Lake Treasure Holdings, Ltd., et al v. Foundry Hill GP, LLC, et al and Foundry Hill Holdings, LP and CP-1 LLC, C.A. No. 6546-VCL (October 10, 2014) (Laster, V.C.)

By Eric Feldman and Porter Sesnon

In Lake Treasure Holdings, Ltd., the plaintiffs, investors in a now-defunct start-up, Foundry Hill Holdings LP (the “Partnership”), sued the Partnership, one of its founders (Ulric Taylor (“Taylor”)),  one of Taylor’s subsequent business partners (Christopher Klee (“Klee”)), and various other Partnership-related entities and operating subsidiaries for breach of fiduciary duty and aiding and abetting the breach of fiduciary duty, as well as under the Delaware Uniform Fraudulent Transfer Act (“DUFTA”) and Delaware Uniform Trade Secrets Act (“DUTSA”), in connection with a series of transactions whereby all of the assets of the Partnership were ultimately transferred to entities owned and/or controlled by Taylor and Klee. 

Taylor controlled the Partnership through his control of the Partnership’s general partner.  As a result, the Court initially found that Taylor owed fiduciary duties, including the duty of loyalty, to the Partnership and its limited partners.  In analyzing the transactions at issue, the Court further found that Taylor stood on both sides of such transactions and that therefore the entire fairness standard applied in analyzing such transactions.  In applying the entire fairness test, the Court held that Taylor had breached his duty of loyalty when he granted a security interest in all of the assets of the Partnership, including its primary asset, high frequency trading software, to Klee in exchange for a $28,000 loan from Klee to the Partnership.  Prior to the $28,000 loan by Klee, Taylor and Klee had previously contemplated Klee purchasing the software for $500,000 with an enterprise valuation of $3 million. 3 months following the granting of the security interest, as foreseen by Taylor and Klee at the time the loan was made, the Partnership defaulted on the loan, Klee foreclosed on the security interest, and Taylor amicably surrendered all of the assets of the Partnership, including all interest in the software, to an entity controlled by Klee.  The Court determined that Taylor and Klee “acted in concert to move the Partnership’s high frequency trading software out of the Partnership and into an entity where Taylor and Klee could enjoy its benefits.”  Upon finding the fiduciary duty breach by Taylor, the Court then also found that Klee had aided and abetted such breach of fiduciary duty.

However, the plaintiffs were unable to provide a basis for a responsible estimate of damages related to the breach of fiduciary duty because the high frequency trading software had failed to turn a profit over the time it was used and the plaintiffs were unlikely to commit any additional funds to be traded using the untested software as the business relationship between the parties had deteriorated significantly.  Notwithstanding that Taylor and Klee themselves had considered the software valuable, based on expert testimony, the Court found that it ultimately held little value and that the purported estimate of damages proposed by plaintiffs were too speculative, indefinite and unsupported.  As a result, the Court only awarded the plaintiffs nominal damages of $1.00 for the breach of fiduciary duty and aiding and abetting claims.

The Court did, however, hold that the transfer of the software out of the Partnership was a fraudulent transfer under DUFTA.   Consequently, the Court rescinded the transactions and ordered the defendants to transfer ownership of all Partnership assets, including the software, back to the Partnership.  No relief was available for misappropriation of trade secrets under DUTSA because defendant’s showed at trial, based on expert testimony, that the software was not a trade secret.

Finally, the Court granted the plaintiffs request that the Partnership be dissolved as it found that the plaintiffs had a right under the partnership agreement to dissolve the Partnership if either its general partner or Taylor committed a breach of fiduciary duty.  Further, the Court found that good cause existed to appoint a liquidating trustee to wind up the Partnerships affairs.

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