CHANCERY COURT GRANTS MOTION TO DISMISS RELATING TO ALLEGED BREACH OF FIDUCIARY DUTIES BY DIRECTORS OF A DISSOLVED CORPORATION

By: Scott E. Waxman and Joseph Phelps

In Akrout v. Jarkoy, No. 2017-0473-JRS (Del. Ch. July 10, 2018), the plaintiff Nabil Akrout sought a declaration that the dissolution of Intelligent Security Systems International, Inc., Delaware corporation (“ISSI”), was void, and alleged that three individual director-defendants had breached their fiduciary duties to him by failing to apprise him of ISSI’s dissolution and financial condition.  Akrout also alleged that the dissolution deprived him of accrued salary and dividends.

Akrout was a director and approximately 25% stockholder of ISSI, which operated in the digital security and surveillance video space. He served as President and CEO of ISSI pursuant to an employment agreement until he was terminated in 2008.  Akrout alleged that the last board meeting of ISSI occurred in 2007, and, consequently, he was not afforded an opportunity to participate in the management or oversight of ISSI since his removal as an officer.  ISSI filed a certificate of dissolution in 2014, and three years later, Akrout filed the lawsuit at issue.

In his lawsuit, Akrout named as defendants ISSI and three individuals who were also directors and stockholders of ISSI – Vladamir Bobrovsky, Boris Kalk and Roman Jarkoi (the “Individual Defendants”) – alleging, among other things, that (i) the Individual Defendants knowingly kept Akrout in the dark about the dissolution and mislead Akrout about the financial condition of ISSI and (ii) those actions by the Individual Defendants deprived Akrout of accrued salary and dividends and constituted a breach of the Individual Defendants’ fiduciary duties to Akrout. Akrout also sought a declaratory judgment that ISSI’s dissolution was void and sought the appointment of a receiver for ISSI.  Of the defendants, only Jarkoi entered an appearance, and so Akrout sought a default judgment against ISSI, Bobrovsky and Kalk.

The Court first addressed the request for a default judgment against ISSI that sought the voidance of ISSI’s dissolution and appointment of a receiver. The Court noted that under Section 278 of the Delaware General Corporation Law (“DGCL”), a dissolved corporation continues for a term of three years from such dissolution, “or such longer period as the Court of Chancery shall in its discretion direct,” for the purpose of prosecuting and defending lawsuits, among other things.  The Court concluded, however, that the claims against ISSI were “indisputably untimely,” because Akrout filed his action one day too late, after the three-year winding-up period had expired.  The Court noted that although the DGCL gave the Court discretion to extend the three-year period, that discretion could only be exercised if the request for an extension was made prior to expiration of the three-year period, as the Court was “without authority to resurrect ISSI” after the winding-up period had expired.

Second, the Court addressed Akrout’s claims against Jarkoi, accepting all well-pled allegations in the complaint as true, and drawing all reasonable inferences from those facts in Akrout’s favor, for purposes of Jarkoi’s related motion to dismiss. The Court noted, as an initial matter, that it was unclear on the face of the complaint whether Akrout’s claims were intended to be direct claims (where the plaintiff “suffered some individualized harm”) or derivative claims (“[w]here all of a corporation’s stockholders are harmed and would recover pro rata in proportion with their ownership of the corporation’s stock solely because they are stockholders”).  Although the distinction between direct and derivative claims is often consequential, the Court concluded it need not decide the nature of the claims as, in either case, they would fail as a matter of law due to Jarkoi’s defense of laches – or an “unreasonable delay by the plaintiff in bringing suit after [he] learned of an infringement of his rights, thereby resulting in material prejudice to the defendant.”  To defend on laches, Jarkoi needed to demonstrate that (i) Akrout “had knowledge of the invasion of his rights,” (ii) Akrout “unreasonably delayed in bringing suit to vindicate those rights” and (iii) “the delay resulted in injury or prejudice to Jarkoi.”  The Court then addressed each of those elements in turn:

  • Knowledge of Claims. By Akrout’s own admission, he stopped receiving information about ISSI after his removal as an officer in 2008, at which time he began to “routinely” read ISSI’s website and press releases. Clearly then, he was cognizant of the information vacuum more than nine years before filing the complaint. Based on the compliant (and as discussed further below), Akrout also had knowledge of any misappropriation relating to accrued salary under his employment agreement or dividends in 2008 when he began inquiring to other members of ISSI about those payments (and admittedly did so on multiple “occasions” before filing the complaint) and was told by ISSI that the company “had no money.”
  • Unreasonable Delay. As an initial matter, the Court noted that because a three-year statute of limitations applied to claims sounding in tort, contract or breach of fiduciary duty, such three-year period also applied by analogy to similar proceedings in equity and must be given “great weight in determining whether [the claim] is to be time-barred in equity.” Turning to each claim, the Court first concluded that Akrout’s claim that the Individual Defendants deprived him of information relating to ISSI accrued “as soon as the wrongful act occurr[ed]” – in this case when Akrout stopped receiving that information, which was more than nine years prior to the filing of the complaint. With respect to the claim relating to deprivation of accrued salary, the Court noted that such a claim for back pay could not have accrued any later than a year following his removal as an officer in January 2008, and possibly accrued as early as the time of removal – in either event, well before the three-year mark prior to the filing of the complaint. Finally, with respect to the claim for dividends, the Court noted that there were no details provided in the complaint regarding ISSI’s past dividend practice, and there was no allegation that specific dividends were paid to other stockholders but not Akrout. The Court concluded that “the only reasonable inference” was that Akrout was aware of any claim for dividends soon after his removal given that the complaint alleged Akrout made inquiries of the Individual Defendants as to when he would receive such dividends, along with his back pay. Even though the Individual Defendants told him “ISS[I] had no money” to pay his accrued salary and dividends and was told to “be patient,” the Court concluded that that allegation “falls well short” of a basis to toll the three-year statute of limitations or to avoid laches given that the allegation provides no detail as to when Akrout reached out to ISSI or to whom Akrout spoke, and the alleged responses from ISSI provided no assurance the payment would ever be made.
  • Jarkoi’s Prejudice. The Court noted that the consequence of Akrout’s unreasonable delay in bringing suit is “presumed prejudice” to the Individual Defendants, though in this case the prejudice did not need to be presumed because ISSI had already been dissolved, the three-year winding-up period had run, and the claims related to events from almost a decade ago. The Court concluded, as a result, that the Individual Defendants would face “significant and potentially insurmountable challenges” in mounting a defense given the passage of time and dissolution of the corporate entity.

Although the Court noted that the laches defense is “frequently not ‘well-suited for treatment’ on a motion to dismiss,” it was clear on the face of Akrout’s complaint that the claims were time-barred given the analogous statute of limitations. For that reason and because each of the three elements of laches discussed above were satisfied, the Court granted Jarkoi’s motion to dismiss based on laches.

Finally, the Court addressed Akrout’s motion for a default judgment against Bobrovsky and Kalk, who failed to appear. The Court concluded that, since the claims against Bobrovsky and Kalk were the same as those against Jarkoi, there was no basis to allow Akrout’s time-barred claims to proceed against Bobrovsky and Kalk simply because they did not appear to defend them.  As a result, the Court dismissed the motion for default judgment on the same basis as the dismissal of claims against Jarkoi.

Akrout v. Jarkoy, C.A. No. 2017-0473-JRS (Del. Ch. July 10, 2018)

 

Update:

In our prior post above, we summarized the Chancery Court’s decision in Akrout v. Jarkoy, No. 2017-0473-JRS (Del. Ch. July 10, 2018), where the plaintiff Nabil Akrout sought, among other things, a declaration that the dissolution of Intelligent Security Systems International, Inc., Delaware corporation that did not enter an appearance in the Court (“ISSI”), was void.  In that action, the Court dismissed the motion for default judgment against ISSI, concluding that Akrout’s claims were brought outside the three-year period for post-dissolution winding-up set forth in Section 278 of the Delaware General Corporation Law (“DGCL”).  On September 19, 2018, the Court addressed Akrout’s motion for reargument of that dismissal.

The Court first noted that, under Chancery Rule 59(f), a motion for reargument must be denied “unless the [C]ourt has overlooked a controlling decision or principle of law that would have controlling effect, or the [C]ourt has misapprehended the law or the facts so that the outcome would be different.” In other words, a motion for reargument cannot be used to re-litigate claims or to present new evidence that could have been raised in the prior proceeding.

In addressing the standard for a motion for reargument, Akrout asserted that he had no occasion in the prior proceeding to raise his proffered basis to challenge the Court’s dismissal of his motion for default judgment against ISSI (which underlying claims the Court dismissed as time-barred as outside the three-year period for post-dissolution winding-up). In particular, Akrout noted that the Court focused on this issue of timeliness after motions were already submitted.  The Court acknowledged that, in the prior proceeding, it declined to enter the requested default judgment sua sponte, given that ISSI did not enter an appearance.  As a result, the Court agreed that its prior ruling did not allow Akrout to fully develop his arguments regarding the timeliness of the complaint, and thus his arguments regarding timeliness were not procedurally barred.

Nevertheless, the Court concluded that there were several separate grounds upon which the motion should be denied:

  • As set forth in the Court’s prior opinion, Akrout failed to provide notice of his motion for default judgment to ISSI, which the Court concluded was sufficient, on its own, to deny the motion for default judgment;
  • The Court reaffirmed its prior conclusion that Section 278 of the DGCL provided for a three-year post-dissolution wind-up period that could not be extended once the three-year period had run. In particular, the Court rejected Akrout’s arguments that Chancery Court rules would extend the expiration of the three-year period, which occurred on a Sunday in Akrout’s case, to the next business day, citing the case In re Citadel Industries as dispositive on the issue (the “corporation” ceased to exist as a legal entity” precisely three years from the date of dissolution and the Court had “no power to ‘continue’ a corporation…after the statutory three-year period ha[d] expired”), and noting that the absence of any exclusions from the firm three-year deadline in Section 278 precluded any common law rules of construction, such as the so-called Sunday Rule, to extend the deadline to the next business day; and
  • Akrout had the opportunity to act within the three-year window, but simply failed to make any effort to do so.

For those reasons, the Court denied Akrout’s motion for reargument.

Akrout v. Jarkoy, C.A. No. 2017-0473-JRS (Del. Ch. Sept. 19, 2018)

 

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