Feeley, et al. v. NHAOCG, LLC, et al., C.A. No. 7304-VCL (Del. Ch. Mar. 20, 2012) (Laster, V.C.)
In this case, the Court, relying on the implied consent provisions found in the Delaware Limited Liability Company Act (the “Act”), found that it was entitled to exercise personal jurisdiction over defendant NHAOCG, LLC (“NHA”), a New York limited liability company, and denied without prejudice the individual defendants’ motion to dismiss for lack of personal jurisdiction pending jurisdictional discovery and further briefing. Plaintiff Feeley and defendant Andrea Akel formed Ak-Feel, LLC (“Ak-Feel”). Following the formation of Ak-Feel, Ak-Feel and NHA formed Oculus Capital Group, LLC (“Oculus”). NHA is comprised of 3 members, each of which is an entity affiliated with defendants George Akel, David Newman and Daniel Hughes. Pursuant to the Oculus LLC Agreement, Ak-Feel was appointed as the Managing Member, with exclusive authority and discretion to operate the business affairs of Oculus, subject to the provisions of the Oculus LLC Agreement and applicable law. Feeley entered into an Employment Agreement with Oculus, pursuant to which Feeley was appointed to serve as CEO and President of Oculus. The Employment Agreement had a specific term, which would automatically be extended for successive yearly periods unless the agreement was terminated by Feeley or Oculus.
Upon the falling out between Feeley and his business associates, defendant Newman, signing on behalf of Newman Holdings, LLC, in its capacity as a member of NHA, sent several notices and letters, purportedly on behalf of Oculus (including as the purported new Managing Member of Oculus), including notices terminating the Employment Agreement and, subsequently, Feeley’s employment with Oculus and removing Ak-Feel as Managing Member of Oculus and replacing Ak-Feel as Managing Member with NHA. None of this correspondence provided an explanation as to how NHA could act on behalf of Oculus, given that sole management and authority to conduct the business affairs of Oculus was given to Ak-Feel. In addition, Newman, on behalf of NHA as the purported new Managing Member of Oculus also corresponded with Oculus business partners and clients, informing said business partners and clients that plaintiff was no longer associated with Oculus and that the Managing Member of Oculus was now NHA. Feeley disputed NHA’s authority under the Oculus LLC Agreement to remove Ak-Feel as the Managing Member of Oculus and terminate Feeley’s employment contract and filed a lawsuit seeking a determination as to the validity of such actions, along with additional claims (i) against NHA for breach of the Oculus LLC Agreement and breach of the implied covenant of good faith and fair dealing and (ii) against all defendants for breach of fiduciary duty, unjust enrichment, civil conspiracy, tortious interference with the Employment Agreement, tortious interference with business relations and prospective economic advantage, deceptive trade practices and misappropriation of trade secrets. All defendants other than Andrea Akel moved to dismiss the complaint in its entirety for lack of personal jurisdiction of the Court.
The Court noted that the burden of proof in a motion to dismiss for lack of personal jurisdiction is on the plaintiff to show “a basis for the court’s exercise of jurisdiction over the nonresident defendant.” In applying this standard, the plaintiff must show that service of process is authorized by statute and the exercise of personal jurisdiction comports with the due process clause of the Fourteenth Amendment. Because the Oculus LLC Agreement did not contain a consent-to-jurisdiction provision and the plaintiff did not present evidence of any jurisdictional ties the defendants had to Delaware other than their actions vis-à-vis Oculus, the Court had to determine whether it had the authority to exercise personal jurisdiction over the defendants based on the implied consent provisions of the Act. Under Section 18-110(a) of the Act, the Court is granted in rem jurisdiction “to determine who validly holds office as a manger of a Delaware limited liability company.” Pursuant to Section 18-110(a) of the Act, upon application by a member or manager, the Court may “hear and determine. . . the right of any person to become or continue to be a manager of a limited liability company, and, in case the right to serve as a manager is claimed by more than 1 person, may determine the person or persons entitled to serve as managers. . . .” Section 18-110(a) also states that service of such application on the registered agent of the limited liability company shall be deemed to be service upon such limited liability company “and upon the person or persons whose right to serve as a manager is contested and upon the person or persons, if any, claiming to be a manager or claiming the right to be a manager.” The Court found that “[b]ecause a Section 18-110 proceeding affects the Delaware LLC and the office of managing member, it is not necessary for all claimants to the office to be subject to the Court’s in personam jurisdiction in order for the Court to make an authoritative determination.” Citing case law applying the analogous Section 225 of the General Corporation Law of Delaware, the Court noted that “[w]hile these claimants are not personally subject to this court’s coercive jurisdiction in this case, they must realize, as they surely do, that their failure to participate in this adjudication will not foreclose the authoritative adjudication in this proceeding of their claim of title.” Applying this standard, the Court found that it had jurisdiction to determine the validity of the removal of Ak-Feel as Managing Member of Oculus and the right of NHA to serve as Managing Member of Oculus notwithstanding all of the defendants’ participation (or lack thereof) in the proceeding. Because NHA had purported to take action on behalf of Oculus, including staking claim to the role of Managing Member, the Court’s ruling as to the control of Oculus was binding on NHA.
In analyzing the Court’s jurisdiction with respect to the breach of fiduciary duty claims, the Court relied on Section 18-109 of the Act, “an implied consent statute that empowers this Court to exercise personal jurisdiction over persons who serve as managers of an LLC for purposes of adjudicating claims for breaches of duty in that capacity involving or relating to the business of the LLC.” Under that section of the Act, a manager’s serving in such a capacity “constitutes such person’s consent to the appointment of the registered agent of the limited liability company. . . as such person’s agent upon whom service of process may be made as provided in this section. . . .” For purposes of Section 18-109(a), the term “manager” is defined to include not only the manager designated in the LLC agreement of such company, but also includes “a person, whether or not a member of a limited liability company, who, although not a manager as defined in [Section] 18-101(10) of this title, participates materially in the management of the limited liability company. . . .” Considering NHA’s actions of purporting to act on behalf of Oculus with respect to (i) the termination of Feeley’s Employment Agreement, (ii) the termination of Feeley as an officer of Oculus, and (iii) the communication with clients and business partners of Oculus, all of which fall under the authority of the Managing Member of Oculus pursuant to the Oculus LLC Agreement, the Court found that the complaint sufficiently alleged that NHA participated materially in the management of Oculus, such that it was subject to the personal jurisdiction of the Court pursuant to Section 18-109(a) of the Act. The Court noted that Section 18-109(a) also “extends, consistent with due process, to encompass an alleged violation by a manager of the express and implied contractual duties owed by the manager under the operative limited liability company agreement.” As such, the Court found that it also had the authority to exercise personal jurisdiction over NHA with respect to the breach of contract and breach of implied duty of good faith and fair dealing counts. As to the remaining counts as against NHA, the Court found that, because it had jurisdiction over NHA with respect to the foregoing claims pursuant to Section 18-109(a) of the Act, and because the remaining claims were “sufficiently related” to the Section 18-109-related claims, the Court could exercise personal jurisdiction over NHA with respect to those other, sufficiently related claims.
Regarding the claims against the individual defendants, the Court noted that there was relevant case law that holds that the Court could exercise personal jurisdiction over “flesh-and-blood individuals who control an entity that acts as a fiduciary for another Delaware entity.” In USACafes, L.P. Litig., the Court pierced the veil of the corporate general partner to assert personal jurisdiction over the individuals who controlled the general partner in connection with a claim of breach of fiduciary duty to the limited partnership. Because of the differences between the facts in this case and the facts in USACafes, namely that there is an additional layer of entities between NHA and the individual defendants and that this case also encompasses contractual-duty theories, the Court deferred ruling on the motion to dismiss so that the parties could engage in discovery to determine whether the Court had authority to exercise personal jurisdiction over such defendants with respect to the breach of fiduciary duty claims (and the remaining claims that were sufficiently related thereto).