SDF Funding LLC v. Fry

• Court: Supreme Court of Delaware
• Decided: July 8, 2022
• Docket: 205, 2022
• Status: Published

Opinion

IN THE SUPREME COURT OF THE STATE OF DELAWARE

SDF FUNDING LLC AND § STUART D. FELDMAN, § derivatively on behalf of § FLASHPOINT TECHNOLOGY, § No. 205, 2022 INC., § § Plaintiffs Below, § Court Below–Court of Chancery Appellants, § of the State of Delaware § v. § § C.A. No. 2017-0732 STANLEY B. FRY, EDWARD D. § HERRICK, ROSS BOTT, CYRUS § W. GREGG, AND MAGDALENA § RAMOS, § § Defendants Below, § Appellees, § § and § § FLASHPOINT TECHNOLOGY, § INC., § § Nominal Defendant Below, § Appellee. §

Submitted: June 24, 2022 Decided: July 8, 2022

Before VALIHURA, VAUGHN, and TRAYNOR, Justices.

ORDER

After careful consideration of the notice of interlocutory appeal, the

supplemental notice of appeal, and their exhibits, it appears to the Court that: (1) In October 2017, the plaintiffs below/appellants, SDF Funding LLC

(“SDF”) and Stuart D. Feldman (“Feldman”) (together, the “Plaintiffs”), filed this

derivative suit on behalf of the nominal defendant FlashPoint Technology, Inc.

(“FlashPoint”). Relevant here, Feldman initially invested in FlashPoint through his

wholly owned subsidiary, Chelsey Capital, LLC (“Chelsey”), in 2019 and caused

Chelsey to transfer the FlashPoint stock to SDF, another of his wholly owned

subsidiaries, in March 2015.

(2) On February 16, 2021, the defendants moved for partial summary

judgment. Observing that Feldman and SDF’s claims are derivative and subject to

the contemporaneous-ownership requirement of the DGCL,1 the defendants argued

that they were entitled to summary judgment because Feldman never owned

FlashPoint stock and SDF did not acquire FlashPoint stock until 2015. In its May

13, 2022 memorandum opinion, the Court of Chancery granted the defendants’

motion for summary judgment as to the Plaintiffs’ claims that challenged actions

taken before SDF acquired FlashPoint stock (the “Opinion”).2 In so doing, the Court

of Chancery rejected the Plaintiffs’ argument that Feldman has standing to pursue

those claims under the equitable-standing doctrine.

1 8 Del. C. § 327 (“In any derivative suit instituted by a stockholder of a corporation, it shall be averred in the complaint that the plaintiff was a stockholder of the corporation at the time of the transaction of which such stockholder complains or that such stockholder’s stock thereafter devolved upon such stockholder by operation of law.”). 2 SDF Funding LLC v. Fry, 2022 WL 1511594 (Del. Ch. May 13, 2022). 2 (3) On May 27, 2022, the Plaintiffs asked the Court of Chancery to certify

an interlocutory appeal from the Opinion under Supreme Court Rule 42. The

Plaintiffs maintained that the Opinion decided a substantial issue of material

importance—namely, that the Plaintiffs do not have standing to pursue the “vast

majority” of their claims. The Plaintiffs also argued that the following Rule

42(b)(iii) factors weighed in favor of interlocutory review: (i) the Opinion decided a

question of law that is a matter of first impression in Delaware;3 (ii) the Opinion is

“in tension” with other trial court decisions;4 (iii) the question of law relates to the

construction and application of Section 327 of the DGCL;5 and (iv) interlocutory

review would serve the considerations of justice.6 The defendants opposed the

application.

(4) On June 16, 2022, the Court of Chancery denied the application for

certification.7 The Court of Chancery agreed with the Plaintiffs that the Opinion had

resolved a substantial issue of material importance—a threshold consideration under

Rule 428—but nonetheless concluded that the benefits of interlocutory review would

not outweigh the costs. First, the Court of Chancery found that, although it had

3 Del. Supr. Ct. R. 42(b)(iii)(A). 4 Del. Supr. Ct. R. 42(b)(iii)(B). 5 Del. Supr. Ct. R. 42(b)(iii)(C). 6 Del. Supr. Ct. R. 42(b)(iii)(H). 7 SDF Funding LLC v. Fry, 2022 WL 2165922 (Del. Ch. June 16, 2022). 8 Del. Supr. Ct. R. 42(b)(i) (“No interlocutory appeal will be certified by the trial court or accepted by this Court unless the order of the trial court decides a substantial issue of material importance that merits appellate review before a final judgment.”). 3 given serious consideration to the Plaintiffs’ novel theory of the equitable-standing

doctrine, the Opinion did not adopt it or otherwise expand existing law. Second, the

Court of Chancery disagreed with the Plaintiffs’ assertion that the Opinion is in

conflict with other trial court decisions and distinguished them. Third, the Court of

Chancery agreed with the Plaintiffs that the Opinion involves the application of

Section 327 and that Factor C favored certification. Fourth, the Court of Chancery

found the considerations-of-justice factor to be neutral—although the time and

money that the Plaintiffs had spent litigating and investigating on behalf of the

injured stockholders is relevant, so too is the allocation of defense and judicial

resources. On balance, the Court of Chancery concluded that the support of one of

the eight Rule 42(b)(iii) factors did not warrant certification of an interlocutory

appeal.

(5) We agree with the Chancery Court that interlocutory review is not

warranted in this case. Applications for interlocutory review are addressed to the

sound discretion of the Court.9 In the exercise of its discretion and giving due weight

to the Court of Chancery’s analysis, the Court has concluded that the application for

interlocutory review does not meet the strict standards for certification under Rule

42(b). Exceptional circumstances that would merit interlocutory review of the Court

9 Del. Supr. Ct. R. 42(d)(v). 4 of Chancery’s decision do not exist in this case,10 and the potential benefits of

interlocutory review do not outweigh the inefficiency, disruption, and probable costs

caused by an interlocutory appeal.11

NOW, THEREFORE, IT IS ORDERED that the interlocutory appeal is

REFUSED.

BY THE COURT:

/s/ James T. Vaughn, Jr. Justice

10 Del. Supr. Ct. R. 42(b)(ii). 11 Del. Supr. Ct. R. 42(b)(iii). 5