Kuroda v. Spjs Holdings, L.L.C.

• Decision Date: 15 April 2009
• Docket Number: Civil Action No. 4030-CC.
• Citation: 971 A.2d 872
• Parties: Kenzo KURODA, Plaintiff, v. SPJS HOLDINGS, L.L.C., Liberty Square Asset Management, L.L.C., WGL Capital Corp., Warren G. Lichtenstein, Thomas J. Niedermeyer, Jr., and Claire A. Walton, Defendants.
• Court: Court of Chancery of Delaware

971 A.2d 872

Kenzo KURODA, Plaintiff, v. SPJS HOLDINGS, L.L.C., Liberty Square Asset Management, L.L.C., WGL Capital Corp., Warren G. Lichtenstein, Thomas J. Niedermeyer, Jr., and Claire A. Walton, Defendants.

Civil Action No. 4030-CC.

Court of Chancery of Delaware.

Submitted: January 30, 2009.

Decided: April 15, 2009.

Collins J. Seitz, Jr., David E. Ross, and Ryan P. Newell, of Connolly Bove Lodge & Hutz LLP, Wilmington, Delaware; of Counsel: Reid M. Figel, David L. Schwarz, and Kelly P. Dunbar, of Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C., Washington, D.C., Attorneys for Plaintiff.

Edward McNally, Lewis H. Lazarus, and Jason C. Jowers, of Morris James LLP, Wilmington, Delaware; of Counsel: Howard J. Kaplan, Lisa C. Solbakken, and Sara Welch, of Arkin Kaplan Rice LLP, New York, New York, Attorneys for Defendants.

OPINION

CHANDLER, Chancellor.

Plaintiff's primary claim in this case is that he is owed money pursuant to a limited liability company agreement. From around 2002 to 2006, plaintiff served as an investment adviser for a group of entities that invested in publicly traded Japanese corporations. As part of this arrangement, plaintiff entered into various agreements with defendants, including the limited liability company agreement at issue in this case. Plaintiff alleges that he did not receive the payments to which he was entitled under this agreement and that he was assigned excess income for tax purposes in violation of the agreement. Plaintiff also seeks a declaration of his right under the agreement to receive certain payments in the future and a declaration that his formation of an investment fund did not violate the terms of the agreement. In addition, plaintiff brings claims for tortious interference with contract, tortious interference with prospective economic advantage, breach of the implied covenant of good faith and fair dealing, conversion, unjust enrichment, and civil conspiracy.

Defendants moved to dismiss some, but not all, of plaintiff's claims under Court of Chancery Rule 12(b)(6) for failure to state a claim upon which relief can be granted. For the reasons set forth below, defendants' motion to dismiss the breach of contract claims against Liberty Square Asset Management, L.L.C. and WGL Capital Corp. is denied. On the conditions set forth below, plaintiff's claims for (1) breach of contract for the improper tax allocation, (2) tortious interference with contract, (3) tortious interference with prospective economic advantage, (4) breach of the implied covenant of good faith and fair dealing, (5) conversion, (6) unjust enrichment, and (7) civil conspiracy, are all dismissed for failure to state a claim upon which relief can be granted.

I. BACKGROUND

Plaintiff Kenzo Kuroda is a sophisticated investment adviser, with more than twenty years of experience working on highly specialized corporate finance and mergers and acquisitions transactions involving publicly traded Japanese corporations.¹ Defendants Thomas J. Niedermeyer, Jr. and Warren G. Lichtenstein were introduced to Kuroda through a mutual acquaintance in late 2000. During 2001, the parties explored the formation of a private investment fund that would invest in Japanese public corporations.

In 2001, Niedermeyer and Lichtenstein, acting through defendants Liberty Square Asset Management, L.L.C. ("Liberty Square") and WGL Capital Corp. ("WGL Capital") respectively, formed a private fund to invest in small to mid-size, publicly traded Japanese companies.² Liberty Square is operated by defendants Niedermeyer and Claire A. Walton, and WGL Capital is operated by Lichtenstein. The structure of the fund involved the creation of two investment funds — Steel Partners Japan Strategic Fund (Offshore), L.P. ("Master Fund") and Steel Partners Japan Strategic Fund, L.P. ("Feeder Fund") — as well as a series of affiliated entities to manage and provide investment advice to those funds.³ The Master Fund was to serve as the principal investment vehicle for making investments in Japanese companies, while the Feeder Fund was structured to serve as a vehicle for United States investors to invest in the Master Fund.

At all relevant times, defendant SPJS Holdings, L.L.C. ("SPJS Holdings"), a Delaware limited liability company, has been the general partner of the Master Fund. SPJS Holdings is governed by the Second Amended and Restated Limited Liability Company Agreement of SPJS Holdings ("LLC Agreement"), which was executed by WGL Capital, Liberty Square, Kuroda, and non-party Yusuke Nishi. The LLC Agreement establishes that Kuroda and Nishi are non-managing members of SPJS Holdings and that Liberty Square and WGL Capital are managing members of SPJS Holdings. Non-party Steel Partners Japan Asset Management, which is principally owned by Liberty Square and WGL Capital, was created to provide management services to the Master Fund.

In November 2001, Kuroda and Nishi formed Steel Partners Japan, K.K. ("SPJ-KK"), a Japanese corporation, to provide investment advisory services to defendants.⁴ SPJ-KK entered into a consulting agreement with Steel Partners Japan Asset Management, and pursuant to this agreement, Kuroda provided a variety of management services for the benefit of defendants.

Plaintiff alleges that he was compensated for his services in two ways. First, as a non-managing member of SPJS Holdings, Kuroda had a right to 16-2/3% of any incentive allocations that SPJS Holdings received from the Master Fund pursuant to the July 1, 2004 Amended and Restated Limited Partnership Agreement of Steel Partners Japan Strategic Fund (Offshore), L.P.⁵ Second, as a shareholder of SPJ-KK Kuroda shared (with Nishi) approximately one-third of the 2% management fee (after deducting out expenses) paid to Steel Partners Japan Asset Management.

From on or about January 1, 2002 to June 30, 2006, Kuroda provided consulting and investment advice to defendants. During this time, Kuroda, acting through SPJ-KK, was a primary source of investment ideas for the Master Fund. Kuroda was responsible for the identification of potential investments in Japanese corporations, for conducting due diligence on the Master Fund's investments, for providing advice on the terms and structuring of those investments, and for reviewing the operations of the companies in which the Master Fund invested. Kuroda was also a principal spokesperson on behalf of defendants.

At the end of 2005, Kuroda began to have significant and increasing differences of opinion with Lichtenstein and Niedermeyer regarding the appropriate methods for pursuing shareholder activism in Japan. Kuroda, a Japanese national with extensive experience in Japanese business practices, believed that the increasingly confrontational approach being advocated and pursued by Lichtenstein and Niedermeyer would be counterproductive and reflected a fundamental lack of sophistication about business practices in Japan. Kuroda was also uncomfortable with actions taken by WGL Capital, Liberty Square, Lichtenstein, Niedermeyer, and Walton that, Kuroda believed, improperly disadvantaged the non-managing members of SPJS Holdings. Ultimately, these disagreements led Kuroda to inform defendants that he could no longer serve as an adviser to the Steel Partners entities. Kuroda indicated that he was willing to negotiate his withdrawal as a non-managing member of SPJS Holdings and as a shareholder of SPJ-KK, but that he intended to preserve his rights until the parties had reached a complete agreement.

Lichtenstein, Niedermeyer, and Walton expressed concerns about the impact that Kuroda's departure would have on current and potential investors, including the possibility that a public dispute among the initial partners would cause investors to lose confidence in the Master Fund and withdraw their investments. In an attempt to minimize the effect of Kuroda's departure, Lichtenstein, Niedermeyer, and Walton agreed with Kuroda to publicly disclose that Kuroda's departure was mutually amicable. To further allay investor concerns, Kuroda agreed to continue to provide investment advice to defendants and to delay the date of his formal separation until June 30, 2006. In mid-2006, Kuroda and several partners founded a private investment fund, Fugen Capital Management LLC ("Fugen"), to invest in Japanese corporations.

The parties engaged in negotiations regarding Kuroda's separation from SPJS Holdings. During these negotiations, defendants made offers that Kuroda believed did not reflect the fair market value of Kuroda's membership interest in SPJS Holdings and the funds he would be entitled to receive under the LLC Agreement. The parties were unable to reach an agreement, and Kuroda initiated this action. In the complaint, Kuroda alleges that defendants refused to pay him incentive allocations owed to him under the parties' agreements. The complaint also alleges that in 2007, Liberty Square, Walton, and Niedermeyer caused SPJS Holdings to issue Kuroda an inaccurate Schedule K-1 that purported to assign Kuroda nearly $10 million of income for the 2006 tax year despite the fact that SPJS Holdings refused to recognize Kuroda's contractual right to share in the incentive allocations earned by SPJS Holdings during the tax year.

Kuroda also alleges that during the negotiations Kuroda formally requested an immediate payment of all specific amounts held for his direct and indirect benefit in his capital accounts at the Master Fund and SPJS Holdings. Kuroda received a payment reflecting 90% of the amount of the then-current balance in his investment capital account at SPJS Holdings. Defendants have refused, however, to pay Kuroda the 10% that remained in his investment capital account as of June 30, 2006, allegedly in violation of the relevant agreements.

Kuroda further alleges that defendants attempted to undermine his reputation and interfere with his economic opportunities in order to save the personal reputations of...