Skye Mineral Investors, LLC v. DXS Capital (U.S.) Limited

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
SKYE MINERAL INVESTORS, LLC and )
CLARITY COPPER, LLC, directly and derivatively )
on behalf of SKYE MINERAL PARTNERS, LLC, )
)
Plaintiffs, )
)
v. )
) C.A. No. 2018-0059-JRS
DXS CAPITAL (U.S.) LIMITED, PACNET )
CAPITAL (U.S.) LIMITED, MARSHALL )
COOPER, SANJIV NORONHA, WATERLOO )
STREET LIMITED, LIPPO CHINA RESOURCES )
LTD., MICHAEL RIADY, STEPHEN RIADY, )
)
Defendants, )
)
SKYE MINERAL PARTNERS, LLC, )
)
Nominal Defendant. )
__________________________________________ )
DXS CAPITAL (U.S.) LIMITED, PACNET )
CAPITAL (U.S.) LIMITED, and WATERLOO )
STREET LIMITED, directly and derivatively on )
behalf of SKYE MINERAL PARTNERS, LLC, )
)
Counterclaim Plaintiffs, )
)
v. )
)
SKYE MINERAL INVESTORS, LLC and )
CLARITY COOPER, LLC, )
)
Counterclaim Defendants, )
)
SKYE MINERAL PARTNERS, LLC, )
)
Nominal Defendant. )
DXS CAPITAL (U.S.) LIMITED, PACNET )
CAPITAL (U.S.) LIMITED, and WATERLOO )
STREET LIMITED, directly and derivatively on )
behalf of SKYE MINERAL PARTNERS, LLC, )
)
Third Party Plaintiffs, )
)
v. )
)
DAVID J. RICHARDS and CLINTON W. )
WALKER, )
)
Third Party Defendants, )
)
SKYE MINERAL PARTNERS, LLC, )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: April 13, 2021
Date Decided: July 28, 2021
Rudolf Koch, Esquire, Kevin M. Gallagher, Esquire and Daniel Kaprow, Esquire of
Richards, Layton & Finger, P.A., Wilmington, Delaware and Jason Cyrulnik,
Esquire, Edward Normand, Esquire and Paul Fattaruso, Esquire of Cyrulnik
Fattaruso LLP, New York, New York, Attorneys for Plaintiffs, Counterclaim-
Defendants and Third-Party Defendants.
Thomas W. Briggs, Jr., Esquire and Miranda N. Gilbert, Esquire of Morris, Nichols,
Arsht & Tunnell LLP, Wilmington, Delaware and Pedro A. Jimenez, Esquire,
Kevin C. Logue, Esquire, Kevin P. Broughel, Esquire, Nicholas Bassett, Esquire,
Katherine K. Solomon, Esquire, Katherine Rookard, Esquire of Paul Hastings LLP,
New York, New York, Attorneys for Counterclaim-Plaintiffs and Third-Party
Plaintiffs.
SLIGHTS, Vice Chancellor
The Greek philosopher Pythagoras is said to be the first to observe that
“there are two sides to every question.” 1 Last year, this Court decided a motion to
dismiss brought by the majority members of a Delaware limited liability company,
Skye Mineral Partners, LLC (“SMP” or the “Company”), alleging that minority
members orchestrated a scheme wrongfully to divest SMP of its lone asset, a wholly-
owned operating subsidiary, CS Mining, LLC (“CSM”). 2 When the Court
determined that certain of SMP’s claims would survive, the minority members,
Defendants, DXS Capital (U.S.) Limited (“DXS”), PacNet Capital (U.S.) Limited
(“PacNet”) and Waterloo Street Limited (“Waterloo” and, together with DXS and
PacNet, “Counterclaim-Plaintiffs”), brought counterclaims (the “Counterclaims”)
to state their side of the story. This decision addresses the motion to dismiss those
Counterclaims.
Counterclaim-Plaintiffs allege that Skye Mineral Investors, LLC (“SMI”) and
Clarity Copper (“CC”), along with their controllers, David J. Richards and
Clinton W. Walker (together with SMI, CC and Richards, “Counterclaim-
Defendants”), wielded their economic, operational and voting control of both SMP
and its operating subsidiary, CSM, unlawfully to advance their own interests over
1
Pythagorean Theorem, Encyclopedia Britannica (last visited July 25, 2021)
www.britannica.com/science/pythagorean-theorem.
2
Skye Mineral Invs., LLC v. DXS Cap. (U.S.) Ltd., 2020 WL 881544 (Del. Ch. Feb. 24,
2020).
1
those of SMP and its minority owners to whom they owed fiduciary duties. In broad
strokes, the Counterclaims cast Counterclaim-Defendants as faithless fiduciaries
who engaged in a series of unlawful acts to preserve the first-lien creditor status of
non-party, David Richards LLC d/b/a Western US Mineral Investors, LLC
(“Richards LLC”), with the goal of driving CSM into bankruptcy. Once CSM
entered bankruptcy, the plan was for Richards LLC to leverage its creditor rights to
divest DXS and PacNet of their equity interests in SMP.
The Counterclaims detail wrongful behavior dating back as far as 2013,
asserting direct and derivative claims against all Counterclaim-Defendants for
breach of their fiduciary duties, aiding and abetting and civil conspiracy.
Counterclaim-Plaintiffs also assert claims for tortious interference against Richards
and Walker for their role in allegedly subverting Waterloo’s claim to CSM’s assets
as creditor in favor of Richards LLC. Finally, Counterclaim-Plaintiffs bring a breach
of contract claim under SMP’s operative constitutive agreement, the Third Amended
and Restated Limited Liability Company Agreement (the “SMP Agreement”),
against SMI and CC for unduly engaging in “Related Party” transactions.
All Counterclaim-Defendants have moved to dismiss the Counterclaims.
At the threshold, Counterclaim-Defendants argue Counterclaim-Plaintiffs’
claims are time-barred under the doctrine of laches. They further argue, under
Chancery Rule 12(b)(6), that Counterclaim-Plaintiffs fail to state legally viable
2
claims. Finally, under Chancery Rule 23.1, Counterclaim-Defendants argue the
derivative claims fail because Counterclaim-Plaintiffs do not adequately plead
demand futility.
For reasons explained below, as was the case with the motion to dismiss
Counterclaim-Defendants’ claims, the result of the effort to dismiss the
Counterclaims is “a mixed bag.”3 The bulk of the Counterclaims are time-barred,
except Waterloo’s claim for tortious interference and those claims arising from
Richards and Walker’s alleged attempt during bankruptcy to force a settlement
between CSM and Richards LLC. Thus, Counterclaim-Plaintiffs’ claim for breach
of contract is dismissed in its entirety, while their claims for breach of fiduciary duty,
aiding and abetting and civil conspiracy are preserved only to the extent they rely on
the alleged forced settlement. In addition, Waterloo fails to state a claim for tortious
interference except with respect to one of the discrete alleged acts, while PacNet and
DXS’s claims for breach of fiduciary duty, aiding and abetting and civil conspiracy
survive. As for the derivative claims brought on behalf of SMP, Counterclaim-
Plaintiffs have well pled demand futility; therefore, the motion to dismiss under
Chancery Rule 23.1 must be denied. My reasoning follows.
3
Id. at *1.
3
I. BACKGROUND
The facts are drawn from the pleadings, documents incorporated into the
pleadings by reference and matters of which the Court may take judicial notice. 4
A. The Parties
Counterclaim-Plaintiff, DXS, is a Delaware limited liability company.5
DXS is a member of SMP. 6
Counterclaim-Plaintiff, PacNet, is a Delaware limited liability company. 7
PacNet is a member of SMP and was an unsecured creditor of CSM, having extended
an unsecured loan in the amount of approximately $5 million to CSM in early 2016
to help CSM address its liquidity issues.8 Under the SMP Agreement, PacNet, along
with DXS, together were entitled to designate one member to SMP’s three-member
Board of Managers (the “Board”).9
4
Vanderbilt Income & Growth Assocs., L.L.C. v. Arvida/JMB Managers, Inc., 691 A.2d
609, 612–13 (Del. 1996).
5
Defs.’ Answering and Affirmative Defenses to Pls.’ Second Am. Verified Compl. and
Defs.’ Verified Countercls. and Third-Party Compl. (D.I. 109) (“Countercl.”) ¶ 6.
6
Id.7
Countercl. ¶ 7.
8
Id.9
D.I. 60, Ex. 1 (“SMP Agreement”); see also Countercl. ¶¶ 129–36 (incorporating by
reference the SMP Agreement). The SMP Agreement is governed by Delaware law.
4
Counterclaim-Plaintiff, Waterloo, is a British Virgin Islands limited
company.10 Waterloo was a secured creditor of CSM through its acquisition of a
loan made to CSM by Noble Americas Corporation (“Noble”). 11
Counterclaim-Defendant, SMI, is an Ohio limited liability company.12 SMI is
a member of SMP with the right under the SMP Agreement to appoint one member
to the Board.13 Counterclaim-Defendant, Richards, is a citizen of Ohio and a
member of the Board (as SMI’s designee) and CSM’s Board of Managers.14 At all
relevant times, Richards controlled SMI and was an investor in Richards LLC. 15 He
was also a member of the Board of Managers of Richards LLC.16
Counterclaim-Defendant, CC, is a Delaware limited liability company.17
CC is a member of SMP and was also an investor in Richards LLC. 18 Like SMI,
CC had a right to appoint one member to SMP’s Board. Its designee was
10
Countercl. ¶ 8.
11
Id.12
Countercl. ¶ 10.
13
Id.14
Countercl. ¶ 9.
15
Id.16
Id.17
Countercl. ¶ 12.
18
Id.5
Counterclaim-Defendant, Walker, who was also on CSM’s Board of Managers.19
At all relevant times, Walker controlled CC, was an investor in Richards LLC, and
was also a member of the Board of Managers of Richards LLC.20
B. The Entities’ Formation
In 2011, Richards and Walker formed SMP and CSM after purchasing CSM’s
assets out of a prior bankruptcy.21 SMP’s sole asset was a 99% ownership stake in
CSM, a Delaware limited liability company. 22 Prior to a court-supervised sale
process in August 2017, CSM owned a copper mining operation in Utah where it
sought to exploit valuable mineral deposits that, if extracted and processed, were
potentially worth $600 million.23
SMP has four members: SMI, CC, DXS and PacNet. 24 SMI and CC
controlled SMP through their majority ownership of SMP’s Class A equity and its
19
Countercl. ¶ 11.
20
Id.21
Countercl. ¶ 13.
22
Countercl. ¶ 14.
23
Id.24
Countercl. ¶ 15.
6
fully diluted equity. DXS and PacNet held minority ownership positions in SMP.25
As noted, Richards and Walker control SMI and CC, respectively.26
Under the SMP Agreement, SMP’s managers’ fiduciary duties are analogous
to those owed by directors of Delaware corporations. 27 With that said, the SMP
Agreement makes clear that managers “may have other business interests.”28 As for
the members of SMP, the SMP Agreement disclaims fiduciary duties “insofar as
making other investment opportunities available to the Company or to the other
Members,” and allows SMP’s members to give or withhold, condition or delay their
“votes, approvals or consents” in their “sole and absolute discretion.” 29 Section 3.5
of the SMP Agreement authorizes the Board to cause the Company to borrow from
the members, provided other members had a right to participate in the loan on a pro
rata basis and the Board authorizes the loan. 30
Richards, Walker and CC were all investors in Richards, LLC, which held as
its sole investment a senior lien over substantially all of CSM’s assets, the result of
25
Countercl. ¶ 16.
26
Countercl. ¶ 15.
27
SMP Agreement § 5.1.
28
Id. § 5.1(h).
29
Id. §§ 4.3, 4.6.
30
Id. § 3.5.
7
an approximately $20.5 million loan made between August 2012 and July 2014 to
fund CSM’s operations and capital investments.31 As “Minority Managers” under
the First Amended Limited Liability Company Agreement of Richards LLC
(the “Richards LLC Agreement”), Richards and Walker had final say over key
decisions of its Board of Managers. 32 For example, under Section 5.4 of the
Richards LLC Agreement, Richards LLC could not declare a default on the
Richards LLC loan to CSM, except under limited circumstances, and could not
pursue collection or foreclosure on Richard LLC’s loan to CSM without Richards
and Walker’s approvals.33
C. The Noble Loan
In 2014, Noble made a loan to CSM as part of CSM’s effort to raise
approximately $45 million to build a new ore processing facility known as
“Phase II.”34 Noble agreed to loan $15 million initially, then another $15 million if
and when CSM secured $15 million in matching equity financing (the “Noble
Loan”). 35 The agreement memorializing the Noble Loan is dated August 12, 2014
31
Countercl. ¶¶ 9, 11–12, 21, 23–24.
32
Countercl. ¶ 22.
33
Id.
34
Countercl. ¶¶ 25, 28, 30.
35
Countercl. ¶ 30.
8
(the “Noble Loan Agreement”).36 The Noble Loan and the proposed equity
financing together would raise the $45 million projected to be needed for Phase II.
The Noble Loan Agreement required that: (i) CSM complete the new processing
facility by November 30, 2015; and (ii) CSM begin making amortization payments
on the Noble Loan starting in October 2015.37
As further inducement for the Noble Loan, Richards LLC agreed to
subordinate the liens it held against CSM’s Phase II assets, allowing Noble to step
into the senior lien position on those assets. 38 Noble agreed, in turn, that
Richards LLC would continue to enjoy a senior lien on CSM’s other assets until
Noble advanced the full $30 million to CSM, at which time Richards LLC would
convert the full amount of its loan into equity of SMP and release all of its liens on
CSM’s assets.39 The terms and obligations of these agreements were detailed in the
Noble Loan Agreement and the Intercreditor Agreement between CSM,
Richards LLC and Noble (the “Intercreditor Agreement”), dated August 12, 2014.40
36
Countercl. ¶ 29.
37
Countercl. ¶ 38.
38
Countercl. ¶ 28.
39
Id.
40
Countercl., Ex. 1.
9
According to the Counterclaims, as soon as the ink was dry on the Noble Loan
documents, Counterclaim-Defendants commenced their scheme to cause CSM to
default under the Noble Loan, thereby triggering a chain reaction where
Richards LLC would avoid the conversion of the Richards LLC Loan to SMP equity,
which, in turn, allowed Richards LLC to avoid the full consequences if CSM were
to fail by preserving its rights as creditor. 41 Counterclaim-Defendants implemented
their scheme by:
• Blocking CSM from raising the additional capital (~$10 million) necessary
for CSM to keep the Phase II project on track, thereby increasing the
likelihood of default under the Noble Loan; 42
• Secretly negotiating and forcing CSM to execute a side agreement with
Richards LLC providing that CSM would not be permitted to draw down the
full $30 million of the Noble Loan (which would cause the Richards LLC
Loan to convert to equity) without Richards LLC’s prior consent, and
concealing that secret agreement from SMP’s other members and managers; 43
• Advancing their own interests over their fiduciary obligations to SMP by
revoking their consent to a December 2015 amendment to the Noble Loan
Agreement that would have remedied a default thereunder and paved the way
for the Richards LLC Loan to convert to equity; 44
• Inducing PacNet to provide approximately $5 million of unsecured funding to
keep CSM afloat by representing that Counterclaim-Defendants would work
in good faith on a comprehensive, long-term funding solution for SMP and
CSM, all while harboring their secret agreement to ensure that the Richards
41
Countercl. ¶¶ 4, 35, 39–75.
42
Countercl. ¶¶ 4(a), 37.
43
Countercl. ¶¶ 4(b), 48.
44
Countercl. ¶¶ 4(c), 39–47.
10
LLC Loan would never convert to SMP equity, thereby ensuring CSM’s
insolvency;45
• Executing consents and exercising their managerial influence over Richards
LLC to permit Richards LLC to begin foreclosure proceedings against CSM’s
assets and refusing to take any actions (as fiduciaries of SMP and CSM) to
halt or oppose such proceedings;46
• Opposing the attempts of DXS and PacNet to appoint an independent receiver
for CSM;47 and
• Forcing CSM to seek the Utah bankruptcy court’s approval of a self-serving
“settlement” with Richards LLC, which would have allowed Richards and
Walker to acquire CSM’s assets on the cheap and which harmed
Counterclaim-Plaintiffs by chilling third-party bidding for CSM’s assets.48
Counterclaim-Defendants’ scheme ultimately drove CSM into bankruptcy.49
The petition for protection under Chapter 11 of the United States Bankruptcy Code
was brought in the United States Bankruptcy Court for the District of Utah
(the “CSM Bankruptcy Case”).50 Counterclaim-Plaintiffs allege that they, along
with SMP, suffered significant damages as a result of these actions and seek to
recover those damages in the Counterclaims. 51
45
Countercl. ¶¶ 4(d), 59–62.
46
Countercl. ¶¶ 65–67.
47
Countercl. ¶¶ 69–70.
48
Countercl. ¶¶ 71–76.
49
Countercl. ¶ 4(f).
50
Id.
51
Countercl. ¶¶ 110, 117, 122, 128, 136, 142.
11
D. Procedural History
On July 21, 2016, Waterloo and PacNet commenced an adversary proceeding
in the CSM Bankruptcy Case (the “Adversary Proceeding”), asserting, among other
things, that Richards, Walker, SMI and CC had tortiously interfered with Waterloo’s
contractual or economic relationship with CSM. 52 In December 2017, the Utah
Bankruptcy Court denied motions to dismiss the Adversary Proceeding.53
In January 2018, Counterclaim-Defendants, SMI and CC, commenced this
action and simultaneously filed nearly identical counterclaims in the Adversary
Proceeding.54 Counterclaim-Defendants also moved to stay the Adversary
Proceeding, which prompted the parties to stand down voluntarily in the CSM
Bankruptcy Case to avoid duplicative litigation. 55
Meanwhile, on April 22, 2019, Counterclaim-Defendants filed their Second
Amended Complaint (the “Complaint”), which Counterclaim-Plaintiffs promptly
moved to dismiss.56 In December 2019, while the motion to dismiss the Complaint
was pending in this Court, the Utah Bankruptcy Court issued an order to show cause
52
Countercl. ¶ 77 (citing C.A. No. 16-ap-2118, D.I. 1).
53
Countercl. ¶ 78 (citing C.A. No. 16-ap-2118, D.I. 69).
54
D.I. 1; Countercl. ¶ 78.
55
Countercl. ¶ 78.
56
D.I. 52, 59, 60.
12
why the Adversary Proceeding should not be dismissed given that it had remained
largely inactive since mid-2018.57 In response, all parties agreed the Utah
Bankruptcy Court should not take action until this Court ruled on the motion to
dismiss the Complaint. 58
On February 24, 2020, this Court issued its ruling denying in part and granting
in part the motions to dismiss the Complaint.59 Counterclaim-Plaintiffs filed their
Answer, Affirmative Defenses, Counterclaims and Third-Party Complaint on
March 31, 2020.60 The Counterclaims comprise six Counts.61
Count I asserts Richards and Walker are liable for tortious interference with
contract by:
• Executing a “secret side agreement” between Richards LLC and CSM, giving
Richards LLC consent rights that it could withhold until the accrual of certain
events of default under the Noble Loan; 62
• Delaying and obstructing all efforts to provide necessary capital to CSM so
that CSM would default under the Noble Loan in an effort to relieve Richards
LLC of its obligation to convert the Richards LLC Loan to equity and release
all liens on CSM’s assets; 63 and
57
Countercl. ¶ 80.
58
Id.
59
Countercl. ¶ 81.
60
Id.
61
Countercl. ¶¶ 91–142.
62
Countercl. ¶ 48.
63
Countercl. ¶ 106.
13
• Withdrawing (in their capacity as CSM’s board members) their consent to the
amendment to the Noble Loan that would have extended the deadline to
complete construction of a new processing facility and the deadline to begin
repaying the Noble Loan as of February 3, 2016. 64
Count II asserts Richards and Walker are liable for breach of fiduciary duty by:
• Entering into the “secret side agreement”; 65
• Managing CSM and SMP “in a manner designed to create an event of default
under the Noble Loan”;66
• Abusing their control position in SMP “to protect the majority ownership
stake in SMP held by SMI and [CC] and protect their economic stake in”
Richards LLC and its loan; 67 and
• Attempting to force a settlement between CSM and Richards LLC “designed
to give the Counterclaim-Defendants ownership of CSM’s assets and
extinguishing SMP’s economic interest in CSM.” 68
Count III asserts all Counterclaim-Defendants are liable for aiding and
abetting based entirely on the acts underlying Count II. 69 Likewise, Count IV asserts
all Counterclaim-Defendants are liable for civil conspiracy based entirely on those
acts alleged in Counterclaim-Plaintiffs’ breach of fiduciary duty and tortious
64
Countercl. ¶¶ 53, 63, 108.
65
Countercl. ¶ 115(b)
66
Countercl. ¶ 115(c)
67
Countercl. ¶ 115(a).
68
Countercl. ¶¶ 73–75, 115(d).
69
See Countercl. ¶¶ 118–22.
14
interference claims.70 Count V asserts a claim for breach of the SMP Agreement
against SMI and CC based on the “secret side agreement.”71
Count VI asserts SMI and CC are liable for breach of fiduciary duty by:
• Blocking “any financing or investment proposal that would take away from
the Counterclaim-Defendants[’] economic and managerial control of SMP”;72
• Concealing the “secret amendment” of Richards LLC’s loan;73
• “[P]ermitting Richards and Walker to execute consents to permit” Richards
LLC to “begin foreclosure proceedings” and “then failing to take any steps”
to prevent Richards LLC “from initiating foreclosure proceedings”;74 and
• Blocking “the Delaware receivership action that would have appointed a
disinterested receiver” to address Richards LLC’s loan and “imminent
foreclosure of same.”75
On July 31, 2020, the Utah Bankruptcy Court issued a ruling granting the
motion to dismiss the Adversary Proceeding for lack of subject matter jurisdiction.76
In its dismissal order, the Utah Bankruptcy Court specifically stated, “[t]his is not
70
Countercl. ¶ 126.
71
Countercl. ¶ 133.
72
Countercl. ¶ 53.
73
Countercl. ¶¶ 140(a)–(b).
74
Countercl. ¶ 140(c).
75
Countercl. ¶ 140(d).
76
Countercl. ¶ 83.
15
an adjudication on the merits and is without prejudice to the Counterclaim-
Defendants’ ability to refile the litigation elsewhere.”77
Counterclaim-Defendants filed their motion to dismiss the Counterclaims on
December 29, 2020. After briefing, oral argument was held on April 13, 2021, and
the matter was deemed submitted for decision that day. 78
II. ANALYSIS
Counterclaim-Defendants’ arguments in support of their motion to dismiss the
Counterclaims come in three stripes. First, they argue all of the Counterclaims are
time-barred. Second, they argue Counterclaim-Plaintiffs fail to state viable claims
under Chancery Rule 12(b)(6). Third, they argue Counterclaim-Plaintiffs have
failed to plead demand futility under Chancery Rule 23.1. I take up each argument
in turn.
A. Laches
At the threshold, Counterclaim-Defendants argue Counterclaim-Plaintiffs’
claims must be dismissed as untimely under an application of laches, as informed by
77
Id. (citing C.A. No. 16-ap-2118, Minute Entry (July 31, 2020)).
78
D.I. 159 (Countercl. and Third-Party Defs.’ Opening Br. in Supp. of Mot. to Dismiss
Am. Countercls. and Third Party Compl.) (“DOB”); D.I. 172 (Countercl. Pls.’ Answering
Br. in Opp’n to Countercl. and Third-Party Defs.’ Mot to Dismiss Am. Countercls. and
Third Party Compl.) (“PAB”); D.I. 181 (Countercl. and Third-Party Defs.’ Reply Br. in
Supp. of Their Mot. to Dismiss Am. Countercls. and Third-Party Compl.) (“DRB”);
D.I. 195 (“Oral Arg. Tr.”).
16
the applicable statute of limitations. 79 “Laches consists of two elements:
(i) unreasonable delay in bringing a claim by a plaintiff with knowledge thereof, and
(ii) resulting prejudice to the defendant.”80 All of Counterclaim-Plaintiffs’ claims
are either legal or equitable claims seeking monetary relief. 81 In such instances, it is
appropriate for Chancery to look to the “analogous limitations period” as a “strong
presumption of laches” subject to rebuttal “either by a recognized tolling doctrine or
by the presence of extraordinary circumstances.”82 The parties agree that the
limitations period is three years for each of the Counterclaims,83 and that the statute
79
See In re Tyson Foods, Inc. Consol. S’holder Litig., 919 A.2d 563, 584 (Del. Ch. 2007)
(explaining laches and statute of limitations are “properly raised on a motion to dismiss”).
80
Levey v. Brownstone Asset Mgmt., LP, 76 A.3d 764, 769 (Del. 2013).
81
See Countercl. ¶¶ 91–142.
82
Kraft v. WisdomTree Invs., Inc., 145 A.3d 969, 978–83 (Del. Ch. 2016) (providing an
overview of relevant caselaw); see also Baier v. Upper New York Inv. Co. LLC,
2018 WL 1791996, at *11–12 (Del. Ch. Apr. 16, 2018) (“[A] filing after the expiration of
the analogous limitations period is presumptively an unreasonable delay for purposes of
laches . . . and prejudice to defendants is thus presumed.” (internal quotations and citations
omitted)); CMS Inv. Hldgs., LLC v. Castle, 2016 WL 4411328, at *2 (Del. Ch. Aug. 19,
2016) (“[T]he Court will bar claims outside the limitations period absent tolling or
extraordinary circumstances, even in the absence of demonstrable prejudice.” (internal
quotations omitted)); de Adler v. Upper New York Inv. Co. LLC, 2013 WL 5874645, at *12
(Del. Ch. Oct. 31, 2013) (“The Court does not need to engage in a traditional laches analysis
for a presumptively late complaint.”).
83
DOB at 11; PAB at 48–49; see also 10 Del. C. § 8106 (setting out those actions subject
to three-year limitation); Graulich v. Dell Inc., 2011 WL 1843813, at *6 (Del. Ch. May 16,
2011) (“A three-year statute of limitations ‘almost universally’ applies to stockholder
derivative suits for alleged breaches of fiduciary duty in Delaware.”); Dubroff v. Wren
Hldgs., LLC, 2011 WL 5137175, at *12 (Del. Ch. Oct. 28, 2011) (recognizing a three-year
limitations period for breach of fiduciary duty and aiding and abetting); Fike v. Ruger,
17
begins to run when a claim accrues, meaning “at the moment of the wrongful act and
not when the effects of the act are felt.” 84
For limitations purposes, the operative date from which to count backwards is
March 31, 2020, the date the Counterclaims were filed.85 After a careful review of
the Counterclaims, it is clear all of the Counterclaims accrued prior to March 31,
2017, except for the claims arising from the Counterclaim-Defendants’ efforts to
force a settlement between CSM and Richards LLC in the CSM Bankruptcy Case
(which arguably accrued in July 2017). 86 In other words, as outlined below, the
claims accruing prior to March 31, 2017, were not timely filed:
754 A.2d 254, 260 (Del. Ch. 1999) (recognizing a three-year limitations period for breach
of contract), aff’d, 752 A.2d 112 (Del. 2000); BTIG, LLC v. Palantir Techs., Inc.,
2020 WL 95660, at *3 (Del. Super. Ct. Jan. 3, 2020) (recognizing a three-year limitations
period for tortious interference and civil conspiracy).
84
Van Lake v. Sorin CRM USA, Inc., 2013 WL 1087583, at *6 (Del. Super. Ct. Feb. 15,
2013) (quoting Airport Bus. Ctr. V LLLP v. Sun Nat’l Bank, 2012 WL 1413690, at *7
(Del. Super. Ct. Mar. 6, 2012)). Accrual occurs “even if the plaintiff is ignorant of the
cause of action.” Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 319
(Del. 2004).
85
D.I. 109.
86
Counterclaim-Defendants assert (in footnotes to their briefs) that the alleged forced
settlement “may” still be barred by laches. DOB at 13 n.3, 15 n.4. The argument falls
short. First, the fact the argument was relegated to footnotes suggests it is more “an attempt
to preserve it than to advance it for serious consideration.” Sylebra Cap. P’rs Master Fund
v. Perelman, 2020 WL 5989473, at *13 n.133 (Del. Ch. Oct. 9, 2020). Second, and more
importantly, the Counts touching on the allegations regarding the attempted forced
settlement were asserted within the analogous limitations period without resulting
prejudice. See Whittington v. Dragon Gp. L.L.C., 2010 WL 692584, at *5 (Del. Ch.
Feb. 15, 2010), aff’d and remanded, 998 A.2d 852 (Del. 2010) (explaining that defendant
bears burden on laches defense and “[t]he primary inquiry is whether it would be
18
• The claims relating to the “secret side agreement” (featured in all Counts)
necessarily accrued no later than December 4, 2015, when “CSM and Noble
amended the Noble Loan” to “remedy that purported default.”87
• The claims relating to Richards and Walker’s management of CSM and SMP
“in a manner designed to create an event of default under the Noble Loan”
(featured in Counts II, III and IV) accrued no later than February 3, 2016,
when Counterclaim-Defendants allegedly withdrew their consent to the
amendment of the Noble Loan. 88
• The claims relating to Richards and Walker’s alleged abuse of their control
position in SMP “to protect the majority ownership stake in SMP held by SMI
and [CC] and protect their economic stake in” Richards LLC and its loan
(featured in Counts II, III and IV) accrued no later than May 27, 2016, when
Counterclaim-Defendants allegedly opposed a receivership action intended to
prevent Richards LLC from foreclosing on CSM’s assets.89
• The claims relating to SMI and CC’s efforts to conceal the “secret
amendment” of Richards LLC’s loan (featured in Counts V and VI) accrued
no later than December 4, 2015, when, again, Counterclaim-Plaintiffs allege
the Noble Loan was amended to “remedy” the resulting default. 90
• The claims relating Counterclaim-Defendants’ efforts to block “any financing
or investment proposal that would take away from the Counterclaim-
Defendants[’] economic and managerial control of SMP” (featured in
Count VI) accrued no later than December 4, 2015, when Counterclaim-
Plaintiffs allege the Noble Loan was amended to “remedy” the resulting
default.91
inequitable to permit a claim because the plaintiff’s inexcusable delay [led] to an adverse
change in the condition or relations of the property or parties. To determine whether delay
is inexcusable, the court considers whether the plaintiff exercised that degree of diligence
which the situation . . . in fairness and justice require[s].” (internal quotations and citations
omitted)); Levey, 76 A.3d at 769–70 (“[I]n equity, a lawsuit commenced within the
analogous period of limitations is presumed to have been filed within a reasonable time.”).
87
Countercl. ¶ 107.
88
Countercl. ¶¶ 108, 115(c).
89
Countercl. ¶¶ 69–70, 115(a).
90
Countercl. ¶¶ 140(a)–(b).
91
Countercl. ¶ 53.
19
• The claims relating to SMI and CC “permitting Richards and Walker to
execute consents to permit” Richards LLC to “begin foreclosure proceedings”
and “then failing to take any steps” to prevent Richards LLC “from initiating
foreclosure proceedings” (featured in Count VI) accrued no later than May 18,
2016, when Counterclaim-Plaintiffs were allegedly “forced to commence a
derivative action” to prevent Richards LLC from foreclosing on CSM’s assets
before voluntarily dismissing their claims shortly thereafter.92
• The claims relating to Counterclaim-Defendants’ efforts to block “the
Delaware receivership action that would have appointed a disinterested
receiver” to address Richards LLC’s loan and “imminent foreclosure of same”
(featured in Count VI) accrued no later than May 27, 2016, when those efforts
first surfaced. 93
The upshot is that Counts I and V are presumptively time-barred in their entirety,
while Counts II, III, IV and VI are presumptively time-barred except as they relate
to allegations regarding the forced settlement.
Counterclaim-Plaintiffs maintain that none of their claims in Counts II, III, IV
and VI are time-barred because one wrongful (albeit disconnected) act alleged in
those counts occurred within the applicable limitations period. 94 Though
Counterclaim-Plaintiffs cite no cases in support of their theory, and the theory is not
entirely clear from the briefing, I gather Counterclaim-Plaintiffs are attempting to
invoke a variant of the continuous negligent medical treatment doctrine borne out of
92
Countercl. ¶¶ 68, 140(c).
93
Countercl. ¶¶ 69–70, 140(d).
94
See PAB at 48–49; Oral Arg. Tr. 129:1–8.
20
medical negligence cases, 95 whereby the plaintiff attempts to tether discrete harms
(in this case as alleged in Counts II, III and VI) to claims for harm brought within
the applicable limitations period (in this case the claims relating to the forced
settlement) in order to create a coherent, continuing scheme for the purpose of tolling
the statute of limitations. 96
Under Delaware law, when assessing whether claims are timely, our courts
generally analyze when each wrongful act upon which a claim is based occurred and
hold that claims are time-barred to the extent they are based on wrongful acts that
occurred outside the applicable limitations period, regardless of whether other
wrongful acts supporting other claims occurred within the applicable period. 97 Thus,
even if the Court were inclined to hold that the continuous negligent treatment
doctrine could be extended to other tort claims, a dubious proposition, the extension
would not aid the Counterclaim-Plaintiffs as the Counterclaims allege separate,
95
See, e.g., GI Assocs. of Del., P.A. v. Anderson, 247 A.3d 674, 680 (Del. 2021) (discussing
the continuous negligent medical treatment doctrine).
96
Oral Arg. Tr. 129:3–8 (“[T]his is all intertwined.”).
97
See Albert v. Alex. Brown Mgmt. Servs., Inc., 2005 WL 1594085, at *13–18, *24
(Del. Ch. June 29, 2005) (permitting claims only to the extent they are based on alleged
wrongful acts that “occurred after” the statute of limitations accrual date); Pomeranz v.
Museum P’rs, L.P., 2005 WL 217039, at *3 (Del. Ch. Jan. 24, 2005) (“[A]ny possible
tolling exception to the strict application of the statute of limitations tolls the statute only
until the plaintiff discovers (or [by] exercising reasonable diligence should have
discovered) his injury.” (internal quotations omitted) (emphasis in original)).
21
discrete acts of wrongdoing occurring over the course of several years, which
Counterclaim-Plaintiffs discovered and acted to prevent well before Richards and
Walker attempted to force a settlement in the CSM Bankruptcy Case. The otherwise
time-barred claims do not flow from or relate back to the attempted bankruptcy
settlement and the harm related to the time-barred claims accrued independently.98
Since the purported damages from the alleged wrongful acts were sustained
discretely, the breach of duty claims should likewise accrue discretely, rather than
cumulatively at the time of the latest discrete act of wrongdoing. 99
Having determined Counterclaim-Plaintiffs cannot toll the analogous statute
of limitations by lashing together discrete claims into an overarching narrative,
Counterclaim-Plaintiffs are left with two arguments to preserve the balance of their
claims. First, Counterclaim-Plaintiffs invoke 10 Del. C. § 8118(a) (the “Savings
Statute”) as a statutory basis to preserve Count I. Second, Counterclaim-Plaintiffs
argue that all Counts should be deemed timely filed due to lack of prejudice and the
presence of unusual circumstances. I address each in turn.
98
Cf. GI Assocs., 247 A.3d at 680 (applying the negligent medical treatment doctrine);
AM Gen. Hldgs. LLC v. The Renco Gp., Inc., 2016 WL 4440476, at *11–12 (Del. Ch.
Aug. 22, 2016) (explaining in the contract context that the doctrine of continuing breach
applies only where the plaintiff could have alleged a prima facie case for breach of contract
after a single incident).
99
See Albert, 2005 WL 1594085, at *13–18, *24.
22
The Savings Statute
The Savings Statute, which is “remedial in nature and is liberally construed,”
“provides exceptions to the applicable statute of limitations in certain instances
where the plaintiff has timely filed a lawsuit but is procedurally barred from
obtaining a resolution on the merits.”100 It “reflects a public policy preference for
deciding cases on their merits.”101 Relevant here, the Savings Statute preserves
claims dismissed in another forum “for any matter of form” by allowing parties to
refile the claim in Delaware within a year following the dismissal. 102 Counterclaim-
Plaintiffs assert that, because the tortious interference claim against Richards and
Walker was timely filed in the Adversary Proceeding and was then “avoided or
defeated” for a “matter of form” when the Utah Bankruptcy Court dismissed the
claim for lack of subject matter jurisdiction, the Savings Statute preserves the claim.
The problem with Counterclaim-Plaintiffs’ position is that not all of the
Counterclaim-Plaintiffs asserted the tortious interference claims they assert here in
the Adversary Proceeding; only Waterloo—the lender entity that acquired the Noble
100
Reid v. Spazio, 970 A.2d 176, 180–81 (Del. 2009).
101
Id. at 180.
102
10 Del. C. § 8118(a).
23
Loan—asserted that claim against Richards and Walker.103 Thus, while the Savings
Statute clearly works to preserve Waterloo’s claim,104 its application to the other
Counterclaim-Plaintiffs is less clear.
While the parties agree there is no Delaware case directly on point, 105 a survey
of caselaw in other jurisdictions applying analogous statutes reveals “[a] savings
statute does not apply if the parties in the new action are not the same as the ones in
the prior action, if the new action is brought against a different defendant than was
the first one, or an attempt is made to add defendants not sued in the original
action.”106 “[W]hile only the original plaintiff has a right to bring an action under a
savings statute,” courts have held that “a change of parties does not preclude an
103
See Countercl. ¶¶ 110–28; Waterloo St. Ltd. v. David Richards LLC, No. 16-02118-
WTT (Bankr. D. Utah July 11, 2017).
104
Counterclaim-Defendants contend that Waterloo’s claim should not be preserved by the
Savings Statute because it did not “diligently” pursue that claim, as evidenced by the fact
that it has remained inactive since mid-2018. See Countercl. ¶ 80. But Counterclaim-
Defendants admit Waterloo timely pursued its claim under the analogous statute of
limitations, and so, in view of all the alleged facts, at this stage, it has demonstrated that it
exercised “reasonable diligence” in seeking to hold Counterclaim-Defendants to account
for tortious interference. Spazio, 970 A.2d at 183; Oral Arg. Tr. 77:19–23
(“We [Counterclaim-Defendants] are conceding that the savings statute would apply to
Waterloo if the Court found that there was an attempt to diligently pursue that claim.”).
105
The closest a Delaware court has come to adjudicating the issue was in Vari v. Food
Fair Stores, New Castle, Inc., where our Supreme Court held a savings statute did not apply
when a new action is brought against a different defendant than named in the first action.
205 A.2d 529, 530 (Del. 1964). The fact pattern here is the inverse, where a new action is
brought by different plaintiffs (as opposed to against different defendants).
106
51 Am. Jur. 2d Limitation of Actions § 256 (Nov. 2019) (collecting cases).
24
application of the statute if the change is merely nominal or the interest represented
in the renewed action is identical with that in the original action,” 107 Counterclaim-
Plaintiffs admit (and indeed, affirmatively plead) that each party’s damages flowing
from the alleged tortious interference are distinct,108 making their interests neither
nominal nor identical. Those entities could have brought their own tortious
interference claim in the Adversary Proceeding yet, for reasons unclear, decided
not to.
“A savings statute is designed to ensure that diligent litigants retain the right
to a hearing in court until they receive judgment on the merits. Such a statute is
designed to provide relief from a statute of limitations to one who has mistakenly
brought an action in the wrong court.” 109 It is not designed to preserve claims of
107
Id. (citing Smallwood v. Cent. Peninsula Gen. Hosp., 151 P.3d 319 (Alaska 2006);
Milburn v. Nationwide Ins. Co., 491 S.E.2d 848 (Ga. App. 1997); Van der Stegen v. Neuss,
Hesslein & Co., 243 A.D. 122, 276 N.Y.S. 624 (1st Dep’t 1934), aff’d, 270 N.Y. 55, 200
N.E. 577, 105 A.L.R. 605 (1936); Hebertson v. Bank One, Utah, N.A., 9 UT App 342, 995
P.2d 7 (Utah Ct. App. 1999); Keener v. Reynolds Transp. Co., 61 S.E.2d 629(W.Va. 1950)).
108
See Countercl. ¶ 109 (“Absent this unjustified and improper conduct [tortious
interference], SMP and CSM would have recaptured over $21 million in borrowing
capacity to address SMP’s and CSM’s liquidity position, Waterloo would have obtained a
first lien secured position on almost all of CSM’s assets, and PacNet would have recovered
the $5 million it loaned to CSM on an unsecured basis.”).
109
51 Am. Jur. 2d Limitation of Actions § 253 (internal citations omitted); see also Spazio,
970 A.2d at 180 (explaining that “Delaware’s Savings Statute provides exceptions to the
applicable statute of limitations in certain instances where the plaintiff has filed a timely
lawsuit, but is procedurally barred from obtaining a resolution on the merits.”); Gaines v.
City of New York, 109 N.E. 594, 596 (N.Y. 1915) (Cardozo, J.) (“The (saving) statute is
25
entities who failed to pursue them diligently when they had every opportunity to
do so.110 Thus, while the Savings Statute preserves Waterloo’s claims in Count I,
the Savings Statute does not save Count I for the other Counterclaim-Plaintiffs.
There Are No Unusual Conditions or Extraordinary Circumstances
Although delay is presumptively unreasonable when a claim is asserted
outside of the analogous statute of limitations period, this presumption can be
rebutted for laches purposes by a showing of “unusual conditions or extraordinary
circumstances.”111 To discern whether “unusual conditions or extraordinary
circumstances” may excuse a late-filed claim, this court generally considers the so-
called “O’Brien factors,” named after the case where they were first identified:
(1) whether the plaintiff had been pursuing his claim, through litigation
or otherwise, before the statute of limitations expired; (2) whether the
delay in filing suit was attributable to a material and unforeseeable
change in the parties’ personal or financial circumstances; (3) whether
the delay in filing suit was attributable to a legal determination in
another jurisdiction; (4) the extent to which the defendant was aware
of, or participated in, any prior proceedings; and (5) whether, at the time
designed to insure to the diligent suitor the right to hearing in court till he reaches a
judgment on the merits. . . . The important consideration is that, by invoking judicial aid,
a litigant gives timely notice to his adversary of a present purpose to maintain his rights
before the courts.” (emphasis added)).
110
See Spazio, 970 A.2d at 180 (explaining that the Savings Statute is implicated “where
the plaintiff has filed a timely lawsuit”).
111
IAC/InterActiveCorp v. O’Brien, 26 A.3d 174, 178–79 (Del. 2011).
26
this litigation was filed, there was a bona fide dispute as to the validity
of the claim. 112
Under the first factor, Counterclaim-Plaintiffs argue the parties have for years
been engaged in legal proceedings involving SMP and CSM for conduct related to
the claims asserted by both Counterclaim-Plaintiffs and Counterclaim-
Defendants. 113 Specifically, Counterclaim-Plaintiffs point to the following actions
as implicating O’Brien’s first factor:
• In May 2016, DXS and PacNet filed a derivative suit on behalf of SMP and
CSM in New York alleging a breach of contract claim against non-party
Richards LLC for failing to convert the Richards Loan into equity, as well as
an aiding and abetting breach of fiduciary duty claim.114
• Counterclaim-Plaintiffs sought appointment of an independent receiver to
mitigate concerns that Counterclaim-Defendants were engaging in an
imminent breach of fiduciary duty through their alleged actions.115
• Counterclaim-Plaintiffs sought appointment of an independent trustee on
July 25, 2016, in the CSM Bankruptcy Case to place CSM under the care of a
disinterested fiduciary and outside the control of Counterclaim-Defendants,
who are alleged to be abusing their positions as creditors to reduce the value
of CSM’s assets for their own benefit.116
112
Id. at 178.
113
See Countercl. ¶¶ 68–70, 77–83.
114
Countercl., Ex. C.
115
Countercl. ¶¶ 69–70.
116
C.A. No. 16-bk-24818 (Bankr. D. Utah), D.I. 92.
27
According to Counterclaim-Plaintiffs, these actions demonstrate their diligent
pursuit of the Counterclaims “in various forms” within the analogous statutory
period.117
Missing from Counterclaim-Plaintiffs’ list of their previous litigation efforts
is any justification for their failure timely to pursue the specific claims at issue
here.118 The New York Action was brought against non-party Richards LLC and
was voluntarily terminated shortly after it was filed. 119 The receivership action and
the motion in the CSM Bankruptcy Action to appoint an independent trustee for
CSM to resolve “deadlock” among CSM’s constituencies were both brought in 2016,
and neither sought to hold Counterclaim-Defendants liable for any alleged
wrongdoing.120 Indeed, Counterclaim-Plaintiffs do not claim they asserted the
117
PAB at 54.
118
See Forman v. CentrifyHealth, Inc., 2019 WL 1810947, at *9 (Del. Ch. Apr. 25, 2019)
(stating courts expect plaintiff to have been “diligently and productively pursuing his
rights” before the expiration of the limitations period or to have been “precluded from
doing so” (emphasis added)); Daugherty v. Highland Cap. Mgmt., L.P., 2018 WL 3217738,
at *10 (Del. Ch. June 29, 2018) (applying statute of limitations where plaintiff brought
“different claims” than in prior action). I note that the first O’Brien factor’s focus on the
specific claims (and not the existence of litigation between the parties generally) comports
with the laches analysis’ evaluation of a claim’s timeliness based on the particular acts at
issue (as opposed to lumping together all counts based on a broader narrative theme).
119
Countercl. ¶ 68.
120
As noted, Counterclaim-Plaintiffs voluntarily dismissed the receivership action just two
months after it was filed. See DRB Ex. 5, Notice of Voluntary Dismissal, DXS Cap. (U.S.)
Ltd. v. Skye Mineral Invs., LLC, No. 12381-VCS (Del. Ch. July 25, 2016); see also Levey,
76 A.3d at 772 (noting as to the first factor that the plaintiff “raised substantially identical
claims and later reiterated those some claims before the Court of Chancery); cf. BioVeris
28
claims in Counts II–VI in any forum until bringing their Counterclaims at the end of
March last year. 121 As for Count I, only Waterloo pursued that claim. In all
instances, Counterclaim-Plaintiffs admit there was nothing preventing them from
asserting their Counterclaims at an earlier point in this litigation or elsewhere.122
In Daugherty v. Highland Capital Management, L.P., Vice Chancellor
Glasscock held the first O’Brien factor weighed against the plaintiff notwithstanding
its prior (failed) attempt to amend a preexisting action in Texas to pursue its claims
because the plaintiff ultimately “knew that his [Delaware] claims . . . were not under
adjudication in the Texas Action” and did not diligently act to pursue them.123 The
court expressly distinguished IAC on the grounds that, “[i]n IAC, the underlying
Corp. v. Meso Scale Diagnostics, LLC, 2017 WL 5035530, at *12 (Del. Ch. Nov. 2, 2017)
(holding that a demand letter was insufficient to demonstrate pursuit of a claim to warrant
disregarding limitations period), aff’d, 202 A.3d 509 (Del. 2019).
121
See Daugherty, 2018 WL 3217738, at *10 (emphasizing that the plaintiff brought
“different claims than those decided in” another action and distinguishing its facts from
IAC on that basis. (emphasis in original)).
122
Oral Arg. Tr. 132:22–133:2 (“I [Counterclaim-Plaintiffs] wouldn’t say there[] [was]
anything preventing [pursuit of their claims] per se . . . .”); see also Stewart v. Wilm. Tr.
SP Servs., Inc., 112 A.3d 271, 294 (Del. Ch. 2016), aff’d, 126 A.3d 1115 (Del. 2015)
(finding “unusual or extraordinary circumstances” overcame a presumptive time-bar only
after, “[u]nlike a situation in which a plaintiff is injured and then merely waits for years to
file her action, the circumstances of this case arguably required” development of a
liquidation action before pursuing the claims at bar); Daugherty, 2018 WL 3217738, at *9–
10 (finding no unusual circumstances and distinguishing IAC and Levey on the first factor
because the plaintiff in Daugherty “knew that his claims regarding the 2013 agreements
were not under adjudication in the Texas Action”).
123
Daugherty, 2018 WL 3217738, at *9–10.
29
claims . . . were the same as those brought in Delaware; here, [the plaintiff] brings
different claims than those decided in the Texas Action.” 124 That logic applies with
equal force in this case. 125
Counterclaim-Plaintiffs attempt to justify their lack of diligence by suggesting
that the timing of the Counterclaims was the product of sound litigation strategy.126
To be sure, parties and their counsel are entitled to make strategic decisions in the
course of litigation. But a parties’ strategic calculus must account for the basic math
implicated by the applicable statute of limitations. In this case, Counterclaim-
Plaintiffs delayed pursuing their claims without the presence of any impediments.
The first O’Brien factor, therefore, does not point to the presence of “unusual
conditions or extraordinary circumstances.” 127
124
Id. at *10 (emphasis in original).
125
Counterclaim-Plaintiffs attempted at oral argument to distinguish Daugherty because,
in that case, “years had passed between a jury verdict in Texas before new claims were
brought in Delaware.” Oral Arg. Tr. 137:9–13. But the court in Daugherty justified its
application of laches because “[u]nlike the plaintiffs in IAC and Levey, Daugherty knew
that his claims regarding the 2013 agreements were not under adjudication in the Texas
Action.” 2018 WL 3217738, at *9. Here, as in Daugherty, Counterclaim-Plaintiffs knew
their claims were not submitted for adjudication in any preceding action, and yet failed to
timely pursue them.
126
See Oral Arg. Tr. 130:4–135:22.
127
O’Brien, 26 A.3d at 179.
30
As for the other O’Brien factors, Counterclaim-Plaintiffs concede that the
second factor is irrelevant to their tactical delay. 128 On the third factor,
Counterclaim-Plaintiffs suggested for the first time at oral argument that the stayed
bankruptcy proceedings tilt that factor in their favor.129 But Counterclaim-Plaintiffs
had “full control” over their bankruptcy claims during the relevant periods and
proactively agreed to stay the Adversary Proceeding in Utah. 130 Because that
proceeding did not concern the claims at issue in this case, Counterclaim-Plaintiffs’
delay in bringing those claims cannot fairly be attributed to the voluntary stay.131
Like the second factor, the fourth factor is irrelevant since there were no “prior
proceedings” where Counterclaim-Plaintiffs pursued the claims they assert here
about which Counterclaim-Defendants could have been aware. 132 Finally, on the
128
Id. at 139:14–18.
129
Id. at 139:10–13 (dedicating one sentence to state in conclusory fashion “we’d argue,
Your Honor, that the stayed proceedings is relevant to that [fourth factor].”).
130
See Daugherty, 2018 WL 3217738, at *10 (“Unlike the plaintiff in IAC, who acted
promptly in seeking to vindicate his claims in both arbitration and state court, Daugherty
chose to wait more than three years to bring suit regarding actions taken in 2013.”).
131
See id. at *9.
132
See Levey, 76 A.3d at 766–67, 771 (observing that the prior Southern District of
New York proceedings and the arbitration proceedings both took place before the
limitations period for Levey’s claims expired); O’Brien, 26 A.3d at 176, 178 (observing
that the prior arbitration proceedings, Florida action and the appeal all occurred before
O’Brien’s claims expired); Stewart, 112 A.3d at 294–96 (observing that the related
liquidation action and the receiver’s extensive investigation both occurred before the
expiration of the statute of limitations).
31
fifth factor, at this stage, giving all reasonable inferences to Counterclaim-Plaintiffs,
their claims qualify as bona fide disputes, tipping this factor mildly in their favor.
Nevertheless, given the inexplicable delay, “the majority of [O’Brien] factors
indicate that the ‘unusual conditions or extraordinary circumstances’ exception
should not apply.”133
*****
In sum, Counterclaim-Defendants’ laches defense fails as to Count I for
Waterloo and Counts II, III, IV and VI, as they relate to allegations regarding the
forced settlement. The balance of Counterclaim-Plaintiffs’ claims are barred by
laches and, therefore, must be dismissed. 134 I turn now to analyze whether
Counterclaim-Plaintiffs have stated viable claims for the surviving counts.
133
Daugherty, 2018 WL 3217738, at *9. As in Daugherty, many distinctions exist between
this case and IAC and Levey. See id. at *10. Most saliently, Counterclaim-Plaintiffs bring
different claims here than in prior proceedings even though those claims were within their
full control. See IAC, 26 A.3d at 178–79; Levey, 76 A.3d at 771. Further, the court in
Levey found “plenty of indicia” that the plaintiff there was “treated unjustly”; like
Daugherty, there are no such circumstances here. See Daugherty, 2018 WL 3217738,
at *10; Levey, 76 A.3d at 768, 773–74.
134
I note that, while these claims are barred by laches, that does not prevent Counterclaim-
Plaintiffs from presenting evidence of Counterclaim-Defendants’ misconduct as part of
their defenses to set off any potential damages arising from their claims against them.
See Winklevoss Cap. Fund, LLC v. Shaw, 2019 WL 994534, at *10 (Del. Ch. Mar. 1, 2019).
32
B. Chancery Rule 12(b)(6)
The standard for deciding a Motion to Dismiss under Chancery Rule 12(b)(6)
is well-settled:
(i) all well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are “well-pleaded” if they give the opposing party
notice of the claim; (iii) the Court must draw all reasonable inferences
in favor of the non-moving party; and (iv) dismissal is inappropriate
unless the plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of proof. 135
I apply that standard first to Count I, and then the remaining Counts as related to the
forced settlement.
Count I – Tortious Interference
In Count I, Counterclaim-Plaintiffs assert a claim for tortious interference
with contract against Richards and Walker. “This cause of action follows the
Restatement (Second) of Torts, § 766,”136 and requires Counterclaim-Plaintiffs to
prove “(1) a contract, (2) about which defendant knew, and (3) an intentional act that
is a significant factor in causing the breach of such contract, (4) without justification,
(5) which causes injury.” 137 Counterclaim-Defendants do not dispute that there
135
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (citation omitted).
136
Chapter 7 Tr. Constantino Flores v. Strauss Water Ltd., 2016 WL 5243950, at *10
(Del. Ch. Sept. 22, 2016).
137
Skye, 2020 WL 881544, at *32 (quoting Bhole, Inc. v. Shore Invs., Inc., 67 A.3d 444,
453 (Del. 2013)).
33
existed valid contracts (the Intercreditor Agreement and the Noble Loan Agreement)
of which Richards and Walker were aware, and that their alleged actions in
interference with the contracts were intentional.138 Counterclaim-Defendants argue
the tortious interference claim falls short, however, in that Counterclaim-Plaintiffs
lack standing to bring it. They also maintain that it is evident on the face of the
Counterclaims that any interference was justified, and that neither causation nor
damages have been well pled.
As an initial matter, only a party to the contract has standing to bring a claim
that another has tortiously interfered with the contract.139 Waterloo acquired Noble’s
interests and rights under both the Intercreditor Agreement and the Noble Loan
Agreement on or about December 31, 2015, through a Purchase and Sale Agreement
(“PSA”). 140 According to Counterclaim-Defendants, Counterclaim-Plaintiffs do not
have standing to sue for claims that arise from conduct occurring before Waterloo
acquired Noble’s interests. For reasons explained, I agree that each alleged act must
be treated discretely as independent instances of wrongdoing.141 Waterloo thus lacks
138
See DOB at 16–23.
139
See Bishop v. Murphy, 2006 WL 1067274, at *3 (Del. Super. Ct. Apr. 10, 2006);
Banque Arabe et Internationale D’Investissement v. Md. Nat’l Bank, 57 F.3d 146, 151
(2d Cir. 1995).
140
Countercl. ¶ 56; PAB, Ex. 3 (“PSA”).
141
While the Utah Bankruptcy Court held that Counterclaim-Defendants are not suing as
Noble’s assignee for the stated reason that they “are alleging tortious interference with its
34
standing to assert a claim for tortious interference with the Intercreditor Agreement
or the Noble Loan Agreement with respect to any conduct that occurred before the
date of the PSA, unless the PSA contains an express assignment of Noble’s claims
for torts committed by third parties.
The PSA is governed by New York law, which requires that the “assignment
of the right to assert contract claims does not automatically entail the right to assert
tort claims arising from that contract.”142 While there is no “specific boilerplate
language” required “to accomplish the transfer of causes of action sounding in tort,”
the agreement must demonstrate a clear intention to do so. 143
contractual and statutory rights under the Noble loan,” I respectfully disagree. PAB, Ex. 2
at 30:25–31:3. As a matter of law, non-parties to a contract have “no standing to assert
claims for breach of contract or tortious interference with contractual relations.” Bishop,
2006 WL 1067274, at *3; Banque Arabe, 57 F.2d at 151–52; see also Restatement (Second)
of Torts § 766 cmt. p (1979) (explaining that the “person protected by” the tortious
interference rule “is the specified person with whom the third person had a contract that
the actor caused him not to perform”). Under New York law (which governs the PSA), the
right to assert tort claims previously arising under that contract must be expressly assigned.
Banque Arabe, 57 F.3d at 151; PSA § 18. Here, it is alleged that, prior to Waterloo’s
acquisition of the Noble Loan, Counterclaim-Defendants concealed an illegitimate secret
side agreement and blocked financing proposals while, at the same time, they were
attempting to acquire Noble’s interest in the loan. Countercl. ¶ 55. Months later, after
losing that bidding contest, Counterclaim-Plaintiffs are alleged to have reversed course and
“withdrawn” their consent to the Noble Loan amendment to manufacture a default in a
separate effort to “advance their personal economic stake in Richards LLC.”
Countercl. ¶¶ 57–58, 77, 108. Each of these acts, if well pled, make for discrete tortious
acts that cannot be lumped together. See, e.g., Countercl. ¶¶ 129–36 (alleging that the
“secret side agreement” makes for a discrete breach of contract claim).
142
Banque Arabe, 57 F.3d at 151; PSA § 18.
143
Banque Arabe, 57 F.3d at 151–52.
35
The PSA assigned to Waterloo “all of [Noble’s] interest in and to all of
[Noble’s] rights and obligations under the [Intercreditor Agreement and the Noble
Loan Agreement] and the other Transferred Rights.”144 Transferred Rights is
defined to include “all claims, suits, causes of action, and any other right or claim of
[Noble], whether known or unknown, against [CSM] or any other Obligor or [SMP]
that in any way is based upon, arises out of or is related to any of the foregoing.”145
The term “Obligor” is defined to mean “any Entity . . . that is obligated under the
Credit Documents.”146 The term “Entity” is defined to include individuals, and
“Credit Documents” is defined to mean “the [Noble Loan Agreement] and all
guarantees . . . intercreditor agreements (including without limitation the
144
PSA Ex. A.
145
Id. § 1.2. Counterclaim-Plaintiffs also flag preceding language that Noble transferred
“all obligations owed to [Noble] in connection with the Loans” as potentially meaning that
Noble assigned to Waterloo its tort claims against any party. Id. Under well-settled canons
of contract construction, however, the specific governs the general, and the assignment of
“all claims, suits, causes of action, and any other right or claim of [Noble]” is clearly the
more specific provision with respect to assignments. See John Hancock Mut. Life Ins. Co.
v. Carolina Power & Light Co., 717 F.2d 664, 669 n.8 (2d Cir. 1983) (“New York law
recognizes that definitive, particularized contract language takes precedence over
expressions of intent that are general, summary, or preliminary. . . . Thus, where the parties
have particularized the terms of a contract an apparently inconsistent general statement to
a different effect must yield.” (internal quotations omitted)). As a result, the PSA’s clause
assigning causes of action governs the extent to which the PSA allows Counterclaim-
Plaintiffs to pursue Noble’s “claims, suits, [or] causes of action” against Richards or
Walker.
146
PSA § 1.2.
36
[Intercreditor Agreement]) . . . .” 147 Whether the PSA can be understood to assign
Noble’s right to pursue tort claims against Richards and Walker to Waterloo thus
depends on whether they are properly understood to have an “obligation” under the
Noble Loan Agreement or the Intercreditor Agreement.
A colloquial definition of “obligate” is “to bind legally or morally; to commit
(something, such as funds) to meet an obligation.”148 Black’s Law Dictionary
provides support for this colloquial definition as its definition of “Obligor” equates
“someone who has undertaken an obligation” to “a promisor or debtor.”149 Richards
and Walker are not legally bound “under the Credit Documents,” nor did they
commit to undertake an obligation in those documents. Had Noble intended to
transfer its existing tort claims against third parties to Waterloo, it easily could have
done so by simply assigning “all claims, suits, causes of action, and any other right
or claim of [Noble], whether known or unknown, against any Entity.” Instead, it
identified specific parties against whom Waterloo could pursue claims, limiting
those parties to “Obligors” as opposed to the broader “Entit[ies].” In so doing, it
147
Id.
148
Obligate, Merriam-Webster Dictionary (last visited July 25, 2021),
https://www.merriam-webster.com/dictionary/obligate; accord Obligate, Cambridge
Dictionary, https://dictionary.cambridge.org/us/dictionary/english/obligate (last visited
July 25, 2021).
149
Obligor, Black’s Law Dictionary (11th ed. 2019).
37
made clear that Noble did not assign its claims against third-party individuals like
Richards and Walker because they are not “obligated” under the Credit
Documents. 150
The broader agreement supports this reading. As noted, the PSA transferred
Noble’s “rights and obligations under [the Noble Loan Agreement]” in addition to
the other Transferred Rights. Counterclaim-Defendants appear to admit on brief that
“obligations” in that clause refers exclusively to Noble’s obligations arising from
the contract. 151 Because the court must “presume the same words used in different
parts of a writing have the same meaning,” 152 the derivative word “obligated” as
used in the definition of Obligor should be construed consistently to mean those
obligations arising from the contract. With this construction in mind, Counterclaim-
150
See In re New York City Asbestos Litig., 31 A.D.3d 299, 302 (App. Div. 2007) (applying
“the standard canon of contract construction expressio unius est exclusio alterius, that is,
that the expression of one thing implies the exclusion of the other”).
151
See PAB at 36 (arguing that the juxtaposition of Noble’s “rights and obligations” with
“Transferred Rights” must mean that Transferred Rights includes claims sounding in tort).
152
Carlyle Inv. Mgmt. L.L.C. v. Moonmouth Co. S.A., 2015 WL 5278913, at *14 (Del. Ch.
Sept. 10, 2015) (internal quotations omitted). Counterclaim-Plaintiffs argue that, to give
effect to the PSA’s provision of both Transferred Rights and “obligations” under the Noble
Loan Agreement, the Court must understand Transferred Rights to include tort claims.
The question, however, is not whether tort claims were transferred for parties “obligated”
under the PSA. Rather, the question is who Waterloo has the contractual right to sue, i.e.,
whether Richards and Walker are individually “obligated” under the PSA. This inquiry
distinguishes Counterclaim-Plaintiffs’ favorite case, Banque Arabe, where it was
undisputed the plaintiff received “all ‘rights, title and interest’” that included claims against
the defendant. 57 F.3d at 151.
38
Plaintiffs are left with standing to sue only for acts alleged to have occurred after
their acquisition of rights under the Intercreditor Agreement and the Noble Loan
Agreement, namely those arising from Richards and Walker’s withdrawal of their
consent to the amendment of the Noble Loan as directors of CSM.153 Specifically,
Counterclaim-Plaintiffs plead that Richards and Walker’s withdrawal of their
153
See Countercl. ¶¶ 53, 56, 108. At times, the briefing appears to conflict internally and,
more importantly, with the Counterclaim’s allegations regarding when precisely Richards
and Walker withdrew their consent to the amendment to the Noble Loan. See DRB at 12,
19 (arguing Richards and Walker’s withdrawal of consent occurred prior to Waterloo’s
acquisition of the Noble Loan in December 2015); PAB at 32 (same); but see DOB at 13
(acknowledging the withdrawal of consent occurred “on February 3, 2016”); Oral Arg.
Tr. 122:2–11 (Counterclaim-Plaintiffs asserting the withdrawal of consent occurred
“in February of 2016”). For their part, the Counterclaims allege: “After the Noble Loan
was fully drawn down on February 3, 2016, Counterclaim-Defendants further interfered
with Waterloo’s economic or contractual relationship by additionally purporting to
withdraw consent to the amendment to the Noble Loan in an attempt to place CSM back
in default so that Richards LLC would not have to convert the Richards LLC Loan to equity
and release its liens against CSM’s assets. By virtue of Counterclaim-Defendants’ conduct,
Richards LLC breached the provision of the Intercreditor Agreement that provided that in
the event that the full $30 million of the Noble Loan was drawn down, Richards LLC would
‘promptly (but in any event within 5 business days) convert’ the Richards LLC Loan in
full into the equity of SMP and release all liens held by Richards LLC in and against CSM’s
assets.” Countercl. ¶ 108. In other words, Counterclaim-Plaintiffs plead that,
“on February 3, 2016,” Richards and Walker tortiously interfered with Waterloo’s rights
under the Noble Loan Agreement and Intercreditor Agreement, in their capacity as
CSM directors, by withdrawing consent to CSM’s amendment of the Noble Loan, thereby
putting CSM in default and causing Richards LLC not to convert its loan into equity as
required under the Intercreditor Agreement. For purposes of this motion to dismiss, the
allegations in the Counterclaims, not the allegations in the briefs, control. See Standard
Gen. L.P. v. Charney, 2017 WL 6498063, at *25 (Del. Ch. Dec. 19, 2017) (“[I]t is
impermissible to attempt to amend one’s pleading through a brief.”). To the extent
Counterclaim-Defendants prove at a later stage that the withdrawn consents occurred prior
to Waterloo’s entry into the PSA, then further issues regarding standing may arise. At this
juncture, however, I must accept Counterclaim-Plaintiffs’ well pled allegations as true.
39
consent to the amendment to the Noble Loan caused Richards LLC to breach the
Intercreditor Agreement’s provision that Richards LLC would promptly convert the
Richards LLC Loan in full into the equity of SMP and release all liens held by
Richards LLC in and against CSM’s assets.154
Counterclaim-Defendants argue that Richards and Walker cannot be held
liable for tortious interference with the Intercreditor Agreement because they were
at all times acting on behalf of Richards LLC and CSM, who are parties to that
contract.155 Under the “affiliate exception” to the standing rule, the court focuses on
the extent to which the defendant is truly a “stranger” to the contract and the business
relationship underpinning the contract.156 In this regard, “officer[s] or director[s]
may be held personally liable for tortious interference with a contract of the
corporation if, and only if, [they] exceeded the scope of [their] agency in so
doing.”157 Where, as here, a claim for tortious interference is alleged against
“individuals or entities that share common ‘economic interests’ with a party to the
154
Countercl. ¶ 108.
155
DOB at 20.
156
AM Gen. Hldgs. LLC v. Renco Gp., Inc., 2013 WL 5863010, at *12 (Del. Ch. Oct. 21,
2013).
157
Local Union 42 v. Absolute Envtl. Servs., Inc., 814 F. Supp. 392, 400 (D. Del. 1993);
see also Grand Ventures, Inc. v. Paoli’s Rest., Inc., 1996 WL 30022, at *2–3 (Del. Ch.
Jan. 4, 1996) (citing with approval the holding of Local Union 42).
40
contract, Counterclaim-Defendants must ‘demonstrate that an interference by an
affiliated entity was motivated by some malicious or other bad faith purpose.’”158
The standard for bad faith is a “stringent” one,159 which in this context requires a
showing that the defendant is not “pursuing . . . the legitimate profit seeking activities
of the affiliated enterprises.”160 In other words, Counterclaim-Plaintiffs must well
plead that Richards and Walker were acting “without justification.”161
Counterclaim-Plaintiffs have adequately alleged that Richards and Walker
acted in bad faith as directors of CSM. Specifically, Counterclaim-Plaintiffs allege
that, after learning Waterloo acquired the Noble Loan, Richards and Walker
exploited their control over CSM and SMP to withdraw their previously awarded
consent for the amendment to the Noble Loan, in an effort to put CSM back in default
under that loan, for the sole purpose of enriching themselves to the detriment of SMP
and CSM. 162 In view of Richards and Walker’s fiduciary duties under the SMP
158
Skye, 2020 WL 881544, at *33 (quoting AM Gen. Hldgs., 2013 WL 5863010, at *12).
159
Allied Cap. Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1039 (Del. Ch. 2006).
160
AM Gen. Hldgs. LLC, 2013 WL 5863010, at *12.
161
Skye, 2020 WL 881544, at *32.
162
Countercl. ¶¶ 99, 106.
41
Agreement, Counterclaim-Plaintiffs well plead those bad faith actions exceeded the
scope of their agency. 163
Counterclaim-Defendants maintain, nevertheless, that they cannot be liable
for tortious interference if they acted on behalf of the creditor, Richards LLC,
invoking Redbox Automated Retail LLC v. Universal City Studios LLLP for the
proposition that a defendant acting to defend a “legally protected interest” is not
acting “without justification.” 164 Counterclaim-Defendants’ theory appears to be
that Richards and Walker were acting as agents for Richards LLC when they
withdrew their consent and, therefore, are insulated from personal liability.
Though no Delaware case appears to have dealt with the precise issue
presented here (i.e., a tortious interferer acting in bad faith as a fiduciary to a debtor
in service of a creditor counterparty in which the fiduciary holds an interest), the
court in Redbox expressly derived the rule on which Counterclaim-Defendants rely
from the Restatement (Second) of Torts § 773, which requires that the protection of
an interest is undertaken “by appropriate means.”165 As its comments make clear,
163
See Int’l Ass’n of Heat and Frost Insulators and Asbestos Workers Local Union 42 v.
Absolute Envtl. Servs., Inc., 814 F. Supp. 392, 400 (D. Del. 1993) (citing Restatement
(Second) § 770 as setting out the scope of an officer or director’s agency, which requires
that the actor “(a) does not employ wrongful means and (b) acts to protect the welfare of
the third person.”).
164
PAB at 13; Redbox, 2009 WL 2588748, at *6.
165
Restatement (Second) of Torts § 773; see also id. § 770 (providing that an actor “charged
with responsibility for the welfare of a third person” who “intentionally causes that person
42
Restatement (Second) § 773 “is of narrow scope and protects the actor only when
(1) he has a legally protected interest, and (2) in good faith asserts or threatens to
protect it, and (3) the threat is to protect it by appropriate means.” 166 Moreover,
“justification defenses under Sections 769 and 773 [of the Restatement (Second) of
Torts] present fact-intensive inquiries that are typically not appropriate for
disposition on a motion to dismiss.”167 It is, at bare minimum, reasonably
conceivable that the bad faith acts of a fiduciary resulting directly in the alleged
interference with an existing contract are improper means for Richards and Walker
to pursue Richards LLC’s ends.168 Because Counterclaim-Plaintiffs have well pled
not to perform a contract . . . does not interfere improperly with the other’s relation if the
actor (a) does not employ wrongful means and (b) acts to protect the welfare of the third
person.” (emphasis added)).
166
Restatement (Second) of Torts § 773 cmt. A (emphasis added).
167
Chapter 7 Tr. Constantino Flores v. Strauss Water Ltd., 2016 WL 5243950, at *12
(Del. Ch. Sept. 22, 2016); see also Encite LLC v. Soni, 2008 WL 2973015, at *8 (Del. Ch.
Aug. 1, 2008) (noting that the propriety of a tortious interference defendant’s effort to
preserve legally protected rights presents issues of fact rarely suitable for treatment on a
dispositive motion).
168
See Restatement (Second) of Torts, § 773 cmt. a, illus. 2 (illustrating that a party with
an honest belief in a right cannot enforce that right by working through improper means);
see also id. § 767 (setting out factors to consider in determining whether interference is
improper, which include, inter alia, the nature of the actor’s conduct, the actor’s motive,
the interests of the other with which the actor’s conduct interferes, and social policy
concerns); id. cmt. c (“The issue is not simply whether the actor is justified in causing the
harm, but rather whether he is justified in causing it in the manner in which he does cause
it. The propriety of the means is not, however, determined as a separate issue unrelated to
the other factors. . . . Conduct specifically in violation of statutory provisions or contrary
to established public policy may for that reason make an interference improper.”);
43
Richards and Walker’s interference was unlawful and, therefore, executed by
inappropriate means, Counterclaim-Defendants have proffered no basis to avoid
Richards and Walker’s liability for tortious interference as a matter of law. 169
In a last gasp, Counterclaim-Defendants argue Counterclaim-Plaintiffs fail to
allege causation and damages arising from Richards and Walker’s conduct. But
Counterclaim-Plaintiffs affirmatively plead that, but for Richards and Walker’s
interference, the Noble Loan would have been fully drawn down and Richards LLC
would have been forced under the Intercreditor Agreement to “promptly (but in any
event within 5 business days) convert” the Richards LLC Loan into equity of SMP
and release all liens held by Richards LLC against CSM’s assets, thereby allowing
Waterloo to obtain first-lien creditor status prior to the bankruptcy proceedings.170
Counterclaim-Plaintiffs further plead that, as a result of Richards and Walker’s
tortious interference, Waterloo’s position as a senior secured creditor of CSM was
Encite, 2008 WL 2973015, at *7 (noting that, “[t]o state a claim of tortious interference,
[the plaintiff] must allege either an improper motive or means . . . .” (emphasis added)).
169
I note Counterclaim-Defendants cite to Morgan Asset Hldg. Corp. v. CoBank, ACB,
an Indiana case holding that a creditor could not be held liable for tortious interference
where it did not act “exclusively” to injure another creditor by renegotiating its loan
agreement with a third party. 736 N.E.2d 1268 (Ind. Ct. App. 2000). While Indiana
similarly appears to follow the Restatement for its tortious interference analysis, there were
no allegations in Morgan that the creditor achieved its contractual renegotiation by
improper means, as Richards and Walker are alleged to have done here. See id. at 1271–
73.
170
Countercl. ¶¶ 108–09.
44
substantially and negatively impaired, resulting in damages.171 At this stage, those
allegations suffice to well plead causation and damages.172 Accordingly, Waterloo
has stated a claim for tortious interference.
Counts II and VI – Fiduciary Duty Claims
Counterclaim-Plaintiffs individually and, with respect to DXS and PacNet,
derivatively on behalf of SMP, allege Richards and Walker (Count II) and SMI and
CC (Count VI) breached their fiduciary duties to SMP, DXS and PacNet. There is
no dispute that Richards, Walker, SMI and CC owed fiduciary duties to SMP, DXS
and PacNet as managers and entities with economic, managerial and voting control
of SMP.173 Given the preceding laches analysis, these claims are confined to the
alleged settlement Richards and Walker attempted to force between CSM and
Richards LLC, which was “designed to give the Counterclaim-Defendants
ownership of CSM’s assets and extinguish SMP’s economic interest in CSM.” 174
According to Counterclaim-Defendants, DXS and PacNet allege injury that is
solely derivative of the alleged injury SMP suffered, and so their direct claims must
171
Countercl. ¶¶ 109–10.
172
Pharm. Prod. Dev., Inc. v. TVM Life Sci. Ventures VI, L.P., 2011 WL 549163, at *7
(Del. Ch. Feb. 16, 2011) (“[W]hat is important at the pleadings stage is that [the plaintiff]
has given the [defendant] sufficient notice as to the damages it is claiming.”).
173
Skye, 2020 WL 881544, at *22; Countercl. ¶ 51.
174
Countercl. ¶¶ 73, 115(d).
45
be dismissed. I take up that issue before addressing Counterclaim-Defendants’
arguments that Counterclaim-Plaintiffs failed to well plead the elements of breach
of fiduciary duty.
a. The Tooley Analysis
As noted, DXS and PacNet assert breach of fiduciary duty claims in Counts II
and VI, both directly and derivatively on behalf of SMP. Counterclaim-Defendants
counter that the direct claims are improper. In evaluating whether a claim is direct
or derivative, Delaware courts consider “(1) who suffered the alleged harm
(the corporation or the suing stockholders, individually); and (2) who would receive
the benefit of any recovery or other remedy (the corporation or the stockholders,
individually)?” 175
Here, DXS and PacNet allege Counterclaim-Defendants owed them fiduciary
duties and, as part of a conspiracy, breached those duties by stifling the marketing
process for CSM’s assets, adopting resolutions that advantaged Richards LLC in the
CSM Bankruptcy Case and prohibiting CSM from entering into any settlement with
Counterclaim-Plaintiffs regarding the Noble Loan without the approval of both
Richards and Walker.176 In its rejection of the proposed settlement, the Utah
175
Tooley v. Donaldson Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004).
176
Countercl. ¶¶ 73–74, 140.
46
Bankruptcy Court observed that Richards and Walker had “significantly undermined
the CROs’ authority [in order] to ensure the Sale Process was favorable to Richards
and Walker,” including by overruling the CRO with a Board vote “[w]hen the CROs’
recommendations did not favor Richards or Walker.” 177
Neither side contests that Richards and Walker’s actions, if well pled, would
result in derivative claims because they allegedly diminished the value of SMP. But
where “the allegedly faithless transaction involves an extraction from one group of
stockholders, and a redistribution to another, of a portion of the economic value and
voting power embodied in the minority interest,” “the same claims can have direct
aspects.”178 In CMS Investment Holdings, LLC v. Castle, this court held that a
plaintiff stated a direct claim where “certain Defendants allegedly breached their
fiduciary duty of loyalty by actively concealing their misconduct and by deceptively
engineering a foreclosure sale in which the pre-ordained outcome was a sale of the
Company’s assets to themselves for less than full value.” 179 That holding applies by
analogy here because, as alleged, Counterclaim-Defendants harmed Counterclaim-
177
Countercl., Ex. D at 28–32.
178
CMS Inv. Hldgs., 2015 WL 3894021, at *8 (internal quotations omitted).
179
Id. at *9; see also Kelly v. Blum, 2010 WL 629850, at *11 (Del. Ch. Feb. 24, 2010)
(holding direct claims were well-pled where it was alleged that managers of LLC undertook
actions to eliminate plaintiff’s interests in the LLC). I note that Counterclaim-Defendants
never attempted on brief to distinguish CMS even though the decision was featured
prominently in Counterclaim-Plaintiffs’ papers.
47
Plaintiffs by working to stymy a bidding process by which Counterclaim-Defendants
sought to squeeze out DXS and PacNet, and emerge as the sole owners of SMP. It is
reasonable to infer that Counterclaim-Defendants’ actions infringed DXS and
PacNet’s rights and diminished their holdings individually by effectively working to
reallocate their shares in SMP to Counterclaim-Defendants. Because both the harm
and benefit of any recovery would accrue to DXS and PacNet independently, they
well plead a direct claim.
b. Counterclaim-Plaintiffs Have Well Pled a Fiduciary Breach
At the threshold, Counterclaim-Defendants argue that both Counts II and VI
fail for lack of any reasonably conceivable damages arising from a failed attempt to
accomplish an objective that Counterclaim-Plaintiffs affirmatively plead was not
actually realized.180 Damages, of course, are not an element of a claim for fiduciary
breach under Delaware law. Rather, “[t]o establish liability for the breach of a
fiduciary duty, a plaintiff must demonstrate that the defendant owed her a fiduciary
duty and that the defendant breached it.”181 Once proven, the court may fashion a
remedy to address the breach of fiduciary duty, including by an award of nominal
damages. 182 In any event, Counterclaim-Plaintiffs plead that Counterclaim-
180
Countercl. ¶ 75
181
Estate of Eller v. Bartron, 31 A.3d 895, 897 (Del. 2011).
182
See, e.g., Ravenswood Inv. Co., L.P. v. Estate of Winmill, 2018 WL 1410860, at *2, *25
(Del. Ch. Mar. 21, 2018) (awarding nominal damages for breach of fiduciary duty);
48
Defendants’ actions significantly chilled the bidding process and so resulted in
Counterclaim-Defendants receiving less than they would have received through a
proper process.183 While Counterclaim-Plaintiffs may ultimately be unable to prove
such damages, their allegations suffice at the pleading stage to put Counterclaim-
Defendants on notice of the damages they are claiming, and that is all that is
required.184
Counterclaim-Defendants’ remaining arguments are trained on Count II,
particularly as the allegations focus on Richards and Walker. Counterclaim-
Defendants argue Richards and Walker’s alleged actions during the CMS
Bankruptcy Case are protected by the business judgment rule. 185 They also argue
that CSM’s entry into the “zone of insolvency” expands the managers’ fiduciary
duties to creditors, and so Richards and Walker cannot be understood to have acted
unreasonably or improperly in accounting for Richards LLC’s creditor rights.186
Ivize of Milwaukee v. Complex Litig. Supp., LLC, 2009 WL 1111179, at *12 (Del. Ch.
Apr. 27, 2009) (same).
183
See Countercl. ¶¶ 73, 75; PAB at 25.
184
Pharm. Prod. Dev., 2011 WL 549163, at *7 (“[W]hat is important at the pleadings stage
is that [the plaintiff] has given the [defendant] sufficient notice as to the damages it is
claiming.”).
185
DOB at 32; DRB at 22–23.
186
DOB at 34 (citing In re Essar Steel Minn. LLC, 602 B.R. 600, 607 (Bankr. D. Del. 2019)
(quotation marks and citation omitted)).
49
While it is true that a company’s entry into the zone of insolvency gives
creditors standing to bring derivative claims, “[t]he fiduciary duties that creditors
gain derivative standing to enforce are not special duties to creditors, but rather the
fiduciary duties that directors owe to maximize value for the benefit of all residual
claimants.”187 As alleged, Counterclaim-Defendants’ attempt to force a settlement
between Richards LLC and CSM was motivated purely out of self-interest, working
against the best interests of CSM in order to benefit themselves as residual
claimants. 188 Indeed, Richards and Walker’s actions prompted the Utah Bankruptcy
Court to reject the proposed settlement expressly because it was motivated by self-
interest and personal gain and was not in the best interest of CSM. 189
“[T]he duty of loyalty mandates that the best interest of the corporation and
its shareholders takes precedence over any interest possessed by a director, officer
or controlling shareholder and not shared by the stockholders generally.”190 Because
Counterclaim-Plaintiffs have well pled that Counterclaim-Defendants breached their
duty of loyalty and failed to act independently in the best interests of SMP and CSM,
187
Quadrant Structured Prods. Co., Ltd. v. Vertin, 102 A.3d 155, 176 (Del. Ch. 2014)
(citing N. Am. Catholic Edu. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 101
(Del. 2007)).
188
Countercl. ¶¶ 73–75.
189
Countercl. ¶ 75, Ex. D.
190
Skye, 2020 WL 881544, at *22 n.287 (internal quotations omitted).
50
the business judgment rule’s presumptions do not apply.191 Counterclaim-Plaintiffs’
allegations thus allow a reasonable inference that Richards, Walker, SMI and CC’s
forced settlement was attempted for their own self-interest and to CSM’s detriment,
in breach of their fiduciary duties of loyalty.
Count III – Aiding and Abetting
In Count III, Counterclaim-Plaintiffs bring claims against SMI and CC for
aiding and abetting in Richards and Walker’s breach of fiduciary duty. To state a
claim for aiding and abetting breach of fiduciary duty, “a complaint must plead facts
in support of four elements: (1) the existence of a fiduciary relationship, (2) a breach
of fiduciary duty, (3) defendant’s knowing participation in that breach and
(4) damages proximately caused by the breach.”192 Given my finding that
Counterclaim-Plaintiffs have well pled Richards and Walker breached their
fiduciary duties to CSM such that they are entitled to damages if proven, all elements
except for SMI and CC’s knowing participation in the breach have been well pled.193
191
Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), overruled on other grounds, Brehm
v. Eisner, 746 A.2d 244 (Del. 2000) (explaining the business judgment rule “can only be
claimed by disinterested directors whose conduct otherwise meets the tests of business
judgment”).
192
Skye, 2020 WL 881544, at *29.
193
See Lake Treasure Hldgs., Ltd. v. Foundry Gill GP LLC, 2014 WL 5192179, at *1, *13
(Del. Ch. Oct. 10, 2014) (finding nominal damages on an aiding and abetting claim).
51
“To establish scienter, the plaintiff must demonstrate that the aider and abettor
had actual or constructive knowledge that their conduct was legally improper, and
that he acted with an illicit state of mind.” 194 “A claim of knowing participation
need not be pled with particularity”; rather, a party need only plead “factual
allegations . . . from which knowing participation can be reasonably inferred.”195
“A court’s analysis of whether a secondary actor ‘knowingly’ provided ‘substantial
assistance’ is necessarily fact intensive.”196 And, where it is well-pled that a third
party “attempted to create or exploit conflicts of interest in a board,” it is reasonably
conceivable that the third-party aided and abetted that board’s breach of fiduciary
duty to the members of an LLC.197
Counterclaim-Plaintiffs allege that Richards controlled SMI and Walker
controlled CC.198 Because Richards and Walker were “the fiduciary and primary
wrongdoers,” and also allegedly “control[led] [SMI and CC] or [] occupie[d] a
sufficiently high position [such] that [their] knowledge is imputed to” those
194
Skye, 2020 WL 881544, at *29 (internal quotation marks and citations omitted).
195
Id. (internal quotations and citations omitted).
196
In re Dole Food Co., Inc. S’holder Litig., 2015 WL 5052214, at *42 (Del. Ch. Aug. 27,
2015).
197
RBC Cap. Mkts., LLC v. Jervis, 129 A.3d 816, 862 (Del. 2015).
198
Countercl. ¶¶ 9–12.
52
entities,199 “the knowing participation test is ‘easier to satisfy.’”200 Counterclaim-
Plaintiffs further allege that SMI and CC, as members of SMP, appointed Richards
and Walker respectively to the boards of both SMP and CSM. 201 While on the
boards, Richards and Walker are alleged to have leveraged their control over SMI
and CC to frustrate CSM’s bankruptcy process, worked to extinguish DXS and
PacNet’s equity interest in SMP, and divested SMP of its interest in CSM.202 On
these allegations, Counterclaim-Plaintiffs have stated a reasonably conceivable
claim that SMI’s and CC’s participation was knowing and “legally improper.”203
Count IV – Civil Conspiracy
Finally, in Count IV, Counterclaim-Plaintiffs bring a claim for civil
conspiracy against all Counterclaim-Defendants, alleging SMI and CC (as majority
members of SMP) and Richards and Walker (as majority managers of SMP)
conspired to tortiously interfere with the Noble Loan Agreement and in breach of
199
In re PLX Tech. Inc. S’holders Litig., 2018 WL 5018535, at *49 (Del. Ch. Oct. 16,
2018).
200
BrandRep, LLC v. Ruskey, 2019 WL 117768, *6 (Del. Ch. Jan. 7, 2019) (quoting In re
PLX Tech., 2018 WL 5018535, at *49).
201
Countercl. ¶ 1.
202
Countercl. ¶¶ 73–75, 121.
203
Skye, 2020 WL 881544, at *29; see also BrandRep, 2019 WL 11768, at *6 (sustaining
aiding and abetting claim where director allegedly “owned or controlled the Entity
Defendants, such that his knowledge of his alleged breaches of fiduciary duties owed to
[the company] is imputed to both Entity Defendants”).
53
their fiduciary duties. To state a claim for civil conspiracy, Counterclaim-Plaintiffs
must allege “(1) a confederation or combination of two or more persons; (2) an
unlawful act done in furtherance of the conspiracy; and (3) actual damage.”204
I have already determined that Counterclaim-Plaintiffs have well pled that
Counterclaim-Defendants were engaged in an unlawful attempt to force a settlement
between CSM and Richards LLC in breach of their fiduciary duties, and that SMI
and CC aided and abetted Richards and Walker’s fiduciary breaches. I have also
found that Counterclaim-Plaintiffs have stated a claim for tortious interference.
Moreover, I have held each of these acts resulted in reasonably conceivable
damages. Counterclaim-Defendants are thus left to attack the existence of the
conspiracy itself. Indeed, Counterclaim-Defendants’ only argument in support of
dismissal of this Count (beyond the absence of a predicate breach) is that a member
of an LLC cannot conspire with the LLC for purposes of civil conspiracy.205
Accordingly, say Counterclaim-Defendants, neither Richards nor Walker could have
conspired with SMI or CC.
While it is true that “a corporation generally cannot be deemed to have
conspired with its officers and agents,” an exception to this rule exists “when the
204
Skye, 2020 WL 881544, at *31 (citation omitted).
205
DOB at 36 (citing Universal Cap. Mgmt., Inc. v. Micco World, Inc., 2012 WL 1413598,
at *4 (Del. Super. Ct. Feb. 1, 2012); Amaysing Techs., Corp. v. CyberAir Commc’ns, Inc.,
2005 WL 578972, at *8 (Del. Ch. Mar. 3, 2005)).
54
officer or agent of the corporation steps out of her role as an officer or agent and acts
pursuant to personal motives.”206 “Courts interpreting the ‘personal [motives]’
exception . . . have read it to mean a ‘personal animus and/or desire for financial
benefit other than one’s corporate salary.”207 Counterclaim-Plaintiffs have pled that
Walker and Richards acted “pursuant to personal motives” by conspiring with SMI
and CC (majority member entities they fully controlled) to protect their economic
interest in Richards LLC’s loan. 208 Because it is reasonably conceivable Richards
and Walker were conspiring with SMI and CC to force a bankruptcy settlement for
their personal financial benefit, the conspiracy count is well pled. 209
C. Demand Futility
Finally, Counterclaim-Defendants argue Counterclaim-Plaintiffs lack
standing to bring Counts II, IV and VI derivatively on behalf of SMP because they
do not allege facts excusing pre-suit demand as futile. I disagree.
206
Amaysing Techs., 2005 WL 578972, at *7; accord Skye, 2020 WL 881544, at *10.
207
Amaysing Techs., 2005 WL 578972, at *8.
208
Countercl. ¶¶ 1–4, 17, 21, 40, 86, 121, 140–41.
209
See LVI Gp. Invs., LLC v. NCM Gp. Hldgs., LLC, 2018 WL 1559936, at *15 (Del. Ch.
Mar. 28, 2018).
55
This court will excuse demand on a corporation where a plaintiff alleges
“particularized facts showing that demand would have been futile.”210 Demand is
futile where a plaintiff’s “particularized factual allegations . . . create a reasonable
doubt that, as of the time the complaint is filed, the board of directors could have
properly exercised its independent and disinterested business judgment in
responding to a demand.”211
A plaintiff may raise a reasonable doubt about the board’s ability impartially
to consider a demand by well-pleading that, inter alia, a majority of company’s
directors face a “substantial likelihood” of liability.212 “To plead that a member of
the Demand Board faces a substantial likelihood of liability . . . , a plaintiff need not
demonstrate a reasonable probability of success on the claim, as that would be
unduly onerous.”213 “Although framed as a substantial likelihood of liability, the
210
In re Oracle Corp. Deriv. Litig., 2018 WL 1381331, at *9 (Del. Ch. Mar. 19, 2019).
211
Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993). The parties do not engage on whether
the Court should analyze demand futility under Aronson or Rales. See Aronson, 473 A.2d
at 811–12; Rales, 634 A.2d at 934. Because the outcome of the analysis is the same under
Aronson or Rales, I apply Rales. See United Food & Commercial Workers Union v.
Zuckerberg, 250 A.3d 862, 889 (Del. Ch. 2020).
212
Rales, 634 A.2d at 936.
213
In re CBS Corp. S’holder Class Actions and Deriv. Litig., 2021 WL 268779, at *31
(Del. Ch. Jan. 27, 2021) (internal quotations omitted).
56
standard [ ] only requires that plaintiffs make a threshold showing, through the
allegation of particularized facts, that their claims have some merit.” 214
I am satisfied that Counterclaim-Plaintiffs’ allegations of breach of fiduciary
duty satisfy Chancery Rule 23.1’s particularity requirements as to Richards and
Walker, who constitute a majority of SMP’s Board. Counterclaim-Plaintiffs have
alleged with particularity how both parties acted to abuse their power in order to
better position Richards LLC to acquire CSM’s assets on the cheap, to SMP’s
detriment. 215 Indeed, as already noted and as Counterclaim-Plaintiffs allege, the
court overseeing CSM’s bankruptcy expressly found that Richards and Walker had
“significantly undermined the CROs’ authority [in order] to ensure the Sale Process
was favorable to Richards and Walker,” including by overruling the CRO with a
board vote “[w]hen the CROs’ recommendations did not favor Richards or
Walker.” 216 Because Counterclaim-Plaintiffs have cleared their threshold burden to
plead with particularity that Richards and Walker face a substantial likelihood of
liability in Counts II, III, IV and VI, demand is excused.
214
Zuckerberg, 250 A.3d at 887 (internal quotations omitted).
215
Countercl. ¶¶ 73–76.
216
Countercl. ¶ 75 (citing Countercl., Ex. D at 28–32).
57
III. CONCLUSION
For the foregoing reasons, Counterclaim-Defendants’ motion to dismiss
Count V is GRANTED. Counterclaim-Defendants’ motion to dismiss Count I is
DENIED as to Richards and Walker’s withdrawal of consent to amend the Noble
Loan and GRANTED as to the balance of the alleged acts. Counterclaim-
Defendants’ motion to dismiss Counts II, III, IV and VI is GRANTED as to all
alleged acts except the alleged attempt to force a settlement in the CMS Bankruptcy
Action and, as to Count IV, the surviving claim for tortious interference. Otherwise,
the motion is DENIED. Notwithstanding the dismissal of claims, Counterclaim-
Plaintiffs may present evidence of Counterclaim-Defendants’ alleged misconduct to
defend against or set off any potential damages arising from the affirmative claims
asserted against them. 217
IT IS SO ORDERED.
217
Winklevoss Cap., 2019 WL 994534, at *10 (citing King Const., Inc. v. Plaza Four
Realty, LLC, 2012 WL 3518125 at *4 (Del. Super. Ct. Aug. 7, 2012) (“Ordinarily a
defendant may amend a pleading to assert an affirmative defense even where the statute of
limitations or other considerations would bar the assertion of a substantially similar
counterclaim.”); PNC Bank, Del. v. Turner, 659 A.2d 222, 225 (Del. Super. Ct. 1995)
(permitting an affirmative defense of recoupment where the defendant's proposed
counterclaim would have been barred by the statute of limitations, finding “the underlying
policy of the statute of limitations is not promoted by suppressing a valid defense arising
out of a transaction” and the “purpose of statutes of limitation is to bar actions and not to
deny matters of defense. As a general rule, such statutes are not applicable to defenses, but
only where affirmative relief is sought. [. . .] It would therefore be appropriate for
[defendant] to plead her claims [. . .] defensively whether or not they would be barred if
pleaded affirmatively.”).
58