Weiss Ex Rel. E-Scrub Systems, Inc. v. E-Scrub Systems Inc.

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________
No. 14-4178
____________
STANLEY WEISS,
derivatively on behalf of e-Scrub Systems, Inc,
Appellant
v.
E-SCRUB SYSTEMS INC;
RALPH GENUARIO; MAIJA HARKONEN;
JOHN PACKARD; ELIZABETH RICHARDSON
____________
On Appeal from the United States District Court
for the District of Delaware
(D.C. No. 1-13-cv-00710)
District Judge: Honorable Gregory M. Sleet
____________
Submitted Under Third Circuit LAR 34.1(a)
March 23, 2015
Before: HARDIMAN, GREENAWAY, Jr. and KRAUSE, Circuit Judges.
(Filed: April 15, 2015)
____________
OPINION*
____________
*
This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does
not constitute binding precedent.
HARDIMAN, Circuit Judge.
Attorney Stanley Weiss appeals the District Court’s order dismissing his derivative
action. We will affirm.
I
In February 2010, Weiss obtained a $100,150 judgment in New Jersey state court
against his former client, eScrub Systems, Inc., and its founder and CEO, Ralph Genuario.
A few years later, in a proceeding to enforce that judgment, the Circuit Court for the City
of Alexandria, Virginia, held Genuario in contempt and fined eScrub $10,000 to cover
Weiss’s costs.
Unable to collect on either judgment, Weiss filed a derivative action in the United
States District Court for the District of Delaware, claiming that eScrub’s directors
(Defendants) breached their fiduciary duties by failing to mitigate the company’s financial
woes. Specifically, Weiss claimed Defendants knew that eScrub was in severe financial
difficulty and that Genuario was an incompetent CEO, but they failed to exercise control
over the company or implement a reporting system that would have enabled proper
oversight. At a minimum, Weiss argued, Defendants should have to pay eScrub’s long-
overdue attorney’s fees.
The District Court dismissed Weiss’s complaint, finding that Weiss lacked standing
to bring a derivative action on eScrub’s behalf. We will affirm for essentially the same
2
reasons.1
II
We exercise plenary review of the District Court’s order dismissing Weiss’s
complaint. Freedman v. Redstone, 753 F.3d 416, 423 (3d Cir. 2014). Like the District
Court, we accept the complaint’s factual allegations as true and construe them in the light
most favorable to Weiss. Id. (citing Jones v. ABN Amro Mortg. Grp., Inc., 606 F.3d 119,
123 (3d Cir. 2010)). “To survive a motion to dismiss, a complaint must contain sufficient
factual matter, accepted as true, to state a claim to relief that is plausible on its face.”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks omitted).
III
Under Delaware law, creditors of an insolvent corporation have standing to bring
derivative suits against corporate directors for breaches of fiduciary duties. N. Am.
Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 101 (Del. 2007). A
corporation is insolvent if (1) its liabilities exceed its assets such that there is no reasonable
prospect the business will succeed; or (2) it is unable to meet obligations as they come due
in the ordinary course of business. Buckley v. O’Hanlon, 2007 WL 956947, at *7 (D. Del.
Mar. 28, 2007) (citing Prod. Res. Grp., LLC v. NCT Grp., Inc., 863 A.2d 772, 782 (Del.
Ch. 2004)).
1
The District Court had diversity jurisdiction under 28 U.S.C. § 1332. We have
jurisdiction over Weiss’s appeal under 28 U.S.C. § 1291.
3
The District Court correctly found that Weiss lacks standing because he failed to
adequately plead facts demonstrating eScrub’s insolvency. For starters, Weiss did not allege
that eScrub filed for bankruptcy. Nor did he allege that eScrub’s liabilities exceeded its
assets or that it was unable to pay its obligations as they came due. Instead, Weiss tried to
plead insolvency through three factual allegations. First, he cited the deposition of John
Packard, who served as a director of eScrub from 2002 until early 2009. Packard testified
that in November 2007 the company had a “cash flow problem,” App. 90, was “running out
of money,” App. 92, and was “behind the eight ball for having any money for that whole
period of time,” id. When asked if eScrub went bankrupt, Packard responded that he was
uncertain, but “saw something that showed their stock was worthless.” Dkt. No. 21, App.
1. We agree with the District Court that this speculation does not provide a plausible
showing of insolvency under Delaware law. Second, Weiss noted that eScrub didn’t pay
legal bills to several of its attorneys. But the company’s failure to pay these bills does not
show its inability to do so. Indeed, Weiss’s complaint suggests eScrub didn’t pay his legal
bills because—rightly or wrongly—it wasn’t satisfied with his work. See App. 35 (Compl.
¶ 11(b)). Third, Weiss alleges that eScrub failed to pay its Delaware franchise tax from
2009 forward or the sums required to keep its existing and pending patents alive. But these
anecdotal indicators of financial difficulty do not satisfy Weiss’s burden to allege that
eScrub was insolvent. Furthermore, we agree with the District Court that even if Weiss had
sufficiently pleaded insolvency, he lacks standing because the only evidence he marshals of
4
alleged wrongdoing (i.e., Packard’s failure to mitigate eScrub’s financial problems)
occurred in November 2007, and Weiss himself didn’t become a potential creditor until he
was hired in December 2007.2
Weiss argues that “it is incomprehensible” that the District Court lacked subject
matter jurisdiction because it had diversity jurisdiction. Weiss Br. 4–5. But while everyone
agrees the District Court had diversity jurisdiction, that sheds no light on the question of
standing. And “[a]bsent Article III standing, a federal court does not have subject matter
jurisdiction to address a plaintiff’s claims, and they must be dismissed.” Taliaferro v.
Darby Twp. Zoning Bd., 458 F.3d 181, 188 (3d Cir. 2006).
In sum, because Weiss did not allege facts to support a plausible claim of insolvency,
the District Court did not err in concluding he lacked standing to sue. We will affirm.
2
Defendants raise several other reasons why dismissal is appropriate. We find these
arguments largely persuasive, but need not address them in light of our disposition.
5