Delaware Court of Chancery Dispenses with Multiple Motions and Claims as Business Partners Take a “Kitchen Sink” Approach to Ascribing Blame and Seeking Recourse in Business Endeavor
Stone & Paper Investors, LLC, et al., v. Richard Blanch et al., C.A. No. 2018-0394-PAF (Del. Ch. June 29, 2020) involved a barrage of claims and counterclaims among LLC members and managers, including, misappropriation of company funds, breach of LLC agreement, fraud, conversion, unjust enrichment, and aiding and abetting breaches of fiduciary duty. The Court of Chancery resolved a motion to dismiss the counterclaims and third-party claims and, in doing so, provided further guidance on findings of lack of personal jurisdiction, claims for fraudulent inducement and fraud, claims for conversion and aiding and abetting breaches of fiduciary duty.
In 2013, Red Bridge & Stone, LLC (“Red Bridge”), and Skinner Capital, LLC (“Skinner Capital”), as the two common members, and Stone & Paper Investors, LLC (“Stone & Paper”) as the sole preferred member, formed Clovis Holdings LLC (“Clovis”), to produce and sell stone-based paper products. Richard Blanch (“Blanch”) affiliated with Red Bridge, and Brian Skinner (“Skinner”) affiliated with Skinner Capital, were designated as the two managers of Clovis.
In 2018, Stone & Paper filed a complaint asserting multiple claims: (1) a direct claim against Blanch and Skinner for breaches of the LLC Agreement of Clovis (the “LLC Agreement”); (2) derivative claims on behalf of Clovis against Blanch and Skinner for breaches of the LLC Agreement and for breaches of fiduciary duty; and (3) a derivative claim against Skinner Capital, Red Bridge, and Vivianna Blanch (an affiliate of Red Bridge) for aiding and abetting breaches of fiduciary duties. When the Court denied the defendants’ motion to dismiss, Clovis and two of the defendants filed counterclaims and third-party claims alleging that Stone & Paper and/or its affiliates (1) had misappropriated funds of Clovis, (2) had breached the LLC Agreement, (3) had committed fraud, (4) had converted company funds, (5) had been unjustly enriched, and (6) had aided and abetted breaches of fiduciary duty.
The Court determined that Clovis and its members and affiliates on both sides of the complaints had together engaged in several instances of comingling of funds and that Clovis had taken certain decisions, requiring consent of both managers, by a single manager at the request of Stone & Paper. Further, emails provided to the Court appeared to indicate that Skinner had authorized several other acts about which he had complained and claimed ignorance.
In following precedent, the Court dismissed certain claims based on a lack of personal jurisdiction, noting that “[m]ere membership in a Delaware entity is not a basis to confer personal jurisdiction”. The Court dismissed the claims of fraudulent inducement and fraud, noting that a “claimant cannot ‘bootstrap’ a claim of breach of contract into a claim of fraud merely by alleging that a contracting party never intended to perform its obligations.” Further, they noted that “[c]ouching an alleged failure to comply with the [LLC Agreement] as a failure to disclose an intention to take certain actions arguably inconsistent with that agreement is exactly the type of bootstrapping this Court will not entertain.” In evaluating the unjust enrichment claim, the Court noted that where a “contract comprehensively governs the relevant relationship between the parties, [and] the contract… provide[s] the measure of the plaintiff’s rights,… any claim of unjust enrichment will be denied.” Further, the Court noted that the claimants had not alleged “facts to support a claim that either [claimant] has been impoverished by the enrichment of” Stone & Paper. Regarding claims for conversion, the Court noted that “[g]enerally, an action in conversion will not lie to enforce a claim for the payment of money…” Lastly, with respect to the counterclaim that the third-party defendants had aided and abetted alleged breaches of fiduciary duty to Clovis, the Court noted that “it is well settled that only managing members or controllers owe fiduciary duties by default in LLCs… Put differently, [m]anagers and managing members owe default fiduciary duties; passive members do not.”