Poppiti v. Conaty
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SAM GLASSCOCK III
VICE CHANCELLOR
COURT OF CHANCERY
OF THE
STATE OF DELAWARE
COURT OF CHANCERY COURTHOUSE
34 THE CIRCLE
GEORGETOWN, DELAWARE 19947
Date Decided: May 1, 2013
Date Submitted: February 18, 2013
Seth A. Niederman
Austen C. Endersby
Fox Rothschild LLP
919 North Market Street, Suite 1300
Wilmington, Delaware 19801
Stephani J. Ballard
Law Offices of Stephani J. Ballard, Esq.
1308 Delaware Avenue
Wilmington, Delaware 19806
Stephen W. Spence
Phillips, Goldman & Spence, P.A.
1200 North Broom Street
Wilmington, Delaware 19806
Re:
Poppiti v. Conaty
Civil Action No. 6920-VCG
Dear Counsel:
I.
BACKGROUND
Divorce can be contentious, regardless of whether the partners are conjugal
or professional. This case arises from a dispute between two former law partners
and members of the Delaware Bar, James Curran and Thomas Conaty. Since
December 2006, they operated their law practice through an entity named Conaty
& Curran, LLC (the “Firm”).1 Conaty and Curran each had an equal share in Firm
1
Compl. ¶ 4.
Poppiti v. Conaty
May 1, 2013
Page 2
profits.2 On September 24, 2010, Conaty and Curran entered into a Liquidation
Agreement to dissolve their law practice and wind up the Firm’s business.3 As part
of the Liquidation Agreement, Conaty and Curran appointed a liquidating trustee,
Vincent Poppiti, Esq. (the “Liquidating Trustee”), to manage the dissolution of the
Firm.4
The Liquidating Trustee filed this action because Conaty disputed the
Liquidating Trustee’s authority to receive and disburse fees arising from a
settlement between the Catholic Diocese of Wilmington (“CDOW”) and plaintiffs
who alleged that they were victims of sexual abuse for which CDOW was
responsible.5
Prior to its dissolution, the Firm had agreed to represent 10
individual plaintiffs bringing civil claims against the CDOW.6 That litigation was
stayed when the CDOW filed for bankruptcy in 2009.7
The litigation was
ultimately settled in July 2011, and the bankruptcy court appointed Marla Eskin
(the “Settlement Trustee”) to oversee the distribution of victims’ compensation,
2
Compl. Ex. A (Operating Agreement) ¶ GP 26.
Id. ¶ 6. Compl. Ex. B (Liquidation Agreement) ¶ 1.
4
Id. Ex. B. (Liquidation Agreement) ¶ 1.
5
Id. ¶ 14. Conaty and Curran have also brought crossclaims against each other for breaches of
duty arising out of the dissolution of the Firm. The parties agreed to bifurcate this proceeding,
and first determine the question of whether the Liquidating Trustee is entitled to receive the
disputed fees arising from the CDOW litigation. See Teleconf. Tr. 16:13-17:11, Aug. 15, 2012.
6
Compl. ¶ 14.
7
Id. ¶ 16.
3
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May 1, 2013
Page 3
costs, and attorneys’ fees.8 The settlement portended a substantial fee award to the
Firm.
Poppiti notified the Settlement Trustee by letter dated August 9, 2011 that all
attorneys fees’ and costs payable to the Firm were Firm assets and should be
delivered to the Liquidating Trustee.9 Conaty, however, objected. He notified the
Settlement Trustee on September 14, 2011, that fees from the settlement were
payable to Conaty, because the individual plaintiffs were no longer clients of the
Firm, but were clients of Conaty in his individual capacity.10 Conaty asserts that
he did extensive post-dissolution work related to the CDOW cases, including
“client meetings, work on non-monetary aspects of the settlement with the CDOW,
motion practice, discovery practice, and participation in mediation sessions.”11
On October 6, 2011, the Liquidating Trustee filed this action, seeking a
declaratory judgment that (1) the disputed fees are assets of the Firm, and (2) the
Liquidating Trustee has the Authority to receive and distribute the disputed fees
consistent with his duties and responsibilities under the Liquidation Agreement.
Defendant Curran supports the position of the Liquidating Trustee.
8
Id. ¶ 18.
Id. ¶ 21.
10
Id. ¶ 22; Id. Ex. D at 1.
11
Def. Conaty’s Answer ¶ 99.
9
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On September 13, 2012, I held an evidentiary hearing, in which Conaty
presented evidence that, according to Conaty, demonstrated that Curran had
waived his interest in the disputed fees prior to the signing of the Liquidation
Agreement.12 At that hearing, I found that Curran did not waive his interest in the
disputed fees.13 Subsequently, Defendant Curran and Plaintiff Poppiti have jointly
moved for partial summary judgment on the issue of whether the Liquidating
Trustee is entitled to receive and distribute the disputed fees arising from the
CDOW settlement.
The Liquidating Trustee also made an oral petition for
instructions, asking me to declare that his decision to distribute the disputed fees
50-50 between the Defendants is consistent with his duties and responsibilities
under the Liquidation Agreement.14 Defendant Curran and the Liquidating Trustee
have also asked me to order Defendant Conaty to pay their legal fees and costs,
because Conaty has allegedly acted in bad faith in disputing the Liquidating
Trustee’s authority to distribute the disputed fees.
12
Evid. Hr’g Tr. 1, Sept. 20, 2012.
Id. 260:19-261:6.
14
Oral Arg. Tr. 26:1-15, Mar. 7, 2013.
13
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Poppiti v. Conaty
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II. ANALYSIS
Summary judgment pursuant to Court of Chancery Rule 56 is appropriate
when the moving party demonstrates that “no genuine issue of material fact exists
and that [the movant] is entitled to judgment as a matter of law.”15
A. Motion for Summary Judgment
Defendant Curran and Plaintiff Poppiti have moved for partial summary
judgment and have asked me to enter an order that the disputed CDOW fees are
assets of the company, and that Plaintiff Poppiti is entitled to receive and distribute
the disputed fees in his capacity as Liquidating Trustee of the company. Conaty
concedes in his opening brief that the disputed fees are Firm assets and that the
Trustee has the authority under the Liquidation Agreement to receive the disputed
fees.16 Accordingly, I grant Defendant Curran’s and Plaintiff Poppiti’s motions for
partial summary judgment on the questions concerning whether the Liquidating
Trustee should receive and distribute the disputed fees.
15
Levy v. HLI Operating Co., 924 A.2d 210, 219 (Del. Ch. 2007).
Def. Conaty’s Resp. Mot. Partial Summ. J. 1 (“Conaty now concedes that the Disputed Fees
are company assets. . . . Accordingly, with the understanding that the Disputed Fees are
Company assets, Conaty also concedes that the [Liquidating Trustee] has the authority under the
Liquidating Agreement to receive the Disputed Fees.”).
16
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B. Petition for Instructions
The only remaining issue before me, then, is whether the Liquidating
Trustee’s decision to distribute Firm assets 50-50 between the parties is consistent
with his obligations under the Liquidation Agreement. Curran and the Liquidating
Trustee contend that the Liquidation Agreement not only allows, but in fact
requires the Liquidating Trustee to distribute Firm assets to the members in
proportion to their interests in the Firm. Conaty maintains that Curran and Poppiti
are not entitled to summary judgment on the distribution issue because (1) there is
no legal basis supporting the Liquidating Trustee’s decision to distribute the
disputed fees 50-50, and (2) there are disputed, material facts concerning that
issue.17 For the reasons that follow, I conclude that the Liquidating Trustee’s
decision to distribute the disputed fees equally to Conaty and Curran is consistent
with his obligations under the Liquidation Agreement.
The Liquidation Agreement grants the Liquidating Trustee “sole authority to
act on behalf of the [Firm]” in the course of winding up and distributing the assets
of the LLC.18 The Trustee has the discretion to “take such actions as he deems
appropriate in all matters relating to winding up the affairs of the [Firm].”19 The
17
Def. Conaty’s Resp. Mot. Partial Summ. J. 2.
Def. Curran’s Pre-Hr’g Br. Ex. JPC-BRF-1 (Liquidation Agreement) § 1.
19
Id.
18
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Liquidation Agreement specifies that “the affairs of the [Firm] shall be wound up .
. . [and] the remaining assets of the [Firm] shall be distributed by Poppiti according
to § 18-804 of the [Delaware Limited Liability Company] Act.”20
Section 18-804 of the Delaware Limited Liability Company Act (the “LLC
Act”) provides that:
(a) Upon the winding up of a limited liability company, the assets
shall be distributed as follows:
(1) To creditors, including members and managers who are
creditors, to the extent otherwise permitted by law, in
satisfaction of liabilities of the limited liability company
(whether by payment or the making of reasonable provision for
payment thereof) other than liabilities for which reasonable
provision for payment has been made and liabilities for
distributions to members and former members under § 18-601
or § 18-604 of this title;
(2) Unless otherwise provided in a limited liability company
agreement, to members and former members in satisfaction of
liabilities for distributions under § 18-601 or § 18-604 of this
title;21 and
(3) Unless otherwise provided in a limited liability company
agreement, to members first for the return of their
contributions and second respecting their limited liability
company interests, in the proportions in which the members
share in distributions.22
20
Def. Curran’s Pre-Hr’g Br. Ex. JPC-BRF-1 (Liquidation Agreement) § 2.
Distributions under Section 18-601 and 18-604 concern, respectively, interim distributions and
distributions upon the resignation of a member from an LLC. 6 Del. C. §§ 18-601, 18-604.
Neither Conaty nor Curran assert that they are owed distributions under these sections.
22
6 Del. C. § 18-804(a)(1)-(3) (emphasis added).
21
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The Liquidation Agreement contains no other restriction on the Trustee’s authority
to act on behalf of the company and distribute the Firm’s assets.
Conaty makes two arguments that the Liquidating Trustee’s allocation
decision is wrong. First, he contends that the Liquidation Agreement is silent as to
how firm assets are distributed, and therefore Liquidating Trustee must make final
membership distributions on the basis of quantum meruit. Second, Conaty argues
that his post-dissolution work has made him a creditor under Section 18-804 of the
LLC Act, and that he is therefore entitled to payment before any membership
distribution can be made. Accordingly, Conaty concludes that summary judgment
is inappropriate, because determining the amount that each member is owed is a
disputed issue of material fact. Neither argument has merit.
1. Must the Liquidating Trustee Make Membership Distributions
According to Quantum Meruit?
Conaty contends that the Liquidating Trustee must apply the doctrine of
quantum meruit to compensate members of the Firm for the actual work they
performed as part of the windup. In support of this position, Conaty cites cases
which have applied the doctrine of quantum meruit to allocate contingency fees
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Poppiti v. Conaty
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among partners of a dissolved law firm.23 However, those cases are inapposite to
the question before me today.
Not only do those cases deal with foreign
partnerships, rather than Delaware LLC’s, but they generally involve the question
of whether fees arising from legal services rendered subsequent to a law firm’s
dissolution constitute assets of the defunct firm or whether they belong to the
attorney who performed the work.24 Here, Conaty has conceded that the disputed
fees do belong to the Firm, and that the Liquidating Trustee has authority to
receive and distribute them. Accordingly, the cases Conaty relies on are irrelevant
to the issue of how a liquidating trustee should apportion assets under a liquidation
agreement.
Contrary to Conaty’s argument that the Liquidation Agreement is silent on
the distribution issue, Section 2 of the Liquidation Agreement provides that the
Liquidating Trustee should distribute firm assets in accordance with Section 18804 of the LLC Act, and Section 18-804 of the LLC Act provides that after Firm
creditors are paid and the members’ capital contributions are reimbursed,
distributions should be made to the members in the proportion in which the
23
See Def. Conaty’s Resp. Mot. Partial Summ. J. 7.
See, e.g., Santalucia v. Sebright Transp., Inc., 232 F.3d 293, 300-01 (2d Cir. 2000) (“We hold,
therefore, that under New York law, when a professional corporation of lawyers dissolves and a
lawyer leaves with a contingent fee case, absent an agreement to the contrary, that case remains a
firm asset”); Geron v. Robinson & Cole LLP, 476 B.R. 732, 743 (S.D.N.Y. 2012) (“[U]nder New
York law, a dissolved law firm’s pending hourly fee matters are not partnership assets.”).
24
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members shared an interest in the Firm. Conaty does not contest that he and
Curran shared the Firm’s profits 50-50 in accordance with the Operating
Agreement.25 Accordingly, I must conclude that the Liquidating Trustee’s decision
to distribute Firm assets to members in proportion to their interest in the Firm is
consistent with the plain language of the Liquidation Agreement.
2. Is Conaty a Creditor of the Firm?
Conaty’s second argument is that Conaty and Curran, by virtue of their postdissolution efforts to wind up the Firm, are “creditors” under Section 18-804(a)(1)
of the LLC Act, and that the Liquidating Trustee must compensate them for their
work before making final membership distributions. However, Conaty presents no
evidence of an actual contract that would confer on him creditor status. Instead, he
again relies on the principles of quantum meruit to support his argument.
This argument, too, must fail. As Curran and Poppiti both point out in their
briefs, quantum meruit is a quasi-contractual principal that only operates in the
25
Though Conaty argued in supplemental briefing that Curran repudiated the Operating
Agreement, any repudiation is irrelevant to the question of whether the Liquidating Trustee is
acting within the bounds of his authority by distributing firm assets 50-50. The Liquidating
Trustee is not seeking to enforce the Operating Agreement. Rather, the Operating Agreement
constitutes evidence as to what Conaty and Curran’s interests were in the Firm, which in turn
determines distribution rights under Section 18-804 of the LLC Act and the Liquidation
Agreement. Accordingly, I do not address the parties’ arguments concerning repudiation.
10
Poppiti v. Conaty
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absence of an express agreement.26
Here, the parties had an agreement—the
Liquidation Agreement—under which the Liquidating Trustee had authority to
manage the Firm’s affairs and ultimately distribute Firm assets. By conceding that
the fees arising from the CDOW settlement are Firm assets, Conaty has conceded
that the CDOW fees must be distributed in accordance with the Liquidation
Agreement.
In asking me to apply the doctrine of quantum meruit here, Conaty
would have me ignore the existence of the Liquidation Agreement.
The
Liquidation Agreement expressly grants the Liquidating Trustee “sole authority” to
act on the Firm’s behalf, including with regard to “issues which would ordinarily
come before the members of the [Firm] in the absence of the appointment of a
liquidating trustee.”27 The decision to compensate members based on an equal
division of the Firm’s profits, rather than based on the hourly work performed by
each member, is exactly the kind of decision that would ordinarily lie with the
Firm’s members. Indeed, the Operating Agreement indicates that Conaty and
Curran themselves decided that a 50-50 split of profits was the preferred method of
compensation. Because Conaty and Curran agreed to vest the Liquidating Trustee
with authority to manage all aspects of the Firm’s operations in order to wind up
26
See Caldera Props.-Lewes/Rehoboth VII, LLC v. Ridings Dev., LLC, 2009 WL 2231716, at
*31 (Del. Super. May 29, 2009) aff’d sub nom. Ridings Dev., LLC v. Caldera Props. Lewes/Rehoboth VII, LLC, 998 A.2d 851 (Del. 2010).
27
Liquidating Agreement § 1.
11
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May 1, 2013
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the enterprise, it would be inappropriate for me to apply the quantum meruit
doctrine here.28
C. Request for Fees and Costs
Both Curran and the Liquidating Trustee have requested that I require
Conaty to bear the costs of these proceedings on the grounds that Conaty has acted
in bad faith in disputing the Trustee’s authority to receive and distribute the
CDOW fees. Nothing in this litigation convinces me that Conaty has acted in bad
faith. Accordingly, the request for fees and costs is denied.
III. CONCLUSION
Defendant Curran’s Motion for Partial Summary Judgment and Plaintiff
Poppiti’s Motion for Partial Summary Judgment are hereby granted, and I instruct
the Liquidating Trustee that he may distribute residual Firm assets to the members
in proportion to their membership interests. The parties should provide me with a
form of order consistent with this opinion.
IT IS SO ORDERED.
Sincerely,
/s/ Sam Glasscock III
Sam Glasscock III
28
Caldera, 2009 WL 2231716, at *31.
12
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