Harris v. Harris
| Decision Date | 19 January 2023 |
| Docket Number | 2019-0736-JTL |
| Parties | TIMOTHY J. HARRIS, et al. Plaintiffs, v. MARY ELLEN HARRIS, et al., Defendants. |
| Court | Court of Chancery of Delaware |
Date Submitted: November 9, 2022
Joel Friedlander, Christopher M. Foulds, David Hahn, FRIEDLANDER &GORRIS, P.A., Wilmington, Delaware; Counsel for Petitioner/Plaintiff Timothy J. Harris.
S Michael Sirkin, R. Garrett Rice, ROSS ARONSTAM &MORITZ LLP, Wilmington Delaware; Gregory Lomax, LAULETTA BIRNBAUM Sewell, New Jersey; Jill Guldin, FISHER BROYLES, LLP Princeton, New Jersey; Counsel for Kristen C. Harris and Megan Harris Loewenberg.
David A. Jenkins, Julie M. O'Dell, SMITH, KATZENSTEIN &JENKINS LLP; Wilmington, Delaware; Counsel for Mary Ellen Harris.
Steven L. Caponi, Matthew B. Goeller, Megan E. O'Connor, K&L GATES LLP, Wilmington, Delaware; Counsel for Mary Ellen Harris, Paul Petigrow, and Michael Schwager.
Kurt M. Heyman, Patricia L. Enerio, Gillian L. Andrews, HEYMAN ENERIO GATTUSO &HIRZEL LLP, Wilmington, Delaware; Counsel for Royce Management, Inc., Judith Lolli, and Charles Grinnell.
John L. Reed, Ronald N. Brown, III, Peter H. Kyle, Kelly L Freund, DLA PIPER LLP (US), Wilmington, Delaware; Neal J. Levitsky, E. Chaney Hall, FOX ROTHSCHILD LLP, Wilmington, Delaware; Emily A. Kaller, GREENBAUM, ROWE, SMITH &DAVIS LLP, Woodbridge, New Jersey; Counsel for Harris FRC Corporation.
William M. Kelleher, Phillip A. Giordano, Madeline Silverman, GORDON, FOURNARIS &MAMMARELLA, P.A., Wilmington, Delaware; Counsel for The Mary Ellen Harris 2011 Grantor Retained Annuity Trust.
LASTER, V.C.
Dr. Robert M. Harris, Sr. formed Harris FRC Corporation (the "Company").[1] He and his spouse, Mary Ellen Harris, originally owned all of its 1,000 shares as tenants by the entirety. They gifted 190 shares to their five children (the "Siblings"), and they set up two grantor retained annuity trusts (the "GRATs") to transfer another 490 shares to the Siblings in a tax-advantaged manner. Through these transactions, control over the family-owned entity would pass to the second generation.
In this action, three of the Siblings allege that in 2015, as Dr. Harris's health was failing, Mary Ellen and four of her close friends and advisors schemed to seize control of the Company. After securing control, they engaged in a series of self-dealing transactions that tunneled millions of dollars out of the Company. To perpetuate their control, Mary Ellen and her advisors found ways to negate the distribution of shares from the GRATs.
The plaintiffs have asserted claims for breach of fiduciary duty and aiding and abetting breaches of fiduciary duty against Mary Ellen and the advisors based on their selfdealing. They also challenge a merger that Mary Ellen and the advisors effectuated to move the Company from Delaware to New Jersey (the "Outbound Merger"). And they contend that Mary Ellen violated the trust agreement that governed her GRAT by paying far less than equivalent value to withdraw the 245 shares it held (the "Share Withdrawal"). The plaintiffs contend that the advisors tortiously interfered with the GRAT's trust instrument by helping Mary Ellen complete the Share Withdrawal.
Michael Schwager is one of the advisors. After Mary Ellen gained control of the Company, he began handling the Company's financial and accounting work. The plaintiffs allege that because of the Company's simplified operations, the bills for that work should run between $20,000 and $30,000 per year. Schwager has been paid $285,000 per year. As the only person performing financial and accounting work for the Company, Schwager has written the checks for the interested transactions that have tunneled funds to Mary Ellen and her associates. When preparing the Company's financial statements, Schwager has taken steps to hide the interested transactions. When preparing the Company's tax returns, he has deducted personal transfers as if they were bona fide business expenses.
Schwager has moved to dismiss the claims against him for lack of personal jurisdiction. A proper assertion of personal jurisdiction requires a valid method for serving process, and the assertion of jurisdiction must comply with the requirements of due process.
The plaintiffs seek to serve Schwager under Delaware's Officer Consent Statute. Schwager argues that he cannot be served under that statute because he never served in a formal officer position. Addressing an issue of first impression, this decision holds that the Officer Consent Statute can be used to serve process on a person who serves in the role of president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer, or chief accounting officer of the corporation, even if the person does not hold the formal officer position.
In this case, the court cannot yet determine whether Schwager is subject to service of process under the Officer Consent Statute. On the one hand, Schwager was the only person engaged in the financial and accounting function for the Company, and he was so deeply involved that one of the defendants referred to him colloquially as the Company's Chief Financial Officer. The plaintiffs also allege that he was paid far more than what a services provider would receive. On the other hand, Schwager did not accept a formal officer role, and he says that he operated at all times as a principal of a small accounting firm. Under the circumstances, the plaintiffs are entitled to take jurisdictional discovery. A decision on whether Schwager can be served under the Officer Consent Statute and whether the resulting exercise of personal jurisdiction would comply with due process is deferred until after jurisdictional discovery is complete.
The plaintiffs alternatively seek to serve Schwager under Delaware's Long-Arm Statute. They have identified Delaware-directed acts that could support service of process under that statute, including the Outbound Merger and the redomiciling of a trust in Delaware as part of the Share Withdrawal. The plaintiffs also have made allegations indicating that Schwager was sufficiently involved with those Delaware-directed acts to support service of process and a constitutionally proper exercise of personal jurisdiction. Nevertheless, the record remains too limited to rule on those issues. Instead, the plaintiffs are again entitled to jurisdictional discovery. A decision on whether Schwager can be served under the Long-Arm Statute and the constitutionality of exercising personal jurisdiction over him will await the completion of that effort.
Schwager has moved to dismiss the counts that name him as a defendant for failing to state claims on which relief can be granted. Because the absence of personal jurisdiction could render that motion moot, the court does not reach it. A decision on Schwager's Rule 12(b)(6) motion is deferred until the court determines whether personal jurisdiction over Schwager exists.
I. FACTUAL BACKGROUND
The facts are drawn from the plaintiffs' Verified Supplemental and Third Amended Complaint (the "Complaint") and the documents that it incorporates by reference.[2] At this procedural stage, the plaintiffs are entitled to have the court credit their allegations and draw all reasonable inferences in their favor. For purposes of evaluating whether a defendant is subject to the court's jurisdiction, "the court may go beyond the pleadings and look to affidavits and other discovery of record." Chandler v. Ciccoricco, 2003 WL 21040185, at *8 (Del. Ch. May 5, 2003). The factual recitation therefore incorporates matters drawn from the parties' submissions in connection with the motions to dismiss.
Before May 2016, the Company was a New Jersey corporation. From May 2016 until May 2019, the Company was a Delaware corporation. Since May 2019, the Company has been a New Jersey corporation. It is and always has been a family-held entity.
Currently, its only stockholders are Mary Ellen, the five Siblings, and various trusts created for their benefit. The plaintiffs in this action are three of the Siblings: Tim Harris, Kristen Harris, and Megan Harris Loewenberg. As discussed below, another Sibling previously sued Mary Ellen and the Company and reached a settlement.
Dr. Harris founded the Company after securing the patent rights for an epilepsy drug. He monetized the patent rights through a license agreement with a global biopharmaceutical company and formed the Company to hold the rights and receive royalty payments. That revenue stream historically amounted to approximately $100 million per year. The Company's only significant function was to collect and distribute the payments. In 2020, the Company sold its patent rights for $342 million in cash. The Company currently holds a pool of cash of around $120 million. It has no operating business.
The Company has issued 1,000 shares. Originally, Dr. Harris and Mary Ellen owned all of the shares jointly as tenants by the entirety. In 2002, they transferred 38 shares to each of the Siblings, resulting in each owning a 3.8% interest. In 2011, Dr. Harris and Mary Ellen each created a GRAT and funded it with 245 shares. The GRATs would expire on December 31, 2018, and the shares would be distributed to the Siblings. Through the combination of the 190 shares they received directly and the 490 shares distributed from the GRATs, the Siblings would receive a total of 680 shares, representing a controlling 68% interest in the Company.
In October 2013, Dr. Harris was diagnosed with an aggressive form of aphasia consistent with Alzheimer's disease. As Dr. Harris's health deteriorated, Judith Lolli insinuated herself into Mary Ellen's financial life. Lolli and Mary Ellen are next-door...
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