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Stritzinger v. Barba

Court of Chancery of Delaware

August 31, 2018

Jennifer L. Stritzinger
Dennis Barba, et al.

          Submitted: May 15, 2018

          Sean T. O'Kelly, Esquire, Ryan M. Ernst, Esquire, O'Kelly Ernst & Joyce, LLC,

          Michael W. McDermott, Esquire Sean A. Meluney, Esquire Berger Harris LLP

         Dear Counsel:

         This letter constitutes the court's decision on defendants' motion to dismiss the Second Amended Complaint, which asserts a claim for breach of fiduciary duty and seeks the appointment of a receiver. For the reasons explained below, the motion to dismiss is granted.

         I. Background

         The facts recited in this letter decision are drawn from the Verified Second Amended Derivative Complaint (the "Second Amended Complaint") filed on February 16, 2018, and documents incorporated therein.[1] Any additional facts are either not subject to reasonable dispute or subject to judicial notice.

         A. The Parties

         Plaintiff Jennifer L. Stritzinger is a stockholder, but not a dues-paying member, of nominal defendant Newark Country Club (the "Club").

         Defendants are the twelve members of the Club's board of directors (the "Board"): Dennis Barba, Ron Holliday, Michael Barrow, Cheree McPhee, Fred Mink, Fritz Land, Todd Ladutko, Bob Kennedy, Charlotte Short, Chris Scherf, Tom Hall, and Jim Brown (the "Director Defendants"). Barba was the president of the Club during the relevant period and Scherf is the current president.

         B. The Club Faces Financial Difficulties

         The Club was formed in 1921. It is a private corporation governed by the Delaware General Corporation Law, 8 Del. C. § 101 et seq., that operates as a country club, with a club house, a golf course, and related operations in Newark, Delaware. The Club's most meaningful asset is the land it owns. Before the transaction at issue in this case, there were three mortgages on that property totaling approximately $1.8 million.

         Over the years, developers have approached the Club and the Board with proposals to purchase and develop the Club's land. The Board has rejected all such proposals, despite the Club having "operated at a deficit for years," including net losses of $266, 252 in 2014, $242, 154 in 2015, and $416, 392.70 in 2016.[2] According to Stritzinger, the "decisions to reject these proposals were not done in the interests of protecting the value belonging to the Club and its equity stockholders, but instead were done with the goal of maintaining control of the country club and allowing its club members to enjoy its recreational offerings and facilities."[3]

         C. The Newark Country Club Mortgage Company

         On May 21, 2016, one of the defendants, Ladutko, emailed his fellow Board members a proposal to relieve the pressure on the Club's "cash flow problems."[4]Specifically, Ladutko suggested that members of the Club create a limited liability company to loan money to the Club, with the loan to be secured by another mortgage on the Club's property (the "Loan"). The Board was receptive to the idea, and Barba sent an email to the Club's members regarding the proposed plan to raise financing for club operations.

         On June 16, 2016, the Club held a "town hall meeting" at which its members discussed the Club's long-term plans. The Club's members discussed four options: (i) merging with another club; (ii) selling the Club to a land broker, but allowing the Club to continue its operations for ten years; (iii) working with the city of Newark for it to purchase the development rights of the property; and (iv) forming Newark Country Club Mortgage Company, LLC (the "Mortgage Company") to make the Loan to the Club.[5] The Board chose to pursue the Mortgage Company option.

         On July 21, 2016, Barba solicited a $100, 000 bridge loan to cover the Club's "annual shortfall."[6] Barba referenced the proposed Mortgage Company in his request for additional funds from Artisan's Bank, a bank with which the Club already had a $150, 000 line of credit. The Board set a deadline of September 30, 2016 for Club members and equity holders to participate in the Mortgage Company through the sale of membership interests, with the proceeds to be loaned to the Club. The interest rate on the Loan would be 5.75% per annum, paid bi-annually, and the Club would grant the Mortgage Company a mortgage on the Club's property.

         Some Club members raised concerns about the proposed transaction. In response, the Board circulated answers to "Frequently Asked Questions" on September 26, 2016. This document described how the proceeds of the Loan would be used. Specifically, it stated that the funds would be used to repay certain of the Club's short-term obligations but would not secure the long-term financial future of the Club.

         On December 4, 2016, the Board formally adopted a financing agreement with the Mortgage Company. Five of the twelve members of the Board-Kennedy, Ladutko, Scherf, Short, and Land-invested in the Mortgage Company. They all recused themselves from the Board vote authorizing the transaction.

         On January 4, 2017, the Mortgage Company loaned the Club $399, 000 at an interest rate of 5.75%.[7] The proceeds of the Loan allegedly were used to pay off the Club's line of credit with Artisan's Bank and a portion of back taxes it owed.[8]

         II. Procedural History

         On September 27, 2016, after serving a books and records demand on the Club a few months earlier, Stritzinger filed her initial complaint along with a motion for expedited proceedings and a motion for a temporary restraining order seeking to enjoin the Club from closing the Loan transaction. Two days later, Stritzinger withdrew her motion for a temporary restraining order.

         On October 28, 2016, Stritzinger again sought expedition. On November 3, 2016, the court denied the renewed motion for expedition based on, among other things, Stritzinger's failure to demonstrate a sufficient threat of irreparable harm given the availability of a damages remedy. Over ten months later, on September 14, 2017, Stritzinger amended her complaint, which defendants moved to dismiss. In lieu of briefing that motion, Stritzinger amended her complaint a second time without opposition from defendants.

         On February 16, 2018, Stritzinger filed the Second Amended Complaint, asserting two claims. On February 21, 2018, defendants moved to dismiss these claims under Court of Chancery Rules 23.1 and 12(b)(6) for failure to make pre-suit demand on the Board and failure to state a claim for relief.

         III. Analysis

         Count I of the Second Amended Complaint asserts a claim for breach of fiduciary duty against the Director Defendants. Count II seeks the appointment of a receiver for the Club. I address defendants' motion to dismiss with respect to each claim, in turn, below.

         A. Plaintiff Has Failed to Establish that Making a Demand Would Have Been Futile With Respect to Count I

         Count I asserts that the Director Defendants breached their fiduciary duty by approving the Loan with the Mortgage Company.[9] This claim, which seeks an award of compensatory damages to be paid ...

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