West Coast Opportunity Fund, LLC v. Credit Suisse Securities (USA), LLC, No. 474, 2009 (Del. May 17, 2010).
In this case, West Coast Opportunity Fund, LLC (“West Coast”) appealed a Court of Chancery interlocutory order granting judgment on the pleadings. During the course of the appeal, certain legal issues concerning the bona fide pledgee and alter ego doctrines were raised by the parties and the Supreme Court, which issues had not been fully developed in the parties’ respective pleadings. The Supreme Court remanded the case to the Court of Chancery for further proceedings.
In connection with a $15 million investment in GreenHunter Energy, Inc. (the “Company”), West Coast and four senior executives of the Company executed lockup agreements that prohibited the sale, transfer or disposition of Company stock. One of the four executives, Gary Evans (“Evans”), held shares of the Company indirectly through his ownership of Investment Hunter LLC (“Hunter”). During the term of the lockup agreement, Hunter borrowed $2.4 million from Credit Suisse, using shares of the Company as collateral. Several months later, Credit Suisse issued a margin call. In response, the Company’s general counsel advised Credit Suisse that West Coast intended to enforce the terms of the lockup agreement to prevent the sale of any shares. Thereafter, Credit Suisse filed a complaint against West Coast, seeking a declaration that the lockup agreement did not prohibit transfer of the shares and alleging interference with Credit Suisse’s contract with Hunter.
Both parties moved for judgment on the pleadings. The Court of Chancery granted Credit Suisse’s motion and denied West Coast’s motion, holding that Hunter was not bound by the terms of the lockup agreement. The Court of Chancery declined, however, to interpret the transfer restriction contained in the lockup agreement. In its interlocutory appeal, West Coast argued that Evans personally breached the lockup agreement by causing Hunter to pledge shares of the Company, which breach triggered West Coast’s stop transfer right. In the alternative, West Coast argued that judgment should not have been entered on the leading because there were material issues of disputed facts with respect to whether the parties intended Hunter to be subject to the terms of the lockup agreement and as to whether Hunter should be regarded as Evans’ alter ego.
Pursuant to established Delaware law, a trial court may grant a motion for judgment on the pleadings only where, based upon review of the pled facts and inferences therefrom, no material issue of fact exists and the movant is entitled to judgment as a matter of law. Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, LP, 624 A.2d 1199 (Del. 1993). In the course of the appeal, two legal issues were raised that, in the opinion of the Supreme Court, could affect the outcome of the instant case – neither of which were sufficiently addressed in the parties’ pleadings or in the Court of Chancery’s opinion. The first issue, raised by the Supreme Court, was whether Credit Suisse was a bona fide pledgee for value without notice, and the second issue was whether Hunter was Evans’ alter ego, such that Hunter’s pledge could be attributed to Evans. Because the parties’ underlying pleadings failed to adequately address these issues, the Supreme Court remanded the matter to the Court of Chancery.