Holifield v. XRI Inv. Holdings

304 A.3d 896

Gregory A. HOLIFIELD and GH Blue Holdings, LLC, Defendants Below, Appellants/Cross-Appellees,

v.XRI INVESTMENT HOLDINGS LLC, Plaintiff Below, Appellee/Cross-Appellant.

No. 407, 2022

Supreme Court of Delaware.

Submitted: June 28, 2023

Decided: September 7, 2023

Court Below: Court of Chancery of the State of Delaware, I.D. No. 2021-0619

Upon appeal from the Court of Chancery of the State of Delaware. AFFIRMED in part, REVERSED in part, and REMANDED.

Michael W. McDermott, Esquire (argued), Richard I. G. Jones, Jr., Esquire, David B. Anthony, Esquire, Zachary J. Schnapp, Esquire, Harry W. Shenton, IV, Esquire, BERGER HARRIS LLP, Wilmington, Delaware for Defendants Below, Appellants/Cross-Appellees.

A. Thompson Bayliss, Esquire (argued), Eric A. Veres, Esquire, ABRAMS & BAYLISS LLP, Wilmington, Delaware. Of Counsel: Robert N. Hochman, Esquire, SIDLEY AUSTIN LLP, Chicago, Illinois, Margaret Hope Allen, Esquire, Angela C. Zambrano, Esquire, Yolanda Cornejo Garcia, Esquire, SIDLEY AUSTIN LLP, Dallas, Texas, Robin Wechkin, Esquire, SIDLEY AUSTIN LLP, Issaquah, Washington, for Plaintiff Below, Appellee/Cross-Appellant.

Before SEITZ, Chief Justice; VALIHURA, TRAYNOR, GRIFFITHS, Justices; and NEWELL, Chief Judge,¹ constituting the Court en Banc.

VALIHURA, Justice:

Defendants-below, appellants, cross-appellees, Gregory Holifield ("Holifield") and GH Blue Holdings, LLC ("Blue"), appeal the Court of Chancery’s September 19, 2022 memorandum opinion in favor of plaintiff-below, appellee, cross-appellant, XRI Investment Holdings LLC ("XRI"). The issue in this litigation is whether Holifield validly transferred his limited liability membership units in XRI to Blue on June 6, 2018. The resolution of that predicate issue bears on the ultimate dispute between the parties not being adjudicated here, namely, whether XRI validly delivered to Holifield a strict foreclosure notice purporting to foreclose on the XRI membership units, or whether such notice was incorrectly delivered to him because Blue was, in fact, the owner of the units following the transfer.

Following a one-day trial, the Court of Chancery determined that the transfer of the units from Holifield to Blue was invalid because it was not a permitted transfer under XRI’s limited liability company agreement, which provides that noncompliant transfers of XRI interests are "void." The trial court, in interpreting this Court’s holding in CompoSecure, L.L.C. v. CardUX, LLC,² held that the use of the word "void" in XRI’s LLC agreement rendered the transfer incurably void, such that affirmative defenses did not apply. Despite this holding, the trial court, in dicta, further found that XRI had acquiesced in the transfer. In doing so, the Court of Chan- cery, in dicta in its 154-page opinion, detailing the division between law and equity from the time of medieval England, concluded that this Court should reconsider its ruling in CompoSecure II which allows parties to an LLC agreement to contract for incurable voidness. The trial court urged us to adopt a rule wherein only acts that violate the laws of the State, as sovereign, are incurably void.³

Holifield adopts the Vice Chancellor’s suggestion on appeal, urging this Court to: (i) overrule CompoSecure II and instead reserve incurable voidness for acts that violate limits imposed by the State; (ii) hold that the trial court erred in applying CompoSecure II to the contractual language here; (iii) require more specific and emphatic language, such as "null and void ab initio," as opposed to "shall be void," before finding that parties have contracted for incurable voidness; or (iv) hold that incurable voidness does not extend to the affirmative defense of acquiescence.

XRI contests each of Holifield’s arguments and raises certain others on cross-appeal. It argues that: (i) the trial court erred by dismissing XRI’s claim for breach of contract damages related to an action filed against XRI in Texas; and (ii) the trial court erred by dismissing XRI’s claim for recoupment of legal expenses advanced to Holifield under XRI’s LLC agreement. XRI asks this Court to remand the case to the trial court and to instruct the trial court to determine whether Holifield acted willfully or with gross negligence in breaching the LLC agreement.

For the reasons set forth below, we AFFIRM the Court of Chancery’s judgment with respect to the Blue Transfer (defined below) and we REVERSE the Court of Chancery’s judgment insofar as it precludes XRI’s recovery for breach of contract damages and recoupment of legal expenses advanced to Holifield. We hold that the trial court’s finding of acquiescence as to only one of the alleged breaches does not bar either remedy and we REMAND for the trial court to make further determinations consistent with this opinion.

I. RELEVANT FACTS AND PROCEDURAL BACKGROUND⁴

A. Holifield and Gabriel Form XRI in 2013

XRI is a full-cycle water recycling and midstream infrastructure company servicing the energy exploration and production industry. Holifield and Matthew Gabriel ("Gabriel") founded XRI’s predecessor entity in 2013 to explore business uses for non-potable water sources in the oil and gas industry. It was one of approximately a dozen business entities formed by the two men to explore business opportunities in various sectors.⁵

Holifield and Gabriel formed Entia, LLC ("Entia") to provide management services and personnel to the operating entities they formed together.⁶ Entia’s sole purpose is to provide management and personnel services; the entity has never owned any interest in the operating businesses. Instead, Holifield and Gabriel owned the interests personally. Holifield controlled Entia and Gabriel owned a minority stake in Entia.

B. Holifield and Gabriel Sell a Controlling Interest in XRI to Morgan Stanley in 2016

Three years after forming XRI’s predecessor, in August 2016, Gabriel and Holifield sold a controlling interest in the entity to funds affiliated with Morgan Stanley (the "Morgan Stanley Sale"). Out of that sale emerged XRI in its current incarnation as a manager-managed Delaware limited liability company whose internal affairs are governed by a limited liability company agreement (the "LLC Agreement").

The LLC Agreement designated two classes of membership interests — "Class A Units," which Morgan Stanley received as the sole "Class A Member," and "Class B Units," which Holifield and Gabriel received as two of the three "Class B Members."⁷ Holifield’s Class B Units are the units underlying the parties’ dispute (the "Disputed Units"). The LLC Agreement also provided that the entity be managed by a five-member board of directors (the "XRI Board"). As the sole Class A Member, Morgan Stanley had the right to designate three board members. It designated Logan Burt ("Burt"), Mark Bye, and John Moon. As Class B Members, Holifield and Gabriel had the right to designate the remaining two board members. They designated themselves.

Importantly, the LLC Agreement also contains a provision that prohibits members from transferring their member interests (the "No Transfer Provision").⁸ Although the provision generally prohibits transfers, it provides an exception for transfers to a "Permitted Transferee." A Permitted Transferee is defined in the LLC Agreement to include any entity owned solely by the transferring member (the "Permitted Transferee Exception").⁹ However, to qualify for the exception, the transfer must be made for no consideration. If any transfer violates the No Transfer Provision, and does not qualify under the Permitted Transferee Exception, the transfer is "void" under the LLC Agreement (the "Contractual Voidness Provision").¹⁰

As part of the consideration for a controlling interest in XRI, XRI extended a loan to Entia (the "XRI Loan"). The XRI Loan, documented by a secured promissory note executed by Entia in favor of XRI (the "XRI Note"), contemplated a single balloon payment of $10,611,356.88, plus accrued interest, due on August 8, 2020. Holifield executed a personal guaranty in favor of XRI and secured both the XRI Note and the personal guaranty with the Disputed Units, as documented by a Unit Pledge Agreement. Accordingly, XRI filed a UCC-1 financing statement with the State of Florida on August 8, 2016, identifying Holifield as the debtor, XRI as the secured party, and the Disputed Units as collateral. Thus, if Entia failed to repay the XRI Loan, XRI could levy on the Disputed Units.

In turn, Holifield and Gabriel used a portion of the proceeds of the Morgan Stanley Sale to repay a $5 million loan XRI had taken out in 2015. That loan was from Penta Mezzanine Fund, a fund managed by a private investment firm founded and managed by Seth Ellis ("Ellis"). The repayment of the loan resulted in an impressive return for Ellis and his fund, and cemented a strong professional relationship among Ellis, Gabriel, and Holifield.

After the closing of the Morgan Stanley Sale, Gabriel became CEO of XRI. This arrangement reflected Gabriel’s substantial time commitment to the entity in the years leading up to the transaction. Meanwhile, Holifield managed the other portfolio companies he owned with Gabriel, including Entia.

C. The Efforts to Raise Capital for Entia in 2018

In 2018, Holifield and Gabriel began working on ways to raise additional capital through Entia to provide funding to some of the operating businesses that they coowned. Holifield wanted to raise $3.5 million through Entia but did not have the liquidity to raise the capital personally. Thus, he looked for external funding. As an initial step, Gabriel assigned all of his interest in Entia to Holifield for a nominal sum. According to Gabriel, he did so because he believed Entia to be in financial distress and that it would be easier for Holifield to raise capital if Holifield were the sole owner of Entia.

In addition to assigning his interest in Entia to Holifield, Gabriel helped Holifield explore how to use the Disputed Units to raise...