Liquor Co. Execs Sue Rival For Fees Amid Bootlegging Claims
Source: Law360
By Jeff Montgomery
November 18, 2016
Two wholesale liquor company executives asked Delaware’s Chancery Court on Friday to quickly award them legal fees from a company they once helped lead, in order to pay their defense against the same company’s claim that they helped competitors brew up a tax-dodging bootlegging scheme.
Charles Merinoff and Gregory L. Baird asked the Delaware court to expedite its review of the fee advancement motion, arguing Empire Merchants LLC had wrongly refused to provide legal funds despite service by both men on Empire’s board of managers during some of the years in question, and despite company charter provisions for indemnifying directors.
Delaware-chartered Empire sued both, and dozens of other businesses and individuals, on Sept. 20, accusing all of working together to smuggle liquor brands licensed exclusively to Empire into New York by way of rural Maryland retail liquor stores. Maryland charges a $1.50 per gallon liquor excise tax, compared with about $7.44 in New York.
Federal officials in Maryland lodged criminal charges against others accused of the same broad scheme on May 24. Empire’s private, civil action in the U.S. District Court for the Eastern District of New York cited civil Racketeer Influenced and Corrupt Organizations Act violations as well as fraud and other counts, with Merinoff and Baird singled out for fiduciary duty breaches and other allegations.
“Empire is obligated to indemnify plaintiffs and promptly advance to them their legal expenses, including attorneys’ fees,” the Chancery Court action said, noting that both are being sued “based on allegations arising out of their responsibilities as members of Empire’s board of managers.”
Merinoff served on Empire’s board from 2006 to 2015. Baird was an Empire board member from 2012 to 2015, and from 1999 to the present has worked for Reliable Churchill LLLP – one of two companies Empire accused of leading the bootlegging operation – and was a top executive with regional wholesaler Sunbelt Holding Inc. and its successor.
Both men now are officers of an Empire competitor, Breakthru Beverage Group LLC, formed through consolidations of Reliable, Sunbelt and related companies.
Attorneys for the men said attorneys for Empire “asserted disingenuously that the complaint’s allegations do not relate to plaintiffs’ positions at Empire, and that, to the extent they did, claims based on a breach of fiduciary duty are not covered by the LLC agreement” regarding indemnification.
The complaint in the Eastern District of New York cited at length the Empire positions both men held, and asserted that Baird “must have known that orders from [retailers in Cecil County Maryland] were being shipped out of state because tiny Cecil County, Maryland, cannot support excessive orders of voluminous quantities of alcohol.”
In a motion to expedite Chancery Court review of the legal fee request, attorneys for Merinhoff and Baird said they sought $300,000 each to cover initial retainers and a ruling within 45 days of Friday’s request.
The expedition motion said that court precedents have acknowledged awards need to be made promptly “because the failure to advance fees affects the counsel the director may choose and litigation strategy that the executive or director will be able to afford.”
The 108-page Empire complaint accused both men of breaching their fiduciary duties to Empire, and cited Merinoff for aiding and abetting those breaches, common law fraud and negligent misrepresentation for allegedly passing millions of dollars in Sunbelt stock appreciation rights to former Empire CEO E. Lloyd Sobel.
Sobel, also named in the complaint, has since taken an executive leadership position at Breakthru with Merinhoff and Baird.
Empire’s lawsuit claimed that Cecil County, Maryland, on the northern Delaware border, had 78,000 residents in 2015, but a relatively few retail liquor stores handled volumes sufficient for millions of people. Cecil County retailers, the suit noted, “purchased from Reliable Churchill the highest quantity of Johnnie Walker Black of any county in the entire United States.”
Empire’s suit asserts nine claims ranging from the accusations against Merinhoff and Baird to unjust enrichment and unfair trade practice allegations against all defendants, including Cecil County, Maryland, retailers. The suit also alleges RICO violations and conspiracies, as well as contract interference.
Charles Merinoff and Gregory L. Baird are represented by Patricia L. Enerio and Aaron M. Nelson of Proctor Heyman Enerio LLP and Harlan A. Levy of Boies Schiller & Flexner LLP.
Empire Merchants LLC is represented by Avi Weitzman, Brian Robert Morgenstern, Joel M. Cohen, Michael S. Marron and Randy M. Mastro of Gibson Dunn & Crutcher LLC.
The cases are Charles Merinoff and Gregory L. Baird v. Empire Merchants LLC, case number 12920, in the Court of Chancery of the State of Delaware; and Empire Merchants LLC v. Reliable Churchill LLLP, case number 1:16-cv-05226, in the U.S. District Court for the Eastern District of New York.