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Baier de Adler v. Upper New York Investment Co. LLC

Court of Chancery of Delaware

October 31, 2013

VIVIAN CZARNINSKI BAIER DE ADLER Plaintiff,
v.
UPPER NEW YORK INVESTMENT COMPANY LLC, NORTH PARK AVENUE INVESTMENT COMPANY LLC, UPPER HUDSON INVESTMENT COMPANY LLC, VISTAMAR INVESTMENTS LLC, JOHNY JACOBO CZARNINSKI BAIER, DANNY DAVID CZARNINSKI BAIER, and TALY CZARNINSKI SHEFI DE SCHWARTZ, Defendants.

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.

MEMORANDUM OPINION

NOBLE, Vice Chancellor

I. INTRODUCTION

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.[1] Vivian alleges claims under Ecuadorian law for fraud and abuse and for unjust enrichment.[2]

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.[3] 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").[4]

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.[5]

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.[6] Danny controls Vistamar LLC, which was formed on December 29, 2009.[7] 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.[8]

III. BACKGROUND

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.[9]El Rosado Group is not an entity itself but rather a group of companies with significant cross-ownership.[10] In effect, the Group "owns and operates prominent supermarket chains, shopping centers, hardware stores, toy stores, movie theaters, and other businesses."[11] 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."[12]

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.[13] 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.[14] 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%.[15]

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.[16] 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."[17]

On August 19, 2003, Alfredo Czarninski died intestate.[18] 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."[19]

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.[20]

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."[21]

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.[22]

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").[23]One other remaining company, Comercial Inmobiliaria S.A. ("CISA"), owned a majority of the stock of El Rosado Corp.[24]

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."[25] 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%.[26] Vivian was not notified of the meeting or in any way offered to subscribe into this new offering of Lavie stock.[27]

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").[28] At this point, Vivian's niece, Taly, began to assist Vivian's brothers.[29] 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."[30] 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."[31] 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.[32]

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.[33] 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."[34]

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.[35] 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.[36]

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.[37] 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.[38]

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.[39] Vivian does not allege that the Israeli court, or any other court, conducted or approved an inventory of the estate.

D. Vivian Eventually Learns of the Alleged Scheme

Throughout this time, Vivian claims to have been "blamelessly ignorant" of what the Individual Defendants were doing with the Group companies "[g]iven her physical distance from Ecuador, her lack of access to El Rosado [Group] information, and her deference to her brothers."[40] In addition, Vivian alleges that the Individual Defendants fraudulently concealed their misconduct by "deliberately neglecting to send her corporate notices, in violation of Ecuadorian law"; by misrepresentations about a discrepancy in family assets during the Israeli probate proceeding; and by a 2007 statement Johny made when the three siblings were in the Netherlands in which he "falsely assured [her] that he and Danny had run El Rosado [Group] by the book, had done nothing wrong, and that [she] would receive everything to which she was entitled."[41] Finally, Vivian asserts that her reliance on these misrepresentations prevented her from uncovering the scheme. [42]

At some point, the dynamic between Vivian and the Individual Defendants seems to have changed. After retaining Ecuadorian counsel in 2009, Vivian alleges she initiated an action, similar to a books and records inspection, for Lavie. Vivian claims she received Lavie documents between May 2010 and January 2011.[43] But it was not until August 2010 that Vivian first became aware of the Defendants' conduct, "[g]iven the complexity of El Rosado Group, the defendants' fraud, and the hundreds of corporate acts involved."[44]

Despite her allegations that the scheme culminated with the transfer of the stock at issue to the Delaware LLCs, Vivian also asserts that the fraud was ongoing. In particular, Johny is alleged to have held a stockholder meeting for El Rosado Corp. on August 16, 2011, to approve a stock increase, purportedly made "to further dilute Vivian's share . . . and fraudulently transfer wealth from Vivian to the defendants." Vivian claims she was not formally notified of the meeting as required under Ecuador law.[45] She claims she only learned of the planned increase on September 5, 2011, at which time her local counsel sent a letter to Johny as Executive President of El Rosado Corp. Vivian alleges that she did not receive a response before she filed the Complaint on September 28, 2011.[46]

IV. CONTENTIONS

Vivian alleges that the Defendants' five-part scheme is fraudulent and abusive conduct committed in the name of companies in violation of Article 17 of the Corporate Act of Ecuador ("Article 17, " and the "Article 17 Claim").[47] Vivian also alleges that the Defendants' continued, wrongful possession of her El Rosado Group stock constitutes unjust enrichment under Ecuadorian law (the "Unjust Enrichment Claim").[48] Vivian's claims are based on two different theories of stock ownership: first, the stock for which she was a stockholder of record;[49] and second, the stock to which she was entitled upon the intestate death of her father.[50]

A. Subject Matter Jurisdiction

Vivian contends that the Court has subject matter jurisdiction over her claims because "the rights [she] invokes are equitable."[51] She frames the Article 17 Claim as a breach of fiduciary duty owed by the Individual Defendants in light of their positions in the Group. Vivian contends that the Unjust Enrichment Claim also asserts equitable rights.[52] Among the remedies sought are an award of damages for the El Rosado Group stock Vivian alleges she owns, or, alternatively, the shares themselves, and a constructive trust on the assets of the Delaware LLCs.

In opposition, the Moving Defendants do not challenge that Vivian's claims are premised on fiduciary duties owed to her. Rather, they argue that the Court lacks equitable jurisdiction over the Article 17 Claim because Ecuadorian law would require Vivian first to obtain a criminal judgment for the fraud alleged in the Complaint before pursuing civil remedies—a condition precedent that she has not met.[53] In addition, the Moving Defendants argue that the Court lacks jurisdiction over Vivian's claim under the inheritance theory of ownership because they necessarily involve "unresolved predicate questions" about the assets of Alfredo Czarninski's estate, which the Court also lacks jurisdiction to determine.[54]

B. Failure to State a Claim

1. Laches

Vivian concedes that the presumptive limitations period governing her equitable claims is three years.[55] She argues, however, that she has alleged unusual circumstances that warrant application of a limitations period longer than three years.[56] Alternatively, Vivian contends that she has alleged facts that demonstrate a reasonably conceivable basis for tolling of the laches period, particularly under the doctrines of fraudulent concealment and equitable tolling.[57]

The Moving Defendants argue that Vivian's claims accrued when the Group stock was transferred to the BVI Companies, which occurred more than four years before the Complaint was filed. This timeline, they assert, means that the claims are presumptively untimely under laches. The Moving Defendants also insist that Vivian was on inquiry notice more than three years before she filed the Complaint, which would make tolling inappropriate, because reasonable diligence would have revealed facts giving rise to her claims.[58]

2. The Article 17 Claim

Vivian contends that the allegations of the five-part scheme involving the Moving Defendants support the Article 17 Claim.[59] She further argues that a criminal judgment is not a required element to sustain that claim for civil remedies.[60] The Moving Defendants take a contrary position, maintaining that a criminal judgment, which Vivian did not obtain, is a necessary element of relief for the Article 17 Claim.[61] In addition to this criminal judgment prerequisite argument, the Moving Defendants argue that Article 17 is a remedial statute and not a cause of action. They assert, moreover, that Vivian has not alleged that the Individual Defendants acted in the name of companies, making her reliance on Article 17 inappropriate.[62]

3. The Unjust Enrichment Claim

Vivian contends that her allegations support the Unjust Enrichment Claim arising under general principles of Ecuadorian law.[63] The Moving Defendants do not challenge the substance of the allegations, as they instead point to a procedural limitation for this claim. All parties recognize that unjust enrichment is a so-called subsidiary action: it is a claim of last resort available only if Vivian could not have asserted any other cause of action.[64] The Moving Defendants argue that unjust enrichment is unavailable here because Vivian could have sought relief under Article 17 had she first obtained the necessary criminal judgment.[65]

4. Res Judicata or Collateral Estoppel

The Moving Defendants contend that Vivian's claims are barred by either res judicata or collateral estoppel in light of Vivian's prior petitions for intervention to the Superintendent in Ecuador. Because Vivian's petitions for intervention in El Rosado Group were denied or not appealed, they argue Vivian cannot relitigate those legal claims or factual issues here.[66] Vivian challenges the Moving Defendants' statement of Ecuadorian law. She argues that neither res judicata or collateral estoppel applies here because Ecuador does not apply either doctrine to administrative decisions such as the Superintendent's review of her petitions for invention.[67]

V. ANALYSIS

A. Subject Matter Jurisdiction

1. The Standard of Review

If a party moves to dismiss under Court of Chancery Rule 12(b)(1), the non-moving party bears the burden of establishing the Court's jurisdiction.[68] In this analysis, the Court should accept the material factual allegations in the complaint as true, [69] and "all inferences therefrom [should be] construed in [the non-moving party's] favor."[70] The Court should determine if equitable jurisdiction is present based not on any "magic words, "[71] but rather upon its review of whether the complaint asserts equitable rights or seeks equitable remedies.[72] Although the Court may look beyond the complaint, the inquiry should be "as of the time of filing"; subsequent events "are generally irrelevant."[73]

Just as the parties can raise subject matter jurisdiction under Rule 12(b)(1), so too can the Court examine this issue on its own under Rule 12(h)(3).[74] The Court's subject matter jurisdiction cannot be determined by contract, [75] by consent in the pleadings, [76] or even by procedural waiver.[77] That the Defendants may have conceded that the Court has equitable jurisdiction[78] does not, in Vivian's words, "end the inquiry"[79]—equitable jurisdiction must be found by the Court.[80] For this reason, the Court will consider whether it has equitable jurisdiction over Vivian's claims against all Defendants, even though Johny and Danny did not expressly assert that ground in their motion to dismiss.

2. The Scope of the Court's Equitable Jurisdiction

Three situations fall within the Court's limited jurisdiction: "(1) one or more of the plaintiff's claims for relief is equitable in character, (2) the plaintiff requests relief that is equitable in nature, or (3) subject matter jurisdiction is conferred by statute."[81] The equitable rights asserted or remedies sought need not arise under Delaware law, since this Court is capable of adjudicating such rights and remedies under the laws of foreign jurisdictions.[82] But, as a matter of judicial comity, this Court should not exercise jurisdiction where the claims are within the exclusive jurisdiction of a foreign tribunal[83]—such as a violation of criminal laws[84] or a proceeding involving a foreign estate with no Delaware assets.[85]

Common equitable rights within the Court's jurisdiction are "fiduciary rights and duties."[86] Equitable remedies are those in which "the available remedy at law is not fully sufficient to protect or redress the resulting injury under the circumstances."[87] Where the claim asserted is equitable, a request for monetary damages does not render this Court unable to hear the equitable claim.[88] In other words, if the right asserted is not equitable, only if the available remedy at law is "sufficient"—meaning "complete, practical and efficient"—would "this Court [be] without jurisdiction."[89]

Some theories of liability, such as unjust enrichment, resist being defined as either equitable rights or equitable remedies.[90] An unjust enrichment claim typically includes a request for a constructive trust, which is an equitable remedy that generally brings the claim within this Court's jurisdiction.[91] But, this Court has found that a complaint seeking a constructive trust "will only invoke . . . equitable jurisdiction if there is 'either an identifiable fund to which plaintiff claims equitable ownership . . . or the legal remedy will be inadequate for another reason—such as the distinctively equitable nature of the right asserted.'"[92]

Not every claim that a party alleges needs to be equitable. Under the so-called clean-up doctrine, if this Court may hear at least one claim, then it has discretion to resolve the non-equitable, legal claims involving the same controversy.[93] This doctrine is limited to ancillary legal questions—not matters totally outside the Court's jurisdiction, such as punitive damages.[94]

Vivian alleges the Court has equitable jurisdiction under 10 Del. C. § 341, [95]arguing that she has asserted equitable rights.[96] The Court finds it appropriate to analyze Vivian's claims separately by theory of Group stock ownership: first, as a stockholder of record; and second, as a purported heir by intestate succession.

3. Equitable Jurisdiction under the Stockholder of Record Theory

(a) The Article 17 Claim

Evaluating the Complaint in its entirety, the Court finds that Vivian has met her burden to establish that the Article 17 Claim is based on a fiduciary duty. Vivian alleges that the Individual Defendants owed fiduciary duties to her as a stockholder of record because of their positions in El Rosado Group and their management and control over her property, namely, her alleged stockholdings.[97]By extension, those fiduciary duties also support the Court's jurisdiction over the Article 17 Claim against the Delaware LLCs, or, at least, clean-up jurisdiction.[98]Vivian's request for monetary relief does not alter the equitable nature of these rights.[99]

Notwithstanding this analysis, the Court could still lack jurisdiction if the Article 17 Claim involves Ecuadorian criminal law issues.[100] The Defendants maintain that Vivian cannot assert this claim without a preceding judgment against the Individual Defendants, which would presumably only be available in an Ecuadorian tribunal.[101] The Court held a Rule 44.1 hearing during which the parties presented expert testimony on Article 17, and the experts disagreed over whether a criminal judgment is required for civil liability under that statute.[102] As a result, the Court must interpret Ecuadorian law for jurisdictional purposes.

The relevant statute, Article 17, provides:

For frauds, misuses, or de facto proceedings that are committed in the name of companies and other natural persons or legal entities, they will be personally and jointly liable those:
1. Who ordered or executed them, without prejudice to the liability that said persons may affect;
2. Who obtained a profit from it, up to its value; and
3. Who are the holders of assets for the effecting of restitution.[103]

The Defendants concede that Article 17 provides for civil liability for certain unlawful conduct.[104] But, they assert, where the conduct alleged is criminal, Article 41 of Ecuador's Code of Criminal Procedure ("Article 41") restricts civil liability until after a criminal judgment is obtained.[105] This statutory interpretation puts the Defendants in the awkward position of arguing that the Complaint "alleges conduct that constitutes criminal conduct under Ecuadorean law" [106]—specifically under Article 560 for misappropriation and abuse of trust[107] and Article 563 for deceit[108] of Ecuador's Penal Code. Under this theory, absent a criminal judgment, not only would the Court lack equitable jurisdiction, but also "even a civil court in Ecuador would lack jurisdiction."[109]

In response, Vivian argues that a criminal judgment is not a necessary element of the Article 17 Claim such that the Court has jurisdiction, independent of whether the conduct alleged in the Complaint is criminal.[110] For support, she presented the Orrantia litigation in which Ecuador's National Court of Justice[111]allowed a civil claim under Article 17 against an individual for fraud and abuse committed in the name of a company without a preceding criminal judgment against that person.[112] The Defendants argue that Orrantia is distinguishable as a case of contractual liability, in contrast to the fiduciary relationship alleged here, [113]but the Court does not find the distinction persuasive.[114] The Defendants do not challenge that, in the Orrantia litigation, a civil Ecuadorian court exercised jurisdiction without a criminal judgment.[115] As Vivian's expert conceded, judicial decisions in Ecuador may not be binding, but they are nevertheless "very persuasive."[116] The Court is unwilling to contradict this persuasive example here; rather, through expert reports and testimony, Vivian has met her burden to establish the substance of Ecuadorian law.[117]

The interpretation of Article 41 espoused by the Defendants cannot survive scrutiny under public policy grounds articulated by Vivian. Although civil relief would be independently available for abuse under Article 17, once the conduct alleged involves fraud (and thus becomes criminal), the Defendants' argument goes, civil relief is necessarily dependent on, and available only after, the party asserting the claim obtains a criminal judgment. In other words, the Defendants argue that their alleged conduct was so clearly fraudulent as to be criminal such that Vivian cannot assert a claim now unless and until a judge determines that the Individual Defendants' conduct was criminal, [118] which is not possible unless and until a district attorney finds it appropriate to bring criminal charges.[119] Such a reading, in the Court's opinion, would eviscerate Vivian's equitable rights. On policy grounds, especially in light of Orrantia, the Court cannot adopt this reading of Article 41. Instead, the Court finds the more appropriate reading of Article 41 to be that advanced by Vivian's expert: the statute prevents double compensation for an injured party who participated in bringing a criminal action, [120] not any compensation for that party without a criminal judgment.[121] Thus, the Court has equitable jurisdiction over the Article 17 Claim against the Defendants.

(b) The Unjust Enrichment Claim

Vivian has also met her burden to show the Court's equitable jurisdiction over the Unjust Enrichment Claim, which the Defendants largely do not contest.[122]Vivian alleges that the Individual Defendants owed her fiduciary duties and that the Delaware LLCs (and, by extension, the Individual Defendants) unlawfully possess the El Rosado Group stock gained through breaches of fiduciary duty;[123]these allegations satisfy her burden.[124] The requested remedy of "restitution of the fair market value of the [Group] shares of which she has been deprived"[125] does not defeat jurisdiction.[126] By contrast, that Vivian seeks a constructive trust on an identifiable fund—the Delaware LLCs—further supports jurisdiction.[127]

4. Equitable Jurisdiction under the Stockholder by Inheritance Theory

Vivian contends that the Court has equitable jurisdiction, or at a minimum clean-up doctrine jurisdiction, over the Article 17 Claim and the Unjust Enrichment Claim for the El Rosado Group stock that she is entitled to inherit from her father. Vivian requests that the Court "afford full faith and credit to the decision of the Israeli court, " which allegedly found that each of Vivian, Johny, and Danny should receive one-third of Alfredo Czarninski's estate under Ecuador's laws of intestate succession.[128] So armed, Vivian argues that the Court should divide Alfredo Czarninski's estate accordingly and thereby allow her to assert claims as a Group stockholder by inheritance.[129] This request for relief begets an unanswered question: is Group stock among the assets in Alfredo Czarninski's estate?

As a matter of comity, the Court is without jurisdiction to answer that question. None of these assets was alleged to have been in Delaware, let alone owned by the Delaware LLCs, when Alfredo Czarninski died in 2003, as those entities did not even exist until 2008. Vivian has cited one case in which this Court exercised jurisdiction over claims related to a foreign estate—a case in which the plaintiff, a beneficiary, co-executor, and co-trustee of an estate duly probated in Quebec, Canada, filed claims against the co-executors and co-trustees for alleged unpaid tax obligations from stock held by the estate in a Delaware corporation.[130]This case does not stand for the proposition that the disposition of entirely non-Delaware assets of a foreign estate may be within this Court's limited jurisdiction; it supports the opposite.[131] That a portion of Alfredo Czarninski's estate's assets may have been subsequently transferred to the Delaware LLCs after his death does not expand the Court's equitable jurisdiction to determine the estate's assets.

For reasons similar to why the Court lacks jurisdiction to award punitive damages, [132] so too does it lack jurisdiction over Vivian's claims here as a beneficiary of her father's estate's stock in El Rosado Group.[133] Not even the clean-up doctrine can overcome the overwhelming concerns of comity; even if it did, the Court would likely be justified in declining to exercise that discretion.[134]In any event, Vivian has not established that Ecuadorian law would allow for administration of Alfredo Czarninski's estate in Delaware, and she thus has not met her burden to show that the Court has jurisdiction over her claims based on this theory of stock ownership.

In sum, the Court has subject matter jurisdiction over Vivian's Article 17 Claim and Unjust Enrichment Claim under the stockholder of record theory. The Court lacks subject matter jurisdiction over Vivian's claims under the stockholder by inheritance theory.

B. Failure to State a Claim[135]

1. The Standard of Review

In its review under Court of Chancery Rule 12(b)(6), the Court accepts the well-pleaded allegations of fact in the Complaint as true, including "even vague allegations . . . if they provide the defendant[s] notice of the claim, " and it views all reasonable inferences from these allegations in favor of Vivian as the party asserting the claim.[136] But, the Court need not "accept conclusory allegations unsupported by specific facts, nor . . . draw unreasonable inferences in [Vivian's] favor."[137] Under this inquiry, the Court should only grant the motion to dismiss if Vivian "could not recover under any reasonably conceivable set of circumstances susceptible of proof."[138]

2. Laches

Because Vivian's claims sound in equity, the limitations doctrine that applies is laches, which focuses on whether an unreasonable delay in asserting the claim has unfairly prejudiced the defendant.[139] This Court frequently uses the analogous statutory limitations period as the presumptive limitations period for laches.[140] Where a party files a claim after the presumptive period, the claim is likely time-barred "except in the 'rare' and 'unusual' circumstance that a recognized tolling doctrine excuses the late filing."[141]

The Court does not need to engage in a traditional laches analysis for a presumptively late complaint.[142] Instead, the Court may look to the complaint to determine if there are sufficient allegations that the period should be tolled.[143]There is no rule barring this doctrine as the basis for dismissal under Rule 12(b)(6) where "it is clear from the face of the complaint that [laches] exists and that the plaintiff can prove no set of facts to avoid it."[144] Indeed, this Court has dismissed claims upon laches grounds at the motion to dismiss stage.[145] But, since the standard of review under Rule 12(b)(6) is only of reasonable conceivability based on the complaint, "affirmative defenses, such as laches, are not ordinarily well-suited for treatment on such a motion, " even though the Court may reach a different answer with a more developed factual record.[146]

(a) What is the Presumptive Limitations Period?

Under Delaware's borrowing statute, [147] the applicable limitations period for these claims is three years, the shorter of Delaware's analogous statute of limitations for fiduciary duty and unjust enrichment[148] and the limitations period under Ecuadorian law.[149] The presumptive three year period began when Vivian's claims accrued, unless it should be tolled.[150]

(b) When Did Vivian's Claims Accrue?

Vivian's causes of action accrued when the allegedly harmful conduct took place, "even if [she was then] unaware of the cause of action or the harm."[151]Vivian argues that her claims accrued upon what she considers the last step of the Moving Defendants' fraudulent scheme—when the last Group stock was transferred to the Delaware LLCs in December 2009, which would make the September 28, 2011, Complaint timely.[152] In opposition, the Moving Defendants argue that the claims accrued "at the moment [they] removed their allegedly ill-gotten gains from the El Rosado Group Companies to the BVI Companies, " which purportedly occurred in March 2006 and August 2007.[153] The Moving Defendants' argument would render the Complaint presumptively untimely.

The Complaint includes one (repeated) allegation that the transfers of Group stock to the Delaware LLCs were made for no consideration;[154] the Court finds this allegation, without more, insufficient to support Vivian's position on claim accrual. Vivian does not allege to have been a stockholder of either the BVI Companies or the Delaware LLCs; in other words, she does not allege to have been on either side of these transactions. The transfer of El Rosado Group stock from the former to the latter thus cannot be said to have caused additional damage to Vivian as a purported Group stockholder. It would be unreasonable for the Court to infer from the Complaint that Vivian's claims did not accrue until the transfer to the Delaware LLCs. Viewing the allegations in the Complaint most favorably to Vivian, the Court finds that the alleged fraudulent scheme was complete, and the claims accrued, no later than when the stock in El Rosado Group was transferred to the BVI Companies in 2006 and 2007, with the last transaction in October 2007.

(c) Should the Limitations Period be Tolled?

Vivian initially argued that she alleged facts supporting tolling under all three recognized grounds:[155] an inherently unknowable injury, fraudulent concealment, and equitable tolling.[156] In subsequent filings, she did not argue that the alleged injury was inherently unknowable, which would require her to show that "[n]o objective or observable factors . . . exist[ed] that might have put [her] on notice of an injury."[157] Absent a contrary argument, the Court finds Vivian's allegations that she was "blamelessly ignorant" of the alleged scheme and that the injuries were inherently unknowable "[g]iven her physical distance from Ecuador, her lack of access to El Rosado [Group] information, and her deference to her brothers"[158] to be insufficient to support tolling under this theory.

Tolling under fraudulent concealment requires Vivian to allege an "actual artifice by the [Moving] [D]efendant[s] that either prevented [her] from gaining knowledge of material facts or led [her] away from the truth."[159] Vivian alleged that the Moving Defendants, especially through the actions of Johny and Danny, fraudulently concealed their conduct—namely, by their "deliberately neglecting to send her corporate notices, in violation of Ecuadorian law"; by misrepresentations made by their Israeli counsel; and by Johny's 2007 statement to Vivian.[160]

Aside from the statement in 2007, Vivian does not allege when the fraudulent concealment occurred. But, such an omission at the pleadings stage may be unsurprising where the alleged fraudulent concealment includes the failure to send required notices. This failure, as alleged, would prevent her from gaining knowledge of these material facts. Viewed separately, these allegations may not support a finding of fraudulent concealment. But, considered collectively, the Court finds that these allegations support a reasonably conceivable basis for tolling under fraudulent concealment.

Finally, under equitable tolling, the Court may find that the limitations period should be delayed during the period where Vivian alleges she "has reasonably relied upon the competence and good faith of a fiduciary."[161] The Moving Defendants do not contest that Vivian's relationship with the Individual Defendants was fiduciary in nature because of their positions in El Rosado Group and their control over her property.[162] Throughout the Complaint, Vivian alleges good faith reliance on the Individual Defendants. Thus, the Court also finds a reasonably conceivable basis for equitable tolling of Vivian's claims against the Moving Defendants.

(d) Was Vivian on Inquiry Notice?

Even the most persuasive allegations of tolling can only delay the limitations period until the party asserting the claim was on inquiry notice.[163] That point is when the party discovers facts "constituting the basis of the cause of action or the existence of facts sufficient to put a person of ordinary intelligence and prudence on inquiry which, if pursued, would lead to the discovery" of the claim.[164] Said differently, Vivian was on inquiry notice if exercising reasonable diligence should have revealed facts giving rise to the harm.[165]

Vivian alleges she first was aware of the Moving Defendants' conduct in August 2010.[166] In turn, the Moving Defendants argue that Vivian was put on inquiry notice when documents evidencing the allegedly wrongful Group consolidations, stock dilutions, and transfers to the BVI Companies were filed with the Superintendent, and thus available to Vivian if she exercised what they consider to be reasonable diligence. It is the Defendants contention that Vivian's failure to discover the alleged fraud for more than five years, where she alleges to be a sizeable minority stockholder in companies purportedly worth hundreds of millions of dollars, is evidence that she was not reasonably diligent.[167]

At the Rule 44.1 hearing, both parties' experts testified that a so-called public deed evidencing the transformation of a limited liability company to a corporation, the merger of two companies, a capital increase, and the transfer of stock must be filed with the Superintendent before the proposed transaction can occur.[168] But, Vivian's expert contends that it is "[v]ery, very difficult" to find a public deed—in his opinion, a public deed can only be found by someone with some background knowledge of when and where the public deed was filed.[169] The Moving Defendants may not agree with this opinion, but they did not disagree with the opined difficulty in finding a public deed. The Court credits Vivian's expert and thus cannot say now at the motion to dismiss stage that reasonable diligence required Vivian to search for public deeds where she had no information from which to begin a search.[170]

Moreover, the Moving Defendants' argument here centers on what they claim the public deeds would have revealed to Vivian had she found them.[171]Despite how persuasive this evidence might be, the Court's analysis under Rule 12(b)(6), as Vivian correctly notes, [172] is limited to the facts as alleged in the Complaint. The Defendants have not argued that these filings were incorporated or otherwise integral to Vivian's Complaint, so the Court may not consider them now to determine whether the Complaint states a claim.[173] Consequently, Vivian cannot be said to have been on inquiry notice before August 2010.

Therefore, Vivian's claims cannot be dismissed under laches at this time.

3. The Article 17 Claim

The Moving Defendants assert that Article 17 does not provide relief here because Vivian has not alleged that the fraud and abuse was committed in the name of companies. Their other primary argument is based on the premise that a civil claim alleging fraud under Article 17 requires a preceding criminal judgment, which, as they note, Vivian does not allege that she obtained. For the reasons set forth earlier, based on the persuasive Orrantia precedent and legal policy, the Court accepts that the Article 17 Claim can proceed against the Moving Defendants without a criminal judgment against the Individual Defendants.[174]

Vivian alleges that she was not notified about the fraudulent consolidation of entities, the capital increases, or the transfers of El Rosado Group stock. Johny, Danny, and Taly allegedly took these actions, and thereby committed fraud and abuse through their control of El Rosado Group and the BVI Companies—in other words, in the name of companies.[175] The Court need not determine whether the alleged fraud and abuse was committed in the name of El Rosado Group, the BVI Companies and the Delaware LLCs, or all, because Johny, Danny, and Taly acted in the name of companies on both sides of the transactions at issue. These allegations state a reasonably conceivable basis for the Article 17 Claim. Accordingly, the Court may not dismiss this claim for failure to state a claim upon which relief can be granted.[176]

4. The Unjust Enrichment Claim

Vivian's Unjust Enrichment Claim does not arise under any specific provision of Ecuador's Civil Code. Instead, in the words of Vivian's expert, the cause of action reflects a "universal principle of law."[177] The Moving Defendants have, in effect, conceded that this remedy is likely available under Ecuadorian law, noting that "some jurists and the National Court of Justice have suggested that a cause of action akin to unjust enrichment would be recognized in Ecuador."[178]

But, the Moving Defendants insist that the Court can only find that Vivian has alleged a reasonably conceivable basis for the Unjust Enrichment Claim, as a subsidiary action, if Vivian did not have any other cause of action available to her.[179] Vivian, in large part, has agreed with this position, [180] and so too does the Court.

Article 17 would provide relief, in Vivian's own opinion, against a party "who (1) commits fraud or abuse on behalf of companies, (2) takes advantage of corporate fraud or abuse, or (3) is holding property gained through corporate fraud or abuse."[181] This statutory interpretation provides relief against Danny, as an individual who committed fraud and abuse on behalf of El Rosado Group companies, his BVI Company, or Vistamar LLC, and against the Delaware LLCs as entities holding stock in El Rosado Group gained through the Individual Defendants' corporate fraud and abuse. Vivian has not met her burden to show how the Unjust Enrichment Claim would provide for remedies greater than those afforded by the Article 17 Claim.[182] Thus, that the Article 17 Claim is an available cause of action renders the Unjust Enrichment Claim unavailable.

Therefore, the Court must dismiss the Unjust Enrichment Claim against the Moving Defendants for failure to state a claim upon which relief can be granted.

5. Res Judicata or Collateral Estoppel

The Moving Defendants argue that Vivian's claims of wrongful conduct by Johny, Danny, Taly, and El Rosado Group are barred by res judicata or collateral estoppel based on administrative decisions rendered in Ecuador. Vivian contends that Ecuadorian law does not grant preclusive effect to the Superintendent's decisions. The Court agrees with Vivian's presentation of Ecuadorian law and concludes that neither res judicata nor collateral estoppel bars the Article 17 Claim.

Res judicata and collateral estoppel are related doctrines that preclude repetitive litigation. Res judicata prevents a party "from bringing a second suit based on the same cause of action after a judgment has been entered in a prior suit involving the same parties."[183] Collateral estoppel "prohibits a party from relitigating a factual issue that was adjudicated previously."[184] When a party asks the Court to apply res judicata or collateral estoppel to a foreign judgment, "the preclusive effect of a foreign judgment is measured by standards of the rendering forum."[185] Accordingly, the Court must determine the preclusive effect under Ecuadorian law of Vivian's petitions for intervention to the Superintendent.

In a petition for intervention, a stockholder requests the Superintendent to review potential wrongful conduct by the corporate entity.[186] Vivian filed petitions for intervention for both El Rosado Corp. and Lavie. The El Rosado Corp. petitions were denied, [187] but the Lavie petition was granted.[188]

At the Rule 44.1 hearing, Vivian's expert explained that the Ecuadorian courts are not bound by the legal or factual decisions of the Superintendent not only because the Superintendent is only an administrative agency, but also because of express language to that effect in the Superintendent's decisions.[189] The Moving Defendants concede that res judicata does not apply to administrative decisions, [190]but they maintain, based on their expert's report, that because Vivian failed to challenge the Superintendent's decisions in court, "the effects of the Superintendency's decision[s] become final, and they equate to a kind of res judicata because they are immutable."[191] In contrast, Vivian's expert testified that the failure to appeal does not have preclusive effects outside of that petition.[192]

The Court is not persuaded by the Moving Defendants' expert and instead accepts Vivian's expert's testimony. Therefore, because the Court has determined that an Ecuadorian court would not find the Superintendent's decisions preclusive for claims or factual questions, Vivian's Article 17 Claim is not barred by either res judicata or collateral estoppel.

VI. CONCLUSION

For the preceding reasons, Vivian's claims against the Defendants under the theory of Group stock ownership by inheritance are dismissed under Rule 12(b)(1) for the Moving Defendants and under Rule 12(h)(3) for Johny and Taly. The Moving Defendants' 12(b)(6) motions are granted only as to the Unjust Enrichment Claim. Otherwise, the motions to dismiss are denied.

Counsel are requested to confer and to submit an implementing form of order.


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