Finger Lakes Capital Partners, LLC v. Honeoye Lake Acquisition, LLC, 151 A.3d 450

Background

In 2003 Mehta and Shalov formed Finger Lakes Capital Partners (manager) and brought in Lyrical as the capital partner; parties signed a term sheet and later created separate LLCs for each portfolio company with individual operating agreements.
Over ~10 years most portfolio investments failed; one investment was sold profitably and the parties disputed how its proceeds should be distributed under the governing agreements (operating agreement, term sheet, clawback agreement).
The Court of Chancery held the distribution should follow the specific investment operating agreement first, then be reallocated under the overarching term sheet and clawback agreement — resulting largely in proceeds to Lyrical.
Lyrical counterclaimed to recover unpaid management fees, including amounts older than three years prior to the counterclaim (the “earlier amounts”); the Chancery Court allowed those earlier amounts to support recoupment and setoff defenses.
Finger Lakes appealed, arguing the operating agreement superseded the term sheet/clawback, the clawback was misapplied, Lyrical couldn’t recover time‑barred fees by setoff/recoupment, and indemnification should cover all litigation expenses.
The Delaware Supreme Court affirmed most holdings (operating agreement does not supersede overarching agreements; clawback application; indemnification limit) but reversed the allowance of setoff/recoupment for time‑barred management fees and remanded to amend judgment.

Issues

Issue	Plaintiff's Argument (Finger Lakes)	Defendant's Argument (Lyrical)	Held
Whether the specific portfolio company operating agreement supersedes the term sheet/clawback agreement	Operating agreement governs distributions and thus supersedes the term sheet/clawback	Term sheet and clawback govern the parties’ overall relationship and survive alongside operating agreements	Operating agreement does not supersede; operating agreement governs distribution from that entity but distributions remain subject to term sheet/clawback (affirmed)
Whether the Court of Chancery misapplied the clawback agreement	Clawback should not be applied as the court did	Clawback applies to reallocate distributions to protect Lyrical	Chancery’s application, though different than Lyrical’s trial position, was supported by the record (affirmed)
Whether Lyrical may recover time‑barred management fees by setoff or recoupment	Lyrical: earlier amounts can be used defensively via setoff or recoupment to reduce Finger Lakes’ claim	Finger Lakes: earlier amounts are time‑barred and cannot be raised defensively	Reversed as to this point: statutory law bars setoff for time‑barred debts; recoupment not available because the earlier fees are not from the same transaction as the sale/distribution dispute (reversed)
Scope of Finger Lakes’ contractual indemnification for litigation expenses	Finger Lakes: indemnification should cover all expenses related to the proceedings	Lyrical: indemnification limited to expenses arising from merits of membership dispute and up to the partial judgment on pleadings	Chancery correctly limited indemnification to expenses incurred until Finger Lakes obtained a partial judgment on the pleadings; subsequent proceedings were not indemnifiable (affirmed)

Key Cases Cited

TIFD III–X LLC v. Fruehauf Prod. Co., L.L.C., 883 A.2d 854 (Del. Ch. 2004) (recoupment requires a tight transactional nexus; stale claims may not be used to reduce unrelated timely claims)
SV Inv. Partners, LLC v. ThoughtWorks, Inc., 37 A.3d 205 (Del. 2011) (standard of review for legal conclusions; cited for de novo review)
Delaware Chems., Inc. v. Reichhold Chems., Inc., 121 A.2d 913 (Del. Ch. 1956) (discussed in context of setoff/recoupment distinctions and when defensive pleading may amount to recoupment)
Edgemoor Iron Co. v. Brown Hoisting Mach. Co., 62 A. 1054 (Del. 1906) (recoupment doctrine permits asserting matters arising from the same transaction as a defense to avoid multiplicity of suits)