Manichaean Capital, LLC v. Exela Techs., Inc.
| Decision Date | 25 May 2021 |
| Docket Number | C.A. No. 2020-0601-JRS |
| Citation | 251 A.3d 694 |
| Court | Court of Chancery of Delaware |
| Parties | MANICHAEAN CAPITAL, LLC, Charles Cascarilla, Emil Khan Woods, LGC Foundation, Inc. and Imago Dei Foundation, Inc., Plaintiffs, v. EXELA TECHNOLOGIES, INC., Ex-Sigma LLC, Banctec (Puerto Rico), Inc., Banctec Group, LLC, Banctec Intermediate Holding, Inc., Banctec, Inc., BillSmart Solutions, LLC, BTC International Holdings, Inc., BTC Ventures, Inc., Charter Lason, Inc., CorpsourceHoldings, LLC, Deliverex LLC, DFG UK, LLC, DFG2 Holdings, LLC, DFG2, LLC, Economic Research Services, Inc., Exela Intermediate Holdings LLC, Exela Intermediate LLC, Exela Finance Inc., Exela Enterprise Solutions, Inc., Exela Receivables Holdco LLC, Exela RE LLC, Exela Receivables 1, LLC, Exela Receivables 2, LLC, FTS Parent, Inc., HOV Enterprise Solutions, Inc., HOV Services, Inc., HOV Services, LLC, J&B Software, Inc., Kinsella Media, LLC, Lason International, Inc., Managed Care Professional, LLC, Pangea Acquisitions, Inc., RC4 Capital, LLC, Regulus America, LLC, Regulus Group II, LLC, Regulus Group, LLC, Regulus Holding, Inc., Regulus Integrated Solutions, LLC, Regulus West, LLC, Rustic Canyon III, LLC, Sourcecorp Bps, Inc., Sourcecorp Bps Northern California Inc., SourceHOV Healthcare, Inc., SourceHOV Holdings, Inc., SourceHOV LLC, Sourcecorp Legal, Inc., Sourcecorp, Incorporated, Trac Holdings, LLC, Transcentra, Inc., United Information Services, Inc., Sourcecorp Management, Inc., Defendants. |
Rudolf Koch, Esquire, Matthew W. Murphy, Esquire and Andrew L. Milam, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware; Samuel J. Lieberman, Esquire and Alexander H. McCabe, Esquire of Sadis & Goldberg LLP of New York, New York; and Steven K. Davidson, Esquire, Michael J. Baratz, Esquire, Claire Schachter, Esquire and Lauren Goldschmidt, Esquire of Steptoe & Johnson LLP, Washington, DC, Attorneys for Plaintiffs.
T. Brad Davey, Esquire, Matthew F. Davis, Esquire and Andrew H. Sauder, Esquire of Potter Anderson & Corroon LLP, Wilmington, Delaware and Jennifer Barrett, Esquire, Dennis H. Hranitzky, Esquire and Blair Adams, Esquire of Quinn Emanuel Urquhart & Sullivan, LLP, New York, New York, Attorneys for Defendants.
Under the Delaware General Corporation Law, a board of director's decision to cause the company it serves to merge leaves the company's stockholders with one of two options: participate in the merger as negotiated by the board, or dissent to the merger and seek statutory appraisal. It has not always been this way. At common law, all major corporate decisions, including whether to merge, required unanimous stockholder consent, providing each and every shareholder an effective veto power over any corporate transaction.1 That veto right created an unhealthy phenomenon known as "nuisance blocking," where a single stockholder could withhold consent to a merger in order to extract hold up consideration. This dynamic, and others, prompted the Delaware General Assembly to create a statutory right of appraisal as a means to quash the minority's blocking right while also addressing the nonconsensual taking of the stockholders’ property (their stock).2
The plaintiffs here, former stockholders of SourceHOV Holdings, Inc., ("SourceHOV Holdings")3 dissented when presented with the decision of the SourceHOV Holdings board of directors to merge the company with Exela Technologies, Inc., and then sought statutory appraisal of their SourceHOV Holdings shares. They pursued their appraisal rights at great costs, both opportunity and financial, and were vindicated in their efforts when the court awarded them an appraisal judgment reflecting their shares were worth well in excess of what they were offered in the merger. SourceHOV Holdings appealed and the plaintiffs prevailed again. Following the entry of final judgment, the court entered a charging order against SourceHOV Holdings’ interests in its subsidiaries to facilitate the payment of the judgment. Yet the judgment remains unsatisfied.
Confronted with the highly unusual circumstance where an appraisal judgment debtor cannot or will not pay, the plaintiffs in this action, and in a parallel action,4 seek to hold Exela (as acquirer) and its affiliated entities accountable for the appraisal judgment.5 According to the plaintiffs, as the appraisal action was nearing its inevitable conclusion, and since the appraisal judgment and subsequent charging order were entered against SourceHOV Holdings, Exela and its subsidiaries have been executing a scheme to prevent post-merger SourceHOV Holdings from paying the judgment.
Against this backdrop, the plaintiffs seek to hold Exela and its subsidiaries liable under two theories: (1) given the abuse of corporate form by Exela and its subsidiaries, principally through fraudulent maneuvers, the Court should pierce the SourceHOV Holdings corporate veil upwards to reach Exela and downwards to reach SourceHOV Holdings’ solvent subsidiaries so that Plaintiffs can enforce their charging order against these entities; and (2) given that Exela now holds a 100% stake in SourceHOV Holdings but has refused to pay all SourceHOV Holdings stockholders for their share of the company, the Court should determine that Exela was unjustly enriched and order it to pay the plaintiffs restitution in the amount of the appraisal judgment plus interest.
Plaintiffs’ well-pled allegations support a reasonable inference that Exela, lacking in corporate formality, engaged in a transaction, as described in the plaintiffs’ complaint, for the purpose of preventing funds that would otherwise flow from SourceHOV Holdings’ subsidiaries directly to SourceHOV Holdings to flow instead directly to Exela, thereby leaving the judgment debtor unable to satisfy the plaintiffs’ appraisal judgment. Because the charging order requires any money flowing through SourceHOV Holdings first to be paid to the judgment creditors, including the plaintiffs, Exela's participation in a scheme to deprive SourceHOV Holdings of those funds has conceivably rendered the charging order worthless parchment. This supports the plaintiffs’ prayer for relief in the form of traditional veil-piercing (i.e., piercing SourceHOV Holdings’ corporate veil to reach upwards to Exela).
It is likewise reasonably conceivable that SourceHOV Holdings’ subsidiaries knowingly participated in the wrongful scheme, such that the plaintiffs’ prayer for relief in the form of reverse veil-piercing (i.e., piercing SourceHOV Holdings’ corporate veil to reach downwards to its wholly owned subsidiaries) is likewise appropriate. The legality of reverse veil-piercing appears to be a matter of first impression in Delaware. After carefully reviewing the justifications for and against the adoption of reverse veil-piercing, I find that this equitable remedy (or right) is an appropriate means, in limited circumstances, to remedy fraud and injustice.6 Under the framework set out below, the plaintiffs’ claim for reverse veil-piercing, which, again, seeks to hold SourceHOV Holdings’ subsidiaries liable for its debts, is, I believe, viable as a matter of Delaware law.
On the other hand, the plaintiffs’ claim for unjust enrichment is not viable because the charging order, as a matter of law, prevents the use of equitable claims and remedies, such as unjust enrichment, as separate means to reach LLC assets that are subject to the charging order. The unjust enrichment claim, consequently, must be dismissed.
The procedural posture in which these issues are presented to the Court is a motion to dismiss all claims under Court of Chancery Rule 12(b)(6). For reasons stated below, the motion is granted in part and denied in part.
I have drawn the facts from well-pled allegations in the Verified Complaint (the "Complaint") and documents incorporated by reference or integral to that pleading.7 For purposes of the motion, I accept as true the Complaint's well-pled factual allegations and draw all reasonable inferences in the plaintiffs’ favor.8
A. Parties
Plaintiff, Manichaean Capital, LLC, a Delaware LLC, along with individual plaintiffs, Charles Cascarilla and Emil Woods, both New York residents, and LGC Foundation, Inc. and Imago Dei Foundation, Inc., both Ohio corporations, (collectively, "Plaintiffs"), were equity holders in SourceHOV Holdings prior to its acquisition by Exela in a merger consummated on July 12, 2017.9
Defendant, Exela, a Delaware corporation, sits atop a network of "resident and non-resident direct and indirect subsidiaries," many of which have been named as defendants here (the "Exela Subsidiaries").10 Exela operates in the business process automation space.
The Exela Subsidiaries include: Ex-Sigma LLC, the Delaware LLC formed to combine with SourceHOV Holdings in the Merger, SourceHOV Holdings, the surviving entity from the Merger, SourceHOV, LLC, an entity immediately below SourceHOV Holdings in which SourceHOV Holdings maintains a 100% membership interest, and then a number of subsidiary LLCs, which I refer to as the "SourceHOV Subsidiaries."11 The Exela network is depicted in the chart below:
B. The Merger
On July 12, 2017, SourceHOV Holdings merged with Ex-Sigma LLC and Ex-Sigma Merger Sub, Inc., in a transaction whereby each share of SourceHOV Holdings common stock was converted into a right to receive one membership unit of Ex-Sigma LLC (the "Merger").12 Prior to the Merger, Plaintiffs held 10,304 shares of common stock in SourceHOV Holdings.13 The creation of Ex-Sigma and subsequent conversion of stock was a preliminary step to effectuate the merger of SourceHOV Holdings into SourceHOV Merger Sub, with SourceHOV Holdings emerging as the surviving entity.14 The Merger made SourceHOV Holdings an indirect subsidiary of Quinpario Acquisition Corp. 2, which was later renamed Exela.15
Under the Consent, Waiver and Amendment to the Business Combination Agreement (the "Modification Agreement"...
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Significant 2021 Decisions Affecting Private Company M&A
...clear definition of fraud in acquisition agreements and ensuring that it is consistently used. Manichaean Cap., LLC v. Exela Techs., Inc., 251 A.3d 694 (Del. Ch. May 25, In case of first impression, Delaware Chancery Court adopted theory of "reverse veil piercing" to permit plaintiffs to pi......
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Significant 2021 Decisions Affecting Private Company M&A
...clear definition of fraud in acquisition agreements and ensuring that it is consistently used. Manichaean Cap., LLC v. Exela Techs., Inc., 251 A.3d 694 (Del. Ch. May 25, In case of first impression, Delaware Chancery Court adopted theory of "reverse veil piercing" to permit plaintiffs to pi......