SDF Funding LLC v. Fry
| Decision Date | 13 May 2022 |
| Docket Number | C. A. 2017-0732-KSJM |
| Parties | SDF FUNDING LLC and STUART D. FELDMAN, derivatively on behalf of FLASHPOINT TECHNOLOGY, INC., Plaintiffs, v. STANLEY B. FRY, EDWARD D. HERRICK, ROSS BOTT, CYRUS W. GREGG, JARED FRY, RYAN C. FRY, and MAGDALENA RAMOS, Defendants, and FLASHPOINT TECHNOLOGY, INC., Nominal Defendant. |
| Court | Court of Chancery of Delaware |
Date Submitted: February 1, 2022
John G. Harris, BERGER HARRIS LLP, Wilmington, Delaware; Douglas R. Hirsch, Ben Hutman, James Ancone, SADIS & GOLDBERG LLP, New York, New York; Counsel for Plaintiffs SDF Funding LLC and Stuart D. Feldman.
Douglas D. Herrmann, Emily L. Wheatley, TROUTMAN PEPPER HAMILTON SANDERS LLP, Wilmington, Delaware; Pamela S. Palmer Kevin Crisp, TROUTMAN PEPPER HAMILTON SANDERS LLP, Los Angeles, California; Counsel for Defendants Stanley B. Fry Edward D. Herrick, Ross Bott, Cyrus W. Gregg, Jared Fry, Ryan C. Fry, and Magdalena Ramos.
Flashpoint Technology, Incorporated ("Flashpoint") is a Delaware corporation founded by Defendant Stanley Fry in 1996 to hold and license technology patents. Since Flashpoint's formation, Stanley[1] has served as CEO and Chairman of the Board of Directors. Stanley's sons, Defendants Jared Fry and Ryan Fry, work part-time for Flashpoint. Collectively, Stanley, Jared, and Ryan own 36% of the outstanding Flashpoint stock.
Plaintiff Stuart D. Feldman invested in Flashpoint in 1999 through a wholly owned entity. In March 2015, Feldman caused Flashpoint stock to be transferred to another Feldman-owned entity, Plaintiff SDF Funding, LLC ("SDF").
In May 2015, Feldman's investment manager requested Flashpoint's audited financials. From those documents, the manager discovered a series of loans by Flashpoint to entities controlled by the Fry family and other Flashpoint directors or employees. This discovery prompted SDF to demand inspection of Flashpoint books and records concerning any related-party transactions. From those documents, the plaintiffs learned that Flashpoint was paying to lease office and storage space at two properties owned by Stanley. Although the properties collectively served as the headquarters for at least twenty-six other entities owned by or affiliated with Stanley, Flashpoint shouldered the entire cost of the lease payment.
The plaintiffs filed the original complaint in October 2017 asserting four counts collectively challenging the loan transactions and lease payments. Through discovery, the plaintiffs learned that Flashpoint had paid the Fry family members over $20 million in cash bonuses between 2010 and 2013. They also came to believe that the defendants had diverted corporate opportunities to entities that they owned and that those opportunities have earned nearly $20 million in revenue.
The plaintiffs amended the complaint in December 2020 to add Jared and Ryan as defendants and to add an additional four counts, collectively challenging the compensation decisions and alleging usurpation of corporate opportunities.
The defendants moved for summary judgment on the four original counts and to dismiss the other counts. This decision resolves those motions. Jared and Ryan moved to dismiss for lack of personal jurisdiction and on other grounds unique to them. Jared and Ryan's motions are addressed in a separate decision.
The defendants advance one argument in support of their motion for summary judgment. They observe that the plaintiffs' claims are derivative and thus subject to the contemporaneous ownership requirement, but Feldman never owned stock in Flashpoint and SDF did not acquire stock until March 2015. The defendants argue that the plaintiffs lack standing to pursue the claims challenging conduct before SDF became a stockholder. This decision grants the defendants' motion for summary judgment as to claims challenging actions taken prior to March 2015. In reaching this conclusion, the court rejects the plaintiffs' argument that Feldman has equitable standing to pursue those claims.
The defendants moved to dismiss the amended complaint for failure to plead demand futility and failure to state a claim. Given the composition of Flashpoint's board and the nature of the claims at issue, the defendants' dismissal arguments fail.
For the motion to dismiss, the facts are drawn from the Amended Verified Shareholder Derivative Complaint (the "Amended Complaint")[2] and documents incorporated by reference, including public filings and documents obtained in response to a demand made pursuant to Section 220 of the Delaware General Corporation Law by Stanley and SDF ("Plaintiffs"). Except as to direct quotations, facts drawn from the Amended Complaint are set forth in the background without citation.
For the motion for summary judgment, the facts are drawn from the declarations and exhibits submitted by the parties. To draw the distinction between the well-pled allegations of the Amended Complaint and those germane to the motion for summary judgment, this decision includes citations where facts are drawn from the summary judgment record.
Flashpoint is a Delaware corporation headquartered in Peterborough, New Hampshire. Flashpoint was founded by Defendant Stanley in 1996 to "develop[] advanced technology solutions and intellectual property relating to the convergence of internet communications and digital content."[3] Essentially, Flashpoint holds and licenses technology patents.
Since Flashpoint's formation, Stanley has served as CEO and Chairman. Stanley's sons, Defendants Jared and Ryan, work part-time for Flashpoint. Collectively, Stanley, Jared, and Ryan own 36% of the outstanding Flashpoint stock.
At times relevant to this litigation, the Flashpoint board comprised Stanley and Defendants Edward Herrick, Ross Bott, and Cyrus Gregg. Herrick resigned from the Board before this litigation commenced. When the original complaint and Amended Complaint were filed, the Flashpoint board comprised Stanley, Bott, and Gregg.
The Amended Complaint challenges the following related-party transactions dating back to 2011.
Stanley formed Collision Technology, LLC under Delaware law to purchase internet and telecommunications patents (the "Collision Opportunity"). In 2012, Collision Technology, LLC converted to a Delaware corporation, Collision Communications, Inc. ("Collision").
After the conversion, Herrick, Bott, and Jared comprised Collision's board. Stanley owns 46% of Collision. Herrick invested $3 million in Collision through Collision Funding Partners, LLC. Ryan is an employee of Collision.
Between mid-2011 and the end of 2014, Flashpoint loaned Collision over $4.41 million (collectively, the "Collision Loans"). Put into perspective, this amounted to more than the total value of Flashpoint's end-of-year non-tax assets for 2012, 2013, and 2014.
The Flashpoint board approved the first loan to Collision in April 2011 for $3.2 million in exchange for a Derivative Rights Agreement ("DRA"). Flashpoint made additional loans to Collision for over $1 million between November 17, 2011, and December 31, 2012. Flashpoint later loaned Collision $200, 000 during 2014, bringing the total amount of outstanding loans to over $4.4 million.
In May 2015, the Flashpoint board voted to forgive approximately $4, 213, 992 of debt under the Collision Loans and extinguish the DRA in exchange for Collision stock. In exchange, Flashpoint received 36.9% of Collision preferred stock.
Stanley formed Concert Technology, Inc. ("Concert") in 2005 under Delaware law to develop and license technologies and intellectual property relating to the organization and distribution of digital content.
Stanley is Chairman of Concert's board. Flashpoint has identified Concert as an affiliate of Stanley in various records since October 2005. Herrick, Bott, and Gregg have served on the Concert board since 2008, Defendant Magdalena Ramos-a Flashpoint employee-has been the Corporate Secretary since 2009, and Ryan was a Concert employee before joining the Concert board in 2012.
In March 2011, the Flashpoint board approved an unsecured loan for $500, 000 to Concert. Between 2012 and 2014, the Board advanced over $90, 000 to Concert (collectively, the "Concert Loans") for "employee, administrative and office support resources."[4] In 2012, Flashpoint established a reserve for the $500, 000 loan plus $12, 187 in interest because the loan was deemed "uncollectible."[5]
Around the same time that Flashpoint designated the $500, 000 loan uncollectible, Flashpoint approved an interest-free advance of "employee, administrative and office support resources to Concert."[6] The advance amounted to $56, 192 by the end of 2013 and eventually grew to over $90, 000 by the end of 2014. The advance was made despite Concert's earlier default and the fact that "Concert had no net revenues since its inception in 2005."[7]
Beginning in November 2004, Flashpoint made payments to lease office and storage space at Stanley's personal home at 69 Pine Street (the "Lease Payments"), although that address is not listed as a corporate location on Flashpoint's website.
The monthly lease called for payments of $4, 355 for a home valued at approximately $374, 000. Flashpoint pays twice as much to lease this office than it pays to lease its headquarters. At least 18 other business entities affiliated with Stanley purport to operate out of the 69 Pine Street location. In total, Flashpoint paid $775, 000 in rent for the 69 Pine Street location.
Stanley also used the Flashpoint headquarters at 20 Depot Street for at least eight other entities under his control, including...
To continue reading
Request your trial