Condon v. Kadakia
|Court of Appeals of Texas
|ROBERT M. CONDON AND CKC PARTNERS, LLC, Appellants v. ALPESH KADAKIA; RUCHIR KADAKIA; JEFF HODGSON; MANTICORE FUELS LLC; AND GLADIEUX ENERGY LLC, Appellees
|19 January 2023
On Appeal from the 61st District Court Harris County, Texas Trial Court Cause No. 2019-86705
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, who also serve as CKC's only managers. CKC is governed by a company agreement (the "CKC Agreement").
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.
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. Section 5 of the Royalty Agreement established three Manticore payment obligations:
Section 7 established a single Gladieux payment obligation:
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. Additionally, CKC had three employees working on Manticore's projects, for which Manticore was paying CKC, 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.
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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