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In Carlos Eduardo Lorefice Lynch, et al. v. R Angel Gonzalez Gonzalez, et al., C.A. No. 2019-0356-MTZ (Del. Ch. July 31, 2020), the Delaware Court of Chancery (the “Court”) examined an extensive paper trail purportedly documenting the transfer of majority beneficial ownership in an Argentinian company from a media mogul to his attorney, before holding that the media mogul should nevertheless be deemed the owner of the interest in question, because the documents (i) did not constitute a binding contract for the purported transfer to the attorney, (ii) were fraudulently induced by the attorney, and (iii) were the product of unclean hands such that it would be unjust to grant ownership to the attorney.
R. Angel Gonzalez Gonzalez (“Gonzalez”) beneficially owned a media empire across Latin America and determined in the late 2000s to acquire an Argentinian media conglomerate (“IMC”). Gonzalez acquired IMC through Grupo Belleville Holdings, LLC (“GBH”), a Delaware LLC, which was in turn owned 5% by Gonzalez and 95% by Televideo Services, Inc., another Gonzalez entity (“Televideo”, and collectively with Gonzalez, the “Televideo Defendants”). Carlos Eduardo Lorefice Lynch (“Lynch”) was an attorney with the Argentinian firm that aided in the acquisition, and over time gained the complete trust of Gonzalez and stepped into a more personal advisory role.
As Lynch covertly schemed to take majority control of GBH, the Argentinian government serendipitously passed regulations limiting foreign ownership of Argentinian media companies to 30%. Sensing an opportunity, Lynch advised Gonzalez to execute a series of documents to fool the Argentinian authorities (the “Sham Documents”), purportedly evidencing that 65% of Televideo’s interest in GBH (the “Majority Interest”) was in fact owned by Lynch. Meanwhile, Lynch and Gonzalez agreed to execute a separate, secret document (the “Counterdocument”), common in in Latin American countries, evidencing the true ownership. The Counterdocument, it was agreed, would dictate that Lynch in fact held the Majority Interest in name only and that Televideo could reclaim it upon request. Because the Sham Documents were papered to deceive the Argentinian authorities, they were silent as to the existence of the Counterdocument and reflected Lynch’s ownership of the Majority Interest. In the following years, Gonzalez periodically executed additional documents to further the deception, including certain required filings and tax documents, adding to the paper trail supporting Lynch’s ownership.
Over time, the Counterdocument executed by Gonzalez was conveniently misplaced, and Lynch contended he had never executed or agreed to execute the document. Confident his scheme to seize control had succeeded, Lynch held the Majority Interest for ransom in 2018, demanding Gonzalez provide, among other things (i) a $12 million golden parachute payment; (ii) $20 million severance payment; and (iii) additional funds in excess of $25 million to cover liabilities. Gonzalez refused and a series of dueling filings ensued, culminating in the present dispute before the Court concerning ownership of the Majority Interest and management of GBH.
By a preponderance of the evidence, driven largely by witness testimony, the Court concluded the parties had agreed to have Lynch hold the Majority Interest in name only, for the benefit of Televideo. The Sham Documents, by design, reflected that Lynch owned the Majority Interest. The key question was whether therefore whether the Sham Documents represented a bargained-for, binding contract, supported by consideration and the parties’ mutual assent. As viewed objectively from the standpoint of a reasonable negotiator, Lynch and Gonzalez manifested assent to an arrangement under which Lynch would (i) hold the Majority Interest in name only and return it on Gonzalez’s request, (ii) memorialize Televideo’s beneficial ownership in the Counterdocument, and (iii) execute the Sham Documents to satisfy regulators. There was never mutual assent to the substantive terms of the documents purporting to transfer the Majority Interest to Lynch. Accordingly, neither Gonzalez nor Televideo were bound by any document naming Lynch as GBH’s 65% member.
The Court also concluded that Gonzalez and Juan Pablo Alviz (“Alviz”), not Lynch, were the managers of GBH. The Court concluded that Alviz was a manager, by virtue of his designation as such in a 2019 filing with the Delaware Secretary of State that superseded an earlier filing naming Lynch as a manager. The Court further concluded that Gonzalez, by virtue of his extensive involvement in management of GBH, was also a manager. Lynch, for his part, failed to address in post-trial briefing the contention that he was the sole manager of GBH, and therefore waived any such argument. As a result of his vast scheme of misrepresentation, the Court concluded any documents purporting to name Lynch as a Manager of GBH were invalid. Furthermore, the Court noted that in cases regarding disputed management, action of a manager will be deemed invalid if obtained through trickery, as was the case here for actions purportedly taken by Lynch as manager.
For good measure, the Court next addressed the Televideo Defendants’ affirmative defenses of fraudulent inducement and promissory estoppel, finding that even if the Sham Documents were otherwise binding with respect to the Majority Interest, these defenses would prohibit a judgment in Lynch’s favor. To demonstrate fraudulent inducement, a party must prove (i) reasonable reliance on a false misrepresentation; (ii) knowledge or belief by the inducing party that the representation was false, or reckless disregard for the truth; (iii) intent to induce action or inaction; and (iv) action or inaction taken in justifiable reliance. For promissory estoppel, a party must demonstrate by clear and convincing evidence (1) a promise was made; (2) it was the reasonable expectation of the promisor to induce action or inaction; (3) promisee reasonably relied on the promise and took acted to his detriment; and (4) injustice can be avoided only by enforcement of the promise. The Court found the Televideo Defendants had established each affirmative defense. Lynch knew Gonzalez trusted him and would follow Lynch’s proposed means of executing business objectives. Lynch disguised a self-serving course of action as a seemingly legitimate one, and Gonzalez executed the relevant documents accordingly. In short, Lynch intended his false promises and misrepresentations to induce Gonzalez to sign the documents Lynch could use to seize control of GBH, and that is exactly what happened.
Next, the Court found tort claims by the Televideo Defendants for fraud, fraudulent misrepresentation, and conversion, and by Lynch, for conversion, all failed. The Televideo Defendants’ failed to put forth testimony quantifying the harm incurred as a result of the alleged fraud, or the value of the Majority Interest allegedly converted. Lynch, for his part, never rightfully held the Majority Interest for himself, so he could not establish a property interest in or a right to possess the Majority Interest, as required for conversion.
The Court next considered the parties’ dueling assertions of unclean hands, finding the doctrine did not bar recovery by Gonzalez but would bar recovery by Lynch if he was otherwise entitled to any. The Court focused on two considerations: (i) whether the offending party would otherwise receive an undeserved windfall; and (ii) whether public policy favored application of the doctrine. Regarding the Televideo Defendants, because the Court had determined Televideo was the rightful owner of the Majority Interest, there was no undeserved windfall. Furthermore, application of unclean hands would award the Majority Interest to Lynch and reward his scheme, an outcome contrary to public policy. The Court noted Lynch failed to raise unclean hands his initial post-trial brief, and thereby waived it. Nevertheless, the Court stated unclean hands would bar any recovery by Lynch, noting a desire to avoid a windfall for Lynch and an unacceptable policy outcome.
Finally, the Court determined the Televideo Defendants were entitled to costs and fees. To merit such an award, the Court noted, a party must show by clear evidence that the party from whom fees are sought acted in subjective bad faith. The Televideo Defendants were able to make this threshold showing. Lynch schemed for more than a decade to gain control, fraudulently induced multiple sham documents to do so, held the company for ransom, and then used litigation to consolidate the fraudulently-obtained interest. This pervasive bad-faith by Lynch was sufficient to justify an award of costs and fees to Gonzalez and his co-defendants.
