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Empire Merchants, LLC v. Merinoff

United States District Court, S.D. New York

November 8, 2017

CHARLES MERINOFF, et al., Defendants.



         In this diversity action, Plaintiff Empire Merchants, LLC (“Empire”), a liquor distributor, seeks a declaration that two of its former officers, Charles Merinoff and Gregory Baird, are not entitled to indemnification or advancement for their fees and costs in defending a lawsuit that Empire filed against them in the Eastern District of New York. (See Docket No. 8 (“Am. Compl.”) at ¶¶ 37-48). Empire also brings a contract claim against Merinoff and Baird, alleging that they breached a forum selection clause in the parties' contract by filing suit in Delaware rather than here. (See Id. ¶¶ 49-54). Now pending are cross-motions for partial judgment on the pleadings, pursuant to Rule 12(c) of the Federal Rules of Civil Procedure, regarding two questions: whether Merinoff and Baird are entitled to advancement of their fees and costs and whether Empire is entitled to damages for breach of the parties' contract. For the reasons that follow, Empire's motion is GRANTED, and Defendants' motion is DENIED.


         Empire, a Delaware limited liability company, distributes wine and spirits in New York and is the exclusive distributor of several well-known alcohol brands, including Johnnie Walker and Smirnoff. (Am. Compl. ¶¶ 12-13). Defendant Merinoff served on Empire's Board of Managers from its formation in 2006 until November 9, 2015. (Id. ¶ 6). Defendant Baird was also a member of Empire's Board of Managers, from January 1, 2012, to October 22, 2015. (Docket No. 39 (“Mastro Decl.”), Ex. F (“E.D.N.Y. Amended Complaint”), at ¶ 34).

         Complicating matters, however, Baird and Merinoff had several roles in the alcohol industry beyond their roles at Empire. Merinoff was the Chief Executive Officer and Chairman of the Board of Sunbelt Holding, Inc. and Sunbelt Beverage Company (“Sunbelt”), which until 2016 owned Reliable Churchill LLP (“Reliable Churchill”), a liquor wholesaler in Maryland. (Am. Compl. ¶¶ 6, 14). In 2016, Merinoff also became the Co-Chairman of Breakthru Beverage Group, which is now the ultimate parent entity of Reliable Churchill. (Id. ¶ 6). For his part, Baird was the Executive Vice President of Sales for Sunbelt, through which he oversaw sales for Reliable Churchill until he became Chief Operating Officer of Sunbelt in 2010. (Id. ¶ 7). In 2016, Baird became President and CEO of Breakthru Beverage Group. (Id. ¶ 7).

         The relationship between Empire and its Board members was and is defined by the company's Limited Liability Company Agreement (the “LLC Agreement”). Two provisions of that Agreement are relevant here. First, Section 5.5, titled “Liability of the Managers and Officers; Indemnification” provides as follows:

The Company . . . shall, to the fullest extent permitted by applicable law, indemnify, defend and hold harmless each Manager and each officer of the Company from and against any and all claims, suits, losses, judgments, damages, settlements, liabilities, fines, costs and expenses (including, but not limited to, reasonable attorneys' fees, litigation expenses and court costs) (“Losses”) that may be made or imposed upon such Person by reason of the fact that such Person is or was a Manager or officer of the Company; provided, however, that no indemnification shall be provided hereunder to any such Person for any Losses arising out of such Person's breach of his or her duty of loyalty (as such concept is interpreted under the [Delaware General Corporation Law]), act of fraud, bad faith or willful misconduct, or any action or transaction from which such Person derived an improper personal benefit. . . . The Company shall pay the expenses as incurred by the Persons entitled to indemnification under this Section 5.5(b) in defending a civil or criminal action, suit or proceeding, upon receipt of a written undertaking by such Person to repay such payment if it shall be determined that such Person is not entitled to indemnification therefor as provided herein.

(Mastro Decl., Ex. A (“LLC Agreement”), at § 5.5(b)). Second, Section 12.6 provides that “any suit, action or other legal proceeding arising out of” the LLC Agreement “shall be brought” in this Court or a New York State court in Manhattan, except that any legal proceeding that, under Delaware law, “is required to be brought in the Delaware Court of Chancery may only be brought in the Delaware Court of Chancery.” (Id. § 12.6).

         On September 20, 2016, Empire filed a lawsuit in the Eastern District of New York (the “E.D.N.Y. Action”) against Reliable Churchill, Merinoff, Baird, and others. (Am. Compl. ¶¶ 2, 20; Docket No. 45, Ex. 6 (“Original E.D.N.Y. Complaint”)). Empire alleged that Merinoff, Baird, and the other defendants participated in a long-term scheme to illegally smuggle wine and spirits from Maryland to New York in order to avoid paying New York's higher liquor excise tax and to undercut Empire's exclusive distribution of certain brands of liquor. (Original E.D.N.Y. Complaint ¶ 1). In the Original E.D.N.Y. Complaint, Empire also alleged that Baird and Merinoff breached their fiduciary duties as board members of Empire by participating in the scheme. (See, e.g., id. ¶¶ 84-85, 169). For example, Empire specifically alleged that Merinoff and Baird “both breached their fiduciary duties to Empire, ” as “both men sat on Empire's Board of Managers and had knowledge that the bootlegging scheme was affecting Empire's financial well-being.” (Id. at ¶ 169; see also Id. ¶ 170).

         On December 9, 2016, Empire filed an amended complaint in the E.D.N.Y. Action. Once again, Empire again alleged that Merinoff and Baird furthered an illegal smuggling scheme in their capacity as directors and officers of Sunbelt and Reliable Churchill. (E.D.N.Y. Amended Complaint ¶¶ 23, 99 n.108). The E.D.N.Y. Amended Complaint alleged that, notwithstanding Merinoff's role as an Empire Board member, “[b]ecause of the ownership structures of the different relevant entities, Merinoff profited more when Reliable Churchill made a sale, as opposed to when Empire made a sale.” (Id. ¶ 23). It alleged also that Merinoff ultimately intended to weaken Empire in order to target it for acquisition by Breakthru Beverage Group. (Id.). Empire's contentions regarding Baird were sparser: It claimed that he knew of the smuggling operation, initially by virtue of his role as Reliable Churchill's President and, later, as Chief Operating Officer of Sunbelt. (Id. ¶ 99 n.108). The E.D.N.Y. Amended Complaint asserted claims against Merinoff and Baird for tortious interference with contract (id. ¶¶ 301-08), deceptive trade practices in violation of New York General Business Law Section 349 (id. ¶¶ 309-13), unfair competition (id. ¶¶ 314-21), unjust enrichment (id. ¶¶ 331-43), and civil conspiracy (id. ¶¶ 344-53). Notably, however, it did not include any claims for breach of fiduciary duty against Merinoff and Baird. (See, e.g., Docket No. 45, Ex. 4, ¶ 208).

         On October 26, 2016 - between the filing of the original complaint and the amended complaint - Merinoff and Baird demanded that Empire advance them funds to pay for their defense in the E.D.N.Y. Action, which they characterized as a suit “in connection with their positions as members of [Empire's] Board.” (See Am. Compl., Ex. 3, at 1). Not surprisingly, Empire promptly refused. (See Am. Compl., Ex. 4, at 1 (“Surely, you are not seriously advancing this request in good faith.”)). Merinoff and Baird then filed suit in the Delaware Court of Chancery, seeking to obtain advancement of the legal fees. (Am. Compl., Ex. 5). On February 2, 2017, however, the Delaware Court dismissed the case, finding that the “clear and unambiguous language” of the LLC Agreement's “forum selection provision” required that the action to be brought in New York. (Mastro Decl., Ex. C, at ¶¶ 11-12). Thereafter, Empire commenced this action seeking a declaratory judgment that Merinoff and Baird are not entitled to advancement or indemnification. (Am. Compl. ¶ 1). Empire also seeks “breach of contract damages” stemming from Merinoff and Baird's violation of the forum selection clause by filing suit in Delaware. (Id. ¶ 4). Merinoff and Baird filed a counterclaim, demanding advancement of their fees to defend the E.D.N.Y. Action. (Docket No. 24, at ¶¶ 61-67).[1]


         The standard of review for a motion for judgment on the pleadings under Rule 12(c) is the same as that governing motions to dismiss under Rule 12(b)(6). See, e.g., Patel v. Contemporary Classics of Beverly Hills, 259 F.3d 123, 126 (2d Cir. 2001). That is, the plaintiff must plead facts sufficient “to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A complaint that offers only “labels and conclusions” or “a formulaic recitation of the elements of a cause of action will not do.” Id. at 555. If a plaintiff has not “nudged [its] claims across the line from conceivable to plausible, [those claims] must be dismissed.” Id. at 570. In applying these standards, however, a court must assume all of the plaintiff's “factual allegations to be true and draw[] all reasonable inferences in the plaintiff's favor.” Harris v. Mills, 572 F.3d 66, 71 (2d Cir. 2009).

         Although the Court looks to federal law for the applicable pleading standards, it looks to Delaware for substantive law, as the LLC Agreement expressly provides that it “shall be governed by and construed in accordance with the laws of the State of Delaware without regard to the conflicts of law rules of said state.” (LLC Agreement § 12.5). Under Delaware law, when a contract “is clear and unambiguous, [courts] will give effect to the plain-meaning of the contract's terms and provisions.” Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159-60 (Del. 2010). A contract is unambiguous if it is “fairly or reasonably susceptible to only one interpretation.” BLGH Holdings LLC v. enXco LFG Holding, LLC, 41 A.3d 410, 414 (Del. 2012). Where the provisions of a contract governing advancement are unambiguous, a court may resolve a dispute about entitlement ...

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