Bamford v. Penfold, L.P., C.A. No. 2019-0005-JTL (Del. Ch. Feb. 28, 2020) (Laster, V.C.)
In this memorandum opinion resolving motions to dismiss, the Court of Chancery addressed the plaintiffs’ personal and derivative claims against the defendants for their alleged misconduct in connection with a restructuring.
The plaintiffs, Joseph Bamford (“Bamford”) and Young Min Ban (“Ban”), along with one of the defendants, Joseph Manheim (“Manheim”), each held a 30% membership interest in a company that facilitated investments from foreign nationals in infrastructure projects in the United States (“DVRC”). The remaining 10% of the membership interest in DVRC was held by West 36th, Inc. (“WestCo”), which also served as DVRC’s manager. This action arises out of a reorganization that Manheim facilitated whereby the parties contributed their membership interests in DVRC to defendant Penfold, L.P. (“Penfold”)in exchange for a 1/3 equity interest in Penfold (the “Reorganization”). Manheim allegedly made false promises to Ban, including that each parties’ interests would carry equal economic and governance rights and that they would each own the general partnership interest equally. Manheim was Bamford’s close friend and served as his financial and business advisor, to the point that Bamford implicitly trusted Manheim’s decisions and actions. Unbeknownst to Bamford and Ban, after the Reorganization, only Manheim and another entity he controlled were the general partners of Penfold. Manheim took further control of the WestCo board of directors, and thus, DVRC, and engaged in several interested transactions whereby he allegedly misappropriated approximately $5.9 million.
Regarding Bamford and Ban’s claims for common law fraud against Manheim and the other defendants, the Court denied the motion to dismiss Ban’s claim that Manheim fraudulently induced Ban to characterize the salary he received as a loan from DVRC. The Court also found that the plaintiffs’ fraud claims based on Manheim’s oral misrepresentations about the Reorganization were sufficiently particularized and that the plaintiffs’ acknowledgment that Manheim made no oral representations was not dispositive because it was reasonable to infer at the pleading stage that Manheim crafted such statements to insulate himself from challenges to his self-dealing behavior.
Regarding Bamford and Ban’s double-derivative claim for breach of fiduciary duty on behalf of DVRC, the Court held that the plaintiffs had standing to sue on behalf of Penfold to assert claims belonging to DVRC, both before and after the Reorganization. The Court reasoned that the contemporaneous ownership requirement of §18-1002 was satisfied because, although Penfold was not a member of DVRC when Manheim allegedly breached his fiduciary duties in connection with the Reorganization, Penfold became a member of DVRC as an assignee of Bamford’s, Ban’s and Manheim’s interests in DVRC. Thus, Penfold had the right to sue derivatively on behalf of DVRC. In deciding whether Bamford and Ban could sue derivatively on behalf of Penfold, the Court held that the similar contemporaneous ownership requirement of §17-1002 was also satisfied. Citing to the pragmatism of the Delaware Supreme Court decision Lambrecht v. O’Neal, the Court stressed that if the plaintiffs did not have standing to sue, as the only human beings with equity interests in Penfold (besides Manheim), then there would be no procedural vehicle to remedy the claimed wrongdoing. The Court bolstered this determination by reasoning that the policy concerns supporting the contemporaneous ownership requirement did not apply to the instant situation. The Court rejected defendants’ claims that Delaware law does not recognize double-derivative actions in the alternative entity context, and that the plaintiffs failed to meet the continuous ownership requirement.
After finding the plaintiffs had standing to sue both derivatively and double-derivatively, the Court dismissed plaintiffs’ claims on behalf of Penfold and DVRC for fraud against Manheim and his affiliates, arguing that these claims were duplicative of and subsumed by the above double-derivative and derivative breach of fiduciary claims that the defendants did not seek to dismiss.
The Court proceeded to deny the motion to dismiss plaintiffs’ derivative breach of contract claim on behalf of Penfold for breach of an indemnification provision in Penfold’s limited partnership agreement. Although the Court noted that it is likely such a provision would require a finding of fraud or willful malfeasance before such a claim would be ripe, because the limited partnership agreement was not submitted to the Court, the Court accepted the allegations of the complaint.
Finally, the Court dismissed the plaintiffs’ claims for unjust enrichment and held that it was not reasonably conceivable that the enrichment Manheim received could prove to be unjust without Manheim being found liable for one of the other asserted claims.