IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
THE JOSEPH PENAR FAMILY ) TRUST, by its Trustee, Joseph Penar, ) THE WALDER FAMILY TRUST, by its ) Trustee, Cecile Donnamarie Newkirk,) ALLEN COOPER, SUE COOPER, and ) THE ALLEN AND SUE COOPER ) TRUST, by its Trustees, Allen and Sue ) Cooper, ) ) Plaintiffs, ) ) ) v. ) C.A. No. 10441-VCG ) JASEN ADAMS, DAVID HARTCORN, ) and BRIAN TOLLEFSON, ) ) Defendants, ) ) and ) ) PREMIUM OF AMERICA, LLC and ) PREMIUM HOLDING, LLC, ) ) Nominal Defendants. )
MEMORANDUM OPINION
Date Submitted: January 12, 2016 Date Decided: April 28, 2016
Norman M. Monhait and Carmella P. Keener, of ROSENTHAL MONHAIT & GODDESS, P.A., Wilmington, Delaware; OF COUNSEL: Cyril V. Smith and William K. Meyer, of ZUCKERMAN SPAEDER LLP, Baltimore, Maryland, Attorneys for Plaintiffs. Stamatios Stamoulis, of STAMOULIS & WEINBLATT LLC, Wilmington, Delaware, Attorney for Defendants Jasen Adams and David Hartcorn and Nominal Defendants Premium of America, LLC and Premium Holding, LLC.
K. Tyler O’Connell and Travis J. Ferguson, of LANDIS RATH & COBB LLP, Wilmington, Delaware, Attorneys for Defendant Brian Tollefson.
GLASSCOCK, Vice Chancellor This matter involves an entity, Premium of America, LLC (“POA”), formed
by a bankruptcy court to receive the assets of two affiliated companies, Beneficial
Assurance Ltd. and Premium Escrow Services, Inc. (collectively, “Beneficial”).
Beneficial was in the viatical life-insurance business—that is, it purchased existing
life insurance policies, designated itself as beneficiary of those policies, and assumed
the obligation to make the premium payments. Obviously, under this model, the
price paid by Beneficial for the policies relied on a determination of the life
expectancy of the initial policy-holders whose lives were insured. According to the
complaint, these insureds were typically ill with the AIDS syndrome or its
underlying HIV virus. Fortunately for those individuals, and for society at large,
during the course of Beneficial’s business, medicine and medical technology greatly
increased the life expectancy of those suffering from these conditions. Happy as
that fact was, it is a good wind indeed that blows no man ill; as the period during
which Beneficial was required to make premium payments, and to await benefits,
greatly increased, its business model ceased to be viable.1 Beneficial filed for
bankruptcy in 2002.
When formed, POA had two classes of assets: the life insurance policies,
1 I do not mean to disparage the viatical life-insurance industry. Obviously, by relieving the payment obligations of and accelerating (reduced) benefits for critically ill individuals, the industry provides a social good. A viaticum, a payment to fund a journey, is the rather poignant root for the term viatical. which represented both a payment obligation and an ultimate source of funds once
the insureds’ lives ended, and choses in action, lawsuits against the brokers who
initially placed the policies with Beneficial. The latter, apparently pursued
vigorously and at great expense, ultimately proved fruitless. By the fall of 2013, the
board of POA decided to liquidate the LLC and make a final distribution to members.
It notified the members, former creditors of Beneficial, that it was making a final
distribution of approximately $7 million and winding up operations. This notice did
not indicate how the life-insurance assets of POA had been liquidated, nor how the
amount available for distribution was computed.2 Along with the notice, each
member was given a check for its share of the final distribution.
The Plaintiffs are members of POA. They filed this action, asserting four
counts: Count I, brought derivatively on behalf of POA against its managers, alleges
self-dealing and conversion of assets in violation of fiduciary duties owed to the
members; a second derivative count casts the same behavior as breaches of the LLC
Agreements of POA, and a related entity, Premium Holding, LLC; and a third and
fourth count restate Counts I and II as direct claims. This Memorandum Opinion
concerns the Defendants’ motions to dismiss. Unfortunately for the Plaintiffs, their
complaint is a vessel incapable of bearing the freight of the issues for which they
2 As will be described later in this Memorandum Opinion, the assets of POA were presumably held at the time by Premium Holding, LLC, an entity created as a defensive measure by a former board of POA, of which POA was the only member. 2 seek adjudication. For the following reasons, those motions are granted.
I. BACKGROUND3
A. The Parties
The Plaintiffs—the Joseph Penar Family Trust, by its Trustee, Joseph Penar;
the Walder Family Trust, by its Trustee, Cecile Donnamarie Newkirk; Sue and Allen
Cooper, individually; and the Allen and Sue Cooper Trust, by its Trustees, Sue and
Allen Cooper—are all members, or assignees of member interests, in Nominal
Defendant Premium of America, LLC (“POA”), a Delaware limited liability
company governed by a “2003 Limited Liability Company Agreement” (the “POA
LLC Agreement”).4 POA is, and at all times has been, the sole member of Nominal
Defendant Premium Holding, LLC (“PH,” and together with POA, “Premium”),5 a
Delaware limited liability company governed by a “2011 Limited Liability Company
Agreement” (the “PH LLC Agreement”).6
Defendants Jasen Adams, David Hartcorn, and Brian Tollefson were members
of the board of managers of POA (the “POA Board”) at the time of the challenged
transaction,7 and also served on the board of managers of PH (the “PH Board”) “at
3 The facts are drawn from the Plaintiffs’ Second Amended Complaint (the “Complaint”) and are presumed true for purposes of evaluating the Defendants’ motions to dismiss. 4 Compl. ¶¶ 1, 6. 5 Id. at ¶ 14. 6 Id. at ¶ 7. 7 Id. at ¶ 1. 3 all relevant times.”8
B. Factual Overview
The following fact recitation will likely strike the reader as inadequate to the
questions presented; even so. That inadequacy is an artifact of the complaint, the
consequences of which are addressed in this Memorandum Opinion, infra.
1. The Creation of POA
POA was created as a result of proceedings in the U.S. Bankruptcy Court for
the District of Columbia concerning two affiliated companies, Beneficial Assurance
Ltd. and Premium Escrow Services, Inc. (collectively, “Beneficial”).9 Beneficial
was in the business of purchasing insurance policies insuring the lives of critically
ill individuals (in this case, those afflicted with HIV/AIDS), and then selling
fractional shares of those policies to investors, to create what is known in the
insurance industry as “viaticated” or “viatical” life-insurance policies.10 By the early
2000s, due to advances in the treatment of HIV/AIDS, Beneficial’s business model
8 Id. at ¶¶ 3–5. However, it is not entirely clear from the Complaint whether the Defendants constituted the entire Premium Board at the time of the challenged transaction. As discussed later in this Memorandum Opinion, the Complaint asserts only that the alleged improper transaction by the Defendants occurred sometime between June and October 2013. According to the Complaint, manager Lida Bray left the Premium Board “[s]ome time later” than the “latter part of August 2013.” Id. at ¶ 31. Thus, Bray may have been on the Premium Board at the time the challenged transaction was approved. See Oral Argument Tr. 57:21–58:2 (“Your Honor, I think it’s clear from the complaint that the transaction occurred sometime after June 2013 and sometime before October 2013. And the complaint says, with a possible exception of Bray, who was on the board at the time the transaction was approved.” (emphasis added)). 9 Compl. ¶ 8. 10 Id. 4 was no longer sustainable, leading it to file for bankruptcy in 2002.11 The bankruptcy
proceedings culminated in a 2003 “Plan of Reorganization,” pursuant to which the
insurance policies Beneficial owned were transferred to POA, and Beneficial’s
creditors became members of POA.12 The members of the “Creditors Committee”
in the bankruptcy proceedings became the initial POA Board.13
When created, POA was intended to be a liquidating entity only. 14 It held
approximately 280 policies, with a face value of approximately $189 million, and a
sum of cash.15 POA’s model was to pay premiums on the policies that had value,
collect the proceeds upon the insureds’ deaths, and pay distributions to its members
from the cash, all while reserving sufficient funds to pay premiums on the remaining
policies.16 POA anticipated that, through this model, it would return between $100
and $120 million to its members over its first five years.17
POA’s other substantial asset was a group of choses in action. POA brought
a series of lawsuits asserting claims against several of the agents, including
Defendant Hartcorn, who had sold insurance policies to POA members.18 Hartcorn
11 Id. at ¶ 10. 12 Id. 13 Id. 14 Id. at ¶ 11. 15 Id. 16 Id. 17 Id. 18 Id. at ¶ 12. 5 then hired Defendant Adams to represent him in the litigation.19 Adams ultimately
represented over 100 agents in similar lawsuits, thereby gaining an intimate
understanding of POA’s business.20 Ultimately, none of these lawsuits were
resolved in favor of POA.
2. Save POA Removes Incumbent POA Management
In 2011, Adams and Hartcorn formed Save POA LLC (“Save POA”).
Intending to wrest control of POA, Save POA commenced a proxy solicitation
seeking appointment of a new slate of directors that had been hand-picked by Save
POA.21 As a defensive measure against Save POA, the POA Board created and
transferred all of POA’s assets to PH in June 2011.22 Counsel for the Defendants
clarified at oral argument that the PH Board was structured so as to be insulated from
the POA Board; the POA Board could not appoint or remove any PH Board
members, or otherwise control the actions of PH.23
In December 2011, two POA members affiliated with Save POA filed an
19 Id. 20 Id. 21 Id. at ¶ 13. 22 Id. at ¶ 14. Although the Complaint is silent as to whether PH subsequently transferred some or all of the assets back to POA, PH presumably still held all of POA’s former assets at the time of the challenged transaction. Due to this ambiguity surrounding which entity held the assets, it is likewise unclear whether the POA Board, the PH Board, or both, authorized the challenged transaction. See id. at ¶ 1 (The Defendants “appropriated for their personal benefit the assets of POA and/or its wholly-owned subsidiary, Premium Holdings, LLC (“PH”).”) (emphasis added); see also id. at 20 (seeking in relief an order “[o]rdering Defendants to return POA’s and PH’s assets to POA and/or PH”). 23 Oral Argument Tr. 9:13–16. 6 action in this Court seeking, among other things, an order requiring POA to hold an
annual meeting of its members (the “Chancery Action”).24 In February 2012, the
POA Board sued Save POA in the U.S. District Court for the District of Maryland,
alleging that Save POA had violated federal securities law in bringing its proxy
solicitation.25 After the Maryland District Court determined that POA was not
subject to federal securities laws, and thus that any proxy solicitation concerning
POA could not violate federal securities laws, and after the Fourth Circuit affirmed
the ruling in April 2013,26 this Court entered judgment in the Chancery Action in
favor of Save POA.27
In May 2013, POA’s incumbent management resigned, and the Save POA
slate—consisting of Ralph Cyr, James Pannella, Lida Bray, Michael Weber, and
Robert Knight—became the new POA Board, with Pannella serving as President.28
While the complaint does not specifically allege that the incumbent management
also resigned from the PH Board, to be replaced by the Save POA slate, it appears
this occurred as well.29 Likewise, it appears that Pannella was appointed President
24 Compl. ¶ 15. 25 Id. at ¶ 17. 26 Id. 27 Id. at ¶ 18; see Huck v. Premium of Am., LLC, C.A. No. 7283-VCG (Del. Ch. Apr. 11, 2013) (ORDER). 28 Compl. ¶ 18. 29 See Oral Argument Tr. 73:15–19 (“[O]ur understanding is that the compositions of the boards were the same throughout, and I think the reasonable inference to be drawn from our complaint is that the composition of the boards was the same throughout.”). 7 of both POA and PH.30
3. Adams, Hartcorn, and Tollefson Seize Control of POA
According to the complaint, at some undefined time after the Save POA slate
became the POA Board, Adams and Hartcorn, through “threats and/or persuasion,”
caused Knight, Weber, and Cyr to “resign from the Board and to be replaced by
themselves and Defendant Tollefson.”31
In June 2013, Adams and Hartcorn informed Pannella that TYRSS, LLC
(“TYRSS”), a company in which Adams and Hartcorn allegedly each held an
interest,32 would make an offer to purchase POA or its assets (the “TYRSS
Proposal”).33 The TYRSS Proposal called for an aggregate distribution to POA
members of approximately $8.75 million in cash and $400,000 in “Board Member
Termination Fees” to be paid to POA Board members who voted in favor of the
TYRSS Proposal.34
Pannella objected to the TYRSS Proposal as undervaluing POA,35 and to the
30 See Compl. ¶ 30 (describing how Adams, Hartcorn, and Tollefson later “signed resolutions purporting to remove Pannella from the Board, although no provision of the Operating Agreements permitted such removal”) (emphasis added). 31 Id. at ¶ 19. Again, I assume that the Plaintiffs’ use of the term “Board” refers to both the PH and POA Boards. See supra note 29. It is not entirely clear when these Board replacements occurred. The Complaint alleges only that Tollefson, a close personal friend of Adams, became a “Board member in or about May 2013.” Compl. ¶¶ 5, 19. I note that actions are attributed to Cyr as late as June 2013, id. at ¶ 29, but that Knight is not mentioned elsewhere in the Complaint. 32 The Plaintiffs, however, do not believe that TYRSS does, or ever did, exist. Compl. ¶ 23. 33 Id. at ¶ 21. 34 Id. at ¶¶ 21–22. 35 Id. at ¶ 24. 8 $400,000 Board Member Termination Fees as an apparent bribe to entice POA
Board members to vote in favor of the TYRSS Proposal.36 According to the
Plaintiffs, POA held at the time at least $11.6 million in cash, in addition to life
insurance policies worth tens of millions of dollars.37 Therefore, as of June of 2013,
the Plaintiffs allege, POA was in a position to “distribute[] a significant portion of
its $11.6 million in cash to its members, while retaining funds to pay premiums on
policies it still held.”38
Pannella also worked with POA’s then-accountants, Varanko & Black
(“V&B”), to estimate that POA could expect to make at least $20 million in
distributions to members over ten years, with an additional terminal payment of at
least $14 million at the conclusion of business.39 Cyr agreed with Pannella’s
assessment and joined him in refusing to support the TYRSS Proposal.40 Adams,
Hartcorn, and Tollefson “rejected these findings,” without further investigation or
due diligence, and urged Pannella to support the TYRSS Proposal.41 However, at a
June 19, 2013 meeting of POA members, at which Pannella announced to attending
36 Id. at ¶ 26. I note again that the Complaint does not make clear which entity, POA or PH, held the assets. The allegations surrounding the TYRSS Proposal center on POA, but, presumably, PH still held the assets at this time, and the PH Board would also need to vote in favor of the TYRSS Proposal. See supra note 22. 37 Compl. ¶ 24. 38 Id. at ¶ 25. 39 Id. at ¶ 27. 40 Id. at ¶ 29. 41 Id. at ¶ 28. 9 members that he would “marshal POA’s assets for the current and future benefit of
POA and its members,” Adams, Hartcorn, and Tollefson did not dissent or raise the
TYRSS Proposal.42 At least as of that time, the TYRSS Proposal was not
implemented.
In August 2013, allegedly in retaliation for Pannella’s opposition to the
TYRSS Proposal, Adams, Hartcorn, and Tollefson “asserted that they had removed
Pannella both as President of POA and as Chairman and a member of the Board,”
and signed resolutions to that effect, “although no provision of the [LLC]
Agreements permitted such removal.”43 Cyr resigned from the “Board” in early
August 2013.44 As a result, by the later part of August 2013, Adams, Hartcorn,
Tollefson, and Bray constituted the POA and PH Boards.45 Bray resigned
“sometime later” from both boards after—according to the Plaintiffs “[o]n
information and belief”—being paid $100,000 at Adams, Hartcorn, and Tollefson’s
“instigation.”46
4. Adams, Hartcorn, and Tollefson “Apparently” Misappropriate POA’s Assets
In mid-October 2013, POA sent its members an undated, unsigned letter on
42 Id. at ¶ 29 43 Id. at ¶ 30. While it is not clear from the Complaint—as “Board” is an undefined term— it appears, given the allegation that neither the POA nor the PH LLC Agreement permitted this form of removal, that Pannella was removed from both the PH and POA Boards. 44 Id. 45 Id. at ¶ 31. 46 Id. 10 POA stationary (the “Letter”), which stated, among other things, that POA was
making a final distribution of approximately $7 million to its members and winding
up operations.47 Accompanying the Letter, each member received a check from
POA purporting to be a final distribution.48 The Plaintiffs assert, in light of the V&B
valuation and POA’s alleged $11.5 million of cash on hand,49 that the Defendants
“apparently implemented some form of the TYRSS Proposal, distributing a part of
POA’s cash and taking the remaining assets of POA/PH for themselves.”50 The
Plaintiffs assert also, upon information and belief, that Tollefson received a
$100,000 payment in return for his support of the proposal,51 and that the Letter, by
stating that POA had obtained “an independent valuation in the range of $3.4 million
to $3.8 million” in December 2012, was false and misleading.52
The factual recitations in the complaint stop there. The complaint is silent as
to the nature of the actual transaction by which the assets were liquidated, the nature
of the board action, if any, in way of that transaction, who the other parties to the
transaction were, and the current ownership of the assets sold.
C. Procedural History
The Plaintiffs filed a complaint on December 10, 2014, and a second amended
47 Id. at ¶¶ 33, 40. 48 Id. at ¶ 33. 49 Id. at ¶ 40. 50 Id. at ¶ 33 (emphasis added). 51 Id. 52 Id. at ¶ 34. 11 complaint on August 27, 2015 (the “Complaint”), alleging four counts. Count I
assets a derivative claim for breach of fiduciary duties; Count II asserts a derivative
claim for breach of the Defendants’ express and implied obligations under the POA
and PH LLC Agreements; Count III asserts a direct class claim, on behalf of a class
of POA members and assignees of POA member interests, other than the Defendants
or any person or entity affiliated with the Defendants, for breach of fiduciary
duties;53 and Count IV asserts a class claim for breach of the Defendants’ express
and implied obligations under the POA LLC Agreement. In relief, the Plaintiffs seek
the appointment of a receiver for POA and PH; an order directing the Defendants to
return the misappropriated assets; a declaration that Counts III and IV are class
claims and certification of Plaintiffs as class representatives; damages; and costs.
The Defendants moved to dismiss the action pursuant to Court of Chancery
Rules 23.1 and 12(b)(6). After full briefing, I heard oral argument on the motions
on January 12, 2016. This Memorandum Opinion addresses those motions.
II. ANALYSIS
This matter challenges a transaction (the “Presumed Transaction”) by which
the Defendants presumably transferred assets of Premium54 to themselves, or to
53 Id. at ¶ 60. 54 Throughout this section, I refer to POA and PH collectively as “Premium” for the sake of clarity. As discussed above, it is unclear, according to the Complaint, whether the PH and POA Boards were identical at all times, and whether PH still holds all of the assets of POA that were, at one time, transferred to it. 12 persons or entities related to them or under their control, for a manifestly inadequate
price. According to the Complaint, as explained at oral argument, the Presumed
Transaction occurred between the time of the TYRSS Proposal, in June 2013, and
the mid-October 2013 final distribution of approximately $7 million. The Plaintiffs’
theory is that Adams and Hartcorn manipulated the Premium Board membership
after the rejection of the TYRSS Proposal, and, with a new and favorable Board
composition, were able to act in breach of their fiduciary duties. Both LLC
Agreements exculpate certain fiduciary duties; the parties agree, and I accept for
purposes of this Memorandum Opinion, that the fiduciary duty applicable to the
Presumed Transaction was that the managers would act in good faith. The Plaintiffs
argue, and I agree, that a transfer of assets by the Premium Board to individual
managers at a manifestly unfair price would not be an action done on behalf of
Premium in good faith. The managers at the time of the Presumed Transaction,
according to the Plaintiffs “on information and belief,” included Adams, Hartcorn,
and Tollefson. A non-defendant, Lida Bray, resigned from the Premium Board
sometime following the rejection of the TYRSS Proposal, and may or may not have
been a Premium Board member at the time of the Presumed Transaction.
As revealed at oral argument, the Defendants—either as a form of “voluntary
discovery” or as part of settlement negotiations—provided the Plaintiffs with
discovery on the facts leading up to the final distribution. The Defendants contend
13 that those facts are helpful to them, but that they cannot comment on them because
they are not alleged in the Complaint; they fault the Plaintiffs for omitting those facts
from the Complaint, suggesting that they were not included because they were
unhelpful to the Plaintiffs. For their part, the Plaintiffs argue that the facts disclosed
to them by the Defendants during the litigation were in aid of settlement; that they
had a professional responsibility not to use them in the Complaint or otherwise
disclose them; and that, absent this duty, they would have pled these facts (the
“Phantom Facts”), which they contend are in fact helpful to the Plaintiffs. The oral
argument, therefore, occurred in a fashion reminiscent of Lewis Carroll: the parties
argued the sufficiency of the Complaint, which did not disclose the identities of the
managers who engaged in the Presumed Transaction, theoretically in breach of their
fiduciary duties; and which failed to disclose any facts regarding that transaction,
when it occurred, or what individuals or entities now control the insurance assets
formally held by Premium, presumably transferred in that transaction. Despite this
circumscribed argument, all the parties were in fact in possession of the Phantom
Facts; and each hinted that the Phantom Facts were favorable to their side, with only
the Court left ignorant. It is in this context that I approach the motions to dismiss.
The Defendants seek to dismiss under Court of Chancery Rule 23.1, arguing
that demand was not excused for Counts I and II (the derivative counts), and that
Counts III and IV (the direct counts) are in fact derivative under the test announced
14 by our Supreme Court in Tooley v. Donaldson, Lufkin & Jenrette, Inc.55 The
Plaintiffs argue vigorously that the Presumed Transaction has qualities both
derivative and direct that may be pursued in this litigation, or that at least I cannot
definitely state that no claims are direct based on this record. The latter contention,
unfortunately, is indisputably true since, unlike the parties, I am ignorant of the terms
of the Presumed Transaction, assuming it occurred. However, because, under the
facts pled, the Defendants’ additional ground for dismissal—Rule 12(b)(6)—is
sufficient, I need not reach the direct/derivative question.56
A. Standard of Review
On a motion to dismiss under Rule 12(b)(6), I must examine the facts pled in
the light most favorable to the plaintiff and “draw reasonable inferences in the
plaintiff's favor.”57 However, I am “not required to accept every strained
interpretation of the allegations proposed by the plaintiff,” and need not “accept as
true conclusory allegations.”58 Only if, upon such consideration, I find that it is not
55 845 A.2d 1031 (Del. 2004); see id. at 1039 (“[A] court should look to the nature of the wrong and to whom the relief should go. The stockholder's claimed direct injury must be independent of any alleged injury to the corporation. The stockholder must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation.”). 56 I assume, however, that a conversion of assets in connection with the liquidation and distribution of what is the LLC equivalent of a liquidating trust states a direct claim against the managers of that LLC. 57 In re Gen. Motors S’holder Litig., 897 A.2d 162, 168 (Del. 2006) (citation omitted). 58 Id. (internal quotation and citations omitted). 15 reasonably conceivable that the plaintiff may prevail will the motion be granted.59
B. The Plaintiffs’ Second Amended Complaint Fails to State a Claim
The facts alleged here are that (1) an entity (TYRSS)—which may or may not
have had actually existence—associated with two of the Premium Board members,
Adams and Hartcorn, offered to purchase the Premium assets at a price that would
result in an aggregate distribution of $8.75 million in June 2013; (2) following the
TYRSS Proposal, Premium Board member Pannella worked with Premium’s then-
accountants to estimate that Premium could distribute $20 million to its members
over ten years with an additional terminal payment of approximately $14 million;
(3) in October 2013, Premium’s Board made a decision to liquidate and distribute
the remaining assets of Premium, in the amount of approximately $7 million; (4) the
transaction that provided the funds for distribution, “on information and belief,”
“apparently implemented some form of the TYRSS Proposal,”60 and presumably
benefitted Adams, Hartcorn, and Tollefson; and (5) the transaction was in breach of
the duty of good faith imposed on the managers—who included Adams, Hartcorn,
Tollefson, and perhaps Bray—by the LLC agreements. This last conclusory
allegation regarding the Presumed Transaction, based on the Phantom Facts, is a
wholly insufficient ground on which to rest an inference of bad faith on the part of
59 Id. (internal quotation and citation omitted). 60 Compl. ¶ 33. 16 Adams, Hartcorn, and Tollefson, however.
The Plaintiffs lament the professional obligations that prevented them from
disclosing the Phantom Facts—disclosed, in their view, as part of settlement
negotiations—which disclosure, if permissible, would have allowed them to plead a
complaint describing the Presumed Transaction in a way sufficient to state a claim.
Unexplained (despite my inquiry at oral argument) is why the Plaintiffs chose not to
seek documents under 6 Del. C. § 18-305, which would have entitled them, as LLC
members, to books and records relating to the Presumed Transaction. It has perhaps
grown clichéd to note that plaintiffs should use Section 22061 and its LLC analog to
develop facts for litigation by stockholders or members against fiduciaries, or for
derivative litigation on behalf of the entity.62 Premium functioned much like a
liquidating trust, although its LLC form allowed it to proceed over many years to
attempt to vindicate the litigation assets, which appeared valuable but ultimately
proved worthless. Upon liquidation of such a trust, the fiduciary would be required,
on demand, to account to the beneficiaries for the assets subject to trust.63 It is clear
here that equity must provide relief to the members of Premium upon liquidation,
61 8 Del. C. § 220. 62 See, e.g., Thermopylae Capital Partners, L.P. v. Simbol, Inc., 2016 WL 368170, *17 (Del. Ch. Jan. 29, 2016) (granting dismissal under Rule 12(b)(6) where stockholder plaintiffs drafted a complaint without full recourse to Section 220 and omitted pertinent facts to which they would have been entitled under Section 220). 63 See Ch. Ct. R. 115 (“Upon petition of any party interested in the guardianship or the trust, the court may require a guardian of the property or trustee, whenever or however appointed or named, to file an account.”). 17 sufficient to allow them to assure themselves that the contractual fiduciary duty of
good faith to which they are entitled has been complied with. One mechanism for
this would be the use of Section 18-305 as a tool to obtain disgorgement of books
and records sufficient to this inquiry. Here, for reasons, again, never explained, the
Plaintiffs forwent that step. They seek to rely on inferences that are so disconnected
from any pled facts that I am unable to vindicate them even on the standard of a
motion to dismiss.
All I can infer from the Complaint is that the Premium Board rejected an
interested transaction (the TYRSS Proposal), the details of which are not
forthcoming, but which appeared to value the Premium assets at an amount greater
than that ultimately distributed several months later. The Complaint fails to
describe, among other facts, the Presumed Transaction itself, to whom Premium’s
assets were transferred, the details of that transfer, the liabilities of Premium that
were discharged before distribution of the remaining assets, and the liability reserves
maintained by Premium. The inference that the Plaintiffs ask me to draw—that,
because the Premium Board rejected the TYRSS Proposal in June 2013 (which
would have resulted in an aggregate distribution of $8.75 million), because an
estimate prepared by Premium’s then-accountants estimated a significantly higher
value for Premium’s assets, and because Premium ultimately distributed only about
$7 million following its October 2013 liquidation, therefore assets must have been
18 diverted in bad faith to members of the Board—is unsustainable. The Plaintiffs filed
a complaint, an amended complaint, and a second amended complaint in this action,
all without alleging sufficient facts to sustain a claim under Rule 12(b)(6).64
Therefore, the motions to dismiss are granted.
Counsel for the Plaintiffs, perhaps inferring from the tenor of the Court’s
questions that its Complaint was not viable, suggested three “paths forward” at the
close of his argument. First, he suggested that, despite the deficiencies in the
pleadings, I could deny the motions to dismiss. I have already rejected that
suggestion. Next, he proposed that I dismiss the matter without prejudice—a
proceeding that would run afoul of Rule 15(aaa).65 The third suggested way forward,
64 Presumably because the Plaintiffs are unable to rely on the Phantom Facts, the Complaint simply states in a conclusory fashion that the Plaintiffs converted assets to their own use and that, on information and belief, the Premium Board consisted of at least Adams, Hartcorn, and Tollefson, among many other conclusory or unverified statements. At oral argument, counsel for the Plaintiffs raised an epistemological argument in aid of this manner of pleading. He argued that, with the exception of facts that an affiant has directly perceived, all facts in all complaints are effectively pled on “information and belief.” Oral Argument Tr. 81:21–82:7. In other words, there are not strong pleadings and weak pleadings, only weak pleadings that appear strong and weak pleadings that appear weak. In the same vein, I note that even those “facts” that an affiant believes he has directly perceived may be susceptible to the same limitation—see, for example, In re EZCORP, Inc. Consulting Agreement Derivative Litigation, 2016 WL 301245, at *40 (Del. Ch. Jan. 25, 2016)—and that under some schools of philosophical thought, even direct perceptions can only be averred on the equivalent of “information and belief,” since understanding resulting from perception is necessarily based on inference. See generally Bertrand Russell, Theory of Knowledge, in Encyclopaedia Britannica (13th ed. 1926). However, litigation being a practical rather than a theoretical exercise, I note that a production of documents from Premium describing how it went about liquidating the assets and calculating the distribution would allow a verified complaint consistent with litigants’ and counsel’s ethical obligations; in other words, to crib the punchline from the old mathematician/engineer/Zeno’s paradox joke, the Plaintiffs’ understanding of the facts would then be close enough for all practical purposes. 65 Plaintiffs’ counsel points to the unfairness of the Defendants both arguing that the Phantom Facts support their position and failing to relieve him of what he believes is the professional 19 which Plaintiffs’ counsel obviously considers a weary and unnecessarily circuitous
path, would involve dismissal of these Plaintiffs, with litigation to resume, if at all,
by another plaintiff on behalf of the members of POA; that plaintiff could first pursue
a sufficient factual basis, assuming such exists, to plead a complaint adequately
identifying the allegedly wrongful transaction. Weary or not, that is the path that
remains for the members.
At oral argument, the parties discussed whether laches would bar a theoretical
plaintiff from receiving documents under Section 18-305, if such a request were
made today. In light of that discussion, I think it is efficient to note the following:
There was an attempt by the Defendants to use what they describe as materials
produced in “voluntary discovery” as a bludgeon against the Plaintiffs. In that
regard, I do not consider those documents to be protected by professional
responsibility or courtesy from being used in any future theoretical complaint on
behalf of the class. Second, to the extent laches becomes an issue in the maintenance
of a theoretical subsequent suit, that issue would necessarily turn on the facts as then
obligation not to disclose those facts; he argues that such unfairness requires that I exercise my discretion under Rule 15(aaa) and dismiss the matter without prejudice. I find, however, that the purpose of Rule 15(aaa) would be subverted if a plaintiff who failed to use the tools at hand to create a sufficient record to overcome a motion to dismiss could avoid its strictures. I note that the unfairness Plaintiffs’ counsel complains of here—that the Defendants are using professional obligations relating to settlement negotiations as both a sword and a shield—is not pertinent to this inquiry, because I have not relied on Defendants’ argument that the Phantom Facts must be favorable to the Defendants to reach my decision on the motions to dismiss.
20 developed. I note, however, that equity strongly supports a review akin to an
accounting of the conduct of the managers in liquidating the assets and distributing
the proceeds of Premium.
III. CONCLUSION
For the foregoing reasons, the Defendants’ motions to dismiss are GRANTED. An appropriate order accompanies this Memorandum Opinion.
21 IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
THE JOSEPH PENAR FAMILY ) TRUST, by its Trustee, Joseph Penar, ) THE WALDER FAMILY TRUST, by its ) Trustee, Cecile Donnamarie Newkirk,) ALLEN AND SUE COOPER, ) individually, and THE ALLEN AND ) SUE COOPER TRUST, by its Trustees, ) Allen and Sue Cooper, ) ) Plaintiffs, ) ) v. ) C.A. No. 10441-VCG ) ) JASEN ADAMS, DAVID HARTCORN, ) and BRIAN TOLLEFSON, ) ) Defendants, ) ) and ) ) PREMIUM OF AMERICA, LLC and ) PREMIUM HOLDING, LLC, ) ) Nominal Defendants. )
ORDER
AND NOW, this 28th day of April, 2016,
The Court having considered the Defendants’ Motions to Dismiss, and for the
reasons set forth in the Memorandum Opinion dated April 28, 2016, IT IS HEREBY
ORDERED that the Motions to Dismiss are GRANTED.
SO ORDERED: /s/ Sam Glasscock III
Vice Chancellor