Chancery Court Dismisses All Claims for Breach of Fiduciary Duty, Fraud, and Company Dissolution Brought by Creditor

By: Scott Waxman and H. Corinne Smith

In Steven B. Trusa v. Norman Nepo, et al., Civil Action No. 12071-VCMR, the Delaware Court of Chancery granted defendants’ motion to dismiss, holding that the creditor plaintiff lacked standing to pursue a claim for breach of fiduciary duty and a claim for dissolution of the company, that he failed to state a claim for the remaining assertions, and that the declaratory judgment claim was duplicative.

Defendants Nepo, Collins, and Mir (the “Managing Members”) are managing members of XION Management LLC (the “Company”), which was in the business of structural finance with a focus on providing corporate debt. The Managing Members approached plaintiff Trusa to request a loan for the Company and made a number of representations to Trusa in connection with this request. Trusa executed the Loan and Security Agreement (the “Agreement”) and Secured Promissory Note (with the Agreement, the “Loan”) in October of 2010. The Loan matured and the Company defaulted two years later, in October 2012. Trusa began to inquire about activity at the Company, including the possibility that one of the Managing Members had engaged in wrongful conduct. After failing to receive satisfactory responses from Company counsel, the Managing Members, and other Company personnel and affiliates, Trusa filed a complaint in Delaware Superior Court, and Nepo filed a motion to dismiss the complaint.

The complaint asserted eight counts: (I) sought a declaration of various matters related to the dissolution of the Company; (II) alleged that the Managing Members breached their fiduciary duties; (III) alleged that Collins breached his fiduciary duty by failing to put the Company’s best interests above his own; (IV) sought dissolution of the Company; (V) asserted fraud against the Managing Members for knowingly making false representations and intentionally concealing Collins’ conflicts of interest; (VI) asserted a claim for fraudulent transfer against the Managing Members; (VII) alleged that the Managing Members conspired to commit fraud; and (VIII) alleged aiding and abetting against the Managing Members for assisting in perpetration of fraud. Nepo, in response, argued as follows: (I) Trusa lacked standing to assert breach of fiduciary duty claims or seek dissolution of the Company; (II) the declaratory judgment claim was duplicative of the other claims and should be dismissed; and (III) the complaint failed to state a claim for fraud, fraudulent transfer, conspiracy to commit fraud, and aiding and abetting fraud.

The Court first addressed Trusa’s standing to assert the claim for breach of fiduciary duty. The Court concluded that Trusa did not have statutory standing, as the plain language of the Delaware Limited Liability Company Act (the “Act”) provides that only members and assignees may assert derivative claims on behalf of the Company. The Court further concluded that the power of attorney clause in the Agreement, which empowers Trusa “to take any action and to execute any instrument which the Lender may deem reasonably necessary or advisable in pursuing its remedies,” did not grant Trusa a contractual right to assert derivative claims, as the clause only permitted Trusa to pursue remedies as provided in the Agreement.

The Court then turned to dissolution. First, the court concluded that Trusa did not have standing to pursue a statutory dissolution claim. Section 18-802 of the Act provides that only a member or manager may seek dissolution, and Trusa is neither. Trusa cited Section 18-805 of the Act, which allows a creditor to appoint a receiver for a limited liability company that is “canceled by the filing of a certificate of cancellation pursuant to Section 18-203(a),” but the Court rejected this argument. Section 18-203(a) provides for the filing of a certificate of cancellation only upon dissolution and winding up of a limited liability company. Trusa did not argue that the Company had dissolved and completed the winding up process; rather, he maintained that other cancellation methods could also trigger the rights granted to creditors by Section 18-805. The Court concluded that the plain language of the statute does not allow for this interpretation, and therefore that Trusa has no statutory right to dissolution. In addressing Trusa’s claim for equitable dissolution, the Court declined to use its power to employ this “extreme” measure. In doing so, the Court rejected Trusa’s arguments as “wholly conclusory and contrary to the specific allegations” in the complaint, concluding that none of Trusa’s assertions contained sufficient basis for dissolution.

The Court then turned to the claim for fraud, rejecting all of Trusa’s fraud claims. Court of Chancery Rule 9(b) requires all fraud claims to state with particularity the misrepresentations made. Trusa’s fraud claim contained no such particulars: the complaint gave no detail about dates or time frames, where or by what means the misrepresentations were made, or which persons made which particular misrepresentations. Trusa argued that various sections of the Agreement represent fraudulent misrepresentations, but the Court rejected these assertions. In one case, Trusa claimed that the Managing Members misrepresented that one hundred percent of the Loan would be invested in publicly traded companies, but the relevant section of the Agreement leaves the decision of how to invest solely to the Company’s discretion. In another instance, Trusa alleged that that the Managing Members misrepresented that Nepo would be an anchor investor, but Trusa did not also assert that Nepo was not in fact an anchor investor, so the Court found that there is no allegation of fraud. For the remaining purported misrepresentations, the Court rejected these because Trusa never explained why they amount to anything more than unfulfilled contractual promises.

The Court then rejected Trusa’s claim for fraudulent omission, as Trusa failed to allege how any representation was false or misleading, or how any representation created an affirmative disclosure duty that was then breached.

The Court also rejected Trusa’s claim for fraudulent transfer. The complaint alleged that to the extent the Managing Members transferred assets to themselves and their affiliates, such transfers were fraudulent. However, Trusa failed to provide the most basic details regarding who received what assets or where or when any such transfer occurred.

Finally, the Court dismissed the claims of conspiracy to commit fraud and aiding and abetting fraud. Both of these causes of action require an underlying tortious or unlawful act, and Trusa did not allege such an act.

Steven B. Trusa v. Norman Nepo, et al.

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Copyright © 2024, K&L Gates LLP. All Rights Reserved.