Submitted Date: July 17, 2013
Submitted Date: October 31, 2013
Richard L. Renck, Esquire of Ashby & Geddes, P.A., Wilmington, Delaware, and Michael A. Charish, Esquire of Schulman & Charish LLP, New York, New York, Attorneys for Plaintiff.
Thomas W. Briggs, Jr., Esquire and Matthew R. Clark, Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware, Attorneys for Defendants Upper New York Investment Company LLC, North Park Avenue Investment Company LLC, Upper Hudson Investment Company LLC, Johny Jacobo Czarninski Baier, and Taly Czarninski Shefi de Schwartz.
John L. Reed, Esquire and Stuart M. Brown, Esquire of DLA Piper LLP (US), Wilmington, Delaware, Attorneys for Defendants Vistamar Investments LLC and Danny David Czarninski Baier.
NOBLE, Vice Chancellor
This Delaware action is a dispute among family members of Ecuadorian citizenship over their ownership interests in a group of family-owned companies based in Ecuador. That four Delaware limited liability companies hold some of the disputed stock may explain why this lawsuit was filed here.
Vivian Czarninski Baier de Adler ("Vivian") filed this action against two groups of parties: first, the entities Upper New York Investment Company LLC ("Upper New York LLC"), North Park Avenue Investment Company LLC ("North Park Avenue LLC"), Upper Hudson Investment Company LLC ("Upper Hudson LLC"), and Vistamar Investments LLC ("Vistamar LLC, " and collectively, the "Delaware LLCs"); and second, the individuals Johny Jacobo Czarninski Baier ("Johny"), Danny David Czarninski Baier ("Danny"), and Taly Czarninski Shefi de Schwartz ("Taly, " and collectively, the "Individual Defendants, " and together with the Delaware LLCs, the "Defendants").
Vivian contends that the Individual Defendants engaged in a scheme to defraud her of her minority ownership in the Czarninski family empire by, among other actions, consolidating the group of companies into a select few without notice or consent, then unilaterally diluting her ownership interest in the remaining companies, before transferring stock in these companies for inadequate consideration to the Delaware LLCs by way of entities in the British Virgin Islands. Vivian alleges claims under Ecuadorian law for fraud and abuse and for unjust enrichment.
The Defendants filed three separate motions to dismiss. Upper New York LLC, North Park Avenue LLC, and Upper Hudson LLC moved to dismiss for lack of subject matter jurisdiction, improper venue, and failure to state a claim. Johny and Taly moved to dismiss for lack of personal jurisdiction, improper venue, insufficiency of process, and insufficiency of service of process. Finally, Vistamar LLC and Danny moved to dismiss upon all six of these grounds. Aside from filing separate motions, the Defendants presented a joint defense.
By an agreement among the parties, the only grounds for dismissal under the Court's consideration at this time are under Court of Chancery Rule 12(b)(1) for subject matter jurisdiction and under Rule 12(b)(6) for failure to state a claim upon which relief can be granted for the claims against Danny and the Delaware LLCs (together, the "Moving Defendants").
II. THE PARTIES
Vivian, who resides in Israel, is the sister of Johny and Danny and the aunt of Taly, who is Johny's daughter. Johny, Danny, and Taly all reside in Ecuador.
The Delaware LLCs are Delaware limited liability companies. Johny controls Upper New York LLC, North Park Avenue LLC, and Upper Hudson LLC, all of which were formed on April 2, 2008. Danny controls Vistamar LLC, which was formed on December 29, 2009. The Delaware LLCs have no offices, no employees, and no business, according to Vivian, outside the "sole purpose of storing the assets [held by] Johny, Danny and Taly" at issue here.
Vivian, Johny, and Danny are the children of Alfredo Czarninski, who founded a group of family-owned companies that came to be known as Grupo Economico El Rosado ("El Rosado Group" or the "Group"), "a real-estate and business empire" in Ecuador that Vivian alleges is currently worth over $1 billion.El Rosado Group is not an entity itself but rather a group of companies with significant cross-ownership. In effect, the Group "owns and operates prominent supermarket chains, shopping centers, hardware stores, toy stores, movie theaters, and other businesses." Historically, the main operating company of El Rosado Group was Importadora El Rosado Cia. Ltda. ("El Rosado Ltd."), an Ecuadorian limited liability company that "generated almost all of the Group's revenue, and financed and managed the other companies in the Group."
A. The Czarninski Family's Ownership of El Rosado Group
Alfredo Czarninski informed his three children on several occasions that he and his wife each owned 25% of the Group and that the children each owned an equal 16.67%. Not everyone in the family would own his or her designated percentage in every Group company, but rather each allegedly owned that percentage of the Group as a whole. By 2002, Vivian was a stockholder of record for several El Rosado Group companies, and, moreover, her ownership interest reflected her father's general plan. For example, she claims she owned approximately 16.22% of El Rosado Ltd. The purported plan of ownership of the Group by the three siblings after the deaths of their parents was to be an equal 33.33%.
Vivian was less involved than her brothers in the management and operations of the Group. Johny succeeded his father as President of El Rosado Group in 1997, and Danny became Executive Vice President. Living in Israel while the rest of the Czarninski family lived in Ecuador, Vivian was a "passive shareholder of El Rosado Group, who trusted her family members to run the business."
On August 19, 2003, Alfredo Czarninski died intestate. A dispute eventually arose over his estate's assets and plan of distribution, with Vivian claiming ownership of one-third of the estate's stock, if any, in El Rosado Group companies. Since at least their father's death, according to Vivian, "Johny and Danny have exerted complete control over El Rosado Group, ignoring corporate formalities, and acting as if they were the exclusive owners."
B. The Scheme to Defraud Vivian
Vivian claims that Johny and Danny deprived her of her stock in El Rosado Group, which she owned as a stockholder of record and by inheritance from their father, with a five-part fraudulent scheme involving:
(a) converting El Rosado Ltd. to a corporation; (b) consolidating El Rosado Group through a series of mergers; (c) increasing capital to dilute the other shareholders; (d) transferring a substantial majority of El Rosado corporate shares to shell companies in the British Virgin Islands, for no consideration; and (e) transferring those shares from the BVI companies to the Delaware LLCS, again for no consideration.
This scheme, from Vivian's perspective, demonstrates how Johny and Danny "abused Vivian's trust, violated their fiduciary duties, and conspired to fraudulently manipulate El Rosado Group to transfer wealth from Vivian and their parents to the Delaware companies under their control."
1. The El Rosado Ltd. Conversion and the El Rosado Group Consolidation
The scheme began when Johny, "with the tacit consent of Danny, " converted El Rosado Ltd. into Corporacion El Rosado S.A. ("El Rosado Corp."), an Ecuadorian corporation, on March 15, 2005. Although such a conversion under Ecuadorian law purportedly requires the "unanimous written consent of all of [the limited liability company's] members"—which would have included Vivian as a 16.22% member—Johny allegedly did not notify her or obtain her consent.
The next alleged step in the scheme was the consolidation of several companies in El Rosado Group. The restructuring resulted in three "real-estate holding companies worth hundreds of millions of dollars each": El Rosado Corp., Inmobiliaria Lavie, S.A. ("Lavie"), and Inmobiliaria Motke, S.A. ("Motke").One other remaining company, Comercial Inmobiliaria S.A. ("CISA"), owned a majority of the stock of El Rosado Corp.
2. The Dilution of Vivian's Minority Stock Ownership
Vivian alleges particular facts about an unlawful dilution of her ownership in one Group company: Lavie. At a general Lavie stockholders meeting on April 19, 2005, Johny unilaterally issued additional stock in Lavie "to companies that he himself wholly owned." Specifically, Vivian alleges that Johny, who "was the only person present" at this meeting, caused Lavie to issue 9, 734, 582 new shares at a par value of $389, 383, "instead of [at] their market value . . . [in the] hundreds of millions of dollars." The newly issued stock purportedly increased Johny's ownership of Lavie from 0.84% to 68.84%. Vivian was not notified of the meeting or in any way offered to subscribe into this new offering of Lavie stock.
3. The Series of Transfers of Group Stock to the Delaware LLCs
The final steps of the scheme, Vivian contends, culminated with the transfer of stock in the remaining El Rosado Group companies to the Delaware LLCs. By March 29, 2007, Johny and Danny had formed four companies in the British Virgin Islands (the "BVI Companies"). At this point, Vivian's niece, Taly, began to assist Vivian's brothers. The Individual Defendants purportedly transferred two of Lavie's primary assets, its majority controlling interest in CISA "worth hundreds of millions of dollars" and its over 99% interest in Motke similarly "worth hundreds of millions of dollars, " to the BVI Companies "for absolutely no consideration." In addition, the Individual Defendants allegedly transferred to the BVI Companies CISA's majority interest in El Rosado Corp., which also "was worth hundreds of millions of dollars[, ] . . . again for no consideration." These transfers allegedly occurred throughout 2006 and 2007; the final transaction date referenced is October 2007, based on the dates of the accounting entries for CISA and Lavie.
Ecuadorian law is said to require the seller and the buyer of stock to notify the corporation of the transfer so that the corporation can then register the stock in the buyer's name and notify Ecuador's Superintendent of Companies (the "Superintendent") about the new registration. The Individual Defendants were able to accomplish the stock transfers to the BVI Companies, Vivian contends, through their control of El Rosado Group, by which "they simply sent the notices of transfer to each other, registered themselves in the corporate books, and notified the Superintendent . . . themselves."
Lastly, Vivian alleges that the Individual Defendants completed their scheme by transferring the stock in El Rosado Group companies held by the BVI Companies to the newly formed Delaware LLCs. On April 2, 2008, Johny purportedly domesticated the three BVI Companies he had formed, creating Upper New York LLC, North Park Avenue LLC, and Upper Hudson LLC. Danny allegedly then caused the transfer of the Group stock held by his BVI Company to the newly formed Vistamar LLC on December 30, 2009.
The result of the scheme was to put control of approximately 86% of El Rosado Corp., 99% of Lavie, and 100% of Motke in the Delaware LLCs, and thus in the hands of Johny and Danny. By the end of 2010, Vivian claims her direct and indirect stock ownership in these companies had been reduced to almost nothing: from 16% to 5% in El Rosado Corp.; from 14% to 0.02% in Lavie; and from 15% to 0% in Motke.
C. The Israeli Probate Proceeding for Alfredo Czarninski's Estate
Vivian initiated an Israeli probate proceeding for Alfredo Czarninski's estate in November 2006. During the proceeding, she, Johny, and Danny agreed that "the three children are the sole heirs of the deceased [Alfredo Czarninski], and should receive equal inheritances of one-third each." The Israeli court purportedly declared that this plan of intestate succession was appropriate under Ecuadorian law. Vivian does not ...