Court of Chancery Declares LLC Agreement Unenforceable, Rescinds Employment Agreement, and Issues Sanctions Due to Member’s Fraud
In Trascent Management Consulting, LLC v. George Bouri, C.A. No. 10915-VCMR (Del. Ch. Sept. 10, 2018), the Court of Chancery declared a limited liability company agreement unenforceable and rescinded a related employment agreement with the defendant, George Bouri, due to Bouri’s fraudulent and false statements that induced the plaintiff’s principal, Rakesh Kishan, to form Trascent Management Consulting, LLC (“Trascent”), and for Kishan and Trascent to enter into the LLC agreement and the employment agreement with Bouri. In addition, the Court awarded certain attorneys’ fees and costs to Trascent as sanctions for defendant’s continued fraudulent and false statements during the litigation proceedings.
As background, in 2011, Kishan began searching for an investor and partner for his real estate consulting business, UMS Advisory, Inc. (“UMS Advisory”), to assist in overseeing the company’s U.S. operations. Kishan had previously met Bouri, who was an executive at Time Warner, and Kishan eventually asked Bouri if he would be interested in joining UMS Advisory.
Around the time that Kishan and Bouri began discussions, Bouri was terminated without cause by Time Warner, with Time Warner citing performance issues and a “lack of confidence” in Bouri’s business judgment as the reasons for termination. The termination was also shortly after Time Warner had conducted an investigation relating to certain complaints about Bouri’s management and behavior (including sexual harassment allegations). In connection with the termination, Bouri was asked to execute a written resignation relating to his officer position with Time Warner; however, such resignation expressly indicated it did not alter the fact that Bouri was being terminated without cause by Time Warner.
Bouri failed to disclose (and misrepresented) the facts surrounding his termination by Time Warner to Kishan during their negotiations and Bouri instead indicated that he resigned from Time Warner because he was being “micromanaged” by his superiors. In addition, in his discussions with Kishan, Bouri grossly inflated the salary he received at Time Warner and provided a copy of an altered (and false) employment agreement that supported such inflated numbers. Bouri also repeatedly asserted to defendant that he was a “man of substantial means” when, in fact, he was struggling financially, had significant tax liens on his home, sold one his homes in a short sale, and had been forced to sell much of his stock holdings.
During negotiations, Bouri insisted that he would only join UWS Advisory if Kishan instead formed a new entity and Bouri was made an equity partner of such entity. Kishan formed Trascent in 2014 and Bouri insisted on making his capital contribution in the form of a promissory note instead of cash. Kishan indicated he agreed to such contribution in the form of a note because Bouri was a “wealthy man” who “had the means” to fulfill the obligations under the note. Shortly thereafter, Trascent then assumed all of UMW Advisory’s consulting projects and hired all of UMW Advisory’s employees. UMS Advisory retained its existing assets and liabilities.
For the first several months of 2014, Trascent appeared to be operating successfully under Bouri’s leadership. However, despite such appearance, Bouri was actively disrupting the business and engaging in fraudulent activity, including taking cash advances on his paycheck several times, fabricating invoices and letters for reimbursement requests, and encouraging employees to file complaints about Kishan to Trascent’s outside human resources company (which in turn resulted in a human resources investigation into Kishan).
The Court of Chancery held that the elements of fraudulent inducement were satisfied in that Bouri made false representations regarding his termination of employment at Time Warner and his personal wealth, with knowledge and intent that such misrepresentations would induce Kishan to form Trascent and Kishan and Trascent to enter into the employment and LLC agreements, and that Kishan and Trascent justifiably relied on such misrepresentations and were damaged as a result. Specifically, the Court explained that if Bouri had been truthful about his departure from Time Warner and his personal wealth, it was “inconceivable” that Kishan would have hired Bouri as the head of human resources, finance, or the U.S. consulting business of Trascent without any oversight whatsoever, nor would he have made Bouri a member of Trascent.
Bouri claimed that Trascent could not maintain an action for fraudulent inducement relating to statements made prior to the entity’s formation. However, pursuant to Nye Odorless Investor Corp. v Felton, 162 A. 504 (Del. Super. 1931), the Court found that Trascent could maintain the claim for fraudulent inducement relating to misrepresentations made before it was formed because the statements were made to induce the creation of Trascent and to have Trascent take certain actions, namely making Bouri an employee, member, and manager of Trascent.
Bouri additionally claimed that his statement relating to his resignation was facially true in that he did resign as an officer of Time Warner. However, the Court, citing precedent, indicated that “although a statement may be facially true, it may constitute an actionable misrepresentation if it causes a false impression as to the true state of affairs, and the actor fails to provide qualifying information to cure the mistaken belief.” In this case, the Court found that Bouri made statements that gave a “false impression of the true state of affairs” with respect to his termination and financial status and Bouri failed to correct such mistaken impression with Kishan or Trascent.
As the elements of a fraudulent inducement claim were found satisfied, the Court declared the LLC agreement unenforceable by Bouri and granted the rescission of the employment agreement. In addition, the Court held that Bouri’s fraudulent statements during the litigation proceedings amounted to sanctionable conduct and awarded attorneys’ fees and costs relating to Trascent’s Motion for Sanctions and two-fifths of Trascent’s reasonable attorneys’ fees and costs incurred in the litigation proceedings (such award being calculated based on the fact that the fraudulent statements during the proceedings went “to the heart of” two of the five counts brought by Trascent).