Metro Comm. BVI v. ADVANCED MOBILECOMM

• Decision Date: 30 April 2004
• Citation: 854 A.2d 121
• Parties: METRO COMMUNICATION CORP. BVI, Plaintiff, v. ADVANCED MOBILECOMM TECHNOLOGIES INC., Boston Ventures Limited Partnership V, Manuel Ceara, Donald S. Heaton, James P. Hynes, Roy P. Coppedge, Neil A. Wallack and Fidelity Ventures Brazil, LLC., Defendants.
• Court: Court of Chancery of Delaware

854 A.2d 121

METRO COMMUNICATION CORP. BVI, Plaintiff, v. ADVANCED MOBILECOMM TECHNOLOGIES INC., Boston Ventures Limited Partnership V, Manuel Ceara, Donald S. Heaton, James P. Hynes, Roy P. Coppedge, Neil A. Wallack and Fidelity Ventures Brazil, LLC., Defendants.

No. Civ.A. 20099.

Court of Chancery of Delaware, New Castle County.

Submitted February 2, 2004.

Decided April 30, 2004.

Revised May 3, 2004.

Norman M. Monhait, Rosenthal, Monhait, Gross & Goddess, P.A., Wilmington, Delaware; Frank C. Welzer, Zukerman Gore & Brandeis, LLP, New York, New York, for Plaintiff.

Jesse A. Finkelstein, and John D. Hendershot, Richards, Layton & Finger, P.A., Wilmington, Delaware; William F. Lee, Gabrielle R. Wolohojian, and Jonathan A. Shapiro, Hale and Dorr LLP, Boston, Massachusetts, for Defendants Advanced Mobilecomm Technologies Inc., Donald S. Heaton, Manuel Ceara, and James P. Hynes.

A. Gilchrist Sparks, III, Alan J. Stone, and Brian J. McTear, Morris, Nichols, Arsht & Tunnell, Wilmington, Delaware; Mark D. Cahill, Tricia A. Rice, and Jennifer Thibeault Connor, Choate, Hall & Stewart, Boston, Massachusetts, for Defendants Boston Ventures Limited Partnership V and Roy F. Coppedge.

Andre G. Bouchard, and Karen L. Pascale, Bouchard Margules & Friedlander, Wilmington, Delaware; James D. Smeallie, and Joshua C. Krumholz, Holland & Knight LLP, Boston, Massachusetts, for Defendants Fidelity Ventures Brazil, LLC and MetroRED Telecom Group Ltd.

STRINE, Vice Chancellor.

Metro Communication Corp., BVI ("Metro") is a former member of Fidelity Ventures Brazil, LLC ("Fidelity Brazil"), which was established by a limited liability company agreement in February 1998 (the "LLC Agreement") as the vehicle through which Metro and the other members of Fidelity Brazil would invest venture capital in the then-recently deregulated South American telecommunications market. By October 2000, Metro allegedly had invested approximately $31 million in Fidelity Brazil and affiliated entities, with an eye towards an IPO that would take advantage of the stratospheric valuations that similar telecom firms were receiving at that time. These investments were made in the form of contractually contemplated capital calls that Metro and Fidelity Brazil's other investors were required to make upon request by Fidelity Brazil's managers.

Unfortunately for Metro, not only did the telecom bubble burst but it turned out (or so the amended complaint¹ alleges) that certain former employees of Fidelity Brazil were obtaining permits in Brazil through bribery sometime during 1998, a scandal that was ultimately revealed in the South American press in April 2000. The IPO plans were eventually abandoned and Metro's investment is now worth a fraction of what it once hoped.

Metro has thus brought this lawsuit, asserting a variety of claims against Fidelity Brazil and the other former members of that entity and its managers, as well as another related corporate entity. Stripped of its doctrinal complexities, Metro's basic theory is that all of the defendants either participated in the bribery or knew about it well before Metro did, and were not candid with Metro about either the bribery or the effect it was having on Fidelity Brazil's business. Metro claims that this conduct breached the LLC Agreement and the fiduciary duties of Fidelity Brazil's former managers. Having chosen to plead every conceivable claim that came to its lawyers' minds, Metro has also alleged claims of common law fraud and equitable fraud and that the defendants violated the Limited Liability Company Act (the "LLC Act") and the Fraudulent Conveyances Act. The defendants have moved to dismiss Metro's complaint in its entirety.

In this opinion, I conclude that Metro has stated a claim against Fidelity Brazil (and potentially its managers, under certain circumstances) for breach of the LLC Agreement. With respect to Metro's common law fraud claim, the majority of its allegations are insufficiently particularized to satisfy Rule 9(b) but Metro has sufficiently alleged that a series of Fidelity Brazil management reports that were "reviewed, adopted and approved" by Fidelity Brazil's managers and others before delivery to Metro in 1998 (the "1998 Management Reports") contained misleading statements. The 1998 Management Reports indicated that the process of obtaining permits in Brazil was going smoothly while in fact some of permits were being obtained through bribery. Metro allegedly relied on the completeness and accuracy of the 1998 Management Reports in continuing to invest capital in Fidelity Brazil. Therefore, as to those defendants who, from the allegations of the complaint, one can infer knew of the bribery at the time the 1998 Management Reports were delivered (because either they or their agents participated in it), the complaint states a claim for common law fraud.

As the opinion points out, the common law fraud claim is in many respects redundant of, and there is a good argument — which has not been made — that it should be deemed supplanted by, the context-specific common law standard of Malone v. Brincat.² The Malone standard applies when individuals on the governing board of a Delaware entity "knowingly disseminate false information that results in corporate injury or damage to an individual [owner]."³ The Malone standard represents a policy choice by our Supreme Court regarding the standards by which to hold fiduciaries of entities responsible for misleading communications by the entities to their owners and logically, for reasons articulated herein, displaces the less context-specific standards reflected by ordinary principles of common law fraud. Under Malone, the complaint states a claim against those managers who knew of the bribery and who made misleading statements to Metro about the company's progress in securing necessary governmental permits. For obvious reasons, the complaint also pleads a fiduciary duty claim against those defendants who had knowledge of the bribery at the time of its occurrence. Under Delaware law, a fiduciary may not choose to manage an entity in an illegal fashion, even if the fiduciary believes that the illegal activity will result in profits for the entity.

By contrast, certain of the former managers who reviewed, adopted and approved the 1998 Management Reports cannot be deemed to have had knowledge of the bribery until early 1999, when all of the 1998 Management Reports had already been delivered. Because those defendants did not act with scienter during that period, the fiduciary duty claims against them under Malone for their disclosure-related conduct before they learned of the bribery will be dismissed. Because Malone is merely a context-specific application of traditional common law fraud principles, it is unsurprising that the absence of knowledge is also fatal to Metro's attempt to hold these defendants responsible for common law fraud for their actions in that period, regardless of whether Malone merely supplements, rather than supplants, common law fraud principles in this context.

That said, the complaint pleads that by early 1999, all of the defendants were aware of the bribery, which, in the unique circumstances of this case, supports a claim of breach of fiduciary duty under reasoning consistent with Malone. Despite knowing of the bribery, despite knowing that previous communications by Fidelity Brazil regarding the permitting process had omitted information regarding the bribery, and despite knowing that Fidelity Brazil had a contractual duty to disclose the existence of a possible material adverse effect ("MAE"), the defendants who were managers of Fidelity Brazil did not correct the earlier misleading communications to Metro even while continuing to make capital calls on Metro. These pled facts support additional claims for breach of fiduciary duty under Malone even against those managers who did not have contemporaneous knowledge of the bribery when the 1998 Management Reports were delivered because they suggest that those defendants knew a misleading impression had been created by previous communications they themselves had authorized, knew that evidence of an MAE existed, and consciously chose not to cause Fidelity Brazil to make the required MAE disclosure or to correct its earlier misleading statements even as they sought additional infusions of capital from Metro.

In so holding, I do not accept Metro's invitation to consider the demands for it to contribute capital as analogous to a request for stockholder action, as Metro was required to respond affirmatively to those demands in the absence of an excusing breach of the LLC Agreement or of fiduciary duty. Therefore, the more relaxed standard that governs fiduciary disclosure — a standard that requires the disclosure of all material facts and that does not require the plaintiff to show scienter — when fiduciaries request a unitholder tender or vote is inapplicable. Instead, the managers' fiduciary duties were defined by Malone, which requires pled facts supporting an inference that the defendants knowingly misled Metro in the 1998 Management Reports, and by the logical extension of Malone briefly outlined above, under which the managers may be accountable for any knowing and bad-faith failure to correct the false impression that those Reports created once they learned of the bribery in the unique circumstances of this case.

In sum, I sustain Metro's fiduciary duty and common law fraud claims but the extent of those claims against particular defendants differs depending on when the defendants came to know about the bribery. In other words, my ruling critically hinges on the complaint's ability to plead scienter against the various defendants as to various time periods.

Relatedly, I conclude that Metro cannot assert equitable fraud claims against the former managers of Fidelity Brazil for communications made to Metro. As to these claims, the defendants argued that an...