BigHorn Ventures Nevada LLC v. Eric Solis ( 2022 )

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
LORI W. WILL LEONARD L. WILLIAMS JUSTICE CENTER
VICE CHANCELLOR 500 N. KING STREET, SUITE 11400
WILMINGTON, DELAWARE 19801-3734
Date Submitted: December 22, 2022
Date Decided: December 23, 2022
Daniel A. O’Brien, Esquire Megan T. Mantzavinos, Esquire
Venable LLP Marks, O’Neill, O’Brien, Doherty
1201 N. Market Street, Suite 1400 & Kelly, P.C.
Wilmington, DE 19801 300 Delaware Avenue, Suite 900
Wilmington, DE 19801
RE: Bighorn Ventures Nevada, LLC v. Solis et al.,
C.A. No. 2022-1116-LWW
Dear Counsel:
I write regarding the plaintiff’s Motion for Appointment of a Receiver or
Custodian Pendente Lite (the “Motion”). Given the purported exigencies involved
and the impending holidays, I have endeavored to decide the Motion expeditiously.
The record before me makes clear that it is not a close call. The Motion is denied.
My reasoning follows.
C.A. No. 2022-1116-LWW
December 23, 2022
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I. BACKGROUND1
Nominal defendant MovoCash, Inc. (“MOVO”), a private Delaware
corporation headquartered in Palo Alto, California, is a financial technology
company. It offers consumers otherwise traditional banking services through
MOVO’s app and physical debit cards by way of Coastal Community Bank.2
Defendant Eric Solis, who founded MOVO in 2014, is MOVO’s Chief Executive
Officer and a member of its Board of Directors.3
MOVO’s business is reliant on its ability to process transactions.4 MOVO
engages i2c, Inc. as its payment processor and pays i2c certain fees for those
services.5 It also depends on its relationship with Coastal Community Bank to add
1
Evidence submitted by the parties is cited either by reference to the docket or the
parties’ designation of exhibits presented during the evidentiary hearing on the Motion.
The latter is cited by “PX” or “DX” to represent a plaintiff’s exhibit or defendants’
exhibit, respectively. The transcript of the hearing is cited as “Rough Hr’g Tr. ([Witness
Last Name]) __.” The final transcript was not available at the time of this decision;
quoted text and pagination may change slightly.
2
Verified S’holder Deriv. Compl. & Pet. for Emergency Relief & a Receiver or
Custodian (Dkt. 1) (“Compl.”) ¶¶ 17, 29.
3
Id. ¶ 29.
4
Id.; Decl. of Derek B. Distenfield (Dkt. 1) (“First Distenfield Decl.”) ¶ 3; see Rough
Hr’g Tr. (Distenfield) 10-12.
5
Compl. ¶ 31; First Distenfield Decl. ¶¶ 5-6; see Rough Hr’g Tr. (Distenfield) 10-12.
C.A. No. 2022-1116-LWW
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customers and generate revenue.6 Coastal Community Bank has required MOVO
to raise additional capital before it can onboard new user accounts.7
The plaintiff in this action is Bighorn Ventures Nevada, LLC. Bighorn is
MOVO’s largest Series A investor and shareholder.8 Bighorn initially invested in
MOVO because it “believed in the Company’s promise.”9 It now believes,
however, that MOVO’s performance is trending downward. Bighorn alleges,
based on “information and belief,” that MOVO is now on “very precarious
financial footing.”10 It blames Solis for MOVO’s troubles and accuses him of
mismanagement and self-dealing.11
Bighorn maintains that it has tried (and is trying) to “resolve” the MOVO’s
challenges through a “lifeline.”12 On November 18, 2022, Bighorn offered MOVO
a $300,000 unsecured loan (the “Demand Note”) with “favorable, below market
6
Compl. ¶¶ 31-32; First Distenfield Decl. ¶ 8; Rough Hr’g Tr. (Distenfield) 10-12, 20.
7
Compl. ¶ 38; see id. Ex. C.
8
Id. ¶ 1.
9
Id. ¶ 3.
10
Id. ¶ 10.
11
Id. ¶¶ 3-9. For example, Bighorn accuses Solis of employing family members and
invading email accounts. Id. ¶¶ 12-13. Given that these alleged instances of self-dealing
and mismanagement have little bearing on the present Motion, I do not address them in
this decision.
12
Id. ¶ 11.
C.A. No. 2022-1116-LWW
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terms that would permit MOVO to pay amounts immediately due.”13 But its offer
came with strings attached, including a “corporate restructuring” condition.14
Bighorn insisted that: it be permitted to appoint a director to fill the vacant fifth
seat on the Board; Solis be removed as CEO and replaced by Derek Distenfield—a
Bighorn employee and Board appointee—as interim CEO; and non-party Travis
Ault—who had been promised (or at least desired) a Board seat in connection with
a large investment—serve only as a non-voting observer to the Board.15
At a November 22 Board meeting, Solis and defendant Russell Grant Van
Cleve—another Board member—voted against the Demand Note.16 They view the
Demand Note as an attempted “coup” or “hostile takeover” of MOVO by
Bighorn.17 Distenfield and Blake Bell—the second Bighorn appointee to the
MOVO Board—voted in favor.18
On November 25, Solis sent an email to the Board titled “Financial
Update.”19 Solis stated that the Company’s accounts payable was “expected to be
13
Id.; see id. Ex. H.
14
Id. ¶ 14; see id. Exs. E, G, H.
15
Id. Ex. H ¶ 7(b); see also Rough Hr’g Tr. (Distenfield) 49-50.
16
Id. ¶ 45.
17
Id. ¶ 43; Decl. of Eric Solis (Dkt. 24) (“Solis Decl.”) ¶¶ 34-35.
18
See Suppl. Decl. of Derek B. Distenfield (Dkt. 32) (“Suppl. Distenfield Decl.) Ex. G.
19
Compl. ¶ 46; id. Ex. D.
C.A. No. 2022-1116-LWW
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brought down by over $500k by the end of [November]” and that he “believe[d]”
he could “close” additional funding over the coming months.20 Solis explained
that he intended to approach MOVO’s creditors to reorganize debt while making
payments and increasing customer fees.21
On December 1, Van Cleve sent the Board an email detailing his concerns
with the Demand Note.22 Van Cleve expressed a desire to properly “exercise his
fiduciary duties” and explained that his vote against the Demand Note “in no way
signified that [he] support[ed Solis] to the detriment of the company.”23 He
questioned whether the Demand Note and its terms “represented a better, more
viable, path forward for the company” than retaining Solis and allowing him to
seek out “other investments sources (equity or debt), renegotiate debts owed to
vendors, and maintain the finesse and skill (and regulatory understanding) needed
to keep relations sound with [MOVO’s] bank and processor, and to keep the
team.”24
20
Id. Ex. D.
21
Id.; PX 21; see also PX 14; PX 15; PX 27.
22
PX 20 (“An assessment of the offer being provided by Bighorn did not provide the
needed level of credibility and/or ability to move the needle and thus compel me that it
was in the company’s best interest.”).
23
Id.
24
Id.
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Van Cleve recognized that the Demand Note had some “positive features,”
including “money immediately available” for “some weeks of breathing room.”25
But he described “other elements of the offer that gave cause for pause,” including:
• Size of the amount offered. Not enough to move the needle and
actually get the company on a new trajectory.
• Timeline of the time when money due (even if easier interest,
it’s timing of return was shorter than hard money options).
• Change of board control accompanying the injection would
mean the company no long[er] had a sense of balance that is so
helpful in both good governance and attracting additional
investors[.]
• It did not provide any narrative, much less a convincing one, on
how the proposed Interim CEO would be able to breed
sufficient trust to keep bank and processors and regulatory
agencies satisfied, or better yet enthusiastic.
• Proposed Interim CEO [Distenfield] has been serving as [a]
Series A director during a time of increased dysfunction[] in the
company, including a specific key period in which his
demeanor and actions may have contributed meaningfully to
catalytic $600,000 of funding not coming.26
On the evening of December 1, Bighorn proposed revisions to its offer (the
“Revised Demand Note”), purportedly to address Van Cleve’s misgivings.27 The
Revised Demand Note: (1) doubled the initial amount of funding (to $600,000) that
25
Id.
26
Id.
27
Compl. ¶ 49; PX 20.
C.A. No. 2022-1116-LWW
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Bighorn had originally offered; (2) extended the maturity date to six months; and
(3) made clear that the interim CEO would not be Distenfield.28 But it would
impose the following restructuring conditions on MOVO:
The Board shall have: (i) removed, or accepted the
resignation of, Eric Solis as Chief Executive Officer of
the Company [effective prior to December 8]; (ii)
approved and appointed, as successor to Eric Solis, an
Interim Chief Executive Officer (“Interim CEO”) of the
Company which the Interim CEO: (A) shall be appointed
with the consent of [Bighorn], which consent shall not be
unreasonably withheld, (B) shall be independent of any
shareholder and/or director or officer of the Company,
and (C) shall, subject to the oversight of the Board, have
sole authority to manage and oversee all of the
Company’s businesses, personnel, and finances including
but not limited to, negotiating, securing, and approving
terms of any form of debt financing and/or issuing new
equity, exercising discretion to remove any employee,
executive, and/or third-party agent or contractor, and
implementing necessary and appropriate cost reduction
measures; (iii) appointed a Special Restructuring
Committee of the Board acceptable to [Bighorn]; (iv)
appointed as a non-voting member Travis Ault as an
observer to the Board with rights to attend meetings,
receive documents, receive any and all financial
information, and make proposals of any kind directly to
the Board (subject to all applicable privileges); and (v)
authorized and directed the Special Restructuring
Committee and the Interim CEO to seek, negotiate and
present to the Board for approval one or more definitive
28
Compl. ¶ 50; PX 20.
C.A. No. 2022-1116-LWW
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written proposals for a corporate and/or financial
restructuring of the Borrower . . . .29
The Board did not accept the Revised Demand Note.30 The vote was, again, two to
two.
The next day, on December 2, Bighorn filed this litigation against Solis and
Van Cleve. Bighorn advances breach of fiduciary duty claims against Solis and
Van Cleve, a waste claim against Solis, aiding and abetting claims against Van
Cleve, and seeks the appointment of a custodian or receiver for MOVO. Bighorn
sought emergency relief and highly expedited proceedings, asserting that the Board
was deadlocked and that Solis and Van Cleve “refused to act to protect the
Company” because they rejected the Revised Demand Note.31
After receiving briefing on Bighorn’s motion to expedite and for a
temporary restraining order, I heard argument on December 13.32 I denied the
motion for a temporary restraining order, which asked that I enjoin Solis from
“acting as, or holding himself out to be, CEO of MOVO in any manner unless a
majority of directors (other than Solis) has approved in writing any and all such
29
PX 20.
30
Compl. ¶ 50.
31
Id. ¶¶ 54, 64, 69.
32
See Dkt. 35.
C.A. No. 2022-1116-LWW
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actions in advance.”33 That relief would have given the Bighorn directors veto
power over all acts taken by Solis. But I granted the motion to expedite, given
Bighorn’s insistence that MOVO faced certain doom if the court did not
intervene.34
Specifically, Bighorn argues that MOVO owes a substantial payment to i2c
by December 30 and “does not currently have the funds to responsibly make th[is]
payment.”35 It suggests that i2c will terminate services if the payment is not made
and that a “complete collapse” of MOVO will follow.36 To prevent this outcome,
Bighorn avers that a receiver or custodian must break the Board deadlock so that
MOVO can obtain funds through the Revised Demand Note.37 Accepting those
assertions as true, I set an expedited evidentiary hearing on Bighorn’s Motion to
appoint a receiver or custodian.
The parties subsequently submitted briefs and evidence directed at two
questions: whether the Board is deadlocked; and whether MOVO is insolvent. At
a hearing held yesterday, December 22, the parties presented additional evidence
33
[Proposed] Order on Pl.’s Mot. for a TRO (Dkt. 1); see Dkt. 33.
34
Dkt. 33.
35
Pl.’s Reply Mem. in Further Supp. of Mots. for TRO & for Expedited Proceedings
(Dkt. 32) 2 (emphasis removed).
36
Id. at 17.
37
Id.
C.A. No. 2022-1116-LWW
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on these issues. Four witnesses testified live at the hearing. This is my decision on
the Motion.
II. LEGAL ANALYSIS
Bighorn contends that the court should appoint a custodian or receiver to
break a supposed deadlock on the Board and address insolvency. It states that such
relief is called for under Section 226(a)(2) or Section 291 of the Delaware General
Corporation Law. Barring that, it asks this court to appoint a receiver pendente lite
pursuant to its equitable authority.
Bighorn is not entitled to the relief it seeks under any of those avenues.
A. The Requirements of Section 226(a)(2) Are Not Met.
Section 226(a) provides that the Court of Chancery “may” upon an
“application of any stockholder . . . appoint 1 or more persons to be custodians if
the corporation is insolvent, to be receivers” for a corporation.38 Relevant here,
Section 226(a)(2) concerns director deadlock and provides that a custodian may be
appointed when:
The business of the corporation is suffering or is
threatened with irreparable injury because the directors
are so divided respecting the management of the affairs
of the corporation that the required vote for action by the
38
8 Del. C. § 226(a).
C.A. No. 2022-1116-LWW
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board of directors cannot be obtained and the
stockholders are unable to terminate this division.39
Section 226(a)(2) “sets forth three conditions” that must be met “before this
Court may exercise its authority under the statute.”40 First, the board of directors
must be “deadlocked” in the sense that they are “so divided respecting the
management of the affairs of the corporation that the vote required for curative
action by the board as a governing body cannot be obtained.” 41 Second, “‘the
business of the corporation must either be suffering or be threatened with
irreparable injury’ because of the deadlock.”42 Third, “circumstances must be such
that the shareholders are unable by shareholder vote to terminate the division
between the directors.”43 Even if the requirements of Section 226(a)(2) are
satisfied, the appointment of a custodian “is committed to the Court’s discretion.”44
The Board is allegedly deadlocked 2-2 on the question of whether MOVO is
insolvent and if it should accept Bighorn’s Revised Demand Note. A deadlock,
39
8 Del. C. § 226(a)(2). See Pl.’s Br. in Supp. of its Mot. for Appointment of a Receiver
or Custodian Pendente Lite, a TRO, & to Expedite Proceedings (Dkt. 1) (“Opening Br.”)
19-20.
40
In re Shawe & Elting LLC, 2015 WL 4874733, at *26 (Del. Ch. Aug. 13, 2015) (citing
Hoban v. Dardanella Elec. Corp., 1984 WL 8221, at *1 (Del. Ch. June 12, 1984)), aff’d,
Shawe v. Elting, 157 A.3d 152, 155, 162 (Del. 2017).
41
Id.42
Id.43
Id.C.A. No. 2022-1116-LWW
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however, must “be a product of genuine, good faith divisions” to have legal
effect.45 Here, MOVO’s governing documents provide for five Board seats. The
appointment of a fifth director would naturally resolve the purported deadlock and
obviate any need for judicial intervention.
Article V of MOVO’s certificate of incorporation discusses the election of
directors and provides that the “holders of Series A Preferred Stock, voting as a
separate class” are “entitled to elect two members” of the Board.46 The “holders of
Series Seed Preferred Stock, voting as a separate class” are “entitled to elect one
member” of the Board.47 The “holders of Common Stock, voting as a separate
class,” are “entitled to elect one member” of the Board.48 And the “holders of
Preferred Stock and the holders of Common Stock, voting together as a combined
class,” are “entitled to elect one member” of the Board.49
44
Id. at *31 (citing 8 Del. C. § 226).
45
Mehra v. Teller, 2021 WL 300352, at *18 (Del. Ch. Jan. 29, 2021) (citing Shawe &
Elting, 2015 WL 4874733, at *28).
46
Defs.’ Opp’n to Pl.’s Mot. for the Appointment of a Custodian-Receiver (Dkt. 46)
(“Opp’n Br.”) Ex. 1 (“Charter”) § 5(d).
47
Id.
48
Id.
49
Id.
C.A. No. 2022-1116-LWW
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MOVO’s Amended and Restated Voting Agreement provides further
detail.50 The Voting Agreement states, in relevant part, that the “Series A
Preferred Designees” are chosen by Bighorn.51 Distenfield currently holds one
such seat with non-party Blake Bell (purportedly) holding the other.52 The “Series
Seed Preferred Designee” is chosen by the “TCA Investors.”53 Van Cleve
currently holds that seat. The “Common Designee” is chosen by a “majority-in-
interest” of certain “Key Holders” and “shall be” MOVO’s CEO (i.e., Solis).54
Finally, the “Independent Designee”—who must be an individual “not otherwise
affiliated with the Company or any Investor”55—is to be “chosen by a majority-in-
interest of the Key Holders” and “approved by at least two of the Preferred
Directors,” whose support shall not “be unreasonably withheld.”56 It is that final
Independent Designee (or “Additional Director”) seat that remains vacant and in
dispute.
50
See Opp’n. Br. Ex. 2 (“Voting Agreement”).
51
Id. § 2.3(a).
52
See Second Distenfield Decl. Ex. G.
53
Voting Agreement § 2.3(b).
54
Id. § 2.3(c).
55
The term “Investor” is defined to include certain “prior investors” and “new investors”
listed on Exhibit A to the Voting Agreement. Id. at Preamble. Exhibit A was not
provided to the court.
56
Id. § 2.3(d).
C.A. No. 2022-1116-LWW
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An August 2 unanimous written consent of the Board stated that Ault was
appointed to the “vacant board of directors seat reserved for a neutral party” in
“correlation with . . . Ault’s $500,000 investment in the Convertible Series B
Note.”57 As of that date, Distenfield and non-party Diane Link-Morley (spouse of
Bighorn’s managing member Earl Morley) were the two Series A Preferred
Designees. The other two Board members were Van Cleve and Solis.58
On August 10, Link-Morley resigned from the Board and non-party
Massimo Barrone was designated by Bighorn to replace her.59 On August 31,
Barrone submitted his own resignation. Bighorn then purported to move Ault into
the vacant Series A Preferred seat.60
By this point, Solis had obtained the commitment of non-party Jason Bell to
invest $600,000 in MOVO, subject to his receipt of a Board seat.61 But Bighorn
delayed in approving him. Eventually, on August 31, the Board signed a
unanimous written consent designating Jason Bell to serve as the Additional
Director “subject to an approval by at least two Preferred Directors and further
57
Defs.’ Opp’n. Ex. B; see Suppl. Distenfield Decl. ¶ 3; Solis Decl. ¶ 12.
58
Suppl. Distenfield Decl. ¶ 3.
59
Id. ¶ 4; id. Exs. A, B.
60
Id. ¶ 5; id. Exs. C, D.
61
See Rough Hr’g Tr. (Solis) at 142-44.
C.A. No. 2022-1116-LWW
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election by stockholders.”62 That never happened. Solis testified that Bighorn
“sabotaged” Jason Bell’s appointment to prevent him from being seated as the fifth
director.63 MOVO thus lost Jason Bell’s potential investment.
On November 17, Bighorn ostensibly removed Ault from his seat as a Series
A Preferred director and replaced him with non-party Blake Bell.64 Bighorn’s
counsel informed Ault by letter that he was not on the Board because Bighorn was
entitled to remove him under MOVO’s Voting Agreement.65 A significant portion
of the investment Ault had offered was thereby lost. Bighorn’s counsel threatened
that if Ault “or anybody else operates as if [Ault] is on the Board, Bighorn will
regrettably and immediately need to seek appropriate relief with a proper court in
Delaware.”66
62
Suppl. Distenfield Decl. Ex. E.
63
See Rough Hr’g Tr. (Solis) 144-45; see also id. (May) 115.
64
Suppl. Distenfield Decl. Exs. F, G. The defendants contest this, pointing to MOVO’s
bylaws state that a director remains in service “until [a] successor Director is duly elected
and qualified, or until that Director’s death, resignation, or proper removal.” Defs.’
Opp’n. Ex. 3 (“Bylaws”) at Art. IV § 17(a).
65
Defs.’ Opp’n. Ex. D.
66
Id.
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Separately, Bighorn’s counsel told Solis and Van Cleve that if they did not
vote to accept the Revised Demand Note, Bighorn would “move for emergency
relief and a receivership to resolve the deadlock.”67 And so it did.
Based on my review of the limited record before me, a several conclusions
emerge from the fray.
First, Bighorn’s effort to move Ault into a Series A Preferred seat and then
swiftly remove him is shady.68 The events occurring after this litigation was filed
are equally disquieting. On December 17, Solis tried again to seat Ault on the
Board.69 In doing so, MOVO would have obtained the full amount of Ault’s
$500,000 investment. But Bighorn refused to entertain Ault’s nomination, despite
the Voting Agreement’s requirement that consent of the Preferred Directors cannot
be “unreasonably withheld.”70
Bighorn insists that Ault is now ineligible to serve as an Additional Director
because he is “affiliated with” an “Investor”: with Bighorn by virtue of the fact that
Bighorn moved him into a Series A Preferred seat (albeit briefly) and with
67
See DX 31.
68
See Rough Hr’g Tr. (Distenfield) 50-51.
69
Id. at 37.
70
Voting Agreement § 2.3(d).
C.A. No. 2022-1116-LWW
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himself.71 This position appears both baseless and pretextual. Indeed, Distenfield
testified that the “big challenge” Bighorn has with Ault is “not wanting to accept
the [D]emand [N]otes.”72
I therefore suspect that Bighorn took these actions to create a deadlock so
that it could (as its counsel threatened) seek judicial intervention.73 With Van
Cleve expressing thoughtful reasons to reject Bighorn’s loan offer and Solis
opposed, Bighorn ensured that a third director could not vote against it. Delaware
courts “will not recognize a deadlock if one side sought to manufacture it” or if the
alleged deadlock is “based on a specious premise.”74
Moreover, even if there was a true deadlock, there is no evidence that
MOVO’s shareholders cannot break it. This bears on Section 226(a)(2)’s third
condition—“the most limiting restriction” of the statute as “a director deadlock
case in which curative stockholder action is not possible arises only rarely.”75 In
71
See Pl.’s Reply in Supp. of Mot. to Appoint Receiver (Dkt. 47) (“Pl.’s Receiver Mot.
Reply”) 7; Rough Hr’g Tr. (Distenfield) 73-74.
72
Rough Hr’g Tr. (Distenfield) 74-75 (“[W]e felt that that performance was an indication
of him not understanding what needed to be done.”).
73
See Solis Decl. ¶¶ 16-17.
74
Kleinberg v. Cohen, 2017 WL 568342, at *11 (Del. Ch. Feb. 13, 2017) (citations
omitted).
75
Id. at *14 (Del. Ch. Feb. 13, 2017) (quoting Donald J. Wolfe, Jr. & Michael A.
Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery
§ 8.09[c][2], at 8-212 (2012)).
C.A. No. 2022-1116-LWW
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one instance where this circumstance was demonstrated, “stockholders [could] not
break the deadlock because of [a voting agreement] and the rights it conferred,
locking the two competing factions into a 3-3 impasse.”76 In another, the parties
had stipulated to the fact that the company’s stockholders were unable to elect
successor directors and there was “no prospect that the stockholders” would “ever”
be able to resolve a division between two individuals who “behaved functionally”
as if they were 50-50 owners of the company.77
Here, Ault did not receive shareholder approval to serve on the Board based
on a technicality. That is, the requisite shareholder vote needed to elect Ault to the
Additional Director position was obtained at an improperly noticed meeting.78
Bighorn’s insistence that the result of the improperly noticed meeting is voidable
does not, however, mean a properly noticed meeting cannot be held or that the
prior vote could not be ratified.79 Assuming that an Additional Director (Ault or
otherwise) had the support of two of three Preferred Directors, the vote of “holders
76
Id. at *14.
77
Shawe & Elting, 2015 WL 4874733, at *30.
78
See Pl.’s Receiver Mot. Reply 5; Bylaws § 6(b) (stating that “[t]he Board of Directors
shall determine the time and place of [a] special meeting, which shall be held not less
than 35 . . . days after the date of the receipt of the request”); Distenfield Suppl. Decl.
Ex. I.
C.A. No. 2022-1116-LWW
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of Preferred Stock and the holders of Common Stock, voting together as a
combined class” could presumably be secured.80
I therefore decline to appoint a custodian or receiver pursuant to Section
226(a)(2).
B. Appointment of a Receiver Under Section 291 Is Not
Warranted.
Section 291 concerns the appointment of a receiver for insolvent
corporations. The provision states that:
Whenever a corporation shall be insolvent, the Court of
Chancery, on the application of any creditor or
stockholder thereof, may at any time, appoint 1 or more
persons to be receivers of and for the corporation, to take
charge of its assets, estate, effects, business and affairs,
and to collect the outstanding debts, claims, and property
due and belonging to the corporation, with power to
prosecute and defend, in the name of the corporation or
otherwise, all claims or suits, to appoint an agent or
agents under them, and to do all other acts which might
be done by the corporation and which may be necessary
or proper.81
79
Pl.’s Receiver Mot. Reply 6; see Lofland v. Di Sabatino, 1991 WL 138505, at *3 (Del.
Ch. July 25, 1991) (“[T]he results of [an] improperly noticed [shareholder m]eeting are
voidable and not void and are susceptible to cure by ratification.”).
80
Charter Art. V § 5(d). Bighorn has represented that it would attend a properly noticed
shareholder vote. See Suppl. Distenfield Decl. Ex. J. And Solis testified that the vote
could be obtained. See Rough Hr’g Tr. (Solis) 135-36.
81
8 Del. C. § 291.
C.A. No. 2022-1116-LWW
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“The appointment of a receiver ‘lies within the sole discretion of the [c]ourt.’”82
Such an appointment is only appropriate if the company is insolvent and “special
circumstances” indicate that “some real beneficial purpose will be served.”83
A court may conclude that a corporation is insolvent for one of two reasons.
The first is when a corporation has “a deficiency of assets below liabilities with no
reasonable prospect that the business can be successfully continued in the face
thereof.”84 The second is when a corporation has “an inability to meet maturing
obligations as they fall due in the ordinary course of business.”85
“[I]nsolvency is a jurisdictional fact, proof of which must be clear and
convincing and free from doubt.”86 If there is any doubt as to the insolvency of the
corporation, a receiver should not be appointed.87 The record before me, however,
is riddled with uncertainty.
82
Pope Invs. LLC v. Benda Pharm., Inc., 2010 WL 5233015, at *6 (Del. Ch. Dec. 15,
2010) (quoting Banet v. Fonds de Régul. et de Contrôle Café Cacao, 2009 WL 529207,
at *3 (Del. Ch. Feb. 18, 2009)).
83
Id.84
Prod. Res. Grp., L.L.C. v. NCT Grp., Inc., 863 A.2d 772, 782 (Del. Ch. 2004) (quoting
Siple v. S & K Plumbing and Heating, Inc., 1982 WL 8789, at *2 (Del. Ch. Apr. 13,
1982)).
85
Id.86
Kenny v. Allerton Corp., 151 A. 257 (Del. Ch. 1930).
87
See id.C.A. No. 2022-1116-LWW
December 23, 2022
Page 21 of 27
Regarding MOVO’s cash flow solvency, Bighorn points to evidence that
MOVO had negative income earlier this year and faces substantial upcoming
payments.88 In addition to a number of ordinary expenses, it owes a total of $1.3
million to i2c.89 An agreement between MOVO and i2c provides that MOVO will
pay i2c $50,000 by December 30, 2022 and another $142,666.14 by January 31,
2023.90 A series of monthly payments are subsequently owed beginning in
February 2023.91
At the hearing on the Motion, Bighorn offered the testimony of MOVO’s
former Finance Manager, who stated that Bighorn had about $2 million in accounts
payable (owed to vendors) in addition to outstanding demand notes and convertible
notes due in February.92 Bighorn compared that testimony about MOVO’s
liabilities to MOVO’s monthly revenue which, as of October 2022, was
88
See Second Supp. Decl. of Derek B. Distenfield (Dkt. 47) (“Second Supp. Distenfield
Decl.”) Ex. A.
89
Id. Ex. D ¶¶ 2, 3.
90
Id. Ex. D ¶ 4.1.
91
Id. Ex. D ¶¶ 4.1, 4.2.
92
Rough Hr’g Tr. (May) 109-11.
C.A. No. 2022-1116-LWW
December 23, 2022
Page 22 of 27
$184,938.42.93 It was unknown, however, what notes were due when or whether
Solis had sought to extend those obligations.94
Distenfield, who has been on the Board for six months, also testified. He
stated his understanding that MOVO must raise $900,000 in capital to pay amounts
owed to Coastal Community Bank or risk losing that relationship.95 Bighorn also
educed testimony about another $5 million due to Coastal Community Bank at the
end of January. But the “evidence” offered in support was a blurry screenshot of a
portion of a document with no heading, sender, recipient, or date.96
Regarding its argument that MOVO’s liabilities exceed its assets, Bighorn
has also not met its burden of proof. It relies on a balance sheet dated as of
October 31, which is obviously stale.97 The other financial data it introduced is
likewise current as of October.98 Again, its evidence on MOVO’s current status
was largely limited to testimony from a former MOVO employee and a Bighorn
employee who has been on the Board for a short tenure.
93
PX 1.
94
Rough Hr’g Tr. (May) 113-14.
95
Id. (Distenfield) 12, 21, 24.
96
PX 4.
97
Second Supp. Distenfield Decl. Ex. B ¶ 3.
98
PX 1.
C.A. No. 2022-1116-LWW
December 23, 2022
Page 23 of 27
Overall, the bulk of Bighorn’s evidence concerns upcoming liabilities,
which does not necessarily speak to whether MOVO was insolvent at the time that
Bighorn filed its Complaint.99 In fact, Solis testified credibly that MOVO is
current on payroll and taxes and has cash on hand to make the upcoming $50,000
payment to i2c.100 The latter point is essential, since the December payment to i2c
underpinned Bighorn’s insistence that MOVO faced imminent harm. Moreover,
Solis maintains that MOVO has agreed to terms with i2c for the payment of
MOVO’s outstanding balance over the next 8 months.101 Bighorn provided no
firm evidence to the contrary.
Solis also states that he has brought in funds to cover operating expenses and
debts and has identified investors that may wish to invest in the business.102 He
believes that any outstanding debts can be restructured and payment terms
99
See In re Geneius Biotechnology, Inc., 2017 WL 6209593, at *6 (Del. Ch. Dec. 8,
2017) (considering whether a company was insolvent “at the time of the Petition”);
Manning v. Middle States Oil Corp., 137 A. 79, 80 (Del. Ch. 1927) (“Insolvency existing
at the time of the suit goes to an essential jurisdictional fact and must be shown.”).
100
See Solis Decl. ¶ 39; see also Rough Hr’g Tr. 155.
101
Solis Decl. ¶ 39.
102
Id. ¶ 4. see Rough Hr’g Tr. (Solis) 153.
C.A. No. 2022-1116-LWW
December 23, 2022
Page 24 of 27
amended.103 He explained that MOVO’s business provides an ongoing daily influx
of revenue and that its shareholders remain willing to provide capital.104
Even if MOVO was shown to be insolvent, no special circumstances are
present that weigh in favor of appointing a receiver. Rather, I believe that there are
far less severe means available to solve MOVO’s problems.105 The appointment of
Jason Bell, Ault, or another individual to the Board—with an associated
investment—would obviously help. That option was available yet rejected by
Bighorn. It seems that Bighorn believes MOVO’s solvency issues must be
addressed by Bighorn’s preferred means: the Revised Demand Note.
Relatedly, as previously discussed, there are straightforward mechanisms by
which to appoint a fifth director and resolve the deadlock (if one exists). Bighorn
nonetheless asks that a receiver be “authorized to and shall act as a Director of
[MOVO] so that the current deadlock of the Board can be remedied by, inter alia,
action to remove and replace Mr. Solis as CEO and to redress any wrongdoing that
is uncovered.”106 It is, of course, far preferable that the Board—rather than a third
party—work to move MOVO’s business forward. This court “should not lightly
103
Rough Hr’g Tr. (Solis) 154.
104
Id. at 155.
105
See Pope Invs., 2010 WL 5233015, at *8.
106
[Proposed] Order Appointing Receiver or Custodian Pendente Lite (Dkt. 1).
C.A. No. 2022-1116-LWW
December 23, 2022
Page 25 of 27
undertake to substitute a receiver for the board of directors of an insolvent
company.”107
Though Bighorn may doubt that the rosy future Solis describes is within
reach, it is not Solis’s burden to disprove insolvency. “So long as there is a
reasonable prospect of success and a corporation is able to respond to the lawful
demands of creditors, it should not be pronounced insolvent.”108 As it presently
stands and based on the evidence presented, I am not convinced that MOVO “is a
hopeless endeavor.”109
C. Bighorn’s Plea For Equitable Relief Rings Hollow.
Finally, Bighorn asks that the court draw upon its inherent equitable
authority to appoint a receiver pendente lite. It is well settled, however, that “such
power should not be exercised except in a clear case, when it is necessary for the
prevention of manifest wrong and injury, and where the plaintiff would otherwise
be in danger of suffering irreparable loss.”110 No wrong or injury is “manifest”
and the facts—particularly on this limited record—are anything but clear.
107
Prod. Res. Grp., 863 A.2d at 786.
108
Sill v. Kentucky Coal & Timber Development Co., 87 A. 617, 620 (Del. Ch. 1916).
109
Geneius, 2017 WL 6209593, at *10.
110
Beal Bank, SSB v. Lucks, 1998 WL 778362, at *3 (Del. Ch. Oct. 23, 1998) (quoting
Moore v. Assoc. Producing & Refining Corp., 121 A. 655, 656 (Del. Ch. 1923)).
C.A. No. 2022-1116-LWW
December 23, 2022
Page 26 of 27
The appointment of a receiver pendente lite “ranks as the broadest, most
intrusive remedy” provided for by the court’s “preventative” powers.111 This
drastic remedy will not be “resorted to if milder measures will give the plaintiff,
whether creditor or shareholder, adequate protection for his rights.”112 And powers
to appoint a receiver are “exercised with great caution and only as exigencies of
the case appear by proper proof.”113
At this early stage—and where Bighorn primarily complains of the Board’s
refusal to accept its condition-laden Demand Note—it would be highly
inappropriate to grant such relief. I decline to do so.
III. CONCLUSION
This court took seriously Bighorn’s plea that MOVO faced grave injury
absent the immediate appointment of a receiver or custodian. At Bighorn’s
insistence, the weighty burdens of expedited litigation were placed upon the
defendants and this court. Yet Bighorn came nowhere close to demonstrating that
111
Id.112
Ross Hldg. & Mgmt. Co. v. Advance Realty Grp., LLC, 2010 WL 3448227, at *6 (Del.
Ch. Sept. 2, 2010) (quoting Maxwell v. Enterprise Wall Paper Mfg. Co., 131 F.2d 400,
403 (3d Cir. 1942)).
113
Thoroughgood v. Georgetown Water Co., 77 A. 720, 723 (Del. Ch. 1910) (explaining
that the Court of Chancery will only appoint a receiver pendente lite where there is “gross
mismanagement, positive misconduct, or other grounds showing a breach of trust on the
part of the officers of the corporation, and probably, except in rare cases, only when
insolvency has resulted from such misconduct”).
C.A. No. 2022-1116-LWW
December 23, 2022
Page 27 of 27
the extreme relief sought in the Motion is warranted. For these reasons, Bighorn’s
Motion for Appointment of a Receiver or Custodian Pendente Lite is denied.114
Sincerely yours,
/s/ Lori W. Will
Lori W. Will
Vice Chancellor
114
Bighorn’s Motion to Strike Expert Report and Testimony of Jeffrey T. Willoughby,
filed early this morning, is also denied. Willoughby, a CPA, submitted a report and
testified on behalf of the defendants. He stated that, in his view, “there is a reasonable
basis to believe the Company has the opportunity to maintain an ongoing operation and
survive as a going concern.” Defs.’ Opp’n to Pls.’ Mot. to Strike Expert Report and
Testimony of Jeffrey T. Willoughby at Ex. A. Bighorn essentially argues that this report
should be stricken as irrelevant and unreliable under Delaware Rule of Evidence 702
because it does not speak to the question of MOVO’s current solvency. In my view, that
is not a reason to exclude the testimony entirely. Again, it is MOVO’s burden to prove
solvency by clear and convincing evidence. My conclusion that it failed to do so does
not turn on Willoughby’s report or testimony, to which I have attributed the appropriate
weight. See Strategic Inv. Opps. LLC v. Lee Enters., Inc., 2022 WL 453607, at *12 n.131
(Del. Ch. Feb. 14, 2022) (declining to exclude evidence under Rule 702 but instead
giving the evidence “the weight deemed appropriate” by the court).