Jeehye Jung v. El Tinieblo International, Inc.

Docket: C.A. No. 2021-0798-MTZ

Court: Court of Chancery of Delaware; October 31, 2022; Delaware; State Appellate Court

Original Court Document: View Document

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Plaintiff Jeehye Jung contracted in December 2017 to provide marketing services to TAMA Imports, LLC, a New Hampshire mezcal company, in exchange for a monthly salary, commissions, and an interest in the LLC. Jung earned approximately 2% equity before the LLC terminated her contract six months later. Discussions regarding a buyout occurred, but no payment was made. In April 2019, another entity, formed by two members of TAMA, allegedly acquired 100% of TAMA’s interests, but Jung claims she retained her 2% ownership without compensation. She filed suit against TAMA and its members, seeking a declaration of her membership status and compensation, along with breach of fiduciary duty and breach of contract claims. 

The defendants moved to dismiss the case, arguing lack of subject matter jurisdiction based on New Hampshire law, but the court found the plaintiff's claims did not fall under that exclusive jurisdiction. Additionally, the court determined it had personal jurisdiction over TAMA for the breach of contract claim due to its consent through related claims. The defendants also challenged the merits of the claims, achieving limited success. Background details include the founding of TAMA by Edgar McKean, Alfredo Perez-Salinas Tijerina, and Matthew McKean, the terms of Jung's Services Agreement, and her accrued interest and owed compensation upon termination.

On April 15, TAMA's general counsel acknowledged Jung's 2.08% ownership interest in the company, valuing TAMA shares at $1,000 per unit, resulting in an approximate total value of $2,080 for her units. The company was noted to have a negative overall valuation per its Operating Agreement. Later that month, discussions occurred between Jung, Edgar, and Matthew regarding the acquisition of her interest and a proposed payment of $8,080 for her equity and amounts owed under a Services Agreement; however, no agreement was reached, and no payments have been made. In 2019, El Tinieblo International, Inc. (ETI) acquired all outstanding TAMA units, including Jung's, but she has not received any compensation for her units. Jung filed a Complaint on September 15, 2021, against Tijerina, Edgar, ETI, and TAMA, asserting claims including a declaratory judgment of her ownership, breach of fiduciary duty, aiding and abetting breaches, unjust enrichment, conspiracy, and breach of contract for non-payment under the Services Agreement. Defendants moved to dismiss the Complaint, arguing lack of subject matter jurisdiction based on the New Hampshire LLC Act, and claiming Delaware courts lack personal jurisdiction over TAMA. They also contended that Tijerina and TAMA did not owe Jung fiduciary duties under New Hampshire law and that her claims for aiding and abetting and conspiracy were inadequately stated. The Court engaged in analysis regarding jurisdiction and the merits of the claims following oral arguments and additional briefing.

Subject matter jurisdiction over Jung’s claims is established, with the Court of Chancery identified as having limited jurisdiction applicable in three specific scenarios: (i) when a plaintiff presents an equitable claim, (ii) when equitable relief is requested without an adequate legal remedy, and (iii) when jurisdiction is granted by statute. Jung asserts jurisdiction under the first scenario via her breach of fiduciary duty claim, seeking the Court’s equitable cleanup jurisdiction for her other claims. 

Defendants argue that two provisions of the New Hampshire Act (NH Act) restrict the Court's subject matter jurisdiction regarding New Hampshire LLCs to the state courts of New Hampshire. Jung counters that states cannot claim exclusive jurisdiction over transitory claims, asserting her internal affairs and contract claims are indeed transitory. The court concurs with Jung, determining that one NH Act provision does not apply to claims against TAMA, and the other does not affect the subject matter jurisdiction here.

The relevant NH Act provisions are New Hampshire Revised Statutes Annotated Sections 304-C:59 and 304-C:186. Section 59 mandates that disputes over membership in an LLC be resolved in superior court, while Section 186 directs that disputes among members and between members and managers regarding the LLC must be litigated in New Hampshire courts. As there is no existing New Hampshire court interpretation of these statutes, the court must predict how they would be construed, adhering to principles of statutory interpretation that prioritize legislative intent, plain meaning, and constitutional considerations.

Section 186 is specifically examined, as it does not confer exclusive jurisdiction over Jung’s claims against TAMA, given that it pertains only to disputes among members and managers, not involving the LLC itself. While Jung claims membership in TAMA and her actions against ETI and individual members are relevant, the applicability of Section 186 to these claims remains to be determined, considering that TAMA’s Operating Agreement did not opt out of New Hampshire’s jurisdiction.

The Full Faith and Credit Clause of the U.S. Constitution prevents the enforcement of Section 186, which mandates that disputes involving New Hampshire LLCs be litigated in New Hampshire courts. New Hampshire law interprets "shall" in Section 186 as mandatory, which seeks to limit jurisdiction to New Hampshire. However, under the Full Faith and Credit Clause, states are required to respect the laws of other states but cannot enforce exclusive venue provisions that deny jurisdiction to other states. Supreme Court precedent, particularly in Tennessee Coal v. George, asserts that while states must acknowledge claims under other states' laws, they cannot enforce statutes that restrict venue to a single jurisdiction. The clause allows claims arising from one state's laws to be heard in another state's courts, regardless of the originating state's venue restrictions. Additionally, the argument that Jung's claims are local to New Hampshire and thus subject to Section 186 is countered, as local claims traditionally pertain to real property and are bound to the jurisdiction where the property is located. Therefore, the Court cannot enforce Section 186, and Jung's claims must be heard regardless of the venue stipulation.

A state can localize a claim through statute, which may affect subject matter jurisdiction. Jung's claims, however, are found to be transitory rather than local. Local claims typically include in rem actions or specific real property issues, while transitory claims are defined as those that are not local, including tort and contract claims. Jung's breach of fiduciary duty and breach of contract claims are classified as transitory. Declaratory judgment claims that do not impact real property title are also transitory. For a claim to be localized by statute, it must meet three criteria: (i) the cause of action must be created by statute, (ii) the liability provision must be linked to a special remedy, and (iii) that remedy must be the only option for relief. Simply providing a statutory remedy does not suffice to localize a claim. The Tennessee Coal test is applied to determine localization, examining whether the statutory rights and remedies are so interrelated that claims must be brought in the originating jurisdiction. The NH Act, relevant to Jung's claims, does not prescribe an exclusive remedy, nor does it localize her claims under New Hampshire law. Consequently, because Jung's claims are transitory and have not been localized, the Court cannot enforce Section 186, which would assign jurisdiction solely to New Hampshire.

New Hampshire statutes establish that managers and, in some cases, members have a duty of care and a duty of loyalty, as outlined in N.H. Rev. Stat. Ann. 304-C:108 and 304-C:110, respectively. The determination of whether these statutes codify common law and their implications for claims under Tennessee Coal is not addressed in this opinion. 

The defendants' contractual forum selection argument, initially framed under Section 186 as a statutory venue provision, was waived because it was not presented in their opening brief. Waiver is considered a matter of discretion, where failure to raise an argument in the opening brief typically results in its forfeiture, especially in the interest of fairness, as it denies the opposing party adequate notice and opportunity to respond. While some arguments, including those related to subject matter jurisdiction, cannot be waived, contractual provisions that affect jurisdiction may be waived. The court emphasizes that arguments not raised in opening briefs or those exceeding the scope of responsive briefs are deemed waived, as illustrated by case law. The court found that the defendants did not adequately address certain agency decisions in their briefing, leading to a waiver of related arguments due to lack of opportunity for the opposing party to respond.

Raising a new argument late in the proceedings typically leads to waiver; however, if the argument pertains to the court's subject matter jurisdiction, it is not waivable. A forum selection or choice-of-law clause is not jurisdictional, and parties may waive the right to enforce such provisions. Defendants initially claimed that the court lacked subject matter jurisdiction based on Section 186, which they argued required Jung's claims to be filed in New Hampshire. In their reply, they asserted that Section 186 imposed a contractual obligation on TAMA's Operating Agreement, compelling Jung, as a member, to sue in New Hampshire. These arguments differ significantly: the first relies on state authority to dictate venue, while the second is based on private party agreement. Under both Delaware and New Hampshire law, the term "shall" indicates a mandatory provision, meaning disputes involving members must be resolved in New Hampshire courts. New Hampshire’s statute does not assert exclusive jurisdiction but establishes a default venue for disputes involving limited liability companies. Consequently, Tama's operating agreement, alongside the statute, mandates that litigation occur in New Hampshire, leading to the conclusion that this court lacks subject matter jurisdiction. Additionally, the Defendants' initial argument did not indicate their intent to raise a contractual issue, and presenting an argument in the opening brief does not permit the introduction of a new argument in the reply.

Defendants have waived their argument regarding the New Hampshire statute as a contractual forum selection provision due to a lack of legal support or citation. They criticized Jung for not providing contrary authority, but their own cursory presentation of the argument justifies its waiver. Consequently, the court will not consider the argument that Section 186 establishes a contractual forum selection clause in TAMA’s Operating Agreement.

Additionally, Defendants' invocation of Section 59 of the NH Act to dismiss the action is ineffective. Section 59 clarifies that certain disputes regarding LLC membership must be resolved in superior court but does not require that actions be filed in New Hampshire. This interpretation is supported by the fact that many disputes under Section 59 would also fall under Section 186, making the jurisdictional function of Section 59 redundant. The differing language between the two sections indicates an intent to assign distinct meanings. Reading Section 59 as mandatory for filing in New Hampshire would render it unconstitutional; therefore, it is interpreted as allocating jurisdiction among New Hampshire courts without mandating the location of the filing.

Legislative intent in New Hampshire is highlighted by RSA 651:20, I, which shows that the legislature can impose limitations on trial courts when desired, as seen in In re Baldoumas Enters. Inc. Furthermore, RSA 507–F:4 illustrates the legislature's ability to distinguish between negligence and strict liability. The term ‘public water system’ is explicitly defined in existing statutes, and the court will not infer additional terms not included by the legislature. Section 59 does not affect Delaware’s jurisdiction in this case, allowing the court to exercise subject matter jurisdiction over Jung’s equitable claims regarding fiduciary breaches by TAMA members. New Hampshire’s laws do not impede the court’s constitutional role in handling transitory claims. Regarding personal jurisdiction over TAMA, the defendants argue it lacks jurisdiction specifically for a breach of contract claim, but TAMA has not contested jurisdiction for other related claims. Under Court of Chancery Rule 12(b)(2), the plaintiff must demonstrate the basis for jurisdiction. TAMA's argument is weak since it only addresses the breach of contract claim, which is unrelated to Delaware, while the plaintiff has valid claims connected to TAMA that warrant jurisdiction.

Tama, a New Hampshire entity, lacks personal jurisdiction in Delaware regarding the breach of contract claim due to no apparent connection to the state. Defendants limited their personal jurisdiction argument specifically to this breach of contract claim and did not contest jurisdiction related to the conspiracy claim. Tijerina, Edgar, and ETI did not challenge jurisdiction over themselves. The court stated that a defendant must present all grounds supporting a personal jurisdiction defense in their opening brief; failure to do so waives the argument. Additionally, the court may exercise discretion to litigate claims lacking personal jurisdiction if they are sufficiently related to other claims with established jurisdiction. The court assesses potential prejudice to defendants and the interests of judicial economy. In this case, no prejudice or due process issues were asserted by Tama regarding the breach of contract claim, and trying it with related claims promotes judicial efficiency. The breach of contract claim is closely related to other claims against Tama, as it stems from a Services Agreement linked to Jung's membership in Tama. The defense hinges on a settlement agreement that affects all claims, necessitating adjudication regardless of personal jurisdiction over the breach of contract claim.

The adjudication of the breach of contract claim involves similar elements and facts as other claims against TAMA. New York law allows for the exercise of pendent personal jurisdiction in this context, meaning that the court can assert jurisdiction over related claims without restraint from TAMA's home state of New Hampshire. Consequently, the defendants' motion to dismiss the breach of contract claim for lack of personal jurisdiction is denied. 

Regarding the defendants' motion to dismiss under Court of Chancery Rule 12(b)(6), the court follows a well-established standard: all well-pleaded factual allegations must be accepted as true, and even vague allegations are considered well-pleaded if they provide notice of the claim. The court draws all reasonable inferences in favor of the non-moving party, allowing dismissal only if the plaintiff cannot recover under any conceivable set of circumstances. The standard to survive a motion to dismiss is minimal and plaintiff-friendly, although the court does not accept conclusory allegations without factual support or unreasonable inferences.

The court will evaluate the defendants' motion to dismiss Counts I, II, III, and VI. Specifically, Count I asserts a claim for a declaratory judgment regarding Jung's ownership of a 2.08% interest in TAMA or her entitlement to compensation for the wrongful dispossession of her interest. The court will also consider documents incorporated into the complaint, including the Operating Agreement.

Defendants seek dismissal of the claim on the grounds that, according to the complaint, Jung was recognized as the rightful owner of membership interests in TAMA and that the claim does not assert she never owned these interests. The court interprets Count I as alleging that Jung retains a 2.08% interest in TAMA, as she has not relinquished it, and suggests that the defendants may have wrongfully appropriated her interest, warranting fair compensation. Consequently, Count I states a viable claim for relief, leading to the denial of the defendants' motion regarding this count.

Count II involves allegations of breach of fiduciary duty by Tijerina, Edgar, and TAMA, with claims that Tijerina and Edgar engaged in self-dealing by selling TAMA without including Jung and appropriating her share of the proceeds. The court finds that while the complaint sufficiently alleges a breach of fiduciary duty against Tijerina and Edgar, Jung has abandoned her claim against TAMA.

Regarding Tijerina's fiduciary duties, the court notes that the determination of whether he owes such duties depends on whether TAMA is a member-managed or manager-managed LLC, as defined by New Hampshire law. Jung contends she could not adequately address Tijerina's role due to not having the Operating Agreement, which was subsequently provided to the court. Under New Hampshire law, member-managed LLCs require all members to owe fiduciary duties to each other, while in manager-managed LLCs, these duties apply only to members who exercise management functions. The court's task is to interpret TAMA’s Operating Agreement to ascertain its management structure, adhering to principles of contract interpretation to establish the parties’ intent.

A contract is deemed ambiguous if reasonable parties could disagree on its meaning. In cases of ambiguity, the interpretation is based on what the parties, as reasonable individuals, mutually understood. TAMA is a member-managed LLC, where management powers are vested in its members. The Operating Agreement designates Edgar as the "Managing Member," granting him limited authority to sign checks only. Under New Hampshire law, TAMA's members owe each other fiduciary duties, which includes Tijerina, who, despite not being a manager, has fiduciary obligations. The defendants' motion regarding Tijerina's fiduciary duties is denied.

In contrast, TAMA is not subject to breach of fiduciary duty claims as it does not owe such duties under the NH Act. Jung's claim against TAMA for breach of fiduciary duty is dismissed due to lack of response to the defendants' argument, indicating abandonment of the claim.

Jung alleges that ETI aided and abetted breaches of fiduciary duties by Tijerina and Edgar. The defendants argue that an entity cannot aid and abet its fiduciary’s wrongdoing. However, Jung's claim specifically relates to breaches committed by Tijerina and Edgar in their roles as TAMA fiduciaries. Therefore, the motion to dismiss this claim against ETI is denied.

Lastly, regarding Jung's breach of contract claim against TAMA, the defendants assert that the claim is barred by New Hampshire's three-year statute of limitations. However, Jung contends that New York law applies, which allows a six-year statute of limitations, meaning dismissal based on the statute of limitations is not warranted at this stage.

The Services Agreement lacks a choice of law provision, prompting Delaware to apply Section 188 of the Restatement (Second) of Conflicts of Law, which outlines five factors for determining applicable law: a) place of contracting, b) place of negotiation, c) place of performance, d) location of the contract's subject matter, and e) the parties' domiciles, residences, nationalities, incorporation, and business locations. The Complaint states that the Agreement was executed in New York, that Jung is a Canadian resident, and TAMA is a New Hampshire LLC. Jung claims to have performed some duties under the Agreement in New York. The defendants did not respond to these assertions. Consequently, the court finds insufficient basis to apply New Hampshire's statute of limitations concerning an alleged breach of the Services Agreement, resulting in the denial of Defendants' Motion regarding Count VI. The Motion is partially granted and denied overall, with specific outcomes for Counts I, III, IV, V, and VI. A stipulated implementing order must be provided by the parties within twenty days, alongside a scheduling order.