You know you’re in big trouble if the post-trial decision in a lawsuit you filed begins like this:
“The court finds the plaintiff, Rowen Seibel, not credible. This is primarily because it appears he fabricated evidence and then compounded that fabrication by using the same evidence to lie to this court.”
That was the inauspicious start for Seibel to a Decision After Trial issued two weeks ago by Manhattan Commercial Division Justice Melissa A. Crane in a litigation between celebrity chef Gordan Ramsay and Ramsay’s former business partner.
Ramsay and Seibel were 50% / 50% owners of a California limited liability company, The Fat Cow, LLC, formed the same day as a Delaware limited partnership, FCLA, LP (an acronym for “Fat Cow Los Angeles”), of which Ramsay and Seibel were 49% / 49% limited partners and The Fat Cow the 2% general partner, to develop, own, and operate a restaurant of the same name in Los Angeles, California. The entities had written operating and limited partnership agreements, the former governed by California law, the latter by Delaware law.
The two-week bench trial preceding Justice Crane’s interesting post-trial decision was of two lawsuits consolidated for trial.
The Derivative Action
The first lawsuit Seibel commenced against Ramsay alleged a mix of direct and derivative claims on behalf of The Fat Cow and FCLA. In an earlier decision, retired Manhattan Commercial Division Justice Marcy S. Friedman dismissed most of Seibel’s complaint, allowing to continue only the derivative first cause of action for breach of fiduciary duty and the combined direct and derivative fourth cause of action for breach of The Fat Cow’s operating agreement.
The factual basis of Seibel’s surviving claims was that Ramsay was allegedly responsible for obtaining approval from the US Patent & Trademark Office for the name “The Fat Cow,” failed to obtain approval because there was a conflicting mark owned by another restaurant “Las Vacas Gordas,” still opened the restaurant under the name “The Fat Cow,” breached a provision in the operating agreement requiring “unanimous consent” by unilaterally shutting down the restaurant when “Las Vacas Gordas” objected to the name misappropriation, and finally, allegedly misappropriated the assets from the shut-down restaurant for a new Ramsay restaurant venture in the same space. Seibel alleged that Ramsay was responsible for the loss of his entire capital investment as well as anticipated lost future profits on the venture.
Ramsay counterclaimed against Seibel for breach of fiduciary duty, breach of contract, and indemnification alleging that Seibel badly mismanaged the restaurant, violated California employment wage and hour laws resulting in an administrative fine and a separate class action lawsuit against the business by its employees, used the restaurant to pay personal and undocumented expenses, and refused to contribute additional capital when needed to pay mounting debts, causing the business’s ultimate demise.
The Dissolution Action
The second lawsuit Ramsay commenced against Seibel for judicial dissolution of The Fat Cow and FCLA under California law and Delaware law respectively.
Why did Ramsay sue in New York for dissolution of out-of-state businesses? As Peter Mahler has written several times, a line of Appellate Division – Second and Third Department cases has long held that courts lack subject matter jurisdiction to dissolve foreign entities (see e.g. Rimawi v Atkins, 42 AD3d 799 [3d Dept 2007] [“plaintiffs’ claim for dissolution” of a Delaware LLC “is one over which the New York courts lack subject matter jurisdiction”]; Matter of MHS Venture Mgt. Corp. v Utilisave, LLC, 63 AD3d 840 [2d Dept 2009] [“A claim for dissolution of a foreign limited liability company is one over which the New York courts lack subject matter jurisdiction”]). In apparent reference to this line of cases, Seibel asserted in his answer an affirmative defense that the Court “lacks jurisdiction over the claims asserted in the Complaint.”
Notably, though, the appeals court for the jurisdiction in which Ramsay filed his dissolution complaint – the Appellate Division, First Department – did not align itself with the Second and Third Departments, overruling its own prior decision permitting dissolution of foreign entities, until two years after Ramsay’s complaint, in Raharney Capital, LLC v Capital Stack LLC (138 AD3d 83 [1st Dept 2016] [“courts in New York do not have subject matter jurisdiction to dissolve an out-of-state foreign entity”]).
And it was not until late last year that Manhattan Commercial Division Justice Jennifer G. Schechter ruled that a contractual forum selection clause mandating New York courts resolve disputes among the parties cannot cure a court’s lack of jurisdiction to dissolve foreign entities. Given the lack of clear authority on the subject until just last year, presumably Ramsay relied on the choice-of-forum provision in section 17 of FCLA’s limited partnership agreement providing that “any action, suit or proceeding arising out of or relating to this Agreement shall be brought in the State Supreme Court located in New York County, New York.”
In any event, Seibel withdrew his jurisdictional defense to dissolution. Point VIII of Seibel’s post-trial brief, entitled “Seibel Does Not Contest the Dissolution,” stated in full: “Based upon the evidence submitted at trial, upon the distribution of the derivative damages sought by Plaintiff and established herein, Plaintiff is no longer contesting dissolution of the Entities.”
Ramsay’s post-trial brief addressed the subject of dissolution in Point IV.A, briefing the standards under both California and Delaware law, both of which adopt a “not reasonably practicable” test echoing New York’s LLC dissolution standard in Section 702 of the Limited Liability Company Law.
The Credibility Determinations
The Court kicked off its post-trial decision with the punishing credibility determination against Seibel from the start of this article. The Court ruled that Seibel falsified a check he claimed to have tendered to a restaurant worker to make it appear as if he was responsibly handling employee payroll, when in fact, he was not, Seibel’s mismanagement resulting in the California Department of Labor issuing a wage and hour award against The Fat Cow. It’s rare to see a court throw the book at someone as hard as this:
[T]he court finds that the check was fabricated as an after-the-fact excuse to try to escape criticism from his partner, Ramsay, for allowing the [unpaid employee] to go all the way to a hearing resulting in excess liability and penalties. Then, brazenly, Seibel . . . tried to proffer this clearly backdated check as evidence in court. If a witness will lie to the court, it is possible he would lie about everything. Therefore, under the doctrine in falsus uno, in falsus omnibus, the court disregards all of Seibel’s testimony.
The Court also found Ramsay’s testimony “somewhat lacking in credibility too, however, not as badly as Seibel,” particularly finding a “moving target of excuses” for acting “unilaterally in closing the restaurant.” Discrediting Ramsay’s explanation that inability to use the name “The Fat Cow” was his impetus for closing, the Court ultimately found that Ramsay simply “did not want to be in business with Seibel any longer, most importantly because Seibel unilaterally took money out of the capital account.”
The In Pari Delicto Holding
Turning to Seibel’s claims alleging breach of fiduciary duty and breach of the operating agreement for Ramsay’s unilateral closing of the restaurant, the Court wrote, “The problem for Seibel is he is an active wrongdoer for the harm upon which he seeks to collect and therefore cannot recover derivatively.” Relying upon the doctrine of in pari delicto, which “bars a party that has been injured as a result of its own intentional wrongdoing from recovering for those injuries from another party whose equal or lesser fault contributed to the loss” (Rosenbach v Diversified Group, Inc., 85 AD3d 569 [1st Dept 2011]), Justice Crane ruled:
Here, the evidence at trial demonstrated extensive wrongdoing on the part of Seibel. In particular, he siphoned money from the business at a time when it was cash poor. He refused to pay contractors, ultimately costing the business more money in the long run and alienating the landlord. His conduct and cover up with respect to [the unpaid employee and falsified, backdated check] was nothing short of bizarre. Under his watch, the restaurant suffered extreme negative publicity. And, he was engaged in efforts to parley to his own advantage his partner’s business. This misconduct adds up and the law imputes Seibel’s conduct to the entity. Therefore, he cannot recover derivatively.
The Lost Future Profits Holding
In the alternative, the Court ruled that, even assuming Seibel has viable claims, “there is nothing to recover.” Relying on New York’s law of lost future profits requiring a heightened standard of proof for speculative future business endeavors without a demonstrated track record of past profitability (Justice Crane noted that the “law is the same in Delaware and California”), the Court held:
In actuality, the restaurant was not a going concern. As the historical data shows, the restaurant never made a profit, was unable to meet its debts, had lost $2 million, and faced insolvency due to a looming class action. It only survived as long as it did because Mr. Ramsay, through his other companies, infused cash. In fact, by closing the restaurant, Ramsay likely mitigated damages for The Fat Cow. Accordingly, there are no damages for Seibel to recover.
The Indemnification Holding
Ramsay fared far better on his counterclaims. In a written indemnification agreement, Seibel agreed to indemnify Ramsay up to 50% of all “loss, damage, charge, claims, suit, action and liability, including counsel fees” resulting from the lease for The Fat Cow’s space in LA. The Court ruled that Ramsay incurred $1,554,699 in losses resulting from the lease and in defense and settlement of various litigations. The Court ruled, “Accordingly, Seibel, owes Ramsay 1/2” of this amount, “which equals $777,349.54.”
Finally, the Court held that Ramsay was “entitled to recover derivatively for the authorized withdrawals Seibel took” from The Fat Cow’s operating account, finding the award “fundamentally fair” because “Seibel essentially siphoned Ramsay’s money as Ramsay was the only one infusing cash into the restaurant. These withdrawals amount to $80,000.”
The Attorneys’ Fees Holding
The kicker? Pursuant to a fee-shifting agreement in section 24 of FCLA’s partnership agreement, the Court ruled that Ramsay was the “prevailing party” entitled to recover his attorneys’ fees, with an additional submission as to amount of fees due June 30, 2022. Since the lawsuits lasted eight years and concluded with a two-week trial, Ramsay is guaranteed to request millions of dollars of fees from Seibel.
The moral of the story? At trial, your credibility is by far your most important asset. Lose your credibility chances are pretty good you’re going to lose on the merits (unless of course, your opponent turns out to be an even bigger liar!).