MANICHAEAN CAPITAL, LLC, CHARLES CASCARILLA, EMIL KHAN WOODS, LGC FOUNDATION, INC. and IMAGO DEI FOUNDATION, INC. v. EXELA TECHNOLOGIES, INC., EX-SIGMA LLC, BANCTEC (PUERTO RICO), INC., BANCTEC GROUP, LLC, BANCTEC INTERMEDIATE HOLDING, INC., BANCTEC, INC., BILLSMART SOLUTIONS, LLC, BTC INTERNATIONAL HOLDINGS, INC., BTC VENTURES, INC., CHARTER LASON, INC., CORPSOURCEHOLDINGS, LLC, DELIVEREX LLC, DFG UK, LLC, DFG2 HOLDINGS, LLC, DFG2, LLC, ECONOMIC RESEARCH SERVICES, INC., EXELA INTERMEDIATE HOLDINGS LLC, EXELA INTERMEDIATE LLC, EXELA FINANCE INC., EXELA ENTERPRISE SOLUTIONS, INC., EXELA RECEIVABLES HOLDCO LLC, EXELA RE LLC, EXELA RECEIVABLES 1, LLC, EXELA RECEIVABLES 2, LLC, FTS PARENT, INC., HOV ENTERPRISE SOLUTIONS, INC., HOV SERVICES, INC., HOV SERVICES, LLC, J&B SOFTWARE, INC., KINSELLA MEDIA, LLC, LASON INTERNATIONAL, INC., MANAGED CARE PROFESSIONAL, LLC, PANGEA ACQUISITIONS, INC., RC4 CAPITAL, LLC, REGULUS AMERICA, LLC, REGULUS GROUP II, LLC, REGULUS GROUP, LLC, REGULUS HOLDING, INC., REGULUS INTEGRATED SOLUTIONS, LLC, REGULUS WEST, LLC, RUSTIC CANYON III, LLC, SOURCECORP BPS, INC., SOURCECORP BPS NORTHERN CALIFORNIA INC., SOURCEHOV HEALTHCARE, INC., SOURCEHOV HOLDINGS, INC., SOURCEHOV LLC, SOURCECORP LEGAL, INC., SOURCECORP, INCORPORATED, TRAC HOLDINGS, LLC, TRANSCENTRA, INC., UNITED INFORMATION SERVICES, INC., and SOURCECORP MANAGEMENT, INC.
C.A. No. 2020-0601-JRS
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
May 25, 2021
SLIGHTS, Vice Chancellor
Date Submitted: February 25, 2021
T. Brad Davey, Esquire, Matthew F. Davis, Esquire and Andrew H. Sauder, Esquire of Potter Anderson & Corroon LLP, Wilmington, Delaware and Jennifer Barrett, Esquire, Dennis H. Hranitzky, Esquire and Blair Adams, Esquire of Quinn Emanuel Urquhart & Sullivan, LLP, New York, New York, Attorneys for Defendants.
SLIGHTS, Vice Chancellor
Confronted with the highly unusual circumstance where an appraisal judgment debtor cannot or will not pay, the plaintiffs in this action, and in a parallel action,4 seek to hold Exela (as acquirer) and its affiliated entities accountable for the appraisal judgment.5 According to the plaintiffs, as the appraisal action was nearing
Against this backdrop, the plaintiffs seek to hold Exela and its subsidiaries liable under two theories: (1) given the abuse of corporate form by Exela and its subsidiaries, principally through fraudulent maneuvers, the Court should pierce the SourceHOV Holdings corporate veil upwards to reach Exela and downwards to reach SourceHOV Holdings’ solvent subsidiaries so that Plaintiffs can enforce their charging order against these entities; and (2) given that Exela now holds a 100% stake in SourceHOV Holdings but has refused to pay all SourceHOV Holdings stockholders for their share of the company, the Court should determine that Exela was unjustly enriched and order it to pay the plaintiffs restitution in the amount of the appraisal judgment plus interest.
Plaintiffs’ well-pled allegations support a reasonable inference that Exela, lacking in corporate formality, engaged in a transaction, as described in the plaintiffs’ complaint, for the purpose of preventing funds that would otherwise flow from SourceHOV Holdings’ subsidiaries directly to SourceHOV Holdings to flow instead directly to Exela, thereby leaving the judgment debtor unable to satisfy the plaintiffs’ appraisal judgment. Because the charging order requires any money
It is likewise reasonably conceivable that SourceHOV Holdings’ subsidiaries knowingly participated in the wrongful scheme, such that the plaintiffs’ prayer for relief in the form of reverse veil-piercing (i.e., piercing SourceHOV Holdings’ corporate veil to reach downwards to its wholly owned subsidiaries) is likewise appropriate. The legality of reverse veil-piercing appears to be a matter of first impression in Delaware. After carefully reviewing the justifications for and against the adoption of reverse veil-piercing, I find that this equitable remedy (or right) is an appropriate means, in limited circumstances, to remedy fraud and injustice.6 Under the framework set out below, the plaintiffs’ claim for reverse veil-piercing, which, again, seeks to hold SourceHOV Holdings’ subsidiaries liable for its debts, is, I believe, viable as a matter of Delaware law.
The procedural posture in which these issues are presented to the Court is a motion to dismiss all claims under Court of Chancery Rule 12(b)(6). For reasons stated below, the motion is granted in part and denied in part.
I. BACKGROUND
I have drawn the facts from well-pled allegations in the Verified Complaint (the “Complaint“) and documents incorporated by reference or integral to that pleading.7 For purposes of the motion, I accept as true the Complaint’s well-pled factual allegations and draw all reasonable inferences in the plaintiffs’ favor.8
A. Parties
Plaintiff, Manichaean Capital, LLC, a Delaware LLC, along with individual plaintiffs, Charles Cascarilla and Emil Woods, both New York residents, and LGC Foundation, Inc. and Imago Dei Foundation, Inc., both Ohio corporations,
Defendant, Exela, a Delaware corporation, sits atop a network of “resident and non-resident direct and indirect subsidiaries,” many of which have been named as defendants here (the “Exela Subsidiaries“).10 Exela operates in the business process automation space.
The Exela Subsidiaries include: Ex-Sigma LLC, the Delaware LLC formed to combine with SourceHOV Holdings in the Merger, SourceHOV Holdings, the surviving entity from the Merger, SourceHOV, LLC, an entity immediately below SourceHOV Holdings in which SourceHOV Holdings maintains a 100% membership interest, and then a number of subsidiary LLCs, which I refer to as the “SourceHOV Subsidiaries.”11 The Exela network is depicted in the chart below:
Remainder of Page Intentionally Left Blank
B. The Merger
On July 12, 2017, SourceHOV Holdings merged with Ex-Sigma LLC and Ex-Sigma Merger Sub, Inc., in a transaction whereby each share of SourceHOV Holdings common stock was converted into a right to receive one membership unit of Ex-Sigma LLC (the “Merger“).12 Prior to the Merger, Plaintiffs held 10,304 shares of common stock in SourceHOV Holdings.13 The creation of Ex-Sigma and subsequent conversion of stock was a preliminary step to effectuate the merger of SourceHOV Holdings into SourceHOV Merger Sub, with SourceHOV Holdings
Under the Consent, Waiver and Amendment to the Business Combination Agreement (the “Modification Agreement“), dated June 15, 2017, any Merger consideration was to be delivered to Ex-Sigma LLC without deductions for dissenting shares.16 The Modification Agreement declared that if a stockholder sought appraisal, Ex-Sigma would send that stockholder’s equity interests in SourceHOV Holdings to Exela.17
C. The Appraisal Action
Plaintiffs expressly dissented with respect to the Merger and, on September 27, 2017, filed an appraisal action in this court (the “Appraisal Action“).18 This Court issued its post-trial memorandum opinion on January 30,
D. The Charging Order
On July 15, 2020, Plaintiffs filed a Motion for Charging Order against SourceHOV Holding’s membership interest in SourceHOV, LLC.28 The Court granted the Motion on August 15, 2020.29 The charging order mandated that “[a]ny and all distributions made by SourceHOV, LLC and payable to SourceHOV Holdings, Inc. in respect of SourceHOV Holdings, Inc.’s membership interest in
E. The A/R Facility
On January 10, 2020, mere weeks before this Court’s decision in the Appraisal Action, Exela, through its subsidiaries, entered into a $160 million accounts receivable securitization facility (the “A/R Facility“).31 To facilitate the transaction, Exela created two entities, Exela Receivables Holdco LLC (“Receivables Holdco“) and Exela Receivables I LLC (“Receivables I“).32 Under the First Tier Purchase and Sale Agreement, thirteen of the SourceHOV Subsidiaries sold their accounts receivable to Receivables Holdco.33 Then, under the Second Tier Purchase Agreement, Receivables Holdco sold those receivables to Receivables I.34 Under the Loan and Security Agreement, Receivables I then pledged the receivables as
II. ANALYSIS
The standard for deciding a Motion to Dismiss under Court of Chancery Rule 12(b)(6) is well-settled:
(i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are “well-pleaded” if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences in favor of the non-moving party; and (iv) dismissal is inappropriate unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof.38
The creation of a statutory appraisal right was a significant step forward in the development of our corporate law. Before then, at common law, “an arbitrary minority” could prevent a transformative transaction with the wave of a hand, holding the majority hostage to their whim.39 The appraisal right granted under
In the ordinary course, when judgment debtors fail to pay, the legal remedies of a charging order against a judgment debtor’s LLC interests or a writ of execution against the judgment debtor’s assets are available as tools for collection.43 This Opinion considers what options are available to the judgment debtor in an appraisal action if, after a plaintiff receives a writ of execution or charging order, an appraisal judgment is still left unpaid. In considering the question, it is useful to remember that in appraisal actions, it is the acquirer, not the target, who is “the real party in interest on the respondent’s side of the case.”44
Upon request by a judgment creditor of a member of a Delaware limited liability company, the court “may charge the limited liability company interest of the judgment debtor to satisfy the judgment.”45 Once entered, the charging order acts as a lien on the judgment debtor’s membership interest.46 Importantly,
The Acquisition and Sale of Emerging Growth Companies: The M & A Exit § 11:33 (2d ed. 2017) (“From an acquirer’s perspective, target stockholders pursuing appraisal rights create uncertainty as to how much [the] acquirer will have to pay for the shares of target.“); Joseph Evan Calio, New Appraisals of Old Problems: Reflections on the Delaware Appraisal Proceeding, 32 Am. Bus. L.J. 1, 68 n.64 (1994) (“[E]ither in the market or in an appraisal the acquiror pays the entire bill no matter how it is apportioned.“); Ethan Klingberg & Yavor Efremov, Delaware’s M&A Wildcard-Appraisal Rights, 9 No. 2 M & A Law. 1 (June 2005) (discussing the effects of dissenting target shareholders on the acquirer’s pre- and post-acquisition role).
While the charging order statute clearly limits the types of actions a judgment creditor may take against a debtor to fulfill its judgment once the charging order is in hand, it does not limit the means by which the judgment debtor may enforce the charging order itself. To the extent a judgment creditor seeks merely to define which entities are (or should be) subject to the charging order, that action is not barred by the charging order statute. That is precisely what Plaintiffs’ veil-piercing claims seek to do here.
On the other hand, if a judgment creditor seeks to bypass its charging order to enforce its judgment through “other legal or equitable remedies,” that action is barred by statute and must be dismissed.49 That is what Plaintiffs seek to do through their unjust enrichment claim. I address the effects of the Charging Order more specifically below as I address each of Plaintiffs’ claims in turn.50
Plaintiffs allege that Exela’s undercapitalization of its subsidiary (SourceHOV Holdings), lack of corporate separateness and subsequent attempts to divert funds away from SourceHOV Holdings to avoid the claims of its creditors provide ample bases to pierce SourceHOV Holdings’ corporate veil to reach up the chain to Exela. “Delaware public policy disfavors disregarding the separate legal existence of business entities.”51 With that said, in “exceptional case[s],” corporate veil-piercing is necessary and appropriate.52
Delaware courts consider a number of factors in determining whether to disregard the corporate form and pierce the corporate veil, including: “(1) whether the company was adequately capitalized for the undertaking; (2) whether the company was solvent; (3) whether corporate formalities were observed; (4) whether the dominant shareholder siphoned company funds; and (5) whether, in general, the company simply functioned as a facade for the dominant shareholder.”53 While these factors are useful, any single one of them is not determinative. An ultimate
decision regarding veil-piercing is largely based on some combination of these factors, in addition to “an overall element of injustice or unfairness.”54As to the specific factors, Plaintiffs make a compelling case in their Complaint that Exela and SourceHOV Holdings “operate[] as a single economic entity such that it would be inequitable for this Court to uphold a legal distinction between them.”55 First, accepting the allegations in the Complaint as true, it is reasonably conceivable that SourceHOV Holdings is insolvent and that its insolvency, at least in part, is the result of Exela‘s undercapitalization of SourceHOV Holdings. Insolvency is adequately pled if a plaintiff‘s allegations allow a reasonable inference of either “(1) a deficiency of assets below liabilities with no reasonable prospect that the business can be successfully continued in the face thereof or (2) an inability to meet maturing obligations as they fall due in the ordinary course of business.‘”56
The Complaint‘s case for veil-piercing does not rest on insolvency alone.62 It alleges that Exela was aware of SourceHOV Holdings’ potential liability long ago and yet made a deliberate decision to undercapitalize the entity.63 Exela knew at the time it acquired SourceHOV Holdings that dissenting shareholders would be entitled to the fair value of their shares.64 Indeed, Exela recognized in its Form 10-K, filed on March 16, 2018, that there was a risk of a significant loss associated with the Appraisal Action.65 It corrected its past filings in an 8-K filed on March 17, 2020, and was even more explicit in disclosing that the obligation to pay fair value to dissenting shareholders represented an obligation on the date the Appraisal Action was filed in September 2017.66 Yet, notwithstanding its recognition of substantial exposure to the appraisal petitioners, Exela made the deliberate decision to avoid
Beyond the apparently deliberate effort to starve SourceHOV Holdings of cash, Plaintiffs further allege that Exela failed to observe certain corporate formalities. Specifically, Plaintiffs allege that Exela: (1) is headquartered at the same address as SourceHOV Holdings,69 (2) has failed to maintain proper business registrations for SourceHOV Holdings,70 (3) has significantly overlapping personnel with SourceHOV Holdings,71 (4) has referred to Exela and its subsidiaries as one
With concerns about insolvency, undercapitalization and corporate formalities well pled, Plaintiffs turn next to the fraud and injustice associated with the A/R Facility. “Acts intended to leave a debtor judgment proof are sufficient to show fraud and injustice.”74 Plaintiffs compellingly allege that fraud and injustice has resulted and will result from the diversion of funds from SourceHOV Holdings to Exela in an explicit attempt to avoid payment of the Appraisal Judgment. As mentioned, Exela knew that SourceHOV Holdings would be required to pay a judgment of some amount, at the latest, when Plaintiffs sent their appraisal demand in September 2017.75 The extent of that exposure became all too clear as the appraisal petitioners developed evidence, including expert valuation evidence, that
According to the Complaint, and as discussed above, the A/R Facility created a structure whereby thirteen of the SourceHOV Subsidiaries sold certain receivables to Receivables Holdco, and those receivables were subsequently sold to Receivables I.78 As designed, Receivables I, an indirect subsidiary of Exela but not SourceHOV Holdings, pledged those receivables as collateral under the Loan and Security Agreement in exchange for money paid by the lender under the facility.79 Exela is the guarantor for all moneys borrowed under the A/R Facility and is the servicer on the Loan and Security Agreement.80 According to Plaintiffs’ well-pled allegations, the receivables pledged were not Exela‘s to pledge and yet, as a result
Defendants take issue with the Complaint‘s pled characterization of the A/R Facility. The arguments are granular and, if accepted, would re-write Plaintiffs’ pleading. To be sure, the A/R Facility is a complicated transaction. And Defendants’ characterization of it may well prove to be the better one. But this is not the time to make that potentially dispositive determination, particularly given the fact-intensive intricacies of the transaction.82 Taking Plaintiffs’ well-pled characterization as fact, it is reasonably conceivable the A/R Facility was created in order deliberately to prevent funds from flowing through SourceHOV Holdings and to enable SourceHOV Holdings to avoid its obligations to creditors, including, and perhaps especially, Plaintiffs. Assuming the pled facts are true, it is reasonably
D. Reverse Veil-Piercing
The question of whether and to what extent courts of Delaware should allow so-called reverse veil-piercing is one of first impression. This is not to say that parties in litigation have not asked our courts to authorize reverse veil-piercing. They have. But our courts have yet to accept or deny the claim.83 For reasons explained below, I am satisfied that Delaware law allows for reverse veil-piercing in limited circumstances and in circumscribed execution.
1. The Mechanics of Reverse Veil-Piercing and its Proper Application
At its most basic level, reverse veil-piercing involves the imposition of liability on a business organization for the liabilities of its owners.84 In the parent/subsidiary context, “where the subsidiary is a mere alter ego of the
As the doctrine has evolved, courts now recognize two variants of reverse veil-piercing: insider and outsider reverse veil-piercing.86 Insider reverse veil-piercing is implicated where “the controlling [member] urges the court to disregard the corporate entity that otherwise separates the [member] from the corporation.”87 Outsider reverse veil-piercing is implicated where “an outside third party, frequently a creditor, urges a court to render a company liable on a judgment against its member.”88 Given Plaintiffs are creditors of SourceHOV Holdings, the single member and 100% owner of SourceHOV LLC, which in turn is the single member and owner of the SourceHOV Subsidiaries, and Plaintiffs seek to hold the subsidiaries liable for a judgment held against the member, this case concerns outsider veil-piercing.
The case associated with the first substantive treatment of reverse veil-piercing is Judge Learned Hand‘s decision in Kingston Dry Dock Co. v. Lake Champlain Transp. Co.89 There, the court considered a trial court order allowing a judgment creditor to seize property of a subsidiary controlled by the judgment debtor in satisfaction of the judgment.90 In refreshingly short order, Judge Hand found that reverse veil-piercing was not warranted. In doing so, he observed that the subsidiary had not “interpose[d] in any way in the conduct of [the parent‘s] affairs.”91 He also emphasized that “[s]o long as the law allows associated groups to maintain an independent unity, its sanction is not so easily evaded, and persons dealing with either do so upon the faith of the undertaking of that one which they may select.”92 And so began the reverse veil-piercing debate. Since then, many courts have adopted the doctrine, while others have shied away.93
The concerns expressed in Acree and Postal Instant Press are well-founded. To start, reverse veil-piercing has the potential to bypass normal judgement collection procedures by permitting the judgment creditor of a parent to jump in front
The risks that reverse veil-piercing may be used as a blunt instrument to harm innocent parties, and to disrupt the expectations of arms-length bargaining, while real, do not, in my view, justify the rejection of reverse veil-piercing outright.
In C.F. Trust, Inc. v. First Flight L.P., the Supreme Court of Virginia adopted reverse veil-piercing upon observing that, at their most basic level, traditional and reverse veil-piercing claims both seek to prevent the same sort of wrongdoing: abuse of the corporate form and fraud.103 The court recognized the risk that reverse veil-piercing could negatively impact innocent third-parties and defined the reverse veil-piercing standard expressly to manage that risk.104 Specifically, the court held that a plaintiff asking the court to authorize reverse veil-piercing, in addition to proving the elements required to justify traditional veil-piercing, must also demonstrate that reverse veil-piercing will not cause harm to “innocent investors . . . [or] innocent
Similarly, in In re Phillips, the Supreme Court of Colorado determined that outside reverse veil-piercing claims must be permitted when justice so requires “[d]ue to the similarities and parallel goals achieved in outside reverse piercing and traditional piercing.”106 The court then clarified that, in evaluating reverse veil-piercing claims, courts must first make the traditional determinations of whether the subsidiary is an alter ego of the parent and whether the subsidiary is being used in perpetration of fraud or injustice.107 Then the court must assess whether there is an inequitable result that can be remedied by piercing.108 And finally, before authorizing the piercing, the court must consider whether innocent shareholders or creditors would be prejudiced as a result of the piercing.109
In the only case cited by the parties that purported to apply Delaware law, Sky Cable, the court likewise acknowledged the risks of reverse veil-piercing and then addressed how limits on the doctrine would adequately manage those risks.110
Delaware embraces and will protect “corporate separateness”115; but Delaware will not countenance the use of the corporate form as a means to facilitate fraud or injustice.116 Mindful of the need to balance these important policies, and taking the lead from First Flight, Phillips and Sky Cable, I am satisfied there is a place for a carefully circumscribed reverse veil-piercing rule within Delaware law.117
In defining the rule, I begin by stressing that I am not endorsing “insider” reverse veil-piercing.118
The natural starting place when reviewing a claim for reverse veil-piercing are the traditional factors Delaware courts consider when reviewing a traditional veil-piercing claim—the so-called “alter ego” factors that include insolvency, undercapitalization, commingling of corporate and personal funds, the absence of corporate formalities, and whether the subsidiary is simply a facade for the owner.122 The court should then ask whether the owner is utilizing the corporate form to perpetuate fraud or an injustice.123 This inquiry should focus on additional factors, including “(1) the degree to which allowing a reverse pierce would impair the legitimate expectations of any adversely affected shareholders who are not
Applying this framework, Delaware courts will be well-equipped to handle the varying concerns courts and commentators have rightfully expressed regarding reverse veil-piercing. The expectations of third-party creditors and investors will be well-protected.126 And the “public convenience” factor will require “the balancing of the social value of upholding the legitimate expectations of the affected corporate creditors or debtors, applying a rebuttable presumption in favor of assuring such expectations, against the importance of the policies served by allowing a reverse pierce under the particular circumstances involved.”127
After carefully reviewing the Complaint, I am satisfied this is one of those “exceptional circumstances” where a plaintiff has well pled a basis for reverse veil-piercing. It is at least reasonably conceivable that the SourceHOV Subsidiaries are alter egos of SourceHOV Holdings and that the subsidiaries have actively participated in a scheme to defraud or work an injustice against SourceHOV Holdings creditors, like Plaintiffs, by diverting funds that would normally flow to SourceHOV Holdings away from that entity to Exela. At this stage, from the well pled allegations in the Complaint, I see no innocent shareholders or creditors of the SourceHOV Subsidiaries that would be harmed by reverse veil-piercing, nor any potential alternative claims at law or in equity, as against the SourceHOV Subsidiaries or SourceHOV Holdings itself, that would for certain remedy the harm.128
Beginning with the “alter ego” factors, as previously discussed, the Complaint well-pleads facts that allow a reasonable inference that SourceHOV Holdings is insolvent and that it is undercapitalized.129 The Complaint also pleads a reasonably conceivable basis to conclude that corporate formalities have not been maintained
Turning to the broader fraud or injustice inquiry, the question here is whether the subsidiaries are being used to perpetuate fraud or injustice against a judgment creditor of their parent. Certain of the SourceHOV Subsidiaries’ active participation in a potential fraudulent or unjust scheme, as pled, is evident with a glance at the First Tier Purchase and Sale Agreement associated with the A/R Facility.136 Under
As mentioned in the discussion of traditional veil-piercing, discovery will bear out whether (or not) Plaintiffs accurately describe the mechanics and purpose of the A/R Facility in the Complaint. For now, accepting those allegations as true, it is reasonably conceivable that certain SourceHOV Subsidiaries used the A/R Facility to prevent their proceeds from going to SourceHOV Holdings’ judgment creditors. Specific allegations of intentional acts aimed at avoiding judgments through the use of legal constructs are sufficient to well plead fraud under traditional veil-piercing, and the review of such pled facts in support of a reverse veil-piercing claim is no different.139
Impairment of expectations of adversely affected shareholders. The Complaint pleads no basis to infer that other owners of SourceHOV Holdings or the SourceHOV Subsidiaries will be adversely affected by reverse veil-piercing. The SourceHOV Subsidiaries indirectly are wholly owned by SourceHOV Holdings, which in turn is wholly-owned by Exela.140 Thus, all entities involved in the alleged scheme to starve SourceHOV Holdings of funds are connected by unified ownership.141
The exercise of dominion and control and degree to which that caused Plaintiffs’ injury. According to the Complaint, Exela and certain of the SourceHOV Subsidiaries agreed to the A/R Facility without the involvement or consent, and to the detriment of, the dormant SourceHOV Holdings.142 This allows
The public convenience as articulated by the DGCL and Delaware Common Law. As noted at the outset, Delaware‘s statutory appraisal scheme eliminated the minority stockholder‘s common law right to prevent a merger and replaced it with a mandatory statutory right to obtain the fair value of what is to be taken from the minority stockholder via the merger (his shares) over his dissent. Plaintiffs allege, “Exela and SourceHOV have retained all of the benefits of the [Merger] at issue in the Appraisal Action without paying compensation for Plaintiffs’ dissenting shares and are using their corporate structure as a sham in an attempt to render SourceHOV ‘judgment proof.‘”143 The Complaint then alleges that the scheme by which the SourceHOV Subsidiaries have agreed to channel funds directly to Exela is “fundamentally inequitable because Exela‘s own financial statements recognize the [Appraisal] Judgment as ultimately Exela‘s liability, given its 100% control over SourceHOV.”144 Reverse veil-piercing, in this circumstance, would serve the public convenience as expressed in Delaware‘s appraisal statute.
Plaintiffs’ wrongful conduct. There is no basis in the Complaint to infer that Plaintiffs themselves have engaged in wrongful conduct that would disable them from calling upon equity to address their harm. They lawfully dissented to the Merger, properly sought statutory appraisal of their SourceHOV Holdings shares, prevailed at trial, prevailed on appeal, obtained a final judgment and diligently sought to execute on that judgment.
Harm to innocent third-party creditors. There is no basis in the Complaint to infer that reverse veil-piercing will cause harm to innocent third-party creditors. In this regard, Defendants argue that because the SourceHOV Subsidiaries are primary obligors on certain debt at a level above SourceHOV Holdings, those debt holders will be prejudiced if SourceHOV Holdings’ judgment creditors can hold those subsidiaries liable for the Appraisal Judgment.145 To be clear, factual
Other claims or remedies at law or equity. As for the existence of other claims or remedies, it does not appear that other remedies exist to serve the ultimate purpose the reverse veil-piercing claim is meant to serve here: to enforce the Charging Order held against SourceHOV Holdings. While certain jurisdictions consider the availability of “conversion, fraudulent conveyance of assets, respondeat superior and agency law” as relevant when considering this factor, no such argument has been developed here apart from a reference to the existence of such remedies in other jurisdictions.147 In any event, it is not clear at this nascent stage of the proceedings that enforcement of the properly placed Charging Order can be achieved through means other than reverse veil-piercing. With that said, it may well be that Defendants will be able to demonstrate that traditional judgment collection measures are adequate and that reverse piercing, therefore, would be unnecessarily extreme
3. The Charging Order Does Not Prohibit Reverse Veil-Piercing
This construction makes perfect sense; each of the enumerated remedies are other means by which to force the judgment debtor to pay a creditor‘s judgment and, thus, would be displaced by the exclusive statutory remedy of the charging order. The reverse veil-piercing claim, as asserted here, does not rest on or invoke a remedy other than the charging order; it, instead, seeks a judicially sanctioned expansion of the entities against whom the Charging Order may be enforced. In other words, if the court determines that the SourceHOV Subsidiaries fall under the purview of the
The implication of a successful reverse veil-piercing claim here, as pled, is that the SourceHOV Subsidiaries are alter egos of SourceHOV Holdings and that “the ultimate part[ies] in interest, the [subsidiaries], [should] be regarded in law and fact as the sole party in a particular transaction.”154 If
E. Plaintiffs’ Unjust Enrichment Claim Fails to State a Claim
Unjust enrichment is defined as “the unjust retention of a benefit to the loss of another, or the retention of money or property of another against the fundamental
For its part, Exela argues that it was not enriched, but rather impoverished, as a result of the Merger, the Appraisal Action and the Appraisal Judgment.159 More relevant here, Exela also argues that Plaintiffs unjust enrichment claim fails because they have an adequate (and exclusive) remedy in the form of the Charging Order against SourceHOV Holdings.160 On this latter point, I agree.
Unlike in Mehta, where the plaintiff might not have had any legal claim or remedy by which to recover the merger consideration owed to it, Plaintiffs have an adequate remedy in the form of the Appraisal Judgment and Charging Order. That order provides that, to the extent any dollar flows through SourceHOV Holdings by distribution from a subsidiary, it must first be paid to Plaintiffs before flowing up to
Moreover, the charging order statute declares that the charging order is the judgment creditor‘s exclusive remedy under the circumstances.166 The unjust enrichment claim is not merely an action to expand the Charging Order‘s application to other entities, as is the case with the veil-piercing claims; it is a claim that, if successful, will side-step the Charging Order completely as a means to obtain a new judgment on a new claim. The “exclusive remedy” language of the statute prevents that result. Accordingly, Plaintiffs’ unjust enrichment claim must be dismissed.
For the foregoing reasons, the Motion to Dismiss is GRANTED as to Count I but DENIED as to Count II.
IT IS SO ORDERED.