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JPMorgan Chase Bank, N.A. v. 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,
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

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          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.


         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.

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          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

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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

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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

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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

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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

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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]


         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

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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]

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          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 ...

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