RCS Creditor Trust v. Nicholas S. Schorsch

• Court: Court of Chancery of Delaware
• Decided: April 5, 2018
• Docket: CA 2017-0178-SG
• Status: Published

Opinion

COURT OF CHANCERY OF THE SAM GLASSCOCK III STATE OF DELAWARE COURT OF CHANCERY COURTHOUSE VICE CHANCELLOR 34 THE CIRCLE GEORGETOWN, DELAWARE 19947

Date Submitted: March 6, 2018 Date Decided: April 5, 2018

Philip Trainer, Jr., Esquire Stephen P. Lamb, Esquire Marie M. Degnan, Esquire Meghan M. Dougherty, Esquire Ashby & Geddes Paul, Weiss, Rifkind, Wharton & 500 Delaware Avenue, 8th Floor Garrison LLP Wilmington, Delaware 19899 500 Delaware Avenue, Suite 200 Wilmington, Delaware 19899

Elizabeth A. Sloan, Esquire Ballard Spahr LLP 919 N. Market Street, 11th Floor Wilmington, Delaware 19801

Re: RCS Creditor Trust v. Nicholas S. Schorsch et al., Civil Action No. 2017-0178-SG

Dear Counsel:

I addressed the Defendants’ Motions to Dismiss in my Memorandum Opinion

of November 30, 2017, granting the Motions in part, denying in part, and reserving

decision in part.1 The Plaintiff moved for reargument, in part, of that Memorandum

Opinion. This Letter Opinion denies that Motion, and resolves the remaining issues

regarding the Motions to Dismiss. An adumbration of the pertinent facts, and my

reasoning, follows.

1 RCS Creditor Trust v. Schorsch, 2017 WL 5904716, at *17 (Del. Ch. Nov. 30, 2017). I. BACKGROUND2

In this case, Plaintiff RCS Creditor Trust alleges that Defendants Nicholas S.

Schorsch, Edward M. Weil, Jr., William M. Kahane, Peter M. Budko, and Brian S.

Block (collectively, the “Control Defendants”) breached the fiduciary duties they

owed to RCS Capital Corporation (“RCAP”).3 The Control Defendants were the

sole owners of Defendant AR Capital LLC, which created and sponsored non-traded

real estate investment trusts (“REITs”).4 The Control Defendants also controlled

RCAP, which marketed and distributed AR Capital’s investment products through a

subsidiary known as Realty Capital Services (“RCS”).5 After RCAP went public,

the Control Defendants retained only a 25% interest in the company. 6 They

maintained effective control, however, through their collective ownership of a single

share of super-voting common stock.7

The Complaint primarily challenges the Control Defendants’ use of their dual

control of AR Capital and RCAP to enrich themselves at the expense of RCAP’s

public stockholders.8 The Control Defendants allegedly hatched a scheme in which

RCAP and RCS would enter into off-market wholesaling arrangements with AR

2 I assume familiarity with my November 30 Memorandum Opinion and recite only those facts necessary to decide the pending Motions. 3 RCS Creditor Trust, 2017 WL 5904716, at *1. 4 Id. 5 Id. at *3. 6 Id. at *4. 7 Id. 8 Id. at *1. 2 Capital.9 In those arrangements, RCAP was responsible for marketing and selling

AR Capital’s investment products.10 If the Control Defendants had been loyal RCAP

fiduciaries, the Plaintiff alleges, they would have bargained for RCAP to receive

advisory fees from AR Capital in exchange for performing wholesaling services;

instead, the Control Defendants diverted those fees to wholly owned subsidiaries of

AR Capital.11

The Complaint additionally challenges several other business decisions the

Control Defendants made for RCAP.12 Specifically, the Control Defendants caused

RCAP to pursue three imprudent acquisitions and maintain irrationally high staffing

levels at RCS.13 The overstaffing purportedly benefited AR Capital by enhancing

RCS’s ability to market and sell AR Capital’s investment products.14 But the

Control Defendants’ refusal to fire any RCS employees harmed RCS, which was

suffering “devastating losses that ultimately drove [it] into bankruptcy.”15

On November 30, 2017, I upheld the core fiduciary duty claim in this case—

namely, the challenge to the self-dealing transactions between AR Capital, in which

the Control Defendants held a 100% economic stake, and RCAP, which they

9 Id. at *9. 10 Id. at *4. 11 Id. at *5. 12 Id. at *14–16. 13 Id. at *14. 14 Id. at *6. 15 Compl. ¶ 64. 3 controlled but in which they held only a 25% interest.16 I described the core claim

as a classic example of self-dealing by corporate fiduciaries.17 Indeed, the Control

Defendants stood on both sides of the allegedly unfair wholesaling arrangements.18

Worse still, all of those arrangements were negotiated and approved solely by the

Control Defendants and their affiliates.19 The allegations about the core claim thus

invoked entire fairness review, which in turn precluded dismissal on a Rule 12(b)(6)

motion.20

I reached a different conclusion as to the imprudent acquisitions and the

purportedly irrational staffing decisions. Because the Control Defendants did not

stand on both sides of those transactions, they did not automatically trigger entire

fairness review.21 Thus, to rebut the presumptions of the business judgment rule, the

Plaintiff had to allege that the challenged transactions conferred material benefits on

the Control Defendants that were not shared with RCAP’s other stockholders.22 I

held that the Plaintiff had failed to meet this pleading burden.23 In my view, the

Plaintiff’s allegations about the Control Defendants’ financial circumstances and the

benefits conferred by the challenged decisions failed to support a reasonable

16 RCS Creditor Trust, 2017 WL 5904716, at *9–13. 17 Id. at *13. 18 Id. at *6. 19 Id. 20 Id. at *10. 21 Id. at *14. 22 Id. 23 Id. at *16. 4 inference that those benefits were material to them. 24 Turning to the overstaffing

allegations in particular, the pertinent theory is that during a period when RCS was

increasingly less profitable, staffing levels were maintained; the Plaintiff alleges

they should have been reduced.25 With respect to that theory, I noted that the

“Plaintiff provide[d] no details that allow[ed] me to quantify any benefit to AR

Capital from having additional staff members at RCS push AR Capital product.”26

Thus, I held that the allegations relating to the imprudent acquisitions and the

overstaffing at RCS failed to state a claim for breach of the duty of loyalty. 27 I

reserved decision on the Plaintiff’s claims for unjust enrichment and aiding and

abetting breach of fiduciary duty pending supplemental briefing on the viability of

those claims in light of my rulings on the fiduciary duty count.28

The Plaintiff has moved for reargument on one narrow issue: the dismissal of

its claim that the Control Defendants breached the duty of loyalty by causing RCS

to maintain irrationally high staffing levels. The parties have also submitted the

requested supplemental briefing on the unjust enrichment and aiding and abetting

24 Id. at *15–16. 25 Id. at *6. 26 Id. at *15. 27 Id. at *16. 28 Id. at *17. The Complaint also alleges that the Control Defendants breached their fiduciary duties by facilitating proxy fraud. Id. at *13. In my November 30 Memorandum Opinion, I held that these allegations failed to state a claim for relief. Id. I also dismissed Defendant Louisa Quarto from the litigation based on the Complaint’s failure to plead facts giving rise to a claim for breach of fiduciary duty against her. Id. at *16. 5 claims. I address the Motion for Limited Reargument first. I then turn to the balance

of the Motions to Dismiss.

II. ANALYSIS

A. Motion for Limited Reargument

Court of Chancery Rule 59(f) allows a party to move for reargument within

five days after the filing of the Court’s opinion.29 The standard governing motions

for reargument is settled. This Court will deny reargument unless it “overlooked a

decision or principle of law that would have controlling effect or . . . misapprehended

the facts or the law so the outcome of the decision would be different.” 30 “Where

the motion merely rehashes arguments already made by the parties and considered

by the Court when reaching the decision from which reargument is sought, the

motion must be denied.”31 Nor is reargument warranted simply because a party

disagrees with the Court’s decision.32 Thus, if the ruling on which reargument is

sought was a close call, or one on which reasonable minds could differ, reargument

will be denied.33 In my view, the Plaintiff has failed to meet its “heavy burden” of

29 Ct. Ch. R. 59(f). 30 Pontone v. Milso Indus. Corp., 2014 WL 4352341, at *1 (Del. Ch. Sept. 3, 2014). 31 AM Gen. Holdings LLC v. Renco Grp., Inc., 2017 WL 3046819, at *1 (Del. Ch. July 18, 2017). 32 Tumulty v. Schreppler, 2015 WL 2374714, at *1 (Del. Ch. May 15, 2015). 33 See Bhd. of Maint. of Way Emps. Div. of the Int’l Bhd. of Teamsters v. Ind. Harbor Belt R.R. Co., 2014 WL 4987972, at *4 (N.D. Ind. Oct. 7, 2014) (“[J]ust because a matter might be a close call doesn’t mean reconsideration is appropriate.”); United States v. Sanchez-Gonalez, 2011 WL 4043568, at *2 (S.D. Cal. Sept. 12, 2011) (“This motion . . . presents a close call. But on reconsideration, where the Court must find clear error, the Court is not persuaded that reversal is appropriate.”); Crigler v. Richardson, 2010 WL 2696506, at *5 (M.D. Tenn. July 7, 2010) (denying a motion for reconsideration on “an issue about which reasonable minds could, and have, 6 showing that I misapprehended the law or the facts in an outcome-determinative

fashion.34

First, the Plaintiff argues that, “in a very real sense,” the Control Defendants

stood on both sides of “the macro business decision to maintain extremely high

staffing” at RCS.35 The Plaintiff points out that each RCS wholesaler was hired

primarily to sell AR Capital products. Thus, the Plaintiff reasons, maintaining

unreasonably high staffing levels at RCS served AR Capital’s interests in a

particularly direct way. While the Plaintiff does not explicitly so argue, the

implication appears to be that entire fairness automatically applies to the decision to

overstaff RCS. I disagree.

Delaware law is clear: “Entire fairness review ordinarily applies in cases

where a fiduciary either literally stands on both sides of the challenged transaction

or where the fiduciary ‘expects to derive personal financial benefit from the

[challenged] transaction in the sense of self-dealing, as opposed to a benefit which

devolves upon the corporation or all stockholders generally.’”36 And if the fiduciary

differed”). The decisions just cited involved application of the analogous federal standards governing motions for reconsideration. I look to them for guidance in interpreting Court of Chancery Rule 59(f). Cf. Russum v. IPM Dev. P’ship LLC, 2015 WL 4885480, at *2 n.8 (Del. Super. Aug. 14, 2015) (looking to federal caselaw for guidance because “Superior Court Civil Rule 59(e)[, which governs motions for reargument,] tracks Federal Rule of Civil Procedure 59(e)”). 34 In re ML/EQ Real Estate P’ship Litig., Consol., 2000 WL 364188, at *1 (Del. Ch. Mar. 22, 2000). 35 Pl.’s Mot. for Limited Reargument ¶ 18. 36 eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 37–38 (Del. Ch. 2010) (emphasis added) (quoting Litle v. Waters, 1992 WL 25758, at *4 (Del. Ch. Feb. 11, 1992)). 7 does not stand on both sides of the challenged transaction, a plaintiff seeking to rebut

the business judgment rule must plead that any non-pro rata benefit the fiduciary

received was material to her.37 Here, the Plaintiff acknowledges that “the hiring of

individual wholesalers is not technically a contract between RCS and AR Capital.”38

I am aware of no authority supporting the position that, even when a fiduciary does

not stand on both sides of a transaction, entire fairness automatically applies if the

transaction “directly implicates” her interests, regardless of materiality to her.39 To

the extent the Plaintiff is arguing for such a rule, I decline to adopt it.

Next, the Plaintiff claims it has adequately alleged that the decision to

maintain irrationally high staffing levels at RCS was material to the Control

Defendants. A benefit is material if it is so significant, “in the context of the

[fiduciary]’s economic circumstances, as to have made it improbable that [she] could

perform her fiduciary duties to the . . . shareholders without being influenced by her

overriding personal interest.”40 The Court must apply “a subjective ‘actual person’

standard to determine whether a particular director’s interest is material and

debilitating.”41

37 Orman v. Cullman, 794 A.2d 5, 23 (Del. Ch. 2002). 38 Pl.’s Mot. for Limited Reargument ¶ 18. 39 Id. 40 In re Gen. Motors Class H S’holders Litig., 734 A.2d 611, 617 (Del. Ch. 1999). 41 Orman, 794 A.2d at 24. 8 The Plaintiff points out that the Complaint describes each Control

Defendant’s equity stake in AR Capital. For example, Block held a 3.03% interest

in AR Capital, which the Plaintiff says was worth “tens of millions of dollars.”42

The Plaintiff then argues that these valuable equity stakes demonstrate that the

Control Defendants had “a strong motivation to further AR Capital’s interests.”43

That is true, but beside the point. The question is not whether the Control Defendants

generally had an interest in benefiting AR Capital at RCAP’s expense; I have already

recognized the “perverse incentives” created by the misalignment of equity and

control at these two companies.44 Instead, the question is whether the Control

Defendants received material benefits from maintaining RCS’s existing staffing

levels as opposed to firing some (undisclosed) appropriate number of employees.

The Complaint itself is silent as to how many superfluous employees RCS kept on,

or how much additional profit for AR Capital those unnecessary employees helped

generate. That is why I held the Complaint did not “allow me to quantify any benefit

to AR Capital from having additional staff members at RCS push AR Capital

product.”45

42 Pl.’s Mot. for Limited Reargument ¶ 20 n.5. 43 Id. ¶ 20. 44 E.g., RCS Creditor Trust, 2017 WL 5904716, at *6. 45 Id. at *16. 9 According to the Plaintiff, it has alleged enough facts to quantify such

benefits. It states that “during the period when RCS lost more than $62 million . . .

, it raised more than $13 billion in capital – providing AR Capital with an income

stream in perpetuity of approximately $130 million per year.” 46 Again, however,

these allegations do not address the core of the materiality inquiry here: what portion

of these benefits was attributable to the superfluous RCS employees? Absent well-

pled facts answering that question, I cannot evaluate whether the purported

overstaffing at RCS conferred material benefits on the Control Defendants.

Finally, the Plaintiff suggests it can satisfy the materiality requirement simply

by alleging that the Control Defendants’ refusal to fire any RCS employees was

irrational from RCS’s perspective, but made perfect sense for AR Capital.47 To my

mind, that amounts to an allegation that the Control Defendants acted in bad faith by

refusing to cut staff when RCS was experiencing financial difficulties. “[A] plaintiff

may show a lack of good faith by establishing that a [corporate fiduciary’s] decision

46 Pl.’s Mot. for Limited Reargument ¶ 8 (emphasis omitted) (citing Compl. ¶ 60). 47 See Mar. 6, 2018 Oral Arg. Tr. 17:20–18:14 (“MR. HOROWITZ: The second question is -- and I think it’s an interesting question -- whether, where pre-filing investigation doesn’t allow a plaintiff to make detailed allegations about the precise economic benefit to the defendants or what the defendants’ net worth is, for example -- to raise an issue that Your Honor mentioned in the opinion – so that you could say, ‘Oh, gee, they stood to gain millions of dollars and, given these defendants’ circumstances, that was probably a corrupting influence,’ can you, alternatively, satisfy this materiality standard by alleging facts that give rise to a different reasonable inference, an inference that the decision would have been irrational but for the defendants’ self-interest, so that the only reasonable explanation for the decision, assuming the defendants’ rationality -- which I think is a fair assumption to make -- is that they made the decision because of their self- interest?”). 10 was ‘so far beyond the bounds of reasonable judgment that it seems essentially

inexplicable on any ground other than bad faith.’”48 “This is a high pleading

standard, as Delaware courts typically frame a lack of good faith in terms of

‘intentional’ misconduct.”49 The Complaint does not satisfy this exacting standard.

As just noted, the Plaintiff alleges that RCS should have been firing people when the

business was cratering. Maybe so. But I cannot say that the Control Defendants’

decision to keep on RCS employees in the face of serious financial troubles “lacks

any rationally conceivable basis.”50 Indeed, the Complaint itself acknowledges that

“more salespeople [at RCS] spending more money produced more sales, albeit at a

dramatically slower pace [in light of RCS’s financial difficulties].”51 The Plaintiff’s

bad-faith theory does not rebut the presumptions of the business judgment rule.

Having determined, on examination of the core claim, that the Complaint

sufficiently pleads that the Control Defendants looted the Peter of RCAP to benefit

their Paul—AR Capital—it is, I acknowledge, tempting to follow the Plaintiff’s

suggestion to its conclusion and subject all business decisions at RCAP, including

staffing decisions, to entire fairness review. The core claim, which I have upheld,

involves the purportedly off-market nature of the wholesaling arrangements between

48 Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 63 (Del. Ch. 2015) (quoting In re J.P. Stevens & Co., Inc. S’holders Litig., 542 A.2d 770, 780–81 (Del. Ch. 1988)). 49 Id. 50 Frederick Hsu Living Trust v. ODN Holding Corp., 2017 WL 1437308, at *25 (Del. Ch. Apr. 14, 2017). 51 Compl. ¶ 67. 11 RCAP and AR Capital. The costs of running RCAP, including RCS’s labor costs,

are part of the entire fairness analysis that I must ultimately undertake. Stand-alone

claims concerning certain business decisions at RCAP—including acquisitions and

staffing levels—are, to my mind, however, insufficiently pled to survive

independent of the core claim. Thus, because the Plaintiff has failed to show that I

“misapprehended the law or the facts so that the outcome of the decision would be

affected,” I deny the Motion for Limited Reargument.52

B. The Remainder of the Motions to Dismiss

As noted above, in my November 30 Memorandum Opinion, I reserved

decision on the Plaintiff’s claims for unjust enrichment and aiding and abetting

breach of fiduciary duty pending supplemental briefing.53 The unjust enrichment

claim is brought against AR Capital, AR Global LLC (the successor to AR

Capital),54 and several wholly owned AR Capital subsidiaries (the “Advisor

Defendants”) that provide “management services” to AR Capital’s investment

52 Bear Stearns Mortg. Funding Trust 2006-SL1 v. EMC Mortg. LLC, 2015 WL 139731, at *8 (Del. Ch. Jan. 12, 2015) (quoting Miles, Inc. v. Cookson Am., Inc., 677 A.2d 505, 506 (Del. Ch. 1995)). The Plaintiff also seeks reargument on the ground that the Defendants never argued for dismissing the overstaffing claim based on a failure to plead materiality. I disagree with that characterization of the briefing and argument. See, e.g., Defs.’ Opening Br. 36 (arguing that the allegations about Weil and Quarto “do not provide a basis for reasonably inferring that these defendants’ interest in AR Capital was so material to these defendants that they would run RCS into the ground to benefit AR Capital” (emphasis added)). In any event, because the Plaintiff has failed to show that reargument is warranted on the merits, I need not address the procedural argument. 53 RCS Creditor Trust, 2017 WL 5904716, at *17. 54 Id. at *2. 12 vehicles.55 The Advisor Defendants allegedly received the management fees that

would have gone to RCAP (or a wholly owned RCAP subsidiary) if the wholesaling

arrangements between RCAP and AR Capital had been negotiated at arm’s length.56

The aiding and abetting claim is brought against the Control Defendants, Quarto,

and RCAP Holdings LLC (“Holdings”).57 Holdings’ primary asset was the single

share of super-voting RCAP common stock used by the Control Defendants to

control RCAP.58

The Defendants have moved to dismiss the aiding and abetting and unjust

enrichment claims under Court of Chancery Rule 12(b)(6). When reviewing a Rule

12(b)(6) motion,

(i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are well-pleaded if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences in favor of the non-moving party; and (iv) dismissal is inappropriate unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof.59

55 Id. at *2, *17. The Advisor Defendants are American Realty Capital Retail Advisor, LLC, American Finance Advisors, LLC, American Realty Capital Healthcare III Advisors, LLC, American Realty Capital Hospitality Advisors, LLC, New York City Advisors, LLC, Global Net Lease Advisors, LLC, American Realty Capital Healthcare II Advisors, LLC, New York Recovery Advisors, LLC, and BDCA Adviser. Id. at *2. 56 Id. at *5. The Plaintiff also seeks the imposition of a constructive trust to remedy the alleged unjust enrichment. 57 Id. at *1, *17. 58 Id. at *1. 59 Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (footnotes and internal quotation marks omitted). 13 I need not, however, “accept conclusory allegations unsupported by specific facts or

. . . draw unreasonable inferences in favor of the non-moving party.”60

1. Aiding and Abetting Breach of Fiduciary Duty

The Plaintiff’s aiding and abetting claim is pled in the alternative to its

fiduciary duty claim.61 Specifically, the Plaintiff alleges that, even if the Control

Defendants (and Quarto62) “are determined not to have owed direct fiduciary duties

of care and loyalty to RCAP and/or any of its subsidiaries at any relevant time, each

of these defendants knowingly participated in breaches of fiduciary duty by other

defendants and thus is liable for aiding and abetting such breaches.”63 The

Defendants argue that the aiding and abetting claim must be dismissed because the

Complaint lacks facts suggesting that the Control Defendants knowingly

participated in a breach of fiduciary duty. Alternatively, the Defendants ask me to

dismiss the aiding and abetting count to the extent it relies on alleged breaches of

fiduciary duty dismissed in my November 30 Memorandum Opinion.

To plead a claim for aiding and abetting breach of fiduciary duty, a plaintiff

must allege “(i) the existence of a fiduciary relationship, (ii) a breach of the

fiduciary’s duty, (iii) knowing participation in that breach by the defendants, and

60 Price v. E.I. DuPont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011). 61 Compl. ¶ 132. 62 Because Quarto has already been dismissed from this litigation, I address the aiding and abetting claim only as it relates to the Control Defendants. 63 Id. 14 (iv) damages proximately caused by the breach.”64 “An adequate pleading of

‘knowing participation’ requires a pleading of scienter.”65 “To establish scienter,

the plaintiff must demonstrate that the aider and abettor had ‘actual or constructive

knowledge that their conduct was legally improper.’”66

At the outset, the Plaintiff does not dispute that its aiding and abetting claim

must be dismissed to the extent it is premised on already dismissed allegations of

breach of fiduciary duty. As noted above, I have dismissed any claim for breach of

fiduciary duty based on the purportedly imprudent acquisitions, the overstaffing at

RCS, and the supposed efforts to facilitate proxy fraud. Thus, I dismiss the

Plaintiff’s claim for aiding and abetting breach of fiduciary duty to the extent it relies

on those purported breaches.67

The aiding and abetting claim survives, however, to the extent it rests on the

core claim in this case: that the “Control Defendants engineered a series of

transactions between RCAP and AR Capital that allegedly siphoned value away

from RCAP and to AR Capital.”68 The Plaintiff brings its aiding and abetting count

64 RBS Capital Mkts., LLC v. Jervis, 129 A.3d 816, 861 (Del. 2015). 65 Cumming v. Edens, 2018 WL 992877, at *26 (Del. Ch. Feb. 20, 2018). 66 RBC Capital Mkts., LLC, 129 A.3d at 862 (emphasis omitted) (quoting Wood v. Baum, 953 A.2d 136, 141 (Del. 2008)). 67 See, e.g., Madison Realty Partners 7, LLC v. Ag ISA, LLC, 2001 WL 406268, at *6 n.19 (Del. Ch. Apr. 17, 2001) (“The plaintiffs’ claim against Angelo Gordon for aiding and abetting AGGP’s breaches of fiduciary duty must . . . be dismissed because there is no legally sufficient underlying claim for breach of fiduciary duty against AGGP.”). 68 RCS Creditor Trust, 2017 WL 5904716, at *10. 15 to address the possibility that any of the Control Defendants may later be found not

to have owed fiduciary duties to RCAP. The Complaint pleads that the Control

Defendants were either officers or directors of RCAP at all relevant times. 69 The

Complaint also supports a reasonable inference that the Control Defendants acted as

a control group with regard to RCAP.70 Thus, at the pleading stage, I may infer that

the Control Defendants owed fiduciary duties to RCAP.71 But what is pled may turn

out not to be true, and it is possible that some of the Control Defendants did not stand

in a fiduciary relation to RCAP at any given time. This Court has allowed plaintiffs

to plead aiding and abetting claims in the alternative to account for this possibility. 72

The Defendants’ only response is that the Plaintiff has failed to adequately

allege that any of the Control Defendants knowingly participated in a breach of

69 Id. at *10 n.156. 70 Id. 71 Id. 72 See Wallace v. Wood, 752 A.2d 1175, 1184 (Del. Ch. 1999) (“This claim [for aiding and abetting breach of fiduciary duty], which on its face assumes the officers, parents and affiliates to be ‘non- fiduciaries,’ seems inconsistent with plaintiffs [sic] primary argument that each defendant owes fiduciary duties to the Limited Partners. Nonetheless, I will not dismiss plaintiffs’ aiding and abetting claim as I may later decide, after discovery or at trial, that plaintiffs cannot prove the pleaded requisite control necessary to establish the existence of a fiduciary relationship between each defendant and the Limited Partnership and/or the Limited Partners. Therefore, plaintiffs may continue to pursue the inconsistent, conflicting, aiding and abetting claim if they so choose.” (footnote omitted)); see also In re Nine Sys. Corp. S’holders Litig., 2014 WL 4383127, at *48 (Del. Ch. Sept. 4, 2014) (“[T]he Plaintiffs have standing to bring this aiding and abetting claim directly against Dwyer, Wren, Javva, and Catalyst. But, because the Court previously concluded that Wren, Javva, and Catalyst breached their fiduciary duties as a control group, their liability for aiding and abetting is limited to the extent that they did not constitute a control group. In other words, the Plaintiffs are limited to one recovery—breach of fiduciary duty or aiding and abetting— as against Wren, Javva, and Catalyst.”), aff’d sub nom. Fuchs v. Wren Holdings, LLC, 129 A.3d 882 (Del. 2015). 16 fiduciary duty. The Defendants are wrong. I have already held that the Complaint

states a claim against the Control Defendants for breach of the duty of loyalty. That

claim rests on allegations about a self-dealing scheme hatched by the Control

Defendants themselves. Specifically, “by forcing RCAP to bear all the costs of

wholesaling AR Capital’s investment vehicles, the Control Defendants enriched AR

Capital, in which they (together with Schorsch’s wife) held a 100% economic stake,

to the detriment of RCAP, in which they held only a 25% economic interest.”73 This

scheme allegedly involved blatantly off-market arrangements between AR Capital

and RCAP.74 It is reasonably conceivable that each of the Control Defendants

understood that his assistance in looting RCAP for AR Capital’s benefit contributed

to a breach of fiduciary duty.75 Thus, if Schorsch (or any of the other Control

Defendants) happened not to owe fiduciary duties to RCAP during one part of the

scheme, he still could be held liable under an aiding and abetting theory for his

deliberate participation in any self-dealing transactions that took place during that

time. I decline to dismiss the aiding and abetting count.

73 RCS Creditor Trust, 2017 WL 5904716, at *5. 74 Id. 75 See Malpiede v. Townson, 780 A.2d 1075, 1097 (Del. 2001) (“Knowing participation in a board’s fiduciary breach requires that the third party act with the knowledge that the conduct advocated or assisted constitutes such a breach.”). 17 2. Unjust Enrichment

The Plaintiff alleges that AR Capital, AR Global (AR Capital’s successor),

and the Advisor Defendants were unjustly enriched “because each received the

benefits of income flowing from sales made and supported by RCAP without

entering into customary arrangements to share advisory and management business

with RCAP on terms consistent with . . . arm’s-length market transactions.”76 In

particular, the Advisor Defendants, which were wholly owned AR Capital

subsidiaries, received management fees that would have gone to RCAP (or an RCAP

subsidiary) but for the Control Defendants’ disloyal conduct. And, under the

wholesaling arrangements between AR Capital and RCAP, AR Capital received

equity in each of the Advisor Defendants, equity that again would have gone to

RCAP had those arrangements been negotiated at arm’s length.77 Assuming, as I

must at the pleading stage, that these allegations are true, the Complaint states a

claim for unjust enrichment.

76 Compl. ¶ 135. 77 See id. ¶ 47 (“In light of the inherent unprofitability of th[e wholesaling] portion of the business, wholesalers must either: (a) function as a cost center within a larger vertically integrated organization, or (b) negotiate for a share of the ongoing management economics generated by the investments they raise, either through a joint venture interest in the advisory, or through advisor/subadvisor contractual relationship with the sponsor.” (emphasis added)); id. ¶ 55 (noting that “the off-market nature of RCAP’s existing business arrangements with AR Capital” would be revealed by information regarding Strat Cap, including that it “received between 20% and 25% of the ongoing management economics – either through an interest in the entities created to provide advisory services or through a ‘sub-advisory’ contract” (emphasis added)). 18 “Unjust enrichment is ‘the unjust retention of a benefit to the loss of another,

or the retention of money or property of another against the fundamental principles

of justice or equity and good conscience.’”78 “The elements of unjust enrichment

are: (1) an enrichment, (2) an impoverishment, (3) a relation between the enrichment

and impoverishment, (4) the absence of justification, and (5) the absence of a remedy

provided by law.”79 In evaluating an unjust enrichment claim, I must first determine

“whether a contract already governs the relevant relationship between the parties.”80

“If a contract comprehensively governs the parties’ relationship, then it alone must

provide the measure of the plaintiff’s rights and any claim of unjust enrichment will

be denied.”81 But when a plaintiff alleges that “it is the [contract], itself, that is the

unjust enrichment,” the existence of the contract does not bar the unjust enrichment

claim.82 In other words, “[t]he contract itself is not necessarily the measure of [the]

plaintiff’s right where the claim is premised on an allegation that the contract arose

from wrongdoing (such as breach of fiduciary duty or fraud) or mistake and the

[defendant] has been unjustly enriched by the benefits flowing from the contract.”83

78 Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010) (quoting Fleer Corp. v. Topps Chewing Gum, Inc., 539 A.2d 1060, 1062 (Del. 1988)). 79 Id. 80 BAE Sys. Info. & Elec. Sys. Integration, Inc. v. Lockheed Martin Corp., 2009 WL 264088, at *7 (Del. Ch. Feb. 3, 2009). 81 Id. 82 McPadden v. Sidhu, 964 A.2d 1262, 1276 (Del. Ch. 2008); accord Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 2014 WL 6703980, at *27 (Del. Ch. Nov. 26, 2014). 83 Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery § 12.01[b] (2016) (citing McPadden, 964 A.2d at 1276). 19 The Defendants first argue that the unjust enrichment claim fails because the

conduct at issue was governed by the contracts between the Advisor Defendants, AR

Capital, and RCS. It is true that the Advisor Defendants received management fees

from AR Capital pursuant to a series of advisory agreements. But the core claim in

this case is premised in large part on the allegation that the Control Defendants

breached their fiduciary duties by causing the Advisor Defendants, rather than

RCAP, to receive those management fees. Faithful fiduciaries, the Plaintiff asserts,

would have bargained for RCAP to receive a portion of the “management

economics.”84 Indeed, according to the Plaintiff, that is how wholesalers in the REIT

industry typically make most of their profits. Thus, the Complaint supports a

reasonable inference that the advisory agreements (and the benefits they conferred

on the Advisor Defendants) resulted from the Control Defendants’ breaches of

fiduciary duty. The unjust enrichment claim is therefore not barred by the existence

of binding contracts between AR Capital, RCS, and the Advisor Defendants.85

Next, the Defendants argue that unjust enrichment cannot be invoked against

the Advisor Defendants because they earned the advisory fees they received for work

performed under the advisory agreements. Thus, the Advisor Defendants

84 Compl. ¶ 47. 85 See McPadden, 964 A.2d at 1276 (upholding an unjust enrichment claim where a contract existed between the parties but the plaintiff alleged that the contract was the product of one of the defendants’ “manipulative conduct”). 20 supposedly did not receive any benefits to which they were not entitled. Relatedly,

the Defendants point out that the Complaint does not allege the Advisor Defendants

themselves engaged in wrongful conduct. These arguments do not defeat the

Plaintiff’s unjust enrichment claim.

For starters, it is irrelevant that the Advisor Defendants performed actual work

in exchange for receiving advisory fees from AR Capital. The Plaintiff does not

seek to disgorge the gross fees received by the Advisor Defendants; instead, it seeks

only the profits that would have gone to RCAP or an RCAP subsidiary if the Control

Defendants had been faithful fiduciaries.86 Indeed, this is the heart of the Plaintiff’s

core claim: that the Control Defendants breached their fiduciary duties by diverting

the lucrative advisory fees from RCAP to AR Capital subsidiaries. The Complaint

supports a reasonable inference that the Advisor Defendants were not entitled to the

profits realized from those fees. And, contrary to the Defendants’ suggestion, the

Plaintiff need not allege that the Advisor Defendants themselves engaged in

wrongdoing in order to invoke unjust enrichment against them.87 It is sufficient to

plead, as the Plaintiff has here, that the defendant received “benefits that in equity

86 E.g., Sept. 29, 2017 Oral Arg. Tr. 70:7–10. 87 See, e.g., Schock v. Nash, 732 A.2d 217, 232 (Del. Ch. 1999) (“Restitution is permitted even when the defendant retaining the benefit is not a wrongdoer.”); see also Topps Chewing Gum, Inc., 539 A.2d at 1063 (“The remedy of restitution may be invoked regardless of whether or not the party retaining the benefit is found to be a wrongdoer.”). 21 and good conscience he ought not to keep, even though he may have received those

benefits honestly in the first instance.”88

Finally, the Defendants ask me to dismiss the Plaintiff’s “claim” for

imposition of a constructive trust. A constructive trust is not itself a cause of action,

however; instead, it is an equitable remedy designed to “correct the unlawful vesting,

or assertion of, legal title.”89 It is premature, at this stage of the litigation, to discuss

the propriety or applicability of particular equitable remedies.90

III. CONCLUSION

For the reasons stated above, the Plaintiff’s Motion for Limited Reargument

is denied, and the Defendants’ Motions to Dismiss are granted in part and denied in

88 Topps Chewing Gum, Inc., 539 A.2d at 1063 (internal quotation marks and citation omitted). As noted above, the Complaint also alleges that AR Capital (and its successor, AR Global) were unjustly enriched when they received equity in the Advisor Defendants, equity that would have gone to RCAP but for the Control Defendants’ disloyal conduct. 89 Triton Constr. Co., Inc. v. E. Shore Elec. Servs., Inc., 2009 WL 1387115, at *28 (Del. Ch. May 18, 2009) (quoting E. Lake Methodist Episcopal Church, Inc. v. Trs. of Peninsula-Del. Annual Conference of the United Methodist Church, Inc., 731 A.2d 798, 809 n.4 (Del. 1999)), aff’d, 988 A.2d 938 (Del. 2010); see also VTB Bank v. Navitron Projects Corp., 2014 WL 1691250, at *6 n.60 (Del. Ch. Apr. 28, 2014) (“Under Delaware law, a constructive trust is a remedy, not a substantive cause of action.”). 90 See, e.g., Crescent/Mach I Partners, L.P. v. Turner, 846 A.2d 963, 991 (Del. Ch. 2000) (“In response to a motion to dismiss, I simply determine whether plaintiff has stated a claim for which relief might be granted. If I find that plaintiffs have stated cognizable claims, then ‘the nature of that relief is not relevant and need not be addressed.’ Because the determination of relief is beyond the scope of this motion and premature without an established evidentiary record, I will not address this issue.” (footnotes omitted) (quoting Chaffin v. GNI Grp., Inc., 1999 WL 721569, at *7 (Del. Ch. Sept. 3, 1999))). 22 part. The parties should submit an appropriate form of order.

Sincerely,

/s/ Sam Glasscock III

Sam Glasscock III