IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
STAR AMERICA RAIL HOLDCO, ) LLC, ) ) Plaintiff, ) ) v. ) C.A. No. 2024-0883-LWW ) CASEY CATHCART, ) ) Defendant, ) ) and ) ) CATHCART RAIL HOLDCO, LLC, ) ) Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: October 18, 2024 Date Decided: December 17, 2024
Raymond J. DiCamillo, Kevin M. Gallagher, Andrew L. Milam, Kaitlyn R. Cannan, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Laura K. O’Boyle, Nathan C. Strauss, Zachary R. Edelman, GIBSON, DUNN & CRUTCHER LLP, New York, New York; Colin B. Davis, GIBSON, DUNN & CRUTCHER LLP, Irvine, California; Counsel for Plaintiff Star America Rail HoldCo, LLC
Jennifer R. Hoover, Andrew D. Kinsey, BENESCH, FRIEDLANDER, COPLAN & ARONOFF, LLP, Wilmington, Delaware; Andrew G. Fiorella, Alyssa A. Moscarino, BENESCH, FRIEDLANDER, COPLAN & ARONOFF, LLP, Cleveland, Ohio; Counsel for Defendant Casey Cathcart
Tyler J. Leavengood, Charles Wood, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Counsel for Nominal Defendant Cathcart Rail HoldCo, LLC
WILL, Vice Chancellor Cathcart Rail Holdco, LLC was co-founded by Casey Cathcart, who served as
its CEO. In 2020, the company took on an outside investor. The investor negotiated
for a contractual right to remove Cathcart as CEO and replace him if the company’s
annual EBITDA was below $18 million. When EBITDA fell short of the threshold
in 2023, the investor sought out a new CEO.
Cathcart resisted. He prodded the company’s CFO to alter financial results so
that reported EBITDA exceeded $18 million. Even after the investor sued for a
declaration that Cathcart was validly removed and replaced, Cathcart insisted that
2023 actual EBITDA was disputed. He knew that this position was baseless.
Nevertheless, expedited discovery—including into the calculation of
EBITDA—ensued. On the eve of trial, Cathcart conceded that 2023 actual EBITDA
was less than $18 million. He focused instead on arguing that the investor could not
remove and replace him without other members’ consent.
The unambiguous terms of the contract prove otherwise. The investor was
entitled to remove and replace Cathcart as CEO. It did not act unreasonably or in
bad faith in exercising its discretion to do so. Judgment is entered for the investor
and fees are shifted.
1 I. BACKGROUND
The following facts were stipulated to by the parties or proven by a
preponderance of the evidence at trial.1
A. Cathcart Rail’s Formation
Cathcart Rail HoldCo, LLC (the “Company”) is a privately held Delaware
limited liability company.2 It owns 100% of the membership interests of Cathcart
Rail, LLC—an Illinois entity that operates in the railroad industry.3
In 2015, Casey Cathcart and his father Thom formed Cathcart, Inc. (formerly
T&C Rail Holdings, Inc.).4 Each individual owned 50% of the corporation.
They subsequently formed the Company, with Cathcart, Inc. as its sole
member, to acquire a railcar repair facility.5 Through Cathcart, Inc., Casey and
Thom Cathcart had equal ownership of the Company at the time of its formation.6
1 Joint Pre-trial Stipulation and Order (Dkt. 83) (“PTO”). The trial record includes live testimony of 3 fact witnesses and 177 joint exhibits (including 4 deposition transcripts). Trial testimony is cited as “[Name] Tr. __.” See Dkt. 97. Exhibits are cited by the numbers provided on the parties’ joint exhibit list as “JX __,” unless otherwise defined. See Dkt. 82 Ex. A. Deposition transcripts are cited as “[Name] Dep. __.” 2 PTO ¶ 5. 3 Id.; see Cathcart Tr. 8. This decision refers to Casey Cathcart as “Cathcart.” 4 Cathcart Tr. 12. 5 Id. at 12-13. 6 Id. at 130-31. 2 The Company grew into a successful freight rail platform.7 It functions
mainly in the short line space, meaning rail lines that connect to a larger railroad
network. It has three general divisions: certified railcar service and repair facilities;
rail agent inspection services; and short line railroads that facilitate moving railcars
across lines.8
B. Star Infra’s Investment
By 2020, the Company was demonstrating continued signs of success.9 It
sought out new paths to advance its growth.10
In May 2020, Cathcart was approached by Tikehau Star Infra—an
infrastructure asset investor—about a potential investment in the Company.11
Though Cathcart had some trepidation, he accepted the offer.12 Tikehau Star Infra
established Star America Rail HoldCo, LLC (“Star Infra”) to hold its investment in
the Company.13 Star Infra became a member of the Company alongside
7 Id. at 13, 16. 8 Id. at 8-9. 9 Id. at 15-16. 10 Id. 11 Id. at 16; Melson Tr. 135. 12 Cathcart Tr. 16-17. 13 Melson Tr. 137. 3 Cathcart, Inc.14 It continued to make additional investments in the Company,
totaling $70 million.15
The terms of Star Infra’s investment were outlined in a September 2, 2020
Subscription Agreement among the Company, Star Infra, and Cathcart, Inc.16
Section 1.4 of the Subscription Agreement contemplated that Star Infra could
increase its equity ownership percentage if the Company’s “Actual EBITDA” fell
below its “Target EBITDA.”17 “Actual EBITDA” means “earnings before interest,
taxes, depreciation and amortization” as calculated in accordance with GAAP during
an “Applicable Calculation Period.”18 “Target EBITDA means $4,480,000.”19
On December 14, 2020, the parties executed a second amended limited
liability company agreement and an amended Subscription Agreement.20 Section
1.4 of the Subscription Agreement continued to provide that “in the event Actual
14 PTO ¶ 3. After the investment, Cathcart, Inc. owned 75% of the Company’s issued and outstanding common units; Star Infra owned 25%. JX 1 at 4. The terms of the Subscription Agreement were later amended such that each party owned 50% of the Company’s issued and outstanding common units. JX 7 Ex. B. 15 Melson Tr. 137-39. 16 PTO ¶ 6. 17 Id. ¶ 8; JX 1 at 3. 18 JX 1 Ex. A. 19 Id. 20 PTO ¶¶ 7-8, 11; JX 3; JX 4. 4 EBITDA for the Applicable Calculation Period is less than Target EBITDA,” Star
Infra’s percentage of equity ownership in the Company would be increased.21
C. CEO Replacement Negotiations
In late 2021, the Company’s performance faltered.22 Star Infra notified
Cathcart that Section 1.4 of the Subscription Agreement had been triggered, entitling
it to a greater percentage of Company equity.23 Cathcart asked Star Infra to discuss
a “settlement” to remove this provision of the Subscription Agreement.24 He
proposed that, in exchange, the parties would “explore the option of designating a
permanent CEO so that [he] [could] continue [his] role as Executive Chairman.”25
Star Infra’s representative, Mark Melson, confirmed that they would “work
together to identify a new CEO with the goal of putting that person in place by June
30, 2023.”26 He expressed Star Infra’s hope that Cathcart would remain Executive
Chairman.27
21 PTO ¶ 8; JX 3 § 1.4; see also JX 3 § 1.3 (amending the definition of “Actual EBITDA”). 22 Cathcart Tr. 21-22. 23 PTO ¶ 9; Cathcart Tr. 66-67. 24 PTO ¶ 10; Cathcart Tr. 70-71; JX 12 at 5. 25 Cathcart Tr. 70-71; JX 12 at 5-6. 26 JX 12 at 3. 27 Id. at 2. 5 The parties then exchanged proposals for amending the Company’s limited
liability company agreement and the Subscription Agreement.28 The proposals all
contemplated that Cathcart would step down as CEO by a set date.29 One sticking
point was whether Star Infra would have the sole discretion to select a new CEO or
whether the Company’s board would have a say.30
Negotiations paused for a time and resumed in spring 2022.31 In April,
discussions about a replacement CEO provision shifted from a time-based trigger to
a performance-based one.32 Cathcart proposed that that if the Company’s EBITDA
fell below $23.5 million in 2023, he “[would] agree to open a search for a new CEO
and look to appoint one as quickly as one [was] identified,” subject to board
approval.33 Star Infra demanded a second, lower EBITDA threshold at which it
would have a unilateral CEO replacement right not subject to board or other member
approval.34
On May 12, Star Infra sent Cathcart a draft amendment to the operative limited
liability company agreement that included a two-tier CEO replacement provision in
28 See JX 13; JX 14. 29 See Melson Tr. 149. 30 See Cathcart Dep. 87; JX 20; JX 24; JX 19 at 5; Melson Tr. 150. 31 See Melson Tr. 147-48; JX 17 at 1. 32 See Cathcart Tr. 72; Melson Tr. 152-54. 33 JX 27 at 3; see Cathcart Tr. 73. 34 Melson Tr. 155-57; Cathcart Tr. 74-75. 6 Section 8.3(a).35 The first tier adopted Cathcart’s proposal. It provided that if 2023
EBITDA was below $23.5 million, the Company’s board would launch a search for
a replacement CEO, subject to the approval of Star Infra and Cathcart Inc.36 The
second threshold contemplated that if 2023 EBITDA was below $20 million, Star
Infra could terminate Cathcart and hire a replacement CEO on terms set in its “sole
and absolute discretion.”37
Cathcart provided feedback on May 17.38 His only comment to Section 8.3(a)
was that the calculation of EBITDA needed to “include adjustments / add-backs, not
simply GAAP EBITDA.”39
In response, Star Infra proposed a definition of EBITDA that was consistent
with the Company’s credit agreement with various lenders.40 This definition
“include[d] fewer adjustments” than Cathcart suggested.41 To make Cathcart “more
35 JX 28. 36 Id. at 6 (“On or after December 31, 2023, in the event that the EBITDA for the Company was less than $23,500,000 for the calendar year ending December 31, 2023, but more than $20,000,000 the Board will commence with a search for a replacement Chief Executive Officer, subject to approval of the Star Infra Member and Cathcart Member, acting in the best interests of the Company and not to be unreasonably withheld conditioned or delayed.”). 37 JX 28 at 6. 38 PTO ¶ 15; JX 30. 39 JX 30 at 8; see also JX 32. 40 JX 34 at 6; see JX 45 (Credit Agreement). 41 JX 32. 7 comfortable,” Star Infra offered to lower the trigger amounts.42 Star Infra’s proposal
set the upper threshold for a board-led CEO replacement at $21 million and the lower
threshold for Star Infra’s unilateral replacement right at $18 million.43
Cathcart agreed to use the lender’s EBITDA definition at these lower
threshold amounts.44 On June 12, he suggested that Section 8.3(a) “[u]se ‘Actual
EBITDA’ instead of ‘EBITDA’” and that “Actual EBITDA” be “calculated in
accordance with the terms of the Company’s senior loan agreement.”45
D. The Amended LLC Agreement
On July 8, 2023, the parties further amended the Company’s limited liability
company agreement (the “LLC Agreement”).46
The LLC Agreement adopted the negotiated two-tier performance threshold
for replacing the Company’s CEO. If 2023 Actual EBITDA was less than $21
million but greater than $18 million, the Company’s board would launch a CEO
search “subject to the consent of Star Infra and Cathcart Inc. (not to be unreasonably
withheld . . .).”47 If 2023 Actual EBITDA was less than $18 million, Star Infra had
42 PTO ¶ 16; JX 33 at 1. 43 JX 33. 44 JX 36. 45 PTO ¶ 20; JX 38 at 1. 46 PTO ¶ 21; JX 46 (“LLC Agreement”). 47 LLC Agreement § 8.3(a); id. at § 2.1 (defining “Actual EBITDA”). 8 the unilateral right to “terminate” Cathcart as CEO and “hire a replacement” on
“terms and conditions” set in its “sole and absolute discretion.”48
The LLC Agreement also laid out the timing for the Company’s delivery of a
“detailed statement and calculation of Actual EBITDA.”49 The statement had to be
delivered to Star Infra “within 120 days of the end of calendar year ending December
31, 2023.”50
E. The 2023 EBITDA Calculation
On January 17, 2024, Company Chief Financial Officer Kirk Feiler sent Star
Infra a calculation showing 2023 Actual EBITDA of $17.6 million. 51 The figure
was calculated “as defined in the [Company’s] credit agreement.” 52 Feiler’s cover
email represented that the numbers “should be final.”53
Feiler confirmed this calculation in reports delivered on February 9, February
16, March 15, April 10, and April 29.54 The Company also sent its lender a draft
compliance certificate on April 22 showing “2023 Consolidated EBITDA” of $17.6
48 Id. § 8.3(a). 49 Id. 50 Id. 120 days after December 31, 2023 is April 29, 2024. 51 JX 47 at 6; Melson Tr. 162-63. 52 Feiler Tr. 243; see also Feiler Dep. 28. 53 JX 47 at 1. 54 JX 50 at 16; JX 51 at 7; JX 53 at 7; JX 60 at 5; JX 66 at 46; see also Feiler Tr. 235-36. 9 million.55 The definition of “Consolidated EBITDA” in the credit agreement has the
same meaning as Actual EBITDA in the LLC Agreement.56
F. The CEO Search
In April 2024, Star Infra retained two executive search firms (Korn Ferry and
BluWave) to seek out CEO candidates.57 It also established a screening committee
to review individuals the firms identified.58 Star Infra was presented with and
considered at least five CEO candidates over several weeks.59
In mid-April, Korn Ferry proposed Jeff Chick as a candidate who “checks all
the boxes” and was the “closest fit” to Star Infra’s criteria “of all the candidates [it
had] presented.”60 Star Infra’s ideal candidate was one “who had dealt with
distressed situations,” which was important to it since the Company had defaulted
on its credit agreement.61
55 JX 63 at 1. 56 See LLC Agreement § 2.1. 57 Melson Tr. 168-69. 58 JX 74 at 23; Melson Tr. 168-70. 59 Melson Tr. 169; JX 74 at 13. 60 JX 74 at 9-10. 61 Melson Tr. 170. 10 Star Infra’s search committee interviewed Chick multiple times.62 In June,
after additional diligence, Star Infra formally hired Chick.63
G. The Altered 2023 EBITDA Calculation
Meanwhile, on May 8, Melson had told Cathcart that Star Infra intended to
remove and replace him as CEO.64 Cathcart responded that Star Infra would “need
to get a court order” to do so.65
On June 1, Cathcart directed Feiler to create a new “[EBITDA] report [for]
Star [Infra].”66 Feiler understood that Cathcart was “looking for $18 million or
more” in 2023 Actual EBITDA.67 When Feiler “counsel[ed] [Cathcart] that there’s
a cap” on addbacks under the credit agreement that made this impossible, Cathcart
asked Feiler to “take out the cap.”68
On June 3, Feiler told Cathcart that even when he “maximized Y[ear] E[nd]
add backs,” there was “only 20k additional [they] could have charged . . . [which]
62 Id. at 169-70; JX 74 at 8-10. 63 JX 72 at 3; Melson Tr. 169, 171-72, 256-57; JX 73. 64 Cathcart Tr. 39-41; see also JX 178. 65 Melson Tr. 167. 66 JX 56 at 2. 67 Feiler Tr. 234. 68 Id. at 242-44. 11 d[id]n’t help with the 18m argument.”69 Cathcart directed Feiler to “[k]eep[]
working through it, [to] get to $18m.”70 He insisted that he “need[ed] that $18m.”71
On June 4, Feiler sent Star Infra a new calculation showing 2023 Actual
EBITDA of approximately $18.3 million.72 This was 36 days after the EBITDA
reporting deadline set by Section 8.3(a) of the LLC Agreement.73 Cathcart told
Feiler not to “provide detail behind [their] statement” and to “[d]rag it out” to
“[m]ake [Star Infra] pay for an audit.”74
H. Cathcart Doubles Down.
On July 9, Cathcart learned that Star Infra had hired Chick.75 The next day,
Cathcart told Star Infra that the Company’s lender had “reviewed and blessed” the
$18.3 million EBITDA figure.76 He represented that the lender had “agreed with the
add-backs and agreed that it conformed to the credit agreement.”77 These statements
were false.78
69 JX 86 at 3. 70 Id. at 1. 71 JX 56 at 3. 72 PTO ¶ 30; JX 88 at 3; see also JX 194. 73 See supra note 50 and accompanying text. 74 JX 56 at 3. 75 Cathcart Tr. 41. 76 JX 105. 77 Id. 78 Cathcart Tr. 104-07; Feiler Tr. 250, 252-54; JX 93. 12 Cathcart also threatened to have Chick “escorted out” if he tried to enter
Company property.79 When Chick arrived at Company headquarters on July 15—
his first day on the job—he was escorted into a conference room by Thom Cathcart.80
Cathcart “joined by phone [and] threatened to call the police to have [Chick]
removed for trespassing . . . .”81
I. A Brief Ceasefire
Amid the hostilities, a “reputable firm” expressed interest in acquiring Star
Infra’s Company equity.82 Cathcart recommended a “60-day ceasefire” to present a
“united front” and close the deal.83 In exchange, he agreed that Chick could join the
Company as Star Infra’s designated “Operating Partner,” allowing Chick to
collaborate with him and participate in discussions with potential buyers, lenders, or
clients.84
But the sale process collapsed and, with it, the ceasefire.85 Attempts to find
compromise were unsuccessful.86 On August 22, Star Infra reiterated that it was
79 JX 105. 80 Melson Tr. 184-85. 81 Id. 82 Id. at 184. 83 JX 103. 84 JX 195. 85 Melson Tr. 186-87. 86 See JX 98 at 2-4; JX 97 at 2. 13 exercising its right under Section 8.3(a) of the LLC Agreement to immediately
replace Cathcart with Chick as CEO.87 Cathcart would remain Executive
Chairman.88
Cathcart responded negatively. He warned of legal action, including to
remove Star Infra personnel from the Company’s offices.89
On August 23, Star Infra filed this action under 6 Del. C. § 18-110.90 It seeks
a declaration that Cathcart was removed as CEO and replaced by Chick pursuant to
the LLC Agreement.91 On September 9, I entered a status quo order designating
Cathcart as CEO for the limited duration of this suit, with Chick remaining the
Operating Partner.92
After expedited discovery, a one-day trial was held on October 18.93 Post-trial
briefing was completed on October 25.94
87 JX 123. 88 Id. at 1-2. 89 JX 124. 90 Dkt. 1. 91 Id. 92 Dkt. 38; see also Dkt. 52 (holding that maintaining the Company’s longstanding CEO was less disruptive for the Company during this limited period). 93 Dkt. 90. 94 See Def. Casey Cathcart’s Post-trial Br. (Dkt. 94) (“Def.’s Post-trial Br.”); Pl.’s Post- trial Br. (Dkt. 95). 14 II. ANALYSIS
Star Infra seeks a declaration that it validly terminated Cathcart as CEO and
appointed Chick to replace him. Its claim is brought under Sections 18-110 and
18-111 of the Delaware Limited Liability Company Act, which “vest jurisdiction
with the Court of Chancery in actions involving removal of managers and
interpreting, applying or enforcing LLC agreements.”95 Star Infra has the burden to
prove its claim by a preponderance of the evidence.96
Section 18-110 empowers this court to “hear and determine the validity of
any . . . appointment [or] removal . . . of a manager of a limited liability company.”97
A manager includes “a person . . . [w]hether or not a member of a limited liability
company, who, although not a ‘manager’ as defined in § 18-101 of th[e] [statute],
participates materially in the management of the limited liability company.”98
Cathcart managed the day-to-day business of the Company and—before the
challenged events—was its de facto manager.99
95 Elf Atochem N. Am., Inc. v. Jaffari, 727 A.2d 286, 295 (Del. 1999). 96 See, e.g., Taylor v. State, 748 A.2d 914 n.11 (Del. 2000) (TABLE) (“[T]o establish something by a preponderance of the evidence means to prove that something is more likely so than not so.”). 97 6 Del. C. § 18-110(a). 98 Id. § 18-110(c). 99 Dkt. 23 at 1-2, 17. 15 Section 18-111 empowers this court to “interpret, apply or enforce the
provisions of a limited liability company agreement” as well as determine the
“duties, obligations or liabilities among members or managers.”100 Here, Star Infra’s
claim involves the interpretation of the Company’s LLC Agreement. Star Infra
asserts that its removal of Cathcart as CEO and appointment of Chick as CEO was
a proper exercise of its rights under Section 8.3(a).
Cathcart reads the LLC Agreement differently. He contends that Cathcart,
Inc.’s approval is required before the Company’s CEO can be removed or a new
CEO appointed. He also raises an affirmative defense under the implied covenant
of good faith and fair dealing concerning Chick’s selection.101
As discussed below, I find in favor of Star Infra. The parties have now
stipulated that the Company’s 2023 Actual EBITDA was below $18 million. 102 This
result triggered Star Infra’s unambiguous right to remove Cathcart and replace him
in its sole discretion. None of Cathcart’s arguments provides grounds to hold
otherwise.
100 6 Del. C. § 18-111. 101 Def.’s Post-trial Br. 26-33. A party raising affirmative defenses has “the burden to prove each element of each of [its] affirmative defenses by a preponderance of the evidence.” TA Operating LLC v. Comdata, Inc., 2017 WL 3981138, at *21 (Del. Ch. Sept. 11, 2017). 102 PTO ¶ 26; see also id. ¶ 31. 16 A. Star Infra’s Unambiguous Removal and Replacement Right
In Section 18-110 suits, “the starting (and end) point almost always is the
parties’ bargained-for operating agreement, and the court’s role in these disputes is
to ‘interpret [the] contract [and] effectuate the parties’ intent.’”103 “Delaware
[courts] adhere[] to the ‘objective’ theory of contracts, i.e., a contract’s construction
should be that which would be understood by an objective, reasonable third party.”104
The court will “give priority to the parties’ intentions as reflected in the four corners
of the agreement” by construing the agreement as a whole and giving effect to all
included provisions.105 “When [a] contract is clear and unambiguous,” the court
must “give effect to the plain-meaning of the contract’s terms and provisions without
resort to extrinsic evidence.”106
103 A & J Cap., Inc. v. L. Off. of Krug, 2018 WL 3471562, at *5 (Del. Ch. July 18, 2018) (citing GRT, Inc. v. Marathon GTF Tech., Ltd., 2012 WL 2356489, at *7 (Del. Ch. June 21, 2012)); see also Mickman v. Am. Int’l Processing, LLC, 2009 WL 2244608, at *2 (Del. Ch. July 28, 2009) (“LLC agreements are creatures of contract, which should be construed like other contracts.” (citing Arbor Place, L.P. v. Encore Opportunity Fund, LLC, 2002 WL 205681, at *4 (Del. Ch. Jan. 29, 2002))). 104 Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010) (citing NBC Universal v. Paxson Commc’ns, 2005 WL 1038997, at *5 (Del. Ch. Apr. 29, 2005)). 105 GMG Cap. Invs., LLC v. Athenian Venture P’rs I, 36 A.3d 776, 779 (Del. 2012). 106 Sunline Com. Carriers, Inc. v. CITGO Petroleum Corp., 206 A.3d 836, 846 (Del. 2019) (citation omitted). 17 1. Section 8.3(a) of the LLC Agreement
Section 8.3(a) of the LLC Agreement sets out a two-tier structure for the
removal and replacement of the CEO based on EBITDA thresholds. For the higher
threshold, the Company’s board leads the replacement process:
On or after December 31, 2023, in the event that the Actual EBITDA for the Company was less than $21,000,000 for the calendar year ending December 31, 2023, but more than $18,000,000 the Board will commence with a search for a replacement Chief Executive Officer, subject to the consent of Star Infra and Cathcart Inc. (not to be unreasonably withheld conditioned or delayed) acting in the best interests of the Company. The Board shall take all Necessary Action to promptly recruit, vet and hire a replacement Chief Executive Officer.107
But if a lower EBITDA threshold is hit, Star Infra has the right to terminate
and replace the CEO:
On or after December 31, 2023, in the event that the Actual EBITDA for the Company was less than $18,000,000 for the calendar year ending December 31, 2023, Star Infra may commence with a search for a replacement Chief Executive Officer, hire a replacement Chief Executive Officer on such terms and conditions as determined in its sole and absolute discretion and terminate Casey Cathcart as the Company’s Chief Executive Officer.108
107 LLC Agreement § 8.3(a) (emphasis added). 108 Id. (emphasis added). 18 Before trial, Cathcart stipulated that the Company’s reported 2023 Actual
EBITDA fell below $18 million.109 He conceded that—despite previously insisting
otherwise—the $18.3 million EBITDA figure Feiler circulated in June 2024
included impermissible addbacks.110 Thus, the lower EBITDA threshold was
implicated—giving Star Infra unilateral removal and replacement rights.
Since EBITDA fell below $18 million, Star Infra had the right to “search” for
a new CEO, “terminate” Cathcart as CEO, and “hire” a replacement CEO.111 It could
do so on “terms and conditions” determined in its “sole and absolute discretion.”112
Nothing in the LLC Agreement limits its exercise of this unambiguous right.
2. Cathcart’s Arguments
Cathcart advances a different reading of the LLC Agreement. He asserts that
the LLC Agreement requires the affirmative vote of at least one
Cathcart, Inc.-affiliated board member to remove the Company’s CEO.113 This
argument implicates two provisions of the LLC Agreement that grant
109 PTO ¶ 26; Cathcart Tr. 101 (conceding that the $18.3 million EBITDA figure was “[t]rue legally”). 110 PTO ¶ 31; Cathcart Tr. 102; see also infra Section III.A (addressing Star Infra’s request for fee shifting based on Cathcart’s false statements). 111 LLC Agreement § 8.3(a). 112 Id. 113 See Def.’s Post-trial Br. 18-21. 19 member-affiliated directors consent rights on certain decisions made by the
Company.114
Section 8.2(f) of the LLC Agreement requires the consent of at least one “Star
[Infra] Director” and one “Cathcart[, Inc.] Director” for certain Company “Major
Decisions.”115 It states, in relevant part:
Notwithstanding anything to the contrary contained in th[e] [LLC] Agreement . . . the Company and its Subsidiaries shall not . . . take, directly or indirectly on behalf of the Company or any of its Subsidiaries, and no director, officer, employee, agent or other representative of the Company or any of its Subsidiaries shall have any authority to cause or to permit the Company or any of its Subsidiaries to take, any action, make any decision, expend any sum or undertake or suffer any obligation which comes within the scope of any of the following actions [without consent from one Star Infra and one Cathcart, Inc. director].116
Section 8.2(g) extends similar but more limited consent rights to 730
CTHRAIL LLC (“730 Member”), which became a member of the Company in July
2022.117 It states that, “[n]otwithstanding anything to the contrary contained in th[e]
[LLC] Agreement . . . the Company and its Subsidiaries shall not . . . take [certain]
114 Id. at 20-21. 115 LLC Agreement § 8.2(f). 116 Id. (emphasis added). 117 Id. § 8.2(g); see PTO ¶ 25. Cathcart’s post-trial brief largely focuses on Section 8.2(g) rather than Section 8.2(f). See Def.’s Post-trial Br. 18-21. At times in prior briefing and in his testimony, however, he has raised both provisions. Given the overlap, I address Section 8.2(f) alongside Section 8.2(g) for the sake of completeness. 20 action[s] . . . without the consent of the 730 [Member] Director” and at least one
director designated by each of Star Infra and Cathcart, Inc.118
One of the Company decisions that requires member-designated director
consent under Sections 8.2(f) and 8.2(g) is the “appoint[ment], remov[al], or
replace[ment] [of] the chief executive officer.”119
Cathcart points out that “notwithstanding” clauses, like those in Sections
8.2(f) and 8.2(g), “clearly signal[] the drafter’s intention that . . . [those] section[s]
override conflicting provisions of any other section.”120 That is, he believes that the
consent rights afforded members in Sections 8.2(f) and 8.2(g) override Star Infra’s
rights in Section 8.3(a).
But there is no conflict between Sections 8.2(f) and 8.2(g), on the one hand,
and Section 8.3(a), on the other hand.121 Sections 8.2(f) and 8.2(g) place conditions
on certain decisions made by the Company. They do not address actions and
decisions assigned to a member.122 Section 8.3(a), by contrast, expressly grants Star
118 JX 46 § 8.2(g) (emphasis added). 119 Id. §§ 8.2(f)(iii)(A), 8.2(g)(ii). 120 Def.’s Post-trial Br. 19 (quoting Cisneros v. Alpine Ridge Grp., 508 U.S. 10, 18 (1993)). 121 See, e.g., In re Est. of Crist, 863 A.2d 255, 258 (Del. Ch. 2004) (holding that “[d]espite the inclusion of the word ‘notwithstanding,’” one section in a contract did not trump another section because the two were “not in conflict”), aff’d, 879 A.2d 602 (Del. 2005) (TABLE). 122 JX 46 §§ 8.2(f), 8.2(g). 21 Infra—not the Company or its board—the exclusive right to “search for” and “hire”
a replacement CEO if 2023 Actual EBITDA falls below $18 million.123 Unlike
Sections 8.2(f) and 8.2(g), Section 8.3(a) does not grant any other member a consent
right or cabin how Star Infra can exercise its rights.
Delaware courts must interpret contracts “in a way that does not render any
provisions illusory or meaningless.”124 By Cathcart’s reasoning, Cathcart, Inc.
would have a veto right over a decision that the LLC Agreement leaves exclusively
to Star Infra. This reading would eviscerate Star Infra’s rights to “terminate” the
CEO and “appoint” a new one in its “sole discretion.”125
Cathcart’s interpretation would also render superfluous the limits on member
consent rights in Section 8.3(a) where Actual EBITDA is less than $21 million but
more than $18 million.126 In this scenario, Section 8.3(a) gives certain members—
through their board designees—consent rights that cannot be “unreasonably
withheld” and must be exercised in the “best interest of the Company.”127 The major
123 Id. § 8.3(a). 124 O’Brien v. Progressive N. Ins. Co., 785 A.2d 281, 287 (Del. 2001) (citation omitted). 125 LLC Agreement § 8.3(a). 126 See NAMA Hldgs., LLC v. World Mkt. Ctr. Venture, LLC, 948 A.2d 411, 419 (Del. Ch. 2007) (“Contractual interpretation operates under the assumption that the parties never include superfluous verbiage in their agreement, and that each word should be given meaning and effect by the court.”), aff’d, 945 A.2d 594 (Del. 2008). 127 LLC Agreement § 8.3(a). 22 decision provisions in Sections 8.2(f) and 8.2(g), however, lack such limitations on
how member-appointed directors may exercise their discretion when approving
certain Company decisions.128
The provision of Section 8.3(a) triggered when EBITDA falls below $18
million would also become meaningless if it required board or other member
consent. There would be no reason to differentiate between the removal mechanism
when EBITDA falls below $18 million, which does not expressly contemplate
consent rights, and when EBITDA falls between $21 and $18 million, which does.
This distinction also “speaks volumes” on the parties’ intent.129 The parties knew
how to make board or member consent a condition to certain acts. But they excluded
such conditions from Star Infra’s removal and appointment rights if the lower
EBITDA threshold was met.
Further, even if Sections 8.2(f) and 8.2(g) conflicted with Section 8.3(a),
Cathcart’s arguments would fail. Delaware courts follow the canon of construction
that “specific terms and exact terms are given greater weight than general
128 See id. §§ 8.2(f), 8.2(g). 129 Kan. City S. v. Grupo TMM, S.A., 2003 WL 22659332, at *3 (Del. Ch. Nov. 4, 2003) (invoking the inclusio unius est exclusio alterius canon of construction when observing that the inclusion of “noteholder approval” in one part of a section but not “shareholder approval” suggested “[shareholder] approval [wa]s not a condition to the [a]greement”). 23 language.”130 If 2023 Actual EBITDA fell below $18 million, Section 8.3(a) created
a specific exception to the more general provision on CEO appointment and removal
in Section 8.2.
Star Infra’s interpretation of the LLC Agreement is the only reasonable one.
It gives meaning and effect to each of the contract’s terms. Conversely, Cathcart’s
interpretation creates multiple inconsistencies.
B. Implied Covenant of Good Faith and Fair Dealing
As an affirmative defense, Cathcart asserts that Star Infra “violated the
implied covenant of good faith and fair dealing.”131 Cathcart argues that Star Infra
exercised its discretion to seek out and hire a CEO in bad faith by selecting Chick.132
He maintains that Star Infra’s recruitment effort was too rushed and that it chose a
person lacking rail experience to “supplant [him]” as “quickly as possible.”133
Any room left in the LLC Agreement for the implied covenant is narrow. The
LLC Agreement not only empowers Star Infra to use its “sole and absolute
discretion” to set “terms and conditions” of the new CEO’s employment.134 It also
130 Restatement (Second) of Contracts § 203(c) (1981); see DCV Hldgs., Inc. v. ConAgra, Inc., 889 A.2d 954, 961 (Del. 2005) (“[W]here specific and general provisions conflict, the specific provision ordinarily qualifies the meaning of the general one.”). 131 JX 152 at 29-30. 132 Def.’s Post-trial Br. 30-33. 133 Id. at 30. 134 LLC Agreement § 8.3(a). 24 permits it to exercise its discretion without consideration of other members’ or the
Company’s interests. The LLC Agreement eliminates all fiduciary duties Star Infra
owes to the Company or to any other member and explicitly permits Star Infra to
consider its interests alone.135
Still, the vesting of discretion in Star Infra did not entirely relieve it of the
obligation “to use that discretion consistently with the implied covenant of good faith
and fair dealing.”136 “[W]hen a contract provides discretion to one party and the
scope of that discretion is not specified ‘the implied covenant requires that the
discretion be used reasonably and in good faith.’”137 Good faith under the implied
covenant contemplates “faithfulness to the scope, purpose, and terms of the parties’
contract.”138
To the extent that the implied covenant applies, Cathcart failed to prove that
Star Infra acted in bad faith by recruiting, vetting, or hiring Chick. Star Infra hired
135 See id. § 2.2 (“Wherever in this Agreement a Member is permitted or required to make a decision or determination or take an action in its ‘discretion’ or its ‘judgment,’ that means that such Member may take that decision in its ‘sole discretion’ or ‘sole judgment’ without regard to the interests of any other Person.”); id. § 7.4 (“To the fullest extent permitted by applicable Law, no Member shall have any fiduciary duties to the Company or to any other Member.”). 136 Miller v. HCP Trumptet Invs., LLC, 194 A.3d 908, 908 (Del. 2018) (TABLE). 137 Policeman’s Annuity and Benefit Fund of Chicago v. DV Realty Advisors LLC, 2012 WL 3548206, at *12 (Del. Ch. Aug. 16, 2012) (citing Airborne Health, Inc. v. Squid Soap, LP, 984 A.2d 126, 146 (Del. Ch. 2009)). 138 Gerber v. Enter. Prods. Hldgs., LLC, 67 A.3d 400, 419 (Del. 2013), overruled on other grounds by Winshall v. Viacom Int’l, Inc., 76 A.3d 808 (Del. 2013). 25 two respected search firms to find a qualified turnaround CEO. 139 Star Infra put
together a screening committee to review proposed candidates.140 Both Star Infra
and the search firms reviewed and interviewed multiple candidates over several
weeks.141 Chick was identified as the best fit and, after several interviews, hired.142
There is nothing unreasonable or nefarious about this process.
Cathcart’s “ideal CEO” candidate would have extensive experience in the
railroad industry.143 But the parties never agreed that such expertise—or any specific
qualification—was a prerequisite for future Company executives.144 Star Infra
decided that there were characteristics, like experience turning around struggling
companies, that were “more important than rail experience, which many
[employees] of the [C]ompany had.”145 Regardless, Chick has been the CEO of four
139 See JX 74 at 23; JX 52 at 15; see also Melson Tr. 168-69. 140 See Melson Tr. 169-70; JX 74 at 15. 141 See JX 74 at 4-23; Melson Tr. 169. 142 See JX 74 at 9-10; Melson Tr. 170-71. 143 Def.’s Post-trial Br. 12; see also Cathcart Tr. 34-35. 144 By that strained logic, an individual with prior experience as the CEO of a fast casual Mexican restaurant would be unfit to lead a coffee company. See Danielle Kaye & Julie Creswell, Starbucks Replaces C.E.O With Chipotle’s Brian Niccol, N.Y. Times (Aug. 13, 2024), https://www.nytimes.com/2024/08/13/business/starbucks-ceo-brian-niccol- chipotle.html. 145 Melson Tr. 171; see also JX 74 at 19 (“Proven ‘turnaround’ experience is more important that specific industry experience.”). 26 companies, at least two of which had a “similar operation” to the Company.146
Selecting him to lead the Company does not indicate bad faith by Star Infra.147
* * *
Because the Company’s 2023 Actual EBITDA fell below $18 million, Section
8.3(a) of the LLC Agreement gave Star Infra the unambiguous right to replace
Cathcart as CEO. Star Infra opted to exercise that right. It launched a search process,
hired Chick, and terminated Cathcart. Nothing in the LLC Agreement prevented it
from doing so. Nor did the implied covenant of good faith and fair dealing.
Cathcart was aware that the Company’s EBITDA results could lead to this
outcome. As discovery revealed, he tried to fudge the Company’s financial results
to avoid it. But he cannot circumvent the bargain he struck. He was validly removed
as CEO of the Company and Chick was validly appointed as his replacement.
III. SANCTIONS
Star Infra seeks sanctions against Cathcart on two grounds. First, it asks that
the court award its reasonable attorneys’ fees incurred due to Cathcart’s bad faith
146 Melson Tr. 171. 147 Star Infra has invested tens of millions of dollars in the Company. It would be commercially unreasonable to hire a CEO that it felt was bound to fail. 27 conduct.148 Second, it contends that Cathcart is in contempt of the status quo order
entered in this case.149 The first argument has merit; the second does not.
A. Attorneys’ Fees
“The Delaware Supreme Court has consistently affirmed the American Rule
under which both sides pay their own attorneys’ fees.”150 Although this court has
the discretion to shift fees if circumstances warrant, the American Rule “remains the
default.”151 Exceptions to the American Rule that can merit fee shifting include
situations where:
[(1)] the judge concludes a litigant brought a case in bad faith or through his bad faith conduct increased the litigation’s cost; and [(2)] cases in which, although a defendant did not misuse the “litigation process in any way, . . . the action giving rise to the suit involved bad faith, fraud, ‘conduct that was totally unjustified, or the like’ . . . .”152
Both types of bad faith are found here.
Pre-litigation, Cathcart caused Feiler to manufacture an inflated statement of
2023 Actual EBITDA that Cathcart knew was inconsistent with the LLC
148 Pl.’s Post-trial Br. 50-55. 149 Id. at 55-59. 150 In re Straight Path Commc’ns Inc. Consol. S’holder Litig., 2024 WL 4602914, at *5 (Del. Ch. Oct. 29, 2024) (citation omitted). 151 Id. 152 Scion Breckenridge Managing Member, LLC v. ASB Allegiance Real Est. Fund, 68 A.3d 665, 687 (Del. 2013) (citation omitted). 28 Agreement.153 He pressured Feiler to reach a number above $18 million and
suggested that Feiler “look[] for” impermissible addbacks.154 After Feiler circulated
the revised figure, Cathcart falsely informed Star Infra that the Company’s creditors
had “reviewed and blessed” it.155
During litigation, Cathcart continued to obfuscate. He maintained that the
$18.3 million EBITDA figure was operative, though he knew it was untimely and
contravened the credit agreement and the LLC Agreement.156 The court set an
expedited trial schedule based, in part, on Cathcart’s claim that the Company’s 2023
Actual EBITDA was in dispute.157
Discovery into the true EBITDA figure ensued, during which Cathcart
continued to deny that 2023 Actual EBITDA was below $18 million.158 Then, on
the eve of trial, Cathcart withdrew this contention and stipulated otherwise.159 In
doing so, he conceded that he lacked grounds for two out of his three theories for
breach of the implied covenant: (1) that Star Infra delayed credit agreement
153 See supra notes 66-74 and accompanying text. 154 Feiler Tr. 234. 155 JX 105. 156 Dkt. 45 (Answer) 3-5; see also JX 167 at 2. 157 Dkt. 52 at 25-26, 31-33. 158 Compare JX 167 at 2, with JX 86 at 2 and Feiler Tr. 244; see also Dkt. 52 at 25-27 (including the validity of the company’s 2023 EBITDA value as a “discovery topic”). 159 PTO ¶ 26. 29 amendments that affected the 2023 Actual EBITDA calculation, and (2) that Star
Infra “knew” 2023 Actual EBITDA could not be calculated until a year-end audit
concluded.160
Delaware courts have shifted fees where a defendant advanced “multiple
theories” that had “minimal grounding in fact and law” and “made the litigation
more expensive than it should have been.”161 Cathcart’s false statements drove up
litigation costs and unnecessarily expanded the scope of this case. Without his
tactics, the case arguably could have been resolved on summary judgment based on
the terms of the LLC Agreement.
Cathcart’s reliance on a falsity until just before trial warrants fee shifting. Star
Infra is entitled to the reasonable fees it incurred in refuting Cathcart’s baseless
defenses.162
160 Dkt. 45 (Answer) 29-30; JX 181 at 25, 29. 161 Montgomery Cellular Hldg. Co. v. Dobler, 880 A.2d 206, 227-28 (Del. 2005) (citation omitted); see also Bay Cap. Fin., L.L.C. v. Barnes & Noble Educ., Inc., 2020 WL 1527784, at *11 (Del. Ch. Mar. 30, 2020) (awarding attorneys’ fees where a party “doubled down” on misleading statements in court filings, “did not provide a factual basis from which anyone could reach that conclusion,” and engaged in discovery abuse), aff’d, 249 A.3d 800 (Del. 2021) (TABLE). 162 See Martin v. Med-Dev Corp., 2015 WL 6472597, at *20-21 (Del. Ch. Oct. 27, 2015) (shifting fees incurred in defending one claim that, although bordering on frivolous, the plaintiff refused to abandon until shortly before trial); Arbitrium (Cayman Is.) Handels AG v. Johnston, 705 A.2d 225, 231, 235-37 (Del. Ch. 1997) (awarding fees based on a finding of defendants’ bad faith where, among other issues, “contemporaneous documents created by defendants” proved plaintiff’s claims), aff’d, 720 A.2d 542 (Del. 1998); Auriga Cap.
30 B. Contempt
Star Infra next contends that Cathcart violated the status quo order.163 This
court may provide relief “[f]or failure to obey a restraining or injunctive order, or to
obey or to perform any order.”164 A finding of civil contempt for violating a status
quo order is appropriate where a party is (1) bound by the order, (2) has notice of the
order, and (3) nevertheless violates the order.165
The first two factors are met: Cathcart was bound by and had notice of the
status quo order. The third factor is not.
Star Infra has not proven, by a preponderance of the evidence, that Cathcart
meaningfully violated the status quo order.166 Technical violations of the order are
Corp. v. Gatz Props., LLC., 40 A.3d 839, 881-82 (Del. Ch. 2012) (concluding that fee shifting was appropriate where the defendant “and his counsel simply splattered the record with a series of legally and factually implausible assertions”), aff’d, 59 A.3d 1206 (Del. 2012); Loretto Literary & Benevolent Inst. v. Blue Diamond Coal Co., 444 A.2d 256, 258, 261 (Del. Ch. 1982) (shifting fees where there was “no evidence in the record [supporting defendant’s defense],” which the defendant did not abandon until after discovery, shortly before trial). 163 See Dkt. 95 at 55-59. 164 Ct. Ch. R. 70(b). 165 See DiDonato v. Campus Eye Mgmt., LLC, 2024 WL 368112, at *9 (Del. Ch. Jan. 31, 2024), appeal dismissed, 315 A.3d 517 (Del. 2024) (TABLE). 166 See TransPerfect Glob., Inc. v. Pincus, 278 A.3d 630, 644 n.97 (Del. 2022) (“[T]he preponderance standard is the appropriate burden for findings of civil contempt.”); cf. In re Aerojet Rocketdyne Hldgs., Inc. 2022 WL 2180240, at *22-25 (Del. Ch. June 16, 2022). 31 insufficient.167 To merit sanctions, the violation “must constitute a failure to obey
the court in a meaningful way.”168 None of its complaints rises to that level.
First, Star Infra asserts that Cathcart failed to ensure that the Company
responded to Star Infra’s information requests within three days. 169 The three-day
deadline has a carveout: “if the requested information is not reasonably available,
the parties will confer in good faith about the requested information, and if
necessary, provide additional time for such information to be provided.”170 The
evidence reflects that Cathcart worked with Feiler and Chick to discuss and satisfy
Star Infra’s information requests.171 Although some information was not
immediately available, Chick later gained access.172 Any violation of the status quo
order was a technical one.
Second, Star Infra argues that Cathcart violated a prohibition on disparaging
Star Infra or Chick.173 In a September 12 email to Melson, Thom Cathcart, Chick,
and three others, Cathcart called Chick a “cookie-cutter CEO-for-hire” who would
167 DiDonato, 2024 WL 368112, at *9. 168 Dickerson v. Castle, 1991 WL 208467, at *4 (Del. Ch. Oct. 15, 1991) (citation omitted). 169 JX 139 § 2(i). 170 Id. 171 See Feiler Tr. 261; Cathcart Tr. 49-50. 172 See Feiler Tr. 262-64; JX 143 at 1. 173 JX 139 ¶ 2(q). 32 “destroy th[e] Company.”174 A discourteous email to a limited group hardly amounts
to disparagement. A contempt finding is unwarranted.
Finally, Star Infra asserts that Cathcart violated the status quo order by
excluding Chick from company meetings.175 On September 16, Cathcart told a
Company officer that he could “say no” to Chick’s request to attend a planning
meeting.176 But the status quo order does not grant Chick unfettered access to
meetings. It requires Cathcart to provide Chick “full access” to the Company’s
employees and to “work collaboratively” with Chick.177 Company employees were
not explicitly required to accede to Chick’s requests to attend meetings.178
IV. CONCLUSION
Star Infra is entitled to judgment in its favor under Sections 18-110 and 18-111
of the LLC Act. Star Infra validly removed Cathcart as the Company’s CEO and
appointed Chick to that role. It had the right to do so under Section 8.3(a) of the
174 JX 153 at 3. 175 Pl.’s Post-trial Br. 58 (citing JX 139 ¶ 2(j)). 176 JX 157 at 1, 6. 177 JX 139 ¶ 2(j). 178 Cf. Mother Afr. Union First Colored Methodist Protestant Church v. Conf. of Afr. Union First Colored Methodist Protestant Church, 1992 WL 83518, at *9 (Del. Ch. Apr. 22, 1992) (“A cardinal requirement for any adjudication of contempt is that the order allegedly violated give clear notice of the conduct being proscribed.”). 33 LLC Agreement. Cathcart failed to prove his affirmative defense based on the
implied covenant of good faith and fair dealing.
Star Infra is also entitled to a reasonable award of fees and expenses insofar
as they were incurred because of Cathcart’s bad faith conduct, as set forth above. It
is not entitled to a finding of civil contempt.
The parties are to confer on an order to implement this decision and file it
within one week.