Delaware Chancery Court Rules in LLC Dispute: Report

The Court of Chancery of the State of Delaware has ruled in the complex case of two affiliated short line railroad LLCs involved in a lawsuit over indemnification, according to a report published in an on-line legal journal.

According to a report in Law360 (a LexisNexis Company) written by Rose Krebs about International Rail Partners LLC et al. v. American Rail Partners LLC (case number 2020-0177), Delaware Vice Chancellor Paul A. Fioravanti Jr. ruled that American Rail Partners LLC (ARP) must cover legal expenses incurred by International Rail Partners LLC (IRP). ARP had sued IRP “over unjust enrichment claims.” Fioravanti ruled that a limited liability agreement “unambiguously” provides that expenses be covered.

Fioravanti said “fee advancement provisions of ARP’s limited liability agreement are ‘quite broad’ and unambiguous,” according to Law360. “‘For purposes of this action, there is no dispute that the plaintiffs are covered persons under the broad advancement and indemnification provisions of the company’s limited liability company agreement,’ the opinion said. IRP, its manager, Gary O. Marino (pictured), and Boca Equity Partners LP sued ARP for the advancement of fees earlier this year, asserting that their LLC agreement entitles them to ‘mandatory advancement and indemnification’ related to a suit filed in the [Delaware’s] Superior Court in February. Boca Equity is the sole owner and only member of IRP, according to court filings.

“IRP is one of two members of ARP, the opinion said. Despite the ‘broad scope’ of the advancement provisions, ARP had argued it should not be required to advance legal fees because the LLC agreement does not provide indemnification for claims between the company and any covered person—what it calls ‘first-party claims,’ the suit said.”

“ARP sued IRP in Superior Court, claiming ‘a long litany of supposed mismanagement acts by IRP and Mr. Marino personally,” and that Marino ‘caused IRP to cause ARP to take various bad management acts to enrich Mr. Marino and his entity affiliates, at the expense of ARP,’ according to IRP’s Chancery Court complaint,” Law360 reported. “IRP, which managed ARP until July 2019, contends that the Superior Court suit resulted from a management dispute between IRP and Newco SBS Holdings LLC, which is not a party to the suit. Newco SBS, a private-equity-backed portfolio company, is ARP’s other member, along with IRP, according to court filings. As tensions over the direction of ARP’s business affairs mounted, IRP was pushed out as manager, and SBS Holdings ‘caused’ ARP to file the Superior Court suit, IRP contends in court filings. After ARP failed to respond to a demand in March that legal fees be advanced, the Chancery suit was filed, IRPl said in filings.”