Condon v. Kadakia

CourtCourt of Appeals of Texas
Docket Number14-21-00014-CV
Decision Date19 January 2023

Panel consists of Justices Jewell, Zimmerer, and Hassan



For a member to sue derivatively on behalf of a Delaware LLC, the member must either make a demand that the LLC pursue litigation or meet a heightened pleading standard showing with particularity that such a demand would have been futile. Properly pleading demand futility is a difficult burden which is not satisfied by conclusory statements or mere notice pleading.

In today's case, an individual seeks to sue derivatively on a Delaware LLC's behalf (and purportedly on his own behalf), alleging that his business associate and others wrongfully usurped corporate opportunities. According to appellant Robert Condon, appellees' actions violated a royalty agreement between several parties and enriched the business associate at the LLC's expense. Condon alleged that his business associate's actions breached the LLC agreement and the business associate's fiduciary duties. Condon did not make a pre-litigation demand on the LLC, but instead pleaded that demand would have been futile.

Appellees filed special exceptions, asserting in relevant part that all of Condon's claims were derivative in nature and that he failed to sufficiently plead demand futility as required by Delaware law. The trial court granted the appellees' special exceptions and dismissed Condon's claims without prejudice.

Condon appeals, arguing that he properly pleaded demand futility for his derivative claims and that his direct claims were subject only to Texas's fair notice pleading standards, which he met. After thorough review of the record, we hold that Condon's claims are all derivative in nature and that he failed to overcome the heightened pleading burden required to show demand futility under Delaware law. Accordingly, we overrule Condon's issues and affirm the trial court's order dismissing his claims.


CKC Partners, LLC is a Delaware limited liability company that Condon and appellee Alpesh Kadakia formed to invest in startup opportunities. CKC has two voting members-Condon and Alpesh,[1] who also serve as CKC's only managers. CKC is governed by a company agreement (the "CKC Agreement").[2]

Condon is the plaintiff below, and we summarize the following facts from his live pleading. CKC, appellee Manticore Fuels LLC and appellee Gladieux Energy LLC, are parties to a contract (the "Royalty Agreement") under which Manticore distributed diesel fuel supplied by Gladieux to meet the fueling needs for drilling and completion of oil wells in the Permian Basin. Manticore is a Texas company, and Alpesh served as its president. Gladieux is an Indiana company allegedly owned and operated by Alpesh and appellees Ruchir Kadakia (Alpesh's brother) and Jeff Hodgson.[3]

Condon "sponsored" the start-up of the Manticore business and then brought the Manticore opportunity to CKC. Condon provided $500,000 to CKC, which was then invested in Manticore. In September 2018, Alpesh contributed additional funds to CKC to support Manticore, but the petition does not state the amount provided by Alpesh. Manticore quickly began generating a "gross profit margin of over 20%." Condon and the other defendants signed Memorandums of Understanding to document their "partnership," agreeing that "each would own Manticore Fuels." Later, however, "Gladieux and the Defendants began a pattern of renegotiating or reneging on their obligations" to Manticore. Gladieux told Condon that he could not own Manticore if they wanted to use financing through Gladieux's credit facility, which was a stipulated in-kind contribution that Gladieux was required to make in exchange for Condon's equity interest in the partnership. Alpesh, Ruchir, and Hodgson represented that using Gladieux's credit facility was the only feasible way to make Manticore profitable and doing so required Gladieux to own 100% of Manticore. Under pressure and facing the others' threatened withdrawal from the venture Condon and CKC "relinquished equity ownership in Manticore" to Gladieux.

These events led to CKC, Manticore, and Gladieux executing the Royalty Agreement in July 2018.[4] Section 5 of the Royalty Agreement established three Manticore payment obligations:

§ 5(a): "Performance and Success" fees for the six-month period July 1 -December 31, 2018, if Manticore increased its sales to a specific customer, ProPetro.
§ 5(b): Monthly commission/royalty payments based on a third-party published indexed price of diesel fuel (the "rack rate").
§ 5(c): Reimbursement to CKC of $190,000 for all investment management services, paid on or before July 20, 2018.

Section 7 established a single Gladieux payment obligation:

§ 7(a): A "Change of Control" payment of "20% of the consideration paid for the Equity Interest" of Manticore or net assets received, less 20% of any broker fees and customary transaction expenses, if any.

The Royalty Agreement also prohibited Manticore and Gladieux from engaging in actions or transactions that would directly compete with the services Manticore was providing. Specifically, Gladieux and Manticore agreed that

they shall not circumvent, avoid or bypass CKC, directly or indirectly, to avoid payment of Commission and Fees as defined in Section 5 herein. [Gladieux and Manticore] further agree that they will not take any action, or enter into transaction, that would result in the formation of a business that would directly compete with the comprehensive Frack Fleet Fueling Business, as referred to as the last mile services, of Manticore Fuels, LLC; provided, however, that it is acknowledged that Gladieux Energy is a private equity firm that may acquire new businesses in the future and it will not be a violation of this Section 1 if any such acquired business conducts operations that would otherwise constitute a part of the Frack Fleet Fueling Business if such activities do not constitute more than 20% of the acquired business'[s] gross revenue. For the avoidance of doubt, it is understood by all Parties that the Gladieux Companies have been, are currently involved in and intend to continue to trade, market and distribute fuel throughout the United States, including the Permian basin located in West Texas, which is not and shall not be considered a violation of this Section 1.

Manticore paid royalties to CKC in 2018, but the amount of royalties declined in 2019. According to Condon, the defendants began "circumventing" the Royalty Agreement by engaging in acts that reduced the amount payable by Manticore to CKC under the agreement. Condon alleged that Alpesh, Manticore's president, did not cause Manticore and Gladieux to maintain separate accounting records, which enabled Alpesh to hide certain charges and margins by Gladieux. Further, Manticore is alleged to have altered its pricing structure to unbundle fuel from other services. Fuel, the only item on which royalties are based, was "deeply discounted and sold separate and apart from the other services." Condon asserted that the defendants were having Manticore sell fuel at a low price in order to create a higher margin on all other "last mile services" for themselves. In 2020, the royalty payments stopped altogether.

Also, under the Royalty Agreement, Manticore engaged CKC to provide "executive, managerial and leadership" services. Although Manticore is alleged to have paid CKC $15,000 per month from July to December of 2018 for these services, those payments stopped in January 2019 after Alpesh began taking a $500,000 annual salary from Manticore.[5] Additionally, CKC had three employees working on Manticore's projects, for which Manticore was paying CKC,[6] but Alpesh told Condon that CKC no longer needed them, and Condon agreed that they could be fired. Manticore then hired the employees directly, allegedly taking away profits for CKC.

Condon asserted that another development contributed to Manticore's failure to pay amounts owed under the Royalty Agreement, thus harming CKC's business interests. Alpesh in 2019 secretly created a new entity, Permian Global, Inc. d/b/a Core Automated Fueling Solutions ("CORE"), which competed directly with Manticore and effectively siphoned away all of Manticore's business and services. CORE's ownership is not alleged in the pleadings, but Condon asserted that Alpesh was its only director. According to Condon,

instead of promoting Manticore Fuels' fueling services to existing and potential customers, Alpesh is promoting and selling CORE's automated fueling equipment and services to the same customers. The direct result of Alpesh's actions are that he has transferred the lucrative last mile services that Manticore Fuels was providing to Alpesh's entity, CORE. Alpesh's actions have devalued the value of Manticore Fuels by reducing Manticore Fuels' margins, but enriched Alpesh's CORE entity by the same or greater amounts. Alpesh neither fully informed, nor sought consent from Condon in accordance with the CKC Company Agreement for these actions that harm CKC Partners' financial interests under the Royalty Agreement.

In August 2019, Alpesh told Condon that Manticore was worth at least $15 million. However, shortly thereafter, the defendants began telling Condon that Manticore could not "continue to operate as a wholly-owned subsidiary of Gladieux." Hodgson emailed CKC in November telling CKC that it needed to invest $1.2 million to own twenty percent of...

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