Metro Storage International LLC v. Harron ( 2019 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
METRO STORAGE INTERNATIONAL LLC, )
a Delaware limited liability company, METRO )
STORAGE LATAM LLC, a Delaware limited )
liability company, MSI MANAGER LLC, a )
Delaware limited liability company, LATAM )
MANAGER LLC, a Delaware limited liability )
company, MATTHEW M. NAGEL, AS )
TRUSTEE OF THE MATTHEW M. NAGEL )
REVOCABLE TRUST DATED JULY 27, )
2001, AS AMENDED, and K. BLAIR )
NAGEL, AS TRUSTEE OF THE K. BLAIR )
NAGEL REVOCABLE TRUST DATED )
JULY 30, 2003, AS AMENDED, )
)
Plaintiffs, )
)
v. ) C.A. No. 2018-0937-JTL
)
JAMES A. HARRON, )
)
Defendant. )
MEMORANDUM OPINION
Date Submitted: May 7, 2019
Date Decided: July 19, 2019
David C. McBride, Emily V. Burton, Lauren Dunkle Fortunato, YOUNG CONAWAY
STARGATT & TAYLOR, LLP., Wilmington, Delaware; Harold C. Hirschman, Leah R.
Bruno, Jacqueline A. Giannini, DENTONS US, LLP, Chicago, Illinois; Counsel for
Plaintiffs.
E. Chaney Hall, Kasey H. DeSantis, FOX ROTHSCHILD LLP, Wilmington, Delaware;
Jeffrey L. Widman, FOX ROTHSCHILD LLP, Chicago, Illinois; Counsel for Defendant.
LASTER, V.C.
Defendant James Harron served as president of plaintiffs Metro Storage
International LLC (“International”) and Metro Storage LATAM LLC (“LATAM”;
together, the “Companies”). After Harron resigned, his former employers discovered that
he had been pursuing personal business ventures on the side. The Companies filed suit,
joined by the other plaintiffs. They contend that Harron violated the Companies’ LLC
agreements, breached his fiduciary duties, and violated the Stored Communications Act.
They also seek declarations that Harron defaulted on loans he received.
Harron moved to dismiss the complaint for lack of personal jurisdiction. The
exercise of personal jurisdiction requires a valid means of serving process. The plaintiffs
argue that they properly served Harron under the implied consent provision in the Delaware
Limited Liability Company Act (the “LLC Act”), 6 Del. C. § 18-109(a), which establishes
a mechanism for serving process on a manager of an LLC.
For purposes of service, Section 18-109(a) defines the term “manager” as
encompassing two categories of persons: first, a person formally named as a manager
pursuant to the governing LLC agreement; and second, a person not formally named as a
manager pursuant to the governing LLC agreement but who nevertheless “participates
materially in the management of the limited liability company.” 6 Del. C. § 18-109(a). This
decision refers to the first category as a “formal manager” and the second category as an
“acting manager.”
The Companies were manager-managed LLCs, and their LLC agreements vested
authority over their business and affairs in formal managers. Harron was not a formal
manager, but he was an acting manager. The record supports a reasonable inference that
Harron participated materially in the Companies’ management. As president, he managed
their day-to-day operations. That conduct satisfies the plain language of the statute.
Harron argues that a greater showing is required. He asserts that to qualify as an
acting manager, the person must have occupied a “control or decision-making role.” He
argues that any time an LLC agreement vests authority in a formal manager, another person
cannot occupy a control or decision-making role, because the formal manager has that role.
He further argues that when a person participates in management as an agent for another,
the person’s actions as an agent cannot support acting-manager status.
Based on these theories, Harron argues that the plaintiffs cannot serve him under
Section 18-109(a). He contends that even though he served as president of the Companies
and, in that capacity, managed their day-to-day operations, he never held a control or
decision-making role because the LLC agreements designated formal managers, and he
was merely their agent.
This decision analyzes the precedent on which Harron relies and traces the lines of
reasoning to their origins. In each case, the archaeological effort uncovers a weak
foundation, which subsequent decisions have built upon without shoring up. In each case,
Harron’s theories conflict with the LLC Act or with jurisdictional doctrines. This decision
therefore rejects Harron’s arguments.
The exercise of personal jurisdiction also must comply with the Due Process Clause
of the Constitution of the United States. Harron has sufficient contacts with the State of
Delaware to render this court’s exercise of personal jurisdiction constitutionally
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permissible. Harron’s motion to dismiss for lack of personal jurisdiction is denied.
I. FACTUAL BACKGROUND
The facts are drawn from the plaintiffs’ complaint and the documents it incorporates
by reference. Citations to exhibits (“Ex. —”) refer to documents attached to the complaint.
When considering a Rule 12(b)(2) motion, a court may consider affidavits relating to the
jurisdictional issues, and this decision takes into account the affidavits that the parties
submitted. At this stage of the proceedings, the complaint’s allegations are assumed to be
true, and the plaintiffs receive the benefit of all reasonable inferences.
A. Metro and Harron
Non-party Metro Storage LLC (“Metro”) is one of the largest privately owned
operators of self-storage facilities. Two brothers own Metro: plaintiff Matt Nagel, who
serves as its chairman, and plaintiff Blair Nagel, who serves as its chief executive officer.
The Nagel brothers are parties to this action solely as trustees of their respective trusts,
which own member interests in the Companies. For simplicity, this decision refers to the
Nagels using their first names.
In 2011, Harron approached Matt about developing self-storage facilities in Brazil.
Matt liked the idea, and Harron began working with Metro to develop it. Later, the concept
broadened to include pursuing opportunities throughout Latin America.
Harron took the lead in working with counsel and accountants to establish the
necessary entities. He formulated the business objectives and strategy, and he negotiated a
joint venture with a Brazilian company.
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B. International
Effective October 10, 2012, Harron, Matt, and Blair executed the LLC agreement
for International (the “International Agreement”). It established a manager-managed
governance structure for International and designated MSI Manager LLC as the formal
manger. Matt and Blair owned and controlled MSI Manager.
As the LLC Act requires when establishing a manager-managed governance
structure, the International Agreement contained a provision specifically empowering MSI
Manager to manage the entity. Section 10.1 of the International Agreement stated:
Except as hereinafter expressly provided the Manager shall have exclusive
authority to manage the operations and affairs of the Company and to make
all decisions regarding the business of the Company, and the Members (as
Members) shall have no right to vote upon or otherwise make any decisions
relating to the operation of the Company except as may be otherwise
expressly provided in this Agreement. The Manager shall have all the rights
and powers of Manager [sic] as provided in the Act and as otherwise
provided by law, subject to the express limits set forth herein. Any action
taken by the Manager shall constitute the act of and serve to bind the
Company; provided that the Manager agrees not to cause the Company to
take any Unanimous Approval Action other than requiring Capital
Contributions unless such Unanimous Approval Action shall have been
approved by the Principals and, during the first two years after the date
hereof, the Executive.
As is customary when establishing a manager-managed governance structure, the
International Agreement contained a reciprocal provision confirming that the members did
not have the ability to participate in management. Section 10.5 of the International
Agreement stated:
Except as may be otherwise expressly provided herein, the Members shall
not participate in the management or control of the Company’s business or
transact any business for the Company, nor shall they have the power to act
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for or bind the Company, all such powers being vested solely and exclusively
in the Manager.
Under this structure, MSI Manager had the exclusive authority to manage
International, and MSI Manager’s actions would constitute the acts of and bind
International, except that MSI Manager could not unilaterally take what Section 10.1
identified as “Unanimous Approval Actions.” Those actions required the prior approval of
“the Principals,” defined as Matt and Blair, and (for the first two years) the “Executive,”
defined as Harron. In Section 10.3, the International Agreement identified nineteen
“Unanimous Approval Actions.” They generally reflected major actions that International
might take, such as dissolving or merging, terminating or replacing the manager, admitting
a new member, or amending the agreement. But several of the Unanimous Approval
Actions involved decisions that could be expected to arise with some frequency for an
entity planning to develop self-storage facilities, such as
(iii) borrowing money or guaranteeing the debt of any other Person;
(iv) encumbering any of the Company’s assets; . . . [or]
(vi) directly or indirectly acquiring any real property or entering into any
binding agreement to directly or indirectly acquire any real property.
For the first two years of International’s existence, Harron had a veto over these and other
Unanimous Approval Actions.
The International Agreement authorized the Company to have officers. Section 10.7
stated:
The Company may have officers (each an “Officer”) to exercise such power
and perform such duties as shall be determined from time to time by the
Manager. The Officers may include a Chairman, a Chief Executive Officer,
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a President, a Chief Operating Officer, a Secretary a [sic] Treasurer and one
or more Vice Presidents, Executive Vice Presidents, Assistant Secretaries
and Assistant Treasurers. . . . The Officers, to the extent of their powers set
forth in this Agreement or otherwise vested in them by action of the Manager
not inconsistent with this Agreement, are agents of the Company for the
purpose of the Company’s business and the actions of the Officers taken in
accordance with such powers shall bind the Company. However, no Officer
shall execute any agreement by or on behalf of the Company, or any Metro
International Entity, relating to (i) the acquisition or disposition of real
property, (ii) the borrowing of money or any guarantees relating to the
borrowing of money, or (iii) any other matter pursuant to which the
Company, or any Metro International Entity would be expected to expend or
receive $25,000 or more unless in any such case the applicable action shall
have been approved in writing by the Manager.
The International Agreement designated Matt as Chairman, Blair as CEO, and Harron as
President.
Notably, Section 10.7 recognized that “the actions of the Officers taken in
accordance with [their] powers shall bind the Company.” But Section 10.7 contained three
exceptions when an officer could not act without the written approval of MSI Manager: (i)
acquiring real property, (ii) borrowing money or providing a guarantee, or (iii) any other
matter involving more than $25,000. The first two exceptions also qualify as Unanimous
Approval Actions that Harron could veto during the first two years of International’s
existence.
C. Harron Runs International.
As president, Harron ran International’s day-to-day operations. His responsibilities
included screening opportunities, negotiating joint venture agreements, coordinating
meetings with third parties, analyzing whether to make capital calls, overseeing joint
venture staff, interacting with joint venture partners, and monitoring the company’s
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performance. He was quite literally the face of the business, and International’s website
identified him as the point of contact for any potential investor or business partner.
Harron’s resume represents that he “led all elements of international investment.”
Although MSI Manager formally had authority to manage International, its
principals, Matt and Blair, were not directly involved in International’s day-to-day
operations. Harron only sought approval from Matt and Blair for major decisions, such as
borrowing money or entering into joint venture agreements. By seeking these approvals,
Harron complied with the last sentence of Section 10.7 of the International Agreement,
which limited his authority as president to acquire or dispose of real property, to borrow
money or provide guarantees, or to commit International or its affiliates to spend or receive
$25,000 or more.
D. LATAM
The International Agreement implied that International would be the vehicle
through which Metro’s principals would pursue all of their international operations. But in
2017, Matt, Blair, and Harron formed a separate entity—LATAM—to pursue opportunities
in Latin America outside of Brazil.
LATAM’s internal affairs are governed by a limited liability company agreement
dated March 28, 2017 (the “LATAM Agreement”). The terms of the LATAM Agreement
and the governance structure it created largely track the International Agreement.
Like the International Agreement, the LATAM Agreement established a manager-
managed governance structure, and it designated LATAM Manager LLC as the formal
manager. Like MSI Manager, LATAM Manager was owned and controlled by Matt and
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Blair. As in the International Agreement, the LATAM Agreement (i) empowered the
manager to manage LATAM, (ii) prohibited members from participating in management,
and (iii) identified a list of Unanimous Approval Actions that required unanimous approval
from Matt, Blair, and Harron. The LATAM Agreement also authorized LATAM Manager
to appoint officers and empower them to act on behalf of the Company, subject to the same
limitations found in the International Agreement. Like the International Agreement, the
LATAM Agreement designated Matt as Chairman, Blair as CEO, and Harron as President.
As with International, Harron ran LATAM’s day-to-day operations. Among other
things, he led the creation of a joint venture with Central America’s leading operator of
self-storage facilities.
E. Harron Resigns.
In 2018, Harron resigned from Metro and its affiliates. After Harron’s departure,
Matt and Blair uncovered evidence that Harron had been pursuing personal projects and
investments in the storage industry while working for Metro and its affiliates. In December
2018, the plaintiffs filed this lawsuit against Harron.
The complaint in this action contains seven counts:
 Counts I and II contend that Harron breached the International and LATAM
Agreements by misusing the Companies’ confidential information to conduct
business with third parties for his own personal benefit.
 Count III contends that Harron breached his fiduciary duties as an officer of the
Companies by pursuing business opportunities for his own personal benefit.
 Count IV asserts that Harron violated the Stored Communications Act by using
Metro’s email servers and computer systems for unauthorized purposes and by
attempting to delete emails and files from his Metro accounts before his departure.
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 Counts V and VI seek declaratory judgments that the Companies have the right to
repurchase Harron’s member interests at no cost because of Harron’s breaches of
the International and LATAM Agreements.
 Count VII seeks a declaration that Harron defaulted on loans he received from the
Companies to meet capital calls and that he must repay the amounts due after the
Companies repurchase his member interests.
II. LEGAL ANALYSIS
Harron moved to dismiss the complaint under Rule 12(b)(2) for lack of personal
jurisdiction. “When a defendant moves to dismiss a complaint pursuant to Court of
Chancery Rule 12(b)(2), the plaintiff bears the burden of showing a basis for the court’s
exercise of jurisdiction over the defendant.” Ryan v. Gifford, 935 A.2d 258, 265 (Del. Ch.
2007).
Under Delaware law, the exercise of personal jurisdiction has two requirements.
Matthew v. Fläkt Woods Gp. SA, 56 A.3d 1023, 1027 (Del. 2012). First, the plaintiff must
identify a method of serving process. Second, the defendant must have certain minimum
contacts with Delaware such that the exercise of personal jurisdiction “does not offend
traditional notions of fair play and substantial justice.” Id. (quoting Int’l Shoe Co. v.
Washington, 326 U.S. 310, 316 (1945)).
A. Service of Process
As their method of serving process, the plaintiffs rely on Section 18-109(a) of the
LLC Act. In relevant part, it states:
A manager . . . may be served with process in the manner prescribed in this
section in all civil actions or proceedings brought in the State of Delaware
involving or relating to the business of the limited liability company or a
violation by the manager . . . of a duty to the limited liability company or any
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member of the limited liability company, whether or not the manager . . . is
a manager . . . at the time suit is commenced.
A manager’s . . . serving as such constitutes such person’s consent to the
appointment of the registered agent of the limited liability company (or, if
there is none, the Secretary of State) as such person’s agent upon whom
service of process may be made as provided in this section.
6 Del. C. § 18-109(a) (formatting added).
Like other entity statutes that authorize service of process on members of the
governing body of an entity or its officers, Section 18-109(a) only provides a basis for
specific jurisdiction, not general jurisdiction. See Total Hldgs. USA, Inc. v. Curran
Composites, Inc., 999 A.2d 873, 885 n.39 (Del. Ch. 2009). The claim against the manager
must therefore “involv[e] or relat[e] to the business of the limited liability company or a
violation by the manager . . . of a duty to the limited liability company or any member of
the limited liability company.” 6 Del. C. § 18-109(a). Harron does not dispute that
dimension of the analysis.
Section 18-109(a) defines the term “manager” to encompass both formal managers
and acting managers. It states:
As used in this subsection (a) and in subsections (b), (c) and (d) of this
section, the term “manager” refers
(i) to a person who is a manager as defined in § 18-101(10) of this title and
(ii) to a person, whether or not a member of a limited liability company, who,
although not a manager as defined in § 18-101(10) of this title, participates
materially in the management of the limited liability company;
provided however, that the power to elect or otherwise select or to participate
in the election or selection of a person to be a manager as defined in § 18-
101(10) of this title shall not, by itself, constitute participation in the
management of the limited liability company.
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6 Del. C. § 18-109(a) (formatting added); accord id. § 18-110(c) (using same definition).
The two-part manager definition in Section 18-109(a) reference Section 18-101(10), which
defines a “manager” as “a person who is named as a manager of a limited liability company
in, or designated as a manager of a limited liability company pursuant to, a limited liability
company agreement or similar instrument under which the limited lability company is
formed.” Id. § 18-101(10).
The first category of persons identified in Section 18-109(a)—formal managers—
encompasses persons who have been officially named as managers in or designated
pursuant to the entity’s governing documents. The second category of persons—acting
managers—encompasses other persons, not formally named as managers, who
nevertheless “participate[] materially in the management of the limited liability company.”
Under Section 18-109(a)(ii), a person can be served as an acting manager “whether
or not a member of a limited liability company.” But for the purpose of determining
whether a person is an acting manager, “the power to elect or otherwise select or to
participate in the election or selection of a person to be a [formal manager] shall not, by
itself, constitute participation in the management of the limited liability company.” This
safe harbor confirms that a passive investor will not be treated as a manager simply because
the investor enjoys the right to participate in the election of managers, which is a right that
passive investors typically enjoy.
The plaintiffs contend that Harron was an acting manager under Section 18-
109(a)(ii). They do not claim that Harron was a formal manager under Section 18-109(a)(i).
They recognize that the International Agreement named MSI Manager as International’s
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formal manager and that the LATAM Agreement named LATAM Manager as LATAM’s
formal manager. To support their claim that Harron was an acting manager, they observe
that Harron served as president of both International and LATAM and was responsible for
managing their day-to-day operations. They arrive at the common-sense conclusion that
given these roles and activities, Harron “participate[d] materially in the management of”
International and LATAM.
In response, Harron argues that despite serving as president and managing the
Companies’ day-to-day operations, he did not “participate[] materially” in management.
To reach this counterintuitive conclusion, he makes three arguments. First, he cites three
decisions that have added a layer to the material-participation test by holding that persons
are not amenable to service as acting managers unless they occupy a “control or decision-
making role.”1 This decision describes this additional layer as the “control overlay.”
Second, Harron notes that the decisions applying the control overlay have placed
significant weight on the presence in the pertinent LLC agreement of a provision vesting a
formal manager with authority to manage the LLC.2 Each case reasoned that another person
could not have occupied a “control or decision-making role” because the provision
1
See Wakley Ltd. v. Ensotran, LLC, 2014 WL 1116968, at *5 (D. Del. Mar. 18,
2014); CelestialRX Invs., LLC v. Krivulka, 2019 WL 1396764, at *19 (Del. Ch. Mar. 27,
2019); In re Dissolution of Arctic Ease, LLC, 2016 WL 7174668, at *3 (Del. Ch. Dec. 9,
2016).
2
See Wakley, 2014 WL 1116968, at *6; CelestialRX, 2019 WL 1396764, at *19;
Arctic Ease, 2016 WL 7174668, at *5.
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assigned that role to the formal manager. Under this line of reasoning, the presence of a
formal manager forecloses acting-manager status, except possibly in a case where a person
usurps the formal manager’s role. This decision refers to this aspect of Harron’s argument
as the “formal manager designation.”
Third, Harron notes that one of the decisions applying the control overlay reasoned
that persons who participated in the management of an LLC while acting as agents for a
member could not be served because they acted as agents. See Wakley, 2014 WL 1116968,
at *6. Under this approach, the agency relationship shields the agent from Section 18-
109(a)(ii)’s reach, so this decision describes this aspect of Harron’s argument as the
“agency shield.”
Adding these arguments together, Harron concludes he could not have participated
materially in managing the Companies because that standard requires a “control or
decision-making role.” The complaint does not allege that Harron usurped the authority of
the Companies’ formal managers, so Harron views the formal manager designations as
dispositive. The International and LATAM Agreements further provided that as president,
Harron was subject to the authority of the Companies’ formal managers, making him their
agent and bringing the agency shield into play. Harron says he did not participate materially
in the management of the Companies under these lines of authority, regardless of whether
he actually managed the Companies.3
See Dkt. 10 at 10 (“Where the company’s operating agreement states that
3
management and control of the company is vested solely in the manager, members of the
13
To determine whether the plaintiffs could serve Harron under Section 18-109(a)(ii),
this decision first analyzes the plain language of the material-participation test. After
concluding that Harron is subject to service under a plain-language analysis, this decision
analyzes the control overlay, the implications of a formal manager designation, and the
agency shield. Each line of reasoning rests on a weak foundation and leads to problematic
results. Accordingly, this decision declines to follow those approaches.
1. Material Participation
Determining what is required to qualify as an acting manager under Section 18-
109(a)(ii) presents a question of statutory interpretation. When interpreting a statute, the
court’s task is to “ascertain and give effect to the intent of the legislature.” Coastal Barge
Corp. v. Coastal Zone Indus. Control Bd., 492 A.2d 1242, 1246 (Del. 1985). “Where the
statute is unambiguous,” the court “must adhere to the plain meaning of the statutory
language.” Hazout v. Tsang Mun Ting, 134 A.3d 274, 286 (Del. 2016). To do so, a court
company’s board of directors lack management control for jurisdictional purposes.”); id.
at 10–11 (“[I]ndividuals who are in charge of financial and commercial functions for a
limited liability company and who act subject to the board’s authority do not participate
materially in the management of the company absent a ‘control or decision-making role’
in the company.”); id. at 14 (“Although Harron had high-level duties with the companies,
like the defendants in Arctic Ease and Wakley, his authority was always subject to that of
the Manager of each company.”); id. at 15 (“Harron’s authority, however, was always
subject to the approval and oversight of the manager of each company, which was solely
owned by Matt and Blair.”); Dkt. 20 at 10 (“Where the operating agreement expressly
reserves control or decision-making authority for specifically identified individuals, such
as the named manager or a management committee, other executives do not participate
materially in management within the meaning of Section 109(a)(ii).”).
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starts with “the plain meaning of the words . . . .” Rubrick v. Sec. Instrument Corp., 766
A.2d 15, 18 (Del. 2000). A statute “must be read as a whole in a manner that will promote
its purposes.” Id.
Section 18-109(a)(ii) permits a plaintiff to serve process on a person who
“participates materially in the management of the limited liability company.” The plain
meaning of the word “participate” involves taking part in or playing a role in an activity or
event.4 When modifying the word “participate,” the word “materially” introduces a level
of significance. It requires meaningful participation, rather than minor participation.5
4
See, e.g., Participation, BLACK’S LAW DICTIONARY (11th ed. 2019) (“1. The act
of taking part in something, such as a partnership, a crime, or a trial. 2. The right of an
employee to receive part of a business’s profits; profit-sharing.”); Participate, BLACK’S
LAW DICTIONARY (5th ed. 1979) (“To receive or have a part or share of; to partake of;
experience in common with others; to have or enjoy a part or share in common with others.
To partake, as to ‘participate’ in a discussion, or in a pension or profit sharing plan. To take
equal shares and proportions; to share or divide, as to participate in an estate. To take as
tenants in common.”); Participate, Merriam-Webster, https://www.merriam-
webster.com/dictionary/participate (last visited July 10, 2019) (“[T]o take part” or “to have
a part or share in something.”); Participate, Am. Heritage Dictionary English Language,
https://ahdictionary.com/word/search.html?q=Participate (last visited July 10, 2019) (“To
be active or involved in something; take part.”).
5
See, e.g., Material, BLACK’S LAW DICTIONARY (11th ed. 2019) (“2. Having some
logical connection with the consequential facts . 3. Of such a nature
that knowledge of the item would affect a person’s decision-making; significant; essential
.”); Material, BLACK’S LAW DICTIONARY (5th ed.
1979) (“Important; more or less necessary; having influence or effect; going to the merits;
having to do with matter, as distinguished from form. Representation relating to matter
which is so substantial and important as to influence party to whom made is ‘material.’”);
Material, Merriam-Webster, https://www.merriam-webster.com/dictionary/material (last
visited July 10, 2019) (“[H]aving real importance or great consequences.”); Material, Am.
Heritage Dictionary English Language,
https://ahdictionary.com/word/search.html?q=Material (last visited July 10, 2019) (“Being
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Before the introduction of the control overlay in 2013, this court twice applied the
plain language of the material-participation test. In Phillips v. Hove, 2011 WL 4404034
(Del. Ch. Sept. 22, 2011), an LLC (“GnB”) lacked a formal LLC agreement, and its two
members failed to agree on anything other than the LLC Act’s default member-managed
governance structure. The two members implicitly consented to Hove, a third party, taking
over as the president of GnB. Hove began running GnB’s day-to-day operations and later
filed a bankruptcy petition for GnB. The decision held that through these actions, Hove
“participated materially in the management of GnB, thereby satisfying the requirements of
Section 18-109(a) and consenting to suit in Delaware for breaches of his duties to GnB.”
Id. at *22. The Phillips decision supports the exercise of jurisdiction over Harron, who
similarly acted as president of the Companies, ran their day-to-day operations, and took
binding action on their behalf.
both relevant and consequential; crucial.”); see also, e.g., TSC Indus., Inc. v. Northway,
Inc., 426 U.S. 438, 449 (1976) (“An omitted fact is material if there is a substantial
likelihood that a reasonable shareholder would consider it important in deciding how to
vote.”); Akorn, Inc. v. Fresenius Kabi AG, 2018 WL 4719347, at *85 (Del. Ch.) (explaining
how transactional drafters qualify covenant compliance with the phrase “in all material
respects” to prevent “small, de minimis, and nitpicky issues” from derailing a transaction),
aff’d on other grounds, 2018 WL 6427137 (Del. Dec. 7, 2018) (ORDER); id. at *86
(cautioning that party could materially breach contractual covenant even if breach would
not be severe enough to excuse performance under common-law principles governing
material breach of contract); cf. Williams Cos. v. Energy Transfer Equity, L.P., 159 A.3d
264, 273 (Del. 2017) (analyzing whether breach of covenant “materially contribute[d] to
the failure of [a] closing condition”); Medicalgorithmics S.A. v. AMI Monitoring, Inc., 2016
WL 4401038, at *24 (Del. Ch. Aug. 18, 2016) (describing factors for common-law analysis
of material breach of contract).
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In the PT China case, the defendant conceded that he was a manager of the LLCs in
question. PT China LLC v. PT Korea LLC, 2010 WL 761145, at *5 & n.25 (Del. Ch. Feb.
26, 2010). The court nevertheless remarked that the complaint’s allegations were sufficient
to establish that the defendant participated materially in the management of the LLCs
where he was responsible for developing investment opportunities, was named as a
principal of the business and a “key man” in a joint venture agreement that the LLCs had
entered, and where he would have led an investment program for the joint venture. See id.
at *5 n.25. The PT China decision likewise supports the exercise of jurisdiction over
Harron, who was responsible for developing all of the Companies’ investment
opportunities, was the key officer for both Companies, and oversaw their investment
programs. See also In re Mobilactive Media, LLC, 2013 WL 297950, at *2, *30 (Del. Ch.
Jan. 25, 2013) (exercising jurisdiction over entity that was acting manager of LLC where
entity’s subsidiary was 50% member of LLC, subsidiary lacked employees, and entity
caused subsidiary to file petition for LLC’s dissolution).
Moving beyond plain language, there is a paucity of authority addressing the
concept of material participation. Research has not revealed any legislative history that
might shed light on the phrase, and the principal Delaware treatise on the LLC Act
describes the holdings of various cases without providing independent guidance on how
the statute should operate. See Robert L. Symonds, Jr. & Matthew J. O’Toole, Symonds &
O’Toole on Delaware Limited Liability Companies § 9.13[A] (2d ed. & Supp. 2018).
In the broader legal literature, the concept of material participation appears to arise
most frequently under federal tax law, where the concept determines whether a taxpayer is
17
an active participant in a trade or business, as opposed to a passive investor, and hence the
extent to which the taxpayer can claim deductions for certain business losses.6 The concept
also plays a role in determining whether the interest that a taxpayer owns in an entity
taxable as a partnership either (i) has the characteristics of a general partner interest and
hence obligates the taxpayer to pay self-employment tax on the taxpayer’s share of business
income or (ii) has the characteristics of a limited partner interest and hence does not
obligate the taxpayer to pay self-employment tax.7
The LLC was originally invented through the combined efforts of sophisticated
corporate lawyers and savvy tax practitioners. Together, they convinced the State of
Wyoming to adopt the first LLC statute in 1977 with the goal of delivering a combination
of limited liability and partnership tax treatment. In 1988, the Internal Revenue Service
ruled that this previously obscure entity could indeed deliver both features. After the IRS
ruling and with the LLC gaining in popularity, a group of Delaware lawyers under the
auspices of the Council of the Corporation Law Section of the Delaware State Bar
6
See, e.g., 26 U.S.C. § 469; Mattie K. Carter Tr. v. United States, 256 F. Supp. 2d
536, 539–42 (N.D. Tex. 2003); In re Frank Aragona Tr., 142 TC No. 9 (2014).
7
See, e.g., 26 U.S.C. § 1402; Riether v. United States, 919 F. Supp. 2d 1140, 1158–
60 (D.N.M. 2012); Karen C. Burke, Exploiting the Medicare Tax Loophole, 21 Fla. Tax
Rev. 570, 590–606 (2018) (describing “functional approach” to determining whether
member in manager-managed LLC who is not designated as formal manager nevertheless
is sufficiently active participant in business to acquire attributes of general partner and be
subject to self-employment tax).
18
Association began drafting the LLC Act. In 1992, the LLC Act became law. 8 Given this
history, it is logical that the LLC Act would use tax-related concepts like “material
participation” consistently with the tax code, or at least would avoid using them
inconsistently with the tax code.9
The applicable tests under federal tax law examine the extent of the taxpayer’s
involvement in the LLC’s business based on a range of facts and circumstances. For
example, for purposes of claiming certain losses, a taxpayer participates materially in a
8
See Symonds & O’Toole, supra, § 1.01[A] & [B]; Susan Pace Hamill, The Story
of LLCs: Combining the Best Features of a Flawed Business Tax Structure, in Business
Tax Stories, 295 (Steven A. Bank & Kirk J. Stark eds., 2005). Ever since, tax planning has
been a major driver of governance decisions involving LLCs. See generally John M.
Cunningham & Vernon R. Proctor, Drafting Delaware Limited Liability Company
Agreements: Forms and Practice Manual § 1.03[B] (2011) (titling section: “The
Importance of Tax Knowledge in Handling Delaware LLC Formations”); id. § 15.02
(titling section: “The Importance of Tax Knowledge for Lawyers Engaged in LLC
Formation Practice”); id. chs. 15–22 (eight chapters addressing implications of federal and
state tax issues for LLC formation).
9
See Hazout, 134 A.3d at 290 & n.58 (collecting authorities demonstrating that
where legislature uses term with “well-settled legal meaning,” it uses it in its “legal
sense”); LeVan v. Indep. Mall, Inc., 940 A.2d 929, 933 (Del. 2007) (looking to “both legal
and non-legal definitions” of “to make” when interpreting statute of limitations); Penton
Bus. Media Hldgs., LLC v. Informa PLC, 2018 WL 3343495, at *12 (Del. Ch. July 9, 2018)
(“When established legal terminology is used in a legal instrument, a court will presume
that the parties intended to use the established legal meaning of the terms.”); Viking Pump,
Inc. v. Liberty Mut. Ins. Co., 2007 WL 1207107, at *13 (Del. Ch. Apr. 2, 2007) (“[W]here
a word has attained the status of a term of art and is used in a technical context, the technical
meaning is preferred over the common or ordinary meaning.”); cf. Am. Legacy Found. v.
Lorillard Tobacco Co., 2005 WL 5775806, at *11 (Del. Ch. Aug. 22, 2005) (presuming
use of words with “no accepted blackletter legal definition . . . was an implicit agreement
by the parties to avoid the use of legal terms of art”).
19
business if he or she works on a regular, continuous, and substantial basis in operations. 26
U.S.C. § 469(h)(1). Under regulations promulgated by the Internal Revenue Service, a
taxpayer satisfies the requirements for material participation if she meets any one of seven
tests, including (i) working more than 500 hours during a year in an activity, (ii) performing
substantially all the work for an activity, or (iii) working more than 100 hours during a year
in an activity where no one else works more than the taxpayer.10
By citing the tax code and its implementing regulations, this decision is not
suggesting that the material-participation test under Delaware law should track tests from
federal tax law. The more limited yet still pertinent observation is that the tax-oriented tests
align with a plain-language approach to material participation.
Under a plain-language interpretation of Section 18-109(a)(ii), the plaintiffs are
entitled to a pleading-stage inference that Harron participated materially in the
management of the Companies. He served as the president of each entity, managed its day-
to-day affairs, made decisions for the entity, and only sought approval from the officially
designated manager for major issues like financial commitments. Put simply, the complaint
pleads adequately that Harron served as the acting manager.
10
26 C.F.R. § 1.469-5t(a). Although the Internal Revenue Service has not
promulgated regulations governing when a non-managing member would be deemed to
have the attributes of a general partner for purposes of self-employment tax, the Service
has applied similar factors, including a test based on participating in an entity’s trade or
business for more than 500 hours per year. See Burke, supra, at 594; Cunningham &
Proctor, supra, § 18.03[D].
20
2. The Control Overlay
In his first major argument against service of process under Section 18-109(a)(ii),
Harron relies on the control overlay. Tracing the references to a “control or decision-
making role” leads to a decision in a books-and-records case called Florida R & D Fund
Investments, LLC v. Florida BOCA/Deerfield R & D Investments, LLC (Florida
Investments), 2013 WL 4734834 (Del. Ch. Aug. 30, 2013). That decision mentioned the
phrase “control or decision-making role” once, in passing, without citing authority to
support the formulation, and without providing any reason for departing from the statutory
material-participation test. Id. at *8. The case involved odd facts, and it dismissed a
complaint containing relatively sparse allegations.
Both legally and factually, Florida Investments provides an uncertain foundation
for the control overlay. Later decisions have followed its language without testing the
foundation’s footings. Regardless, the control overlay is suspect because it departs from
and constrains the statutory standard. The Delaware Supreme Court recently took a plain-
language approach to a comparable jurisdictional statute in the Hazout case. In light of
Hazout and the absence of any articulated justification for the control overlay, this decision
declines to apply it.
a. Florida Investments
In Florida Investments, this court granted a motion to dismiss a defendant from an
action seeking books and records. The decision concerned a special purpose vehicle (the
“SPV”) that had been formed to own, develop, and operate a real estate project in Florida.
The plaintiff (the “Investor”) held an 87% member interest in the SPV. The two minority
21
members were affiliates of the investment firm that sponsored the project. One minority
member (“Services”) served as the SPV’s asset manager pursuant to an asset management
agreement. Id. at *2.
After the Investor learned that Services had received an unauthorized payment from
the SPV, and after the other minority member failed to make a capital contribution, the
Investor demanded books and records to explore whether wrongdoing had occurred. The
SPV produced the books and records that it maintained itself, but two of the requested
categories were held by Services. The SPV declined to produce any books and records that
Services held. See id. at *3–4.
The Investor responded by filing a books-and-records action against the SPV and
Services. To establish jurisdiction over Services, the Investor relied on Section 18-
109(a)(ii). The Investor argued that Services was an acting manager because the asset
management agreement authorized Services to run the SPV’s day-to-day operations. Id. at
*8. Services moved to dismiss the complaint for lack of personal jurisdiction.
The Florida Investments court held that it lacked personal jurisdiction over Services.
The decision began by quoting at length from the asset management agreement, which
provided that Services was acting as an independent contractor and not as an agent of the
SPV. The court regarded this language as “detract[ing] from [Investor’s] contention that
[Services] had participated materially in the management of the [SPV].” Id. The decision
also noted that Services was “confined to acting ‘as the asset manager,’” remarking that
“management of the underlying assets of an LLC is analytically distinct from the
management of the LLC itself for purposes of Section 18-109(a)(ii).” Id. Running contrary
22
to this commentary, the decision described the asset management agreement as giving
Services “relatively broad authority to engage in most of the operation and supervision of
the [SPV].” Id.
The court next turned to the Investor’s complaint to assess whether the pled facts
supported jurisdiction. The decision criticized the complaint for not alleging that Services
“actually engaged in any of its contractually authorized conduct.” Id. The decision also
criticized the complaint for “offer[ing] very little, if anything, about [Services’s] actual role
in the operation of the [SPV].” Id. The opinion noted, “There is an allegation that [Services]
maintains the books and records, but that alone does not constitute material participation
in the management, especially in light of the designation of the board of directors as the
[SPV’s] manager.” Id.
The opinion then introduced the phrase that subsequently evolved into the control
overlay: “There are other incidental steps taken by [Services] that are alleged in the
Complaint, but those allegations do not demonstrate the control or decision-making role
necessary to satisfy the statutory standard for personal jurisdiction.” Id. The decision did
not cite any authority for this proposition. Instead, in a footnote, the opinion observed:
It seems unlikely that a party who is alleged to have acted solely as a rental
agent would be considered to be materially participating in management of
the limited liability company that owned the rental property. The Complaint
offers few allegations of fact as to what [Services] may have done for the
[SPV] that would allow the Court to distinguish [Services] from that of a
mere rental agent. Certainly the powers conferred by the Asset Management
Agreement, if those powers were in fact broadly and routinely carried out,
would create an interesting question of whether they constituted sufficient
participation to be viewed as “material participation.” Without those
additional allegations in the Complaint, however, this hypothetical is a
question which the Court need not, and should not, resolve.
23
Id. at *8 n.75.
It is difficult to draw strong conclusions from the abbreviated discussion in Florida
Investments. By statute, books-and-records cases receive summary treatment, and this
court strives to decide them quickly. A Monday-morning quarterback, here commenting
years after the fact, lacks a first-hand sense of the facts and circumstances that informed
the judicial judgment. But based solely on the language of the decision itself, an argument
can be made that the Investor had alleged enough to support jurisdiction for purposes of a
pleading-stage analysis in a books-and-records case. Section 18-109(a) supports the
exercise of specific jurisdiction, not general jurisdiction, and the Investor only sought
books and records. From this standpoint, the statutory standard of “participates materially
in the management of the limited liability company” would seem to invite considering
whether the complaint supported a reasonable inference that (i) the documents were
material to the management of the SPV and (ii) Services maintained the documents. If so,
then one could infer that Services was participating materially in the management of the
SPV by maintaining those documents. To the extent the analysis extended to Services’s
role more broadly, the Investor could have received a pleading-stage inference that
Services performed the functions it was entitled to perform under the asset management
agreement. The Florida Investments decision declined to draw this inference based on a
distinction between managing the entity and managing its assets, but for a single-purpose
entity with only one asset, it is not clear how much daylight there is between those concepts.
For present purposes, the problematic legacy of Florida Investments is the reference
to a “control or decision-making role.” Id. at *8. To reiterate, the opinion did not provide
24
any explanation for introducing this overlay, nor did it cite any authority supporting it.
When examining whether subsequent decisions should have embraced that language as the
governing test, it remains pertinent that the control overlay originated as a passing phrase.
b. Wakley
One year after Florida Investments, the United States District Court for the District
of Delaware applied the control overlay when determining whether a person had
participated materially in the management of an LLC under Section 18-109(a)(ii). In doing
so, the Wakley court made the control overlay more onerous by interpreting a “control or
decision-making role” as requiring that the person named as a defendant be “effectively
running [the entity’s] entire business.” Wakley, 2014 WL 1116968, at *5.
The Wakley litigation stemmed from the demise of Ensotran, LLC, whose founders
had invented a low-cost manufacturing process for producing wire-grid polarizers. The
promise of Ensotran’s intellectual property attracted the interest of Wakley Limited, an
investment fund, and Elmer Yuen, its principal.
After negotiating with Yuen, Ensotran’s founders sold a one-third member interest
to Wakley for $1,666,666.67. Id. at *2. As part of the deal, they agreed that Ensotran would
be a manager-managed entity with a three-member board of directors. The members of the
board would consist of Ensotran’s two principals and an individual appointed by Wakley.
They also agreed that Wakley could appoint a Vice President of Business Development
and a Financial Controller for Ensotran. Both would be paid by Wakley. The Vice President
of Business Development would have “sole responsibility to negotiate any sale, or
licensing of any of the assets of Ensotran LLC, or the sale of Ensotran LLC or its
25
involvement in any joint ventures, subject to the decisions and instructions of the board.”
Id. (emphasis omitted). The Financial Controller would have “complete oversight and
management of the finances of Ensotran LLC, subject to the decisions and instructions of
the board.” Id. (emphasis omitted).
Wakley appointed Yuen as its board representative, Roger Baar as the Vice
President of Business Development, and Donna Baar, Roger’s spouse, as the Financial
Controller. After the investment closed, Donna prepared financial statements documenting
the equity investment and showing Wakley owning a one-third member interest.
After assuming their positions, Yuen and Roger involved themselves in Ensotran’s
day-to-day operations. Yuen and Roger wanted Ensotran to pursue one process for
developing the wire-grid polarizer, while Ensotran’s founders wanted to pursue a different
process. Ensotran alleged that “Roger took control of Ensotran’s day-to-day operations and
the technology involved in developing a prototype wire-grid polarizer on April 18, 2012.”
Id. at *3. Ensotran alleged that “[o]ver the next month, Roger continued to control
Ensotran’s day-to-day operations, and obtained further technical information from [one of
Ensotran’s founders] to develop a wire-grid polarizer prototype.” Id.
Meanwhile, Donna transferred $989,914.53 from Ensotran to the Baars’ personal
entity. She then prepared new financial statements for Ensotran reflecting that Wakley had
loaned $722,070.97 to Ensotran and was owed that amount as a creditor. Wakley
subsequently declared the loan in default, and Roger demanded that Ensotran issue Wakley
a 55% member interest to satisfy the loan. Ensotran became insolvent.
26
In the ensuing litigation, Ensotran asserted claims for breach of fiduciary duty and
conversion against the Baars. To serve them, Ensotran relied on Section 18-109(a). After
concluding that the Baars were not formal managers, the district court analyzed whether
the Baars nevertheless qualified as acting managers.
As to Roger, the district court was “not persuaded” that he “‘took over in all
respects’ the day-to-day operations and effectively ran Ensotran’s entire business.” Id. at
*5. After reviewing the emails on which Ensotran relied, the court held that Roger was
managing only one of Ensotran’s projects, albeit its most important one. The court also
rejected the idea that Roger was “wholly” managing the project, noting that Roger had
asked questions of Ensotran’s founders, “which suggests that [the founders] possess the
relevant information concerning the project that Ensotran contends Roger wholly
manages.” Id. The court further reasoned that “allegations that Roger assumed management
over one of [Ensotran’s] projects,” even “Ensotran’s main project,” did not “equate to
Roger effectively running Ensotran’s entire business . . . .” Id. Citing Florida Investments
for the control overlay, the court concluded that “these acts fail to demonstrate the
necessary control or decision-making role that has been found to satisfy the statutory
standard for personal jurisdiction.” Id.
As to Donna, the district court reached a similar conclusion. To support jurisdiction,
Ensotran cited her role as the Financial Controller and contended that she “(1) was
authorized to prepare the financial statements of Ensotran, (2) prepared and maintained
Ensotran’s books and records setting forth the equity interests of each member, (3) was the
sole signatory on Ensotran’s bank account, and (4) oversaw and managed the disbursement
27
of approximately $720,000 of Ensotran’s funds.” Id. at *6. The district court regarded these
allegations as suggesting only that Donna had managed Ensotran’s assets, citing Florida
Investments for the proposition that “management of the underlying assets of an LLC is
analytically different from the management of the LLC itself . . . .” Id. (quoting Florida
Investments, 2013 WL 4734834, at *8).
Through this analysis, Wakley elevated the control overlay from a passing phrase to
an operative test, while further elevating the necessary level of involvement to require
“effectively running [the LLC’s] entire business.” Other than citing Florida Investments,
the Wakley decision did not discuss its choice of these more onerous standards, which had
evolved considerably from what a plain-language interpretation of material participation
would suggest.11
c. Hazout
The lack of a meaningful explanation for the control overlay provides one good
reason to reconsider it. The Hazout case requires abandoning it.
11
As Harron notes, two decisions of this court—Arctic Ease and CelestialRX—have
subsequently quoted and applied the control overlay. Neither decision elaborated on why
the control overlay should replace the statutory standard; both treated the issue as settled.
Arctic Ease cited Wakley, and CelestialRX cited Arctic Ease. See CelestialRX, 2019 WL
1396764, at *19 n.298; Arctic Ease, 2016 WL 7174668, at *4. Both decisions then focused
on the implications of a formal manager designation for acting manager status. Both cases
are thus more pertinent to Harron’s second argument, which implicates that issue, and this
decision discusses Arctic Ease and CelestialRX in that context. Neither decision provides
additional support for the control overlay itself.
28
In Hazout, the Delaware Supreme Court considered whether a plaintiff could serve
a Canadian resident, Marc Hazout, who had served as the President, CEO, Principal
Financial and Accounting Officer, and a director of Silver Dragon Resources, Inc., a
Delaware corporation. The plaintiff alleged that Hazout acted as the lead negotiator for
Silver Dragon when negotiating the terms of a capital infusion with a group of investors.
When the deal fell apart, the investors sued both Hazout and Silver Dragon.
Hazout moved to dismiss for lack of personal jurisdiction, arguing that Delaware’s
consent-to-service statute for directors and officers, 10 Del. C. § 3114, did not apply
because the lawsuit did not allege a breach of any duty that Hazout owed to Silver Dragon
or its stockholders. In making this argument, Hazout relied on three decades of authority,
starting with Hana Ranch, Inc. v. Lent, 424 A.2d 28 (Del. Ch. 1980), that had construed
Section 3114 to extend only to claims asserting that the defendant had breached duties
owed to the corporation or its stockholders.
In Hazout, the Delaware Supreme Court abrogated Hana Ranch and its progeny,
relying on the plain language of Section 3114. Hazout, 134 A.3d at 277, 286–87, 289–90.
The high court noted that the statute authorized service of process in two classes of cases:
(i) “all civil actions or proceedings brought in this State, by or on behalf of, or against such
corporation, in which such officer is a necessary or proper party,” and (ii) “any action or
proceeding against such officer for violation of a duty in such capacity.” Id. at 277 (quoting
10 Del. C. § 3114). After recognizing that the Hana Ranch line of authority effectively
eliminated the first class of cases, the justices admonished:
29
[W]e do not believe that it is a proper role for the Judiciary to excise a clear
category set forth in § 3114(b), simply because there might be cases where it
is susceptible to an overly broad reach. . . . Rather, under settled principles
of statutory interpretation, it is our obligation to give effect to the plain
language of statutes to the extent we can do so without offending any
supervening constitutional limits.
Id. at 278. The court later reiterated that “blanket judicial invalidation of a statute’s words
should not ensue if the statute can be applied constitutionally in a wide class of cases, but
might operate overbroadly in some more limited class of cases.” Id. at 287. If effectuating
service in some cases could result in an overly broad assertion of jurisdiction, then the
proper response is to “use the minimum contacts analysis required by [the Due Process
Clause] to ensure that the statute is not used in a situationally inappropriate manner.” Id. at
291; see also id. (citing doctrine of forum non conveniens as “a viable tool” for
“address[ing] the burden to nonresident fiduciaries of addressing litigation in our state”).
The control overlay limits Section 18-109(a)(ii) in a manner analogous to Hana
Ranch’s construction of Section 3114. Rather than applying the plain language of the
statute to authorize service of process over any person who participates materially in
managing the business of an LLC, the control overlay restricts service of process to persons
who serve in a control or decision-making role. Under Hazout, it oversteps the judiciary’s
role to interpret Section 18-109(a)(ii) to eliminate a class of persons from the statute’s
scope. In light of Hazout and the unconvincing origins of the control overlay, this decision
declines to apply it.
30
3. The Formal Manager Designation
In his next major argument, Harron contends that a defendant cannot serve as an
acting manager if the operative LLC agreement contains a formal manager designation.
The foundational case for this argument is Fisk Ventures, LLC v. Segal, 2008 WL 1961156
(Del. Ch. May 7, 2008), and as with Florida Investments, the foundation is not as solid as
it might appear. In this instance, Fisk Ventures mistakenly built on a prior case—Palmer
v. Moffat, 2001 WL 1221749 (Del. Super. Oct. 10, 2001)—which it described as having
decided the issue. See Fisk Ventures, 2008 WL 1961156, at *8 (citing Palmer as having
“previously considered and rejected” the acting-manager argument). In reality, Palmer did
not consider whether the defendants in that case qualified as acting managers. As the
Palmer decision noted, the plaintiff had not made an acting-manager argument. See
Palmer, 2001 WL 1221749, at *2 (“Plaintiff concedes that the second definition does not
apply to the Spencer Defendants, that is, that they did not participate materially in
managing the Company.”). Palmer only considered whether the defendants qualified as
formal managers. See id. The entire line of authority on formal manager designations thus
stems from a mistaken citation.
In addition, reliance on a formal manager designation to foreclose acting-manager
status runs contrary to the structure of the LLC Act. By default, a Delaware LLC has a
member-managed governance structure. See 6 Del. C. § 18-402. To establish a manager-
managed structure, the LLC Act requires that the governing LLC agreement contain
provisions vesting authority in a formal manager. Id. By statutory mandate, therefore, the
LLC agreement of a manager-managed entity must contain a formal manager designation.
31
Under the Fisk Ventures line of authority, a manager-managed LLC cannot have an acting
manager. That result, however, conflicts with Section 18-109(a), which recognizes that any
LLC, including a manager-managed entity, can have both formal managers and acting
managers. Given this conflict, this decision declines to give jurisdiction-foreclosing effect
to the formal manager designations in the International and LATAM Agreements.
a. Fisk Ventures
The Fisk Ventures decision arose out of the demise of Genitrix, LLC, which had
been governed by a five-member “Board of Member Representatives.” Fisk Ventures, LLC
was a Class B member with the right to appoint one board member. Fisk Johnson owned
99% of Fisk Ventures, had also invested personally in Genitrix, and had the right to appoint
two board members. At one point, Johnson had served on the board, but he resigned before
the events giving rise to the litigation. Fisk Ventures, 2008 WL 1961156, at *3.
After Genitrix failed, its disappointed founder, Andrew Segal, sued Johnson. Segal
contended that Johnson was an acting manager under Section 18-109(a)(ii) because he (i)
controlled his board appointees and (ii) participated in the management of Genitrix through
broad veto rights. The decision rejected the first theory, finding that various emails
evidencing Johnson’s occasional communications with his appointees did “not support the
notion that Johnson was materially participating in the management of Genitrix.” Id. at *7.
The decision also rejected Segal’s second theory, which contended that Johnson was
an acting manager because of his governance rights. In ruling on this issue, the Fisk
Ventures court cited Palmer as authoritative:
32
Segal’s second theory—that the LLC Agreement gives Johnson so much
power that he is a de facto manager—has been previously considered and
rejected. In Palmer v. Moffat, Judge Babiarz of the Superior Court confronted
a dispute among members and managers of a Delaware limited liability
company. There, plaintiffs argued that some of the LLC’s members, though
not called “managers,” served as managers on account of the powers
conferred to them by the LLC Agreement. Specifically, the LLC Agreement
in that case stated that “The Members shall have full, exclusive, and complete
discretion, power and authority . . . to manage, control, administer and
operate the business and affairs of the company for the purposes herein
stated, to make all decisions affecting such business and affairs . . . .” Despite
this broad language, Judge Babiarz found it insufficient to render all
members “managers” for the purpose of section 18-109, because another
provision of the agreement stated that “[t]he operations of the Company shall
be conducted by the Management Committee.”
Id. at *8 (footnotes omitted). It is true that Palmer reached this holding, but it did so for
purposes of analyzing the question of formal-manager status, not acting-manager status.
The plaintiff in Palmer never argued that the defendants were acting managers. Palmer,
2001 WL 1221749, at *2. The entity in Palmer was a member-managed entity, and the
plaintiff argued that by virtue of that fact, every member (including the defendants) was a
manager and subject to service under Section 18-109(a)(i). See id. (“Plaintiff’s construction
of the Operating Agreement boils down to an argument that all members are managers.”).
The court rejected this contention because, despite explicitly establishing a member-
managed structure, the LLC agreement vested “actual authority” in a management
committee. Id. The court held that the creation of the management committee prevented
the defendants from being formal managers under Section 18-109(a)(i). Palmer did not
address acting-manager status under Section 18-109(a)(ii).
The Fisk Ventures decision, however, treated Palmer as authoritative for purposes
of Section 18-109(a)(ii). Turning to the Genitrix LLC agreement, the Fisk Ventures
33
decision described the following provision as “even more specific” than the dispositive
provision in Palmer:
Except as otherwise provided herein, the members shall conduct, direct and
exercise full control over all activities of the company through their
representatives of the board. Unless delegated by the Board, all management
powers over the business and affairs of the Company shall be exclusively
vested in the board.
Fisk Ventures, 2008 WL 1961156, at *8. The Fisk Ventures decision concluded that “[a]s
in Palmer,” the designation of the board as the formal manager precluded Johnson from
qualifying as an acting manager.
On the facts of Fisk Ventures, this holding was not problematic, because it fit with
the limited factual allegations regarding Johnson’s involvement with Genitrix. Setting
aside Johnson’s communications with his board representatives, those actions amounted to
Johnson and Fisk Ventures standing on or exercising their contractual rights as members.
The reference to the formal manager designation in the Genitrix LLC agreement did not
add anything to the analysis.
But as one of the earliest cases to address service under Section 18-109(a)(ii), Fisk
Ventures was widely cited, including by Harron’s principal authorities.12 The rule that Fisk
Ventures drew from Palmer thus permeated the case law.
12
The Wakley and Florida Investments decisions included parallel citations to
Palmer and Fisk Ventures, framed in a manner that suggested that the courts were relying
on Fisk Ventures’s analysis of Palmer. See Wakley, 2014 WL 1116968, at *5 n.7; Florida
Investments, 2013 WL 4734834, at *8 n.73. The more recent decisions on which Harron
relies—Arctic Ease and CelestialRX—only cited Fisk Ventures and not Palmer, but both
34
b. Wakley, Arctic Ease, and CelestialRX
Harron relies on three decisions—Wakley, Arctic Ease, and CelestialRX—that
referenced formal manager designation when addressing acting-manager status under
Section 18-109(a)(ii). These cases are not persuasive precedent’s for Harron’s motion to
dismiss.
The reference to a formal manager designation in Wakley is the most elliptical.
There, after discussing the factual allegations regarding Donna’s role as Financial
Controller and rejecting their sufficiency, the court cited the existence of a formal manager
designation as an additional reason for not exercising jurisdiction. The decision stated:
Although the Term Sheet [for the sale of equity to Wakley] granted [Donna]
broad authority over Ensotran’s finances, her power was “subject to the
decisions and instructions of the board.” Therefore, the court finds Donna is
not a “manager” under § 18-109(a)(ii) because she did not participate
materially in the management of Ensotran.
Wakley, 2014 WL 1116968, at *6. This brief reference does not appear to have played a
meaningful role in the court’s analysis, because the decision had already concluded that
Donna was not subject to service based on its interpretation of the control overlay.
Reinforcing this impression is the fact that the decision could have made the same point
about Roger, who likewise reported to the board in his role as Vice President of Business
Development. But the case did not mention the formal manager designation as part of its
otherwise more thorough analysis of Roger’s involvement with Ensotran.
cited Wakley, and CelestialRX also cited Florida Investments. See CelestialRX, 2019 WL
1396764, at *19 nn. 293 & 298; Arctic Ease, 2016 WL 7174668, at *4 & n.44.
35
The presence of a formal manager designation took on greater significance in Arctic
Ease. That litigation arose out of the demise of two Delaware LLCs: Summetria, LLC and
its wholly owned subsidiary, Arctic Ease, LLC. Although Arctic Ease gained pride of place
in the caption, the pertinent events for Section 18-109(a) concerned Summetria.
In mid-2012 and again in early 2013, Summetria needed capital to support Arctic
Ease’s business. Summetria obtained it through loans from William Cohen, who at the time
controlled a 20% member interest in Summetria and served on its board of directors. Arctic
Ease, 2016 WL 7174668, at *1.
Summetria continued to need funds and retained an investment bank to raise capital.
In April 2013, Cohen told Carol Forden, who served as Summetria’s managing member,
that the investment bank would not provide any bridge financing unless Cohen guaranteed
the loan, which Cohen seemed unwilling to do. Cohen later told Forden that he would not
support a bridge financing because its terms would conflict with his rights as an investor.
Cohen subsequently resigned from the board and declared a default under his note.
Other lenders called their loans. Cohen eventually purchased Summetria’s assets in a
foreclosure sale. In the resulting dissolution proceeding, Forden and her affiliates sued
Cohen and his affiliates based on Cohen’s alleged role in causing the entities’ demise,
contending that Cohen had schemed all along to starve them of financing so that he could
purchase their assets at a discount. Forden and her affiliates asserted that Cohen was subject
to jurisdiction as an acting manager of Summetria, claiming he participated materially in
management by negotiating a contract with a reseller for Arctic Ease’s products, attending
36
meetings with distributors of Arctic Ease’s products, otherwise marketing Arctic Ease’s
products, and serving in an investor relations role.
Cohen moved to dismiss the claims against him for lack of personal jurisdiction.
The Arctic Ease decision rejected the plaintiffs’ argument that Cohen participated
materially in the management of Summetria. Drawing on Wakley, the court reasoned that
because Forden was Summetria’s managing member, and because Summetria’s LLC
agreement empowered the managing member to manage the entity, Cohen could not have
served in the type of “control or decision-making role” necessary to satisfy the control
overlay. Id. at *5 (quoting Wakley, 2014 WL 1116968, at *5–6). The court concluded that
“to the extent Cohen had any power, it was subject to Forden’s decision-making authority
under the Summetria LLC Agreement.” Id.
As in Fisk Ventures, the outcome in Arctic Ease was not problematic on the facts
because Forden’s allegations would not have supported the exercise of specific jurisdiction.
The claims that Forden asserted against Cohen do not appear to have arisen out of any of
the actions he took on behalf of Summetria or Arctic Ease. The plaintiffs instead seem to
have been trying to tie Cohen generally to those entities while at the same time claiming
that he acted wrongfully by foreclosing on his loan.
Lastly, in CelestialRX, the plaintiffs sought to assert claims on behalf of an LLC
(“Akrimax”) against Leonard Mazur, who had cofounded Akrimax and served for years as
a member of its board of directors. CelestialRX, 2019 WL 1396764, at *5. In 2013,
however, the LLC agreement was amended to name Joseph Krivulka as sole manager. Id.
at *9. Mazur retained the title of Vice Chairman, and in subsequent years he spoke often
37
with Krivulka about the business. He also engaged an investment banker to advise the
company on strategic alternatives. Id. at *19.
Citing Arctic Ease, Wakley, and Florida Investments, the CelestialRX decision held
that after the LLC agreement was amended to make Krivulka the sole manager, Mazur
could not have participated materially in management because he no longer occupied a
control or decision-making role. As the decision explained:
Here, Amendment No. 7, in explicit terms, put Krivulka solely at the helm
of Akrimax on July 1, 2013. . . . The Plaintiffs’ allegations that Mazur
retained his title as vice chairman and engaged a banker on behalf of Akrimax
are not sufficient to suggest that Mazur materially participated in the
management of Akrimax, when Krivulka alone had the authority to manage
Akrimax and the Plaintiffs allege that Krivulka asserted this authority.
Nothing in those allegations suggests that Mazur acted outside of or usurped
Krivulka’s control.
Id. (footnotes omitted). As in Fisk Ventures and Arctic Ease, the CelestialRX decision
reached a logical outcome on the facts, because the allegations against Mazur do not appear
to have supported jurisdiction under a plain-language interpretation of the material-
participation test.
Harron thus can legitimately cite Wakley, Arctic Ease, CelestialRX as referring to
formal manager designations when analyzing acting-manager status, but the cases offer
little else for his position. At one level, the formal manager designation derives from the
control overlay, which is problematic under Hazout and for the other reasons discussed
above. At another level, the formal manager designation is suspect because it originated
from a misreading of Palmer, which none of the subsequent decisions identified or
addressed. And when examined in their own right, Harron’s three precedents reached
38
outcomes for which the formal manager designation was unnecessary, either because the
defendant could not be served under the plain-language of the statute (Arctic Ease and
CelestialRX) or based on reasoning elsewhere in the decision (Wakley).
For these reasons, none of Harron’s cases supports the proposition that the most
senior executive in an LLC, who manages the business on a day-to-day basis, cannot be
served under an acting manager theory simply because the LLC agreement designates a
formal manager. Harron’s reliance on the formal manager designations in the International
and LATAM Agreements is unconvincing.
c. The Structure of the LLC Act
Section 18-402 of the LLC Act provides an equally significant reason for rejecting
Harron’s reliance on the formal manager designations in the International and LATAM
Agreements. Under Section 18-402, by default, a Delaware LLC does not have formal
managers; it has a member-managed structure in which each member also acts as a
manager. See 6 Del. C. § 18-402. To create a manager-managed structure, the LLC
agreement must expressly vest authority in one or more managers. Id. It will thus always
be the case that the LLC agreement for a manager-managed entity contains a formal
manager designation. See generally Symonds & O’Toole, supra, § 9.01 (describing default
member-managed structure and ability to create manager-managed alternatives).
If the statutorily required provisions for creating a manager-managed structure
meant that only formal managers could participate materially in management, then a
manager-managed LLC could not have acting managers. That outcome is contrary to
Section 18-109(a), which contemplates that any LLC, including a manager-managed LLC,
39
can have acting managers. See 6 Del. C. § 18-109(a)(ii); see also id. § 18-110(c). Put
differently, the fact that the LLC Act contemplates that a manager-managed LLC can have
acting managers means that a provision empowering a formal manager should not be
dispositive for purposes of Section 18-109(a)(ii).
From the standpoint of a member-managed entity, the default governance structure
under Section 18-402 has an even more significant implication: rejection of the control
overlay. By default, when an entity is member-managed, each member can bind the entity
to the same degree as a formal manager. See id. § 18-402 (“Unless otherwise provided in
a limited liability company agreement, each member and manager has the authority to bind
the limited liability company.”). Given this fact, a plaintiff might argue, like the plaintiff
in Palmer, that every member of the LLC can be served as a formal manager under Section
18-109(a)(i). But a credible response is that the LLC agreement of a member-managed
LLC has not designated a formal manager, thereby eliminating that jurisdictional path. The
focus would then turn to Section 18-109(a)(ii) and whether the member named as a
defendant participated materially in the management of the entity for purposes of the claims
being asserted. Because Section 18-109(a) supports specific jurisdiction and not general
jurisdiction, the plaintiff could serve those members who had participated materially in the
events giving rise to the claim, but not every member of the LLC.
Now introduce the control overlay. If a person is subject to service under Section
18-109(a) only if the person occupies a “control or decision-making role,” then no one
could satisfy this test for a multi-member, member-managed LLC. Under the default
40
governance scheme, no one member controls the LLC, and no one member has the power
to make decisions on behalf of the LLC. By default,
[u]nless otherwise provided in a limited liability company agreement, the
management of a limited liability company shall be vested in its members in
proportion to the then current percentage or other interests of members in the
profits of the limited liability company owned by all of the members, the
decision of members owning more than 50 percent of the said percentage or
other interest in the profits controlling . . . .
6 Del. C. § 18-402. It is of course possible, as in Palmer, that the LLC agreement for a
member-managed LLC could contain provisions that would lead a court to treat some
members but not others as formal managers, or potentially as acting managers, but under
the default framework, it is not clear that anyone could be served if the control overlay
were the governing test. Harron’s contention that a formal manager designation forecloses
service under Section 18-109(a)(ii) depends on and falls with the control overlay.
The structure of Section 18-402 thus counsels against applying the control overlay
and against relying on a formal member designation. By contrast, reading Section 18-
109(a)(ii) broadly to extend to anyone who participates materially in the business of the
LLC comports with what appears to be a conscious decision by the drafters of the LLC Act
to extend service beyond formal managers. The LLC Act stands alone among the Delaware
entity statutes in taking this step. The statutes governing other entities—corporations,
general partnerships, limited partnerships, and business trusts—apply only to formal
41
officeholders.13 Because LLCs have flexible governance structures and often operate with
a relatively high degree of informality, the broader formulation enables Delaware courts to
exercise personal jurisdiction over key individuals who take action on behalf of the entity.
Delaware’s experience with corporate officers underscores the need for the LLC
Act’s reach. The implied-consent statute in the corporate context originally applied only to
directors, and Delaware courts lacked the ability to exercise personal jurisdiction over
senior officers. See 10 Del. C. § 3114(a); In re Am. Int’l Gp., Inc., 965 A.2d 763, 778 (Del.
Ch. 2009). The omission became problematic, and to fill the gap, the General Assembly
extended Section 3114 to senior officers. See 10 Del. C. § 3114(b). Section 18-109(a)(ii)
avoids a similar problem by enabling Delaware courts to exercise personal jurisdiction over
individuals who participate materially in the business of an LLC, regardless of title, for
claims relating to their actions.
Statutory analysis thus provides another reason for rejecting Harron’s second
argument. In light of the implications of Section 18-402 and the other reasons discussed
previously, this decision rejects Harron’s argument about the formal manager designations
in the International and LATAM Agreements.
4. The Agency Shield
In his last argument, Harron invokes the agency shield. He contends that if a person
13
See 6 Del. C. § 15-114(a) (partner in general partnership); id. § 17-110(a) (general
partner of limited partnership); 10 Del. C. § 3114(a) (corporate director elected, appointed,
or serving after September 1, 1977); id. § 3114(b) (corporate officer elected, appointed, or
serving after January 1, 2004); 12 Del. C. § 3804(b) (trustee of statutory trust).
42
participates materially in the management of an LLC while acting as an agent, then the
person’s actions as agent cannot support a finding of material participation because the
agent is acting on behalf of his principal. This decision reject this argument.
As support for his agency-shield argument, Harron returns to Wakley. That decision
deployed the concept of an agency shield as an additional reason why Roger and Donna
had not participated materially in the management of Ensotran. After ruling that the
complaint’s allegations did not satisfy the control overlay, and after citing the fact that
Donna reported to the board of directors, the district court observed that Roger and Donna
were acting on behalf of Wakley and Yuen, concluding: “Ensotran’s averments fail to
convince the court that Roger and Donna were not acting at the direction of, and as
representatives for, Wakley and Yuen.” Wakley, 2014 WL 1116968, at *6. The decision’s
analysis did not go much further than this sentence.
As readers of this opinion will have perceived by now, Wakley was a decision with
many moving parts. In the section that comprised the bulk of its analysis of Section 18-
109(a)(ii), Wakley held that Roger was not an acting manager after conducting a detailed
inquiry into whether factual allegations about his involvement rose to the level of a “control
or decision-making role,” which the court equated with “effectively running Ensotran’s
entire business . . . .” Id. at *5. In the section devoted to Donna, the decision conducted a
more generalized review of the factual allegations about her involvement, then jumped to
her reporting arrangement with the board of directors and the concept of a formal manager
designation. The latter move was unnecessary because the allegations against Donna fell
short under the standard that the decision had applied to Roger. At the same time, citing
43
the formal manager designation introduced a rationale that could have applied equally to
Roger, but which the decision had not mentioned previously. The decision then referenced
Roger and Donna’s status as agents for Wakley and Yuen, which the opinion seemed to
regard as an independent ground for not exercising jurisdiction over both of them. Any one
of these three rationales could be viewed as dispositive and the other two as dicta. Given
Wakley’s abbreviated discussion of the agency shield, it is tempting to view this aspect of
the decision as dictum.
Elsewhere in the decision, Wakley summarized this court’s decision in Vichi v.
Koninklijke Philips Electronics N.V., 2009 WL 4345724 (Del. Ch. Dec. 1, 2009). The Vichi
decision had discussed a defendant’s role as an agent when declining to exercise personal
jurisdiction under Section 18-109(a)(ii), so it seems likely that Wakley’s comment about
agency status stemmed from Vichi. Unfortunately, Vichi’s discussion of the agency issue
is not much more detailed than Wakley’s.
The complex facts of Vichi involved a snarl of entities. Koninklijke Philips
Electronics N.V. (“Philips”) had formed a joint venture with LG Electronics. That joint
venture formed a subsidiary (“Finance Sub”) as a special purpose vehicle to raise capital.
Finance Sub otherwise had no assets or operations. Another subsidiary of the joint venture
(“Manager Sub”) served as the sole member and manager of Finance Sub. The plaintiff,
Carlo Vichi, loaned a large sum to Finance Sub. One of the defendants, Kiam-Kong Ho,
was an employee of Manager Sub. Ho helped form Finance Sub, and he acted on behalf of
Finance Sub when negotiating and signing the loan documents with Vichi. See id. at *1–3.
Finance Sub subsequently defaulted on the loan, and the joint venture declared
44
bankruptcy. Striving to identify a theory of recovery against a solvent defendant, Vichi
asserted tort claims for fraud and breach of fiduciary duty against Ho, Manager Sub, and
Philips. Ho moved to dismiss for lack of personal jurisdiction. After concluding that
jurisdiction did not exist under the Delaware Long-Arm Statute, the court reached the same
conclusion under Section 18-109(a)(ii), reasoning as follows:
Vichi’s allegations of Ho’s material participation are based on assertions that
Ho (1) had a direct role in the formation of [Finance Sub] and (2) executed
certain documents relating to the issuance of the Notes on behalf of [Finance
Sub]. Neither of these assertions, however, alleges that Ho was acting in
anything other than his capacity as a representative of [Manager Sub], his
formal employer at the time and [Finance Sub’s] manager. Nothing in the
record suggests that Ho had any ownership share in [Finance Sub], or a
personal stake in the Notes transaction. In other words, Vichi does not allege
any benefit to Ho from the formation of [Finance Sub] or the Notes
transaction. Nor has Vichi alleged any other specific facts from which the
Court reasonably could infer that Ho personally participated materially in
the management of [Finance Sub], rather than simply at the direction of and
as a representative for [Manager Sub] and ultimately its parent, [the joint
venture].
Id. at *7 (emphasis added). The court concluded that Ho was “not a ‘manager’ of an LLC
within the meaning of § 18-109, and the statute provides no basis for exercising jurisdiction
over Ho.” Id. The decision did not otherwise explain the relevance of Ho’s status as agent.14
14
In addition to the two sentences citing Ho’s agency status, two other aspects of
this paragraph are confusing. One refers to the absence of any indication “that Ho had any
ownership share in [Finance Sub].” Section 18-109(a)(ii) specifies that a person may be an
acting manager “whether or not a member of a limited liability company,” so Ho’s lack of
a member interest in Finance Sub should not have mattered. Another refers to Ho not
having “a personal stake in the Notes transaction.” The material participation test turns on
participation, not benefit, so the fact that Ho did not have a personal interest in the
transaction should not have mattered.
45
The Wakley and Vichi decisions thus raised the important question of how to apply
Section 18-109(a)(ii) to a person who participates in management while acting as an agent,
either as a representative of a third party (Wakley) or as a representative of a formal
manager (Vichi). Both cases treated agency status as dispositive, but without explaining
why. At least two interpretations seem possible. It might be that the decisions evaluated
the agent’s role under the control overlay, with the operative question becoming whether
the agent could occupy a “control or decision-making role” despite acting under the control
of a principal with final decision-making authority. Or it might be that the decisions
regarded the availability of service under Section 18-109(a)(ii) as subject to the broader
fiduciary-shield doctrine, which holds that when an officer or other agent for an entity
engages in acts within a jurisdiction in an official capacity, the agent is not subject to
jurisdiction based on official acts, but only for acts committed in a personal capacity. Both
approaches deviate from a plain-meaning analysis under Section 18-109(a)(ii), in which a
court would analyze the defendant’s actions to determine whether they rose to the level of
material participation, without affording any special significance to the defendant’s status
as an agent.
Because Vichi did not otherwise discuss the control overlay, it seems unlikely that
the decision examined Ho’s status within that rubric. It seems more likely that the decision
applied a version of the fiduciary shield. Wakley discussed the control overlay, but because
Wakley appears to have relied on Vichi, it seems likely that Wakley also applied a version
of the fiduciary shield. But it is not possible to rule out the control-overlay interpretation.
The viability of evaluating an agent’s role within the control overlay depends on the
46
viability of the control overlay itself. As this decision has discussed at length, the control
overlay is suspect, and this decision has declined to apply it. But accepting that framework
for purposes of analysis, an actor’s status as an agent for a third party (as in Wakley) should
not defeat the actor’s ability to serve in a “control or decision-making role” for a different
entity. The control overlay appears to focus on the ability of the defendant to make
decisions that bind the entity or otherwise exercise authority on its behalf. A third party’s
agent can do these things. As shown by Delaware decisions involving dual fiduciaries,
persons frequently make decisions on behalf of one entity while simultaneously owing
fiduciary duties to a different entity, whether as agents or otherwise. 15 To the extent the
competing duties conflict, the dual fiduciary does not lose the ability to exercise managerial
authority. The conflicted dual fiduciary instead faces heightened liability risk.
When the defendant acts as an agent for the LLC’s formal manager (as in Vichi),
the defendant can legitimately claim not to have had the formal power to exercise ultimate
control, but that should not lead automatically to a conclusion that the agent did not occupy
a “control or decision-making role.” The analysis would have to consider the facts of the
case, including the scope of the delegation of authority from the principal to the agent, the
15
See, e.g., Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983) (holding that
officers of parent corporation faced conflict of interest when acting as directors of
subsidiary in transaction with parent); accord Sealy Mattress Co. of N.J., Inc. v. Sealy, Inc.,
532 A.2d 1324, 1336–37 (Del. Ch. 1987) (same); see also In re Trados Inc. S’holder Litig.,
2009 WL 2225958, at *8 (Del. Ch. July 24, 2009) (treating directors as interested for
pleading purposes in transaction that benefited preferred stockholders when “each had an
ownership or employment relationship with an entity that owned Trados preferred stock”).
47
degree of supervision and involvement of the principal, and whether the agent in fact made
the decision or actually exercised control, notwithstanding the locus of formal authority.16
In this case, in addition to these dimensions, the analysis would have to consider the
consent rights that Harron possessed for the lists of Unanimous Approval Actions, which
mitigated the extent to which the Companies’ formal managers could fully exercise control.
To ignore these types of case-specific permutations and apply the agency shield
automatically would give dispositive effect to a formal manager designation, thereby
elevating formality above all else. As discussed previously, the cases relying on a formal
manager designation do not appear to have gone that far, and doing so would run contrary
to the statutory structure established by Section 18-402 of the LLC Act. Cases examining
control in other contexts take a “fact-intensive” approach that does not turn solely on
whether another actor, such as the board of directors, has statutory authority to act on behalf
of and bind the corporation.17 Even under the control overlay, Harron’s argument for a
16
See, e.g., Restatement (Second) of Agency § 33 (Am. Law Inst. 1958) (“An agent
is authorized to do, and to do only, what it is reasonable for him to infer that the principal
desires him to do in the light of the principal’s manifestations and the facts as he knows or
should know them at the time he acts.”); id. § 26 cmt. e (“Since the existence of authority
is dependent upon the reasonable belief of the agent in view of the manifestations of the
principal, authority is not static but varies with changing facts . . . .”).
17
In re Crimson Expl. Inc. S’holder Litig., 2014 WL 5449419, at *10 (Del. Ch. Oct.
24, 2014) (surveying cases and citing “fact-intensive” nature of control inquiry); see, e.g.,
Kahn v. Lynch Commc’ns Sys., Inc., 638 A.2d 1110, 1113–14 (Del. 1994) (holding that
43.3% stockholder who appointed five of eleven directors controlled company); Reith v.
Lichtenstein, 2019 WL 2714065, *7–10 (Del. Ch. June 28, 2019) (finding that complaint’s
allegations supported reasonable inference that defendant controlled company through
combination of 35.62% equity stake, significant board representation, and influence over
48
bright-line rule based on agency status appears misguided.
The alternative to the control-overlay interpretation—a version of the fiduciary
shield—is even more problematic. Scholars have thoroughly critiqued the fiduciary shield
and argued for its rejection,18 citing (i) its dubious origins in misinterpreted dicta,19 (ii)
inconsistencies with otherwise applicable principles of jurisdictional analysis,20 (iii)
illogical conflicts between the outcome under the fiduciary shield and the outcome as a
management). See generally Klein v. Wasserman, 2019 WL 2296027, at *8–9 (Del. Ch.
May 29, 2019) (discussing factors pertinent to finding of control).
18
See, e.g., Nat Stern, Circumventing Lax Fiduciary Standards: The Possibility of
Shareholder Multistate Class Actions for Directors’ Breach of the Duty of Due Care, 72
Neb. L Rev. 1, 18 (1993) (criticizing doctrine as an “effort to pre-empt the minimum
contacts standard’s individualized inquiry with a wooden rule”); Robert A. Koenig, Note,
Personal Jurisdiction and the Corporate Employee: Minimum Contacts Meet the Fiduciary
Shield , 38 Stan. L. Rev. 813, 814 (1984) (concluding that “the fiduciary shield rule cannot
substitute for thorough analysis under existing constitutional standards governing personal
jurisdiction”); Carlos R. Carrasquillo, Note, The Fiduciary Shield Doctrine: A Rule of
Statutory Construction or a Constitutional Principle?, 9 J. Corp. L. 901, 930 (1984)
(concluding that “[c]ourts should not, therefore, make this exception when determining
jurisdictional amenability”); Thomas H. Sponsler, Jurisdiction Over The Corporate Agent:
The Fiduciary Shield, 35 Wash. & Lee L. Rev. 349, 365 (1978) (“[T]he doctrine . . . ,
having come into existence through misunderstanding and having thrived on lack of
articulation and analysis, should be allowed to fade away in the course of more reasoned
application of established principles.”).
19
See Koenig, supra, at 820–21 (tracing origins of doctrine); Carrasquillo, supra, at
907–12 (same); Sponsler, supra, at 351–62 (same).
20
See Koenig, supra, at 828–32 (discussing conflict with minimum-contacts
analysis); Carrasquillo, supra, at 915–16, 918, 920, 925–26 (same); Sponsler, supra, at 365
(same).
49
matter of substantive law,21 (iv) an unprincipled distinction between business torts and
physical torts,22 and (v) contrary reasoning in two decisions from the Supreme Court of the
United States.23
As with the fiduciary-shield doctrine generally, Harron’s agency-shield argument
conflicts with otherwise applicable principles of jurisdictional analysis. The Delaware
Long-Arm Statute explicitly authorizes service on a party who engages in forum-directed
activity “in person or through an agent.” 10 Del. C. § 3104(c)(1). Under the plain language
of the Delaware Long-Arm Statute, agency status expands jurisdiction; it does not limit it.
The same is true under the common-law agency theory of jurisdiction, which
provides a basis for asserting jurisdiction over a non-resident principal by attributing the
jurisdictional contacts of the agent to the principal. See generally Donald J. Wolfe, Jr. &
Michael A. Pittenger, Corporate and Commercial Practice in the Delaware Court of
Chancery § 3.04[c][3] (2d ed. & Supp. 2018). When this theory applies, it does not shield
the agent from jurisdiction, nor does it substitute the principal for the agent; it instead
21
See Carrasquillo, supra, at 918, 925–26, 930 (noting conflict with principles of
substantive law).
22
See id. at 916–17.
23
See Calder v. Jones, 465 U.S. 783, 790 (1984); Keeton v. Hustler Magazine, Inc.,
465 U.S. 770, 781 n.13 (1984); Stern, supra, at 18–19 (discussing Calder and Keeton);
Koenig, supra, at 821–23 (same); Carrasquillo, supra, at 926–27, 930 (discussing Calder).
50
enables the plaintiff to add the principal to the case in addition to the agent.24
Harron’s position showcases the illogical conflicts between the outcome under the
fiduciary shield and the outcome under substantive law, where agency status does not
operate as a shield. Instead, “[a]n agent is subject to liability to a third party harmed by the
agent’s tortious conduct.” Restatement (Third) of Agency § 7.01 (Am. Law Inst. 2006).
“Unless an applicable statute provides otherwise, an actor remains subject to liability
although the actor acts as an agent or an employee, with actual or apparent authority, or
within the scope of employment.” Id. The actor’s status as an agent instead provides a
potential avenue to hold the principal liable in addition to the agent under principles of
attribution. See Verrastro v. Bayhospitalists, LLC, --- A.3d ---, 2019 WL 1510458, at *2
(Del. Apr. 8, 2019) (discussing respondeat superior); Fisher v. Townsends, Inc., 695 A.2d
53, 57–58 (Del. 1997) (same). “It is consistent with encouraging responsible conduct by
individuals to impose individual liability on an agent for the agent’s torts although the
agent’s conduct may also subject the principal to liability.” Restatement (Third) of Agency
§ 7.01 cmt. b (Am. Law Inst. 2006). Permitting an agent to use their status as a jurisdictional
defense would create a needless discontinuity between jurisdictional principles and
substantive law.
24
See, e.g., Sternberg v. O’Neil, 550 A.2d 1105, 1125 & n.45 (Del. 1988)
(explaining agency theory and authorizing jurisdiction over parent corporation in addition
to subsidiary), abrogated on other grounds by Genuine Parts Co. v. Cepec, 137 A.3d 123
(Del. 2016); see also Hollinger, Inc. v. Hollinger Int’l, Inc., 858 A.2d 342, 374 n.40 (Del.
Ch. 2004) (analogizing to agency theory for purposes of extending analysis under 8 Del.
C. § 271 from subsidiary to parent).
51
This court previously rejected an agency-shield argument as a basis for defeating
jurisdiction under the Delaware Long-Arm Statute. See Sample v. Morgan, 935 A.2d 1046,
1058–60 (Del. Ch. 2007). The plaintiff in Sample sued a lawyer and his law firm for aiding
and abetting breaches of duty by senior officers and directors of a Delaware corporation.
As part of the events giving rise to the underlying claims, the lawyer and his law firm
caused a certificate of amendment to be filed with the Delaware Secretary of State,
providing a Delaware nexus for the assertion of jurisdiction. But the lawyer and his law
firm argued that the court could not consider this contact because they acted as agents for
the corporation when making the filing. Id. at 1058–59. This court rejected their argument:
When well-pled facts support the inference that a person caused a corporation
to take jurisdictionally-significant conduct in Delaware and that conduct is
an element in a scheme by corporate fiduciaries to unfairly advantage
themselves at the expense of a Delaware corporation and its stockholders,
our case law has consistently held that the long-arm statute may be used to
serve the person. It would be surprising were it otherwise, because a contrary
ruling would turn the very essence of faithless conduct—the abuse of
corporate power—into an immunity from accountability, precisely because
the disloyal fiduciaries derived their wrongful gains from actions of the
[entity] itself, albeit . . . actions that their own conduct brought about. Such
an accountability-destroying reading of the long-arm statue would itself be
entirely disloyal to the statute’s purpose . . . .25
This same reasoning applies to Harron’s agency-shield argument under Section 18-
109(a)(ii). When a defendant engages in jurisdictionally significant conduct under Section
18-109(a)(ii), i.e., participating materially in the management of the LLC, and when that
25
Id. at 1060 (citations omitted); see Mobil Oil Corp. v. Advanced Envtl. Recycling
Techs., Inc., 833 F. Supp. 437, 442–43 (D. Del. 1993) (surveying Delaware law and
declining to recognize fiduciary shield as a basis for avoiding jurisdiction).
52
conduct supports a claim for which a defendant can be served under the statute, then the
statute can be used to serve that person, even if the person acted as an agent of the LLC or
its formal manager when engaging in the conduct. Were it otherwise, then the “very
essence” of the conduct covered by Section 18-109(a)(ii)—participating materially in the
management of the LLC—would become an immunity from accountability, an outcome
“entirely disloyal to the statute’s purpose.”
The two possible interpretations of the agency shield argument thus offer little (if
anything) to recommend them and many reasons to reject them. This decision rejects the
agency shield.
B. Due Process
Once a plaintiff has identified a valid method of serving process, the court must
assess whether the exercise of personal jurisdiction comports with due process. “The focus
of this inquiry is whether [the defendant] engaged in sufficient minimum contacts with
Delaware to require it to defend itself in the courts of this State consistent with the
traditional notions of fair play and justice.” AeroGlobal Capital Mgmt., LLC v. Cirrus
Indus., Inc., 871 A.2d 428, 440 (Del. 2005) (internal quotation marks omitted). In addition
to the defendant’s contacts with the state, relevant factors include “the forum State’s
interest in adjudicating the dispute; the plaintiff’s interest in obtaining convenient and
effective relief . . . ; [and] the interstate judicial system’s interest in obtaining the most
efficient resolution of controversies . . . .” Istituto Bancario Italiano SpA v. Hunter Eng’g
Co., 449 A.2d 210, 220 (Del. 1982) (citations omitted) (quoting World-Wide Volkswagen
Corp. v. Woodson, 444 U.S. 286, 292 (1980)).
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Harron was a founding member of both International and LATAM, spearheaded the
formation of those entities under the laws of this State, and accepted the role of president
with each. His active participation in the formation of the two Delaware entities is a
sufficient contact to enable this court to adjudicate Harron’s rights and obligations under
their governing agreements. See Terramar Retail Ctrs., LLC v. Marion #2-Seaport Tr.
U/A/D June 21, 2002, 2017 WL 3575712, at *10–11 (Del. Ch. Aug. 18, 2017), aff’d, 184
A.3d 1290 (Del. 2018) (ORDER). Having engaged in conduct that involved the formation
of a Delaware entity, Harron should have “reasonably anticipated . . . that his . . . actions
might result in the forum state exercising personal jurisdiction over him in order to
adjudicate disputes arising from those actions.” In re USACafes, L.P. Litig., 600 A.2d 43,
50–51 (Del. Ch. 1991); accord Hamilton P’rs v. Englard, 11 A.3d 1180, 1198–99 (Del.
Ch. 2010). Harron’s service as a senior officer of the Companies is likewise a sufficient tie
to subject him to jurisdiction in this state for purposes of adjudicating claims relating to his
duties and obligations in that capacity. PT China, 2010 WL 761145, at *5; Assist Stock
Mgmt. L.L.C. v. Rosheim, 753 A.2d 974, 980–81 (Del. Ch. 2000); see Del. Prof’l Ins. Co.
v. Hajjar, 55 F. Supp. 3d 537, 542 (D. Del. 2014) (“As a director of two Delaware
corporations, [the defendant] purposefully availed himself of the privilege of conducting
activities in Delaware so as to reasonably anticipate being haled into court here.”).
Another factor in the constitutional analysis is the forum state’s interest in the
dispute. Delaware has a “significant and substantial interest in actively overseeing the
conduct of” persons who manage Delaware entities. Armstrong v. Pomerance, 423 A.2d
174, 177 (Del. 1980) (discussing corporate directors). This interest “far outweighs any
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burden” to a defendant who “voluntarily associated” himself with an entity by accepting a
position as a senior officer. See id. This is particularly so where, as here, Harron is an
international executive who, although based in Chicago, regularly does business in Latin
America and Brazil. Litigating in Delaware is a relatively inconsequential burden that
Delaware’s interest far outweighs. See Cornerstone Techs., LLC v. Conrad, 2003 WL
1787959, at *13 (Del. Ch. Mar. 31, 2003).
Two additional factors—the plaintiffs’ interest in obtaining convenient and
effective relief and the interstate judicial system’s interest in obtaining the most efficient
resolution of controversies—similarly support the reasonableness of this court’s exercise
of personal jurisdiction over Harron. The plaintiffs are Delaware entities. As citizens of
this State, they have an interest in using its courts to recover for the injuries they claim to
have suffered. In cases involving claims against persons who manage the business and
affairs of Delaware entities, jurisdictional statutes like Sections 3114 and 18-109 make
Delaware uniquely able to provide a convenient and effective forum. Cases involving the
internal affairs of Delaware entities implicate questions of Delaware law, and for those
issues litigating in Delaware provides the additional benefit of a direct appeal from the trial
court to the Delaware Supreme Court, which is the only tribunal capable of providing a
definitive ruling as to an issue of Delaware law. Cf. In re Topps Co. S’holders Litig., 924
A.2d 951, 954 (Del. Ch. 2007) (observing during course of forum non conveniens analysis
that litigating in Delaware would “provide litigants the timely opportunity to seek review
from this state's highest court, the Delaware Supreme Court,” which “is obviously
unavailable in the courts of another state”). These advantages benefit all of the parties, not
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only the plaintiffs, and serve the interstate judicial system’s interest in the efficient
resolution of controversies.
The one claim that does not fit neatly into this analysis is Count IV, which asserts
that Harron violated federal law as set forth in the Stored Communications Act by using
Metro’s email servers and computer systems for unauthorized purposes and by attempting
to delete emails and files from his Metro accounts before his departure. It seems unlikely
that a Delaware court would exercise personal jurisdiction over Harron for this claim
standing alone. In this case, however, Count IV is sufficiently related to the claims for
which personal jurisdiction exists to render proper the assertion of personal jurisdiction
over Harron for Counts IV.
“Once a defendant is subject to personal jurisdiction under 6 Del. C. § 18-109(a) as
to certain claims, the Court may exercise personal jurisdiction over the defendant with
respect to any claims that are sufficiently related to the cause of action.” Yu v. GSM Nation,
LLC, 2018 WL 2272708, at *11 (Del. Super. Apr. 24, 2018). “Sufficiently related claims
are those predicated on the same set of facts.” Id. That test is met here. The federal claim
under the Stored Communications Act arises out of Harron’s allegedly wrongful efforts to
pursue and subsequently hide his personal ventures, which provide the crux for the other
claims in this action. Because this court can exercise personal jurisdiction over Harron for
purposes of the Counts I–III, V, and VI, this court also can exercise personal jurisdiction
over Harron for purposes of the related claim in Count IV.
The other claim with a twist is Count VII. That count seeks a declaration that Harron
defaulted on loans that the Companies extended pursuant to their LLC agreements so that
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Harron could meet capital calls, with the consequence that Harron now must repay the
loans when the Companies exercise their contractual right to repurchase his member
interests. Normally this court would not exercise personal jurisdiction over a defendant
who lacked any ties with Delaware other than his status as an officer of an entity for
purposes of a garden-variety breach of contract claim, such as a claim to recover a loan.
Here, it is possible that this court could exercise personal jurisdiction over Harron under
the Delaware Long-Arm Statute without offending due process, because the loan claims
implicate Harron’s obligations as a member under the International and LATAM
Agreements, and Harron was personally involved in creating those entities and preparing
their LLC agreements. See Terramar, 2017 WL 3575712, at *10–11. But this decision need
not dilate on that point, because the claim to recover the loans is closely related to Harron’s
departure from the Companies and the plaintiffs’ claims regarding his wrongful acts. As
with Count IV, because this court can exercise personal jurisdiction over Harron for Counts
I–III, V, and VI, this court also can exercise personal jurisdiction over Harron for the
related claim in Count VII.
III. CONCLUSION
Harron is subject to personal jurisdiction in Delaware for purposes of the claims
asserted in this case. His motion to dismiss this action pursuant to Rule 12(b)(2) is denied.
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