January 28, 2010
In Vichi v. Koninklijke Philips Electronics, C.A. No. 2578-VCP (Del. Ch. Dec. 1, 2009), the Court of Chancery resolved numerous motions to dismiss based on personal jurisdiction, pleading requirements, statute of limitations defenses and forum non conveniens. The Court ultimately granted some of the motions to dismiss while denying others. Notably, in reaching its holdings, the Court (i) clarified the application of a recent amendment to the Delaware Securities Act, and (ii) extended the Delaware Supreme Court’s holding in N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007), to apply equally to Delaware limited liability companies, such that creditors of a limited liability company that is either insolvent or in the zone of insolvency cannot, as a matter of law, bring a direct suit for breach of fiduciary duty.
In Vichi, plaintiff Carlo Vichi sought recovery of a 200 million Euro loan that he made to defendant LG.Philips Displays Finance LLC (“Finance”) in the form of convertible notes (the “Notes Transaction”). In 2002, Finance was created as a subsidiary of LG.Philips Displays Holding B.V. (“LPD”), a joint venture between defendant Koninklijke Philips Electronics, N.V. (“Philips N.V.”) and LG Electronics, solely to facilitate the Notes Transaction. Two years after he made his investment, Vichi received a letter from LPD stating that the convertible notes had been structurally subordinated to the obligations due to certain lending banks because, unlike Vichi, the banks had guarantees from various subsidiaries of LPD. LPD thereafter defaulted on the notes and declared bankruptcy. In November 2006, Vichi filed a complaint charging the defendants with various counts of breach of contract, fraud, unjust enrichment and breach of fiduciary duty.
In its opinion, the Court of Chancery addressed the defendants’ motions to dismiss on several grounds, including lack of personal jurisdiction, forum non conveniens and failure to state a claim. Most notably, the Court dismissed Vichi’s allegations that Philips N.V. violated Sections 7323(a)(2) and 7303 of the Delaware Securities Act. The Court interpreted a recent amendment to the penalties provision for Section 7303 violations that authorizes “restitution to any investor” and concluded that, because the restitution provision was added to a section entitled “Criminal Penalties,” restitution under Section 7303 is only available in criminal cases. The Court further concluded that the Delaware Securities Act would not apply to the instant litigation because the Act only applies where there is a sufficient nexus between Delaware and the transaction at issue. The Court held that the mere fact that Finance was formed in Delaware was not sufficient to bring the Notes Transaction within the scope of the Delaware Securities Act.
Philips N.V., a corporation located in and organized under the law of the Netherlands, also sought to dismiss Vichi’s claims against it for lack of personal jurisdiction. In addressing this motion, the Court explained that it is established Delaware law that “a single act of incorporation in Delaware [of an entity], if done as part of a wrongful scheme, will suffice to confirm personal jurisdiction over the nonresident defendants responsible for the scheme.” Analyzing the act of organizing Finance in Delaware, the Court found that Vichi had alleged sufficient facts to make a prima facie showing that Finance was organized as part of a wrongful scheme on the part of Philips N.V. and certain of its affiliates.
The Court also held that Vichi had sufficiently alleged that the Court had personal jurisdiction over Philips N.V. under the apparent agency theory. In so holding, the Court noted that jurisdictional acts of an apparent agent could be attributed to the principal if (i) the principal held the agent out as its agent and (ii) the plaintiff reasonably relied on this representation. The Court found that Vichi had sufficiently alleged that Philips N.V. held certain of its employees out as its agents leading up to Finance’s organization and that Vichi had reasonably relied on that representation. Thus, the Court concluded that Philips N.V. could be held directly responsible for the actions of its agents in relation to the organization of Finance as part of the alleged wrongful scheme. Additionally, the Court found that subjecting Philips N.V. to personal jurisdiction comported with due process, as Philips N.V. “purposefully availed” itself of the privileges and protections of Delaware’s laws when it—through its agents—organized Finance in Delaware.
With respect to certain of Vichi’s claims for breach of fiduciary duty, the Court concluded that creditors of a Delaware limited liability company that is either insolvent or in the zone of insolvency cannot bring a direct suit for breach of fiduciary duty. In its analysis the Court discussed Gheewalla, in which the Delaware Supreme Court established that creditors are barred from asserting direct claims against directors of a Delaware corporation that is insolvent or in the zone of insolvency. Applying Gheewalla in the alternative entity context, the Court held that a direct claim could not be brought against managers of a limited liability company that was insolvent or in the zone of insolvency. Because Vichi’s complaint stated that he suffered individualized harm and would likewise benefit from a remedy, the Court concluded that his claims for breach of fiduciary duty were direct and therefore failed to state a cognizable claim.
Finally, the Court denied Philips N.V.’s request for a stay pending the resolution of LPD’s Netherlands bankruptcy because the instant action and the LPD bankruptcy proceeding were not similar—as required for a stay in Delaware.