XRI Investment Holdings LLC v. Holifield
| Decision Date | 19 September 2022 |
| Docket Number | C.A. No. 2021-0619-JTL |
| Citation | 283 A.3d 581 |
| Parties | XRI INVESTMENT HOLDINGS LLC, Plaintiff, v. Gregory A. HOLIFIELD and GH Blue Holdings, LLC, Defendants. |
| Court | Court of Chancery of Delaware |
A. Thompson Bayliss, John M. Seaman, Eric A. Veres, Daniel J. McBride, ABRAMS & BAYLISS LLP, Wilmington, Delaware; Margaret H. Allen, Yolanda C. Garcia, Angela C. Zambrano, SIDLEY AUSTIN LLP, Dallas, Texas; Attorneys for Plaintiff.
Michael W. McDermott, Richard I. G. Jones, Jr., David B. Anthony, Zachary J. Schnapp, BERGER HARRIS LLP, Wilmington, Delaware; Attorneys for Defendants.
LASTER, V.C.
Defendant Gregory Holifield is a co-founder and member of XRI Investment Holdings LLC ("XRI" or the "Company"). In June 2018, Holifield formed defendant GH Blue Holdings, LLC ("Blue") as a single-member LLC. He then transferred all of his Class B units in XRI to Blue (the "Blue Transfer").
The limited liability company agreement that governs XRI's internal affairs (the "LLC Agreement") contains a provision that generally prohibits members from transferring their member interests (the "No Transfer Provision"). When Holifield engaged in the Blue Transfer, he sought to comply with an exception for a transfer to a "Permitted Transferee," defined in the LLC Agreement to include an entity owned solely by the transferring member (the "Permitted Transferee Exception").
One of the requirements for the Permitted Transferee Exception is that the transfer be made for no consideration. The record shows that Holifield made the Blue Transfer as part of a larger transaction in which Holifield secured a loan of $3.5 million for Entia, LLC ("Entia"), another company he owned. Holifield thus received consideration in connection with the Blue Transfer. That fact is enough to render the Permitted Transferee Exception unavailable and cause the Blue Transfer to violate the No Transfer Provision.
The LLC Agreement specifies that any transfer that violates the No Transfer Provision is "void" (the "Contractual Voidness Provision"). Having shown a violation of the No Transfer Provision, XRI insists that the Blue Transfer was void ab initio and never became effective.
Holifield responds that XRI's claim is barred by the equitable defense of acquiescence.
Holifield satisfied all of the requirements to prove the defense of acquiescence. He demonstrated that XRI took a series of actions which caused Holifield to believe—reasonably and in good faith—that XRI did not object to the Blue Transfer, notwithstanding that it was part of a financing transaction. And he demonstrated that XRI took those actions knowing everything that it wanted and needed to know about the Blue Transfer and the associated financing.
The actions and knowledge of Matthew Gabriel, XRI's co-founder and CEO, contribute significantly to the finding of acquiescence. Gabriel worked with Holifield to obtain financing for Entia. He helped Holifield develop the structure for the financing, interacted with the lender who extended the financing, knew the loan was going to close contemporaneously with the Blue Transfer, learned the loan had closed shortly afterward, and took credit for helping Holifield obtain the loan. Through Gabriel, XRI knew all of the material facts about the Blue Transfer and the related financing in June 2018, when the Blue Transfer took place.
The actions that XRI took ten months later, in April 2019, further contribute to the finding of acquiescence. At that point, XRI obtained all of the documents relating to the financing, and XRI's lawyers thoroughly analyzed whether the Blue Transfer violated the LLC Agreement. XRI's lawyers concluded that a violation had occurred, but XRI's governing board made a business decision not to pursue it. XRI did not take the position that the Blue Transfer was void until December 2020. Before then, XRI acted as if it had no intention of challenging the Blue Transfer. And that was understandable, because the Blue Transfer conferred benefits on XRI by isolating the transferred units in a special purpose vehicle and structurally subordinating Holifield's general creditors.
XRI now contends that acquiescence cannot apply because Holifield misled XRI about the purpose of the Blue Transfer and failed to reveal that it would facilitate the loan to Entia. The evidence disproves those assertions. Gabriel knew that Holifield was making the Blue Transfer to facilitate Entia's ability to obtain a loan, and a representative of the sophisticated financial institution that controlled XRI represented to Holifield that XRI did not care as long as Holifield kept any financing "on his side of the ledger." Holifield and his lawyers believed—reasonably and in good faith—that they had complied with that directive. They believed—again reasonably and in good faith—that XRI and its controller knew everything that they wanted and needed to know. Holifield and his lawyers believed—also reasonably and in good faith—that XRI and its controller did not want or need to be involved in anything else.
From XRI's perspective, the validity of the Blue Transfer only became worth challenging in November 2020, after XRI purported to seize the Class B units that were the subject of the Blue Transfer (the "Disputed Units"). XRI had made a loan to Entia in 2016 that was secured by the Disputed Units (the "XRI Loan"). When the Blue Transfer took place, XRI made sure that the Disputed Units continued to secure the XRI Loan.
In August 2020, when the XRI Loan came due, Holifield lacked the liquidity to pay it. He asked XRI to work with him, but no resolution was reached.
XRI now claims that in November 2020, it seized the Disputed Units by engaging in a strict foreclosure. Under the Uniform Commercial Code ("UCC"), a strict foreclosure is a procedure in which a secured creditor can agree with its debtor to accept the collateral securing a loan in full or partial satisfaction of the amount due. A strict foreclosure is supposed to be a consensual transaction, but the UCC deems a debtor to have consented to a strict foreclosure if the secured creditor makes an unconditional proposal to accept the collateral in full satisfaction of the loan and the debtor fails to respond within twenty days after the proposal is sent. At that point, the secured creditor takes title to the collateral, and the loan is extinguished. If the collateral is worth less than the loan, the debtor does not owe any deficiency. If the collateral is worth more than the loan, the debtor does not receive any of the surplus.1
Before engaging in the strict foreclosure, XRI had been communicating directly with Holifield about the XRI Loan. XRI knew that Holifield believed that the value of the Disputed Units exceeded the balance due on the XRI Loan, and Holifield had informed XRI in writing that he believed XRI needed to pursue a commercially reasonable process to levy on the Disputed Units. XRI also knew that Blue—not Holifield—held the Disputed Units as a result of the Blue Transfer.
Yet when XRI proposed a strict foreclosure, XRI directed its proposal to Holifield, and it used an office address that XRI knew was defunct. XRI did not send a copy of the proposal to Holifield by email, as XRI had done for prior communications. In any event, when the proposal arrived at the defunct office, Holifield was in a city on the opposite coast. Holifield did not learn about the proposal until over a month later, when XRI asserted that he was deemed to have accepted it. When XRI took that position, XRI made sure to send its communication to Holifield by email. Holifield immediately caused Blue to object to the strict foreclosure. At that point, XRI asserted clearly for the first time that the Blue Transfer was void.
The parties have divergent views about the value of the Disputed Units. XRI has claimed that the Disputed Units were worth less than the $12 million that Holifield owed on the XRI Loan and that the Company did Holifield a favor by engaging in a strict foreclosure and not pursuing him for the deficiency. Holifield has testified and introduced evidence to support his contention that the value of the Disputed Units exceeded the amount due on the XRI Loan by $40 to $50 million and that XRI deprived him of that value. Although this case provides no opportunity to answer the valuation question, the resources that XRI has invested in this litigation suggest that Holifield's position is closer to the truth.
The parties’ real dispute is over the validity of the strict foreclosure, but that transaction is not directly at issue in this litigation. Through this case, XRI is litigating the predicate issue of whether the Blue Transfer validly transferred the Disputed Units to Blue. XRI seeks a ruling that the Blue Transfer was void. If so, then Holifield remained the owner of the Disputed Units, and XRI sent its proposal for a strict foreclosure to the correct party. A victory for XRI in this litigation thus will help XRI prevail in any future litigation over the validity of the strict foreclosure. The question answered in this litigation will not be dispositive in that future litigation, because there will be additional disputes of fact and law for that litigation to address. At best, therefore, this case is a prelude to another lawsuit. Why would XRI litigate so vigorously if the Disputed Units were worth so little?
The natural inference is that XRI pursued this case precisely because the Disputed Units have significant surplus value. That is why XRI filed this lawsuit over three years after the Blue Transfer took place and at least two years after XRI's governing board made a business decision not to challenge the Blue Transfer. That is why XRI has pushed this lawsuit to a conclusion, even though it is advancing Holifield's legal fees in addition to paying its own.
For XRI, therefore, avoiding the otherwise dispositive defense of acquiescence is critical, and XRI offers two reasons why this court of equity cannot...
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