Chancery Determines Validity of LLC Ownership Following Fraud and Deceit in Cross-Border Control Dispute

Morris James LLP
Contact

Lynch v. Gonzalez, C.A. No. 2019-0356-MTZ (Del. Ch. July 31, 2020)

Disputes over control of a Delaware limited liability company can turn on rigorous fact-finding efforts by the Court of Chancery where issues of witness credibility may be paramount. As this decision illustrates, the Court will not permit trickery or misrepresentations to prevail in a control dispute, nor will it apply the doctrine of unclean hands to permit an undeserved windfall or countenance a fraudulent scheme.

Defendant R. Angel Gonzalez Gonzalez, who owned media assets throughout Latin America, formed a Delaware LLC (“Belleville”) to acquire an Argentine media conglomerate in 2007. Gonzalez owned 5 percent of Belleville directly and the other 95 percent indirectly through an entity (“Televideo”). Plaintiff Carlos Eduardo Lorefice Lynch was an Argentine attorney whose firm assisted Gonzalez with the acquisition.

Lynch became a trusted confidant of Gonzalez. In 2009, when Argentine law limited a foreigner’s ownership of a media company to no more than 30 percent, Lynch and Gonzalez devised a scheme by which Lynch would appear on paper to own 65 percent of Belleville, but in actuality Televideo would remain the beneficial owner of its full 95 percent interest. They executed a purchase agreement that purported to transfer beneficial ownership to Lynch. This framework was to include a secret “counterdocument” contract that verified beneficial ownership belonged to Televideo, and obligated Lynch to return the 65 percent interest in Belleville to Televideo upon Gonzalez’s request. Lynch falsely represented to Gonzalez that he had joined Gonzalez in executing the counterdocument. Over time, as Gonzalez provided the funding by which Lynch “acquired” Belleville from Televideo, Lynch restructured the purchase agreement several times, with the final version going so far as to purportedly invalidate the (still unexecuted) counterdocument. Lynch explained to Gonzalez that this “invalidation” was necessary in the event of an inquiry by Argentine regulators. Ultimately, Lynch hid or destroyed the counterdocument Gonzalez had executed. Believing he had successfully secured ownership of Belleville, Lynch attempted to extort tens of millions of dollars from Gonzalez to return the interest in Belleville to Televideo. Gonzalez refused, and litigation ensued in the Delaware Court of Chancery.

In its post-trial opinion, the Court held that Gonzalez and his deputy were Belleville’s co-managers, that Televideo is Belleville’s majority member, and that Lynch had no ownership interest in Belleville. The Court reasoned that for Lynch to prevail would require the Court to find that Lynch’s paper trail represented a series of bargained-for, binding contracts for Lynch’s purchase of 65 percent of Belleville, supported by consideration, and the parties’ mutual assent. However, the only mutual assent reflected in the paper trail was a sham transaction to evade foreign ownership requirements under Argentine law.  Hence, Gonzalez never assented to Lynch actually owning Belleville, and therefore Gonzalez was not bound by any document purporting to transfer ownership to Lynch. The Court noted that even if Gonzalez was bound by such documents, Lynch had fraudulently induced Gonzalez into signing them and was estopped from seeking their enforcement. The Court also found that Gonzalez’s past representations for tax purposes to the United States Internal Revenue Service and the State of Florida that Lynch owned 65 percent of Belleville did not support judicial estoppel, which under Delaware law is a doctrine that narrowly applies only to positions taken in judicial proceedings. Finally, the Court declined to apply the doctrine of unclean hands to bar relief for Gonzalez, reasoning that to apply the doctrine in these circumstances would provide a windfall to Lynch and would in effect constitute an implicit blessing by the Court of the parties’ scheme to avoid Argentine law. Finally, due to Lynch’s bad-faith conduct in asserting and litigating his claims, the Court shifted Gonzalez’s attorney’s fees and costs to Lynch.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morris James LLP | Attorney Advertising

Written by:

Morris James LLP
Contact
more
less

Morris James LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide