IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
TERRY FRIDDLE, BRUCE ) GEBHARDT, HENRY GORDON, ) JEFFREY GREEN, BARRY HAWK, ) ROBERT JONES, PATRICK PARKER, ) SHANNON SMITH, and CRESSON ) TECHNOLOGY INVESTORS GP, LLC, ) ) Plaintiffs, ) ) v. ) C.A. No. 2021-0306-SG ) CHRISTOPHER MOEHLE, ROBOTICS ) HUB FUND 1, LLC, and COAL HILL ) VENTURES, LLC, ) ) Defendants. ) ) ) ROBOTICS HUB FUND 1, LLC, ) ) Counterclaim Plaintiff, ) ) v. ) ) TERRY FRIDDLE, BRUCE ) GEBHARDT, HENRY GORDON, ) JEFFREY GREEN, BARRY HAWK, ) ROBERT JONES, PATRICK PARKER, ) SHANNON SMITH, and CRESSON ) TECHNOLOGY INVESTORS GP, LLC, ) ) Counterclaim Defendants. )
MEMORANDUM OPINION
Date Submitted: November 13, 2023 Date Decided: February 8, 2024 Thad J. Bracegirdle and Emily L. Skaug, BAYARD, P.A., Wilmington, Delaware; OF COUNSEL: Brian A. Katz and John G. Moon, OLSHAN FROME WOLOSKY LLP, New York, New York, Attorneys for Plaintiffs and Counterclaim Defendants Terry Friddle, Bruce Gebhardt, Henry Gordon, Jeffrey Green, Barry Hawk, Robert Jones, Patrick Parker, Shannon Smith, and Cresson Technology Investors GP, LLC.
Steve L. Caponi and Matthew B. Goeller, K&L GATES LLP, Wilmington, Delaware; OF COUNSEL: Christopher M. Verdini, K&L GATES LLP, Pittsburgh, Pennsylvania, Attorneys for Defendants Christopher Moehle, Robotics Hub Fund I, LLC, and Coal Hill Ventures, LLC, and Counterclaim Plaintiff Robotics Hub Fund 1, LLC.
GLASSCOCK, Vice Chancellor As our Supreme Court has recently opined, “[t]he courts of this State hold
freedom of contract in high—some might say, reverential—regard.”1 This sentiment
applies with especial weight to agreements to arbitrate, in that they carry the dual
policy avoirdupois of respecting private ordering and promoting alternative dispute
resolution. So much is this the case that our courts typically refer to such
agreements, and specific enforcement thereof, as depriving the courts of
jurisdiction.2
It is axiomatic, however, that rights established by agreement may be waived
by agreement as well. The scope of such a waiver is at issue here.
This litigation began in 2021. The initial complaint, and the subsequent
counterclaims, involved a discrete set of issues, addressing whether one defendant
had been validly removed as General Partner of a limited partnership, the “Fund.”
The Fund was subject to a limited partnership agreement, under which the issues
above were unambiguously subject to mandatory arbitration. The parties, content,
apparently, to have the matter settled in Chancery, agreed to waive the arbitration
provision, to allow “the complete resolution of their disputes before this Court.”
1 Cantor Fitzgerald, L.P. v. Ainslie, 2024 WL 315193, at *1 (Del. Jan. 29, 2024). 2 As Vice Chancellor Laster recently pointed out in a scholarly review of the issue, this shorthand is, in fact, a misnomer. See Gandhi-Kapoor v. Hone Capital LLC, 2023 WL 8165594 (Del. Ch. Nov. 22, 2023). 1 In 2023, Plaintiffs filed an amended complaint. That complaint introduces
new claims, for breach of contract and fiduciary duty. Defendants have moved to
dismiss the new claims, arguing that these tort claims are subject to the mandatory
arbitration provision. Plaintiffs contend that the arbitration waiver applies to these
new claims as well.
The issue is a simple one of construing the breadth of the waiver filed by the
parties. The parties agreed to waive arbitration for “their disputes before this Court.”
Plaintiffs argue that the tort claims had attached as of the time of the waiver or
resulted from the dispute between the parties, and therefore constitute a portion of
the parties’ dispute at the time. Defendants counter that they only waived the
“disputes before this Court”—that is, the disputes set forth in the Complaint and
Counterclaims about whether the General Partner had been validly removed.
Defendants aver that they did not intend to waive unknown claims, whether those
claims had attached at the time of the agreement or not.
I find the waiver unambiguous. The only claims “before this Court” were the
ones inhering in the pleadings at that time, as set out in the Complaint and
Counterclaims. To the extent ambiguity did reside in the waiver agreement,
moreover, it would be consistent with public policy to construe the waiver narrowly,
rather than subject Defendants to an unintended forfeiture of the right to mandatory
2 arbitration. Accordingly, the tort claims are dismissed, subject to arbitration
consistent with the Partnership Agreement. I explain more fully, below.
I. BACKGROUND
A. Factual Background3
1. The Fund
In 2015, Christopher Moehle formed RHFI LLC4 and Coal Hill to begin an
investment fund with an emphasis on early-stage robotics companies.5 At that time,
Moehle also formed a Delaware limited partnership, Robotics Hub Fund 1, LP (the
“Fund”), that was to be the investment vehicle.6 Coal Hill, which is solely owned
and controlled by Moehle, served as the investment manager of the Fund.7 The Fund
maintains investments in seven portfolio companies.8
The Fund’s limited partnership agreement (the “Partnership Agreement”),
designated RHF1 LLC as the General Partner.9 Under the terms of the Partnership
Agreement, RHF1 LLC shall cease to be the Fund’s General Partner if a “Disabling
Event” transpires.10 In the event that RHF1 LLC is removed due to the occurrence
3 The facts in this section are drawn from the First Amended Complaint. For purposes of Defendants’ motion to dismiss, I accept as true the allegations Plaintiffs assert in the First Amended Complaint. 4 Undefined capitalized terms herein have the same meaning as in my February 25, 2022 memorandum opinion. See Friddle v. Moehle, 2022 WL 20651183 (Del. Ch. Feb. 25, 2022). 5 First Am. Compl. ¶ 28, Dkt. No. 54 (“Am. Compl.”). 6 Id. ¶¶ 24–26. 7 Id. ¶ 25. 8 Id.¶ 29. 9 Id. ¶¶ 24–26. 10 Id. ¶¶ 42–44.
3 of a Disabling Event, the Fund will be dissolved unless a “Majority in Interest agrees
in writing to continue the business of the [Fund] and to the appointment . . . of
another General Partner” within 90 days of the Disabling Event. 11 Regarding each
limited partner’s interest, the Partnership Agreement allows the termination thereof
if the limited partner’s continued participation in the Fund would “result in any
material adverse consequences to the Partnership or its Limited Partners.”12
With respect to fiduciary duties, the Partnership Agreement provides that “the
General Partner shall act consistent with its fiduciary duties to the Limited
Partners.”13 The Partnership Agreement dictates that “the Partnership, the General
Partner, and the Principals shall at all times act consistently with their fiduciary
duties to the Partners.”14 “Principal” is defined to include Moehle.15
2. The Sidecar Investments
Defendants offered Plaintiffs the opportunity to invest in the Fund’s portfolio
companies (“Sidecars”) through Coal Hill and RHF1 LLC.16 The investments in the
Sidecars were separate from Plaintiffs’ investments in the Fund and governed by
Sidecar Agreements.17 The Sidecar Agreements contain language similar to the
11 Id. ¶¶ 42–44. 12 Answer Verified Compl. and Verified Countercls. Ex. A, § 5.06(a), Dkt. No. 8 (the “Partnership Agreement”). 13 Am. Compl. ¶ 39 (quoting Partnership Agreement § 3.06(d)). 14 Id. (quoting Partnership Agreement § 3.06(e)). 15 Partnership Agreement Art. I. 16 Am. Compl. ¶ 1. 17 Id. ¶¶ 1–2.
4 Partnership Agreement pertaining to fiduciary duties, stating that “the General
Partner shall act consistent with its fiduciary duties to the Limited Partners.”18
3. Financial Disclosures Under the Partnership Agreement and Sidecar Agreements
The Partnership Agreement and Sidecar Agreements provide that Plaintiffs
will receive an annual disclosure of investment activity and financial reporting. 19
These disclosures are to be disseminated within four months of the close of the fiscal
year, or “as soon thereafter as reasonably possible.”20 The transmission of these
reports to Plaintiffs, however, was routinely delayed by seven or eight months.21 For
example, Plaintiffs did not receive the 2019 financial statements until January
2021.22
As limited partners of the Fund, Plaintiffs also expected to receive quarterly
statements about the net asset value of the Fund’s portfolio companies. 23 These
statements, however, were routinely late or never issued.24 Those statements that
were issued often lacked financial analysis of the portfolio companies.25 Moehle
claimed these omissions were due to the portfolio companies’ refusal to share such
18 Id. ¶ 40. 19 Id. ¶ 61. 20 Id. (quoting Partnership Agreement § 7.02(a)). 21 Id. ¶¶ 62, 64. 22 Id. ¶ 64. 23 Id. ¶ 65. 24 Id. ¶¶ 65, 80. 25 Id. ¶¶ 66, 81–82.
5 information, but representatives of some of the portfolio companies evidenced a
willingness to share the information.26 The information that was included in these
statements was often false or misleading,27 as Moehle described the present value of
the Fund’s portfolio as “exceptional” while valuing the majority of the portfolio
companies at “cost.”28
With respect to the Sidecar investments, Defendants never provided Plaintiffs
with quarterly statements of the net asset value.29
4. Management of Fund Assets
In his role as a principal of the Fund, Moehle invoiced non-Fund expenses to
Coal Hill, the investment manager of the Fund.30 Despite being separate entities
with different partners, the administrative costs for the Sidecar investments were
also allocated to the Fund’s limited partners.31
In 2017, Coal Hill requested that the limited partners prepay management fees
to enable the Fund to hire additional staff.32 The limited partners continued to be
charged these advance management fees through 2019, prepaying approximately
$600,000.33 The new employees whose salaries these prepaid fees were meant to
26 Id. ¶¶ 66–68. 27 Id. ¶ 69. 28 Id. ¶ 70. 29 Id. ¶¶ 79–80. 30 Id. ¶ 85. 31 Id. ¶¶ 107–08. 32 Id. ¶¶ 90–92. 33 Id. ¶¶ 96–99.
6 pay were never hired by the Fund.34 Instead, Coal Hill used these prepaid
management funds to pay Moehle’s personal legal fees.35 Moehle also borrowed
$150,000 from the Fund, the reason for which has not been disclosed 36 and Moehle
charged the Fund for international trips that were unrelated to the Fund’s business
by misrepresenting the business purposes of the trips.37
As a result of these activities, the Fund lacks liquidity to cover its operation
costs.38
5. The Conflicted Transactions
In 2015, prior to forming the Fund, Moehle created JDV Robotics (“JDV”).39
Moehle concealed his involvement in JDV from Plaintiffs by claiming JDV was
owned by the University of Pittsburgh Medical Center.40 However, JDV’s registered
corporate address is Moehle’s home address and Moehle is listed the sole officer of
JDV.41
34 Id. ¶¶ 93–94, 100. 35 Id. ¶¶ 90, 102–04. 36 Id. ¶¶ 86–88. 37 Id. ¶ 105. For example, Moehle billed the Fund for an April 2019 trip to Dubai to review collaborations that several portfolio companies had entered into in the region, however, the portfolio company named in the update to explain the trip has no such collaborations in Dubai. Id. ¶ 106. 38 Id. ¶¶ 109–12. 39 Id. ¶ 115. 40 Id. ¶ 116. 41 Id. ¶ 117.
7 Once the Fund was formed, Moehle caused the Fund to enter into a convertible
note with JDV, whereby the Fund loaned JDV $200,000.42 Moehle signed the
convertible note on behalf of both the Fund and JDV.43 This loan to JDV also
included a $50,000 consulting fee paid to Moehle from JDV.44 Despite JDV’s
insolvency, Moehle caused the Fund to extend credit by claiming that Fund’s JDV
notes had more favorable terms than other portfolio companies.45 The Fund has not
disclosed its investment in JDV, nor does the Fund list JDV as one of its portfolio
companies.46
In October 2017, Moehle, through his control of Coal Hill, also merged
Robotics Hub Special Purpose Vehicle (“RHSPV”) interest, worth $125,000, into
the Fund.47 Coal Hill earned a 12% annual return from the Fund from this
transaction.48 Prior to the merger, Coal Hill’s investment in RHSPV was maintained
on an interest-free loan from the Fund since late 2016.49 These transactions resulted
in Moehle, through his control of Coal Hill, earning 12% return on the limited
partners’ capital, without compensating the Fund.50 Moehle further asserted his
42 Id. ¶ 115. 43 Id. 44 Id. ¶ 118. 45 Id. ¶ 123. 46 Id. ¶ 121. 47 Id. ¶ 124. 48 Id. 49 Id. 50 Id.
8 control to ensure that the merger date was delayed to maximize his personal profit
from the transaction.51
In 2019, Moehle represented to some of the Fund’s portfolio companies that
he would raise funds for them through investment opportunities offered to RHF1
investors.52 Plaintiffs, who were RHF1 investors, were not informed of these
offerings.53 Instead, Moehle created another fund, “The Robotics Hub Fund 2, LP,”
to make these additional investments into the Fund’s portfolio companies.54 The
investors who gave “The Robotics Hud Fund 2, LP” funds were given preemptive
rights to purchase future issuance of equity securities.55 Plaintiffs were not given
the opportunity to invest in this separate fund and, as a result of the creation of “The
Robotics Hud Fund 2, LP,” Plaintiffs’ holdings in the portfolio companies were
diluted.56 Thereafter, Moehle informed the Fund’s limited partners that the Fund
was closed.57 At that time, the Fund’s assets comprised $8 million.58
51 Id. 52 Id. ¶ 125. 53 Id. 54 Id. ¶¶ 125–26. 55 Id. ¶ 126. 56 Id. Defendants further diluted Plaintiffs’ holdings by creating other new entities that utilized the Fund’s pro rata investment rights and Moehle’s relationships with the portfolio companies. Id. ¶ 131. These new entities had a 20% carry to Moehle compared to the 10% carry associated with the Fund Sidecars in which the Limited Partners had invested. Id. 57 Id. ¶ 130. 58 Id.
9 6. Litigation Ensues Regarding a “Disabling Event”
In March 2021, Plaintiffs purportedly removed RHF1 as General Partner
following the alleged occurrence of a “Disabling Event” under the Partnership
Agreement; the nature of the “event” is discussed below.59 Plaintiffs notified RHF1
of its removal on March 15, 2021.60 Cresson GP was chosen as the Fund’s new
general partner and, using its purported authority as the general partner, removed
Coal Hill as the Fund’s manager.61
When RHF1 refused to accept its removal as General Partner of the Fund,62
Plaintiffs initiated this action by filing a complaint (the “Complaint”) on April 12,
2021,63 along with a motion to expedite.64 Defendant RHF1 filed counterclaims (the
“Counterclaims”) challenging the validity of its purported termination as the General
Partner of the Fund.65 On May 20, 2021, the parties submitted a joint letter to the
Court explaining that, while the Partnership Agreement contained a mandatory
arbitration provision, the parties “mutually agreed to waive the arbitration provision
to permit the complete resolution of their disputes before this Court.” 66 The matter
59 Id. ¶¶ 134–35. 60 Id. ¶ 135. 61 Id. ¶ 137. 62 Id. ¶ 141. 63 Verified Compl., Dkt. No. 1. 64 Pls.’ Mot. for Expedited Proceedings, Dkt. No. 2. 65 See Answer Verified Compl. and Verified Countercls., Dkt. No. 8. 66 Joint Letter to Vice Chancellor Glasscock, Dkt. No. 15 (the “Joint Letter”).
10 was expedited that same day.67 The parties filed cross-motions for judgment on the
pleadings on July 21, 2021.68
The parties requested that the Court determine whether an operative complaint
filed in federal court by a former board member of the Moehle entities (the
“Operative Complaint”) against Defendants in the instant case was a “Disabling
Event,” as defined by the Partnership Agreement, which would automatically
remove RHF1 LLC as the Fund’s General Partner.69 On February 25, 2022, I issued
a memorandum opinion granting Defendants’ motion for judgment on the pleadings
and denying Plaintiffs’ motion for partial judgment on the pleadings.70 I determined
that the Operative Complaint did not meet the contractual definition of a Disabling
Event.71 Since the counts contained in Plaintiffs’ original complaint all arose from
Plaintiffs’ contention that the Operative Complaint was a Disabling Event, I
dismissed Counts I, II, and III.72 The February 25, 2022 memorandum opinion did
not resolve Plaintiffs’ motion to dismiss the Counterclaims brought by RHF1 LLC.73
On September 13, 2022, Defendants notified Plaintiffs that they had “been
removed from the Fund effective May 31, 2021, and [Plaintiffs’] limited partnership
67 See Tr. Tel. Scheduling Conf. 3:20–23, Dkt. No. 22. 68 See Defs.’ Countcl. Pl.’s Mot. J. Pleadings, Dkt. No. 26; Pls.’ Mot. Partial J. Pleadings, Dkt. No. 27. 69 Friddle v. Moehle, 2022 WL 201651183, at *3–4. 70 See id. at *11. 71 Id. at *5–10. 72 Id. at *11. 73 See id. at *1 n.2.
11 interests have been terminated.”74 Plaintiffs were not provided consideration for the
termination of their interests.75
B. Procedural Posture
On March 8, 2023, Plaintiffs filed a motion for leave to file an amended
complaint.76 The parties fully briefed the motion and I heard oral arguments on May
10, 2023.77 I granted Plaintiffs’ request to file an amended complaint.78 In doing
so, I withheld a ruling determining whether there had been a waiver of the binding
arbitration clause with respect to any newly asserted claims in the forthcoming
amended complaint.79
Plaintiffs filed the amended complaint (the “Amended Complaint”) on June
2, 2023.80 The Amended Complaint realleges Counts I–III81 and includes two new
counts: Count IV for breach of fiduciary duty and Count V for breach of contract.82
Both claims are predicated on Moehle’s alleged misuse of the Fund’s assets and
Defendants’ purported termination of Plaintiffs as limited partners in September
74 Am. Compl. ¶ 142. 75 Id. ¶ 143. 76 Pls.’ Mot. for Leave to File First Am. Verified Compl., Dkt. No. 47. 77 See Judicial Action Form re: Tel. Mot. before Vice Chancellor Sam Glasscock dated 5.10.23, Dkt. No. 106. 78 See id. 79 See id. 80 See Am. Compl. 81 Plaintiffs reallege these already-dismissed counts for the purpose of preserving Plaintiffs’ right to appeal. See Am. Compl. 1 n.1. 82 Am. Compl. ¶¶ 162–69.
12 2022.83 On July 28, 2023, Defendants filed a motion to dismiss the Amended
Complaint under Rules 12(b)(1) and 12(b)(6).84 The parties finished briefing
Defendants’ motion on October 13, 2023.85 I heard oral arguments on November
13, 2023.86 I consider the matter fully submitted as of that date.87
II. ANALYSIS
The Partnership Agreement provides that “[a]ll disputes between the Partners
arising under this Agreement will be resolved by arbitration in the county and state
in which the General Partner maintains its principal office at the time the request for
such arbitration is made . . . .”88 The parties agree that this is a valid arbitration
clause.89 Nor is there a dispute that Counts IV and V are within the scope of the
arbitration clause.90 Rather, the parties dispute whether their joint letter to the Court,
dated May 20, 2021 (the “Joint Letter”), constitutes a valid waiver of Defendants’
83 Id. ¶¶ 164, 168. 84 Defs.’ Mot. to Dismiss Pls.’ First Am. Compl., Dkt. No. 98. 85 See Defs.’ Reply Supp. Defs.’ Mot. to Dismiss First Am. Compl., Dkt. No. 104. 86 See Judicial Action Form re: Oral Arg. before Vice Chancellor Sam Glasscock dated 11.13.23, Dkt. No. 107. 87 During the November 13, 2023 oral arguments, I declined to hear arguments with respect to RHF1’s counterclaims. Instead, I requested that the parties submit a letter explaining the status of those claims in light of my February 25, 2022 memorandum opinion and what impact, if any, my decision on Defendants’ motion to dismiss the Amended Complaint would have on the outstanding counterclaims. The parties submitted the requested letter on November 28, 2023. See Letter to The Hon. Sam Glasscock III, Dkt. No. 108. 88 Partnership Agreement § 9.05(a). 89 Opening Br. Supp. of Defs.’ Mot. to Dismiss Pls.’ First Am. Verified Compl. 9, Dkt. 98 (“Defs.’ OB”); see Pls.’ Answering Br. Opp’n Defs.’ Mot. to Dismiss 15–19, Dkt. No. 101 (“Pls.’ AB”). 90 Defs.’ OB 9–10; see Pls.’ AB 15–19.
13 ability to enforce the arbitration provision with respect to these two new counts.91
Before I can address whether the Amended Complaint should be dismissed for
failure to state a claim, I must first determine whether Defendants have waived their
right to enforce the Partnership Agreement’s mandatory arbitration provision.
A. Rule 12(b)(1) and Waiver of the Mandatory Arbitration Provision
Under Court of Chancery Rule 12(b)(1), the Court routinely dismisses claims
that are subject to a valid arbitration agreement.92 An arbitration provision, like any
contractual provision, can be waived if the parties consent.93 “Waiver of arbitration
is a matter of intention and to constitute a waiver there must be an intentional
relinquishment of a right with both knowledge of its existence and intention to
relinquish it.”94 While “waiver may be express or implied”95 the waiver of an
arbitration provision requires “clear and convincing evidence[.]”96 Arbitration is
strongly favored under Delaware law and policy,97 so “waiver is not lightly
inferred.”98
91 See Defs.’ OB 10; Pls.’ AB 15–16. 92 See Li v. Standard Fiber, LLC, 2013 WL 1286202, at *4 (Del. Ch. Mar. 28, 2013) (“[A] Rule 12(b)(1) motion will be granted if the parties contracted to arbitrate the claims asserted in the complaint.”). 93 See Parfi Hldg. AB v. Mirror Image Internet, Inc., 842 A.2d 1245, 1260 n.39 (Del. Ch. 2004) 94 James Julian, Inc. v. Raytheon Serv. Co., 464 A.2d 665, 668 (Del. Ch. 1980) (quoting 6 C.J.S. Arb. § 37 (1975)). 95 Dirienzo v. Steel P’rs Hldgs. L.P., 2009 WL 4652944, at *4 (Del. Ch. Dec. 8, 2009). 96 Zaret v. Warners Moving Storage, 1995 WL 56708, at *1 (Del. Ch. Feb. 3, 1995). 97 Fraternal Order of Police Del. Lodge 10, 2017 WL 6055375, at *2 (Del. Ch. Dec. 7, 2017) (“[F]avoring arbitration is a clearly defined public policy under Delaware law.”). 98 Halpern Med. Servs., LLC v. Geary, 2012 WL 691623, at *3 (Del. Ch. Feb. 17, 2012).
14 Plaintiffs’ arguments in favor of concluding that Defendants waived their
ability to enforce the arbitration provision can be grouped into two categories: (1)
the language of the Joint Letter expressly waives the arbitration provision or, in the
alternative, (2) Defendants’ actions in this litigation indicate an implicit waiver.99 I
take each category in turn, below.
1. Explicit Waiver: The Joint Letter
An explicit waiver occurs “where it is clear from the language used that the
party is intentionally renouncing a right that it is aware of.”100 Where the parties
have agreed, in writing, to waive an arbitration provision, “the Court will give
priority to the parties’ intentions as reflected in the four corners of the agreement.”101
If the agreement is clear and unambiguous, “extrinsic evidence may not be used to
interpret the intent of the parties, to vary the terms of the contract or to create an
ambiguity.”102
The Joint Letter, which Plaintiffs allege constitutes an explicit waiver of the
arbitration provision with respect to Counts IV and V, states, in relevant part:
By way of background, the [Partnership Agreement] . . . at issue in this action contains a mandatory arbitration provision (Section 9.05). While the parties disagree as to the provision’s application to [P]laintiffs’ claims in this action, [the parties] wish to inform the Court that they
99 Pls.’ AB 16–19. 100 Dirienzo, 2009 WL 4652944, at *4. 101 GMG Cap. Invs., LLC v. Athenian Venture P’rs I, L.P., 36 A.3d 776, 779 (Del. 2012). 102 Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232–33 (Del. 1997).
15 have mutually agreed to waive the arbitration provision to permit the complete resolution of their disputes before this Court.103
Plaintiffs contend that Defendants’ agreement to waive the arbitration
provision “to permit the complete resolution of their disputes before this Court”
constitutes unambiguous agreement by Defendants to fully waive the arbitration
provision in the course of this litigation.104 According to Plaintiffs, because the term
“disputes” is not limited in scope to specific claims, pleadings, or disputes,
Defendants cannot enforce the arbitration agreement with respect to Counts IV and
V, even though those claims were not brought by Plaintiffs until two years after the
Joint Letter was filed.105
In further support of their argument, Plaintiffs note that, in a letter filed
separately by Defendants on May 20, 2021, Defendants paraphrased the language of
the Joint Letter, stating “the parties have mutually agreed to waive the arbitration
provision [in the Partnership Agreement] to permit the complete resolution of their
disputes before this Court.”106 Plaintiffs ask that the Court view this language with
the knowledge that Defendants are sophisticated parties with sophisticated counsel
who “clearly understand that the word ‘dispute’ is broader than specific causes of
103 Joint Letter. 104 See Pls.’ AB 16 (quoting the Joint Letter) (emphasis added). 105 Pls.’ AB 16. 106 Id. at 17 (quoting Letter to Vice Chancellor Glasscock from Steven L. Caponi re Pls.’ Mot. to Expedite and Schedule, Dkt. No. 16) (emphases added) (“Defs.’ Letter”).
16 action, and that any given legal ‘dispute’ includes multiples claims that are not static
but can be amended and supplemented.”107
Defendants submit that the one sentence in the Joint Letter relied upon by
Plaintiffs as evidence of waiver does not constitute an “intentional relinquishment
of a right with both knowledge of its existence and intention to relinquish it.”108
Rather, Defendants advocate for a narrow reading of the language of the Joint Letter
and that such reading demonstrates that Defendants’ waiver of the arbitration
provision was limited to the known claims asserted at the time the Joint Letter was
filed.109 I agree.
The Joint Letter states, “While the parties disagree as to the provision’s
application to [P]laintiffs’ claims in this action, [the parties] wish to inform the Court
that they have mutually agreed to waive the arbitration provision to permit the
complete resolution of their disputes before this Court.”110 This statement is written
in the present tense and, therefore, must be read as of the date the Joint Letter was
submitted to the Court. As I read the Joint Letter, it is unambiguous that, as of May
20, 2021, Defendants were only aware of the counts asserted in Plaintiffs’ original
complaint, filed on April 12, 2021, and Defendants’ counterclaims, filed on May 14,
107 Id. 108 James Julian, Inc., 464 A.2d at 668 (quoting 6 C.J.S. Arb. § 37 (1975)). 109 Defs.’ OB 12–13. 110 Joint Letter.
17 2021. The claims asserted prior to the Joint Letter related to (1) whether there had
been a Disabling Event that enabled Plaintiffs to remove RHF1 and Coal Hill as
General Partner and manager of the Fund, respectively, and (2) if there was no such
Disabling Event, whether RHF1 could remove Plaintiffs as Limited Partners under
the terms of the Partnership Agreement.111 These claims did not include breach of
contract nor breach of fiduciary duty, i.e., Counts IV or V. These torts are based, I
note, in part on Defendants’ action not yet taken at the time of the waiver.
Thus, a reading of the plain text of the Joint Letter illustrates that Defendants
knowingly and intentionally waived their right to enforce the arbitration provision
solely to those claims that were asserted as of the Joint Letter’s submission, that is,
Counts I–III of the original complaint and Defendants’ counterclaims. As
Defendants were not aware that Plaintiffs would assert Counts IV and V until nearly
two years later, Defendants could not have known that their agreement in the Joint
Letter to waive the arbitration provision would expose them to litigation over these
not-yet-asserted claims. Therefore, the language of the Joint Letter demonstrates
that Defendants’ explicit waiver of the arbitration provision does not extend to
Counts IV and V.
111 See Verified Compl., Dkt. 1.
18 2. Implicit Waiver: Defendants’ Conduct in This Litigation
Even if “no express language is used, an implied waiver of a right is possible,
but only if there is ‘a clear, unequivocal, and decisive act of the party demonstrating
relinquishment of the right.’”112 A party taking actions “inconsistent with his right
to arbitration, such as active participation in a lawsuit, shows an intent to relinquish
his right to arbitration.”113 While a parties’ actions may implicitly waive their right
to enforce an arbitration waiver, such waiver is not lightly inferred.114 When
considering whether a party implicitly waived its right to arbitration, the Court
considers “not merely the inconsistency of a party’s actions, but the presence or
absence of prejudice which is determinative of the issue of waiver.”115 Typically,
implicit waiver is found only where “the demand for arbitration or dismissal due to
the arbitrability of the claims came along after the suit commenced and when both
parties had engaged in extensive discovery.”116
112 Dirienzo, 2009 WL 4652944, at *5 (quoting 28 Am. Jur. 2d Estoppel and Waiver § 209 (2009)). 113 Zaret, 1995 WL 56708, at *1. 114 See, e.g., Zenon v. Dover Downs, Inc., 2022 WL 2304118, at *2 (D. Del. June 27, 2022) (finding a party had not waived their right to enforce an arbitration provision even where that party filed an answer that did not assert arbitration as a defense, but sought to compel arbitration within six months of the complaints filing); Morgan v. Sundance, Inc., 596 U.S. 411, 414–15, 419 (2022) (reversing a lower court’s ruling that a party waived it right to arbitrate under the Federal Arbitration Act where the party (1) filed an answer containing no mention of the arbitration provision; (2) participated in a mediation; and (3) waited eight months before seeking to compel arbitration). 115 Halpern Med. Servs., LLC, 2012 WL 691623, at *3 (citation omitted). 116 Id.
19 Plaintiffs contend that Defendants’ actions during the course of this litigation
establish Defendants’ intent to relinquish their right to arbitration.117 In making this
argument, Plaintiffs rely on two actions taken by Defendants that Plaintiffs allege
are contrary to Defendants’ claim that the waiver in the Joint Letter was limited to
the Counts I–III.118 First, Plaintiffs contend that Defendants would not have filed
counterclaims in this action if Defendants’ waiver of the arbitration provision was
limited to the claims asserted by Plaintiffs in the original complaint.119 Second,
Plaintiffs point to Defendants’ language in a separate letter filed on May 20, 2021,
as evidence that Defendants understood the waiver to extend to resolving all disputes
before the Court, including later-asserted claims because complaints can be amended
and supplemented.120 These actions, without more, are insufficient to demonstrate
that Defendants acted inconsistent with their right to enforce the arbitration
provision with respect to Counts IV and V.
Since Defendants filed their counterclaims on May 14, 2021, these
counterclaims were known to both parties at the time the Joint Letter was submitted
to the Court.121 Under the plain terms of the Joint Letter’s waiver, these
counterclaims are within the scope of the “disputes before this Court[]” at the time
117 Pls.’ AB 17. 118 Id. 119 Id. 120 Id. 121 See Answer to Verified Compl. and Verified Countercls., Dkt. No. 8.
20 of the Joint Letter’s submission.122 Defendants’ decision to file the counterclaims in
response to Plaintiffs’ claims in the original complaint is not an indication that
Defendants intentionally relinquished their right to enforce the arbitration agreement
for Counts IV and V, which were not yet known to Defendants.
Defendants’ counterclaims themselves relate directly to the same subject
matter as Counts I–III—whether there had been a Disabling Event and whether, as
a result of “engineering the so-called ‘disabling event[,]’” Defendants could
terminate Plaintiffs’ limited partnership interests.123 The filing of these
counterclaims is not inconsistent with Defendants’ right to arbitrate Counts IV and
V because Defendants agreed to waive the arbitration provision to resolve the
disputes then before the Court, namely Counts I–III and Defendants’ counterclaims.
As for Defendants’ decision to file a separate letter filed on May 20, 2021,
that reiterated to the Court that “the parties have mutually agreed to waive the
arbitration provision [in the Partnership Agreement] to permit the complete
resolution of their disputes before this Court[,]”124 this letter does not purport to
expand the Joint Letter’s waiver. Indeed, it mirrors the pertinent language in the
Joint Letter by reiterating that the waiver of the arbitration provision was limited to
122 Joint Letter. 123 Defs.’ RB 3. 124 Defs.’ Letter.
21 the “disputes before this Court.”125 Defendants’ letter goes on to explain that the
central issue was whether or not a Disabling Event occurred.126 There is no
indication from the language of Defendants’ letter or the filing of the letter itself that
indicates that Defendants were issuing a blanket waiver of their right to arbitrate any
claims that could be later be brought against them by Plaintiffs. Defendants issued
the May 20, 2021 letter many months before Plaintiffs sought to add the tort claims.
Since Plaintiffs sought to amend their complaint to assert two new claims,
Defendants have sought to enforce their right to arbitrate. Defendants asserted their
right to arbitrate in both their opposition to Plaintiffs’ request for leave to amend
their complaint127 and in their arguments in support of their motion to dismiss the
newly added claims.128 Defendants’ actions with respect to Counts IV and V have
been consistent with their right to arbitrate. Plaintiffs have not alleged any prejudice
they will face if Defendants are allowed to assert their right to arbitrate these new
claims.129 Thus, the evidence before the Court is insufficient to find that Defendants
implicitly waived their right to arbitrate Counts IV and V.
125 See id. 126 See id. 127 See Defs.’ Opp’n to Pls.’ Mot. for Leave to File First Am. Verified Compl. ¶¶ 4–14, 30–41, Dkt. No. 50. 128 See Defs.’ OB 9–14; Defs.’ RB 1–7. 129 See Pls.’ AB 15–19.
22 III. CONCLUSION
The parties’ agreement to waive the mandatory arbitration provision
contained in the Partnership Agreement was limited to the claims before the Court
at the time of Joint Letter’s filing on May 20, 2021. Defendants’ waiver of their
right to arbitrate those claims in 2021 does not extend to claims Plaintiffs chose to
bring nearly two years later. Since the filing of the Amended Complaint,
Defendants’ actions have been consistent with their right to arbitrate. Therefore,
Defendants’ motion to dismiss is GRANTED. The parties should submit an
appropriate form of order in accordance with this opinion and inform me of their
intention regarding the claims not addressed here.