evidence revealing the origins or purpose of the No

Additional Capital Exception. In light of its placement, the conflict with other express

provisions, and the typographical error in “discretions,” the No Additional Capital

158 Id. at 361.

159 Trematerra Tr. 448, 452.

160 Daniel Dep. 68; see also Daniel Tr. 25–26.

161 Daniel Tr. 195–96.

55 Exception does not look like language that received both sides’ full attention. It looks

like something that Trematerra’s side slipped in.

When the governing agreements are read as a whole, the only reasonable

interpretation is that Trematerra had to make the Initial Capital Contribution

promptly after executing the LLC Agreement. He never did. That conduct breached

the LLC Agreement. But it does not support expulsion.

First, the Founders never took issue with Trematerra’s failure to make the

Initial Capital Contribution. They allowed Trematerra to make his contribution by

paying bills as they became due. Although the LLC Agreement contains a no-waiver

provision,162 the ability to rely on such a provision can itself be waived. 163 Here, the

Founders waited so long to invoke Trematerra’s obligation to make the Initial Capital

Contribution that they waived both the no-waiver provision and the breach.

Second, the Founders did not cite Trematerra’s failure to make the Initial

Capital Contribution in the Expulsion Notice, and they cannot meet the requirements

of the after-acquired evidence doctrine. Trematerra’s failure to make the Initial

162 OA § 18.05 (“Failure on the part of a person to complain of any act of any

person or to declare any person in default with respect to the Company, irrespective of how long that failure continues, does not constitute a waiver by that person of its rights with respect to that default until the applicable statute-of-limitations period has run.”).

163 Pepsi-Cola Bottling Co. of Asbury Park v. Pepsico, Inc., 297 A.2d 28, 33 (Del.

1972) (“The prohibition against amendment except by written change may be waived or modified in the same way in which any other provision of a written agreement may be waived or modified, including a change in the provisions of the written agreement by he [sic] course of conduct of the parties.”).

56 Capital Contribution was known to everyone. Rather than satisfying the after-

acquired evidence doctrine, allowing the Founders to invoke Trematerra’s failure to

make the Initial Capital Contribution would violate the mend-the-hold doctrine.

b. Characterizing His Contributions As Loans

During this litigation, the Founders obtained evidence that Trematerra

characterized his capital contributions to the Company as loans. The LLC Agreement

obligated Trematerra to make equity contributions. An attempt to characterize his

contributions as loans would have justified expulsion under both the Willful Breach

Requirement and the Recklessness Requirement. The Founders, however, failed to

carry their burden of proof.

There is some evidence that Trematerra breached his obligations under the

LLC Agreement by characterizing the payments he made on behalf of the Company

as loans rather than as equity contributions.164 The Contribution Agreement and LLC

Agreement contemplate that the Initial Capital Contribution and the Additional

Capital Contributions were equity, not debt.

The evidence about the loans, however, is too thin to carry the Founders’

burden of proof. The Founders could have pursued this issue further in discovery and

developed a stronger record at trial. As it is, the court cannot rule in their favor.

164 See JX 92 (Company’s business checking summary marking transfer from

Trematerra as “loan”); JX 97 (same); JX 109 (same); see also Trematerra Tr. at 533– 34 (Trematerra admitting that he wrote “loan” on multiple business checking summaries of the Company).

57 c. Signing The Lease In The Name Of The Original LLC

Although no one realized it at the time, the Lease mistakenly identified the

Original LLC as the tenant rather than the Company. The Founders made much of

this, but it was an honest mistake that would have been fixed had anyone noticed. It

does not satisfy any of the requirements for expulsion.

d. A $5,000 Payment To Neuman

The Founders separately argue that Trematerra’s expulsion was justified

because he wrote a check from the Company’s account for $5,377.39 to Eric Neuman,

his personal attorney. Trematerra proved through supplemental evidence submitted

by consent that he voided the Company check and paid Neuman from his own

account. Both checks bear the same date, showing that the check written on the

Company’s account was a mistake. That mistake does not support expulsion.

B. Indemnification

The Founders proved that they validly expelled Trematerra because they

properly relied on two of the Original Reasons. In doing so, they proved that

Trematerra breached the LLC Agreement. The Founders are therefore entitled to

indemnification.

The Indemnification Provision states that “[t]o the fullest extent permitted by

law, each Member shall indemnify the Company, each other Member and hold them

harmless from and against all losses, costs, liabilities, damages, and expenses

(including, without limitation, costs of suit and attorney’s fees) they may incur on

58 account of any breach by that Member of this Agreement.”165 That provision covers

both first-party and third-party claims.166

The Founders proved that Trematerra breached the LLC Agreement by

repudiating his obligations to provide capital and unilaterally cancelling the Lease.

The Founders are therefore entitled to recover their “expenses (including, without

limitation, costs of suit and attorney’s fees).”

The Founders proved no damages other than their litigation expenses. The

parties must confer regarding a reasonable amount of expenses. If the parties cannot

agree, the Founders must submit a Rule 88 affidavit specifying the amounts to which

they are entitled. If Trematerra opposes the amounts sought, his counsel must file an

affidavit specifying the expenses Trematerra incurred.

III. CONCLUSION

The Founders proved they validly expelled Trematerra. The Founders also

proved their entitlement to indemnification. Judgment will be entered in favor of the

Founders and against Trematerra. Within thirty days, the parties must submit a

proposed final order, agreed as to form. If there are issues that need to be addressed

before a final order can be entered, then the parties must submit a joint letter

165 OA § 18.11.

166 Int’l Rail P’rs LLC v. Am. Rail P’rs, LLC, 2020 WL 6882105, at *8 (Del. Ch.

Nov. 24, 2020).

59 identifying those issues and proposing a path forward. This instruction is not an

invitation to raise new issues or seek a do-over.