Alan L. Lucas ( 2014 )

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
ABIGAIL M. LEGROW
MASTER IN CHANCERY NEW CASTLE COUNTY COURTHOUSE
500 NORTH KING STREET, SUITE 11400
WILMINGTON, DE 19801-3734
Final Report: July 1, 2014
Submitted: June 11, 2014
Alan L. Lucas Jackie and Della Miller
Linn County Correctional Center 1120 37th Street
P.O. Box 608 Des Moines, IA 50311
Cedar Rapids, IA 52406-0608
Francis and Gwen Miller
Dwight and Carol Miller 204 12th Street NW
103 15th Street SE Mason City, IA 50401
Mason City, IA 50401
Theodore J. Tacconelli
Rick S. Miller
Ferry Joseph & Pearce, P.A.
P.O. Box 1351
Wilmington, DE 19899
Re: Alan L. Lucas, et al. v. Alan Hanson, et al.
C.A. No. 9424-ML
Dear Counsel and Parties:
I am in receipt of the defendants‟ motions to dismiss the amended complaint in the
above-captioned action, along with the plaintiff‟s response to those motions. For the
reasons that follow, I recommend that the Court dismiss without prejudice the amended
complaint because the plaintiff has not alleged sufficient facts to establish that (i) he has
standing to maintain this action, and (ii) this Court has personal jurisdiction over certain
of the defendants. This is my final report on these motions.
C.A. No. 9424-ML
July 1, 2014
Page 2
BACKGROUND
The following facts are drawn from the complaint, giving the plaintiff the benefit
of all reasonable inferences. This case involves Covenant Investment Fund LP
(“Covenant”), a Delaware limited partnership created in 2007. Prosapia Capital
Management LLC (“Prosapia Capital”) is the general partner and a limited partner of
Covenant.1 Prosapia Capital is a wholly-owned subsidiary of Prosapia Financial LLC
(“Prosapia Financial”).2 The plaintiff, Alan Lucas (“Lucas”) is the operating manager of
both Prosapia Capital and Prosapia Financial and is a member of Prosapia Financial.3
The defendants are current or “disassociated” limited partners of Covenant, none
of whom are residents of Delaware.4 The complaint does not allege that any of the
defendants participated in the management of Covenant. According to the Amended
Complaint, after Prosapia Capital became general partner, it expended some of
Covenant‟s funds to conduct an audit, hire contractors, and purchase a corporate vehicle,
and took steps to liquidate Covenant‟s fiber optic utility rights and assets, with an
ultimate goal of purchasing a large hotel and convention center.5 Some of the limited
partners objected to this plan for Covenant‟s future. In June 2011, Lucas was charged in
1
Am. Compl. for Declaratory J. and Prelim. Inj. (hereinafter “Am. Compl.”) ¶ 16
2
Id. ¶ 17.
3
Id. ¶¶ 2, 19.
4
Id. ¶¶ 3-11. The term “disassociated” is drawn from the complaint. The plaintiff uses the term
to refer to limited partners who allegedly received final distributions and withdraws from
Covenant in 2009. Id. ¶ 23.
5
Id. ¶ 24
C.A. No. 9424-ML
July 1, 2014
Page 3
Iowa with theft and ongoing criminal conduct associated with the expenditure and
liquidation of Covenant‟s funds and assets.6
Lucas was convicted on October 23, 2013 and was sentenced on March 14, 2014
to 25 years in prison. In connection with the criminal proceedings, Iowa declared “that
the cash held in [Covenant‟s] account was the property of the [named defendants],” and
should have been distributed to the named defendants when Prosapia Capital became
Covenant‟s general partner.7 After his conviction, but before the sentencing, Lucas filed
this action seeking declaratory and injunctive relief and arguing that “Iowa‟s attempt to
force distributions of company assets is the regulation of the internal affairs of a
Delaware entity with no ties to Iowa in violation of the commerce clause, due process
clause and full faith and credit clause of the United States Constitution.”8 Although the
Amended Complaint appears to seek declaratory and injunctive relief regarding whether
Iowa‟s prosecution of Lucas violated his constitutional rights,9 Lucas maintains that he
seeks only an injunction prohibiting the named defendants from receiving Covenant‟s
funds as restitution, explaining that “the actions by the State of Iowa and the underlying
constitutional implications are only alleged to establish that the only proper way for the
6
Id. ¶ 26.
7
Id.
8
Id.
9
See, e.g. Am. Compl. Prayer for Relief p. 20 (alleging that “[t]he State of Iowa violated the due
process, full faith and credit, and commerce clauses of the United States Constitution when Iowa
initiated a criminal prosecution of Lucas for actions undertaken as Operating Manager of the
General Partner of Covenant. In essence, Lucas‟s conduct that is not only legal, but is required
under Delaware partnership law, has been deemed illegal under Iowa law”); id. p. 22, ¶ 4
(seeking a declaration that “[w]hen the State of Iowa imposed criminal sanctions on Alan Lucas
for directing the partnership to not issue distributions or dissolve the partnership, it was acting
extraterritorially in violation of the Commerce Clause of the United States Constitution”).
C.A. No. 9424-ML
July 1, 2014
Page 4
defendants to receive a distribution or disbursement from [Covenant] is by initiating a
derivative action in this Court.”10 The defendants filed a series of motions to dismiss the
Amended Complaint. Alan Hanson, Patty Hanson, and Marcella Hosch moved to
dismiss (the “Hanson/Hosch Motion”) on the basis that Lucas lacks standing to pursue
this action because there is no allegation in the Amended Complaint that Lucas is a
limited or general partner of Covenant. Dwight Miller, Carol Miller, Jackie Miller, Della
Miller, Francis Miller, and Gwen Miller (collectively, the “Miller Defendants”) moved to
dismiss the claims against them for lack of personal jurisdiction and for failure to state a
claim.
ANALYSIS
Pursuant to Rule 12(b)(6), this Court may grant a motion to dismiss for failure to
state a claim if a complaint does not assert sufficient facts that, if proven, would entitle
the plaintiff to relief. The governing pleading standard in Delaware to survive a motion
to dismiss is “reasonable „conceivability.‟”11 That is, when considering such a motion, a
court must
accept all well-pleaded factual allegations in the Complaint as
true, accept even vague allegations in the Complaint as “well-
pleaded” if they provide the defendant notice of the claim,
draw all reasonable inferences in favor of the plaintiff, and
deny the motion unless the plaintiff could not recover under
10
Lucas‟s Resp. to Defs. Hansons‟ and Hosch‟s Motion to Dismiss (hereinafter “Resp. to
Hanson/Hosch”) at 2-4.
11
Central Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 537 (Del.
2011) (footnote omitted).
C.A. No. 9424-ML
July 1, 2014
Page 5
any reasonably conceivable set of circumstances susceptible
of proof.12
This “conceivability” standard asks whether there is a “possibility” of recovery. 13 If the
well-pleaded factual allegations of the complaint would entitle the plaintiff to relief under
a reasonably conceivable set of circumstances, the Court must deny the motion to
dismiss.14
In response to the Hanson/Hosch motion, Lucas concedes the Amended Complaint
does not allege that he is a limited partner of Covenant, but contends the absence of that
allegation merely is an oversight, asserts that he is in fact a limited partner of Covenant,
and urges the Court to “constructively amend” the Amended Complaint to add the
allegation that Lucas has a limited partnership interest in Covenant.15 On a motion to
dismiss, however, I cannot look outside the complaint for facts to support it,16 and there is
no basis in this Court‟s rules or precedent for a “constructive amendment” to the
pleadings at this stage in the proceedings. I therefore recommend that the Court dismiss
the Amended Complaint without prejudice to Lucas‟s ability to file a second amended
complaint. Although the Hanson and Hosch defendants urge that any such amendment
would be futile because the claims Lucas seeks to pursue are derivative, and he is not a
proper derivative plaintiff, those arguments were raised in the reply brief and are best
12
Id. (citing Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002)).
13
Id. at 537 & n.13.
14
Id. at 536.
15
Resp. to Hanson/Hosch at 5-6.
16
Shintom Co., Ltd. v. Audiovox Corp., 2005 WL 1138740, at *4 n.8 (Del. Ch. May 4, 2005).
C.A. No. 9424-ML
July 1, 2014
Page 6
considered on a more complete record after Lucas has been given an opportunity to
respond.
The Miller Defendants also moved to dismiss on the basis that this Court lacks
personal jurisdiction over them for purposes of deciding Lucas‟s claims.17 When a
defendant moves to dismiss for want of personal jurisdiction, it is the plaintiff‟s burden to
show a basis for the Court to exercise jurisdiction over a nonresident defendant. 18 “In
determining whether it has personal jurisdiction over a nonresident defendant, the court
will generally engage in a two-step analysis. First, was service of process on the
nonresident authorized by statute? Second, does the exercise of jurisdiction, in the
context presented, comport with due process?”19
Lucas‟s response to the Miller Defendants‟ Motion to Dismiss does not identify
the statute he contends authorized service of process over the Miller Defendants,
although I presume he relies on the State‟s long arm statute, 10 Del. C. § 3104. Even if
Lucas properly identified a statutory provision and alleged sufficient facts to meet the
terms of that statute, however, he also makes no effort to satisfy any “minimum contacts”
analysis. Instead, Lucas argues that the Miller Defendants consented to the jurisdiction
of this Court by signing Covenant‟s partnership agreement.20 Although a defendant may
waive her defense based on personal jurisdiction by expressly consenting to jurisdiction
17
The Hanson/Hosch motion does not raise personal jurisdiction as a basis for dismissal, and I
therefore have not considered this Court‟s jurisdiction over those defendants.
18
Albert v. Alex. Brown Mgmt. Servs., 2005 WL 2130607, at *14 (Del. Ch. Aug. 26, 2005).
19
Id. (citing LaNuova D & B, S.P.A. v. Bowe Co., 513 A.2d 764, 768 (Del. 1986)).
20
Consolidated Resp. to Miller Defs. Mot. to Dismiss (hereinafter “Resp. to Miller Defs.”) at 3,
4 (citing Sections 14.05 and 14.06 of the partnership agreement).
C.A. No. 9424-ML
July 1, 2014
Page 7
by contract,21 and although such consent eliminates the need for a minimum contacts
analysis,22 Lucas has not filed with the Court a copy of the partnership agreement, and I
therefore cannot determine whether the Miller Defendants in fact consented to
jurisdiction. Because Lucas has not met his burden to establish a basis for this Court to
exercise jurisdiction over the Miller Defendants, all of whom are residents of Iowa, I
recommend that the Court grant the Miller Defendants‟ motion to dismiss, without
prejudice to an amended pleading that establishes a basis by which the Court may
exercise jurisdiction over those defendants.
CONCLUSION
For the foregoing reasons, I recommend that the Court grant the motions to
dismiss without prejudice. This is my final report and exceptions may be taken in
accordance with Rule 144.
Sincerely,
/s/ Abigail M. LeGrow
Master in Chancery
21
Hornberger Mgmt. Co. v. Haws & Tingle Gen. Contrs., 768 A.2d 983, 987 (Del. Super. 2000);
see also Werner v. Miller Tech. Mgmt., L.P., 831 A.2d 318, 331 (Del. Ch. 2003) (stating that
parties can choose to avail themselves of Delaware law through a forum selection clause); cf. Del
Pharm., Inc. v. Access Pharm., Inc., 2004 WL 1631355, at *1 (Del. Ch. July 16, 2004)
(enforcing a forum selection clause, which chose New York as the exclusive forum for
adjudication, to dismiss suit).
22
Hornberger, 768 A.2d at 987; USH Ventures v. Global Telesystems Group, Inc., 1998 WL
281250, at *8 (Del. Super. Ct. May 21, 1998).