Chancery Court Finds Management Services Agreement Key in Establishing Jurisdiction

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On August 28, 2012, the Delaware Court of Chancery found that a management services agreement could help establish both personal jurisdiction through a conspiracy to defraud and joint and several liability through an agency theory.  Hospitalists of Delaware, LLC v. Lutz, No. 6221-VCP, 2012 Del. Ch. LEXIS 207 (Del. Ch. Aug. 28, 2012).  Plaintiffs in the case were two judgment creditors seeking damages and declaratory relief from defendant Cubit Medical Practice Solutions (Cubit), a dissolved medical billing company, and three other entities in the same corporate family incorporated in Ohio.  Plaintiffs received default judgments against Cubit in 2010. 

Cubit, a Delaware corporation with its principal place of business in Ohio, was party to a Management Services Agreement (“Agreement”) with defendant Integra.  Both Cubit and Integra were organized under Blue Chip Venture Company, an Ohio limited liability company.  Pursuant to the Agreement, Integra provided management services to Cubit in exchange for management fees.  Though Cubit and Integra entered into the Agreement in 2005, the insolvent Cubit paid no management fees to Integra until 2008.  Plaintiffs claimed that Cubit’s directors instructed Integra to document the management fees it received from Cubit as secured payments so Integra would have priority over Cubit’s other creditors.

Integra claimed that, as an Ohio corporation, it was not subject to personal jurisdiction in Delaware.  However, Delaware recognizes a conspiracy theory of personal jurisdiction.  In Delaware, a conspiracy to defraud is satisfied by a claim for aiding and abetting a breach of fiduciary duty.  Because Cubit engaged in a series of self-dealing and interested transactions by paying Integra when it was insolvent, and Integra accepted these as secured payments knowing Cubit was insolvent, the court determined that Integra had aided and abetted the Cubit directors’ breach of fiduciary duty.  Additionally, the court found that Integra may be jointly and severally liable for the judgments against Cubit under the agency theory.  The court focused on the fact that the Agreement allowed Integra to direct Cubit’s affairs and finance Cubit’s operations by not seeking payment, in addition to the sharing of directors, office space, data services, and a credit card account.  The opinion may be read by clicking here.

Reporter, Paige Fillingame, Houston, +1 713 615 7632, pfillingame@kslaw.com.

Published In: Administrative Agency Updates, Business Organization Updates, Business Torts Updates, Civil Procedure Updates, Health Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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