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Baier v. Upper New York Investment Co. LLC

Court of Chancery of Delaware

April 16, 2018

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

          Date Submitted: January 16, 2018

          Douglas D. Herrmann, Esquire of Pepper Hamilton LLP, Wilmington, Delaware, Attorney for Plaintiff, Danny David Czarninski Baier.

          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, and Johny Jacobo Czarninski Baier.

          Richard L. Renck, Esquire of Duane Morris LLP, Wilmington, Delaware and Michael A. Charish, Esquire of Schulman & Charish LLP, New York, New York, Attorneys for Defendant Vivian Czarninski Baier de Adler.

          MEMORANDUM OPINION

          SLIGHTS, VICE CHANCELLOR.

         Plaintiff, Danny David Czarninski Baier ("Danny"), brings this action against Defendants, Upper New York Investment Company LLC, North Park Avenue Investment Company LLC, Upper Hudson Investment Company LLC (collectively, the "LLC Defendants"), Johny Jacobo Czarninski Baier ("Johny") and Vivian Czarninski Baier de Adler ("Vivian") (collectively, "Defendants"), in which he alleges that Defendants engaged in a fraudulent scheme and conspiracy to deprive him of his inheritance from his parents' estate.[1] Johny and the LLC Defendants have moved to dismiss Danny's complaint for lack of subject matter jurisdiction, lack of personal jurisdiction, forum non conveniens, insufficient process, insufficient service of process, failure to state a claim and failure to join an indispensable party. Because the Court lacks subject matter jurisdiction over the controversy and personal jurisdiction over certain of the Defendants, the motion to dismiss must be granted.[2]

         I. FACTUAL BACKGROUND

         I draw the facts from the well-pled allegations in the Verified Complaint (the "Complaint"), documents incorporated or referenced in the Complaint and, pursuant to Court of Chancery Rules 12(b)(1) and (2), certain materials extrinsic to the pleadings, such as affidavits, all of which are proper reference points when the Court determines whether it can exercise jurisdiction over claims and parties.[3]

         A. The Parties and Prior Litigation

         Danny, Johny and Vivian (collectively, the "siblings") are citizens of Ecuador and Germany.[4] Danny and Johny reside in Ecuador; Vivian resides in Israel.[5]According to the Complaint, the LLC Defendants are Delaware limited liability companies that Johny controls and owns either directly or indirectly.[6]

         The siblings' longstanding dispute relates to their inheritance from their parents, Alfredo and Ruth (the "parents"), who died intestate in Ecuador in August 2003 and January 2013, respectively.[7] Alfredo built one of the largest commercial groups in Ecuador, El Rosado Group (or the "Group"), and the parents allegedly held assets in both Ecuador and Israel at the time of their deaths (the "Estate").[8]According to the Complaint, Alfredo maintained numerous bank accounts around the world and structured the Group as a complicated web of companies owned directly or indirectly by Alfredo, Ruth, Danny, Johny and Vivian.[9]

         After Alfredo's passing in 2003, and Ruth's in 2013, the siblings commenced various proceedings in Israel and Ecuador in which they sought adjudication of various aspects of their inheritance rights.[10] The siblings' dispute brought them to Delaware because the Complaint alleges Johny wrongfully transferred El Rosado Group stock that allegedly should be part of the siblings' inheritance (the "Inheritance Stock")[11] to three British Virgin Island ("BVI") entities, and then to the Delaware LLC Defendants.[12]

         Danny's allegations of Johny's wrongdoing present an ironic twist on a familiar theme. On September 28, 2011, Vivian filed an action in this Court against, inter alia, Johny and Danny ("Vivian's complaint"), [13] premised upon the same operative allegations that Danny now asserts against Johny in the Complaint.[14]Specifically, the Complaint alleges Johny engaged in the same five-step fraudulent scheme (the "fraudulent scheme") that formed the basis of Vivian's complaint by: "(a) converting [Importadora El Rosado Cia. Ltda., ] El Rosado Ltd.[, the primary operating company of the Group] 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) re-domiciling the BVI companies to Delaware, where [the LLC Defendants] now hold the El Rosado shares."[15]

         On October 31, 2013, the Court issued a decision on defendants' (including Danny's) motions to dismiss Vivian's complaint wherein, per the parties' agreement, the Court considered only two grounds for dismissal: lack of subject matter jurisdiction and failure to state a claim.[16] As to subject matter jurisdiction, this Court held that it could exercise subject matter jurisdiction over Vivian's unjust enrichment and Article 17 claims premised on her direct ownership of Group stock, but not over the claims premised on her purported ownership of Group stock by inheritance.[17] As to failure to state a claim, the Court found Vivian's complaint pled a reasonably conceivable Article 17 claim and "a reasonably conceivable basis for equitable tolling of Vivian's claims."[18] The Court determined that the Article 17 claim obviated need for the redundant unjust enrichment claim, a subsidiary claim.[19]The Court also determined that Vivian's claims of wrongful conduct under Article 17 were not barred by res judicata or collateral estoppel based on administrative decisions rendered in Ecuador.[20]

         B. Estate Proceedings in Israel and Ecuador

         In the Israeli estate proceedings, the court determined that the Estate is governed by Ecuadorian law, under which the Estate is to be divided into equal portions between the three siblings.[21] It does not appear that the Israeli courts conducted an inventory of, or endeavored to distribute, the Estate's assets.[22] An inventory and distribution, however, did occur in connection with Ecuadorian probate proceedings. While the Complaint acknowledges the decisions of the Israeli courts entitling the siblings to equal thirds of the Estate, it omits any discussion of the Ecuadorian probate proceedings, despite recognizing that "the whereabouts of Alfredo's assets" remained an open question until recently.[23]

         The inventory performed in Ecuador in 2007 revealed that Alfredo's estate included small direct stock holdings in certain Group entities, valued at approximately $124, 000.[24] In 2012, Vivian asked an Ecuadorian court to include in the inventory indirect holdings of various Group entities that she claimed also belonged to Alfredo.[25] In 2016, an Ecuadorian tribunal held "there is no record in the proceedings that [Alfredo] left approximately 41 companies and there is no record in the proceedings that 'shares were interconnected so that some companies controlled the other ones.'"[26] Thus, the Ecuadorian courts have determined that Alfredo's estate does not include El Rosado Group stock beyond the small block accounted for in the inventory process.

         After Ruth's passing, similar inventory proceedings occurred in Ecuador, in which it was determined that Ruth's estate included small stock holdings of one El Rosado Group company, worth approximately $2, 819, but no additional Group holdings.[27] Again, Vivian failed to establish that Ruth's estate included additional, indirect holdings of El Rosado Group stock.[28] In January 2017, an Ecuadorian court ordered the distribution of Alfredo's estate, as inventoried, and in April 2017, the same was ordered for Ruth's estate.[29]

         C. Procedural Posture

         Following the Court's decision in de Adler, the parties continued to litigate the remaining claims in Vivian's complaint. On February 25, 2016, the Court issued a stay to allow the parties to pursue alternative dispute resolution efforts.[30] Formal mediation took place in May 2016, but did not produce a global resolution.[31] Negotiations continued following the mediation. The parties ultimately reached an agreement in principle to settle, subject to the negotiation of a final agreement.[32]While negotiating a formal settlement agreement, discussions between all three siblings reached an impasse, but Vivian and Johny continued to negotiate their agreement.[33]

         On October 3, 2016, Danny filed an answer to Vivian's complaint.[34] Two weeks later, he filed an amended answer with a counterclaim against Vivian in which he sought to prevent consummation of any settlement agreement between Johny and Vivian. Danny also brought four cross-claims against Johny and the LLC Defendants alleging fraud and abuse in violation of Article 17 as well as common law fraud, conversion and wrongful possession.[35] On December 7, 2016, Johny and Vivian informed the Court of their agreement to settle Vivian's claims against Johny (the "Settlement Agreement").[36] On December 29, 2016, Johny, Vivian and the LLC Defendants filed a notice of dismissal stating that Vivian's claims against Johny and the LLC Defendants would be dismissed with prejudice and her claims against Danny would be dismissed without prejudice.[37] The Court approved the notice of dismissal over Danny's objection.[38]

         In February 2017, Danny again sought to amend his answer, counterclaim and cross-claims.[39] In August 2017, the Court ordered a realignment of the parties in this action, whereby Danny became the plaintiff and Vivian, Johny and the LLC Defendants became Defendants.[40] Danny filed an amended Complaint on August 11, 2017, which became the operative complaint.[41]

         The Complaint sets forth eleven counts against Johny, the LLC Defendants and Vivian, premised on the five-step fraudulent scheme first described in Vivian's complaint against Johny and Danny, and also on the Settlement Agreement.[42] The Complaint sets forth three counts against Johny and the LLC Defendants: Count I seeks injunctive relief to prevent Johny from transferring the Inheritance Stock and from taking any action that would impact Danny's equitable interest in the El Rosado Group companies[43]; Count III seeks an accounting of the Inheritance Stock[44]; and Count IV claims fraud and abuse in violation of Article 17 in connection with steps taken to restructure the El Rosado Group companies.[45] Count II, against the LLC Defendants only, seeks to hold the Inheritance Stock in constructive trust.[46]

         The Complaint sets forth three counts against Johny alone: Count V asserts breach of fiduciary duty related to Johny's actions dealing with the Inheritance Stock and Jointly Owned Assets[47]; Count VI asserts common law fraud, conversion and wrongful possession related to the Inheritance Stock[48]; and Count VII asserts civil conspiracy for entering into the Settlement Agreement with Vivian as a means to exercise unlawful dominion and control over the Jointly Owned Assets, including the Inheritance Stock.[49]

         Finally, the Complaint sets forth four counts against Vivian: Count VIII seeks injunctive relief to prevent consummation of the Settlement Agreement[50]; Count IX seeks an accounting regarding the Settlement Agreement[51]; Count X asserts breach of fiduciary duty for entering into the Settlement Agreement[52]; and Count XI, the corollary to Count VII, asserts civil conspiracy for entering into the Settlement Agreement with Johny as a means to exercise unlawful dominion and control over the Jointly Owned Assets, including the Inheritance Stock.[53]

         Johny and the LLC Defendants have moved to dismiss the Complaint for lack of subject matter jurisdiction, forum non conveniens, failure to state a claim and failure to join an indispensable party.[54] Johny further moves to dismiss the Complaint for lack of personal jurisdiction, insufficient process and insufficient service of process.[55] Vivian moved to dismiss the Complaint for failure to state a claim, but withdrew her motion and instead partially joined the Opening Brief submitted on behalf of Johny and the LLC Defendants.[56]

         For reasons discussed below, I conclude the Complaint must be dismissed for lack of subject matter jurisdiction and personal jurisdiction. Further, even if the Court could exercise subject matter jurisdiction over Danny's claims and personal jurisdiction over Johny, Danny's claims are barred by laches. Accordingly, I need not and decline to reach Defendants' arguments as to forum non conveniens, failure to state a claim and failure to join an indispensable party.

         II. LEGAL ANALYSIS

         The Court may not adjudicate a matter over which it lacks subject matter jurisdiction.[57] Likewise, "[a] Court that lacks jurisdiction over a defendant is without power to consider a complaint on the merits."[58] Thus, jurisdictional challenges, both subject matter and personal, present threshold inquiries. On a motion to dismiss for want of jurisdiction, the plaintiff bears the burden to make out a prima facie case establishing jurisdiction.[59] A prima facie case requires the "production of enough evidence to allow the fact-trier to infer the fact at issue and rule in the party's favor."[60] Danny has failed to carry this burden. Even if he had carried his jurisdictional burdens, however, it is clear from the face of his Complaint that his claims are stale and barred by laches. My reasoning follows.

         A. Subject Matter Jurisdiction Over Claims Against Johny and the LLC Defendants

         This Court has subject matter jurisdiction when "(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."[61] "Whenever it appears by suggestion of the parties or otherwise that the Court lacks jurisdiction of the subject matter, the Court shall dismiss the action."[62] Danny alleges the Court has jurisdiction over this dispute pursuant to 10 Del. C. § 341, which provides that the Court of Chancery "shall have jurisdiction to hear and determine all matters and causes in equity."[63]

         In de Adler, Vivian invoked this same basis for jurisdiction, based on the same pled facts in response to the same subject matter jurisdiction defense raised by defendants (including Johny and Danny).[64] There, the Court determined it had equitable jurisdiction over Vivian's claims of direct ownership of El Rosado Group stock, but did not have jurisdiction over claims that she obtained El Rosado Group stock by inheritance.[65] Specifically, the Court found that it did not have "equitable jurisdiction to inventory the estate of a non-domiciliary [(Alfredo)] with no Delaware assets where the Court does not already have jurisdiction."[66] Because a proper inventory and distribution were predicates to determining whether Vivian's inheritance included the Inheritance Stock, the Court concluded that it lacked jurisdiction to adjudicate that claim.[67]

         After de Adler, an Ecuadorian tribunal finalized the inventory of the Estate, which was found to include only small holdings of Group stock, and thereafter ordered distribution of the Estate. The fact that an Ecuadorian tribunal has now inventoried and ordered the distribution of the Estate does not change that, "[a]s a matter of comity, this Court is without jurisdiction" to determine the threshold question whether the Estate included El Rosado Group stock allegedly removed to the BVI entities and ultimately held in the LLC Defendants.[68] Rather, if anything, the fact that an Ecuadorian tribunal has now determined that the Inheritance Stock is not an asset of the Estate makes this Court's exercise of subject matter jurisdiction over Danny's claims even less tenable. Danny's claims rest on the premise that Johny and Vivian seek to misappropriate Inheritance Stock from the Estate. Yet the factual predicate of that claim-that the Estate ever held the Inheritance Stock-has been adjudicated in Ecuador to be without merit.

         Under the doctrine of law of the case, the Court cannot revisit its ruling in de Adler that it lacks subject matter jurisdiction to conduct another inventory, [69] and it cannot and will not disturb the results of the inventory performed by the Ecuadorian court out of fundamental notions of comity.[70] Consequently, the Court lacks subject matter jurisdiction over Danny's claims to the Inheritance Stock as a stockholder by inheritance. This finding extends to each of the counts asserted in the Complaint-injunctive relief, fraud, constructive trust, accounting, fraud and abuse in violation of Article 17, breach of fiduciary duty, common law fraud, conversion and wrongful possession and civil conspiracy-because the factual predicate underlying each count is the allegation that Danny has been deprived of his rightful inheritance.[71]

         Danny contends that his Complaint, like Vivian's, also asserts claims based on his direct ownership of El Rosado Group stock. As I must, I draw all reasonable inferences in favor of Danny.[72] The 58-page, 246-paragraph Complaint, while replete with allegations premised on Danny's stock ownership by inheritance, contains just two cursory references to Danny's direct holdings of El Rosado Group Stock.[73] Nevertheless, because these two cursory references exist, I find that Danny has established a prima facie case for jurisdictional purposes that he has asserted claims based on his direct holdings of El Rosado Group. Therefore, in keeping with the law of the case established by de Adler, this Court could exercise subject matter jurisdiction over Danny's claims based upon his direct ownership of El Rosado Group stock. But, as explained below, these claims fail at the threshold for other dispositive reasons.

         B. Subject Matter Jurisdiction Over Claims Against Vivian

         Although Vivian has withdrawn her motion to dismiss, this Court is obligated to assess sua sponte subject matter jurisdiction over Danny's claims against Vivian.[74] The Court's lack of subject matter jurisdiction over Danny's claims based on stock ownership by inheritance bars Danny's claims against Vivian. As stated, Danny's claims against Vivian all arise from the Settlement Agreement, which Danny claims is an unlawful attempt to divide and distribute Jointly Owned Assets, including the Inheritance Stock. In order for this Court to adjudicate any of the four counts that Danny has brought against Vivian, it must revisit findings made by courts in other jurisdictions regarding the Estate's assets to determine whether Jointly Owned Assets, including the Inheritance Stock, are included in the Estate. As explained above, these issues are beyond the reach of this Court's subject matter jurisdiction.[75] Moreover, for the Court to adjudicate Danny's claims against Vivian, the Court would be required to determine whether the Settlement Agreement should be nullified, a determination that would necessitate an inquiry into whether Johny wrongfully removed the Inheritance Stock. This would bring the Court full circle back to determinations already made by courts in Israel and Ecuador. Accordingly, because the adjudication of these claims would require the Court to decide predicate factual and legal questions in a manner that conflicts with rulings from tribunals (with jurisdiction) that have already ruled on those matters, counts VIII-XI must be dismissed.

         C. Personal Jurisdiction Over Johny

         As with subject matter jurisdiction, Danny "bears the burden of showing a basis for the court's exercise of jurisdiction over [Johny]."[76] Prior to jurisdictional discovery, "[Danny] need only make a prima facie showing of jurisdiction in order to survive a motion to dismiss."[77] "Once jurisdictional discovery has been completed, however, [Danny] must allege specific facts supporting [his] position" that the Court has jurisdiction over Johny.[78] Here, the parties apparently commenced, but did not complete, jurisdictional discovery.[79] Accordingly, I give Danny the benefit of the doubt and hold him to the lower burden of establishing a prima facie case for this Court's exercise of jurisdiction over Johny. Even under this less onerous standard, the Complaint fails to pass muster.

         In the case of a nonresident defendant, Delaware courts apply a two-step personal jurisdiction analysis.[80] First, the Court assesses whether there is a statutory basis for personal jurisdiction.[81] Second, the Court determines whether exercising personal jurisdiction over the nonresident defendant is consistent with the Due Process Clause of the Fourteenth Amendment to the United States Constitution.[82]Danny asserts this Court has personal jurisdiction over Johny pursuant to 10 Del C. § 3104 and 6 Del. C. § 18-109. I disagree. My analysis follows.

         1. 10 Del C. § 3104

         Delaware's long-arm statute, 10 Del C. § 3104, contemplates that any nonresident who commits certain acts or causes certain injuries in Delaware is subject to Delaware's jurisdiction. The long-arm statute states, in relevant part:

(c) . . . a [Delaware] court may exercise personal jurisdiction over any nonresident . . . who in person or through an agent:
(1) Transacts any business or performs any character of work or service in [Delaware]; . . .

         In support of his claim that the Court may exercise personal jurisdiction over Johny, Danny alleges that Johny "formed his Delaware LLCs in Delaware in furtherance of a fraudulent scheme and the formation of Johny's Delaware LLCs is an integral part of the actions giving rise to Danny's claims."[83] While the Complaint does not specify the subsection of Section 3104 on which Danny relies, [84] Danny addressed this gap in his opposition brief by expressly identifying Section 3104(c)(1) as his jurisdictional hook as to Johny.[85] Thus, I focus my analysis on Section 3104(c)(1).

         Section 3104(c)(1) is a "single act" statute.[86] Accordingly, I must analyze whether the Complaint alleges that Johny did anything in Delaware that would constitute transacting business under Section 3104(c)(1), and one single act of transacting business will suffice.[87] But the nonresident defendant's act of transacting business in Delaware must have a nexus to the claim(s) against that nonresident defendant.[88] Stated differently, the act(s) of transacting business in Delaware must be "an integral component of the total transaction to which [Danny's] cause of action relates."[89]

         The Complaint's sole allegation that Johny transacted business in Delaware is that, in 2008, Johny domesticated three BVI entities (that were allegedly holding the Inheritance Stock) in Delaware, by forming the LLC Defendants.[90] But mere formation of a Delaware entity, without more, is insufficient for this Court to exercise jurisdiction.[91] Rather, the act of formation must be "an integral component of the total transaction to which [Danny's] cause of action relates."[92] This is where Danny's theory of personal jurisdiction over Johny falls short.

         The domestication of the BVI entities into the LLC Defendants in 2008 cannot be integral to Johny's alleged fraudulent scheme because "the [ ] scheme was complete . . . no later than when the stock in El Rosado Group was transferred to the BVI [entities] in 2006 and 2007, with the last transaction in October 2007."[93]Entities that did not exist at the commencement or conclusion of an alleged fraudulent scheme could not have been employed in furtherance of, much less have been integral to, the fraud. Moreover, Danny concedes that the LLC Defendants "have no offices, no employees, and conduct no business."[94] Thus, he concedes that Johny has not transacted business in Delaware through the LLC Defendants since October 2007. Given that the formation of the LLC Defendants could not have been integral to the alleged wrongs that animate Danny's claims (whether based on direct ownership or ownership by inheritance), Danny cannot make a prima facie case for the Court's exercise of jurisdiction over Johny under Section 3104(c)(1).

         2. 6 Del. C. § 18-109

         Nor can the Court exercise personal jurisdiction over Johny under 6 Del. C. § 18-109. Section 18-109 is Delaware's implied consent statute for obtaining personal jurisdiction over nonresident managers of Delaware limited liability companies.[95] Section 18-109 states, in relevant part: "A manager . . . of a limited liability company may be served with process . . . in all civil actions or proceedings brought in the State of Delaware involving or relating to the business of the limited liability company or a violation by the manager . . . of a duty to the limited liability company."[96] To justify the exercise of personal jurisdiction over a nonresident as LLC manager pursuant to Section 18-109, the Court must find that: (1) the claims at issue focus on the manager's "rights, duties, and obligations"; (2) the resolution of the matter is "inextricably bound up in Delaware law"; and (3) Delaware has a strong interest in providing a forum for the resolution of the type of dispute at issue.[97] None of the three requirements for personal jurisdiction under Section 18-109 is satisfied here.

         First, the claims at issue do not focus on Johny's rights, duties and obligations as manager of the LLC Defendants. Rather, the claims all arise from Johny's alleged wrongful removal of El Rosado Group stock to the BVI entities. That Johny now allegedly holds the Inheritance Stock in the LLC Defendants does not change the undisputed fact that the alleged fraud was completed outside of Delaware. As stated, the Court already has determined the fraud, if any, was complete with the final transfer of stock out of Ecuador and into the BVI entities in October 2007.[98] And, as stated, the alleged fraudulent scheme was commenced and completed prior to the existence of the LLC Defendants. It is inconceivable how Johny's alleged wrongdoing, which occurred prior to the formation of the LLC Defendants, arose out of his rights, duties and obligations as manager of limited liability companies that were not yet in existence when the wrongdoing occurred. Moreover, the Complaint acknowledges that the LLC Defendants "have no offices, no employees, and conduct no business."[99] Thus the claims at issue cannot possibly focus on Johny's rights, duties and obligations as manager of the LLC Defendants where, by Danny's own admission, there is nothing for Johny to do (or not do) as relates to these entities.

         Second, the resolution of this matter is not inextricably linked to Delaware law. On the contrary, the alleged fraud commenced in Ecuador, from which the Inheritance Stock allegedly was wrongfully removed, and was completed in the BVI. Whether the assets were wrongfully removed depends on whether the assets were ever part of the siblings' parents' estate, which is a matter of Israeli or Ecuadorian law, not Delaware law.

         Third, accepted principles of comity dictate that Delaware not offer a forum to resolve this type of dispute over foreign assets in foreign estates governed by foreign law, particularly when foreign courts have already made substantive rulings relating to the controversy.[100]

         Danny has not established a prima facie case for the Court's exercise of personal jurisdiction over Johny under Section 18-109 in order for this Court to adjudicate Danny's claims against Johny or the LLC Defendants, whether based on ownership by inheritance or direct ownership of Group stock. Having found no statutory basis under either Section 3104(c)(1) or Section 18-109 to assert personal jurisdiction over Johny, I need not ...


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