IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

Transcription

1 IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE CORNELL GLASGOW, LLC, : : Plaintiff, : : v : Civil Action : No. -VCL STEPHEN J. NICHOLS, LOWELL W. McCOY, : and McCOY ENTERPRISE, INC. (a/k/a : LOWELL McCOY ENTERPRISES, INC.), : : Defendants, : : and : : LaGRANGE PROPERTIES LLC and : LaGRANGE COMMUNITIES LLC, : : Nominal Defendants. : Chancery Courtroom No. C New Castle County Courthouse 00 North King Street Wilmington, Delaware Thursday, October, 0 :0 p.m BEFORE: HON. J. TRAVIS LASTER, Vice Chancellor ORAL ARGUMENT ON DEFENDANTS' and NOMINAL DEFENDANTS' MOTION TO DISMISS and RULINGS OF THE COURT New Castle County Courthouse 00 North King Street - Suite 00 Wilmington, Delaware (0) -0

2 APPEARANCES: DAVID A. FELICE, ESQ. Ballard Spahr LLP for Plaintiff STEPHEN J. NICHOLS Pro Se Defendant DONALD L. GOUGE, JR., ESQ. Donald L. Gouge, Jr. LLC -and- JAY C. EMREY III, ESQ. of the Maryland Bar Baker, Thomey & Emrey, P.A. for Defendants Lowell W. McCoy and McCoy Enterprise, Inc. (a/k/a Lowell McCoy Enterprises, Inc.) CHRISTOPHER M. COGGINS, ESQ. ROBERT A. PENZA, ESQ. Polsinelli, P.C. for Nominal Defendants

3 MR. COGGINS: afternoon, Your Honor. MR. EMREY: MR. COGGINS: Welcome, everyone. Good morning -- good Good afternoon. Good afternoon, Your Honor. May it please the Court, Christopher Coggins 0 on behalf of nominal defendants LaGrange Communities LLC and LaGrange Properties LLC -- I'll refer to them collectively as LaGrange today -- arguing in support of their motion to dismiss plaintiff Cornell Glasgow, LLC's claims to disregard the separate legal existence of the LaGrange entities in order to enforce Cornell's judgment from the Superior Court against LaGrange's members based on two alternate ego theories. Cornell has failed to sufficiently plead its claims to survive under Rule (b)(). Delaware court -- and based on Delaware courts not lightly disregarding any separate legal existence. And here, Cornell does not give the Court any reason to do so, does not come close to satisfying the long-established and high burden to show that LaGrange is the alter ego of its members, even under the low bar of reasonable conceivability. The complaint lacks allegations

4 necessary to indicate the exceptional circumstances may exist to allow this Court to disregard LaGrange's separate legal existence. So dismissal is warranted. Cornell's conclusory allegations are not enough to survive dismissal. Further, they lack specificity as required by Chancery Court Rule (b), as then-judge Slights pointed out in his June, 0, opinion, dismissing all of Cornell's claims except its breach of contract and defamation claims. The current case differs from your typical (b)() motion case in that here, Cornell has conducted full discovery, elicited testimony of the defendants and others at a trial on the underlying facts, allegations that are pending before this Court today. Also, the Superior Court made findings on those same operative facts. Cornell then conducted 0 further discovery after receiving a judgment in aid of execution and was still unable to do more than file the same basic complaint it filed with the Superior Court, hoping for a different result from this Court, I assume. Generally plaintiffs are left to piece together their complaints without formal discovery or a full trial on the facts they need to plead, unlike

5 Cornell had the opportunity to do here. Cornell, even with a significant advantage, still only presents a barebones complaint, full of unsupported allegations that cannot survive the current motions to dismiss brought by the defendants. The need for dismissal is only further buttressed by Cornell rehashing the same allegations here, as the Superior Court has both granted the motion to dismiss and had a full trial on and judgment after that. Further, Cornell's dismissed Superior Court claims against LaGrange members are basically the same allegations they present here. And now 0 Cornell relies on that for its alter ego claims, which, at a minimum, I believe cuts against the reasonable conceivability that their claim should survive. The Slights dismissal opinion, June opinion, provides ample reasons why Cornell's claims cannot survive and even after having clear rulings from the Superior Court concerning the deficiency of its claims, it never thought to put meat on the bones of its complaint. Therefore, dismissal is warranted, and we believe it should be with prejudice, since they

6 responded with an answering brief here rather than an amended complaint. As to the facts, I will not burden the Court with a full recitation of the alleged facts in this matter, as they've been laid out multiple times multiple places, the complaint here, the complaint in Superior Court, the opinions written by Judge Slights, and then, also, you know, the opening and answering briefs that have been submitted. And, you know, we're here on a (b)() motion. So I have to accept all well-pled facts in the complaint. However, many of the allegations, as I stated earlier, are conclusory, which I'll detail in the argument today. They cannot be accepted as true to defeat this motion. That being said, I do want to direct the Court to certain facts that are not in dispute. And these are listed on pages and of LaGrange's reply brief. The first fact I want to point out is 0 the underlying agreements, the development agreement, the amendment, and the escrow agreement, were executed by Cornell and LaGrange, not with LaGrange's members -- Mr. Nichols and Mr. McCoy are the founding members of LaGrange. Mr. Nichols is the manager of LaGrange

7 -- and that the LaGrange entities were formed in 00, which is approximately four years before they ever had any interaction with Cornell. Cornell's claims as set forth, first in the Superior Court and now here, arise from the breach of those agreements, the development agreement amendment and escrow agreement, which, again, were executed by LaGrange and not its members. Cornell relies on the same allegations for its fraud claims that it made in the Superior Court action and simply, you know, regurgitates them here and calls them alter ego claims. And LaGrange's chief asset since its formation has always been, and remains, the development that was the underlying property that caused this dispute originally. Finally, Judge Slights, then-judge Slights dismissed Cornell's fraud and other claims against LaGrange's members by that dismissal opinion of June, 0, that I referred to earlier. I feel that opinion provides significant insight into why 0 Cornell's claims are so deficient here. And as I said, they pled basically the same thing, you know, when you compare the complaints. In -- in Judge Slights' opinion he points out that claims and allegations are all based

8 in contract, and the prevailing law in Delaware is that a plaintiff bringing a claim based entirely upon a breach of the terms of the complaint generally must sue in contract and not in tort. Further, he goes on, "Delaware [law] will not permit a plaintiff to 'bootstrap' a breach of contract claim into a tort claim merely by intoning the prima facie elements of the tort while telling the story of the defendants' failure to perform under the contract." Delaware's public policy is to enforce and uphold contracts between -- voluntary contracts between sophisticated parties. And then he goes on more specifically to say, "Cornell's allegations relating to... fraud and... misrepresentation allegedly perpetrated by the defendants all relate to the defendants' failed performance under the Development Agreement." And then in a footnote, he states that, "... the negligent misrepresentation claim," an 0 equitable claim, "fails as a matter of law..." So he dismissed it before he ever gets to it under the (b)(). And, you know, further, he says, "... even if the defendants never intended to perform

9 [under the development agreement], their alleged scheme to breach the Development Agreement simply cannot give rise to an actionable claim for fraud or negligent misrepresentation." At best, he says, they -- they've pled efficient breach of contract which they can be held liable for compensatory and expectancy damages. He also found that they failed to plead fraud with the particularity required under the Superior Court Rule (b), specifically pointing out that damages is one of the elements that needs to be placed -- that needs to be pled with particularity. And he -- they didn't, and they plead the same damages here before Your Honor. lots other than Lot 0? MR. COGGINS: What happened to the I'm sorry, Your Honor? Lot 0. 0 MR. COGGINS: MR. COGGINS: Yes, Your Honor. There were other lots. Yes, there were. What happened to the other lots? MR. COGGINS: That were in escrow or

10 all of them? They've stayed in escrow, Your Honor. And there's references in the return of service to LaGrange continuing to own land? MR. COGGINS: LaGrange does still own the development where the -- the property or the land that the development was started on. And I'll ask Mr. Felice this when he gets up, but what's preventing the plaintiff from executing on that? MR. COGGINS: Well, they -- there is a $ million loan with M&T. So they're behind -- MR. COGGINS: That has priority? Yeah. Has the bank foreclosed on it? MR. COGGINS: I'm aware of, Your Honor. It has not, as far as May I continue? 0 MR. COGGINS: Uh-huh. The standard of review to be applied to the pending motions is reasonable conceivability as set forth by the Delaware Supreme Court in Central Mortgage and Your Honor in China

11 Agritech. earlier. But -- which is a low bar, as I stated But even under that, the Court doesn't have to accept conclusory allegations that are not supported by specific facts, nor does it have to draw -- MR. COGGINS: I understand it. Understood, Your Honor. Going into the alter ego allegations, in order to pierce the corporate veil of LaGrange, Cornell must overcome Delaware's long-established policy that separate legal existence of entities will not be disregarded without a good reason. Conclusory allegations and lack of well-pled facts provide this Court with no reason to disregard LaGrange's separate legal existence. The case law cited by LaGrange and the McCoy defendants in support of their motions clearly set forth the high burden required to do that. I got that, too. 0 So talk to me about capitalization. MR. COGGINS: Capitalization. Yes, Your Honor. The -- when they entered into the agreement, development agreement, about 00, at that point they had -- the members had taken out money to

12 try and capitalize the company, get the business started up and running. They borrowed funds from all sources they could and continued to borrow funds until there were no funds -- you know, no one would lend them funds anymore. They -- you know, plaintiff alleges undercapitalization. We feel that should not weigh heavy in this Court's -- heavily in this Court's analysis in the five-factor test, and -- because the plaintiffs didn't benefit -- or, excuse me -- the defendant, the members, didn't benefit from any of those loans, as all funds were used for the benefit of LaGrange and the development, which Cornell also benefited from until the parties came to an impasse. And often, you know, talking about looking at it from the, you know -- it's accused that the members were trying to avoid liability; but many times they personally guaranteed the debts themselves for the benefit. Cornell had -- you know, they had 0 leverage. They -- if they weren't aware, they should have been aware that the LaGrange entities were, you know, under $ million debt. So they could have probably negotiated guarantees in that. They chose not to. And if they would have, that wouldn't have

13 been here today. In the Superior Court action, were there ever fraud claims made based on misrepresentations about the degree of the entities' capital strength? MR. COGGINS: I don't believe so, Your Honor. I can look at the complaint, if you like. Why don't you do that when you're -- MR. COGGINS: Sitting down. -- when Mr. Felice comes up. MR. COGGINS: Sure. Do you want me to continue, or do you have specific questions? I can go through the other five. I mean, The only thing I need you to talk about is if you have something that is different than what's in your brief. 0 MR. COGGINS: burden the Court with that. Your Honor, then I won't And if I have anything that -- I just want to point out that the -- just generally, that, you know, even if they -- the factors are found, you still need injustice or fraud to survive. And, you

14 know, it's clearly established Delaware law that it can't be based on the underlying claim. And here, that still seems to be the breach of the -- the agreements. They make -- plaintiff makes reference to -- that they'd be able to prove fraudulent transfer in their answering brief. That's not alleged anywhere in their complaint. And then-judge Slights, in his final opinion, denied that claim. Even as to Lot 0. MR. COGGINS: I believe there is still open issues on that, but he did say -- he did direct plaintiff if they wanted to seek any relief related to fraudulent transfer, that they needed to -- against the individual members, then they needed to seek to -- an alter ego remedy. were before him -- But as to the defendants that Those are two different things. So -- MR. COGGINS: I'm sorry, Your Honor. 0 No, no. You don't need to apologize. So one way to reach live humans is through an alter ego theory. Another way to reach live humans is through a piercing theory. A separate

15 way to reach live humans is through a fraudulent transfer theory. Now, are you telling me that Judge Slights told them, "them" being Mr. Felice, "If you want to reach the human defendants on a fraudulent transfer theory, you will plead piercing"? MR. COGGINS: He -- he told -- he said that you -- he said alter ego, I believe, Your Honor. And I will pull the opinion out. -- Actually, I have it Yeah. The one that's attached; yeah? MR. COGGINS: Yes. dismissal one. 0. I do not recall -- MR. COGGINS: No, no. That was the The final one, which is 0 Westlaw All right. So is this in 0 your compendium somewhere? MR. COGGINS: can look at? No, Your Honor. Do you have a copy that I MR. COGGINS: Yes. It is marked up, if you don't mind. I'll show it to you right here. All right. Why don't you

16 show it to Mr. Felice first, make sure you're not passing me any secret messages. MR. COGGINS: Magic messages, no, Your Honor. (Handing document) MR. COGGINS: All the stars, and then there's the rest of the opinion. Thank you. (Reviewing) All right. MR. COGGINS: Thank you, Your Honor. That's -- unless... Let me just take one quick look, but I believe I will sit down and let Mr. Felice have all the fun. No, Your Honor. Thank you. Great. Thank you. Mr. Felice. MR. FELICE: Your Honor, would the Court like to hear from the McCoy defendants before I proceed? 0 nonduplicative to add? Do you have something MR. EMREY: I do, Your Honor. I think Mr. Gouge has to introduce me first. How are you doing, sir?

17 MR. GOUGE: Good afternoon, Your Honor. Don Gouge. I'm local counsel for the McCoy defendants. I'd like to respectfully introduce to the Court Jay Emrey. He was admitted pro hac vice by Your Honor, Docket Entry No., on May st. MR. GOUGE: MR. EMREY: Okay. Thank you, Your Honor. Thank you, Mr. Gouge. May it please the Court, Jay Emrey, East Main Street, Elkton, Maryland, Baker, Thomey & Emrey, on behalf of Lowell McCoy and McCoy Enterprise, Inc. Your Honor, I would certainly agree with everything Mr. Coggins told the Court, represented to the Court. And I just want to go over 0 a few things that maybe he didn't touch on, one of which is back in 00, when this LaGrange was set up between basically Mr. Nichols and Mr. McCoy, real estate -- the real estate market here and just about everywhere else was just blooming, bursting, growing, escalating monthly. And I think these gentlemen entered into this agreement with the understanding -- or with the anticipation that it was going to continue, which, of course, we all know it did not.

18 '0. They started out with this project in As Mr. Coggins told you, then they needed somebody to build. They were not homebuilders, and they got in touch with Cornell. Cornell prepared the agreement. They signed the agreement. No personal guarantees. and LaGrange. It was just the agreement with Cornell And things proceeded for awhile. the real estate market, unfortunately, did not But cooperate with LaGrange. The real estate market plunged, particularly the residential real estate market, which is what they were doing. They were building townhouses, duplexes, and single-family residences. evaporated. And the market for those almost They did okay with the townhouses, but most of the profit in the project was with the single-family residences, and I think they were able to sell one or two single-family residences in an extended period of time, nothing like what they were 0 projecting. They were hoping to sell a couple a month. Unfortunately, they did not. LaGrange had a $ million-plus acquisition loan with Wilmington Trust, that later became M&T Bank. They were making interest payments

19 to the bank. They were doing fine. But when they sort of ran out of -- I guess they ran out of personal funds, which they were infusing into the business constantly. They hit that roadblock and the members, particularly -- I represent Mr. McCoy. Mr. McCoy was borrowing money from banks, friends, relatives, everywhere he could to infuse money into the project to keep it going. Of course, Cornell -- and one of the criteria that the Court considers under Delaware law, the five factors regarding the alter ego theory, is that the dominant shareholder, or in this case members, were somehow siphoning money off from the company and that somehow this company was a sham for them to, I guess, get rich quick or at least get money. It wasn't there. The reverse is true. They weren't siphoning money off. Mr. McCoy was infusing money to the tune of $ million over -- over a period of about two years. They -- always with the 0 expectation that things are going to turn around and we're all going to be fat and happy. happened. Well, just never They were running out of money, running out of sources to borrow money. Mr. McCoy had

20 0 relatives borrowing money and loaning it to him. things were not going well, and they needed to do something. So they thought, "Well, we're not And getting along with Cornell and we're going to have to do something." So what they did basically was try to find another way to salvage this project, because the agreement they had with Cornell wasn't working. Wasn't working. They weren't making any money. In fact, they were losing an awful lot of money. So what they did was they -- they were planning to try and do it themselves, but never got to that point because they -- it didn't work. The project didn't work. They are still on the hook for $ million to now M&T Bank. But when they started out, they certainly weren't undercapitalized and they were solvent. They were -- they had access to money. 0 They had money in the bank, and they were basically performing what we would call site work, site improvements to take a site and make it available to Cornell. I think the deal with Cornell was -- a motion to dismiss; right? So you understand this is

21 MR. EMREY: Yes, sir. Where do I look in the plaintiff's complaint for the representation that at the time these folks started out, they were solvent and had access to plenty of money? MR. EMREY: that they didn't. motion to dismiss? MR. EMREY: Well, there's no claim Is that the standard for a The standard, I believe, adequately capitalized, solvent. about a pleading standard. No, no. We're talking MR. EMREY: Well, they must plead with particularity that something -- they haven't alleged anything -- 0 question here, sir. MR. EMREY: finish, Your Honor. I'm asking you a different I'll wait until you My point is that you're telling a good story. It's not a bad story. It's probably completely accurate. are we in? What stage of the case

22 MR. EMREY: I'm sorry? What stage of the case are we in? MR. EMREY: Very initial. Motion to dismiss. All right. Do you get to come in and tell your story on a motion to dismiss? MR. EMREY: the point, Your Honor. I will be a little more to I think the plaintiff has failed to plead anything that McCoy Enterprise, Inc. did anything wrong or did any -- was participating in any of these alleged activities that would cause the -- survive -- let the motion -- let the complaint survive a motion to dismiss. Nothing against McCoy Enterprise. And the pleadings against -- the representations or allegations against Mr. McCoy in the complaint essentially reiterate everything that was in the Superior Court case, and goes on to say 0 "and he borrowed money." And he put it in the company. He borrowed money from the banks. What you promised me is you were going to be nonduplicative. you're doing now -- And so what

23 MR. EMREY: the same thing that -- MR. EMREY: MR. EMREY: Okay. -- is you're telling me Yes. -- your cocounsel told me. Well, the plaintiff in this case has had three opportunities: initially in the Court of Chancery, then in Superior Court; and I think Judge Slights sort of hit the nail right on the head in the second or third page of his opinion, the June, 0, opinion, on -- where he dismissed some of the counts. went bad and -- This is just a real estate deal that I got that. I understand that. I understood that from your papers. MR. EMREY: But there was no fraud -- I understood that -- hold on. I'm talking. You have a problem with that. 0 MR. EMREY: third time you've done it. I get that. No, sir. This is like the second or I get that from the briefing. I got that from Judge Slights' opinion. I got that from your colleague. What do you have to

24 tell me that is nonduplicative? MR. EMREY: I would ask why do they get another chance? They've had two chances. They got an award for damages. That's it. That's all they're entitled to. There was no fraud. There was no intentional misrepresentations. Like I said, at the time, initially everybody was -- their expectations were very high, and it just didn't work out. Now they're looking for somebody to -- since LaGrange itself, as Mr. Coggins, sole asset was the land and the land was mortgaged to the tune of over $ million with M&T, so they couldn't get anything out of the land, they figured, "Well, let's go after the individuals." And that's what they're trying to do. And I don't think that's available, and certainly in this state where the corporate existence -- or in this case limited liability existence -- is quite significant, much more 0 significant than some other states. And I think it would be incumbent upon this Court to dismiss the action. There are no -- there's no meat on the bones, Your Honor, no sham. This was not a sham.

25 This was no sham limited liability company where the members were somehow siphoning off money or using it for their own personal gain to the detriment of creditors or anybody else. So we've got to the point where you're now just repeating your friend, you're repeating yourself. MR. EMREY: you'd like to tell me? MR. EMREY: Yes. Is there anything new that Well, not -- I adopt what Mr. Coggins said, and I don't think there's a whole lot else to tell the Court. MR. EMREY: Great. So I will agree with him. So we'll let Mr. Felice talk. MR. EMREY: Thank you, Your Honor. Oh, I'm sorry, Your Honor. As a 0 preliminary matter, which escaped me when the Court started, we are withdrawing our jurisdictional challenge, and I think the Court can figure out why. MR. EMREY: Thank you. Thank you, Your Honor.

26 MR. FELICE: Good afternoon, Your Honor. David Felice from Ballard Spahr on behalf of the plaintiff, Cornell Glasgow, in opposition to defendants' motions to dismiss. get right to the points here. I'm going to try and Your Honor pointed out, you know, the undercapitalization issue here. We allege in the 0 complaint -- and it has not been contested in briefing -- that by the time LaGrange entered into the development agreement with Cornell Glasgow in September of and that's important because it was after the bubble burst in the real estate market -- in September 00 LaGrange had had more than $ million in debt on the property. So we submit -- and we allege in our complaint -- that defendants knew or should have known that they had no reasonable prospect of honoring their obligations under the agreement when they contracted with Cornell in September of 00. Your Honor asked the question whether or not that undercapitalization allegation was asserted in the underlying complaint. I wasn't involved when the complaint was drafted; but based on my taking the case at trial and reviewing the

27 0 complaint, I do not believe that undercapitalization was a grounds for the fraud or negligent misrepresentation claims asserted in that case. It was -- it was refreshing to hear Mr. Emrey tell the Court that they just weren't making enough money and they decided to go at it on their own when they terminated Cornell in February of 0, because we spent a whole lot of time in discovery and five days at trial determining whether or not they were able to kick us off because we breached the contract; but we have now an admission that they just weren't making enough money to service the debt and they had to go at it on their own and that's why they got rid of us. Those facts are set forth in our complaint and we believe are sufficient on a motion to dismiss stage to clear the hurdle. But I would submit that there are two additional facts that are supplemental to our complaint and that the Court can take judicial notice of here today that clearly make us cross the threshold on a motion to dismiss. Here, Nichols and McCoy own additional property in their own names that should be held in LaGrange's name. After the Superior Court

28 judgment was entered, Cornell set about to execute on its judgment. Part of those efforts was Cornell pursuing a sheriff's sale on one building lot in the LaGrange development and a -acre parcel of land owned by LaGrange. the sheriff's sale. We purchased those two parcels at LaGrange moved to set aside those sales as -- based on a claim that the price was inadequate. Argument on that motion was held before President Judge Vaughn on September th, just last month. So it was after our motion -- our briefing was submitted and just before the reply brief was submitted by the defendants. Your Honor, may I pass some materials that I might refer to up? Well, no, I don't think you can. I mean, we're on a motion to dismiss; right? MR. FELICE: Yes, Your Honor, but I -- Is this stuff in your complaint? 0 MR. FELICE: No, Your Honor, but I would submit that it's supplemental facts and they're admissions by attorney to another court. Well, I have the same view that I have of that that I discussed with Mr. Emrey.

29 We're here to talk about your complaint. MR. FELICE: Your Honor, turning to the merits of the argument, here, we have set forth a reasonable conceivable set of facts that would lead to alter ego liability. Both parties alluded to the five factors that the Court will address. We -- we talked about those on pages to of our answering brief. But I want to highlight two things. First, LaGrange's reply brief, after conceding the appropriate standard on a motion to dismiss, proceeds to argue the factual -- what the factual allegations should convey to this Court and whether the allegations would tend to ultimately prove alter ego liability. By arguing these facts rather than challenging the existence of them, they've conceded that we've pled a sufficient basis to overcome a motion to dismiss. Here today, Mr. Coggins actually 0 said, in response to Your Honor's questions, he's arguing the benefit of these loans, of these $ million loans and, you know, whether or not they benefited us or whether they benefited LaGrange; he's not challenging the existence of them. So we would submit that on a motion to dismiss, that's sufficient to get it past.

30 0 Also, LaGrange continually suggests that Judge Slights' decision dismissing our fraud and negligent misrepresentation claim is dispositive of the fraud or injustice element of a piercing claim. And we would submit that at least the briefing wasn't as faithful as it could have been to Judge Slights' opinion, but we do have a little bit more analysis today at argument as to what actually Judge Slights decided. He relied on what has been known as the bootstrap doctrine, saying that Cornell can't bootstrap a fraud claim or negligent misrepresentation claim alongside a breach of contract claim. When you allege the same facts and say it forms the basis for a breach of contract, you cannot bootstrap those same allegations and say they serve as a basis for a fraud claim. He also said when you're claiming the same 0 damages, you're -- you're left to pursue your remedy under a breach of contract claim. Judge Slights did not comment on the propriety of whether or not those facts were true, whether those facts would lead to a finding of fraud or injustice. All he said was "Pursue your remedy as a breach of contract." And that's what we did. And

31 what happened, we proved those facts. We got a judgment, and that judgment has now been affirmed by the Supreme Court. Looking to the specific instances of fraud or injustice alleged in the complaint, we -- we talk about the undercapitalization, and we covered that here today and the fact that when these borrowings would take place and Mr. McCoy would have to pay these loans back, oftentimes he would pay those loans back from his own personal checking account, and then he would try to reconcile those payments with his partner in LaGrange and try and adjust his membership interest accordingly. We suggest that that demonstrates that these members were using LaGrange as a mere instrument for their own personal benefit. So you put in here that Cornell Glasgow is an affiliate of Cornell Homes; true? 0 MR. FELICE: Excuse me, Your Honor? You plead in your complaint that Cornell Glasgow LLC is an affiliate of a parent entity called -- and I think you described it as Cornell Homes. MR. FELICE: Yes, Your Honor.

32 Was Cornell -- is Cornell Glasgow an entity that had business other than this one project? MR. FELICE: I believe Cornell Glasgow was created for the specific purpose of working on this project. MR. FELICE: Thank you. Your Honor had questions about Lot 0 and whether or not that was one of -- more than one of the lots held in escrow. Lot 0 was the lot where the parties had built the model home and was, in fact, the last lot held in escrow. It was the last of 0 lots held in escrow. And it was held in escrow even after the parties disputed whether or not it should be released. When the real estate agent 0 said "I'm holding it in escrow," a new deed was created and it was transferred from LaGrange to Mr. McCoy's son-in-law, Bruce Johnson. With regard to Your Honor's question about fraudulent conveyance, when Judge Slights was hearing this case, he was hearing it as a Superior Court judge. And the case was given to Judge Slights after -- specifically with regard to the Lot 0 case -- after Your Honor dismissed the case in the

33 Court of Chancery. It was refiled in the Superior Court. Judge Slights said, "Let's see if, one, we're entitled to legal relief and, two, whether the legal relief will be adequate before I go and you go have me appointed as a Vice Chancellor." So that's what we did, and we were successful on the Lot 0 case. And we have an award of about $00,000. It hasn't been reduced to a judgment yet, but an award of $00,000 just for Lot 0. Now that relief has -- legal relief has proven inadequate, we're proceeding with the claims that seek equitable relief before President Judge Vaughn, who's taken over the case for Judge Slights. He has been appointed as a Vice Chancellor. And we agreed, other counsel for LaGrange, we've agreed to submit that dispute on briefs based on the trial evidence -- the evidence that was taken at the original trial. So that's fully briefed before 0 President Judge Vaughn for his decision. So the only way we can get to the individuals with regard to fraudulent conveyance is for that one model home that was transferred. I would submit that if -- and hopefully when we proceed to a trial on the merits, based on comments made that Your

34 Honor doesn't want to hear about today, there are other pieces of property that are held in the individuals' names that should be held in LaGrange's names -- LaGrange's name, that we would possibly look to either pierce the corporate veil to get to them individually or we'd have to assess whether or not, given the statute of limitations, whether we could pursue a fraudulent conveyance claim. And that's something -- let's parse this out. Focusing solely on those other pieces of property that you now believe exist, is that something you intend to pursue in this action or something you intend to pursue in front of Judge Vaughn? MR. FELICE: Well, Your Honor, it would be something we would pursue in this action. In this action. 0 MR. FELICE: Yes, Your Honor. If we were to pierce the corporate veil to Mr. Nichols and Mr. McCoy or McCoy Enterprises -- that piece of property is held in their name and has been represented that it's held in their name as tenants in common as members of LaGrange. That was admitted in open court by LaGrange's own counsel.

35 So we found out where this property is, and, in fact, it is in their names. It was part of this LaGrange development. And they submitted to President Judge Vaughn that it's also subject to this -- to this M&T lien. So if they split part of this off and we pierce the corporate veil, we would be able to get to that property because, you know, one, they're individual owners of it or, two -- I'd have to check the statute of limitation -- the fraudulent conveyance may be clawed back as a fraudulent conveyance. It sounds like they told you they're holding it as nominees for the entity. MR. FELICE: That could be -- that could be construed that way, yes. Why isn't what's in front of me isn't in front of Judge Vaughn? flattered it's -- you brought it here. I mean, I'm Judge Vaughn 0 is a good guy. Why am I even pondering this stuff? MR. FELICE: Well, Your Honor -- And I understood it before I knew that he was still handling the case and had been appointed a Vice Chancellor pro hac vice. Then I thought I understood it; but now that I understand

36 that he, in fact, is appointed a Vice Chancellor pro hac vice, why -- why am I the guy who should be dealing with this? MR. FELICE: Well, Your Honor, President Judge Vaughn has been appointed Vice Chancellor, but it was specifically with regard to the Lot 0 case and that one conveyance, the conveyance of the model home, from LaGrange to Mr. Johnson with respect to what equitable claims we would have under the fraudulent conveyance act. Was he aware of this action? MR. FELICE: I believe so, Your Honor. I'm not a hundred percent sure, but I believe so. All right. I mean, I don't want to -- this strikes me that this is the secondary case and that the Superior Court case has been the primary case. As I say, it made sense to me, 0 once I believed that the Superior Court case was wrapped up, that you would come back over here for some species of equitable relief; but now that I know that the primary case is continuing in some shape or form, I'm hard-pressed to understand why this isn't all being done by the same judge, particularly

37 somebody who is more expert in these facts than I. MR. FELICE: Your Honor, perhaps I wasn't as clear as I could have been. There's a $ million judgment. This case was separate from the Lot 0 case. That case was tried at the same time -- they were not consolidated -- and an award was entered and a judgment was entered. And then that judgment was appealed to the Supreme Court. affirmed. And it's been So we have a $ million judgment that is not collectible, and we're alleging here that we should be able to pierce the corporate veil to get that relief because of the facts alleged in the complaint. The Lot -- Are you telling me that the $ million judgment does not encompass the $00,000 that you attribute for the Lot 0? MR. FELICE: That is correct, Your 0 Honor. They're two separate cases. So that would conclude my argument on the alter ego allegations, unless Your Honor has any questions. We addressed briefly concerns about

38 the motive or the standing LaGrange has in our papers. We would submit that, you know, if you even look at the reply brief on pages to, they clearly set forth arguments specifically directed to Mr. Nichols that aren't LaGrange's arguments, and that would be in keeping with the proposal that LaGrange made that they file joint briefs; but, in fact, they're separate entities. LaGrange has no -- we would submit, has no interest in this case. They're completely under water with regard to the development. There's a judgment that we have. There's a secured debt by -- M&T has. The only reason they would be -- have any interest in this case would be to defend the members. So we would 0 submit that LaGrange is asserting its arguments in an improper method to shield its members, and those members should make their own arguments. And given the Supreme Court's affirmance of the Superior Court judgment and memorandum opinion, we submit that the motion to stay is now moot. For those reasons, Your Honor, we submit that the motion to dismiss should be denied. Thank you. Great. Thank you.

39 In the interest of time, we're going to dispense with reply. Today's hearing is for the Court to consider the defendants' motion to dismiss in Cornell Glasgow versus Nichols, C.A. No. -VCL. Cornell Glasgow, who I'll refer to as Cornell, brought this litigation seeking to pierce the corporate veil of LaGrange Properties, LLC and LaGrange Communities, LLC so it can collect on a judgment that it secured in Superior Court. The timeline is that in 00 LaGrange acquired a -lot residential subdivision in New Castle County for $,0,000. In 00 LaGrange and 0 Cornell negotiated an agreement pursuant to which Cornell would allow its brand name to be associated with the development and would apply its expertise in marketing, selling, advertising, administering, constructing, and servicing homes in the development. In exchange, LaGrange would fund all of Cornell's marketing, construction, and overhead expenses, pay Cornell a set fee for each home sold and pay Cornell a percentage of the development's profits. On the date of September, 00, LaGrange and Cornell executed the original development

40 0 agreement pursuant to which Cornell received the exclusive right to market, sell, and construct of the residences in the development. LaGrange was unable to secure a commitment from any lender for a construction loan to pay for the costs of site improvements, and, as a result, LaGrange and Cornell negotiated an alternative financing arrangement. was put together in what's called the development This agreement, which gave Cornell the exclusive right to market, sell, and construct all residences in the development. Under the modified financing provisions, LaGrange agreed to hold in escrow deeds for 0 of the lots, including the Lot 0 that has been the subject of discussion today, that were purchased by Cornell as part of the modified financing provisions. The deeds are to be released upon a sale or upon a default by LaGrange. In September 0 LaGrange is said to have failed to timely reimburse Cornell for invoices 0 submitted for reimbursement. LaGrange requested further documentation and explanation for the invoices. Assured that payment would be forthcoming, Cornell continued working on the development despite the nonpayment.

41 been reimbursed. By February 0 Cornell still had not Cornell notified LaGrange in writing that LaGrange was in default of the development agreement and had 0 days to cure. Later that day Nichols, a principal of LaGrange, informed Cornell's sales representatives that Cornell had been fired, and directed all sales representatives to leave the development. Nichols subsequently changed the locks on each of the model homes built by Cornell. In May 0 Cornell asked for the deed to the model home on Lot 0 to be released to Cornell as a result of LaGrange's default. LaGrange refused. In February of that year Cornell filed a complaint in the Court of Chancery seeking mandatory injunctive relief and specific performance. Chancellor Chandler, to whom the case was then assigned, granted a temporary restraining order. Later that month Cornell withdrew its equitable claims and transferred the 0 breach of contract action to Superior Court. Court approved the transfer. This Then in June 0 Cornell filed a second action in Chancery Court seeking relief for the wrongful transfer of Lot 0. I dismissed that action, and the parties transferred it over to

42 Superior Court so that the entire matter could be heard by one judge, if necessary, with that judge acting as temporary Vice Chancellor. In December 0, after a bench trial, a verdict was entered in Cornell's favor, holding that LaGrange breached the development agreement by failing to reimburse Cornell, by throwing Cornell's employees off the project, and by wrongfully conveying Lot 0 to Johnson. That judgment has since been affirmed. In this case Cornell Glasgow is seeking to hold the individuals and at least one entity behind LaGrange personally liable for the damages that it has suffered and for the judgment that it has secured. In Count I it asserts an attempt to pierce the corporate veil. In Count II it seeks to 0 hold McCoy and Nichols liable under an agency theory. The defendants have moved to dismiss. In considering a motion to dismiss, I am, of course, required to assume the truth of the well-pled allegations and give the plaintiff the benefit of all reasonable inferences. That is drawn from the Delaware Supreme Court's decision in Malpiede versus Townson. I also have to deny the motion to

43 dismiss if it is reasonably conceivable that the plaintiff could state a claim for relief. That is from the Delaware Supreme Court's decision in Central Mortgage. I am granting the motion to dismiss. In terms of the piercing claim, to persuade a Delaware court to disregard a corporate entity is a difficult task. Generally courts disregard the corporate entity only in the interest of justice where matters of fraud, contravention of law, or public wrong are required or other equitable considerations come into play. Courts focus on a number of factors, including adequate capitalization, solvency, corporate formalities, siphoning of funds, and whether in general the company simply functioned as a facade. Here, there's no reason to believe that this was anything other than a sophisticated arm's length contract between two contracting 0 counterparties. People often use separate entities to cabin contractual risk. People form separate entities, even separate entities without other assets, for the purpose of entering into agreements precisely for the purpose of allocating contractual risk. As

44 Mr. Felice very candidly conceded -- and I commend him for it -- to his understanding, Cornell Glasgow, the plaintiff, is such an entity. It was formed to enter into this agreement for this development. It is understandable that Cornell Homes, the parent, would want to have a specific entity whose liabilities and assets were limited to this project and that it would not want itself and its other assets to be available to creditors. The defendants are entitled to do exactly the same thing. There's an easy way to address the risks that come from using an entity in this fashion. Indeed, there are multiple ways contractual counterparties can do it. One is to get a personal guarantee. The other is to get some form of security such as a letter of credit. One can do what later was done here in terms of putting assets in escrow. these things are easy ways that contractual All 0 counterparties, who are sophisticated in the ways of business, as these individuals certainly were, at least sufficiently sophisticated for them to be able to use corporate and alternative entity forms and agree to contract for a real estate development. There are many ways through which these individuals

45 could have addressed their problems. That background, I think, is critical to my analysis of the elements. When you look at piercing cases, they're usually situations involving torts, where one party couldn't voluntarily contract to address the risk imposed on them by the defendants' use of a corporate form, or they involve illegality, or they involve serious disparities of bargaining power such as consumers contracting with shell entities where they have been led to believe that, in fact, the entity was substantial or had assets. None of that exists here. All that is pled here is corporate entities or alternative entities -- I'm sorry. I keep saying "corporate" -- who entered into 0 a business agreement that turned sour. With that background, I go through the five elements. The first is control. Cornell alleges that Nichols and McCoy Enterprises are the sole owners of LaGrange and, thus, exercised complete control. Okay. That's true of closely held entities. That's why people form closely held entities, to cabin their exposure under contracts. Again, if this were a tort claim or some type of claim for illegality, perhaps that factor would cut differently. Not here.

46 Next is capitalization and solvency. Cornell alleges that LaGrange was not adequately capitalized when it entered into the contractual arrangement. There's no suggestion that LaGrange hid information from Cornell. There's no suggestion LaGrange as a sophisticated entity didn't have the ability to obtain some type of contractual protection for its interests. Instead, this looks like -- and the only reasonably conceivable inference from the facts as alleged -- is that this is an arm's length business deal where both sides wanted to contract through entities as opposed to as individuals. Even if I assume that LaGrange was undercapitalized, on these facts that is not a factor that I believe warrants piercing. Next is the observation of corporate formalities. This is one of those oddities in the piercing context because it's a factor that really a third party has no standing to invoke. We don't let 0 third parties come in and allege that corporations or alternative entities couldn't take action because it was beyond their powers or because they didn't do it properly. A third party gets to hold the corporate form, or the alternative entity, to its contracts,

47 just like anybody else. It's only as to allocation of liability within the entity that one worries about things like corporate formalities and authority, et cetera. Nevertheless, our cases have looked at this factor. I think it's generally used as a subsidiary factor because it adds to the idea that a corporation may be being used as a ruse or a fraud. I don't see anything here that supports a reasonable inference that this entity was being used in that fashion or any type of lack of corporate formality, such that would allow for piercing. Again, this seems to me to be a situation where people decided in an arm's length commercial agreement that everybody was going in through entities. That's an allocation-of-risk decision that people can make. 0 Now, in terms of siphoning off company funds and the company functioning as a facade, I thought the strongest allegation there was this bit about Lot 0. I don't know any of the facts there beyond what's alleged in the complaint, but that's the type of thing where I looked at that and I said, "Well, it's not piercing. But that's the type of

48 thing you might be able to chase somebody for as a fraudulent conveyance or for conversion if you actually had a property interest in it." But what I was going to tell Mr. Felice is that it's not pled. It's not a claim in this case. Now I understand why it's not a claim in this case, because he plans on pursuing that matter in front of Presiding Judge Vaughn. Let me just say in terms of commenting on that cause of action, I intimate no view as to its potential likelihood of success. It was something merely that I noted in passing, that if one were to proceed on a theory, the theory would not be piercing. The theory would be fraudulent conveyance or the theory would be conversion or the theory would be something like that. Whether or not that is adequately pled or there's any basis for it is wholly up to Presiding Judge Vaughn, and I am not suggesting in any way what the outcome of that should be. I have 0 no view on that whatsoever. wasn't a piercing situation. My only view was that it And to the extent there was some theory on that, it wasn't pled. Now we're all agreed that it's not even in this case. don't have to worry about it. So I

49 Now, because of all this, there is, in my view, no reasonably conceivable basis to believe that injustice was done through the use of the corporate form in this situation. These were arm's length counterparties that entered into a commercial development agreement using entities. When people do that, they take risk. They also cabin risk. That's part of the business deal people make. There were devices that could have been used to mitigate that risk. They weren't used here. Accordingly, Count I is dismissed. That analysis largely applies to Count II as well. I don't see anything in here to suggest an agency theory by which McCoy and Nichols could be reached in terms of piercing the corporate veil. Again, the whole point of them using an entity was so that their individual assets could not be reached. By contracting with the entity, Cornell Glasgow accepted 0 that. Indeed, Cornell Glasgow itself was doing that. Lastly, I was concerned somewhat by the representation by defense counsel that Judge Slights basically told the plaintiffs to go pierce to the extent they wanted to pursue some action with respect to the lots. I would want to be respectful of