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Commercial Division Declines to Dismiss Claim Seeking to Invalidate Delaware LLC Member’s Exercise of a Put Option Amidst Allegations of Anticipated Insolvency

In GMX Technologies, LLC v. Pegasus Capital Advisors, L.P., Justice Andrea Masley of the New York County Commercial Division denied Defendants Pegasus Capital Advisors, L.P. (“Pegasus”) and The Leiber Group Inc.’s (“Leiber”) (collectively, “Defendants”) motion to dismiss a claim for declaratory judgment seeking to bar Leiber from exercising a put option in connection with its membership interest in Plaintiff GMX Technologies, LLC (“GMX”).[1]  The opinion addressed whether a Delaware LLC member may exercise a put option when doing so would force the LLC into insolvency.

Factual Background

Plaintiff GMX is a Delaware-incorporated agricultural company that develops and distributes crop treatment products.  It is owned and controlled by Arnold Simon (“Simon”).[2]  Defendant Pegasus is an asset management firm which provides strategic growth capital to middle-market companies.  Pegasus is comprised of five private equity funds, including co-defendant Leiber.[3]

This lawsuit arises from a “cross-investment arrangement” in which Pegasus agreed to lend Simon’s company, nonparty Satz International LLC, $8 million.  From the $8 million loan, Simon agreed that $4 million would be provided to Leiber to pay off one of Leiber’s loans, and in exchange, Simon would receive a 7% equity stake in Leiber.  Separately, Pegasus invested an additional $4 million in a second company owned by Simon, nonparty Designer Holdings, conditioned on Simon’s agreement to personally guaranty the earlier cross-investments totaling $8 million.[4]

After the parties entered into the cross-investment arrangement, they had a falling-out, and Simon sued Leiber and one of Pegasus’s funds (the “Prior Action”).[5]  The parties settled the Prior Action.  As part of the settlement, Leiber received a 12.5% equity interest in GMX (the “Membership Interest”), and the right to exercise a put option in connection with the Membership Interest (“Put Option”).[6]  The terms of the settlement stated in part that “Leiber, in its sole and absolute discretion, shall have the right . . . to resell” to GMX Leiber’s Membership Interest in exchange for $8 million.[7]

On June 26, 2019, Leiber provided notice to GMX that it was exercising the Put Option and sought an $8 million payment.[8]  On July 15, 2019, GMX responded that Leiber’s attempt to exercise the Put Option was invalid under the terms of the governing agreement and the Delaware Limited Liability Company Act (“Delaware LLC Act”).[9]  Among other things, GMX contended that the exercise of the Put Option constituted a “Distribution” as defined in the governing agreement and that it would impermissibly force GMX into insolvency.[10]  GMX filed suit asserting claims against Defendants for declaratory judgment, breach of contract, injunctive relief, tortious interference with prospective business relations, and promissory estoppel in connection with Leiber’s attempt to exercise the Put Option. 

Defendants moved to dismiss all of the claims for failure to state a claim.

Justice Masley’s Opinion

The Court began its analysis with a discussion of GMX’s requests for declaratory judgment. Among other requests, GMX sought a declaration that the terms of the governing agreement and the Delaware LLC Act’s limitations on distributions barred Leiber from exercising the Put Option. 

First, GMX argued that Leiber could not exercise the Put Option because the governing agreement and Section 18-607 of the Delaware LLC Act prohibited GMX from making a “Distribution” that would cause GMX’s liabilities to exceed the fair market value of GMX’s assets.[11]  The governing agreement defined “Distribution” as “the transfer of Property by the Company to one or more of its Members in his or her capacity as a Member.”[12]  In response, Defendants argued that the satisfaction of the Put Option did not constitute a “Distribution” because Leiber was required to deliver all GMX certificates to GMX at the closing, and Leiber would therefore no longer hold a membership interest in GMX when it received payment.[13]  The Court rejected Defendants’ argument, holding that the Put Option payment to Leiber was required to be made simultaneously with Leiber’s delivery of the certificates.[14]

In addition, Defendants argued that Leiber’s exercise of the Put Option did not violate the governing agreement or the Delaware LLC Act because satisfaction of the Put Option would not render GMX insolvent.  On this issue, the Court held that whether the payment of the Put Option would force GMX into insolvency is a question of fact that cannot be resolved by a motion to dismiss.[15]  The Court therefore denied the motion to dismiss GMX’s first request for declaratory relief.

After holding that GMX’s first request for declaratory judgment survived Defendants’ motion to dismiss, the Court went on to dismiss the remainder of GMX’s claims for (1) declaratory judgment, (2) breach of contract, (3) injunctive relief, (4) tortious interference, and (5) promissory estoppel. 

First, the Court dismissed GMX’s additional claims for declarations that Leiber’s attempt to exercise the Put Option constituted a material breach of the governing agreement or was otherwise improper and untimely.[16]  The Court found that the governing agreement provided Leiber with a right to exercise the Put Option unless the related payment would render GMX insolvent, reasoning that the prohibition on Distributions that would force GMX into insolvency is a “restraint…on GMX, not Leiber.”[17]

Second, for the same reasons, the Court dismissed GMX’s claim for breach of the governing agreement by virtue of Leiber’s attempt to exercise the Put Option.[18] 

Third, the Court dismissed GMX’s claim for an injunction to prevent Leiber from exercising the Put Option.  Although GMX contended that Leiber’s exercise of the Put Option would trigger certain remedies in the governing agreements that could allow Defendants to “effectively take control of GMX,” the Court held that GMX’s allegations were too speculative to support a claim for injunctive relief.[19] 

Fourth, Justice Masley also rejected GMX’s claim for tortious interference with a business opportunity, which was premised on allegations that Defendants impermissibly disclosed GMX’s confidential business information in a meeting with a potential investor.  The Court held that GMX failed to allege facts showing that the alleged interference was “motivated solely by malice, as opposed to [Defendants’] normal economic interest.”[20]

Finally, Justice Masley dismissed GMX’s claim for promissory estoppel based on allegations that Defendants made false promises that they would invest in GMX or raise capital for it.  The Court found that a contract between the parties memorialized that Pegasus would use commercially reasonable efforts to raise capital for GMX, and a “claim for promissory estoppel cannot stand when there is an existing contract between the parties.”[21]

Conclusion

In sum, the Court declined to dismiss GMX’s claim for declaratory judgment seeking to bar Leiber from exercising the Put Option on the grounds that it would render GMX insolvent.  The decision highlights the Delaware LLC Act’s limitation on distributions and the circumstances under which an LLC member may be precluded from exercising contractual put rights.


[1] GMX Techs., LLC v. Pegasus Capital Advisors, L.P., No. 654056/2019, 2020 BL 310826 (N.Y. Sup. Ct. Aug. 10, 2020).

[2] Id. at *1.

[3] Id.

[4] Id.

[5] Id.

[6] Id.

[7] Id. at *1-2.

[8] Id. at *2.

[9] Id.

[10] Id. at *4.

[11] Id.

[12] Id.

[13] Id. at *4-5.

[14] Id. at *5.

[15] Id.

[16] Id. at *5-7.

[17] Id. at *6.

[18] Id. at *7.

[19] Id.

[20] Id. at *7-8.

[21] Id. at *8.