This memorandum opinion by the Delaware Court of Chancery addressed a motion to dismiss a fifteen-count complaint alleging that minority members of an LLC, along with their non-member affiliates, drove the LLC’s subsidiary into bankruptcy to acquire its valuable assets at a substantial discount. The Court granted the motion to dismiss in part and denied the motion to dismiss in part.
This action arises out of an alleged scheme by minority members of plaintiff Skye Mineral Partners, LLC (the “LLC”). The LLC’s subsidiary owned mineral deposits, and the LLC was involved in a capital project to monetize and develop those assets, including a $30M loan from a lender to the subsidiary. In connection with that capital project, the minority members’ board designee learned the mineral deposits were worth $600M. Rather than inform the board, the designee informed other minority members and a group of affiliated individuals and entities. Defendants allegedly entered into a scheme to drive the subsidiary into bankruptcy in order to obtain the mineral rights. The minority members accomplished this scheme by exercising their blocking rights to starve the LLC of capital, causing the subsidiary to default on its loan, driving the subsidiary into bankruptcy, where a non-party affiliate purchased the assets. Plaintiffs brought various claims for breach of contract, breach of fiduciary duty, aiding and abetting, and fraud against the minority members, their affiliates, and the lender.
Defendants moved to dismiss for lack of personal jurisdiction and for failure to state a claim. The Court rejected defendants’ personal jurisdiction argument under the conspiracy theory, finding plaintiffs’ claims supported an inference that the non-member affiliates implemented a plan to starve the LLC of capital, drive the subsidiary into bankruptcy, and acquire the valuable mineral deposits “very cheap.”
Addressing defendants’ merits-based arguments, the Court first addressed the threshold issue of whether the bankruptcy sale order barred plaintiffs’ claims. Defendants argued the bankruptcy sale order transferred the subsidiary’s assets free and clear of litigation claims. Interpreting the Bankruptcy Code, the Court found it only protected a buyer from collateral attacks, and because the buyer was a non-party, the Bankruptcy Code did not, on its face, bar the complaint. In addition, the Court found plaintiffs’ claims were assets of the LLC, not assets of the subsidiary, and the sale order only purported to transfer the subsidiary’s assets to the buyer. Accordingly, the Court held that the bankruptcy sale order did not bar plaintiffs’ claims.
Analyzing the various breach of contract claims, the Court found that plaintiffs adequately pled a breach by the minority members of their confidentiality obligations under the LLC agreement. However, the Court dismissed claims for breach of contract against the lender in connection with the loan because the subsidiary, not the LLC, was a signatory to loan, and as non-signatories, plaintiffs lacked standing to enforce the loan.
Regarding the breach of fiduciary duty claims against the minority manager, the Court found the LLC agreement imposed, by contract, the same fiduciary duties as the common law except for the duty not to usurp company opportunities. Under this interpretation, the Court found a reasonable inference that the manager used his fiduciary status to harm the LLC, reasoning a fiduciary cannot intentionally sit back while its company collapses so the fiduciary’s affiliate can buy the company’s (discounted) assets.
In connection with the manager’s breaches of fiduciary duty, plaintiffs alleged the manager was also acting as an agent of the non-member affiliates, and therefore, those defendants were liable for the manager’s breaches. Applying concepts of agency law, the Court rejected plaintiffs’ argument. The Court noted plaintiffs failed to allege the non-member affiliates had a right to control the manager or force him to take the wrongful actions. Instead, the manager exercised his own rights and obligations, derived from his status as a manager. Likewise, the Court rejected plaintiffs’ arguments that the non-member affiliates were liable for breach of fiduciary duty under a control theory because they did not (i) own any LLC units, (ii) appoint managers, or (iii) have blocking rights. In contrast, the breach of fiduciary duty claims against the minority members were not dismissed. The Court found the minority members’ blocking rights, and their use of the blocking rights, led to an inference of actual control over the LLC, and that they used their blocking rights in bad faith.
Regarding plaintiffs’ aiding and abetting claims, the Court denied the motion to dismiss those claims against the non-member affiliates, as plaintiffs pled their involvement in the scheme at all levels. However, the Court granted the motion to dismiss aiding and abetting claims against the lender, finding the lender was a third-party that provided the loan at arm’s length. Finally, the Court dismissed the fraud claims for lack of justifiable reliance, as plaintiffs themselves pled that they were aware of certain facts.