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Akrout v. Jarkoy

Court of Chancery of Delaware

July 10, 2018

NABIL AKROUT, Plaintiff,
v.
ROMAN JARKOY, VLADIMIR BOBROVSKY, BORIS KALK, and INTELLIGENT SECURITY SYSTEMS INTERNATIONAL, INC., Defendants.

          Submitted: April 17, 2018

          David L. Finger, Esquire of Finger & Slanina, LLC, Wilmington, Delaware, Attorney for Plaintiff.

          Kenneth J. Nachbar, Esquire and Alexandra M. Cumings, Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware, and Steven G. Mintz, Esquire and Kevin M. Brown, Esquire of Mintz & Gold LLP, New York, New York, Attorneys for Defendant Roman Jarkoi.

          MEMORANDUM OPINION

          SLIGHTS, Vice Chancellor

         A sidelined director and stockholder of a dissolved corporation seeks the Court's assistance to resurrect the corporation and cause the corporation and its directors to answer his claims of wrongdoing. In his Verified Complaint for Breach of Fiduciary Duties, Declaratory Relief and Appointment of a Receiver (the "Complaint"), Plaintiff, Nabil Akrout, seeks a declaration that the dissolution of Intelligent Security Systems International, Inc. ("ISSI") is void. He requests that the Court revive ISSI and appoint a receiver on its behalf. He also alleges that Defendants, Vladimir Bobrovsky, Boris Kalk and Roman Jarkoi[1] (together the "Individual Defendants"), breached their fiduciary duties of "candor/loyalty, and good faith and fair dealing" by failing to apprise Akrout of ISSI's dissolution and "affirmatively mislead[ing] him regarding ISSI's financial condition and legal standing."[2] These actions allegedly allowed the Individual Defendants to benefit from revenues generated by ISSI to the exclusion of Akrout and to deny Akrout accrued salary and benefits.[3]

         Certain defendants, ISSI, Bobrovsky and Kalk, have not appeared in the litigation. Accordingly, Akrout seeks a default judgment against them pursuant to Court of Chancery Rule 55. Jarkoi has appeared and has filed a motion to dismiss the Complaint as to Count I (breach of fiduciary duty) under Court of Chancery Rule 12(b)(6) for failure to state a claim and under Court of Chancery Rule 23.1 for Akrout's lack of standing to pursue what Jarkoi characterizes as solely derivative claims.[4]

         The Complaint is not a model of clarity. Nevertheless, I have done my best to discern the claims Plaintiff intended to plead and to draw all reasonable inferences in Plaintiff's favor. Even after giving Plaintiff all benefits of the highly deferential Rule 12(b)(6) standard of review, I am satisfied that Plaintiff has failed to plead viable claims. Accordingly, I grant Jarkoi's motion to dismiss, deny Plaintiff's motions for default judgment against Bobrovsky, Kalk and ISSI and dismiss the Complaint with prejudice.

         I. FACTUAL BACKGROUND

         I have drawn the facts from the allegations in the Complaint and documents incorporated by reference or integral to the Complaint. I accept as true the Complaint's well-pled factual allegations and draw all reasonable inferences in Plaintiff's favor.[5]

         A. The Parties

         Plaintiff, Akrout, was a director and stockholder of Defendant, ISSI, a Delaware corporation that operated in the digital security and surveillance video space.[6] Akrout and the Individual Defendants founded ISSI on March 3, 2004.[7]According to the Complaint, Akrout held 170 shares of ISSI's 655 outstanding shares at the time of the dissolution, and he continues to hold those shares today.[8]Like Akrout, the Individual Defendants were each directors and stockholders of ISSI.[9]

         Akrout and the Individual Defendants were all parties to a stockholders agreement dated March 1, 2004.[10] It appears that Akrout was identified as a "founder" in that agreement and that he was granted approximately 12.2% of ISSI's authorized shares in that capacity.[11]

         Akrout served as President and CEO of ISSI pursuant to an employment contract until he was removed from those positions on January 29, 2008.[12] After his removal as President and CEO, Akrout alleges that he continued to serve as an ISSI director even though the other directors stopped communicating with him.[13]

         B. The Aftermath of Akrout's Removal from ISSI's Management

         According to Plaintiff, ISSI's board of directors ("the Board") did not hold regular meetings.[14] The last meeting of the Board of which Akrout had notice convened on May 16, 2007.[15] Consequently, Akrout has not been afforded an opportunity to participate in the management of ISSI since his removal as President and CEO in January 2008.[16]

         Akrout alleges that ISSI "still owes [him] approximately $2, 000, 000 in accrued salary (exclusive of bonuses)" under his employment contract.[17] After his removal from management, Akrout communicated with "other members [of] ISS[I] to inquire about when he would receive any payment of his back salary and any dividends, the most recent communication being in January, 2017."[18] In response to these inquiries, Akrout allegedly was told (by whom he does not say) that "ISS[I] had no money [to pay him] and to be patient."[19]

         Following his removal from ISSI management, Akrout followed ISSI's operations by "read[ing] routinely ISS[I]'s website, including press releases . . . in the hopes of receiving his back pay plus stock dividends."[20] This practice of remote monitoring led Akrout to discover on February 21, 2017, that ISSI had filed a certificate of dissolution on June 26, 2014.[21] Akrout was surprised to learn of ISSI's dissolution because he had received no prior notice of either a meeting of the Board at which a recommendation to dissolve was to be discussed, or a meeting of stockholders where a vote to authorize dissolution was to be held.[22]

         C. Plaintiff's Claims

Count I comprises the following six paragraphs:
12[B]. Akrout incorporates by reference the allegations contained in numbered paragraphs 1-11[B] above.
13. Prior to "dissolution," Defendants Jarko[i], Bobrovsky and Kalk owed fiduciary duties to Akrout as a stockholder. Upon dissolution, Jarko[i], Bobrovsky and Kalk owed fiduciary duties to Akrout as a creditor.
14. Jarko[i], Bobrovsky and Kalk knowingly and intentionally kept Akrout in the dark about the dissolution and affirmatively misled him about ISS[I]'s financial condition and legal standing.
15. Their actions allowed them to benefit from revenues generated by ISS[I] at the expense of Akrout, denying him accrued salary and dividends.
16. The actions of Jarko[i], Bobrovsky and Kalk, constitute breaches of their fiduciary duties of candor/loyalty, and good faith and fair dealing.
17. Jarko[i], Bobrovsky and Kalk should be ordered to account for all money that came in and/or out of ISS[I] since Akrout was removed as President and CEO of ISS[I]. They should also be required to disgorge any money they took or otherwise obtained from ISS[I] in violation of Akrout's contract rights and stockholder dividend rights.

         During oral argument, Plaintiff's counsel explained that:

The crux of the complaint is that Mr. Akrout discovered just inadvertently that the company had been dissolved and what he really wants to do is get the company back what may have been taken from him improperly; that is, moneys that have gone in and out either through operation of the company as a going concern, notwithstanding it being dissolved, and money that should have been distributed, as one does in a dissolution if there was a proper dissolution-marshal the assets, pay off creditors, and distribute the-whatever is left over to the stockholders as dividends.[23]

         Notwithstanding counsel's attempt at clarification, even after drawing all inferences in Plaintiff's favor, I can discern no well-pled claim in Count I that the Individual Defendants breached their fiduciary duty to Akrout by failing to make proper distributions to him following the dissolution of ISSI. Instead, the only allegedly improper distributions that are mentioned in Count I took the form of pre-dissolution "dividends" that allegedly were declared and paid following his removal as President and CEO in 2008.[24] Akrout also alleges that the Individual Defendants breached their fiduciary duties by failing to pay him "accrued salary" per his "signed contract" with ISSI.[25] As remedies, Akrout seeks damages, an accounting "for all money that came in and/or out of ISS[I] since Akrout was removed as President and CEO of ISS[I]" and disgorgement of "any money [the Individual Defendants] took or otherwise obtained from ISS[I]."[26] He does not, however, make any mention, much less make a formal prayer for relief, relating to any improper post-dissolution distributions.

         Count II seeks a declaratory judgment that ISSI's dissolution is void.[27]Count III seeks the appointment of a receiver for ISSI.[28]

         D. Procedural History

         Plaintiff filed the Complaint on June 26, 2017, three years to the day after ISSI filed its certificate of dissolution. As noted, only Jarkoi has entered an appearance as among the defendants. On December 18, 2017, the Court dismissed Counts II and III as to Jarkoi, with prejudice.[29] In doing so, the Court explained:

You've got a director [Jarkoi] who is no longer a director. He is at best, a former director of at least a facially dissolved entity. I disagree that he maintains some status as trustee. Our statute isn't built that way. I don't see that he has any interest separate and apart from the company to defend here. . . . [ISSI] might have a basis to defend [] Count II [declaration of no valid dissolution] and III [appointment of a receiver] on the merits but I don't think Mr. Jarkoi needs to be the one articulating those arguments. . . . [Section] 3114 does not provide a basis to have the Court exercise personal jurisdiction over [Jarkoi] as a defendant in a claim where the plaintiff is seeking a declaratory judgment relating to the bona fides of a dissolution resolution by the board of a company or the appointment of a receiver.[30]

         In January and February 2018, Plaintiff moved for default judgment against ISSI, Bobrovsky and Kalk.[31] In accordance with Court of Chancery Rule 55(b), on January 17, 2018, the Court directed that Akrout's counsel provide notice to ISSI and submit an affidavit of such notice in advance of the default judgment hearing scheduled for February 27, 2018.[32] At the February 27, 2018 oral argument, the Court learned that the affidavit of notice had not been filed.[33] Accordingly, the Court declined to take the motion for default judgment against ISSI under submission, [34]and again directed that Plaintiff's counsel submit an affidavit reflecting notice as to ISSI as per Rule 55(b), and also as to Bobrovsky and Kalk. The Court requested that Plaintiff's counsel file the notice in advance of the April 17, 2018 hearing on Plaintiff's motion for default judgment against Bobrovsky and Kalk and Jarkoi's motion to dismiss Count I.[35] Once again, the affidavit of notice for ISSI, Bobrovsky or Kalk was not filed as directed prior to the April 17, 2018 hearing.[36] Nevertheless, the Court took all pending motions-Jarkoi's motion to dismiss Count I and Plaintiff's motions for default judgment against ISSI, Bobrovsky and Kalk-under submission.

         II. LEGAL ANALYSIS

         I address the three pending motions in the following sequence: (A) Plaintiff's motion for default judgment against ISSI; (B) Jarkoi's motion to dismiss Count I; and (C) Plaintiff's motion for default judgment against Bobrovsky and Kalk.

         A. Plaintiff's Motion for Default Judgment Against ISSI

         Plaintiff has moved for default judgment against ISSI. Although not specified in his motion papers, [37] I assume Plaintiff seeks default judgment against ISSI on Counts II and III of the Complaint as the entity does not appear to be a subject of Count I.[38] As explained below, Plaintiff's motion for default judgment against ISSI must be denied because the claims against ISSI were brought outside of the three-year period for post-dissolution winding up set forth under 8 Del. C. § 278.

Section 278 states, in relevant part:
All corporations, whether they expire by their own limitation or are otherwise dissolved, shall nevertheless be continued, for the term of 3 years from such expiration or dissolution or for such longer period as the Court of Chancery shall in its discretion direct, bodies corporate for the purpose of prosecuting and defending suits, whether civil, criminal or administrative, by or against them, and of enabling them gradually to settle and close their business, to dispose of and convey their property, to discharge their liabilities and to distribute to their stockholders any remaining assets, but not for the purpose of continuing the business for which the corporation was organized.[39]

         While Section 278 sets a three-year post-dissolution winding up period within which claims against the dissolved corporation may be prosecuted, it does not specify how the three-year period is to be calculated. In In re Citadel Industries, Inc., this Court determined that the three-year period under Section 278 begins to run as of the date of the filing of the certificate of dissolution and that it expires three years thereafter.[40] Here, ISSI filed its certificate of dissolution with the Delaware Secretary of State on June 26, 2014, and the last day of the statutory three-year winding up period was June 25, 2017.[41] Plaintiff filed the Complaint at 6:36 PM on June 26, 2017, one day late.[42]

         Although Section 278 grants the Court discretion to extend the statutory three-year winding up period, [43] the court explained in Citadel that Section 278

merely [] permit[s] this Court, in its discretion, and prior to the expiration of three years from the date of dissolution, to continue corporate existence for such an additional period of time beyond three years as might be required in order to permit a corporation to complete the winding up of its affairs through its officers and directors. . . . [T]he statute, as amended, gives this Court no power to "continue" a corporation for winding up purposes on an application made after the statutory three-year period has expired and thus after the corporation has ceased to exist as a legal entity.[44]

         Because Plaintiff filed the Complaint after the expiration of the statutory three-year winding up period provided for in Section 278, and did not seek an extension within that period, the Court is without authority to resurrect ISSI to answer the allegations in the Complaint.[45] Accordingly, Plaintiff's motion for default judgment against ISSI is denied[46] and the claims against ISSI (Counts II and III), which are indisputably untimely under Section 278, are dismissed.

         B. Jarkoi's Motion to Dismiss Count I

         Under Court of Chancery Rule 12(b)(6), a complaint must be dismissed if the plaintiff would be unable to recover under "any reasonably conceivable set of circumstances susceptible of proof" based on the facts as pled in the complaint.[47] In considering a motion to dismiss, the Court must accept as true all well-pled allegations in the complaint and draw all reasonable inferences from those facts in Plaintiff's favor.[48] The Court need not accept, however, conclusory allegations that lack factual support nor "accept every strained interpretation of the allegations proposed by the plaintiff."[49]

         1. The Direct Versus Derivative Inquiry

         As an initial matter, I note that it is unclear on the face of the Complaint whether the claims Akrout sets forth in Count I are intended to be derivative or direct.[50] The distinction is always consequential; it is particularly so here because Akrout did not make a demand upon the Board to bring the claim and ...


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