In this memorandum opinion, the Court of Chancery denied a motion to dismiss derivative and direct claims filed by a shareholder of ICE Systems, Inc. (“ICE” or the “Company”) against the Company’s president, sole director and majority shareholder. In so doing, the Court held that plaintiff offered sufficient allegations of fraud and gross mismanagement that could justify appointing a custodian for ICE, a solvent company, at a later stage of the proceedings.
In 2001, defendant offered an equity stake in the Company to plaintiff, who had performed financial-related functions for the Company, if she would commit herself full-time to rehabilitating ICE until it became profitable and could be sold. In 2004, the Company was reorganized and reincorporated in Delaware, and plaintiff entered into a Restricted Stock Agreement in which she received a 22% equity stake in the newly organized company and was named its Treasurer. Shortly thereafter, plaintiff loaned ICE $400,000 and personally guaranteed the Company’s new five-year lease and its business line of credit. According to the complaint, in 2007, plaintiff planned to take a two-month leave of absence for a known medical condition. In an alleged retaliatory response, defendant withdrew $250,000 from ICE’s business line of credit, placing the money into a personal account before using it for a down payment on a house in the Hamptons, removed plaintiff’s name and signatory power from ICE’s accounts, and terminated her employment. Additionally, defendant allegedly used ICE’s corporate credit card for personal expenses, commingled company funds, and falsified corporate books to conceal his actions. Plaintiff brought suit in New York on a number of claims, many of which were dismissed in favor of defendant in 2011.
Plaintiff then filed a derivative action in Delaware in April 2012. In response, defendant purported to amend ICE’s charter and effectuate a reverse stock split that would eliminate plaintiff’s ownership interest in the Company, and then moved to dismiss for lack of standing. Plaintiff next filed an amended complaint alleging, among other things, breach of fiduciary duty, failure to pay full value for her cashed-out stock, and equitable fraud, and sought the appointment of a receiver or custodian to prevent further wrongdoing.
Following argument on defendant’s motion to dismiss, the Court issued the instant opinion denying defendant’s motion in its entirety. First, the Court disagreed with defendant’s contention that plaintiff had alleged a “wrongful removal” claim, which was previously dismissed by the New York court and therefore barred by the doctrine of res judicata. Rather than re-litigating the wrongful termination claim, the Court held that the complaint sufficiently alleged that defendant breached his fiduciary duties to ICE by “failing to ensure financial oversight by removing ICE’s Treasurer and failing to replace that function within the Company’s management.”
Second, plaintiff was not collaterally estopped from re-litigating the issue of whether plaintiff relied on defendant’s representations that her equity stake would not be eliminated prior to the sale of the Company. Although the New York court dismissed plaintiff’s breach of oral contract claim under the parol evidence rule, the Vice Chancellor determined that the previous claim related to plaintiff’s employment agreement, whereas the present claim related to plaintiff’s stock ownership. The issues involved different representations made by defendant and different theories of liability, and the New York court did not determine any facts pertaining to plaintiff’s present claim for misrepresentation.
Third, the Court denied defendant’s argument that plaintiff failed to state a claim for appointment of a custodian or receiver, noting that the remedy is not limited to circumstances involving director deadlock and insolvency. Although plaintiffs bear a heavy burden in order to obtain the appointment of a receiver for a solvent corporation, “a party can state a claim for appointment of a custodian or receiver upon a showing of fraud, gross mismanagement, positive misconduct by corporate officers, breach of trust, or extreme circumstances showing imminent danger of great loss which cannot otherwise be prevented.” Accepting plaintiff’s allegations as true and drawing all reasonable inferences in her favor, the Court held that plaintiff’s allegations of fraud and gross mismanagement were sufficient to state a claim that appointment of a custodian may be an appropriate remedy.
Finally, the Court denied defendant’s laches and statute of limitations defenses, as well as his argument that plaintiff sought to “bootstrap” her breach of contract claim into a claim for fraud. By raising these defenses for the first time in his reply brief, the Court held that defendant had waived them for purposes of the motion to dismiss.
The full opinion is available here.