RCS Creditor Trust v. Nicholas S. Schorsch, CA 2017-0178-SG

Background

AR Capital (private) created and sponsored non-traded REITs; RCS (wholesale broker‑dealer) distributed AR Capital products. In 2012–2013 the Control Defendants formed RCAP, took it public, but retained voting control via a super‑voting B share held through Holdings while materially reducing their economic interest in RCAP.
After the IPO, RCS (an RCAP subsidiary) allegedly continued to wholesale AR Capital products on off‑market terms that funneled advisory/promote economics to AR Capital (100% owned by the Control Defendants) while imposing costs and low wholesale compensation on RCAP public stockholders.
Plaintiff (the RCS Creditor Trust, successor to RCAP claims) alleges the Control Defendants (Schorsch, Weil, Kahane, Budko, Block) breached fiduciary duties by engineering self‑dealing transactions, overstaffing RCS, and causing imprudent acquisitions (Strat Cap, Docupace, Snyder Kearney) that benefited AR Capital at RCAP’s expense.
Additional allegations: proxy‑solicitation misconduct by RCS employees in support of an Apollo transaction (later unwound), and regulatory fines arising from proxy practices; some challenged deals were approved by RCAP’s executive committee composed of interested insiders and not by independent directors.
Procedural posture: Defendants moved to partially dismiss under Chancery Rule 12(b)(6). Court denied dismissal in part (core self‑dealing claims), granted dismissal in part (claims based on acquisitions/staffing, Quarto), sustained Holdings as a defendant, and reserved ruling on unjust enrichment and aiding/abetting pending potential supplemental briefing.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the Control Defendants breached duty of loyalty by structuring RCAP/AR Capital dealings to divert advisory economics to AR Capital while RCAP bore wholesaler costs	Control Defendants controlled RCAP and caused it to enter off‑market wholesaling arrangements with AR Capital, invoking entire fairness because they stood on both sides	Disclosures, FINRA limits on wholesaler compensation, and pre‑IPO conduct undermine the claim; some arrangements were publicly disclosed	Survives dismissal: allegations that conflicted controllers stood on both sides invoke entire fairness and cannot be dismissed on 12(b)(6) grounds
Whether proxy‑solicitation misconduct supports a fiduciary‑duty claim against the controllers	RCS employees, pressured by management, engaged in misconduct (impersonation, steamrolling) in support of Apollo/charter amendments	Pressure alone is not illegal; allegations do not show directors directed unlawful acts or satisfy Caremark monitoring failure	Dismissed as standalone fiduciary claim: proxy allegations are ancillary and insufficient by themselves to state a breach of fiduciary duty
Whether RCAP acquisitions (Strat Cap, Docupace, Snyder Kearney) and RCS overstaffing are actionable breaches because they benefited controllers	These transactions and staffing decisions primarily served AR Capital and conferred benefits on the controllers that were not shared with RCAP shareholders, creating conflicted interest	Defendants say they did not stand on both sides; plaintiff fails to allege the benefits were material to make insiders’ interests disabling; business judgment rule applies	Dismissed for failure to plead that any non‑pro rata benefits were material to the fiduciaries; business judgment rule applies absent disabling interest or self‑dealing
Liability of non‑individual defendants: Quarto and Holdings	Quarto participated in conduct concealing off‑market terms and knew of overstaffing; Holdings is the vehicle through which controllers exercised voting control	Quarto’s alleged acts are vague and do not show disloyalty; Holdings is merely the ownership vehicle but defendants argue it should be dismissed	Quarto dismissed for inadequate pleading; Holdings remains a defendant (allowed as the instrumentality through which controllers exercised control)

Key Cases Cited

Cede & Co. v. Technicolor, 634 A.2d 345 (Del. 1993) (business judgment rule and entire fairness framework)
Orman v. Cullman, 794 A.2d 5 (Del. Ch. 2002) (director interest and materiality standards)
Broz v. Cellular Information Systems, 673 A.2d 148 (Del. 1996) (corporate opportunity test)
Stone v. Ritter, 911 A.2d 362 (Del. 2006) (Caremark monitoring standard)
Solomon v. Armstrong, 747 A.2d 1098 (Del. Ch. 1999) (need to plead materiality of director’s pecuniary interest to rebut business judgment rule)
Gantler v. Stephens, 965 A.2d 695 (Del. 2009) (officers owe fiduciary duties equivalent to directors)
In re Gen. Motors Class H S’holders Litig., 734 A.2d 611 (Del. Ch. 1999) (assessing materiality of director benefits)