BET FRX LLC v. Myers
| Decision Date | 27 April 2022 |
| Docket Number | C. A. 2019-0894-KSJM |
| Parties | BET FRX LLC, on behalf of itself and derivatively on behalf of FRX GROWTH, LLC, a Delaware limited liability company, Plaintiff, v. REBECCA MYERS, DIETRICH STEPHAN, JOY BOCHNER, THE VILLAGE OF EASTBROOK, LLC, LIPIZZANER, LLC, and CIELO E MAR, LLC, Defendants, and FRX GROWTH, LLC, a Delaware limited liability company, Nominal Defendant, and FARMACEUTICALRX, LLC, Intervening Defendant. |
| Court | Court of Chancery of Delaware |
Date Submitted: February 15, 2022
Sean M. Brennecke, KLEHR HARRISON HARVEY BRANZBURG LLP Wilmington, Delaware; Jordan M. Rand, KLEHR HARRISON HARVEY BRANZBURG LLP, Philadelphia, Pennsylvania; Counsel for Plaintiff BET FRX LLC.
Samuel T. Hirzel, II, Jamie L. Brown, HEYMAN ENERIO GATTUSO & HIRZEL LLP Wilmington Delaware; Eric R. Levine, Eric Aschkenasy, EISEMAN LEVINE LEHRHAUPT & KAKOYIANNIS, P.C., New York, New York; Counsel for Defendants Rebecca Myers, Dietrich Stephan, Joy Bochner, the Village of Eastbrook, LLC, Lipizzaner, LLC, and Cielo E Mar, LLC.
Geoffrey G. Grivner, Kody M. Sparks, BUCHANAN INGERSOLL & ROONEY PC, Wilmington, Delaware; Kathleen Jones Goldman, BUCHANAN INGERSOLL & ROONEY PC, Pittsburgh, Pennsylvania; Counsel for Intervenor FarmaceuticalRX, LLC.
A minority member of a limited liability company sued the other members and their principals. The plaintiff alleges that after it invested eight million dollars into the nominal defendant, the other members and their principals funneled that investment into a company that they owned, and in which neither the plaintiff nor the nominal defendant had an interest. The plaintiff brought this litigation to recoup its investment. The plaintiff took a "kitchen sink" approach in the complaint, asserting claims for breach of the express and implied terms of the LLC agreement and for judicial dissolution. The plaintiff also asserted claims for breach of fiduciary duties directly and derivatively.
Most of the plaintiff's claims are clearly deficient and this decision makes quick work of them. The plaintiff's claims for breach of the express and implied terms of the LLC agreement fail because the plaintiff fails to identify any express or implied terms allegedly breached. The plaintiff's claim for judicial dissolution fails because the plaintiff does not plead any factual basis for such relief. The plaintiff's direct claim for breach of fiduciary duties fails because the alleged harm is to the nominal defendant only. That leaves one close call-the plaintiff's claim for breach of fiduciary duties asserted derivatively, which is adequately alleged. Except as to the close call, this decision grants the defendants' motion to dismiss.
The facts are drawn from the Verified Amended Complaint (the "Amended Complaint") and exhibits thereto.[1] A. FarmaRX, FRX, And Plaintiff
FarmaceuticalRX, LLC ("FarmaRX") is a Pennsylvania company formed to obtain a Medical Marijuana Grower and Processor License (the "License") from the Commonwealth of Pennsylvania.
In 2015, Defendants Rebecca Myers, Dietrich Stephan, and Joy Bochner (collectively, the "Individual Defendants") acquired 90% of the membership interests in FarmaRX. The Individual Defendants acquired their interest through their respective investment vehicles, The Village of Eastbrook, LLC ("Eastbrook"), Lipizzaner, LLC ("Lipizzaner"), and Cielo E Mar, LLC ("Cielo," together with Eastbrook and Lipizzaner, the "LLC Defendants," and with the Individual Defendants, "Defendants").
The Pennsylvania Department of Health awarded FarmaRX the License on July 31, 2018.
Around April 2019, Myers and Stephan began searching for outside investors to fund FarmaRX's operations. To facilitate an investment, the Individual Defendants formed FRX Growth LLC ("FRX") and exchanged their interests in FarmaRX for interests in FRX. Through the transaction, FRX became the majority owner of FarmaRX. FRX has held an 85.21% membership interest in FarmaRX at all relevant times.
On May 16, 2019, Plaintiff BET FRX LLC ("Plaintiff" or "BET") acquired 50% of the membership units of FRX from the Individual Defendants for $8, 000, 000 (the "BET Investment"). FRX loaned the BET Investment to FarmaRX pursuant to a promissory note dated May 16, 2019.
B. The Governing Agreements
In connection with Plaintiff's investment, the parties executed the First Amended and Restated Operating Agreement of FRX dated as of May 16, 2019 (the "LLC Agreement"). A few provisions of the LLC Agreement are germane to the parties' dispute.
Section 8.01 provides that FRX is to be "managed, operated, and controlled by or under the direction of" a three-member board of managers (the "FRX Board"). BET is entitled to appoint one of the Managers (the "BET Manager"). The remaining two managers are to be designated by a majority of the members other than BET. At all relevant times, Douglas Topkis has served as the BET Manager and Myers and Stephan have served as the Managers unaffiliated with BET.
Section 8.05(a) defines board quorum to require the BET Manager's presence. The upshot is that, although the FRX Board may approve most board actions by a majority vote, the BET Manager must participate in every board decision.
Section 8.05(d) identifies sixteen types of actions that require the approval of the BET Manager, which effectively grants the BET Manager a veto right over these actions. They include: dissolution of FRX; increases in the authorized number of membership units; redemption or repurchase of membership units by FRX; the issuance of additional membership units by FRX; and the incurrence by FRX of any indebtedness greater than $100, 000. The list of sixteen actions does not include loans by FarmaRX or FRX to other entities nor related-party transactions.
C. The Challenged Transaction
Myers and Stephan have an interest in an Ohio-based medical marijuana company (the "Ohio Company").[2]
Myers caused FarmaRX to loan $2 million of the BET Investment to fund the Ohio Company's growth.[3] Before filing the Amended Complaint, Plaintiff deposed Julia Wnek, formerly FarmaRX's Vice President of Finance. According to Plaintiff, Wnek admitted during her deposition "that whenever the Ohio Company had cashflow issues, FarmaRX made 'intercompany loans' to the Ohio Company without any loan documentation."[4] Those loans have not been repaid.
Plaintiff alleges that the Ohio Company had no management or administrative employees of its own and that Myers caused FarmaRX employees to perform management and administrative services for the Ohio Company. Plaintiff further alleges that Myers directed Wnek to allocate as much as 95% of the Ohio Company's payroll expenses to FarmaRX and that FarmaRX paid the Ohio Company's utility bills.
This decision refers to the transactions with the Ohio Company as the "Ohio Company Transactions."
Plaintiff alleges that Myers caused FarmaRX to engage in the Ohio Company Transactions. Plaintiff further alleges that Stephan refused to take action against Myers because he believed the monetary benefit from Myers's actions would be "life-changing."[5]
D. This Litigation
Plaintiff filed this action on November 6, 2019.[6] On December 10, 2019, Defendants moved to dismiss the original complaint and FarmaRX moved to intervene and to dismiss.[7] The parties deferred briefing the motion to dismiss until the court resolved FarmaRX's motion to intervene.[8] On September 11, 2020, the Court granted FarmaRX's motion to intervene.[9]
This case sat idle for a while. On July 12, 2021, the Court sent the parties a letter requesting a status report.[10] In response, Plaintiff informed the Court that it intended to amend its original complaint.[11] Plaintiff filed the Amended Complaint on August 26, 2021, asserting the following claims:
Defendants renewed their motion to dismiss, [14] and on October 12, 2021, intervenor FarmaRX joined Defendants' motion to dismiss.[15] The parties fully briefed the motion and the court held oral argument on February 15, 2022.[16]
Defendants have moved to dismiss the Amended Complaint pursuant to Court of Chancery Rule 12(b)(6) for failure to state a claim.
"[T]he governing pleading standard in Delaware to survive a motion to dismiss is reasonable 'conceivability.'"[17] When considering a motion under Rule 12(b)(6), the court must "accept all well-pleaded factual allegations in the [c]omplaint as true . ., draw all reasonable inferences in favor of the plaintiff, and deny the motion unless the plaintiff could not recover under any reasonably conceivable set of circumstances susceptible of proof."[18] The court, however, need not "accept...
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