Jeff Lipman v. GPB Capital Holdings LLC
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Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
JEFF LIPMAN and CAROL LIPMAN, ) derivatively on behalf of GPB ) HOLDINGS II, LP and GPB ) AUTOMOTIVE PORTFOLIO, LP ) ) Plaintiffs, ) ) v. ) C.A. No. 2020-0054-SG ) GPB CAPITAL HOLDINGS LLC, a ) Delaware limited liability company, ) DAVID GENTILE, JEFFREY LASH, ) and JEFFRY SCHNEIDER, ) ) Defendants, ) ) and ) ) GPB HOLDINGS II, LP, a Delaware ) limited partnership, and GPB ) AUTOMOTIVE PORTFOLIO, LP, a ) Delaware limited partnership, ) ) Nominal Defendants. )
MEMORANDUM OPINION
Date Submitted: October 26, 2020 Date Decided: November 18, 2020
Marcus E. Montejo and Stephen D. Dargitz, of PRICKETT, JONES & ELLIOTT, P.A., Wilmington, Delaware; OF COUNSEL: Chet B. Waldman and Adam J. Blander of WOLF POPPER LLP, New York, New York, Attorneys for Plaintiffs Jeff Lipman and Carol Lipman.
Patricia L. Enerio and Elizabeth A. DeFelice, of HEYMAN ENERIO GATTUSO & HIRZEL LLP, Wilmington, Delaware; OF COUNSEL: Tab K. Rosenfeld, Steven M. Kaplan, and Nicole E. Meyer, of ROSENFELD & KAPLAN, LLP, New York, New York, Attorneys for Defendant GPB Capital Holdings LLC and Nominal Defendants GPB Holdings II, LP and GPB Automotive Portfolio, LP.
Jacob R. Kirkham, of KOBRE & KIM LLP, Wilmington, Delaware; OF COUNSEL: William McGovern and Leif T. Simonson, of KOBRE & KIM LLP, New York, New York, Attorneys for Defendant David Gentile.
Michael W. McDermott and Richard I. G. Jones Jr., of BERGER HARRIS LLP, Wilmington, Delaware; OF COUNSEL: Jeffrey Schreiber and Richard J. Jancasz, of MEISTER SEELIG & FEIN LLP, New York, New York, Attorneys for Defendant Jeffry Schneider.
David A. Felice, of BAILEY & GLASSER, LLP, Wilmington, Delaware; OF COUNSEL: Kevin D. Galbraith, of LAW OFFICE OF KEVIN GALBRAITH, LLC, New York, New York, Attorneys for Defendant Jeffrey Lash.
GLASSCOCK, Vice Chancellor
1 This matter involves allegations that the controller of a general partner and his
associates looted the general partner’s constituent partnerships. The Plaintiffs are
limited partners; they seek to proceed derivatively on behalf of the partnerships. The
individual Defendants are the alleged controller, David Gentile, and two alleged
associates of Gentile, Jeffrey Lash and Jeffry Schneider. The Defendant General
Partner is a Delaware LLC, GPB Capital Holdings (“GPB”). The Defendants have
moved to dismiss; this Memorandum Opinion addresses those motions.
The primary contention of the individual Defendants is that only GPB owes
fiduciary duties to the limited partnerships. Accordingly, Gentile cannot have
breached such duties, and Lash and Schneider cannot have aided and abetted any
breach, the allegations of which form the gravamen of the Complaint. I find,
however, that the allegations of the Complaint, together with the reasonable
inferences therefrom, are sufficient to sustain a claim that Gentile used his control
over GPB to cause it to breach duties to the partnerships, that he used his control to
usurp partnership assets, that this exercise of control imposed fiduciary duties on
Gentile in way of the partnerships, which he breached, and that Lash and Schneider
aided and abetted such breaches.
To proceed derivatively on behalf of a partnership, a limited partner must first
have made a demand that the general partner undertake the litigation, or demonstrate
via the pleadings that such demand should be excused as futile. Here, the Plaintiffs
2 made no demand against GPB, and the Defendants contend that demand is not
excused. I find that the allegations of the Complaint, which incorporate in the
pleadings several independent legal actions involving the Partnerships, make the
threat of liability to the general partner, and its controller, such that it is reasonably
conceivable that the general partner could not bring its business judgment to bear on
any demand involving these allegations. Accordingly, demand is excused and the
Plaintiffs may proceed derivatively.
My reasoning follows a recitation of the factual background, below.
I. BACKGROUND 1
A. The Parties
Nominal Defendant GPB Holdings II (“Holdings II”) is a Delaware limited
partnership.2 It was formed in 2015 to acquire and operate automotive retail,
healthcare, and information technology companies.3
Nominal Defendant GPB Automotive Portfolio, LP (“Auto,” and together
with “Holdings II,” the “Partnerships) is a Delaware limited partnership. 4 Auto was
formed in 2013 to acquire and operate automotive dealerships. 5
1 The facts, except where otherwise noted, are drawn from the Verified Derivative Complaint (“Compl.”), Dkt. No. 1, and exhibits or documents incorporated therein, and are presumed true for the purposes of these Motions to Dismiss. 2 Compl. ¶ 7. 3 Compl. ¶ 7. 4 Compl. ¶ 8. 5 Compl. ¶ 8.
3 Plaintiffs Jeff Lipman and Carol Lipman are limited partners of both Holdings
II and Auto and were limited partners at the time of the wrongs alleged in the
Complaint.6 They invested $550,000 in Holdings II and $200,000 in Auto.7
Defendant GPB Capital Holdings, LLC is a Delaware limited liability
company that holds itself out to be a “New York-based alternative asset management
firm that seeks to acquire income-producing private companies.” 8 It operates as a
holding company and manages several investment funds in different industries.9
GPB was the general partner of both Holdings II and Auto at the time of all alleged
breaches of fiduciary duty. 10 Both Auto and Holdings II share an office with GPB.11
Defendant David Gentile is the founder, sole member, and Chief Executive
Officer of GPB. 12 In that capacity, Gentile is actively involved in the day-to-day
operations of the Partnerships and in marketing to the Partnerships’ limited
partners.13
6 Compl. ¶ 6. 7 Compl. ¶ 6. 8 GPB Capital Alternative Asset Management, https://gpb-cap.com/ (last visited November 18, 2020). 9 Compl. ¶ 11. 10 Compl. ¶ 9. 11 Compl. ¶¶ 7–9. 12 Compl. ¶ 12. 13 Compl. ¶ 12; Stephen D. Dargitz’s Ltr. Enclosing Massachusetts Enforcement Action Compl., Ex. A (“Mass. Enforcement Compl.”) at 2, Dkt. No. 60.
4 Defendant Jeffrey Lash is one of GPB’s former automotive retail directors
and managed many of the retail dealerships in which GPB had majority control.14
Defendant Jeffry Schneider is the founder of Ascendant Alternative
Strategies, LLC (“Ascendant Alternative”). Ascendant Alternative is an investment
firm that was the exclusive dealer manager of GPB’s funds. 15 Ascendant Alternative
has received a subpoena from the Securities and Exchange Commission (the “SEC”)
in connection with the SEC’s investigation of GPB.16 An administrative complaint
filed by the Enforcement Section of the Massachusetts Securities Division of the
Office of the Secretary of the Commonwealth (“Massachusetts Enforcement
Complaint”) alleges that Ascendant Alternative is owned and controlled by “persons
includ[ing] Gentile and Schneider.” 17
B. Factual Overview
In 2013, Gentile created GPB to acquire “middle market, income-producing
companies, regardless of a specific fund’s strategy.” 18 To obtain financing for these
acquisitions, “Gentile offered high sales commissions to financial professionals to
sell his funds”19 and told investors that they would receive monthly distributions
14 Compl. ¶ 13. 15 Compl. ¶ 14. 16 Compl. ¶ 14. 17 Mass. Enforcement Compl. 3–4. 18 Mass. Enforcement Compl. 2–3. 19 Mass. Enforcement Compl. 3.
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
JEFF LIPMAN and CAROL LIPMAN, ) derivatively on behalf of GPB ) HOLDINGS II, LP and GPB ) AUTOMOTIVE PORTFOLIO, LP ) ) Plaintiffs, ) ) v. ) C.A. No. 2020-0054-SG ) GPB CAPITAL HOLDINGS LLC, a ) Delaware limited liability company, ) DAVID GENTILE, JEFFREY LASH, ) and JEFFRY SCHNEIDER, ) ) Defendants, ) ) and ) ) GPB HOLDINGS II, LP, a Delaware ) limited partnership, and GPB ) AUTOMOTIVE PORTFOLIO, LP, a ) Delaware limited partnership, ) ) Nominal Defendants. )
MEMORANDUM OPINION
Date Submitted: October 26, 2020 Date Decided: November 18, 2020
Marcus E. Montejo and Stephen D. Dargitz, of PRICKETT, JONES & ELLIOTT, P.A., Wilmington, Delaware; OF COUNSEL: Chet B. Waldman and Adam J. Blander of WOLF POPPER LLP, New York, New York, Attorneys for Plaintiffs Jeff Lipman and Carol Lipman.
Patricia L. Enerio and Elizabeth A. DeFelice, of HEYMAN ENERIO GATTUSO & HIRZEL LLP, Wilmington, Delaware; OF COUNSEL: Tab K. Rosenfeld, Steven M. Kaplan, and Nicole E. Meyer, of ROSENFELD & KAPLAN, LLP, New York, New York, Attorneys for Defendant GPB Capital Holdings LLC and Nominal Defendants GPB Holdings II, LP and GPB Automotive Portfolio, LP.
Jacob R. Kirkham, of KOBRE & KIM LLP, Wilmington, Delaware; OF COUNSEL: William McGovern and Leif T. Simonson, of KOBRE & KIM LLP, New York, New York, Attorneys for Defendant David Gentile.
Michael W. McDermott and Richard I. G. Jones Jr., of BERGER HARRIS LLP, Wilmington, Delaware; OF COUNSEL: Jeffrey Schreiber and Richard J. Jancasz, of MEISTER SEELIG & FEIN LLP, New York, New York, Attorneys for Defendant Jeffry Schneider.
David A. Felice, of BAILEY & GLASSER, LLP, Wilmington, Delaware; OF COUNSEL: Kevin D. Galbraith, of LAW OFFICE OF KEVIN GALBRAITH, LLC, New York, New York, Attorneys for Defendant Jeffrey Lash.
GLASSCOCK, Vice Chancellor
1 This matter involves allegations that the controller of a general partner and his
associates looted the general partner’s constituent partnerships. The Plaintiffs are
limited partners; they seek to proceed derivatively on behalf of the partnerships. The
individual Defendants are the alleged controller, David Gentile, and two alleged
associates of Gentile, Jeffrey Lash and Jeffry Schneider. The Defendant General
Partner is a Delaware LLC, GPB Capital Holdings (“GPB”). The Defendants have
moved to dismiss; this Memorandum Opinion addresses those motions.
The primary contention of the individual Defendants is that only GPB owes
fiduciary duties to the limited partnerships. Accordingly, Gentile cannot have
breached such duties, and Lash and Schneider cannot have aided and abetted any
breach, the allegations of which form the gravamen of the Complaint. I find,
however, that the allegations of the Complaint, together with the reasonable
inferences therefrom, are sufficient to sustain a claim that Gentile used his control
over GPB to cause it to breach duties to the partnerships, that he used his control to
usurp partnership assets, that this exercise of control imposed fiduciary duties on
Gentile in way of the partnerships, which he breached, and that Lash and Schneider
aided and abetted such breaches.
To proceed derivatively on behalf of a partnership, a limited partner must first
have made a demand that the general partner undertake the litigation, or demonstrate
via the pleadings that such demand should be excused as futile. Here, the Plaintiffs
2 made no demand against GPB, and the Defendants contend that demand is not
excused. I find that the allegations of the Complaint, which incorporate in the
pleadings several independent legal actions involving the Partnerships, make the
threat of liability to the general partner, and its controller, such that it is reasonably
conceivable that the general partner could not bring its business judgment to bear on
any demand involving these allegations. Accordingly, demand is excused and the
Plaintiffs may proceed derivatively.
My reasoning follows a recitation of the factual background, below.
I. BACKGROUND 1
A. The Parties
Nominal Defendant GPB Holdings II (“Holdings II”) is a Delaware limited
partnership.2 It was formed in 2015 to acquire and operate automotive retail,
healthcare, and information technology companies.3
Nominal Defendant GPB Automotive Portfolio, LP (“Auto,” and together
with “Holdings II,” the “Partnerships) is a Delaware limited partnership. 4 Auto was
formed in 2013 to acquire and operate automotive dealerships. 5
1 The facts, except where otherwise noted, are drawn from the Verified Derivative Complaint (“Compl.”), Dkt. No. 1, and exhibits or documents incorporated therein, and are presumed true for the purposes of these Motions to Dismiss. 2 Compl. ¶ 7. 3 Compl. ¶ 7. 4 Compl. ¶ 8. 5 Compl. ¶ 8.
3 Plaintiffs Jeff Lipman and Carol Lipman are limited partners of both Holdings
II and Auto and were limited partners at the time of the wrongs alleged in the
Complaint.6 They invested $550,000 in Holdings II and $200,000 in Auto.7
Defendant GPB Capital Holdings, LLC is a Delaware limited liability
company that holds itself out to be a “New York-based alternative asset management
firm that seeks to acquire income-producing private companies.” 8 It operates as a
holding company and manages several investment funds in different industries.9
GPB was the general partner of both Holdings II and Auto at the time of all alleged
breaches of fiduciary duty. 10 Both Auto and Holdings II share an office with GPB.11
Defendant David Gentile is the founder, sole member, and Chief Executive
Officer of GPB. 12 In that capacity, Gentile is actively involved in the day-to-day
operations of the Partnerships and in marketing to the Partnerships’ limited
partners.13
6 Compl. ¶ 6. 7 Compl. ¶ 6. 8 GPB Capital Alternative Asset Management, https://gpb-cap.com/ (last visited November 18, 2020). 9 Compl. ¶ 11. 10 Compl. ¶ 9. 11 Compl. ¶¶ 7–9. 12 Compl. ¶ 12. 13 Compl. ¶ 12; Stephen D. Dargitz’s Ltr. Enclosing Massachusetts Enforcement Action Compl., Ex. A (“Mass. Enforcement Compl.”) at 2, Dkt. No. 60.
4 Defendant Jeffrey Lash is one of GPB’s former automotive retail directors
and managed many of the retail dealerships in which GPB had majority control.14
Defendant Jeffry Schneider is the founder of Ascendant Alternative
Strategies, LLC (“Ascendant Alternative”). Ascendant Alternative is an investment
firm that was the exclusive dealer manager of GPB’s funds. 15 Ascendant Alternative
has received a subpoena from the Securities and Exchange Commission (the “SEC”)
in connection with the SEC’s investigation of GPB.16 An administrative complaint
filed by the Enforcement Section of the Massachusetts Securities Division of the
Office of the Secretary of the Commonwealth (“Massachusetts Enforcement
Complaint”) alleges that Ascendant Alternative is owned and controlled by “persons
includ[ing] Gentile and Schneider.” 17
B. Factual Overview
In 2013, Gentile created GPB to acquire “middle market, income-producing
companies, regardless of a specific fund’s strategy.” 18 To obtain financing for these
acquisitions, “Gentile offered high sales commissions to financial professionals to
sell his funds”19 and told investors that they would receive monthly distributions
14 Compl. ¶ 13. 15 Compl. ¶ 14. 16 Compl. ¶ 14. 17 Mass. Enforcement Compl. 3–4. 18 Mass. Enforcement Compl. 2–3. 19 Mass. Enforcement Compl. 3.
5 providing an 8% annual rate of return. 20 GPB also hired a broker-dealer branch
office called Ascendant Capital, LLC (“Ascendant Capital”) to facilitate the
marketing and sale of its funds.21 Ascendant Capital is wholly-owned by
Schneider.22 In 2017, Ascendant Capital became a branch office of Ascendant
Alternative, and Gentile engaged Schneider, Ascendant Capital’s founder and sole
owner, to draft key documents and attend internal GPB executive meetings. Gentile
also gave Schneider the exclusive right to sell GPB funds.23
1. The DiBre Allegations
In July, 2017, GPB sued one of its former automotive retail directors, Patrick
DiBre, alleging that he had failed to complete auto dealership sales valued at $40
million. 24 In a counterclaim filed in March, 2018 (the “DiBre Counterclaim”), DiBre
alleged that “senior GPB executives had engaged in a pattern of self-dealing,
effectively diverting Partnership assets to themselves without disclosing their self-
interested transactions.” 25 The Plaintiffs incorporated the counterclaim by reference
to its detailed allegations:
DiBre alleged that: (i) Gentile and Schneider indirectly purchased property on which a dealership [was] located and charged the dealership rent; (ii) Gentile and Schneider received undisclosed stipends from dealerships acquired by GPB; (iii) Gentile and Schneider
20 Compl. ¶ 15. 21 Mass. Enforcement Compl. 3. 22 Mass. Enforcement Compl. 3. 23 Mass. Enforcement Compl. 3. 24 Compl. ¶ 17. 25 Compl. ¶ 17.
6 created an entity, LSG, to which they directed more than $4 million from reinsurance funds and manufacturer rebates that should have gone to dealerships and ultimately to the Partnerships; (iv) Gentile engaged his father’s accounting firm to perform approximately $100,000 worth of services each month, and those services either were not performed or were overbilled; (v) Gentile and Schneider expensed various luxury items for their own personal use; and (vi) Gentile and Schneider overstated the purchase price for dealerships and then redirected the overage to themselves in the form of ‘acquisition fees.’26
2. The Rosenberg Allegations
Plaintiffs also incorporated by reference allegations made in a complaint filed
by David Rosenberg (the “Rosenberg Complaint”), the CEO of Prime Automotive
Group, which is “a network of automotive dealerships” that is “one of the
Defendants’ largest investments.”27 The Rosenberg Complaint was a result of
GPB’s failure to pay $5.9 million that was allegedly owed under a March 1, 2019
Amended and Restated Repurchase Agreement. 28 According to the Rosenberg
Complaint, GPB refused to pay Rosenberg and sought to replace him as CEO of
Prime Automotive in retaliation for his reporting of GPB’s alleged financial
misconduct to the Partnerships’ auditor, EisnerAmper LLP (“EisnerAmper”). 29 That
financial misconduct included Gentile and Lash engaging in fictitious transactions
26 Compl. ¶ 17. 27 Ltr. to the Court from Stephen D. Dargitz, Exhibit, Rosenberg Compl. ¶ 4, Dkt. No. 66. 28 Compl. ¶ 18. 29 Compl. ¶ 18; Transmittal Decl. of Elizabeth A. DeFelice (“DeFelice Decl.”), Ex. F, at 2, Dkt. No. 28.
7 and other improper procedures to enrich themselves and inflate the Partnerships’
financial results.30 Specifically:
Gentile and Lash . . . funneled nearly $2,000,000 in revenue to entities they controlled, including some under the guise of “management fees.” For the year 2015, $201,7076 [sic] was transferred to Emdykycol, Inc., and $201,706 was transferred to Jachirijo, Inc., an entity owned by Gentile. Upon information and belief, Emdykycol, Inc. is owned by [both] Lash and . . . Gentile. Dealership funds have also been siphoned off to LSG Auto Wholesale, an entity named for Lash, Schneider (a close associate of Gentile), and Gentile. Upon information and belief, the payments described above served no legitimate purpose nor were they disclosed to investors. . . .
[U]pon information and belief . . . (i) Lash improperly drew an advance of $750,000 that he labelled a “retention bonus,” which he then distributed to himself and others; (ii) Lash and others inexplicably received approximately $100,000 worth of sporting vehicles and equipment after the close of a dealership purchase, suggesting a kickback arrangement; and (iii) Lash and others orchestrated kickback payments to themselves of $100 per vehicle for every Canadian used car purchase. 31
3. Problems with the Partnerships’ Financial Statements
This alleged financial misconduct caused GPB to be unable to pay the
promised monthly distributions amounting to an 8% annual rate of return.32 To
retain the veneer of being able to pay these distributions, GPB used individual capital
accounts of limited partners to fund distributions—essentially returning the limited
partners’ own capital to them under the guise of “distributions.” Such a scheme is,
30 Compl. ¶ 19. 31 Compl. ¶¶ 20–21. 32 Compl. ¶ 22.
8 of course, not sustainable, and in December, 2017, GPB reported, in a letter to the
Partnerships’ limited partners, that the Partnerships had failed to meet performance
expectations in 2018 and would likely have an intangible asset impairment charge.33
In that letter, GPB also indicated that it intended to divest certain underperforming
assets and it would provide more detail in forthcoming audited financial
statements.34
Those details never arrived. As of the date of the filing of the Complaint,
GPB has not filed its audited financial statements for the Partnerships for the years
2017 or 2018.35 And although GPB announced in the summer of 2018 that its 2015
and 2016 financial statements would need to be restated, those restatements have
also not been released. 36 GPB also did not disclose the reason for the restatement.37
On July 27, 2018, Auto’s auditor, Crowe LLP (“Crowe”), attempted to resign,
stating in a resignation letter that it:
concluded the scope of [its] audits would be expanded significantly based on information that [it had] obtained through July 26, 2018, related to the ongoing investigation of certain claims against the Company and certain officers, as well as significant related party activity. Even with the expanded audit procedures, which [it has] not completed, [it did] not believe [it would] be able to obtain sufficient reliable evidence to support issuing an unqualified opinion.
33 Compl. ¶ 24. 34 Compl. ¶¶ 24–25. 35 Compl. ¶¶ 32, 42. 36 Compl. ¶¶ 26, 32, 42. 37 Compl. ¶ 27.
9 In light of the item above and work performed to date, [Crowe] believe[d] internal controls [were] not sufficient to develop reliable financial statements.
Based on various changes within management during the audit period and information obtained through July 26, 2018, [it did] not believe [it was] in a position to rely on management’s representations related to the audits identified below [regarding Auto and GPB Prime Holdings, LLC].
As previously communicated to [GPB], information came to [Crowe’s] attention that caused [it] to believe that the previously issued GPB Automotive Portfolio, LP 2015 financial statements, which were audited by other auditors, were materially misstated. [Crowe] understand[s] that at this time management has concluded those financial statements require restatement; however, management has not come to their conclusion on the impact of the restatement on subsequent period financial statements.38
Further, Crowe wrote a second resignation letter also dated to July 27, 2018,
which stated that it was resigning as auditor for GPB itself, as well as other funds
owned by GPB, because of material misstatements in the 2016 financial statements
for those entities.39 Crowe mentioned in that letter that its audit reports on those
statements should no longer be relied upon. 40
In response to Crowe’s attempted resignation, Gentile and other GPB officers
met with Crowe to convince it to stay on while management attempted to address
the material deficiencies identified in the resignation letters.41 GPB’s officers
38 Compl. ¶ 27. 39 Compl. ¶ 28. 40 Compl. ¶ 28. Neither letter, I note, was attached to the Complaint nor provided by Defendants in their Motions to Dismiss briefing. 41 Compl. ¶ 29.
10 represented to Crowe that StoneTurn Group LLC (“StoneTurn”) was investigating
and expressed confidence that StoneTurn would soon be able to address the
deficiencies so that Crowe could continue its audits.42 Thereafter, on August 2,
2018, Crowe sent two letters to GPB rescinding its July 27th resignation letters but
stating that it would cease working until more information was produced so that it
could make a final resignation decision. 43 Crowe also clarified that it had not
changed its overall conclusion that the 2015 and 2016 financial statements for
several of GPB’s funds would need to be restated.44
On September 26, 2018, Crowe sent GPB a follow-up letter confirming its
decision to resign as auditor for Auto. 45 GPB did not disclose this information until
six weeks later, on November 9, 2018. 46 GPB’s disclosure, moreover, only
mentioned that Crowe’s resignation was due to perceived risks that Crowe
determined fell outside its internal risk tolerance parameters.47 It did not mention
Crowe’s issues with GPB’s materially misstated financials, its inability to trust
managements’ representations, or the lack of internal controls mentioned in Crowe’s
resignation letter. 48
42 Compl. ¶ 29. 43 Compl. ¶ 30. 44 Compl. ¶ 30. 45 Compl. ¶ 31. 46 Compl. ¶¶ 31, 34. 47 Compl. ¶ 34. 48 Compl. ¶ 34.
11 Also in November of 2018, GPB announced that it was temporarily
suspending redemptions by limited partners and not accepting new capital from
investors, pending its attempt to resolve accounting and financial reporting issues at
the Partnerships.49 By this point, investors were expecting restated 2015 and 2016
financials as well as audited 2017 financial statements that had not yet been
provided. However, in March, 2019, GPB informed limited partners of the
Partnerships that it would not be providing Schedule K-1 documents before the April
15, 2019 tax filing deadline.50 And when April arrived, GPB disclosed that the
audits of the Partnerships were being delayed due to internal deficiencies.51 GPB
again provided a deadline for the financial statements: June 30, 2019 for the June,
2017 audits and September 30, 2019 for the June, 2018 audits. 52
The June 30th deadline was, again, not met. 53 GPB informed limited partners,
in June, 2019, that the audits for 2016, 2017, and 2018 would all be released on
September 30, 2019.54 And, in September, 2019, GPB again delayed the deadline,
stating that as a result of SEC and FBI investigations, it expected that audits would
be completed by the end of 2019. 55 In November of 2019, GPB’s entire Audit
49 Compl. ¶ 33. 50 Compl. ¶ 37. 51 Compl. ¶ 38. 52 Compl. ¶ 38. 53 Compl. ¶ 39. 54 Compl. ¶ 39. 55 Compl. ¶ 41.
12 Committee resigned and GPB’s new auditor suspended its pending work
indefinitely. 56 As a result, as of the filing of the Complaint, GPB has still not
released audited financial statements for the years 2015 through 2018.57
4. The Related SEC and FBI Investigations
In October, 2019, a federal indictment was unsealed—that indictment charged
GPB’s Managing Director and Chief Compliance Officer, Michael Cohn, with
obstruction of justice relating to an SEC investigation of GPB.58 According to the
indictment, Cohn worked for the SEC’s Enforcement Division from September,
2018, until October, 2018. 59 While there, he retrieved information concerning an
investigation of GPB. 60 At the same time, he interviewed with GPB and related that
he had inside information about the SEC’s investigation.61 GPB hired Cohn for an
executive position and paid him $400,000 a year—a position he began in October of
2018, right after leaving the SEC. 62 After the indictment was unsealed, GPB
scrubbed all mentions of Cohn from its website. 63
56 Compl. ¶¶ 42, 45. 57 Compl. ¶ 42. 58 Compl. ¶ 43. 59 Compl. ¶ 43. 60 Compl. ¶ 43. 61 Compl. ¶ 43. 62 Compl. ¶ 43. 63 Compl. ¶ 43.
13 5. The Partnerships’ Current Situation
The Partnerships are now under several investigative proceedings and are the
subject of arbitrations and litigation relating to the problems detailed above.64 For
example, the SEC is still investigating the possibility of securities fraud in
connection with the marketing of the Partnerships.65 The Financial Industry
Regulatory Authority (“FINRA”) is also investigating the Partnerships, and
investors have filed arbitrations with FINRA against broker-dealers who sold them
units in the Partnerships. 66 And the Commonwealth of Massachusetts is also
investigating broker-dealers that helped GPB market the Partnerships.67
In addition, the involvement of GPB and its executives in other investigations
and litigation tends to rope the Partnerships into the chaos. For example, in the
summer of 2018, the U.S. Attorney for the Eastern District of New York subpoenaed
GPB as part of a joint investigation of the FBI and the New York City Business
Integrity Commission (the “BIC”) targeting GPB’s waste management fund. On
February 28, 2019, both the FBI and the BIC raided GPB’s Manhattan office—an
office it shares with the Partnerships.
64 Compl. ¶ 46. 65 Compl. ¶ 47. 66 Compl. ¶ 48. 67 Compl. ¶ 49.
14 The uncertainty caused Fidelity Investment’s National Financial Services to
announce that it would need to remove GPB’s private placements—such as the
Partnerships—from its platform within 90 days if it could not determine their true
value.68 GPB, in response, admitted that the value of its portfolio had declined from
approximately $1.8 billion to approximately $1.1 billion.69 In particular, GPB
reported on December 31, 2018, that Holdings II had lost 25.4% of its fair market
value and Auto had lost 39% of its fair market value. 70
C. Procedural History
The Plaintiffs made a demand on GPB for an inspection of the Partnerships’
books and records relating to, among other things, the failure to provide audited
financial statements on August 30, 2019.71 On January 28, 2020, the Plaintiffs filed
a derivative Complaint, seeking declaratory relief that GPB, Gentile, Lash, and
Schneider had either breached fiduciary duties to the Partnerships and/or aided and
abetted breaches of fiduciary duty and monetary damages. 72 On April 8, 2020,
Schneider, GPB, Holdings II, Auto, and Gentile filed their Motions to Stay or
Dismiss.73 Lash joined the other Defendants’ Motions to Stay or Dismiss on May
68 Compl. ¶ 57. 69 Compl. ¶ 57. 70 Compl. ¶ 58. 71 Compl. ¶ 40. 72 Compl., Relief Requested, ¶¶ a–b, e. 73 Def. Jeffry Schneider’s Mot. To Stay or Dismiss, Dkt. No. 26; Defs. GPB Capital Holdings LLC and Nominal Defs. GPB Holdings II, LP and GPB Automotive Portfolio, LP Mot. To Dismiss or Stay, Dkt. No. 28; Def. David Gentile’s Mot. To Stay or Dismiss, Dkt. No. 29.
15 11, 2020. 74 I heard oral argument on the Motions on July 7, 2020, and denied the
Defendants’ Motions to Stay from the bench. 75 What remains are their Motions to
Dismiss, which I now largely deny.
II. ANALYSIS
The Defendants collectively make four arguments that apply to all the
Defendants in favor of their Motions to Dismiss, and which I will address before
turning to the defendant-specific arguments. First, the Defendants argue that
demand is not excused because GPB’s potential liability is insufficient to render it
unable to exercise its business judgment. Second, the Defendants contend that the
Plaintiffs’ own allegations, i.e., allegations not sourced from other pleadings,
constitute only a failure to provide financial statements, which is a breach of the
Limited Partnership Agreements, but not a breach of fiduciary duties. This argument
relies on the assumption that incorporation of factual allegations from other
pleadings has either less force than a factual allegation raised by the Plaintiffs from
their own knowledge or no force at all—a contention that has implications for both
the demand futility issue and the breach of fiduciary duty issue and which I discuss
in Section II.B. infra. Third, the Defendants point to the Limited Partnership
Agreements of the Partnerships, which contain a limitation of liability provision, and
74 Def. Jeffrey Lash’s Joinder in Briefs in Support of Mot. To Dismiss or Stay, Dkt. No. 35. 75 Tr. of July 7, 2020, Oral Arg. Via Zoom on Defs.’ Mots. To Dismiss or Stay and Rulings of the Court on Defs.’ Mots. To Stay, at 25, Dkt. No. 64.
16 argue that it means that fiduciaries may only be held liable for bad faith. That
provision provides that
[t]he General Partner and its Affiliates shall not be liable to the Partnership or any Partner for . . . liabilities incurred . . . in connection with or resulting from . . . any decisions made by, or actions taken or not taken by, the General Partner or its Affiliates, so long as [they] . . . acted in good faith and in a manner [they] reasonably believed to be in, or not opposed to, the best interests of the Partnership and [their] conduct did not constitute gross negligence, fraud, or willful or wanton misconduct.76
The Complaint, per the Defendants, does not state a claim for bad faith against GPB
or Gentile. And fourth, the Defendants argue that no breach of fiduciary duty has
occurred—and therefore no aiding and abetting can have occurred—because GPB’s
duty to disclose financial statements is a contractual duty rather than a fiduciary one.
I find none of these arguments persuasive and conclude that it is reasonably
conceivable that GPB has breached its fiduciary duties to the Partnerships. I further
find it reasonably conceivable that Gentile, as the undisputed controller of GPB,
owes fiduciary duties to the Partnerships because it is reasonably conceivable that
he exercised control over the Partnerships’ assets. Finally, I find it reasonably
conceivable that Schneider and Lash knowingly participated in Gentile’s alleged
76 Def. Jeffry Schneider’s Opening Br. in Supp. of Mot. To Stay or Dismiss 22 (“Schneider Opening Br.”), Dkt. No. 27.
17 breaches of fiduciary duty. Accordingly, the Defendants’ Motions to Dismiss the
substantive counts are denied.77
A. Demand is excused as to all the Defendants.
Under 6 Del. C. § 17-1001, a limited partner seeking to proceed derivatively
must make a demand on the general partner to pursue the claim, unless such a
demand would be “not likely to succeed.” The Defendants collectively argue that
demand is not excused because the Plaintiffs have failed to make “any allegations as
to the management of GPB . . ., its officers or its management committees.”78 They
contend that the Plaintiffs’ allegations regarding demand futility “are too general and
conclusory to satisfy Delaware law.” 79 In applying the demand requirement of the
Limited Partnership Act, our courts have mined much of the rich vein of law existing
in regard to the similar demand requirement imposed by Rule 23.1 in the corporate
arena.80 Pertinent here, to excuse demand on a general partner on futility grounds,
supportive facts (like those sufficient to excuse demand under Rule 23.1) must be
pled “with particularity;” 81 conclusory assertions are insufficient to sustain the
77 The Plaintiffs also sought declaratory relief. Compl. ¶ 79. Because that relief is duplicative of the counts alleging breaches of fiduciary duty, I dismiss the count for declaratory judgment without prejudice, Section II.D. infra. 78 Schneider Opening Br. 17. 79 The GPB Defendants’ Opening Br. in Supp. of their Mot. To Dismiss or Stay (“GPB Opening Br.”) 18, Dkt. No. 28. 80 See, e.g., Seaford Funding Ltd. P’ship v. M&M Assocs. II, L.P., 672 A.2d 66, 70 (Del. Ch. 1995) (“[C]orporate standards apply to limited partnerships in the ‘demand excused’ analysis.”). 81 6 Del. C. § 17-1003.
18 burden. There are differences in the application of the two demand requirements,
however, as I address below.
The Complaint alleges that demand would be futile here. The Defendants
argue that the allegations lack specificity, in that they omit details about how the
general partner is managed. The Defendants suggest that I import corporate demand
law, which in this situation would require that I employ the test set out by our
Supreme Court in Rales v. Blasband: could those who direct the entity bring their
business judgment to bear on behalf of the entity in considering the demand at
issue? 82 Because the Complaint omits the details of how GPB is managed, the
Defendants contend that the Plaintiffs cannot meet their burden to demonstrate that
it is reasonably conceivable that demand is futile. The arguments of the Defendants,
however, fail to note that demand here would be made on the entity, GPB, and not
its directors or managers. 83 They also omit two important details pled in the
complaint: (i) GPB is wholly owned and therefore controlled by Gentile, its CEO,
and (ii) Gentile is alleged, with particularity, to have wrongfully diverted funds of
the partnerships to himself and the other individual defendants.
82 634 A.2d 927, 934 (Del. 1993) (“[A] court must determine whether or not the particularized factual allegations of a derivative stockholder complaint 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.”). 83 Gotham v. Hallwood Realty Partners, L.P., 1998 WL 832631, at *5 (Del. Ch. Nov. 10, 1998).
19 Before proceeding with this analysis, it is worth noting that, although Gentile
is implicated in the demand futility analysis, had the Plaintiffs sought to make a
demand, that demand would not be made upon Gentile himself, nor upon the
managers of GPB. Where the general partner of a partnership is an entity rather than
a person, “it should be sufficient to make the demand upon the general partner,
whatever its form.” 84 After all, “it is the general partner who owes the limited
partners fiduciary duties, not the management of the general partner, even though
they make the decisions for that business entity.” 85 Thus, “in the case of a corporate
[or other entity] general partner, the demand excusal inquiry focuses on the general
partner itself (as an entity),” and not on those who direct corporate affairs. 86
Why should this be? Demand in the corporate context is on a board composed
of human beings, each of whom is presumed to be acting in the corporate interest,
but each liable to self-interest and divided loyalties that may cause the board to be
unable to bring its business judgement to bear, excusing demand. With respect to
general partners of limited partnerships, these are—not always, but typically—
entities themselves. Here, the general partner is a limited liability company. Such
entities have no lusts to slake, no egos to protect, no dreams of wealth or power and
no sense of duty to others. Their existence is solely maintained by the human beings
84 Id. 85 Id. 86 Wenske v. Blue Bell Creameries, Inc., 2018 WL 3337531, at *18 (Del. Ch. July 6, 2019).
20 who control them. Because the Plaintiffs have failed to allege who those managers
are, or any specific reasons they would be unable to bring their business judgment
to bear upon demand, the Defendants argue that the Complaint fails to satisfy Rales.
But this argument misses the mark. GPB is the general partner whose fiduciary duty
runs to the Partnerships.87 The mangers of GPB, in contrast, owe duties to GPB and
its beneficial owner, not the Partnerships. If GPB (or Gentile) has a substantial risk
of liability or harm from the pursuit of this litigation, GPB’s managers cannot be
expected, in light of their duty to GPB, to cause GPB to approve the litigation upon
Plaintiffs’ demand. That is why the focus must be on the entity general partner, and
not its directors or managers. 88
However, whether demand on GPB is excused depends on whether the
Plaintiffs have “pled particularized facts raising a pleading-stage doubt about the
independence” of GPB. 89 Gentile is the sole member—and therefore controller—of
GPB. 90 By definition, then, GPB is not independent of Gentile. This would be of
87 See Gotham, 1998 WL 832631, at *5 (“[I]t is the general partner who owes the limited partners fiduciary duties, not the management of the general partner, even though they make the decisions for that business entity.”). 88 Id. (rejecting the “proposed rule” that the Court should consider the “form of entity of each general partner in order to determine whether the entity’s internal decision making individuals . . . were independent” because it “looks not to the person owing the fiduciary duty, but to individuals who make decisions in that entity’s best interest” (emphasis added)). 89 Delaware Cty. Employees Ret. Fund v. Sanchez, 124 A.3d 1017, 1020 (Del. 2015) (internal quotation marks omitted). 90 Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1113 (Del. 1994) (noting that a shareholder is “only” a controller “if it owns a majority interest in or exercises control over the business affairs of the corporation” (emphasis removed)).
21 no moment if the Complaint had nothing to do with Gentile. But that is not the
case—indeed, Gentile’s conduct, which includes exercising control of the
Partnerships through GPB, is at the very heart of the Plaintiffs’ Complaint.
“A general partner has ‘a disabling interest for pre-suit demand purposes’
when it faces a ‘substantial likelihood’ of liability in connection with the derivative
claim(s) asserted against it.”91 The same can be said for general partners controlled
by individuals or entities that face a substantial likelihood of liability in connection
with such claims. Here, the Plaintiffs have alleged that Gentile engaged in self-
dealing conduct that harmed the Partnerships. Those specific self-dealing-conduct
allegations are not unique to this case—indeed, they appear in at least three different
litigations where Gentile is a defendant and which are incorporated into the
Complaint: the DiBre Counterclaim, the Rosenberg Complaint, and the
Massachusetts Enforcement Complaint. The allegations in these three cases
complement each other. 92 For example, the Complaint alleges, by reference to the
DiBre Counterclaim, that “Gentile and Schneider created an entity, LSG, to which
they directed more than $4 million from reinsurance funds and manufacturer rebates
that should have gone to dealerships and ultimately to the Partnerships.”93 Similarly,
91 Wenske, 2018 WL 3337531, at *18 (quoting Ryan v. Gifford, 918 A.2d 341, 355 (Del. Ch. 2007)). 92 At least one of these pleadings is accompanied by a verification attesting to the accuracy of the facts alleged. 93 Compl. ¶ 17.
22 the Complaint notes that the Rosenberg Complaint alleges that “[d]ealership funds
have also been siphoned off to LSG Auto Wholesale, an entity named for Lash,
Schneider (a close associate of Gentile), and Gentile.”94 And the Massachusetts
Enforcement Complaint alleges that “LSG Auto (owned partially by Gentile and
Lash), received payments from GPB Capital-owned dealerships, without ever
disclosing this fact to investors.” 95
Thus, any litigation—including the litigation before me—aimed at
determining whether those allegations are true could lead to liability in all litigations
where Gentile may be liable for that conduct. If these allegations prove true, Gentile
faces a substantial likelihood of liability, which in turn makes prosecution of this
matter by a Gentile-controlled entity problematic.96 It is reasonably conceivable that
GPB is unable to evaluate a demand using its business judgment, because the
litigation that the Plaintiffs advocate risks substantial liability against its controller.
Although the Plaintiffs’ demand would be made on GPB, Gentile’s control of GPB
and his substantial likelihood of liability stemming from the Complaint and those
facts that may come to light in this litigation are particularized allegations that make
it reasonably conceivable that GPB would be unable to exercise its business
94 Compl. ¶ 20. 95 Mass. Enforcement Compl. 7–8. 96 The Defendants’ rebuttal regarding the Partnerships’ Limited Partnership Agreements does not persuade me that Gentile will not face a substantial likelihood of liability for reasons addressed in part II.B.1. infra.
23 judgment with regards to any demand made in connection with the Plaintiffs’
allegations.
The allegations of the Complaint also involve GPB directly. The Complaint
alleges that GPB has refused to provide financial reporting called for in its formative
documents. The Defendants contend that this is merely a contractual obligation
running directly to the limited partners, and not a part of any demand in way of
derivative litigation. But the Complaint goes beyond that—it alleges that the
repeated failures to provide required financials are part of a scheme to hide the
financial depredations to the Partnerships wreaked by Gentile and his confreres.97
The duty to disclose may be contractual, but a disloyal or grossly negligent failure
to meet that contractual obligation invokes fiduciary duties.
Demand is also futile as to Gentile’s alleged associates, Lash and Schneider.
Lash and Schneider are alleged to have aided and abetted Gentile’s and GPB’s
breaches of fiduciary duty; thus, a finding of liability for them is conditioned on
liability for Gentile and GPB. Because GPB is unable to exercise its business
judgment with regards to its own or Gentile’s potential liability, it is reasonably
conceivable that third-party liability conditioned on such liability is also not a
possibility GPB can consider in the exercise of its business judgment.
97 Compl. ¶ 23.
24 The Defendants make much of our precedent stating that demand “is not
excused solely because the directors would be deciding to sue themselves.”98 True.
Departure from this rubric would make allegations that demand is excused self-
proving. But such language must work in tandem with the well-established rule that
“[a] general partner has ‘a disabling interest for pre-suit demand purposes’ when it
faces a ‘substantial likelihood’ of liability in connection with the derivative claim(s)
asserted against it.”99 Departure from this rubric would render faithless fiduciaries
immune to judicial review. This is not a case where demand is being excused solely
because GPB is a named defendant. Here, the Complaint directly implicates conduct
by GPB and its controller, Gentile, in tandem with Lash and Schneider, which could
result in a substantial likelihood of liability for Gentile, in this case or in combination
with others. Accordingly, demand is excused.
B. The Plaintiffs have stated a claim for breach of fiduciary duty against GPB and Gentile.
I pause here to address the Defendants’ argument that the Complaint is
improperly regurgitating allegations in other pleadings. Without addressing the
logical or persuasive force of allegations incorporated by reference, I first note that,
under Delaware Court of Chancery Rule 10, “[s]tatements in a pleading may be
98 Schneider Opening Br. 19 (quoting In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106, 121 (Del. Ch. 2009)). 99 Wenske v. Blue Bell Creameries, Inc., 2018 WL 3337531, at *18 (quoting Ryan v. Gifford, 918 A.2d 341, 355 (Del. Ch. 2007)).
25 adopted by reference in a different part of the same pleading or in another pleading
or in any motion.”100 Second, I need not address the full effect of allegations
incorporated by reference in this matter, given that we are at the Motion to Dismiss
stage and the Complaint need only give the Defendants notice of the claims against
them. 101 As explained above, with regards to demand futility, the existence of
several other litigations that specifically allege Gentile’s self-dealing operation of
GPB’s portfolio companies means Gentile’s exposure to potential liability from
those allegations is not insignificant, implicating GPB’s ability to respond to a
demand. With regards to the Motions to Dismiss for failure to state claims of
breaches of fiduciary duty under Rule 12(b)(6), the need for specific pleading is
absent.102 The complaint must simply allege facts that, if true, and together with the
reasonable inferences therefrom, make it reasonably conceivable that the elements
of breach of fiduciary duty are met: that a defendant was bound by such duty, and
breached it. Here, GPB is a general partner and owes fiduciary duties to the limited
partners. The remaining question is allegations of breach. I need not give the
incorporated allegations the full force of allegations made from the Plaintiffs’ own
100 Emphasis added. 101 Malpiede v. Townson, 780 A.2d 1075, 1083 (Del. 2001) (The motion to dismiss “standard is based on the ‘notice pleading’ requirement established in Ct. Ch. R. 8(e) and is ‘less stringent than the standard applied when evaluating whether a pre-suit demand has been excused in a stockholder derivative suit filed pursuant to Chancery Rule 23.1.’”) (quoting Solomon v. Pathe Commc’ns Corp., 672 A.2d 35, 38 (Del. 1996)). 102 Id.
26 knowledge to find that the incorporated allegations were sufficient to allege breaches
of duty, and to fulfill the notice function of the Complaint by putting the Defendants
on notice of the allegations against them. Accordingly, I need not decide whether to
give full weight to the incorporated allegations. I find the Complaint sufficient to
state a claim under Court of Chancery Rule 12(b)(6).
1. The Limited Partnership Agreements of the Partnerships do not limit liability for all breaches of fiduciary duty except bad faith.
The Defendants make one overarching defense regarding liability for breaches
of fiduciary duty: notwithstanding that the general fiduciary duties inhere in the
General Partner, the Partnerships’ Limited Liability Agreements contain damages
exculpation provisions for breaches of fiduciary duty by GPB and its affiliates. As
I stated above, that provision, which is the same in both Auto and Holdings II’s
Limited Partnership Agreements, provides that
[t]he General Partner and its Affiliates shall not be liable to the Partnership or any Partner for . . . liabilities incurred . . . in connection with or resulting from . . . any decisions made by, or actions taken or not taken by, the General Partner or its Affiliates, so long as [they] . . . acted in good faith and in a manner [they] reasonably believed to be in, or not opposed to, the best interests of the Partnership and [their] conduct did not constitute gross negligence, fraud, or willful or wanton misconduct.103
103 Schneider Opening Br. 22.
27 The Defendants point out that this safe harbor applies to the actions of Gentile;
because he controls GBP, he is a designated “affiliate” of GPB under the LPA.104
The Defendants argue that this limitation means that they cannot be liable unless the
Plaintiffs allege and make a reasonably conceivable showing of bad faith, which (per
the Defendants) they have not done. I disagree with this interpretation of the Limited
Partnership Agreements. First, the Defendants’ interpretation would cause the entire
provision after the term “acted in good faith” to be surplusage—and I must avoid a
construction that renders contractual language meaningless or surplusage.105
Second, the Defendants appear to be confusing the conjunctive nature of the
provision’s conditions precedent for a disjunctive one; their interpretation, as I
understand it, is that liability is limited if the conduct is in good faith or in a manner
that is not opposed to the best interests of the Partnership, or not grossly negligent,
fraudulent, or willful or wanton misconduct. They thus arrive at a much more
expansive limitation on liability. But that is not what the provision says.
Indeed, a plain reading of the provision shows that the provision’s limitation
on liability applies only when all three conditions are met, instead of requiring only
one condition. Specifically, in order for the provision to take effect, the liability must
104 DeFelice Decl., Ex. A at 4; see David Gentile’s Reply Joinder in support of Mot. To Stay or Dismiss and Reply Br. in support of Mot. To Stay or Dismiss 6, Dkt. No. 57. 105 Sunline Commercial Carriers, Inc. v. CITGO Petroleum Corp., 206 A.3d 836, 846 (Del. 2019) (“The contract must also be read as a whole, giving meaning to each term and avoiding an interpretation that would render any term ‘mere surplusage.’”).
28 be in connection to actions taken “in good faith and in a manner . . . reasonably
believed to be in, or not opposed to, the best interests of the Partnership and” the
actions must “not constitute gross negligence, fraud, or willful or wanton
misconduct.” In other words, although the Defendants are correct that the safe
harbor provision does not exculpate liability connected to actions taken in bad faith,
they are not correct that bad faith actions are the only conduct to which exculpation
will not apply. For example, because one of the three conditions precedent is that
the actions “must not constitute gross negligence,” liability stemming from grossly
negligent conduct would also not be eliminated.
Nor can it be said that the three conditions precedent all mean the same
thing—i.e., no bad faith. It is well-settled under Delaware law that gross negligence
is not bad faith.106 Here, the alleged wrongdoings include the extraction of wealth
from the Partnerships and to the controller. By definition, such extraction is opposed
to the best interests of the Partnerships and fails to satisfy the conditions precedent
to the limitation on liability provision. 107
106 In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 64–65 (Del. 2006) (“[T]o afford guidance[,] we address the issue of whether gross negligence (including a failure to inform one’s self of available material facts), without more, can also constitute bad faith. The answer is clearly no.”). 107 In any event, if, as alleged, Gentile intentionally looted the partnerships, and used his control over GPB to cause it to cease financial reporting to cover up his malfeasance, those cannot be actions in good faith.
29 2. The Plaintiffs have stated a claim for breach of fiduciary duty against GPB.
Next, the Defendants argue that the Plaintiffs have failed to state a claim for
breach of fiduciary duty against GPB. They contend that the only allegations
regarding GPB’s conduct “are centered around . . . [GPB’s] alleged failure to provide
audited financial statements or alleged misstatements within the financials.”108 Such
claims, according to the Defendants, are breach of contract claims because the duty
to provide audited financial statements is provided for in the Partnerships’ Limited
Partnership Agreements. 109 For their part, the Plaintiffs contend that GPB has
breached more than a contractual duty to provide audited financial statements—they
contend that GPB has engaged in self-dealing at the direction of Gentile. 110
I agree with the Plaintiffs’ characterization of the Complaint. First, the
allegations regarding financial statements go beyond simply failure to meet
contractual duties: the reasonable inference from the Complaint is that Gentile
caused the Partnerships to promise an 8% annual return on investment, and that he
and his associates diverted funds belonging to the Partnerships rendering that
impossible. Accordingly, Gentile and GPB were reduced to employing the left-
handed Ponzi scheme of paying contributions out of the limited partners’ capital
108 Schneider Opening Br. 20–21; see GPB Opening Br. 20–21. 109 Schneider Opening Br. 20–21; see GPB Opening Br. 20–21. 110 Compl. ¶¶ 3, 17, 20–21.
30 account to preserve the façade of profitability, to the detriment of the Partnerships.
Ultimately, GPB had to breach its financial reporting requirements to conceal the
foregoing and permit it to continue. These are not actions taken in good faith or in
the interest of the partnership.
Second, the Defendants ignore the fact that Gentile—the sole owner and
CEO—controls GPB as a matter of Delaware law. To the extent that Gentile
engaged in self-dealing transactions or transactions that were opposed to the
Partnerships’ best interests, GPB would have been the vehicle through which Gentile
operated and GPB would have breached its fiduciary duties by virtue of allowing
Gentile to use it in that manner. The allegations that Gentile caused GPB to act
against the best interests of the Partnerships are reasonably conceivable based on the
Complaint.
3. The Plaintiffs have stated a claim for breach of fiduciary duty against Gentile.
As to Gentile, the Defendants argue that he does not owe any fiduciary duties
to the Partnerships because the “Plaintiffs make no attempt to plead that Mr. Gentile
in fact exerted control over the assets of Automotive or Holdings II, much less that
he used that control to his own benefit at the expense of the partnerships.” 111 The
Plaintiffs counter that Gentile’s position—that a general partner’s controller does
111 Def. David Gentile’s Joinder in Br. in Supp. of Mot. To Stay or Dismiss and Opening Br. in Supp. of Mot. To Stay or Dismiss 4 (“Gentile Opening Br.”), Dkt. No. 30.
31 not owe fiduciary duties to the limited partnership unless the controller exerts control
over the limited partnership’s assets—is “wrong as a matter of law.” 112
Preliminarily, I note that the Plaintiffs’ statement that “‘[u]nder settled
precedent,’ such controlling persons [as officers of a general partner] are deemed
‘fiduciaries of the limited partners, and subject to liability for implementing unfair,
self-dealing transactions’” 113 overstates then-Vice Chancellor Strine’s opinion,
which it cites. That case, Gotham Partners, L.P. v. Hallwood Realty Partners, L.P.,
when quoted in full, states that “[u]nder settled precedent, directors of corporate
general partners of limited partnerships have been held to be fiduciaries of the
limited partners, and subject to liability for implementing unfair, self-dealing
transactions.” 114 Gotham Partners does not say that such controllers “are deemed”
fiduciaries; it only says they have been so deemed in some precedent cases—in other
words, where adequate allegations of wrongful exercise of control exist.
However, I conclude at this pleading stage that Gentile does indeed owe
fiduciary duties to the Partnerships and that it is reasonably conceivable that he
violated them. “Under the . . . largely unquestioned precedent of USACafes,” 115 “a
corporate general partner’s fiduciary duties to the limited partnership may extend to
112 Pls.’ Omnibus Answering Br. in Opp’n to Defs.’ Mots. To Dismiss and Mots. To Stay 48 (Pls.’ Answering Br.”), Dkt. No. 36. 113 Pls.’ Answering Br. 47 (emphasis added). 114 795 A.2d 1 (Del. Ch. 2001) (emphasis added). 115 Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., 2000 WL 1476663, at *19 (Del. Ch. Sept. 27, 2000).
32 the general partner’s controllers, if such persons exercise control over the limited
partnership’s property.” 116 Contrary to Gentile’s Opening Brief, which claims the
Complaint “makes no attempt to plead” control over the Partnership’s assets, the
Complaint alleges that “Gentile and Schneider created an entity, LSG, to which they
directed more than $4 million from reinsurance funds and manufacturer rebates that
should have gone to dealerships and ultimately to the Partnerships.” 117 That
allegation, if true, would mean Gentile exercised control over funds that belonged to
the Partnerships and thus owed fiduciary duties to the Partnerships—control that I
must infer at this pleading stage that he asserted by using GPB’s position as the
Partnerships’ general partner. This Court has held in the corporate context that
“[l]iability for breach of fiduciary duty . . . extends to outsiders who effectively
controlled the corporation.” 118 The same follows for limited partnerships—those
who effectively control a partnership, via control of its assets, owe fiduciary duties
to the entity. 119
116 Wenske v. Blue Bell Creameries, Inc., 2018 WL 3337531, at *17 (Del. Ch. July 6, 2018) (citing In re USACafes, L.P. Litig., 600 A.2d 43 (Del Ch. 1991) (emphasis added)). 117 Compl. ¶ 17 (emphasis added). Most of the allegations in the Complaint concern self-dealing using assets of GPB-owned entities without specifying which entity. However, at this stage of the proceedings, such allegations are sufficient, to my mind, to show a reasonable conceivability that the Defendants may have engaged in self-dealing using assets of the Partnerships. 118 In re Ezcorp Inc. Consulting Agreement Derivative Litig., 2016 WL 301245, at *9 (Del. Ch. Jan. 25, 2016). 119 USACafes, 600 A.2d at 48 (“I understand the principle of fiduciary duty, stated most generally, to be that one who controls property of another may not, without implied or express agreement, intentionally use that property in a way that benefits the holder of the control to the detriment of the property or its beneficial owner.”).
33 The Complaint has incorporated pleadings that allege that Gentile engaged in
several self-dealing transactions, including siphoning $4 million in funds into LSG,
transferring $201,706 to other entities under his control, and diverting $2,000,000 in
revenue to entities under his control under the guise of management fees. 120 Such
allegations are sufficient to support a reasonable conceivability that Gentile
exercised control over the assets of the Partnerships via his control of GPB and
accordingly owes the Partnerships fiduciary duties. Further, those same allegations
of self-dealing extraction of the Partnerships’ assets are sufficient to show a
reasonable conceivability that Gentile has breached his fiduciary duties to the
Partnerships.
C. The Plaintiffs have stated a claim for aiding and abetting a breach of fiduciary duty against Schneider and Lash.
For an aiding and abetting claim to survive a motion to dismiss, the Complaint
must allege facts that show a reasonable conceivability of: “‘(1) the existence of a
fiduciary relationship, (2) a breach of the fiduciary’s duty, . . . (3) knowing
participation in that breach by the defendants,’ and (4) damages proximately caused
by the breach.” 121 I have already found it reasonably conceivable that both GPB and
Gentile owed and breached fiduciary duties to the detriment of the Partnerships,
120 Compl. ¶¶ 17, 20. 121 Malpiede v. Townson, 780 A.2d 1075, 1096 (Del. 2001) (quoting Penn Mart Realty Co. v. Becker, 298 A.2d 349, 351 (Del. Ch. 1972)).
34 satisfying elements (1), (2), and (4). The third element, “knowing participation,” is
commonly described as having two prongs: knowledge and participation. In other
words, the Plaintiffs must show scienter—i.e., that it is reasonably conceivable that
“the alleged aider and abettor knew that the fiduciary [was] breaching his fiduciary
duty and then . . . participate[d], in some way, in that breach.” 122 This pleading
requirement is stringent. It prevents exposing to liability those who innocently deal
with a faithless fiduciary. 123
The Plaintiffs have alleged that Lash and Schneider both participated in at
least one of Gentile’s self-dealing transactions. Specifically, Lash is alleged to have
“funneled nearly $2,000,000 in revenue to entities [Gentile and Lash] controlled,
including some under the guise of ‘management fees.’ For the year 2015, $201,7076
[sic] was transferred to Emdykycol, Inc. . . . . Upon information and belief,
Emdykycol, Inc. is owned by Lash and . . . Gentile.”124 And Schneider is alleged to
have “created an entity, LSG, to which [he and Gentile] directed more than $4
million from reinsurance funds and manufacturer rebates that should have gone to
122 In re Xura, Inc. Stockholder Litig., 2019 WL 3063599, at *3 (Del. Ch. July 12, 2019). 123 For example, this Court has previously noted that “arm’s-length bargaining is privileged and does not, absent actual collusion and facilitation of fiduciary wrongdoing, constitute aiding and abetting.” Morgan v. Cash, 2010 WL 2803746, at *8 (Del. Ch. July 16, 2010). This “long- standing rule . . . helps to safeguard the market for corporate control by facilitating the bargaining that is central to the American model of capitalism.” Id. 124 Compl. ¶ 20.
35 dealerships and ultimately to the Partnerships.”125 Accordingly, the participation
prong of the third element of aiding and abetting is satisfied.
Whether Lash and Schneider are alleged to have known about the fiduciary
duty breach requires closer analysis. Schneider, at least, is alleged to have been
heavily involved in the marketing of GPB’s dealerships, which may have included
the Partnerships, at the direction of Gentile. 126 According to the allegations of the
Massachusetts Enforcement Complaint, “[t]he line between Gentile, Schneider,
GPB . . . , and Ascendant Alterative Strategies and Ascendant Capital is blurred
beyond recognition. The firms even share office space in Austin, Texas. The only
difference between GPB Capital and the Ascendant entities is the e-mail addresses
used. Gentile profited directly whenever GPB . . . paid Ascendant Alternative
Strategies selling commissions.”127 Schneider’s involvement at Gentile’s request
and his alleged involvement with GPB make it reasonably conceivable—at this
pleading stage—that he both knew that Gentile owed fiduciary duties to the limited
partnerships Schneider was marketing and knew that Gentile was breaching those
duties. Lash, on the other hand, was directly employed by GPB; by dint of his
employment, he would have known that Gentile controlled GPB and through it, the
125 Compl. ¶ 17. 126 Mass. Enforcement Compl. 3. 127 Mass. Enforcement Compl. 4.
36 Partnerships, and thus would have owed fiduciary duties and was breaching them. 128
While the scienter pleading requirement is stringent, at the motion-to-dismiss stage,
all reasonable inferences must be drawn in favor of the Plaintiffs. 129 Accordingly, I
conclude that Lash’s employment by GPB and Schneider’s involvement with GPB
create a reasonable conceivability that they knew that Gentile owed fiduciary duties
to the Partnerships, he was breaching those duties by self-dealing, and they
participated in those breaches.
D. The Plaintiffs’ request for declaratory judgment is redundant and is dismissed without prejudice.
The Plaintiffs request a declaration from this Court that “GPB has engaged in
gross negligence or willful misconduct which has had a material effect on the
Partnerships.”130 They seek this declaration because the Limited Partnership
Agreements of the Partnerships provide that the limited partners may vote to remove
the General Partner after a judicial finding of such conduct.131 However, both the
gross negligence and willful misconduct alleged in this case, if they had material
effects on the Partnerships, would involve breaches of fiduciary duties.
“Declaratory Judgment is a statutory action; it is meant to provide relief in
situations where a claim is ripe but would not support an action under common-law
128 Compl. ¶ 13; see Mass. Enforcement Compl. 5. 129 Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 27 A.3d 531, 536 (Del. 2011). 130 Compl. ¶ 78. 131 Compl. ¶77.
37 pleading rules.”132 That is not the case here. Any finding of gross negligence or
willful misconduct here would be congruent with the elements of the fiduciary duty
claims I have found adequately alleged. The declaratory judgment count is thus
duplicative of the breach of fiduciary duty counts, and is dismissed.
III. CONCLUSION
The Defendants’ Motions to Dismiss are DENIED in part and GRANTED in
part. The parties should submit a form of order consistent with this Memorandum
Opinion.
132 Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 2014 WL 6703980, at *29 (Del. Ch. Nov. 26, 2014) (emphasis added).
Related
Cite This Page — Counsel Stack
Jeff Lipman v. GPB Capital Holdings LLC, Counsel Stack Legal Research, https://law.counselstack.com/opinion/jeff-lipman-v-gpb-capital-holdings-llc-delch-2020.