SDF Funding LLC v. Fry

IN THE SUPREME COURT OF THE STATE OF DELAWARE
SDF FUNDING LLC AND §
STUART D. FELDMAN, §
derivatively on behalf of §
FLASHPOINT TECHNOLOGY, § No. 205, 2022
INC., §
§
Plaintiffs Below, § Court Below–Court of Chancery
Appellants, § of the State of Delaware
§
v. §
§ C.A. No. 2017-0732
STANLEY B. FRY, EDWARD D. §
HERRICK, ROSS BOTT, CYRUS §
W. GREGG, AND MAGDALENA §
RAMOS, §
§
Defendants Below, §
Appellees, §
§
and §
§
FLASHPOINT TECHNOLOGY, §
INC., §
§
Nominal Defendant Below, §
Appellee. §
Submitted: June 24, 2022
Decided: July 8, 2022
Before VALIHURA, VAUGHN, and TRAYNOR, Justices.
ORDER
After careful consideration of the notice of interlocutory appeal, the
supplemental notice of appeal, and their exhibits, it appears to the Court that:
(1) In October 2017, the plaintiffs below/appellants, SDF Funding LLC
(“SDF”) and Stuart D. Feldman (“Feldman”) (together, the “Plaintiffs”), filed this
derivative suit on behalf of the nominal defendant FlashPoint Technology, Inc.
(“FlashPoint”). Relevant here, Feldman initially invested in FlashPoint through his
wholly owned subsidiary, Chelsey Capital, LLC (“Chelsey”), in 2019 and caused
Chelsey to transfer the FlashPoint stock to SDF, another of his wholly owned
subsidiaries, in March 2015.
(2) On February 16, 2021, the defendants moved for partial summary
judgment. Observing that Feldman and SDF’s claims are derivative and subject to
the contemporaneous-ownership requirement of the DGCL,1 the defendants argued
that they were entitled to summary judgment because Feldman never owned
FlashPoint stock and SDF did not acquire FlashPoint stock until 2015. In its May
13, 2022 memorandum opinion, the Court of Chancery granted the defendants’
motion for summary judgment as to the Plaintiffs’ claims that challenged actions
taken before SDF acquired FlashPoint stock (the “Opinion”).2 In so doing, the Court
of Chancery rejected the Plaintiffs’ argument that Feldman has standing to pursue
those claims under the equitable-standing doctrine.
1
8 Del. C. § 327 (“In any derivative suit instituted by a stockholder of a corporation, it shall be
averred in the complaint that the plaintiff was a stockholder of the corporation at the time of the
transaction of which such stockholder complains or that such stockholder’s stock thereafter
devolved upon such stockholder by operation of law.”).
2
SDF Funding LLC v. Fry, 2022 WL 1511594 (Del. Ch. May 13, 2022).
2
(3) On May 27, 2022, the Plaintiffs asked the Court of Chancery to certify
an interlocutory appeal from the Opinion under Supreme Court Rule 42. The
Plaintiffs maintained that the Opinion decided a substantial issue of material
importance—namely, that the Plaintiffs do not have standing to pursue the “vast
majority” of their claims. The Plaintiffs also argued that the following Rule
42(b)(iii) factors weighed in favor of interlocutory review: (i) the Opinion decided a
question of law that is a matter of first impression in Delaware;3 (ii) the Opinion is
“in tension” with other trial court decisions;4 (iii) the question of law relates to the
construction and application of Section 327 of the DGCL;5 and (iv) interlocutory
review would serve the considerations of justice.6 The defendants opposed the
application.
(4) On June 16, 2022, the Court of Chancery denied the application for
certification.7 The Court of Chancery agreed with the Plaintiffs that the Opinion had
resolved a substantial issue of material importance—a threshold consideration under
Rule 428—but nonetheless concluded that the benefits of interlocutory review would
not outweigh the costs. First, the Court of Chancery found that, although it had
3
Del. Supr. Ct. R. 42(b)(iii)(A).
4
Del. Supr. Ct. R. 42(b)(iii)(B).
5
Del. Supr. Ct. R. 42(b)(iii)(C).
6
Del. Supr. Ct. R. 42(b)(iii)(H).
7
SDF Funding LLC v. Fry, 2022 WL 2165922 (Del. Ch. June 16, 2022).
8
Del. Supr. Ct. R. 42(b)(i) (“No interlocutory appeal will be certified by the trial court or accepted
by this Court unless the order of the trial court decides a substantial issue of material importance
that merits appellate review before a final judgment.”).
3
given serious consideration to the Plaintiffs’ novel theory of the equitable-standing
doctrine, the Opinion did not adopt it or otherwise expand existing law. Second, the
Court of Chancery disagreed with the Plaintiffs’ assertion that the Opinion is in
conflict with other trial court decisions and distinguished them. Third, the Court of
Chancery agreed with the Plaintiffs that the Opinion involves the application of
Section 327 and that Factor C favored certification. Fourth, the Court of Chancery
found the considerations-of-justice factor to be neutral—although the time and
money that the Plaintiffs had spent litigating and investigating on behalf of the
injured stockholders is relevant, so too is the allocation of defense and judicial
resources. On balance, the Court of Chancery concluded that the support of one of
the eight Rule 42(b)(iii) factors did not warrant certification of an interlocutory
appeal.
(5) We agree with the Chancery Court that interlocutory review is not
warranted in this case. Applications for interlocutory review are addressed to the
sound discretion of the Court.9 In the exercise of its discretion and giving due weight
to the Court of Chancery’s analysis, the Court has concluded that the application for
interlocutory review does not meet the strict standards for certification under Rule
42(b). Exceptional circumstances that would merit interlocutory review of the Court
9
Del. Supr. Ct. R. 42(d)(v).
4
of Chancery’s decision do not exist in this case,10 and the potential benefits of
interlocutory review do not outweigh the inefficiency, disruption, and probable costs
caused by an interlocutory appeal.11
NOW, THEREFORE, IT IS ORDERED that the interlocutory appeal is
REFUSED.
BY THE COURT:
/s/ James T. Vaughn, Jr.
Justice
10
Del. Supr. Ct. R. 42(b)(ii).
11
Del. Supr. Ct. R. 42(b)(iii).
5