United States District Court, D. Delaware
March 18, 2014
WAKLEY LIMITED, Plaintiff-Counterclaim, Defendant,
ENSOTRAN, LLC, Defendant-Counterclaim, Plaintiff, ENSOTRAN, LLC, Third-Party Plaintiff,
DONNA BAAR, ROGER BAAR, ROSEBANK ENTERPRISES, INC., and YUAN GONG YI a/k/a ELMER YUEN, Third-Party Defendants
GREGORY M. SLEET, Chief District Judge.
On July 25, 2012, the plaintiff, Wakley, Limited ("Wakley"), filed an Amended Complaint asserting five counts against the defendant, Ensotran, LLC ("Ensotran"), including: breach of contract, conversion, fraudulent misrepresentation, negligent misrepresentation, and unjust enrichment. (D.I. 6.) On September 17, 2012, Ensotran filed an Answer to Wakley's Amended Complaint, asserted Counterclaims against Wakley, and filed a Third-Party Complaint against Elmer Yuen ("Yuen"), Donna Baar ("Donna"), Roger Baar ("Roger"), and Rosebank Enterprises, LLC ("Rosebank") (collectively, the "third-party defendants"). (D.I. 8.) Ensotran's Counterclaim/Third-Party Complaint asserts claims against Wakley and the third-party defendants for conversion and breach of fiduciary duty as to "embezzled funds, " seeks injunctive relief protecting confidential information under theories of contract breach of fiduciary duty, and conversion, and seeks injunctive relief for the return of financial records. ( Id. at 25-41.) Presently before the court is Donna's, Roger's, and Rosebank's (collectively, the "moving third-party defendants") Motion to Dismiss the Third-Party Complaint pursuant to Federal Rules of Civil Procedure 12(b)(2, 4-6). (D.I. 24.) On June 26, 2013, the court ordered Ensotran and the moving third-party defendants to submit supplemental briefing addressing whether the court may exercise personal jurisdiction over Donna and Roger under 6 Del. C. § 18-109, specifically regarding whether Donna and Roger acted only as delegates or representatives of Wakley and/or the Ensotran Board. (D.I. 46.) For the reasons that follow, the court grants the moving third-party defendants' motion to dismiss the Third-Party Complaint under Rule 12(b)(2) for lack of personal jurisdiction.
Wakley is a company located in Hong Kong that invests in technology companies. (D.I. 6 at 1.) Yuen is Wakley's principal. (D.I. 8 at 12; D.I. 49 at 4.) Donna and Roger are married and reside in California. (Id.) Rosebank is a California corporation that is owned and controlled by Donna and Roger. ( Id. at 13.)
Ensotran is a Delaware limited liability company that acts as a holding company for intellectual property, including a low-cost manufacturing process for producing wire-grid polarizers. ( Id. at 11-12.) Primal Fernando ("Fernando") is the inventor of Ensotran's wire-grid polarizer manufacturing process. ( Id. at 13.) Fernando and Steven Fischer ("Fischer") founded Ensotran in the fall of 2010. ( Id. at 14.)
In late November 2011, Yuen was introduced to Fernando and Fischer, and Yuen introduced them to Roger. (Id.) The third-party defendants entered into a nondisclosure agreement ("NDA") to protect Ensotran's intellectual property rights. ( Id. at 15.) Ensotran then disclosed its wire-grid polarizer manufacturing process, which was being developed at the College of Nanoscale Science & Engineering at the State University of New York in Albany, New York ("CNSE"). (Id.)
On or about January 3, 2012, Yuen and Ensotran concluded negotiations whereby Wakley would purchase a one third equity interest in Ensotran for a purchase price of $1, 666, 666.67. ( Id. at 16-17.) Wakley and Ensotran then revised an Offering of Membership Interests Term Sheet ("Term Sheet"), which set the parameters for the transaction. (Id.; Id., Ex. E.) The revised Term Sheet provided that Ensotran would be managed by a three-member board, consisting of: (1) Fernando, Chief Executive Officer of Ensotran, (2) Fischer, President of Ensotran, and (3) Wakley, or a person appointed by Wakley. (ld., Ex. E.) Pursuant to the Term Sheet, Wakley was to appoint a Vice President of Business Development and a Financial Controller to Ensotran, both to be paid by Wakley. ( Id. at 17; Id., Ex. E.)
Wakley appointed Yeun as the third board member, Roger as Vice President of Business Development, and Donna as Financial Controller. (ld. at 18.) Roger's duties were as follows:
The Vice President of Business Development shall report to the Board of Directors. The Vice President of Business Development shall have the sole responsibility to negotiate any sale, or licensing of any of the assets of Ensotran LLC, or the sale of Ensotran LLC or its involvement in any joint ventures, subject to the decisions and instructions of the board.
( Id., Ex. E (emphasis added).) Donna's duties were as follows:
The Financial Controller shall report to the Board of Directors. The Financial Controller shall have complete oversight and management of the finances of Ensotran LLC, subject to the decisions and instructions of the board.
(Id. (emphasis added).)
Wakley transferred $1, 666, 666.00 to Ensotran's bank account in two installments. ( Id. at 19; Id., Ex. F.) On February 21, and April 12, 2012, Donna prepared balance sheets that indicated Wakley had a one third equity interest in Ensotran based on Wakley's investment. ( Id. at 19; Id., Exs. G, H.)
Beginning in February 2012, Yuen and Roger became more involved in Ensotran's day-to-day operations. ( Id. at 21.) By April 2012, the parties' had diverging opinions on how to develop a wire-grid polarizer prototype. Yuen and Roger preferred a photo lithographic imaging "chemical" process, while Fernando pursued a nano-imprint "mechanical" process. ( See D.I. 37 ("Fernando Aff."), ¶ 7.) Ensotran asserts that Roger took control of Ensotran's day-to-day operations and the technology involved in developing a prototype wire-grid polarizer on April 18, 2012. (D.I. 8 at 21; Id., Ex. N.) Over the next month, Roger continued to control Ensotran's day-to-day operations, and obtained further technical information from Fernando to develop a wire-grid polarizer prototype. ( Id. at 22; Id., Ex. 0.)
On May 16, 2012, Donna caused $989, 914.53 to be transferred from Ensotran's bank account to Rosebank. ( Id. at 22; Id., Ex. P.) At that time, Donna was the only signatory on Ensotran's bank account. Fernando and Fischer did not have prior knowledge of the transfer, and Donna did not notify them after she transferred the funds. ( Id. at 22-23.) Donna then prepared a new balance sheet that listed Wakley as a creditor that had loaned $722, 070.97 to Ensotran, and not an equity member that had purchased a one-third equity interest in Ensotran for $1, 666, 666.00. ( Id. at 23; ld., Ex. Q.)
On June 1, 2012, Roger, on behalf of Yuen and Wakley, told Fischer that Wakley would bankrupt Ensotran unless Wakley received a 55% interest in Ensotran, based on the funds invested by Wakley that had been expended as of May 31, 2012. ( Id. at 23.) On June 2, 2012, Donna e-mailed Fernando, Fischer, and Roger a copy of the "Ensotran LLC Balance Sheet As of June 1, 2012, " and in the covering e-mail wrote: "Wakley's involvement in [E]nsotran is now listed as a loan, since no agreement was ever put in place." (ld.; Id., Ex. Q.) On June 6, 2012, Ensotran rejected Wakley's June 1 demand. ( Id. at 23.) Ensotran subsequently became insolvent and this litigation ensued.
III. STANDARD OF REVIEW
Federal Rule of Civil Procedure 12(b)(2) requires that the court dismiss an action when it lacks personal jurisdiction over the defendant. In resolving a motion under Rule 12(b)(2), the court must accept the allegations in the complaint as true and construe disputed facts in favor of the plaintiff. Miller Yacht Sales, Inc. v. Smith, 384 F.3d 93, 97 (3d Cir. 2004). However, the plaintiff bears the burden of alleging facts sufficient to make a prima facie showing of personal jurisdiction over the movant. ICT Pharms., Inc. v. Boehringer Ingelheim Pharms., Inc., 147 F.Supp.2d 268, 270-71 (D. Del. 2001). To meet this burden, the plaintiff must offer facts which "establish with reasonable particularity" that jurisdiction exists. Id. Generally, the court may consider only those facts alleged in the pleadings, the documents attached thereto as exhibits, and matters of judicial notice. El-Hewie v. Bergen Cnty., 348 F.Appx. 790, 794 (3d Cir. 2009); Southern Cross Overseas Agencies, Inc. v. Kwong Shipping Grp. Ltd., 181 F.3d 410, 426 (3d Cir. 1999).
The moving third-party defendants contend that the court must dismiss Ensotran's Third-Party Complaint in its entirety on procedural grounds because Ensotran fails to establish personal jurisdiction over Donna, Roger, and Rosebank. (D.I. 25 at 2.) In contrast, Ensotran argues the court has personal jurisdiction over Donna and Roger because they were managers of Ensotran. (D.I. 36 at 4-5.)
A. Personal Jurisdiction
Under Delaware law, there are "two bedrock requirements for personal jurisdiction: (1) a statutory basis for service of process; and (2) the requisite minimum contacts' with the forum to satisfy constitutional due process." Fisk Ventures, LLC v. Segal, C.A. No. 3017-CC, 2008 WL 1961156, *6 (Del. Ch. May 7, 2008). Although plaintiffs have "a relatively light burden" to establish a prima facie basis for personal jurisdiction, the Court of Chancery has stated "[c]ourt[s] should exercise caution in extending jurisdiction over nonresident defendants whose direct ties to Delaware are, at best, tenuous." Ross Holding & Mgmt. Co. v. Advance Realty Grp., C.A. No. 4113-VCN, 2010 WL 1838608, at *15 (Del. Ch. Apr. 28, 2010). Here, Donna and Roger are residents of California, Yuen is a citizen of The People's Republic of China, and none of them had contact with the State of Delaware during the relevant events. Accordingly, the court approaches the personal jurisdiction question with due caution.
1. Personal Jurisdiction over Yuen, Donna, and Roger
Ensotran's Third-Party Complaint asserts the court can exercise personal jurisdiction over Yuen, Donna, and Roger pursuant to 6 Del. C.§ 18-109, an "implied consent statute" that allows for jurisdiction over managers of Delaware limited liability companies ("LLCs") in actions "involving or relating to the business of the [LLC]" or a violation by the manager of a fiduciary duty to the LLC. 6 Del. C. § 18-109(a). The statute only applies to "managers" of an LLC, which are defined as either (1) "a person who is named... or designated as a manager" pursuant to the operative LLC agreements or (2) a "person who participates materially in the management of the limited liability company." See 6 Del C. §§ 18-109(a)(i, ii); 18-101(10). However, § 18-407 of the LLC Act makes clear that a manager's delegation of authority to another person does not cause that individual to become a manager of the LLC. See 6 Del. C. § 18-407
Here, Ensotran's Term Sheet explicitly provides that "[t]he Company will be managed by a three member Board of Directors, " and states that Fernando, Fischer, and Wakley are the board members. (D.I. 8, Ex. E.) Ensotran's Third-Party Complaint alleges that Wakley appointed Yuen as its board member. ( Id. at 18.) Accordingly, the court finds it has a statutory basis for exercising personal jurisdiction over Yuen, a cause he is a "manager" of Ensotran under 6 Del C. § 18-109(a)(i).
However, neither Roger nor Donna was appointed as a manager of Ensotran pursuant to the operative LLC agreement. Nevertheless, Ensotran contends that because Roger's position as Vice President of Business Development and Donna's position as Financial Controller was provided for under the "Management" section of the Term Sheet, Roger and Donna were necessarily designated as managers of Ensotran. (D.I. 50 at 1, 3; D.I..8, Ex. E.) The court disagrees. Irrespective of the section heading, the section's provisions delineate that the three mangers of Ensotran are Fernando, Fischer, and Wakley (Yuen). (D.I. 8, Ex. E.) The Term Sheet does not grant Roger and Donna managerial authority over Ensotran or Wakley. ( See id.) Indeed, pursuant to the Term Sheet, Roger and Donna were required to "report to the Board of Directors" and their authority was "subject to the decisions and instructions of the board." (D.I. 8, Ex. E.) Therefore, the court finds that Roger and Donna are not managers of Ensotran under § 18-109(a)(i).
Next the court must determine whether Roger and Donna are "managers" under § 18-109(a)(ii) because they participated materially in the management of Ensotran. For insight into this narrow issue of law, the court refers to Vichi v. Koninklijike Philips Elecs. NV, No. 2578-VCP, 2009 WL 4345724 (Del. Ch. Dec. 1, 2009). In Vichi, the plaintiff asserted that the defendant, Ho, participated materially in the management of a Delaware LLC ("Finance") by having a direct role in forming Finance, and executing certain documents relating to the issuance of notes on Finance's behalf. Id. at *7. The Court of Chancery found the assertions were not sufficient to establish personal jurisdiction under § 18-109(a) for two reasons. First, the court found that Vichi did not allege any specific facts from which it could reasonably infer that Ho personally participated materially in the management of Finance, rather than simply at the direction of, and as a representative for, his formal employer, which was the sole member and manager of Finance. Id. The Vichi Court reasoned that Ho did not benefit from the formation of Finance or the notes transaction, because he did not have an ownership share in the LLC or a personal stake in the notes transaction. Id. Second, the court found that the allegations did not "involve or relate to the business of Finance, " a necessary predicate to jurisdiction under § 18-109, because "all of the counts that Vichi asserts against Ho relate to the transaction between Finance and Vichi or to breaches of fiduciary duties allegedly owed to Vichi personally. None of these counts relate to the rights, duties and responsibilities Ho owes to Finance, or in any other way to the internal business affairs of Finance or to the running of Finance's day-to-day operations." Id. at *8. Therefore, the Vichi Court found § 18-109 provided no basis for exercising personal jurisdiction over Ho. Id.
Here, both parties claim the Vichi reasoning supports their case. The moving third-party defendants assert that Roger, like defendant Ho, served as a representative for Wakley in dealing with Ensotran, and Donna, at Wakley's direction, provided certain services for Ensotran. (D.I. 49 at 4.) They emphasize that neither Donna nor Roger possessed an ownership interest in Ensotran or had a personal stake in the company. As such, they argue "Donna and Roger were, at all times, paid employees of Wakley and acting at the direction of Wakley and its principal, Elmer Yuen." (Id.) Therefore, the moving third-party defendants contend that the limited role Donna and Roger performed at the request or direction of Wakley did not transform them into a member or manager of Ensotran under 6 Del. C. § 18-407. ( Id. at 4-5.)
In contrast, Ensotran distinguishes Vichi by arguing that once Roger and Donna accepted their positions as Vice President of Business Development and Financial Controller of Ensotran, they were necessarily acting as managers of Ensotran and not merely as representatives of Wakley. (D.I. 5Q at 4.) The court disagrees. As discussed above, the Term Sheet clearly establishes that Roger and Donna were appointed to their position by Wakley, paid employees of Wakley, and their power was "subject to the decisions and instructions of the board." ( See D.I. 8, Ex. E.)
Ensotran further argues Roger's e-mail correspondence with the board establishes that he was "intimately involved in the business affairs of Ensotran and assumed management of the day-to-day operations of Ensotran's main project with CSNE." (D.I. 50 at 1-4; D.I. Exs. M, N, 0.) As such, it argues this case is analogous to a case where the Court of Chancery held a defendant consented to personal jurisdiction under § 18-109 by taking over the day-to-day operations of a Delaware LLC. Phillips v. Hove, C.A. No. 3644-VCL, 2011 WL 4404034 at *22 (Del. Ch. Sept. 22, 2011). Ensotran's reliance on Hove is misplaced. In Hove, the defendant's own testimony established that he "took over... in all respects" the day-to-day operations of the LLC and "effectively ran the business[.]" Id. Further, Hove, without the knowledge or consent of a LLC member, signed bankruptcy petitions on behalf of the LLC, opened up a bank account for the LLC, and then chose to dismiss the bankruptcy proceedings. ld. at *12-14. Through those acts, the court held the "defendant participated materially in the management of [the LLC]." Id. at *22.
Here, the court is not persuaded that the referenced e-mails demonstrate that Roger "took over in all respects" the day-to-day operations and effectively ran Ensotran's entire business. For example, Roger's April 18, 2012 statement that "[he] will be [the] primary contact for the CNSE project(s)" does not equate to Roger taking control of Ensotran's day-to-day operations. (D.I. 8 at 21.) A closer examination of the correspondence indicates that Roger was coordinating Ensotran's photolithography project with CNSE, while Fernando pursued a different manufacturing method elsewhere. ( See id., Ex. N.) In the same e-mail, Roger asks Fernando and Fischer about materials, shipment, and ordering, which suggests that Fernando and Fischer possess the relevant information concerning the project that Ensotran contends Roger wholly manages. (Id.) Similarly, Roger's April 19 e-mail indicates that Fernando and Fischer were the individuals who possessed the relevant information, coordinated with third parties concerning the design of certain materials, and were responsible for executing relevant contracts. ( Id., Ex. 0.)
Further, Ensotran's allegations that Roger assumed management over one of its projects "Ensotran's main project with CSNE" -does not equate to Roger effectively running Ensotran's entire business or an assertion of authority over Ensotran analogous to the facts in Hove. Even accepting all well-pleaded allegations as true, these acts fail to demonstrate the necessary control or decision-making role that has been found to satisfy the statutory standard for personal jurisdiction. Indeed, Roger's April 12, 2012 e-mail actually bolsters his argument that he was acting as a representative of Wakley/Yuen because Roger highlights Yuen's displeasure with the efforts to develop a working polarizer. Therefore, the court finds Roger is not a "manager" under§ 18-109(a)(ii) because he did not participate materially in the management of Ensotran.
With respect to Donna, Ensotran argues that all of its claims against her relate to the "rights, duties and responsibilities she owed to Ensotran" as its financial controller. (D.I. 50 at 4.) It further contends that Donna materially participated in Ensotran's management because she: "(1) was authorized to prepare the financial statements of Ensotran, (2) prepared and maintained Ensotran's books and records setting forth the equity interests of each member, (3) was the sole signatory on Ensotran's bank account, and (4) oversaw and managed the disbursement of approximately $720, 000 of Ensotran's funds." ( Id. at 3.) The court disagrees. The Court of Chancery has stated "[t]he management of the underlying assets of an LLC is analytically distinct from the management of the LLC itself for the purposes of Section 18-109(a)(ii)." Fla. R & D Fund Investors, LLC v. Fla. BOCA/Deerfield R & D Investors, LLC, C.A. No. 8400-VCN, 2013 WL 4734834, ay *8 (Del. Ch. Aug. 30, 2013). The defendant in Florida R & D Fund was granted broad authority by the LLC to run its day-to-day operations. However, the defendant's discretion and decision-making ability was contractually confined by the LLC agreement. Therefore, the court found an allegation that the defendant maintained the books and records "d[id] not constitute material participation in [LLC's] management, especially in light of the designation of the board of directors as the [LLC's] manger." Id.
Here, the court finds Donna's authority was similarly constrained. Although the Term Sheet granted her broad authority over Ensotran's finances, her power was "subject to the decisions and instructions of the board." (D.I. 8, Ex. E.) Therefore, the court finds Donna is not a "manager" under§ 18-109(a)(ii) because she did not participate materially in the management of Ensotran.
The court finds it does not have a statutory basis for personal jurisdiction over Roger and Donna because they are not managers of Ensotran pursuant to 6 Del. C.§ 18-109(a). Ensotran's averments fail to convince the court that Roger and Donna were not acting at the direction of, and as representatives for, Wakley and Yuen. Accordingly, the court finds that roles Roger and Donna performed at the request or direction of Wakley and Yuen did not transform them into a manager of Ensotran under 6 Del. C.§ 18-407.
2. Personal Jurisdiction over Rosebank
Ensotran's Third-Party Complaint asserts the court can exercise personal jurisdiction over Rosebank pursuant to Delaware's Long-Arm Statute, 10 Del. C. § 3104. (D.I. 8 at 13.) However, the Third-Party Complaint does not specify which subsection of § 3104 confers jurisdiction. Ensotran's briefing clarifies its position and relies on § 3104(c)(3), which provides that jurisdiction may be extended over a defendant who "[c]auses tortious injury in the State by an act or omission in this State[.]" (D.I. 36 at 20.) Ensotran argues that a manager's act in violation of a fiduciary duty to a Delaware LLC will suffice as a "tortious injury" directed towards the State of Delaware. ( Id. at 21.) That argument, however, is based on the same faulty premise that Roger and Donna are managers of Ensotran. As has been discussed, Roger and Donna are not managers of Ensotran and thus do not owe a fiduciary duty to Ensotran. Ensotran therefore fails to establish that there has been an act or failure to act within the state of Delaware causing tortious injury. Accordingly, the court may not exercise personal jurisdiction over Rosebank pursuant to Delaware's Long-Arm Statute, 10 Del. C.§ 3104(c)(3).
B. Ensotran's Financial Records
On June 15, 2012, Fernando requested that Donna return Ensotran's financial records, including "the QuickBooks database, tax records, file forms, receipts, reports, and any other relevant information in your possession." (D.I. 37, Ex. B.) Counts Six and Seven of Ensotran's Third-Party Complaint assert that Donna has not returned Ensotran's financial records. (D.I. 8 at 40-41.) The moving third-party defendants do not object to returning such records, so long as Ensotran specifically identifies the documents to be returned. (D.I. 25 at 4.)
For the reasons stated above, the moving third-party defendants motion to dismiss the Third-Party Complaint under Rule 12(b)(2) for lack of personal jurisdiction is granted. However, the court finds it can exercise personal jurisdiction over third-party defendant Elmer Yuen, and he is required to answer the Third-Party Complaint.
IT IS HEREBY ORDERED THAT:
1. Donna Baar's, Roger Baar's, and Rosebank Enterprises, LLC's Motion to Dismiss the Third-Party Complaint for lack of personal jurisdiction (D.I. 24) is GRANTED.
2. In regard to the Third-Party Complaint Counts Six and Seven, the parties shall meet and confer with one another, Ensotran will identify the specific documents to be returned, and the third-party defendants shall return the specifically identified documents on or before
3. Within 14 days of this order, the parties shall submit to the court a revised schedule reflecting the necessary changes with respect to third-party defendant Yuen.