Zhou v. Deng
| Decision Date | 23 May 2022 |
| Docket Number | C. A. 2021-0026-JRS |
| Parties | DENGRONG ZHOU, Plaintiff/Counterclaim Defendant, v. LONG DENG and MARK FANG, Defendants/Counterclaim Plaintiffs, and iFRESH, INC., a Delaware corporation, Nominal Defendant. |
| Court | Court of Chancery of Delaware |
DENGRONG ZHOU, Plaintiff/Counterclaim Defendant,
v.
LONG DENG and MARK FANG, Defendants/Counterclaim Plaintiffs,
and iFRESH, INC., a Delaware corporation, Nominal Defendant.
C. A. No. 2021-0026-JRS
Court of Chancery of Delaware
May 23, 2022
ORDER DENYING DEFENDANTS/COUNTERCLAIM PLAINTIFFS' MOTION FOR A STAY PENDING APPEAL AND MOTION TO EXTEND STATUS QUO ORDER
Joseph R. Slights III Vice Chancellor
WHEREAS, on January 12, 2021, Plaintiff, Dengrong Zhou, filed a complaint under 8 Del. C. § 225 ("Section 225"), seeking a declaration regarding the validity of a written consent signed by stockholders holding a majority of the shares of iFresh, Inc. ("iFresh" or the "Company") that purported to remove Defendants,
Long Deng and Mark Fang, from iFresh's board of directors (the "Board") and appoint Qiang Ou and Jiandong Xu in their stead (the "Consent");[1]
WHEREAS, on February 4, 2021, the Court entered a status quo order (the "Status Quo Order") that was to be effective during the pendency of the litigation;[2]
WHEREAS, on April 6, 2022, the Court issued a Post-Trial Memorandum Opinion (the "Opinion") entering judgment for Plaintiff;[3]
WHEREAS, on May 3, 2022, Defendants filed an amended notice of appeal from the Opinion with the Supreme Court of the State of Delaware;[4]
WHEREAS, on May 6, 2022, Defendants moved for a stay pending appeal and to extend the Status Quo Order until a decision on the motion to stay is entered (collectively, the "Motions");[5]
WHEREAS, on May 12, 2022, Plaintiff filed his opposition to the Motions;[6]and
WHEREAS, on May 16, 2022, Defendants filed a reply in support of the Motions;[7]
NOW THEREFORE, THE COURT FINDS AND ORDERS AS FOLLOWS:
1. The Motions are DENIED
2. Under Supreme Court Rule 32, this Court has discretion to grant a stay of its judgment pending appeal.[8] In exercising that discretion, the Court is guided
by the so-called Kirpat factors.[9] Those factors direct the Court to: (i) make a preliminary assessment of the movant's likelihood of success on appeal; (ii) assess whether the movant will suffer irreparable harm if the stay is not granted; (iii) assess whether any other interested party will suffer substantial harm if the stay is granted; and (iv) consider whether the public interest will be served if the stay is granted.[10]
3. The Kirpat factors "are not a checklist; they are balanced with 'all of the equities involved in the case together.'"[11] "Such a balancing of equities is particularly complex when, as here, the interests at issue are not limited to an award of money."[12]
4. Because Kirpat directs the trial court to assess the strength of its own reasoning and judgment, "the 'likelihood of success on appeal' prong cannot be interpreted literally or in a vacuum."[13] Instead, "[i]f the other three factors strongly
favor interim relief, then a court may exercise its discretion to reach an equitable resolution by granting a stay if the petitioner has presented a serious legal question that raises a 'fair ground for litigation and thus more deliberative investigation.'"[14]"With this guidance in mind, the court often considers [factors (ii) through (iv)] before assessing whether the movant has presented a question that raises a fair ground for review by our Supreme Court."[15]
5. Under Kirpat factor (ii), Defendants argue they will suffer irreparable harm if the stay is not granted because "the board composition remains disputed, creating the risk of unauthorized and irreversible board action."[16] On one hand, in the context of motions to stay judgments where control of a Delaware business entity is at stake, this court has recognized that the "risk of unauthorized Board action . . . supports finding a threat of irreparable harm."[17] On the other hand, loss of board
control alone cannot constitute irreparable harm for purposes of Kirpat, as the party seeking a stay "must point to some injury other than compliance with [the] Court's Order" to carry its burden under Kirpat.[18] According to Defendants, irreparable harm can be found in the fact that Plaintiff "intends to revamp company management wholesale and has already appointed his own daughter as [] CEO."[19] Beyond this conclusory contention, however, Defendants identify no other direct harm to themselves or potential for destructive changes within iFresh that will indirectly cause them harm. The fact that a party will replace management after prevailing on a Section 225 claim does not, alone, threaten the replaced directors with irreparable harm such that a stay is warranted.[20] I am satisfied this factor weighs against a stay.
6. Under factor (iii) of Kirpat, Defendants argue that a stay will not cause substantial harm to others because the stay will be brief given that "the appeal is scheduled to be fully briefed by August[] 2022."[21] They also argue that the absence of a stay will cause iFresh and its lender, KeyBank, harm because Defendant Deng
is no longer a director of iFresh or its CEO, and KeyBank "views Long Deng's involvement as critical to ensuring continuity and a smooth transition."[22] I am not persuaded by either argument for several reasons. First, although the stay pending appeal might be relatively brief, Defendants have already spent more than a year at iFresh's helm under the Status Quo Order, even though "there has never been a dispute as to the facial validity of the [w]ritten [c]onsent" removing them.[23] Any further delay is unnecessary and deprives Plaintiff of the legal effect of the Consent that the Court has now adjudicated to have been valid from the time of its delivery to the Company. Second, while I acknowledge that KeyBank's forbearance is critical to iFresh's continued operations, [24] the status quo at iFresh is that a majority of its stockholders have exercised their right to remove and replace members of the Board (through a consent that indisputably is valid as a matter of form and as a matter of law), and the Board has exercised its right to make changes in management.
Denial of the stay reinforces those rights and provides critical clarity to KeyBank and all others who deal with iFresh at arms-length regarding "the current directors and officers"[25] of the Company and "who is now managing [its] day-to-day operations."[26] Moreover, Defendants' assertion of harm to KeyBank is overblown. KeyBank is capable of negotiating forbearance terms to protect its interest and neutralize any supposed harm resulting from Defendant Deng's removal, as illustrated by Defendants' own exhibits.[27]
7. Factor (iv) of Kirpat asks the Court to determine whether the public interest will be served if the Motions are granted. "Who controls the board of directors, although 'critically important to the litigants' and other stakeholders, implicates the 'private interests of particular corporate constituencies,' not the public interest."[28] Even if some public interest is implicated here because of iFresh's status
as a public company, [29] it is counterbalanced by Delaware's interest in "expeditiously complet[ing] and effectuat[ing] § 225 actions."[30] This is particularly so here given that Plaintiff has made at least a credible case that allowing Defendants to continue leading iFresh is not in the best interests of its stakeholders.[31] In all, this factor is, at best, neutral for Defendants.
8. Based on the foregoing, I am satisfied that Kirpat factors (ii)-(iv) and the balance of equities weigh in favor of denying the Motions. Our Supreme Court has counseled that "[i]f [Kirpat factors (ii)-(iv)] strongly favor interim relief, then a court may exercise its discretion to reach an equitable resolution by granting a stay if the petitioner has presented a serious legal question that raises 'fair ground for litigation and thus for more deliberative investigation'"[32] For the reasons just
explained, the last three Kirpat factors do not favor granting the Motions. Nor am I persuaded Defendants have raised legal questions worthy of serious appellate review.
9. The Opinion did not break new legal ground or extend settled law.[33] Nevertheless, Defendants argue they have identified two "serious legal question[s] that raise[] a fair ground for appeal."[34] First, they argue the Court erred in not applying New York's "peculiar knowledge" exception to justifiable reliance in a fraud claim.[35] Second, they argue the Court erred when it found that Defendants waived the argument that the Consent was invalid because Plaintiff aided and abetted in Amy Xue's (iFresh's CFO) breach of her fiduciary duties in order to secure at least some of the shares voted in the Consent.[36] I address each in turn.
10. After reviewing the parties' submissions and the relevant case law, I remain satisfied that the Court correctly interpreted New York's "peculiar knowledge" exception. In the Opinion, the Court held that the exception "is inapplicable here," that "Defendants and iFresh are sophisticated parties who were represented by counsel," and that "[t]he peculiar-knowledge exception has been rejected by courts when sophisticated parties could have negotiated contractual protections for themselves."[37] Those holdings reflect a proper understanding and application of the peculiar knowledge exception, [38] especially in light of the Court's factual findings that the purported misrepresentations were rebutted by information in public records readily accessible to Defendants and iFresh had they bothered to
conduct even basic due diligence.[39] Nevertheless, Defendants submit that the Court erred because the peculiar knowledge exception "applies regardless of the level of sophistication of the parties, "[40] and, therefore, the Court's holding to the contrary
presents a "serious legal question on appeal."[41] But the Court's determination that the peculiar knowledge...
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