Allied Capital v. Gc-Sun Holdings, L.P.

• Decision Date: 22 November 2006
• Docket Number: C.A. No. 1954-N.
• Citation: 910 A.2d 1020
• Parties: ALLIED CAPITAL CORPORATION, a Maryland corporation, Plaintiff, v. GC-SUN HOLDINGS, L.P., a Delaware limited partnership, GC-Sun G.P., Inc., a Delaware corporation; GC-Sun Holdings II, L.P., a Delaware limited Partnership; GC-Sun G.P. II, Inc., a Delaware corporation; GC-Sun Frontier Investors, LLC, f/k/a/ Brafasco Investors, LLC, a Delaware limited liability company; Brafasco Holdings II, Inc., a Delaware corporation; Glencoe Capital Partners II, L.P., a Delaware limited partnership; Glencoe Capital, LLC, an Illinois limited liability company; and John Does 1-10, Defendants.
• Court: Court of Chancery of Delaware

Page 1020

910 A.2d 1020

ALLIED CAPITAL CORPORATION, a Maryland corporation, Plaintiff, v. GC-SUN HOLDINGS, L.P., a Delaware limited partnership, GC-Sun G.P., Inc., a Delaware corporation; GC-Sun Holdings II, L.P., a Delaware limited Partnership; GC-Sun G.P. II, Inc., a Delaware corporation; GC-Sun Frontier Investors, LLC, f/k/a/ Brafasco Investors, LLC, a Delaware limited liability company; Brafasco Holdings II, Inc., a Delaware corporation; Glencoe Capital Partners II, L.P., a Delaware limited partnership; Glencoe Capital, LLC, an Illinois limited liability company; and John Does 1-10, Defendants.

C.A. No. 1954-N.

Court of Chancery of Delaware, New Castle County.

Submitted: September 18, 2006.

Decided: November 22, 2006.

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Daniel B. Rath, Rebecca L. Butcher, James S. Green, Jr., Landis Rath & Cobb, L.L.P., Wilmington, DE; Daniel M. Litt, Jeffrey Rhodes, Addy Schmitt, Dickstein Shapiro Morin & Oshinsky, L.L.P., Washington DC, for Plaintiffs.

Raymond J. DiCamillo, Elizabeth C. Tucker, Richards, Layton & Finger, P.A., Wilmington, DE; Janet Malloy Link, B. John Casey, Meghan H. Sullivan, Latham & Watkins, L.L.P., Chicago, IL, for Defendants.

OPINION

STRINE, Vice Chancellor.

I. Introduction

The plaintiff, Allied Capital Corporation ("Allied"), brought this case in an effort to collect on a promissory note. Allied claims that the insolvent debtor, GC-Sun Holdings, L.P. ("Sun I"), a Delaware limited partnership, would have had the wherewithal to either repay the note in full, or at least the principal amount, had Sun I's general partner — a controlled affiliate of defendant Glencoe Capital Partners II, L.P. ("Glencoe") — not embarked on a scheme by which Allied's claim on the note was subordinated to a new equity investment made by an affiliate formed by Glencoe for the purpose of making that investment. Allied has mounted a jurisprudentially-intergalactic campaign to recover on the note. It has sued all of the affiliated entities of Glencoe that were possibly involved in the disputed equity investment as well as the unidentified human beings who served those affiliated entities as officers and directors. Allied's causes of action are numerous, and include counts for breach of contract, breach of the implied covenant of good faith, tortious interference with contract, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, fraudulent conveyance, civil conspiracy, and unjust enrichment.

The numerous defendants have moved to dismiss certain discrete aspects of Allied's bounteous pleading for failure to state a claim upon which relief can be granted. This opinion resolves that motion.

First, the decision addresses the counts in Allied's complaint pleading breach of contract, breach of the implied covenant of good faith and fair dealing, and tortious interference with contract claims. Allied premises those claims on the notion that the note prohibited Glencoe and any of its affiliates from making the disputed equity investment. But there is a fundamental flaw in Allied's theory. By its express terms, the note only prohibited Sun I or its subsidiaries from incurring any "indebtedness for borrowed money" to Glencoe or its affiliates. The new equity investment is plainly not "indebtedness for borrowed money." Despite all of its assertions in the complaint that it had extracted a contractual prohibition on any form of investment by Glencoe and its affiliates that was superior to or equal in priority to the note held by Allied, Allied cannot escape the plain and unambiguous language of the note itself. That language clearly proscribed Glencoe and its affiliates from making a debt investment in Sun I or any of its subsidiaries. Had the sophisticated parties to the note meant to preclude Glencoe from making "equity" investments in those entities, they would have said so. Instead, they chose to restrict only "indebtedness for borrowed money." Although other legal doctrines — such as equitable principles of fiduciary duty or statutes addressing fraudulent conveyances — might condemn the equity investment if its terms were unfairly advantageous to Glencoe, the plain terms of the note preclude the notion that the note itself forbade that investment.

This is another in a long line of cases in which a plaintiff has tried, unsuccessfully, to argue that the implied covenant grants it a substantive right that it did not extract during negotiation. The promissory note explicitly addressed what types of investment were forbidden, and thus also impliedly addressed the types of investment were not subject to contractual restriction. Accordingly, Allied's implied covenant claim, like the claims of plaintiffs before it that have implored this court to award new contract rights, fails. Allied's theory — that the note's explicit prohibition of "indebtedness for borrowed money" constituted an implicit ban on any equity investment in Sun I or its subsidiaries that would have the same "practical effect" as a debt investment — is contrary to Delaware's law of contracts. Restrictive covenants in contracts, like promissory notes, that limit the commercial freedom otherwise available to the parties cannot reasonably be read in the squishy and uncertain manner Allied suggests. When an issuer negotiates an agreement that only precludes it — as a matter of contract — from making a discrete form of investment, it is entitled to rely upon the words of the contract. To rule otherwise would turn the contractual relationship on its head, forcing the issuer to prove that its apparently unrestricted right to make equity investments was not implicitly precluded by the note's limited explicit prohibition on "indebtedness for borrowed money." Restrictive covenants are carefully negotiated and our law requires that their unambiguous terms be given effect. When a noteholder is only able to obtain a contractual restriction on "indebtedness for borrowed money," it is stuck with that, and cannot, as an "oh by the way," claim that it never occurred to it to argue for a broader restriction on equity investments in subsidiaries — especially when any reasonable negotiator would have recognized that the words "indebtedness for borrowed money" entirely fail to address equity investments. To permit the noteholder to claim that the issuer breached an implied covenant, and to grant it a right that it clearly did not obtain at the bargaining table, would involve a judicial rewriting of the contract and would disrupt the value that flows from interpreting clear contracts as written.

Because Allied's tortious interference claim depends on the viability of its breach of contract claim, that claim also fails.

The second major issue on appeal is whether a claim can be pled against Glencoe and its affiliated entities for civil conspiracy. The defendants contend, with little explanation, that, as a result of their corporate relatedness, they cannot, as a matter of law, conspire with one another. The issue presented implicates a muddy area of Anglo-American jurisprudence and the parties have done little to help clear the murk.

Because of the lack of clarity, I have approached the question presented with caution. At this stage, I hold only that a conspiracy claim can be pled on the unique facts of this case, where Allied (in simple terms) has alleged that a parent entity (Glencoe) concocted, in bad faith, a scheme whereby one of its controlled, first-tier subsidiaries was rendered unable to pay its debts because Glencoe, the first-tier subsidiary, and a second-tier subsidiary permitted Glencoe's newly formed affiliate to obtain an equity interest in a third-tier subsidiary for an unfair value. Before the new equity infusion, the third-tier subsidiary's equity was entirely owned by the second-tier subsidiary, whose equity was entirely owned by the first-tier subsidiary. The contention is therefore that, through concerted action, the parent and its affiliated entities consciously caused a dilutive injury to the first-tier subsidiary, knowing that the impoverishment of the first-tier subsidiary would enable the diversion of value from the creditors of the first-tier subsidiary to a newly-formed affiliate of the parent. This scenario is far removed from situations where a parent and subsidiary are privileged to consult, such as when a parent expects that a solvent subsidiary will itself be better off if it commits an "efficient breach of a contract" and pays the injured party contractual damages. Here, the parent and the newly formed affiliate allegedly schemed with the first-tier subsidiary to implement a transaction that would render the first-tier subsidiary insolvent and unable to pay its bills by enabling the newly formed affiliate to dilute the first-tier subsidiary's indirect equity ownership of the third-tier subsidiary.

To preclude a conspiracy claim on the argument that the parent and the subsidiaries were one and the same person with identical objectives, and could not, as a matter of law, conspire, is not immediately convincing — especially when the parent is not offering to make the injured creditor whole using any of its assets or those held by the affiliates involved in the challenged transaction. The state of the briefing is such that I cannot confidently say that Delaware law should embrace a black-letter rule that wholly-owned affiliates of a parent entity cannot conspire with a parent. In other circumstances involving similar considerations — i.e., the questions of whether a parent can tortiously interfere with the contracts of its subsidiary or can aid and abet breaches of fiduciary duty by a subsidiary — our courts have refused to hold that the mere fact of common ownership requires treating the commonly-owned entities as a single legal person. Rather, to ensure that such entities may engage in the expected legitimate collaboration without subjecting each other to joint and several...