Geyer v. Ingersoll Publications Co.

• Court: Court of Chancery of Delaware
• Writing for the Court: CHANDLER
• Citation: Geyer v. Ingersoll Publications Co., 621 A.2d 784 (Del. Ch. 1992)
• Decision Date: 16 June 1992
• Docket Number: No. 12406,12406
• Parties: 18 Del. J. Corp. L. 658 Thomas P. GEYER, Plaintiff, v. INGERSOLL PUBLICATIONS COMPANY, a Delaware corporation, and Ralph Ingersoll II, Defendants. Civ. A. . Submitted:

Page 784

621 A.2d 784

18 Del. J. Corp. L. 658

Thomas P. GEYER, Plaintiff, v. INGERSOLL PUBLICATIONS COMPANY, a Delaware corporation, and Ralph Ingersoll II, Defendants.

Civ. A. No. 12406.

Court of Chancery of Delaware New Castle County.

Submitted: June 16, 1992.

Decided: June 18, 1992.

[18 Del. J. Corp. L. 665] Andrew J. Turezyn, of Skadden, Arps, Slate, Meagher & Flom, Wilmington, for plaintiff.

Gregory P. Williams, Matthew J. Ferretti, and Sean P. McDevitt, of Richards, Layton & Finger, Wilmington, for defendants.

OPINION

CHANDLER, Vice Chancellor.

Plaintiff, Thomas P. Geyer, instituted this action against defendants, Ingersoll Publications Company ("IPCO") and Ralph Ingersoll II, alleging, inter alia, breaches of fiduciary duties, fraudulent conveyances and the right to a judgment on a promissory note (the "Note"). Mr. Ingersoll has moved to dismiss all of plaintiff's claims and to stay discovery pending the resolution of his motion to dismiss. In addition, IPCO has moved for judgment on the pleadings as to count II of plaintiff's complaint.

This is my decision on defendants' motions. Part I of the decision provides a brief factual history. Part II addresses Mr. Ingersoll's motion to dismiss all of plaintiff's claims. Part III considers Mr. Ingersoll's motion to stay discovery. Part IV addresses IPCO's motion to dismiss count II of plaintiff's complaint. Finally, part V contains my conclusions.

I. FACTUAL HISTORY

According to the complaint, Mr. Geyer and Mr. Ingersoll, a resident of Connecticut, were principals in a partnership involved in the business of managing newspapers in the late 1970s or early 1980s. Subsequently, the principals replaced the partnership structure with a corporate structure causing the formation of IPCO, a Delaware corporation. Mr. Geyer and Mr. Ingersoll each received shares in the new entity, IPCO, in return for their interests in the partnership. Indeed, plaintiff received 40 shares of IPCO and became an employee of IPCO. Mr. Ingersoll became the President, Chairman of the Board and controlling shareholder of IPCO.

In addition to his dealings with IPCO, Mr. Ingersoll together with E.M. Warburg, Pincus & Co. ("Warburg"), a New York investment firm, assembled an international publishing empire in the late 1980s. Ultimately, after a dispute in 1990, Warburg and Mr. Ingersoll divided their empire at the Atlantic Ocean, with Mr. [18 Del. J. Corp. L. 666] Ingersoll retaining ownership of the international newspapers and Warburg retaining ownership of the domestic newspapers.

Before Mr. Ingersoll's dispute with Warburg, IPCO repurchased Mr. Geyer's IPCO shares in the fall of 1988 in return for the Note in the principal amount of $2 million. The Note obligated IPCO to make monthly payments of principal and interest in increasing amounts with a balloon payment of nearly $1 million due on October 15, 1991. However, plaintiff argues that IPCO failed to make its June 15, 1991, payment and has failed to make any payments since that time.

According to plaintiff, Mr. Ingersoll caused IPCO to surrender its major assets to third parties in return for his personal benefit, at the expense of IPCO, while IPCO remained indebted to Mr. Geyer. Plaintiff provides two examples of such conduct: (1) plaintiff alleges that Mr. Ingersoll caused IPCO to cancel a management agreement with Goodson Newspapers ("Goodson"), which agreement was worth approximately $50 million, in return for an agreement by Goodson to sell the New Haven Register to Warburg and Mr. Ingersoll; and (2) plaintiff alleges that when Warburg and Mr. Ingersoll divided their empire, Mr. Ingersoll caused IPCO to cancel its management agreements with domestic newspapers in return for Mr. Ingersoll receiving the British and Irish holdings held by Warburg and Mr. Ingersoll.

II. MR. INGERSOLL'S MOTION TO DISMISS

Mr. Ingersoll bases his motion to dismiss on two separate grounds. First, he argues that this Court lacks personal jurisdiction over him. Second, he argues that plaintiff fails to state a claim for which I can grant relief.

A. Personal Jurisdiction

Mr. Ingersoll contends that in order for this Court to exercise personal jurisdiction over him, there must be statutory authorization for service of process. Also, he argues, such service must not violate the fundamental fairness required by the 14th Amendment of the United States Constitution. Mr. Ingersoll contends that there is no statutory authorization for service of process upon him and, if there was, such service would violate his 14th Amendment due process rights.

1. Statutory Service of Process

Plaintiff purportedly served Mr. Ingersoll with process pursuant to 10 Del.C. § 3114(a) (Supp.1990). This statute provides that a [18 Del. J. Corp. L. 667] nonresident of Delaware who accepts a position as a director of a Delaware corporation is

deemed [ ] to have consented [from his acceptance of the directorship position] to the appointment of the registered agent of such corporation (or, if there is none, the Secretary of State) as his agent upon whom service of process may be made in all civil actions or proceedings brought in this state, by or on behalf of, or against such corporation, in which such director, trustee or member is a necessary or proper party, or in any action or proceeding against such director, trustee or member for violation of his duty in such capacity, whether or not he continues to serve as such director, trustee or member at the time suit is commenced.

Id.

Mr. Ingersoll argues that Mr. Geyer lost his status as a shareholder when he sold his shares to IPCO. Therefore, Mr. Ingersoll contends, Mr. Geyer is merely a creditor of IPCO. According to Mr. Ingersoll, directors do not owe creditors duties beyond the relevant contractual terms absent fraud, insolvency or a violation of a statute. Thus, Mr. Ingersoll argues, since § 3114 authorizes service of process upon nonresident directors only in limited circumstances (e.g., for breaches of fiduciary duties) which are not applicable to this case, no statutory authorization exists for service of process upon him.

Mr. Geyer responds by arguing that directors owe creditors fiduciary duties no later than when insolvency exists in fact. Furthermore, plaintiff argues, IPCO was, in fact, insolvent. Accordingly, plaintiff contends that Mr. Ingersoll owed Mr. Geyer fiduciary duties and, therefore, that § 3114 is statutory authorization for service of process upon Mr. Ingersoll.

Mr. Ingersoll contends that plaintiff mistakenly applies the insolvency exception. That is, Mr. Ingersoll argues that for the insolvency exception to apply, some sort of statutory proceedings (e.g., bankruptcy) must have begun rather than insolvency merely existing in fact. Without such a rule, Mr. Ingersoll argues, the transaction costs of running a corporation that was bordering on insolvency in fact would be overwhelming.

In order for a Delaware court to exercise personal jurisdiction over a nonresident defendant, a Delaware statute must authorize the obtaining of jurisdiction over that defendant. See In re Cambridge Fin. Group, Ltd., Del.Ch., C.A. No. 9279, Hartnett, V.C. (Nov. 9, [18 Del. J. Corp. L. 668] 1987), Ltr. Op at 4, 1987 WL 19677. The parties do not dispute that § 3114 authorizes service of process upon a nonresident director for breaches of fiduciary duties. However, the parties do dispute whether Mr. Ingersoll owed Mr. Geyer, a creditor, fiduciary duties.

As Mr. Ingersoll states, the general rule is that directors do not owe creditors duties beyond the relevant contractual terms absent "special circumstances ... e.g., fraud, insolvency, or a violation of a statute...." Harff v. Kerkorian, Del.Ch., 324 A.2d 215, 222 (1974), rev'd in part on other grounds, Del.Supr., 347 A.2d 133 (1975). Furthermore, neither party seriously disputes that when the insolvency exception does arise, it creates fiduciary duties for directors for the benefit of creditors. Therefore, the issue the parties present to me is when do directors' fiduciary duties to creditors arise via insolvency. ¹ That is, I must decide whether insolvency arises so as to create a fiduciary duty to creditors when insolvency exists in fact or when a party institutes statutory proceedings (e.g., bankruptcy proceedings).

Two factors lead me to conclude that insolvency means insolvency in fact rather than insolvency due to a statutory filing in defining insolvency for purposes of determining when a fiduciary duty to creditors arises. The first and more important factor is that Delaware caselaw requires this conclusion. Indeed, one case explicitly states that "[t]he fact which creates the trust [for the benefit of creditors] is the insolvency, and when that fact is established, the trust arises, and the legality of the acts thereafter performed will be decided by very different principles than in the case of solvency." Bovay v. H. M. Byllesby & Co., Del.Supr., 38 A.2d 808, 813 (1944) (citing McDonald v. Williams, 174 U.S. 397, 19 S.Ct. 743, 43 L.Ed. 1022 (1899)). This passage clearly states that it is the fact of insolvency which causes the duty to creditors arise. Moreover, the case cited by Bovay buttresses this conclusion because in its discussion of the distinction between the rights of creditors to a solvent company from the rights of creditors to an insolvent company, the Court, in effect, defines insolvency as [18 Del. J. Corp. L. 669] a corporation in which the value of its assets has sunk below the amount of its debts. McDonald, 174 U.S. at 403, 19 S.Ct. at 745. McDonald does not suggest that the institution of statutory proceedings is relevant to the definition of when an entity is insolvent.

Mr. Ingersoll cites a number of cases that purportedly stand for the proposition that insolvency means the institution of statutory proceedings. However, I disagree with his interpretation of those cases. First, in Kidde Indus., Inc. v. Weaver Corp., Del.Ch., 593...