Legent Group, LLC v. Axos Financial, Inc.

IN THE COURT OF CHANCERY FOR THE STATE OF DELAWARE
LEGENT GROUP, LLC, COR )
ADVISORS LLC, ST. CLOUD )
CAPITAL PARTNERS II, L.P., and )
CARLOS P. SALAS, )
)
Plaintiffs, )
)
v. C.A. No. 2020-0405-KSJM
)
AXOS FINANCIAL, INC., AXOS )
CLEARING, LLC, and AXOS )
CLARITY MERGECO, INC., )
)
Defendants. )
ORDER RESOLVING MOTION TO DISMISS
1. The plaintiffs, Legent Group, LLC, COR Advisors LLC, St. Cloud
Capital Partners II, L.P., and Carlos P. Salas (collectively, “Plaintiffs”), are former
stockholders of COR Securities Holdings Inc. (the “Company”). Plaintiffs sold the
Company to two of the defendants, Axos Clearing, LLC and Axos Clarity
MergeCo., Inc. (together, the “Buyers”), under an Agreement and Plan of Merger
(the “Merger Agreement”) executed on September 28, 2018.1
2. The Buyers paid $80 million (unadjusted) in cash for the Company. Of
that consideration, $7.5 million (the “Withheld Amount”) was paid pro rata to each
Plaintiff in the form of promissory notes (the “Notes”). The parties agreed that the
1
C.A. No. 2020-0405-KSJM, Docket (“Dkt.”) 14, Transmittal Aff. of Thomas E. Hanson,
Jr. (“Hanson Aff.”) Ex. A.
Withheld Amount would serve as the “sole source of payment” of Buyers’
indemnification claims under the Merger Agreement. 2 The third defendant, Axos
Financial, Inc. (“Axos Financial,” and with the Buyers, “Defendants”), is the
counterparty to the Notes.
3. The Merger Agreement contains an exclusive Delaware forum
selection provision (the “Forum Selection Provision”) providing that “[e]ach party
agrees that it will bring any action or proceeding in respect of any claim arising out
of or related to this Agreement or the transactions contemplated hereby exclusively
in the Court of Chancery in the State of Delaware.”3
4. Each Note contains a provision requiring arbitration of “[a]ny
controversy arising out of or relating to” the Notes (the “Arbitration Provisions”).4
5. In July 2019, the Buyers tendered a demand for indemnification (the
“Demand”). The Demand stated that the Company breached its representations and
warranties under the Merger Agreement by failing to disclose events of default with
respect to “Material Contracts.”5
6. In April 2020, Plaintiffs advised Defendants that they viewed the
Demand as meritless and procedurally improper. The Buyers nevertheless defaulted
2
Hanson Aff. Ex. A § 2.4
3
Merger Agreement § 10.7(b).
4
Dkt. 1, Verified Compl. Seeking Declaratory J. (“Compl.”) Ex. A ¶ 21.
5
Hanson Aff. at 2 (Demand).
2
on the Notes, claiming that the loss resulting from the alleged breach exceeds the
Withheld Amount.
7. In May 2020, Plaintiffs filed this suit. Plaintiffs’ Verified Complaint
contains five causes of action. In Count I, Plaintiffs seek a declaratory judgment
that Defendants are not entitled to indemnification under the Merger Agreement. In
Counts II through V, each Plaintiff claims that Axos Financial breached their
respective Note.
8. Axos Financial has moved to dismiss the Verified Complaint under
Court of Chancery Rules 12(b)(1) and 12(b)(6). The parties fully briefed the motion
to dismiss and the court held oral argument on October 29, 2020. 6
LEGAL ANALYSIS
9. This analysis first addresses Axos Financial’s motion under
Rule 12(b)(1), which is directed at all Counts, and then addresses the motion under
Rule 12(b)(6), which is directed at Count I only.
10. Axos Financial has moved to dismiss all Counts under Rule 12(b)(1)
for lack of subject matter jurisdiction. “As Delaware’s Constitutional court of
6
See Dkt. 11, Axos Financial, Incorporated’s Opening Br. in Supp. of Its Mot. to Dismiss
Pls.’ Compl. (“Axos Financial’s Opening Br.”); Dkt. 14, Pls.’ Answering Br. in Opp’n to
Def. Axos Financial, Incorporated’s Mot. to Dismiss (“Pls.’ Answering Br.”); Dkt. 15,
Axos Financial, Incorporated’s Reply Br. in Further Supp. of Its Mot. to Dismiss (“Axos
Financial’s Reply Br.”); Dkt. 23, Zoom Teleconference Before Vice Chancellor
McCormick on Axos Financial’s Mot. to Dismiss.
3
equity, the Court of Chancery can acquire subject matter jurisdiction over a cause in
only three ways . . . : (1) one or more of the plaintiff’s claims for relief is equitable
in character, (2) the plaintiff requests relief that is equitable in nature, or (3) subject
matter jurisdiction is conferred by statute.” 7
11. The central thesis of Axos Financial’s Rule 12(b)(1) motion is that the
court lacks subject matter jurisdiction over: Count I, which asserts purely legal
claims; and Counts II through V, which are subject to an arbitration provision
contained in the Notes. 8 Plaintiffs bear the burden of establishing subject matter
jurisdiction. 9
12. To establish subject matter jurisdiction as to Count I, Plaintiffs rely on
the statutory delegation found in Section 111 of the Delaware General Corporation
Law. 10
7
Candlewood Timber Gp., LLC v. Pan Am. Energy, LLC, 859 A.2d 989, 997 (Del. 2004)
(citing 10 Del. C. §§ 341–42).
8
Compl. Ex. A § 21.
9
E.g., Appriva S’holder Litig. Co. v. EV3, Inc., 937 A.2d 1275, 1284 n.14 (Del. 2007);
Lewis v. AimCo Props., L.P., 2015 WL 557995, at *2 (Del. Ch. Feb. 10, 2015); Walker v.
City of Wilmington, 2014 WL 4407977, at *7 (Del. Ch. Sept. 5, 2014).
10
Compl. ¶ 17. As Defendants correctly observe, parties cannot confer subject matter on
this court by agreement, and the forum selection provision alone is therefore insufficient
to confer subject matter jurisdiction. See Thompson v. Lynch, 990 A.2d 432, 434
(Del. 2010) (“[P]arties may not confer subject matter jurisdiction [on a court] by
agreement.”). Plaintiffs do not contend otherwise. See Pls.’ Answering Br. at 12–22.
4
a. In relevant part, Section 111(a) confers this court with subject
matter jurisdiction over “[a]ny civil action to interpret, apply, enforce or
determine the validity of the provision of . . . [a]ny agreement . . . governed
by [DGCL] § 251.”11
b. The Merger Agreement falls within the scope of agreements
giving rise to the court’s exercise of subject matter jurisdiction under
Section 111. The Merger Agreement addresses the merger of two Delaware
corporations and is thus governed by Section 251.12 Because Plaintiffs’
claims hinge on whether Defendants are entitled to indemnification under the
Merger Agreement, this action is a civil action to interpret and enforce the
Merger Agreement.
c. Axos Financial does not dispute that this court has the ability to
exercise subject matter jurisdiction over Count I under Section 111.13 Axos
Financial instead argues that Section 111 vests this court with discretionary
and not mandatory jurisdiction, which the court should decline to exercise in
connection with Count I. This Order declines to address whether Section 111
11
8 Del. C. § 111(a).
12
See 8 Del. C. § 251(a).
13
Axos Financial’s Reply Br. at 3–4.
5
vests this court with discretionary jurisdiction,14 because it is appropriate to
exercise jurisdiction over Count I even if Section 111 confers only
discretionary authority.
d. Section 111 was adopted in part “to take advantage of the Court’s
special corporate expertise” over certain subject matter, like the interpretation
of merger agreements. 15 Axos Financial provides no compelling reason why
this court should defer utilizing its expertise to interpret the Merger
Agreement at issue in this case.
14
For the proposition that Section 111 creates permissive and not mandatory jurisdiction,
Axos Financial relies on Helix Generation LLC v. TransCanada Facility USA, Inc., where
the court observed that “Section 111(a), to the extent it applies, provides permissive, not
mandatory, jurisdiction in this Court.” 2019 WL 2068659, at *2 (Del. Ch. May 10, 2019).
In the footnote supporting this statement, the court explained that “[c]auses of action
described in Section 111(a) ‘may be brought in the Court of Chancery.’” Id. (emphasis
added) (quoting 8 Del. C. § 111(a)). This conclusion is a faithful interpretation of the plain
language of Section 111(a), but it does seem to stand in conflict with other decisions of this
court interpreting parallel provisions of the LLC and LP Act. See, e.g., Duff v. Innovative
Disc. LLC, 2012 WL 6096586, at *1, *6 (Del. Ch. Dec. 7, 2012) (finding that Section 8-
111 of the LLC Act granted subject matter jurisdiction over a breach of contract and
denying Rule 12(b)(1) motion to dismiss); id. at *6 (“[Defendant] has not cited any
authority, nor does the Court know of any, that would imply that once . . . a plaintiff has
chosen to bring its claim here [under Section 18-111], this Court still would have the
discretion to refuse to hear it. As I read the statute, this Court does not have such
discretion.”); see also Albert v. Alex. Brown Mgmt. Servs., Inc., 2004 WL 2050527, at *4–
6 (Del. Super. Sept. 15, 2004) (interpreting Section 17-111 of the LP Act as vesting the
Court of Chancery with sole subject matter jurisdiction to interpret partnership
agreements). As discussed above, this decision declines to address the matter given the
other basis for rejecting Axos Financial’s argument.
15
Kraft v. WisdomTree Invs., Inc., 145 A.3d 969, 974 (Del. Ch. 2016).
6
e. Accordingly, Axos Financial’s motion to dismiss Count I
pursuant to Rule 12(b)(1) is DENIED.
13. To establish subject matter jurisdiction as to Counts II through V,
Plaintiffs invoke this court’s cleanup doctrine, which provides that “[t]he existence
of jurisdiction in this Court over even a single count . . . is sufficient for the exercise
of jurisdiction over the remaining counts.” 16 Plaintiffs contend that the exercise of
subject matter jurisdiction over Count I is sufficient to give rise to jurisdiction over
the remaining Counts.
a. Axos Financial responds that Counts II through V are subject to
the Arbitration Provisions. It correctly observes that “Delaware courts lack
subject matter jurisdiction to resolve disputes that litigants have contractually
agreed to arbitrate” and that this court will dismiss a case for lack of subject
matter jurisdiction if the “dispute is one that, on its face, falls within the
arbitration clause of the contract.”17
b. Plaintiffs cite to no case for the proposition that the cleanup
doctrine overrides the arbitration cases to which Defendants cite. Instead,
Plaintiffs argue that the Arbitration Provisions should be disregarded because
they conflict with the Forum Selection Provision in the Merger Agreement.
16
Duff, 2012 WL 6096586, at *7.
17
NAMA Hldgs., LLC v. Related World Mkt. Ctr., LLC, 922 A.2d 417, 429 (Del. Ch. 2007).
7
Plaintiffs say that the Merger Agreement and Notes should be read together
as a single agreement because the former agreement incorporates the latter by
reference.18 Plaintiffs further argue that contradictory provisions render an
agreement ambiguous such that the competing provisions should be
disregarded. 19
c. Plaintiffs, however, ignore that Axos Financial was not a party
to the Merger Agreement. 20 The Buyers executed the Merger Agreement.
Axos Financial executed the Notes. In fact, the Notes each included a
provision stating that “[t]his instrument . . . embodies the entire agreement.” 21
18
Pls.’ Answering Br. at 27–28 (citing Royal Indemn. Co. v. Alexander Indus., Inc.,
211 A.2d 919, 920 (Del. 1965); State ex rel. Hirst v. Black, 83 A.2d 678, 681
(Del. Super. 1951); Duff, 2012 WL 6096586, at *12)).
19
Pls.’ Answering Br. at 27–30 (citing Duff, 2012 WL 6096586, at *12; Merger
Agreement §§ 2.4, 10.6).
20
This fact distinguishes this case from Duff, the primary case on which Plaintiffs rely.
See Duff, 2012 WL 6096586, at *1–2, *11–12 (finding that the defendant was a party to
both agreements that the court analyzed as integrated).
21
The entire provision reads: “This instrument, together with any rider incorporated
pursuant to paragraph 25 of this Agreement, embodies the entire agreement between the
Broker/Dealer and the Lender. No other evidence of such agreement has been or will be
executed or effective without the prior written consent of FINRA.” Notes ¶ 18. The “rider”
to which ¶ 18 of the Notes refers also includes a severability provision, which states:
Each provision and part thereof of this Agreement shall be
deemed separate from each other provision or part thereof, and
the invalidity or unenforceability, for any reason or to any
extent, of any such provision or part thereof shall not affect the
enforceability of the remainder of this Agreement or of any
other document executed in connection with the loan under this
Agreement, or the application of such provision or part thereof
to other persons or circumstances. Notes ¶ 25(f)(iii).
8
Plaintiffs therefore must adhere to the Forum Selection Provision when
asserting claims under the Merger Agreement against the Buyers, and
Plaintiffs must adhere to the Arbitration Provisions when asserting claims
under the Notes against Axos Financial.22 This scheme might be inefficient,
but it is not ambiguous.
d. Accordingly, Axos Financial’s motion to dismiss Counts II
through V pursuant to Rule 12(b)(1) is GRANTED.
14. Axos Financial has moved to dismiss Count I of the Complaint pursuant
to Court of Chancery Rule 12(b)(6) for failure to state a claim upon which relief can
be granted. “[T]he governing pleading standard in Delaware to survive a motion to
dismiss is reasonable ‘conceivability.’” 23 When considering such a motion, the
Court must “accept all well-pleaded factual allegations in the [c]omplaint as
true . . . , draw all reasonable inferences in favor of the plaintiff, and deny the motion
unless the plaintiff could not recover under any reasonably conceivable set of
circumstances susceptible of proof.”24 The Court, however, need not “accept
22
See Quantlab Gp. GP, LLC v. Eames, 2019 WL 1285037, at *6 (Del. Ch. Mar. 19, 2019)
(“The LPA’s Integration Clause states the LPA ‘contains the entire agreement among the
Partners with respect to the matters of this Agreement.’ . . . Thus, the LPA is fully
integrated with regard to these subjects and cannot be altered or supplemented by another
unincorporated agreement . . . .”).
23
Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 537
(Del. 2011).
24
Id. at 536 (citing Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002)).
9
conclusory allegations unsupported by specific facts or . . . draw unreasonable
inferences in favor of the non-moving party.” 25
15. Axos Financial argues that Count I fails to state a claim under this
standard because it “fails to allege even minimal facts sufficient to identify the issues
in controversy.” 26 Axos Financial contends that “although Plaintiffs seek a
declaration stating that each has ‘no duty to indemnify Defendants for the alleged
loss,’ nowhere do they allege what that loss is or identify the basis by which any
claimed duty to indemnify purportedly arose.” 27
a. The allegations set forth in the Complaint are sufficient to state
a claim as to Count I. With respect to the Demand, the Complaint outlines:
the way in which the Demand was made, the times at which the Demand was
made and subsequent communications occurred, the contents of the Demands
and subsequent communications, and the amount of loss allegedly suffered as
a result. 28
25
Price v. E. I. du Pont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011) (citing Clinton v.
Enter. Rent-A-Car Co., 977 A.2d 892, 895 (Del. 2009)), overruled on other grounds by
Ramsey v. Ga. S. Univ. Advanced Dev. Ctr., 189 A.3d 1255 (Del. 2018).
26
Axos Financial’s Opening Br. at 14.
27
Id. at 14–15 (formatting altered).
28
See Compl. ¶ 5 (“Defendants tendered a demand for indemnity, in the form of multiple
letters asserting shifting theories, claiming they had suffered damages as a result of a failure
of the representations and warranties made under the Merger Agreement and that the
amount of their damages surpassed the total value of the withheld amount.” (formatting
altered)); id. ¶ 47 (“On July 1, 2019, Defendants . . . tendered a demand for
indemnification . . . pursuant to Article VIII of the Merger Agreement . . . . As set forth in
10
b. Axos Financial’s argument that the Complaint lacks sufficient
detail concerning the amount of loss is basically a critique of its own Demand.
It is Defendants claiming indemnification—not Plaintiffs. It is Defendants
who know the basis for their computation of alleged losses set forth in the
Demand. Count I realleges all of the allegations of the Complaint including
its allegations concerning the Demand, which is incorporated by reference
into the Complaint. 29 If the Demand is insufficient to identify the purported
losses or grounds for claiming indemnification, then it is a deficiency created
by Defendants, not Plaintiffs.
c. Accordingly, Axos Financial’s motion to dismiss Count I
pursuant to Rule 12(b)(6) is DENIED.
IT IS SO ORDERED.
/s/ Kathaleen St. Jude McCormick
Vice Chancellor Kathaleen St. Jude McCormick
Dated: January 8, 2021
the Demand, Defendants contend there was a failure of the representations and warranties
made under the Merger Agreement and that this failure caused Defendants to suffer a loss
in excess of $16 million . . . as a result of trading activity on March 6 and 7, 2019 by one
of its customers.” (formatting altered)); id. ¶ 49 (“The Demand claimed that the alleged
loss occurred on March 7, 2019.” (formatting altered)); id. ¶ 50 (“The parties exchanged
further correspondence regarding the Demand on July 19, October 27, and December 18,
2019, and on March 13 and April 6, 2020, in which Defendants asserted shifting,
unsubstantiated and incorrect theories for their claim.” (formatting altered)).
29
Contrary to Axos Financial’s assertions, see Axos Financial Reply Br. at 12 & n.6, the
Demand is incorporated by referenced into the Complaint. By referring to the Demand,
Plaintiffs do not concede that the Complain lacks information sufficient to meet the
Rule 12(b)(6) standard.
11