Alan L. Lucas, et al.
Alan Hanson, et al.
Submitted: June 11, 2014
Theodore J. Tacconelli Rick S. Miller, Ferry Joseph & Pearce, P.A.
Abigail M. LeGrow, Master in Chancery
Dear Counsel and Parties:
I am in receipt of the defendants' motions to dismiss the amended complaint in the above-captioned action, along with the plaintiff's response to those motions. For the reasons that follow, I recommend that the Court dismiss without prejudice the amended complaint because the plaintiff has not alleged sufficient facts to establish that (i) he has standing to maintain this action, and (ii) this Court has personal jurisdiction over certain of the defendants. This is my final report on these motions.
The following facts are drawn from the complaint, giving the plaintiff the benefit of all reasonable inferences. This case involves Covenant Investment Fund LP ("Covenant"), a Delaware limited partnership created in 2007. Prosapia Capital Management LLC ("Prosapia Capital") is the general partner and a limited partner of Covenant. Prosapia Capital is a wholly-owned subsidiary of Prosapia Financial LLC ("Prosapia Financial"). The plaintiff, Alan Lucas ("Lucas") is the operating manager of both Prosapia Capital and Prosapia Financial and is a member of Prosapia Financial.
The defendants are current or "disassociated" limited partners of Covenant, none of whom are residents of Delaware. The complaint does not allege that any of the defendants participated in the management of Covenant. According to the Amended Complaint, after Prosapia Capital became general partner, it expended some of Covenant's funds to conduct an audit, hire contractors, and purchase a corporate vehicle, and took steps to liquidate Covenant's fiber optic utility rights and assets, with an ultimate goal of purchasing a large hotel and convention center. Some of the limited partners objected to this plan for Covenant's future. In June 2011, Lucas was charged in Iowa with theft and ongoing criminal conduct associated with the expenditure and liquidation of Covenant's funds and assets.
Lucas was convicted on October 23, 2013 and was sentenced on March 14, 2014 to 25 years in prison. In connection with the criminal proceedings, Iowa declared "that the cash held in [Covenant's] account was the property of the [named defendants], " and should have been distributed to the named defendants when Prosapia Capital became Covenant's general partner. After his conviction, but before the sentencing, Lucas filed this action seeking declaratory and injunctive relief and arguing that "Iowa's attempt to force distributions of company assets is the regulation of the internal affairs of a Delaware entity with no ties to Iowa in violation of the commerce clause, due process clause and full faith and credit clause of the United States Constitution." Although the Amended Complaint appears to seek declaratory and injunctive relief regarding whether Iowa's prosecution of Lucas violated his constitutional rights,  Lucas maintains that he seeks only an injunction prohibiting the named defendants from receiving Covenant's funds as restitution, explaining that "the actions by the State of Iowa and the underlying constitutional implications are only alleged to establish that the only proper way for the defendants to receive a distribution or disbursement from [Covenant] is by initiating a derivative action in this Court." The defendants filed a series of motions to dismiss the Amended Complaint. Alan Hanson, Patty Hanson, and Marcella Hosch moved to dismiss (the "Hanson/Hosch Motion") on the basis that Lucas lacks standing to pursue this action because there is no allegation in the Amended Complaint that Lucas is a limited or general partner of Covenant. Dwight Miller, Carol Miller, Jackie Miller, Della Miller, Francis Miller, and Gwen Miller (collectively, the "Miller Defendants") moved to dismiss the claims against them for lack of personal jurisdiction and for failure to state a claim.
Pursuant to Rule 12(b)(6), this Court may grant a motion to dismiss for failure to state a claim if a complaint does not assert sufficient facts that, if proven, would entitle the plaintiff to relief. The governing pleading standard in Delaware to survive a motion to dismiss is "reasonable 'conceivability.'" That is, when considering such a motion, a court must
accept all well-pleaded factual allegations in the Complaint as true, accept even vague allegations in the Complaint as "well-pleaded" if they provide the defendant notice of the claim, draw all reasonable inferences in favor of the plaintiff, and deny the motion unless the plaintiff could not recover under any reasonably conceivable set of circumstances susceptible of proof.
This "conceivability" standard asks whether there is a "possibility" of recovery. If the well-pleaded factual allegations of the complaint would entitle the plaintiff to relief under a reasonably conceivable set of circumstances, the Court must deny the motion to dismiss.
In response to the Hanson/Hosch motion, Lucas concedes the Amended Complaint does not allege that he is a limited partner of Covenant, but contends the absence of that allegation merely is an oversight, asserts that he is in fact a limited partner of Covenant, and urges the Court to "constructively amend" the Amended Complaint to add the allegation that Lucas has a limited partnership interest in Covenant. On a motion to dismiss, however, I cannot look outside the complaint for facts to support it,  and there is no basis in this Court's rules or precedent for a "constructive amendment" to the pleadings at this stage in the proceedings. I therefore recommend that the Court dismiss the Amended Complaint without prejudice to Lucas's ability to file a second amended complaint. Although the Hanson and Hosch defendants urge that any such amendment would be futile because the claims Lucas seeks to ...