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Harrison v. Soroof International, Inc.

United States District Court, D. Delaware

July 27, 2018

JOHN E. HARRISON, Plaintiff,

          Peter B. Ladig, BAYARD, P.A., Wilmington, Delaware; Meghan A. Adams, MORRIS JAMES LLP, Wilmington, Delaware, Attorneys for Plaintiff.

          Ryan W. Browning, MANNING GROSS MASSENBURG, Wilmington, Delaware; Haig V. Kalbian, D. Michelle Douglas, William P. McGrath, Jr., KALBIAN HAGERTY LLP, Washington, District of Columbia, Attorneys for Defendant.


          Christopher J. Burke, United States Magistrate Judge.

         Presently pending before the Court is a motion to dismiss filed by Defendant Soroof International, Inc. ("Defendant" or "Soroof) pursuant to Rules 12(b)(1), 12(b)(2), and 12(b)(6) of the Federal Rules of Civil Procedure (the "Motion"). (D.I. 6) Specifically, Soroof argues that this action should be dismissed because: (1) Plaintiff John E. Harrison ("Plaintiff or "Harrison") lacks standing to assert an alter ego/veil piercing claim (the "alter ego claim"); (2) this Court lacks personal jurisdiction over Soroof; and (3) Harrison has failed to allege a plausible alter ego claim. For the reasons that follow, the Court GRANTS-IN-PART Soroof s Motion and DENIES-IN-P ART the remainder of the Motion as moot.

         I. BACKGROUND

         A. Factual Background

         In August 2007, Soroof and Quivus Holdings, LLC (an entity wholly owned by Harrison) formed Quivus Systems, LLC ("Quivus"), a Delaware limited liability company. (D.I. 1, ex. A ("Complaint") at ¶ 1; D.I. 6, ex. A at 1) Soroof and Quivus Holdings, LLC were the sole members of Quivus. (Complaint at ¶ 1) Under the terms of Quivus' operating agreement (the "operating agreement"), [1] Harrison was to serve as Chief Executive Officer ("CEO") of Quivus. (Id. at¶12)

         During the negotiations over the operating agreement, Harrison wanted equal representation on Quivus' board of directors (the "board"), while Soroof wanted to control the board. (Id.) The parties compromised in the end. (Id.) The operating agreement ultimately gave Soroof control of the board—it permitted Soroof to appoint three board members, while Harrison (via Quivus Holdings, LLC) was permitted to appoint two members. (Id.; D.I. 6, ex. A at § 10.1(a)) In return, Harrison negotiated a provision of the operating agreement that stated that Harrison could only be removed as CEO if one of Harrison's own board nominees agreed to his removal. (Complaint at ¶ 12; D.I. 6, ex. A at § 10.1(d)(2))

         On July 1, 2014, Soroof removed Harrison as CEO of Quivus without an approving vote of at least one of Harrison's board nominees, in violation of the terms of the operating agreement. (Complaint at ¶¶ 11-12; see also Id. at ¶ 1) From that date forward, Quivus' operation and management has allegedly been controlled by Quivus directors Prince Bander Bin Abdulla Bin Mohammed Al-Saud ("Prince Bander"), Tahir Rashid, and Sasa Petrovic. (Id. at ¶ 11) Prince Bander serves as Chairman of Quivus' board and is also the owner of a majority of Soroof s outstanding shares. (Id.) Mr. Rashid is the Chief Operating Officer of Soroof. (Id.) And Mr. Petrovic, who currently serves as CEO of Quivus, is said to be "beholden to Soroof for his position at Quivus and [his] salary." (Id.)

         After removing Harrison, Soroof and Quivus (which was now "controlled by Soroof) filed suit against Harrison in the Superior Court for the District of Columbia (the "DC Action") on July 6, 2015 for "breaches of [Harrison's] duties to Quivus." (Id. at ¶¶ 1-2; see also D.I. 6-1 at 4) The DC Action "triggered [] Harrison's right to advancement [of his legal fees and expenses in connection with suits against him for alleged breach of duties to Quivus] under the Quivus operating agreement." (Complaint at ¶ 2) Harrison requested advancement from Quivus but was rejected. (Id.)

         In a March 4, 2016 letter rejecting Harrison's advancement demand, Quivus claimed that it did not have the financial capacity to advance funds to Harrison. (Id. at ¶ 15 & n.l) Following Quivus' rejection of Harrison's advancement demand, on March 7, 2016, Harrison commenced suit (the "Advancement Action") against Quivus in the Delaware Court of Chancery ("Chancery Court"). (Id. at ¶ 2; D.I. 6-1 at 4)

         Harrison alleges that it is not a coincidence that the '"downturn"' in Quivus' financial status, which rendered it unable to pay its advancement obligations, "occurred around the same time that [] Harrison commenced the Advancement Action in March 2016." (Complaint at ¶ 15) Harrison claims that Quivus' suggestion that it was unable to advance these monies is suspicious, given that "Quivus reported over $2.3 million in revenue in 2015 (a full year after Soroof removed [] Harrison as CEO) and an increase in assets in 2015 over 2014[.]" (Id.)[2]

         On August 23, 2016, Harrison obtained an Order in the Advancement Action (the "August 23, 2016 Order") "holding that he was entitled to advancement... of certain fees and expenses incurred in the DC Action and requiring Quivus to indemnify [him] for all of his fees in pursuing the Advancement Action." (Id. at ¶ 2) However, Quivus did not advance Harrison these funds nor indemnify him, as required by the August 23, 2016 Order. (Id. at ¶ 3) This caused Harrison to file a motion for contempt, which the Chancery Court subsequently granted. (Id. at ¶¶ 3-4) In doing so, the Chancery Court ordered Quivus to pay Harrison's counsel in the DC Action $259, 071.88, ordered Quivus to pay Harrison's counsel in the Advancement Action $160, 724.78, and awarded Harrison his fees for bringing the motion for contempt (later determined to be $29, 341.33). (Mat¶4) Additionally, the Chancery Court: (1) ordered that Quivus disclose to it, inter alia, "the manner by which the fees and expenses incurred in defense of the Advancement Action were paid"; and (2) ordered that Harrison was allowed "to propound written discovery requests and take depositions in aid of execution." (Id. at ¶ 5)

         Pursuant to the aforementioned order, Quivus "disclosed that all of the fees incurred in defense of the Advancement Action had been paid by Soroof" (Id. at ¶ 6)[3] Also, in response to discovery propounded in both the DC Action and the Advancement Action, Harrison learned that "Soroof was the sole source of funding for Quivus." (Id.) More specifically, Harrison discovered that Quivus' employees were either paid directly by Soroof, or were paid using funds that Soroof would transfer to a "Quivus Special Account" maintained by Kalbian Hagerty LLP ("Kalbian Hagerty"), a law firm that is representing Soroof and Quivus in the DC Action (and that represents Soroof in the instant action). (Id. at ¶¶ 6, 17) With regard to the latter payment method, a Soroof employee would direct Kalbian Hagerty how much to pay Quivus' employees and would wire that money to the firm; in turn, the firm would provide the funds and payment instructions to Quivus' payroll administrator. (Id. at ¶¶ 6, 17) Kalbian Hagerty also used monies obtained from Soroof to pay other invoices submitted to Quivus. (Id. at ¶ 18)

         Although it complied with the disclosure and discovery requirements ordered by the Chancery Court, Quivus ultimately did not make the payments to Harrison that had been ordered by the Chancery Court. (Id. at ¶ 7) Consequently, on December 22, 2016, Harrison filed a motion for leave to file an amended complaint in the Advancement Action, wherein he sought to add Soroof as a party and "obtain a declaration that Soroof was responsible for Quivus' obligations under a veil piercing theory." (Id.) Additionally, on January 10, 2017, Harrison filed a second motion for contempt against Quivus in the Advancement Action, wherein Harrison again sought to compel payment of the funds owed to him by Quivus and to be appointed receiver of Quivus. (Id.)

         The Chancery Court agreed to hear argument on both motions and scheduled the hearing for March 10, 2017. (Id.) Four days prior to the hearing, the Chancery Court asked the parties to reschedule the hearing to March 9, 2017; Quivus' attorneys advised that they were unable to do so, but provided other dates when they were available. (Id. at ¶ 8) Then, on March 8, 2017, two days prior to the originally-scheduled hearing, "Quivus filed a petition for bankruptcy protection under Chapter 7 of the Bankruptcy Code" (the "Bankruptcy Action") in the United States District Court for the District of Columbia (the "Bankruptcy Court"). (Id.)

         B. Procedural Background In the Instant Case

         Harrison initially filed the instant suit against Soroof in the Chancery Court on March 13, 2017. (Complaint at 1) On April 26, 2017, Soroof filed a notice of removal in this Court on the basis of diversity of citizenship. (D.I. 1) The parties thereafter jointly consented to the Court's jurisdiction to conduct all proceedings in the case, including trial, the entry of final judgment, and all post-trial proceedings. (D.I. 8)

         Soroof filed the instant Motion in lieu of answering on May 17, 2017, (D.I. 6), and briefing was completed on July 6, 2017, (D.I. 10). Harrison thereafter filed additional submissions regarding: (1) a potentially relevant motion filed in the Bankruptcy Action (relating to the Chapter 7 Bankruptcy Trustee's request that Soroof be permitted to purchase Quivus' claims against Harrison), (D.I. 13); (2) potentially relevant decisions in the Bankruptcy Action and DC Action, (D.I. 18); and (3) additional legal authority supportive of its position, (D.I. 19).

         The Court granted oral argument on the Motion, which was held on January 17, 2018. (D.I. 20 (hereinafter, "Tr.")) However, at oral argument, it became clear that a key (and perhaps the key) issue regarding the Motion was whether Harrison's alter ego claim is the property of Quivus' bankruptcy estate (and, thus, whether Harrison has standing to bring that claim here). Yet that issue was addressed in only a few pages of the parties' pre-hearing briefing, and a number of the important cases on the subject were not referenced therein.

         Thus, on January 18, 2018, the Court ordered supplemental briefing on the standing issue. Supplemental briefing was completed by February 2, 2018. (D.I. 23) The parties have stipulated to a stay of the action pending the Court's decision on the Motion. (D.I. 27; D.I. 28)


         Harrison asserted three counts against Soroof in his Complaint: (1) Count I, which seeks a declaration that Quivus is the alter ego[4] of Soroof; (2) Count II, which seeks an order requiring payment of the monies that the Chancery Court previously ordered that Quivus pay to Harrison in the Advancement Action, as well as the payment of other outstanding amounts owed (the "advancement claim"); and (3) Count III, a claim for Harrison's fees in enforcing his advancement award ("fees on fees"). (Complaint at 14-17)

         With its Motion, as noted above, Soroof makes three arguments as to why this action should be dismissed: (1) Harrison failed to state a claim sufficient to establish that Soroof is the alter ego of Quivus; (2) the Court lacks personal jurisdiction over Soroof; and (3) Harrison's alter ego claim is the property of the Quivus bankruptcy estate and thus assertable only by the Bankruptcy Trustee (i.e., Harrison lacks standing to bring that claim here).[5] (D.I. 6-1 at 1)

         The parties agree that Harrison's standing to bring the alter ego claim is a threshold issue, in that, if Harrison lacks standing to assert that claim, then this would moot Soroof s other two bases for relief. (Tr. at 5, 9-12, 36, 54, 59-60; D.I. 21 at 4) Thus, the Court will address that issue first.

         A. Standing to Assert the Alter Ego Claim

         1. Standard of Review

         The parties' briefing did not provide much guidance as to what standard the Court should . use in deciding the standing issue. For example, the parties did not address who bears the burden of proof as to this issue, nor which Federal Rule of Civil Procedure applies to the question. It turns out that there is a considerable difference of opinion among federal courts on these questions.

         Generally, '"Federal Rule of Civil Procedure 12(b)(1) [is the rule that] authorizes dismissal of a complaint for lack of jurisdiction over the subject matter, or if the plaintiff lacks standing to bring his claim."' Arneault v. Diamondhead Casino Corp., 277 F.Supp.3d 671, 674-75 (D. Del. 2017) (quoting Samsung Elecs. Co. v. ON Semiconductor Corp., 541 F.Supp.2d 645, 648 (D. Del. 2008)) (emphasis added); see also Ballentine v. U.S., 486 F.3d 806, 810 (3d Cir. 2007) ("A motion to dismiss for want of standing is also properly brought pursuant to Rule 12(b)(1), because standing is ajurisdictional matter."). Motions under Rule 12(b)(1) may present either a facial or factual challenge to the Court's subject matter jurisdiction and/or standing to hear a case. Gould Elecs. Inc. v. U.S., 220 F.3d 169, 176 (3d Cir. 2000). A facial challenge is based "purely on the sufficiency of the allegations in the complaint" and is reviewed under the same standard as a Rule 12(b)(6) motion—i.e., "the Court must accept well-pled factual allegations as true and may consider only the complaint and any documents referenced therein or attached thereto." Arneault, 277 F.Supp.3d at 675.[6] On the other hand, a factual challenge to standing attaches no presumption of truthfulness "to plaintiffs allegations, and the existence of disputed material facts will not preclude the trial court from evaluating for itself the merits of jurisdictional claims." Mortensen v. First Fed. Sav. & Loan Ass'n, 549 F.2d 884, 891 (3d Cir. 1977). Additionally, a factual challenge puts the burden of proof on the plaintiff. Id. (explaining that sl facial attack to jurisdiction under Rule 12(b)(1) "offer[s] similar safeguards to the plaintiff as does a Rule 12(b)(6) motion, which places the burden on the moving party, as compared to a factual attack to jurisdiction which places the burden of proof on the plaintiff); see also Petruska v. Gannon Univ., 462 F.3d 294, 302 n.3 (3d Cir. 2006).

         However, when it comes to a challenge to a party's standing to bring a claim that may be the property of the bankruptcy estate, there is a lack of uniformity in the courts about whether Rule 12(b)(1) or Rule 12(b)(6) applies to that question. Compare In re Student Fin. Corp., 334 B.R. 776, 777-79 (D. Del. 2005) (dismissing a bankruptcy trustee's tort claims for lack of standing pursuant to Rule 12(b)(6)), with In re Student Fin. Corp., 335 B.R. 539, 546-47 (D. Del. 2005) (declining to dismiss, pursuant to Rule 12(b)(1), a bankruptcy trustee's breach of fiduciary duty claim for lack of standing); cf. Umbenhauer v. Woog, No. CIV. A. 90-5534, 1993 WL 134761, at *l-2 (E.D. Pa. Apr. 28, 1993) (evaluating the standing of creditors to bring certain causes of action under Rule 12(b)(6)). It seems that one reason why there is divergence on this front is that, when it comes to the issue of whether a creditor/debtor/bankruptcy trustee has standing to assert a particular claim, the Third Circuit views the issue as presenting a prudential standing question (as opposed to an Article III standing question).[7] A prudential standing question is one that implicates the requirement that a '"plaintiff [must] generally . . . assert his own legal rights and interests, and [] not rest his claim to relief on the legal rights or interests of third parties.'" In re Majestic Star Casino, LLC, 716 F.3d 736, 748 (3d Cir. 2013) (alterations in original) (quoting Warth v. Seldin, 422 U.S. 490, 498 (1975)). And while some courts have in fact evaluated prudential standing questions pursuant to Rule 12(b)(1), see Acceleration Bay LLC v. Activision Blizzard, Inc., Civil Action No. 15-228-RGA, 2016 WL 3186890, at *5 (D. Del. June 3, 2016) (dismissing an action pursuant to Rule 12(b)(1) because the plaintiff lacked prudential standing), others have taken the position that it is only appropriate to do so using Rule 12(b)(6), see Elizabeth Retail Props., LLC v. KeyBankNat. Ass'n, 83 F.Supp.3d 972, 985-86 (D. Or. 2015) ("While constitutional standing is evaluated under Rule 12(b)(1), prudential standing is evaluated under Rule 12(b)(6).").[8]

         Fortunately for the Court, here it does not matter whether it proceeds under Rule 12(b)(1) or 12(b)(6). That is because there are no factual disputes that would warrant construing Soroof s motion as a factual challenge to Harrison's standing. Here, the Court has not been asked to (and does not need to) rely on any facts other than those: (1) found in the Complaint, (2) found in documents referenced in the Complaint, or (3) that are subject to judicial notice. Since the standard of review for a facial challenge to a party's prudential standing under Rule 12(b)(1) and that of a challenge pursuant to Rule 12(b)(6) is the same, the Court would employ the identical form of review regardless of which Rule applies. That is, the Court must accept Harrison's well- pleaded factual allegations as true and draw all reasonable inferences from those allegations in Harrison's favor.[9] Thus, below the Court will employ this standard and need not make a final determination as to whether it does so pursuant to Rule 12(b)(1) or Rule 12(b)(6).

         2. In re Emoral, Inc. and the Appropriate Legal Framework

         The parties agree that the key case setting out the applicable legal framework here (i.e., for determining whether a non-debtor's claim is property of the bankruptcy estate) is In re Emoral, Inc., 740 F.3d 875 (3d Cir. 2014) ("EmoraF), cert, denied sub nom., Diacetyl Plaintiffs v. AaromaHoldings, LLC, 135 S.Ct. 436 (2014). (D.I. 10 at 1 & n.l; D.I. 21 at 1; D.I. 22 at 1; Tr. at 12-13, 54-55); see also In re Maxus Energy Corp., 571 B.R. 650, 656 (Bankr. D. Del. 2017) ("Emoral provides the current Third Circuit framework for determining whether claims predicated upon successor or alter ego liability against a third-party non-debtor constitute property of the bankruptcy estate."). Emoral stated that:

After a company files for bankruptcy, creditors lack standing to assert claims that are property of the [bankruptcy] estate.... The "estate," as defined in the Bankruptcy Code, includes "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1)).[10] This includes causes of action, which are considered property of the bankruptcy estate if the claim existed at the commencement of the filing and the debtor could have asserted the claim on his own behalf under state law.... In order for a cause of action to be considered "property of the estate," the claim must be a general one, with no particularized injury arising from it. On the other hand, if the claim is specific to the creditor, it is a personal one and is a legal or equitable interest only of the creditor. A claim for an injury is personal to the creditor if the other creditors generally have no interest in that claim....
A cause of action that is "property of the estate" is properly pursued by the trustee because it inures to the benefit of all creditors. This promotes the orderly distribution of assets in bankruptcy, and comports with the fundamental bankruptcy policy of equitable distribution to all creditors that should not be undermined by an individual creditor's claim.... As the Second Circuit has held, when examining "common claims against the debtor's alter ego or others who have misused the debtor's property in some fashion," where a claim is a general one, with no particularized injury arising from it, and if that claim could be brought by any creditor of the debtor, the trustee is the proper person to assert the claim, and the creditors are bound by the outcome of the trustee's action."

Emoral, 740 F.3d at 879 (certain internal quotation marks omitted, citations omitted).

         Although the parties agree that Emoral sets out the applicable legal framework, they disagree about exactly what that framework requires. Soroof s view is that, in order to demonstrate that Harrison's alter ego claim is the property of the bankruptcy estate, Emoral only requires a showing that either: (1) the claim "existed at the commencement of the [bankruptcy] filing and the debtor could have asserted the claim on his own behalf under state law" or (2) the claim is a "general claim" with "no particularized injury arising from it." (Tr. at 27) Harrison, on the other hand, reads Emoral as requiring both: (1) that the claim existed at the time of the bankruptcy filing and was assertable by the debtor under state law and (2) that the claim is a "general" one. (D.I. 22 at 1)

         Below, the Court assumes arguendo that the Emoral framework is properly construed as being cumulative (not disjunctive), since both requirements are described in Emoral as hallmarks of claims that are the property of the bankruptcy estate. See In re Maxus Energy Corp., 571 B.R. at 657-58 (noting that the parties disagreed as to whether the Emoral requirements were cumulative or disjunctive and ultimately deciding that the requirements were cumulative); cf. In re Icarus Holding, LLC, 391 F.3d 1315, 1319-20 (11th Cir. 2004) (stating that an alter ego claim is properly brought by the bankruptcy trustee if it is "a general claim that applies equally to all creditors" and "state law allows the corporate entity to bring an alter ego action against its principal"); Bd. of Trs. of Teamsters Local 863 Pension Fund v. Foodtown, Inc., 296 F.3d 164, 170 n.8 (3d Cir. 2002) ("[I]f, at the time of Twin's filing, Appellant's cause of action existed and was general, it would be the property of the bankruptcy estate and Appellant would lack standing to pursue the action."). It will thus analyze below whether Soroof has shown that both of these requirements have been met. In doing so, the Court will, inter alia, engage in further analysis of Emoral and the guidance set out in that case.

         3. The Alter Ego Cause of Action Is Property of the Bankruptcy Estate

         The parties agree that Delaware state law controls the analysis of Harrison's alter ego claim for purposes of applying the Emoral framework. (D.I. 22 at 1 n.l; D.I. 23 at 1) And the parties also agree as to the requirements for making out an alter ego claim under Delaware law. (D.I. 6-1 at 6-7; D.I. 9 at 10-11)

         "Delaware courts will respect corporate formalities, absent a basis to 'pierce the corporate veil.' . . . One such basis is where a subsidiary is in fact a mere instrumentality or alter ego of its owner." Microsoft Corp. v. Amphus, Inc., C.A. No. 8092-VCP, 2013 WL 5899003, at *6 (Del. Ch. Oct. 31, 2013) (internal quotation marks and citations omitted). "A subsidiary may be the alter ego . . . of its parent when the two operate[] as a single economic entity such that it would be inequitable for [a court] to uphold a legal distinction between them." Id. (internal quotation marks and citation omitted). In addition to the requirement that the two companies operate as a single entity, Delaware law also "requires that the corporate structure cause fraud or similar injustice." Wallace ex rel. Cencom Cable Income Partners II, Inc. v. Wood, 752 A.2d 1175, 1184 (Del. Ch. 1999) (internal quotation marks and citation omitted); see also Theravectys SA v. Immune Design Corp., C.A. No. 9950-VCN, 2014 WL 5500506, at *2 (Del. Ch. Oct. 31, 2014) ("The alter ego doctrine typically only applies when the use of 'the corporate form in and of itself operates to serve some fraud or injustice."') (citation omitted). '"Effectively, the corporation must be a sham and exist for no other purpose than as a vehicle for fraud.'" Mason v. Network of Wilmington, Inc., No. Civ. A. 19434-NC, 2005 WL 1653954, at *3 (Del. Ch. July 1, 2005) (quoting Wallace ex rel. Cencom Cable Income Partners II, Inc., 752 A.2d at 1184).

         With the contours of an alter ego claim now set out, the Court turns back to the two requirements of the Emoral framework. Soroof argues that Harrison's Delaware alter ego claim meets both requirements, and is thus property of the bankruptcy estate. (D.I. 10 at 1-2; D.I. 21 at 2, 4) Although the issue is a challenging one, and both sides made strong arguments, for the reasons set out below, the Court agrees with Soroof.

         a. The alter ego claim existed at the commencement of theBankruptcy Action, and Quivus could have asserted the alter ego ...

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