Jennifer L. Stritzinger
Dennis Barba, et al.
Submitted: May 15, 2018
T. O'Kelly, Esquire, Ryan M. Ernst, Esquire, O'Kelly
Ernst & Joyce, LLC,
Michael W. McDermott, Esquire Sean A. Meluney, Esquire Berger
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.
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. Any additional
facts are either not subject to reasonable dispute or subject
to judicial notice.
Jennifer L. Stritzinger is a stockholder, but not a
dues-paying member, of nominal defendant Newark Country Club
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.
The Club Faces Financial Difficulties
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.
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. 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
The Newark Country Club Mortgage Company
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."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.
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. The Board chose to pursue the Mortgage
21, 2016, Barba solicited a $100, 000 bridge loan to cover
the Club's "annual shortfall." 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.
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.
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.
January 4, 2017, the Mortgage Company loaned the Club $399,
000 at an interest rate of 5.75%. 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
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.
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.
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.
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.
Plaintiff Has Failed to Establish that Making a
Demand Would Have Been Futile With Respect to Count
asserts that the Director Defendants breached their fiduciary
duty by approving the Loan with the Mortgage
Company. This claim, which seeks an award of
compensatory damages to be paid ...