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JPMorgan Chase Bank, N.A. v. Claudio Ballard

Court of Chancery of Delaware

July 11, 2019

JPMORGAN CHASE BANK, N.A., individually, and on behalf of itself and other creditors similarly situated, Plaintiff,
v.
CLAUDIO BALLARD, KEITH DELUCIA, GARY KNUTSEN, SHEPHARD LANE, PETER LUPOLI, IRA LEEMON, JOHN KIDD, CELESTIAL PARTNERS, LLC, ZAAH TECHNOLOGIES, INC., VEEDIMS, LLC, POTENS PARTNERS LLC, AND DATATREASURY CORPORATION Defendants.

          Date Submitted: April 11, 2019

          Gregory P. Williams and John D. Hendershot, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Zachary G. Newman, Annie P. Kubic, and Steven R. Aquino, HAHN & HESSEN LLP, New York, New York; Attorneys for Plaintiff JPMorgan Chase Bank, N.A.

          Michael A. Weidinger and Elizabeth Wilburn Joyce, PINCKNEY, WEIDINGER, URBAN & JOYCE LLC, Greenville, Delaware; Attorneys for Defendants Claudio Ballard, Keith DeLucia, Shephard Lane, Peter Lupoli, Ira Leemon, John Kidd, Celestial Partners, LLC, and VEEDIMS, LLC.

          Andrew D. Cordo, ASHBY & GEDDES, PA, Wilmington, Delaware; Rachel A. Kerlek, WOODS, WEIDENMILLER, MICHETTI & RUDNICK, LLP, Naples, Florida; Attorneys for Defendant Gary Knutsen.

          OPINION

          BOUCHARD, C.

         In June 2005, JPMorgan Chase Bank, N.A., ("J.P. Morgan") and Data Treasury Corporation ("DTC") entered into a licensing agreement to settle a patent infringement lawsuit. In exchange for a license on DTC's check imaging patents, J.P. Morgan paid $70 million to DTC, subject to J.P. Morgan's right to receive a refund if DTC licensed the same patents to someone else on more favorable terms.

         Beginning in January 2006, DTC licensed its patents to many other companies for a small fraction of what J.P. Morgan had paid for its license without telling J.P. Morgan, in violation of DTC's obligation to do so. After catching wind of this, J.P. Morgan sued DTC and obtained a final judgment against DTC for $69 million in June 2015. The judgment was affirmed on appeal in 2016 but remains unpaid.

         J.P. Morgan brings this action in aid of its efforts to collect on its judgment. J.P. Morgan asserts claims against DTC, its directors at relevant times, and certain affiliates to recover two categories of distributions that DTC allegedly made unlawfully to evade its liability for the refund it owed to J.P. Morgan: (i) dividends DTC paid its stockholders from 2006 to 2010, and (ii) other payments DTC made to certain insiders from 2011 to 2013. J.P. Morgan's two main claims are that DTC's directors should be personally liable for the dividends DTC paid from 2006 to 2010 under 8 Del. C. § 174, and that J.P. Morgan is entitled to recover all of the distributions at issue (both the dividends and other payments) because they were fraudulent transfers under the Delaware Uniform Fraudulent Transfer Act.

         DTC moved to dismiss all of J.P. Morgan's claims on a variety of grounds. The motion implicates two questions of first impression concerning Section 174 of the Delaware General Corporation Law, and a third question of first impression concerning a limitations period in the Delaware Uniform Fraudulent Transfer Act.

         The first question is whether one must be a judgment creditor at the time of an allegedly unlawful dividend to have standing to maintain a claim under Section 174 to recover the dividend for the benefit of the corporation's "creditors" in the event of the corporation's insolvency. As explained below, the court concludes that the answer to this question is no because the term "creditors" as used in Section 174 only requires that a person have a claim at the time of the allegedly unlawful dividend. The court thus finds that J.P. Morgan has standing as a creditor of DTC to assert a claim under Section 174 to recover for itself and other creditors of DTC the dividends DTC paid from 2006 to 2010 even though J.P. Morgan did not obtain its judgment against DTC until 2015.

         The second question is whether the six-year limitations period in Section 174 is a statute of limitations to which tolling principles may be applied, or a statute of repose to which tolling principles do not apply. Based on the plain language of the statute, as confirmed by the legal history of Section 174 dating back to the late 1800's, the court concludes that the six-year limitations period in Section 174 is a statute of repose. The court thus finds that J.P. Morgan's Section 174 claim must be dismissed as untimely because it did not file this action until 2018, more than six years after any of the challenged dividends were paid.

         The third question is whether the one-year discovery period in Section 1309(1) of the Delaware Uniform Fraudulent Transfer Act starts when the mere existence of an allegedly fraudulent transfer is or could reasonably have been discovered, or whether it starts when the fraudulent nature of the transfer was or could reasonably have been discovered. Based on the reasoning and substantial weight of authority in other jurisdictions that have considered the issue, the court adopts the latter approach and finds that all of J.P. Morgan's fraudulent transfer claims (challenging both the dividends and other payments) were timely filed.

         For the reasons just summarized, and others explained below, defendants' motion to dismiss the complaint is granted in part and denied in part.

         I. BACKGROUND

         The facts recited herein are based on the allegations of the Verified Complaint (the "Complaint") and documents incorporated therein.[1] Any additional facts are either not subject to reasonable dispute or are subject to judicial notice, including opinions in the action J.P. Morgan brought against DTC in the United States District Court for the Eastern District of Texas (the "Texas Action").

         A. The Parties

         J.P. Morgan is a National Association organized under the laws of the United States, with its principal place of business in Columbus, Ohio. It is a successor in interest to Bank One Corporation.

         DTC is a Delaware corporation. Since 2005, DTC's primary business was suing financial institutions for infringement of two patents for check-imaging technology, often settling such lawsuits by entering into licensing agreements. DTC is a non-public company that allegedly maintained assets below $10 million so it would not be subject to any reporting requirements of the Securities and Exchange Commission.[2]

         The Complaint names seven individuals as defendants who served as directors of DTC when the transactions at issue in this case occurred: Claudio Ballard, Keith DeLucia, Gary Knutsen, Shephard Lane, Peter Lupoli, Ira Leemon, and John Kidd (collectively, the "DTC Directors"). Ballard was the founder of DTC and its Chairman at all relevant times. He died after this action was filed. Knutsen was DTC's Vice Chairman and a Finance Committee member before he resigned from all of his positions at DTC on or about December 29, 2012.

         Defendant Celestial Partners, LLC was a Delaware limited liability company "owned, operated, controlled, and dominated by Ballard" and is alleged to be the alter ego of Ballard.[3] Defendants Potens Partners LLC and VEEDIMS, LLC are both Delaware limited liability companies that were owned and controlled by Ballard. Defendant Zaah Technologies, Inc. is a Delaware corporation and an affiliate of DTC.

         B. The 2005 License Agreement Between DTC and J.P. Morgan and Subsequent Licensing Agreements

         On June 28, 2005, J.P. Morgan and Bank One each entered into a licensing agreement with DTC in connection with settling a lawsuit DTC had brought against them for allegedly infringing its patents. Before the agreements were executed, Bank One merged into JPMorgan Chase & Co., J.P. Morgan's parent company. These two licensing agreements are referred to together as the "JPM License Agreement." DTC received a total of $70 million under the JPM License Agreement, $30 million up front and the remaining $40 million in annual installments through May 31, 2012.[4]

         Section 9 of the JPM License Agreement contains a most-favored license provision (the "MFL Provision"). It states, in relevant part, that:

If DTC grants to any other Person a license to any of the Licensed Patents, it will so notify [J.P. Morgan], and [J.P. Morgan] will be entitled to the benefit of any and all more favorable terms with respect to such Licensed Patents. . . . The notification required under this Section shall be provided by DTC to [J.P. Morgan] in writing within thirty (30) days of the execution of any such third party license and shall be accompanied by a copy of the third party license agreement, which may be redacted by DTC if necessary to comply with any judicial order or other confidentiality obligation.[5]

         In a July 2005 press release, DTC stated that the JPM License Agreement included "'most favored licensee' protection for JPMorgan Chase, giving the bank a competitive edge in check-processing."[6] According to the Complaint, although J.P. Morgan was unaware of it at the time, DTC began violating the MFL Provision soon after entering into the JPM License Agreement by entering into licensing agreements for the same patents with other parties without informing J.P. Morgan.[7]

         In January 2006, DTC granted NCR Corporation a lump-sum license for the same patents for $2.85 million.[8] A few months later, DTC granted another lump-sum license for only $575, 000.[9] Between 2006 and 2013, DTC entered into dozens of other licensing agreements involving the same patents, many of which were for significantly less than the terms of the JPM License Agreement.[10] In one license relevant to the outcome of the Texas Action, DTC licensed the same patents covered under the JPM License Agreement to Cathay General Bancorp on October 1, 2012 for a lump sum of $250, 000 (the "Cathay license").[11] DTC did not notify J.P. Morgan about the Cathay license and did not include the refund owed to J.P. Morgan on its financial statements, balance sheets, or list of liabilities.[12]

         On or about June 9, 2011, J.P. Morgan sent a letter to DTC indicating that it learned that DTC had entered into other license agreements, requesting copies of such agreements, and reminding DTC that a refund was due if any of those agreements contained more favorable payment terms.[13] On June 21, 2011, DTC responded, confirming it would give J.P. Morgan "access to all of its license agreements in accordance to the terms of the [JPM License] Agreement."[14] Over the next few months, DTC sent letters to numerous subsequent licensees advising them that DTC would provide copies of their license agreements to J.P. Morgan for review.[15]

         C. DTC Issues Dividends (2006-2010)

         Between 2006 and 2010, while DTC continuously was entering into license agreements for the same patents with more favorable terms than the JPM License Agreement, it issued more than $117 million in dividends to its stockholders.[16]These dividends are referred to hereafter as the "Challenged Dividends."

         J.P. Morgan alleges that during this time period, DTC and its directors knew or should have known that its business was in jeopardy. Not only should they have known that DTC owed J.P. Morgan a large refund under the JPM License Agreement, [17] but they also knew that the America Invents Act[18]-signed into law in 2011-could impede DTC's primary income source.[19] J.P. Morgan alleges that DTC's board of directors willfully, recklessly, or negligently approved the payments of these dividends at a time when DTC lacked sufficient surplus or net profits, that DTC was insolvent or rendered insolvent at the time of the dividends, and that the payments were made to avoid paying J.P. Morgan.[20]

         D. DTC Transfers Funds to Insiders (2011-2013)

         Between 2011 and 2013, while DTC was on notice that it may owe J.P. Morgan a large refund and after J.P. Morgan commenced litigation against it, DTC transferred approximately $13.7 million to the following insiders and affiliates:[21]

Recipient

2011

2012

2013

Total

Shephard Lane

$959, 843

$3, 112, 586

$258, 800

$4, 331, 229

Keith DeLucia

$2, 725, 000

$925, 000

$186, 757

$3, 836, 757

Celestial Partners (Ballard affiliate)

$863, 009

$3, 098, 807

$0

$3, 961, 816

Gary Knutsen

$52, 000

$0

$52, 000

$104, 000

Peter Lupoli

$52, 000

$52, 000

$52, 000

$156, 000

Ira Leemon

$52, 000

$52, 000

$52, 000

$156, 000

John Kidd

$52, 000

$52, 000

$52, 000

$156, 000

Potens (Ballard affiliate)

$0

$110, 208

$0

$110, 208

Zaah Technologies (DTC affiliate)

$0

$0

$915, 811

$915, 811

         The transfers listed above are referred to hereafter as the "Challenged Transfers." DTC also made a $1.5 million loan to VEEDIMS in 2012.[22]

         Several of these transfers were discussed during a board meeting on June 13, 2012. Knutsen asked about the payment to Potens, but Ballard could not recall why the payment was made and DTC's CEO DeLucia stated that he was not aware of any authorized payments to Potens.[23] Ballard promised to look into the reason for the payment.[24] At the same meeting, Knutsen questioned a $300, 000 payment to Celestial, DeLucia indicated that he was not aware of the payment, and Ballard could not recall the exact reason for it but thought it may have been a loan to him.[25]

         E. The Texas Action

         On November 29, 2012, J.P. Morgan sued DTC in the Texas Action.[26] On February 5, 2015, the district court partially granted J.P. Morgan's motion for summary judgment.[27]

         In its summary judgment motion, J.P. Morgan sought "the benefit of the more favorable price and other terms of the Cathay license."[28] The district court concluded that there was no material dispute that DTC was in breach of the JPM License Agreement.[29] It reasoned that the MFL Provision was self-executing because its plain language "makes its operation automatic" and that DTC violated the provision by failing to give J.P. Morgan timely notice of the Cathay license.[30]

         Turning to damages, the district court held that the MFL Provision applied retroactively to lump-sum license agreements such as the Cathay license:

Therefore, where a licensee with a most favored licensee clause seeks to replace what has become a less-favored lump-sum license payment with a later-granted, more favorable lump-sum payment, the only way to give meaning to the MFL clause is by retroactive substitution of the payment term. That is the outcome of the parties' contract here.[31]

         The district court also held that J.P. Morgan could take advantage of the more favorable consideration term of the Cathay license, even if other aspects of the Cathay license were less favorable, but that the court "must consider Cathay's total package of consideration."[32] That package included Cathay's agreement to make additional payments to cover later-acquired assets based on specific formulas included in the Cathay license, which "would necessarily also have to be applied retroactively" to J.P. Morgan.[33] This created a factual dispute, however, because there was no evidence in the record as to whether any companies J.P. Morgan had acquired after entering into the JPM License Agreement had used the covered patents, which would reduce the recovery by J.P. Morgan.[34]

         On June 2, 2015, J.P. Morgan and DTC stipulated in the district court that DTC was "unable to raise a genuine dispute as to any material fact controverting [J.P. Morgan's] claim of $69 million in damages and that [J.P. Morgan] is entitled to judgment as a matter of law regarding damages."[35] That same day, the district court entered a final judgment awarding J.P. Morgan "damages of $69 million against DTC" (the "Judgment").[36]

         On May 19, 2016, the United States Court of Appeals for the Fifth Circuit affirmed the Judgment.[37] The Fifth Circuit noted that "[t]he district court first concluded that DTC breached the contract because the MFL is self-executing . . . . DTC does not assign as error [this] conclusion, so it has waived any argument on [it]."[38] The court also emphasized that "DTC never even provided sufficient notice of its earlier breaches as required by the MFL clause."[39]

         F. Post-Judgment Discovery in the Texas Action

         After the Judgment was entered in the Texas Action, J.P. Morgan served discovery on DTC and its attorneys asking them to identify dividends DTC had paid and other financial transactions.[40] DTC objected to producing or having any non-party produce such documents for the period before June 2011, contending they were irrelevant "because June 2011 is the date [J.P. Morgan] first notified DTC of a potential issue involving the most favored license clause."[41] For the time period after June 2011, DTC did produce some documents.

         On April 13, 2017, during a meet and confer session, DTC's counsel revealed that after J.P. Morgan had made its post-Judgment discovery demands, DTC transferred its corporate documents to an office in Florida leased by VEEDIMS.[42]VEEDIMS abandoned the documents and permitted them to be destroyed by the building's landlord.[43]

         J.P. Morgan subpoenaed the DTC Directors in the Texas Action, but they have produced no documents.[44] Despite a March 2017 court order requiring DTC to produce Lane for a deposition, DTC has not made him available for deposition, allegedly due to health concerns, and DTC has not offered any alternative witness to be deposed.[45]

         On December 15, 2017, the district court denied J.P. Morgan's motion to compel the pre-June 2011 documents it sought.[46] That issue was on appeal in the Fifth Circuit as of the date the instant motion to dismiss was argued.[47]

         Also on December 15, 2017, the district court ordered DTC to produce to J.P. Morgan by February 13, 2018 financial records concerning matters that occurred on or after June 1, 2011.[48] On the deadline, DTC produced seven documents, none of which provide any information as to whether DTC received consideration for the allegedly fraudulent transfers.[49] One document DTC did produce shows that DTC issued dividends totaling at least $117, 148, 242.07 between January 2002 and May 2013.[50] The Judgment remains unsatisfied.[51]

         II. PROCEDURAL HISTORY

         On December 27, 2017, J.P. Morgan filed an earlier action in this court against the DTC Directors and Celestial Partners challenging as unlawful certain dividends DTC issued in 2011 and 2012.[52] The DTC Directors filed an answer, and that case is in discovery.

         On April 12, 2018, J.P. Morgan filed this action, which focuses on the Challenged Dividends and Challenged Transfers. J.P. Morgan attempted to consolidate this action with its earlier action, but the defendants refused to consent to consolidation.[53]

         The Complaint contains four claims. Count I, which J.P. Morgan brings "individually and on behalf of other legitimate creditors" of DTC, [54] asserts that the DTC Directors and Celestial Partners, as the alter ego of Ballard, are liable, jointly and severally, for the amount of the Challenged Dividends because "DTC lacked sufficient surplus or net profits, and/or was otherwise insolvent or rendered insolvent by the payment of the dividends, in violation of" Sections 170, 172, 173, and 174 of the Delaware General Corporation Law.[55] Count II asserts that the Challenged Transfers were fraudulent.[56] Count III seeks an award of attorneys' fees incurred in connection with the investigation and prosecution of this action based on DTC's fraudulent transfers.[57] In Count IV, which J.P. Morgan asserts as a judgment creditor of DTC, J.P. Morgan seeks to collect payment on a note for $1.5 million that VEEDIMS owes to DTC but has failed to pay.[58]

         On May 25, 2018, the DTC Directors, Celestial Partners, and VEEDIMS moved to dismiss all the claims in the Complaint under Court of Chancery Rule 12(b)(6) for failure to state a claim for relief and, with respect to the fraudulent transfer claims, under Court of Chancery Rule 9(b) for failure to plead fraud with particularity.[59] The remaining two defendants (Zaah Technologies, Inc. and Potens Partners LLC) have failed to appear in this case even though it appears they were served via their Delaware registered agents on May 2, 2018.[60]

         On January 22, 2019, after hearing oral argument on the motion to dismiss, the court requested supplemental briefing on several issues concerning the six-year time limitation in 8 Del. C. § 174(a). Supplemental briefing was completed on April 11, 2019.

         III. ANALYSIS

         The standard governing a motion to dismiss under Court of Chancery Rule 12(b)(6) for failure to state a claim for relief is well settled:

(i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are "well-pleaded" if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences in favor of the non-moving party; and ([iv]) dismissal is inappropriate unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof.[61]

         Under Court of Chancery Rule 9(b), "the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge and other condition of mind of a person may be averred generally."[62]

         Defendants raise a variety of arguments as to why this court should dismiss each of their claims. With respect to the Challenged Dividends, defendants assert that J.P. Morgan (i) is barred by judicial estoppel; (ii) lacks standing under Section 174; and (iii) is time-barred based on the six-year limitation period in Section 174. With respect to the Challenged Transfers, defendants assert J.P. Morgan's claim is untimely and inadequately pled. The court will examine these issues in that order before turning to defendants' arguments for dismissal of the claims against VEEDIMS and Celestial Partners.

         A. J.P. Morgan's Unlawful Dividend Claims Are Not Barred by Judicial Estoppel

         Defendants argue that J.P. Morgan's pursuit of claims in this court challenging dividends that DTC paid from 2006 to 2010 should be barred under the doctrine of judicial estoppel.[63] "Judicial estoppel applies when a litigant's position 'contradicts another position that the litigant previously took and that the Court was successfully induced to adopt in a judicial ruling.'"[64] Put another way, judicial estoppel "acts to preclude a party from asserting a position inconsistent with a position previously taken in the same or earlier legal proceeding" that the court was persuaded to accept.[65] "The 'persuaded to accept' element is important [because] parties raise many issues throughout a lengthy litigation and only those arguments that persuade the court can form the basis for judicial estoppel."[66]

         According to defendants, J.P. Morgan should be judicially estopped because it obtained its Judgment in the Texas Action by "basing its breach claim upon pursuit of the more favorable price term of the 2012 Cathay license, and not any earlier license," but J.P. Morgan now is seeking to rely on licenses DTC entered into previously to establish that DTC breached the MFL Provision and that J.P. Morgan became a creditor of DTC before it paid out the Challenged Dividends beginning in 2006.[67] The fatal flaw in defendants' argument is that defendants have not identified any position J.P. Morgan advanced in the Texas Action that was adopted in a judicial ruling and that is contrary to any of their claims in this case.

         In obtaining the Judgment in the Texas Action, J.P. Morgan relied on the Cathay license to determine its damages. It made sense for J.P. Morgan to do so because the amount Cathay paid for the license was relatively modest ($250, 000) and J.P. Morgan could only use the more favorable terms of one license agreement to establish the amount of its damages. Critically, however, defendants have not identified any occasion when J.P. Morgan took the position in the Texas Action that DTC had not breached the MFL Provision before entering into the Cathay license (e.g., by failing to provide notice to J.P. Morgan of earlier licensing agreements containing more favorable terms than the JPM License Agreement), or that J.P. Morgan was not a creditor of DTC before the Cathay license. Indeed, in affirming the district court's damages award, the Fifth Circuit expressly recognized that there were "earlier breaches" of the MFL Provision than DTC's failure to provide notice of the 2012 Cathay license.[68]

         It is true, as defendants point out, that the district court denied J.P. Morgan the opportunity to take post-Judgment discovery in the Texas Action for pre-June 2011 events.[69] But that ruling was not based on a position J.P. Morgan advanced. Rather, the district court declined to order production of pre-June 2011 matters based on the arguments advanced by DTC.[70] J.P. Morgan sought discovery in the district court for events dating back to 2006, and has appealed to the Fifth Circuit the district court's refusal to permit such discovery.[71]

         In short, defendants' judicial estoppel defense fails because they have not identified any position J.P. Morgan advanced in the Texas Action that any court relied on in making a ruling that is inconsistent with a position J.P. Morgan has advanced in this case.

         B. J.P. Morgan Has Standing to Pursue Its Unlawful Dividend Claims on Behalf of Itself and DTC's Other Creditors

         Defendants argue that J.P. Morgan does not have standing to pursue its unlawful dividend claims under 8 Del. C. § 174. In relevant part, Section 174 provides that:

In case of any wilful or negligent violation of § 160 or § 173 of this title, the directors under whose administration the same may happen shall be jointly and severally liable, at any time within 6 years after paying such unlawful dividend or after such unlawful stock purchase or redemption, to the corporation, and to its creditors in the event of its dissolution or insolvency, to the full amount of the dividend unlawfully paid, or to the full amount unlawfully paid for the purchase or redemption of the corporation's stock, with interest from the time such liability accrued.[72]

         As the text emphasized above makes clear, in the event of a corporation's insolvency, the "creditors" of the corporation may obtain a recovery from the directors personally if they willfully or negligently violated Section 173. That section prohibits the payment of dividends that do not comply with other provisions of the Delaware General Corporation Law, including the requirement to pay dividends out of surplus or net profits. Thus, as a logical matter, only someone who is a "creditor" within the meaning of the statute can have standing to bring such a claim.

         Defendants argue that J.P. Morgan was not a "creditor" and thus "does not have standing to challenge dividends issued by DTC in years 2006 through 2010" because J.P. Morgan "did not become a judgment creditor of DTC until 2015."[73] In other words, defendants contend that one must have a judgment in hand to be a "creditor" under Section 174.

         J.P. Morgan argues in response that the term "creditor" in Section 174 should be construed more broadly to mean someone who has a "claim." Applying the statute in this manner, J.P. Morgan contends as a factual matter that it was a creditor for purposes of Section 174 once DTC entered into a license with terms more favorable than the JPM License Agreement given the self-executing nature of the MFL Provision. The court agrees with J.P. Morgan.

         The term "creditor" is not defined in Section 174, and only one case has been identified that touches on the issue-our Supreme Court's 1985 decision in Johnston v. Wolf.[74] In that case, the Supreme Court considered whether three individuals (Johnston, Praught, and Baron) had standing under Section 174 to challenge the redemption of preferred stock by a company ("pre-merger Allied") that subsequently was merged into "New Allied." In analyzing that question for two of the plaintiffs (Johnston and Praught) whom the high court characterized as "creditors of New Allied on account of certain trade indebtedness" it owed to them, the Supreme Court concluded that they were not "'creditors' of pre-merger Allied within the meaning of 8 Del. C. § 174 because, in fact, they did not have a claim against pre-merger Allied when it went out of existence."[75] In other words, although it did not directly analyze the meaning of the term "creditor" under Section 174, the Supreme Court appeared to equate the term "creditor" to having a "claim" even though the claim had not been reduced to a judgment.[76]

         Focusing on the third individual in Johnston (Baron) who sought standing to bring a claim under Section 174, defendants argue that the Supreme Court suggested that one must have a judgment to be a "creditor" under the statute. The court disagrees. Baron was differently situated than the other two plaintiffs in Johnston: Baron asserted that he was a creditor based on a "judgment for fees and expenses" he had obtained in the Court of Chancery while, as noted above, the other two plaintiffs (Johnston and Praught) based their Section 174 claim on "certain trade indebtedness" owed to them.[77] Importantly, in rejecting Baron's standing argument, the Supreme Court never opined that it was necessary to hold a judgment in order to be a creditor under Section 174. It simply concluded that the judgment Baron held, which was the basis for his Section 174 claim, [78] failed to give him standing against pre-merger Allied because the judgment was obtained after the merger: "We hold that Baron nevertheless lacks standing since the judgment on which he relies was not obtained until after the merger."[79]

         This timing issue was the central holding of Johnston with respect to all three of the plaintiffs, i.e., that they were not entitled to recover because they were not creditors at the time of the payment they sought to challenge.[80] But the important point for purposes of this case is that the Supreme Court tacitly suggested in its analysis that having a claim that had not been reduced to a judgment as of the time of the challenged payment would be sufficient to recover as a "creditor" under Section 174. Significantly, two other areas of Delaware law also support construing the term "creditor" as someone with a "claim," as well as generally construing the term "creditor" broadly.

         In Mackenzie Oil Co. v. Omar Oil & Gas Co., [81] for example, this court held long ago that "a simple contract creditor whose claim is evidenced by promissory notes" had standing as a "creditor" under a statute authorizing the court to appoint a receiver for an insolvent corporation "on the application of a 'creditor.'"[82] In reaching this conclusion, the court explained that "[t]he word 'creditor' is a term of very broad meaning" that had been "defined as to embrace, not alone judgment or lien creditors, but as well general or simple contract creditors, or creditors at large."[83]

         Additionally, the Delaware Uniform Fraudulent Transfer Act ("DUFTA") defines a "creditor" as someone "who has a claim."[84] The statute in turn defines the term "claim" broadly to mean "a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured."[85] Notably, although the statutes operate differently, DUFTA and Section 174 have a similar purpose- both are designed to protect creditors of a corporation from distributions of corporate funds viewed as inappropriate because they undermine the ability of the corporation to repay its debts.[86]

         In light of the above authorities, all of which support construing the term "creditor" broadly to encompass claims for the purpose of determining who can recover under statutes designed to protect creditors, the court holds that J.P. Morgan has pled facts sufficient to establish it has standing to assert claims on behalf of itself and other creditors under Section 174 dating back to 2006 even though it did not obtain its Judgment until 2015. This conclusion is supported by (i) the "self-executing" nature of the MFL Provision, whereby J.P. Morgan became contractually entitled to the benefit of more favorable license terms when DTC entered into another license for the same patents on such terms, [87] and (ii) the Complaint's allegations that DTC licensed its patents to NCR Corporation in January 2006 for $2.85 million, a fraction of the $70 million J.P. Morgan agreed to pay to license the same patents, $30 million of which was paid up front.[88]

         C. The Unlawful Dividend Claims for 2006-2010 Are Not Timely

         Defendants next argue that J.P. Morgan's unlawful dividend claims are untimely based on the six-year limitations period set forth in Section 174. The part of the statute relevant to this argument provides that "the directors . . . shall be jointly and severally liable, at any time within 6 years after paying such unlawful dividend or after such unlawful stock purchase or redemption."[89] It is not disputed that more than six years elapsed between the date DTC paid the last of the dividends that J.P. Morgan challenges in this action (in 2010) and the date that J.P. Morgan filed its Complaint in this action (in April 2018).

         J.P. Morgan contends that the six-year period in Section 174 is a statute of limitations that can and should be tolled under the doctrines of (i) inherently unknowable injuries, (ii) fraudulent concealment, and (iii) equitable tolling. According to J.P. Morgan, the six-year period in Section 174 should be tolled until at least February 13, 2018, because DTC-"a closely held corporation not subject to SEC reporting requirements"-concealed from J.P. Morgan the payment of dividends from 2006 to 2010 until DTC was forced to disclose that information "under compulsion of [a] court order on February 13, 2018."[90] If the six-year period is tolled until February 13, 2018, J.P. Morgan's unlawful dividend claims under Section 174 would be timely.

         Defendants advance two arguments in response: first, that the six-year time period in Section 174 is a statute of repose to which tolling principles do not apply, and second, that even if the six-year time period is a statute of limitations that is subject to tolling doctrines, J.P. Morgan is not entitled to tolling for various reasons. Because the first issue is dispositive, the court does not reach the second issue.

         Whether the six-year provision in Section 174 is a statute of limitations or a statute of repose is a question of first impression. None of the parties has identified any authority that has decided this question.

         Both parties suggest that the Third Circuit in EBS Litigation LLC v. Barclays Global Investors, N.A.[91] viewed the six-year time period in Section 174 to be a statute of limitations.[92] I do not read EBS that way. EBS involved an appeal of the dismissal of a third-party complaint filed on March 29, 2000, in an adversary action arising out of a bankruptcy proceeding. The third-party complaint asserted, among other things, that the former directors of Edison Brothers Stores, Inc. breached their fiduciary duties by distributing a stock dividend on June 29, 1995, i.e., less than five years before the third-party complaint was filed.[93] The Third Circuit noted that "[a]ll parties agree that the statute of limitations for the alleged breaches of fiduciary duty and related offenses is three years," and thus "expired on June 29, 1998, unless the statue was tolled during part or all of that period."[94] The statute of limitations to which the parties were referring, however, logically would have been the three-year statute of limitations in 10 Del. C. § 8106, which governs claims for breach of fiduciary duty, [95] and not the six-year period referenced in Section 174.

         In making the point that "[i]f the stock dividend occurred when Edison was insolvent, or rendered insolvent, it was illegal under Delaware law, and voidable in bankruptcy," the Third Circuit quoted Section 174 but never analyzed whether the six-year time period therein was a statute of limitations or one of repose.[96] Indeed, that time period was irrelevant because the challenged stock dividend occurred within six years of the filing of the third-party complaint at issue in EBS.[97]

         The United States Supreme Court recently described the difference between statutes of limitation and statutes of repose in California Public Employees' Retirement System v. ANZ Securities, Inc.[98] as follows:

[S]tatutory time bars can be divided into two categories: statutes of limitations and statutes of repose. Both are mechanisms used to limit the temporal extent or duration of liability for tortious acts, but each has a distinct purpose.
Statutes of limitations are designed to encourage plaintiffs to pursue diligent prosecution of known claims. In accord with that objective, limitations periods being to run when the cause of action accrues-that is, when the plaintiff can file suit and obtain relief. In a personal-injury or property-damage action, for example, more often than not this will be when the injury occurred or was discovered.
In contrast, statutes of repose are enacted to give more explicit and certain protection to defendants. These statutes effect a legislative judgment that a defendant should be free from liability after the legislatively determined period of time. For this reason, statutes of repose begin to run on the date of the last culpable act or omission of the defendant.[99]

         The Supreme Court further explained that "[t]he purpose and effect of a statute of repose . . . is to override customary tolling rules arising from the equitable powers of courts" because the "object of a statute of repose [is] to grant complete peace to defendants."[100]

         In Delaware, our own Supreme Court explained the difference between a statute of limitations and a statute of repose in Cheswold Volunteer Fire Co. v. Lambertson Construction Co.[101] as follows:

While the running of a statute of limitations will nullify a party's remedy, the running of a statute of repose will extinguish both the remedy and the right. The statute of limitations is therefore a procedural mechanism, which may be waived. On the other hand, the statute of repose is a substantive provision which may not be waived because the time limit expressly qualifies the right which the statute creates.[102]

         In providing this explanation, the high court cited to a New York state court decision, which states, in relevant part:

[W]here, as here, a statute creates a right unknown at common law, and also establishes a time period within which the right may be asserted, the time limit is a substantive provision which "qualifies" the right in effect, a condition attached to the right as distinguished from a statute of limitation which must be asserted by way of defense. But to ascertain whether the substantive time limitation is to be applied rigidly, without exception, as respondent asserts, or whether there are circumstances under which it may be tolled or extended, we must look to the statute itself and its purpose to determine the Congressional intent.[103]

         Given Cheswold's reliance on authorities focusing on the context in which a limitations period is adopted, the court requested that the parties submit supplemental briefing to address "[t]he legislative history of Section 174 and, in particular, the purpose of the six-year time period in Section 174(a)."[104] A summary of that history is set forth next.

         The first statutory provision in Delaware for recovering an unlawful dividend was enacted in 1875 as part of Delaware's first general corporation act. The 1875 Act was silent as to any time limit for asserting an unlawful dividend claim, but it expressly provided that the claim may be enforced by a common law debt action:

[I]t shall be unlawful for any board of directors or managers of any company incorporated by the provisions of this act, to declare dividends out of the capital stock of said company, and for a breach of this clause, those who assent thereto shall be liable, jointly or severally, to the creditors of the company, to the extent to which the capital stock has been encroached upon or impaired by such dividend, and such liability may be enforced by an action of debt, to be brought in the name of any one or more creditors of the company . . . .[105]

         When the 1875 Act was adopted, a debt action was governed by a three-year statute of limitations, [106] which was the precursor of 10 Del. C. § 8106.[107] This limitations period was capable of being tolled.[108]

         The 1875 Act was repealed and replaced with a new general corporation act in 1883. The six-year period for recovering an unlawful dividend from directors personally found today in Section 174 of the Delaware General Corporation Law appeared for the first time in Section 7 of the 1883 Act, and has been in place continuously since then:[109]

It shall not be lawful for the directors of any bank or moneyed or manufacturing corporation in this State, or any corporation created under this act, to make dividends, except from the surplus or net profits arising from the business of the corporation . . . and, in case of any violation of the provisions of this section, the directors, under whose administration the same may happen, shall, in their individual capacities, jointly and severally, be liable at any time within the period of six years after paying any such dividends to the said corporation, and to the creditors thereof in the event of its dissolution or insolvency, to the full amount of the dividend made . . . .[110]

         Section 7 of the 1883 Act dropped the reference in the prior statute to enforcing an unlawful dividend claim "by an action of debt" and was silent on the means of its enforcement, although Section 41 of the 1883 Act permitted an "action on the case" "[w]hen any of the officers or directors of any company, or stockholders thereof, shall be liable by the provision of this act to pay the debts of such company."[111]

         An action on the case was a general cause of action at common law to obtain a remedy where the conduct did not fall into another recognized cause of action.[112] As the Delaware Superior Court explained in Wise v. Western Union Telephone Co.: [113]

Succinctly, therefore, where there exists a legal right on one side and a legal wrong on the other, accompanied by damage, the action of Case will furnish a remedy where no specific remedy exists.[114]

         When the 1883 Act was adopted, an action on the case was governed by the same three-year statute of limitations that governed debt actions.[115]

         In February 1899, a three-judge panel of the Delaware Superior Court issued an important decision interpreting the unlawful dividend provision of the 1883 Act in John A. Roebling's Sons Co. v. Mode.[116] The core issue before the court in Roebling's concerned whether a judgment creditor could recover the amount of its judgment individually from a corporate director of an insolvent corporation based on the payment of an illegal dividend instead of seeking a recovery for the corporation of the entire illegal dividend. The court concluded that it could not:

[Section 7] contemplates the recovery and restoration to the capital of the corporation of the entire amount thus illegally withdrawn, and, to that end, each director is made individually liable for such amount. When so recovered and restored, whether at the instance and in the name of the corporation primarily, or in the name and at the instance of the creditors, it becomes at once a part of the capital stock again, to be held and disposed of as such for the benefit of all concerned.
* * * * *
We are unable to find anything in section 7 that will enable the plaintiff in this action on the case, or in any other common-law action, separately to sue for and recover his individual claim against the defendant. If this be a common fund, the remedy would be by proceedings in equity, where all persons interested would be made parties, and the rights and liabilities of each one could be fully considered and equitably adjusted.[117]

         Having concluded that the relief afforded under Section 7 ran to the corporation, and for distribution to all creditors in the event of insolvency, the Roebling's court further determined "that the remedy by action on the case provided by section 41 [of the 1883 Act] does not apply to cases arising under section 7, and that provisions of section 7 can only adequately and properly be enforced by proceedings in equity."[118] In reaching this conclusion, the court expressed concern that it would be "unreasonable and inequitable" to use Section 41 to hold a director liable under Section 7 because the director then would be entitled to be reimbursed by the corporation under another provision of the 1883 Act, Section 42, [119] which would defeat the intent of Section 7 that directors be held personally liable for paying unlawful dividends.[120]

         Less than five weeks after Roebling's was decided, its holdings were overturned by the adoption of the General Corporation Act of 1899. Specifically, the unlawful dividend provision in the 1883 Act was modified in the 1899 Act to state expressly that the provision could be enforced in an action on the case and that it could be enforced for the benefit of a single creditor by adding the words "or any of them, "[121] while keeping the six-year time period intact:

No corporation created under the provisions of this Act, nor the directors thereof, shall make dividends except from the surplus or net profits arising from its business . . . and in case of any violation of the provisions of this section, the directors under whose administration the same may happen shall be jointly and severally liable in an action on the case at any time within six years after paying such dividend to the corporation and its creditors or any of them in the event of its dissolution or insolvency, to the full amount of the dividend made . . ..[122]

         In 1937, the unlawful dividend statute was amended to remove the reference to an action on the case and to reinstate "Roebling's prohibition on individual creditor actions"[123] by removing the "or any of them" language from the 1899 Act:

No corporation created under the provisions of this Chapter, nor the Directors thereof, shall pay dividends upon any shares of the corporation except in accordance with the provisions of this Chapter. . . . In case of any willful or negligent violation of the provisions of this Section, the Directors under whose administration the same may happen shall be jointly and severally liable, at any time within six years after paying such unlawful dividend, to the corporation and to its creditors, in the event of its dissolution or insolvency, to the full amount of the dividend so unlawfully paid . . . .[124]

         The substance of the provision in the 1937 statute (italicized above) affording a period of six years after payment to assert a claim for willful or negligent violations of the restrictions on paying dividends, which now resides in Section 174, has been materially unchanged since 1937.[125]

         Having reviewed the legislative history of Delaware's unlawful dividend statute, the court turns to the parties' positions based on that history.

         J.P. Morgan argues that "Section 174 did not create a new right; it merely reiterated creditors' long-existing common law right to hold directors liable for impairing corporate capital through dividends," as, "in essence, a breach of trust."[126]An early expression of this common law right is Justice Story's 1824 opinion in Wood v. Dummer, holding that capital stock is a trust fund that "may be followed by the creditors into the hands of any persons, having notice of the trust attaching to it."[127] J.P. Morgan points out that a number of courts followed suit and, inspired by the trust fund doctrine, allowed the maintenance of an unlawful dividend-type claim in the late 1800's and early 1900's at common law.[128] In essence, J.P. Morgan's argument boils down to the contention that, because this common law tradition predated the enactment of the statutory provision that is now Section 174, the adoption of a six-year time period in Section 174 did not qualify the creation of a new right and thus must be a statute of limitations rather than one of repose. J.P. Morgan also points out that other statutes of repose use language that more explicitly qualifies the right to recover.

         Defendants counter that the court's analysis should begin and end with the language of Section 174, which they contend reads like a statute of repose because it does not use the type of "accrual" language contained in most Delaware statutes of limitation.[129] According to defendants, in the absence of such accrual language, the act of paying an unlawful dividend is an "objective trigger" from which the six-year statute of repose period starts to run.[130] Defendants argue further that if the court was to look beyond the plain language of the statute, the history of the unlawful dividend statute in Delaware shows that the legislature was seeking to implement a statute of repose in this instance.

         The court agrees with defendants that Section 174 should be read as a statute of repose rather than a statute of limitations. This conclusion is supported by the plain language of the statute and confirmed by its legal history.

         Starting with the text of Section 174, the rules of statutory construction under Delaware law are well settled:

First, we must determine whether the statute is ambiguous. If it is unambiguous, then there is no room for judicial interpretation and the plain meaning of the statutory language controls. The statute is ambiguous if it is susceptible of two reasonable interpretations or if a literal reading of its terms would lead to an unreasonable or absurd result not contemplated by the legislature. If the statute is ambiguous, then we consider it as a whole and we read each section in light of all the others to produce a harmonious whole.[131]

         For a statute containing a time bar, our Supreme Court's decision in Cheswold also invites consideration of the legal history of the statute, if it is ambiguous, to determine whether the statute created a right unknown at common law such that the adoption of a time limit should be considered a non-waivable qualification of the right.[132] In that vein, when interpreting Delaware's appraisal statute, our Supreme Court recognized that "'[t]he legal history of a statute, including prior statutes on the same subject, is a valuable guide for determining what object an act is supposed to achieve' because frequently legislative enactments are not accompanied by a contemporaneous Commentary."[133]

         Here, the plain language of Section 174 demonstrates that it was intended to be a statute of repose. The critical language in the statute provides that: "In case of any wilful or negligent violation of . . . § 173 of this title, the directors under whose administration the same may happen shall be jointly and severally liable, at any time within 6 years after paying such unlawful dividend."[134] Section 173 provides that "[n]o corporation shall pay dividends except in accordance with this chapter, "[135] i.e., the Delaware General Corporation Law.[136] Section 170, in turn, provides in general terms that dividends may be paid only out of the corporation's "surplus" or "net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year."[137] Thus, because the six-year time limit in Section 174 expressly qualifies the right that Section 174 creates to hold directors personally liable for willful or negligent violations of Section 173, it is a substantive provision that cannot be waived under our Supreme Court's teaching in Cheswold.[138]

         This interpretation is supported by the fact that the six-year period in Section 174 during which directors can be liable for an unlawful dividend is tied, not to the accrual of a cause of action, but rather to the payment of a dividend. As the United States Supreme Court explained in ANZ Securities, the major distinguishing factor of a statute of repose is that the limitations period "begin[s] to run on the date of the last culpable act or omission of the defendant."[139] Indeed, according to the Supreme Court, "this point is close to a dispositive indication that the statute is one of repose."[140]

         Delaware courts have focused on this distinction in determining whether a time bar is a statute of repose or a statute of limitations. For example, in City of Dover v. International Telephone & Telephone Corp., [141] the Supreme Court reaffirmed its decision in Cheswold that the Delaware Builder's Statute, 10 Del. C. § 8127, [142] is a statute of repose because "[t]he limitations period begins to run at the earliest of several designated dates, irrespective of the date of the injury" and thus "prevents a claim from arising, whereas a statute of limitations bars an accrued cause of action."[143]

         Another Delaware statute, 10 Del. C. § 8126, which repeatedly has been referred to as a statute of repose, also is instructive.[144] It provides as follows:

No action, suit or proceeding in any court, whether in law or equity or otherwise, in which the legality of any ordinance, code, regulation or map, relating to zoning, or any amendment thereto, enacted by the governing body of a county or municipality, is challenged, whether by direct or collateral attack or otherwise, shall be brought after the expiration of 60 days from the date of publication in a newspaper of general circulation in the county or municipality in which such adoption occurred, of notice of the adoption of such ordinance, code, regulation, map or amendment.[145]

         This language explicitly ties the expiration of the claim not to when any alleged claim accrued but rather to the date when notice of the ordinance to be challenged is published in a local newspaper. The statute thereby precludes legal challenges by those whose harm was discovered and accrued after the sixty days have passed, such as those later moving into a neighborhood who may otherwise ...


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