COURT OF CHANCERY
OF THE
SAM GLASSCOCK III STATE OF DELAWARE COURT OF CHANCERY COURTHOUSE
VICE CHANCELLOR 34 THE CIRCLE
GEORGETOWN, DELAWARE 19947
Date Submitted: March 6, 2018
Date Decided: April 5, 2018
Philip Trainer, Jr., Esquire Stephen P. Lamb, Esquire
Marie M. Degnan, Esquire Meghan M. Dougherty, Esquire
Ashby & Geddes Paul, Weiss, Rifkind, Wharton &
500 Delaware Avenue, 8th Floor Garrison LLP
Wilmington, Delaware 19899 500 Delaware Avenue, Suite 200
Wilmington, Delaware 19899
Elizabeth A. Sloan, Esquire
Ballard Spahr LLP
919 N. Market Street, 11th Floor
Wilmington, Delaware 19801
Re: RCS Creditor Trust v. Nicholas S. Schorsch et al., Civil Action No.
2017-0178-SG
Dear Counsel:
I addressed the Defendants’ Motions to Dismiss in my Memorandum Opinion
of November 30, 2017, granting the Motions in part, denying in part, and reserving
decision in part.1 The Plaintiff moved for reargument, in part, of that Memorandum
Opinion. This Letter Opinion denies that Motion, and resolves the remaining issues
regarding the Motions to Dismiss. An adumbration of the pertinent facts, and my
reasoning, follows.
1
RCS Creditor Trust v. Schorsch, 2017 WL 5904716, at *17 (Del. Ch. Nov. 30, 2017).
I. BACKGROUND2
In this case, Plaintiff RCS Creditor Trust alleges that Defendants Nicholas S.
Schorsch, Edward M. Weil, Jr., William M. Kahane, Peter M. Budko, and Brian S.
Block (collectively, the “Control Defendants”) breached the fiduciary duties they
owed to RCS Capital Corporation (“RCAP”).3 The Control Defendants were the
sole owners of Defendant AR Capital LLC, which created and sponsored non-traded
real estate investment trusts (“REITs”).4 The Control Defendants also controlled
RCAP, which marketed and distributed AR Capital’s investment products through a
subsidiary known as Realty Capital Services (“RCS”).5 After RCAP went public,
the Control Defendants retained only a 25% interest in the company. 6 They
maintained effective control, however, through their collective ownership of a single
share of super-voting common stock.7
The Complaint primarily challenges the Control Defendants’ use of their dual
control of AR Capital and RCAP to enrich themselves at the expense of RCAP’s
public stockholders.8 The Control Defendants allegedly hatched a scheme in which
RCAP and RCS would enter into off-market wholesaling arrangements with AR
2
I assume familiarity with my November 30 Memorandum Opinion and recite only those facts
necessary to decide the pending Motions.
3
RCS Creditor Trust, 2017 WL 5904716, at *1.
4
Id.
5
Id. at *3.
6
Id. at *4.
7
Id.
8
Id. at *1.
2
Capital.9 In those arrangements, RCAP was responsible for marketing and selling
AR Capital’s investment products.10 If the Control Defendants had been loyal RCAP
fiduciaries, the Plaintiff alleges, they would have bargained for RCAP to receive
advisory fees from AR Capital in exchange for performing wholesaling services;
instead, the Control Defendants diverted those fees to wholly owned subsidiaries of
AR Capital.11
The Complaint additionally challenges several other business decisions the
Control Defendants made for RCAP.12 Specifically, the Control Defendants caused
RCAP to pursue three imprudent acquisitions and maintain irrationally high staffing
levels at RCS.13 The overstaffing purportedly benefited AR Capital by enhancing
RCS’s ability to market and sell AR Capital’s investment products.14 But the
Control Defendants’ refusal to fire any RCS employees harmed RCS, which was
suffering “devastating losses that ultimately drove [it] into bankruptcy.”15
On November 30, 2017, I upheld the core fiduciary duty claim in this case—
namely, the challenge to the self-dealing transactions between AR Capital, in which
the Control Defendants held a 100% economic stake, and RCAP, which they
9
Id. at *9.
10
Id. at *4.
11
Id. at *5.
12
Id. at *14–16.
13
Id. at *14.
14
Id. at *6.
15
Compl. ¶ 64.
3
controlled but in which they held only a 25% interest.16 I described the core claim
as a classic example of self-dealing by corporate fiduciaries.17 Indeed, the Control
Defendants stood on both sides of the allegedly unfair wholesaling arrangements.18
Worse still, all of those arrangements were negotiated and approved solely by the
Control Defendants and their affiliates.19 The allegations about the core claim thus
invoked entire fairness review, which in turn precluded dismissal on a Rule 12(b)(6)
motion.20
I reached a different conclusion as to the imprudent acquisitions and the
purportedly irrational staffing decisions. Because the Control Defendants did not
stand on both sides of those transactions, they did not automatically trigger entire
fairness review.21 Thus, to rebut the presumptions of the business judgment rule, the
Plaintiff had to allege that the challenged transactions conferred material benefits on
the Control Defendants that were not shared with RCAP’s other stockholders.22 I
held that the Plaintiff had failed to meet this pleading burden.23 In my view, the
Plaintiff’s allegations about the Control Defendants’ financial circumstances and the
benefits conferred by the challenged decisions failed to support a reasonable
16
RCS Creditor Trust, 2017 WL 5904716, at *9–13.
17
Id. at *13.
18
Id. at *6.
19
Id.
20
Id. at *10.
21
Id. at *14.
22
Id.
23
Id. at *16.
4
inference that those benefits were material to them. 24 Turning to the overstaffing
allegations in particular, the pertinent theory is that during a period when RCS was
increasingly less profitable, staffing levels were maintained; the Plaintiff alleges
they should have been reduced.25 With respect to that theory, I noted that the
“Plaintiff provide[d] no details that allow[ed] me to quantify any benefit to AR
Capital from having additional staff members at RCS push AR Capital product.”26
Thus, I held that the allegations relating to the imprudent acquisitions and the
overstaffing at RCS failed to state a claim for breach of the duty of loyalty. 27 I
reserved decision on the Plaintiff’s claims for unjust enrichment and aiding and
abetting breach of fiduciary duty pending supplemental briefing on the viability of
those claims in light of my rulings on the fiduciary duty count.28
The Plaintiff has moved for reargument on one narrow issue: the dismissal of
its claim that the Control Defendants breached the duty of loyalty by causing RCS
to maintain irrationally high staffing levels. The parties have also submitted the
requested supplemental briefing on the unjust enrichment and aiding and abetting
24
Id. at *15–16.
25
Id. at *6.
26
Id. at *15.
27
Id. at *16.
28
Id. at *17. The Complaint also alleges that the Control Defendants breached their fiduciary
duties by facilitating proxy fraud. Id. at *13. In my November 30 Memorandum Opinion, I held
that these allegations failed to state a claim for relief. Id. I also dismissed Defendant Louisa
Quarto from the litigation based on the Complaint’s failure to plead facts giving rise to a claim for
breach of fiduciary duty against her. Id. at *16.
5
claims. I address the Motion for Limited Reargument first. I then turn to the balance
of the Motions to Dismiss.
II. ANALYSIS
A. Motion for Limited Reargument
Court of Chancery Rule 59(f) allows a party to move for reargument within
five days after the filing of the Court’s opinion.29 The standard governing motions
for reargument is settled. This Court will deny reargument unless it “overlooked a
decision or principle of law that would have controlling effect or . . . misapprehended
the facts or the law so the outcome of the decision would be different.” 30 “Where
the motion merely rehashes arguments already made by the parties and considered
by the Court when reaching the decision from which reargument is sought, the
motion must be denied.”31 Nor is reargument warranted simply because a party
disagrees with the Court’s decision.32 Thus, if the ruling on which reargument is
sought was a close call, or one on which reasonable minds could differ, reargument
will be denied.33 In my view, the Plaintiff has failed to meet its “heavy burden” of
29
Ct. Ch. R. 59(f).
30
Pontone v. Milso Indus. Corp., 2014 WL 4352341, at *1 (Del. Ch. Sept. 3, 2014).
31
AM Gen. Holdings LLC v. Renco Grp., Inc., 2017 WL 3046819, at *1 (Del. Ch. July 18, 2017).
32
Tumulty v. Schreppler, 2015 WL 2374714, at *1 (Del. Ch. May 15, 2015).
33
See Bhd. of Maint. of Way Emps. Div. of the Int’l Bhd. of Teamsters v. Ind. Harbor Belt R.R.
Co., 2014 WL 4987972, at *4 (N.D. Ind. Oct. 7, 2014) (“[J]ust because a matter might be a close
call doesn’t mean reconsideration is appropriate.”); United States v. Sanchez-Gonalez, 2011 WL
4043568, at *2 (S.D. Cal. Sept. 12, 2011) (“This motion . . . presents a close call. But on
reconsideration, where the Court must find clear error, the Court is not persuaded that reversal is
appropriate.”); Crigler v. Richardson, 2010 WL 2696506, at *5 (M.D. Tenn. July 7, 2010)
(denying a motion for reconsideration on “an issue about which reasonable minds could, and have,
6
showing that I misapprehended the law or the facts in an outcome-determinative
fashion.34
First, the Plaintiff argues that, “in a very real sense,” the Control Defendants
stood on both sides of “the macro business decision to maintain extremely high
staffing” at RCS.35 The Plaintiff points out that each RCS wholesaler was hired
primarily to sell AR Capital products. Thus, the Plaintiff reasons, maintaining
unreasonably high staffing levels at RCS served AR Capital’s interests in a
particularly direct way. While the Plaintiff does not explicitly so argue, the
implication appears to be that entire fairness automatically applies to the decision to
overstaff RCS. I disagree.
Delaware law is clear: “Entire fairness review ordinarily applies in cases
where a fiduciary either literally stands on both sides of the challenged transaction
or where the fiduciary ‘expects to derive personal financial benefit from the
[challenged] transaction in the sense of self-dealing, as opposed to a benefit which
devolves upon the corporation or all stockholders generally.’”36 And if the fiduciary
differed”). The decisions just cited involved application of the analogous federal standards
governing motions for reconsideration. I look to them for guidance in interpreting Court of
Chancery Rule 59(f). Cf. Russum v. IPM Dev. P’ship LLC, 2015 WL 4885480, at *2 n.8 (Del.
Super. Aug. 14, 2015) (looking to federal caselaw for guidance because “Superior Court Civil Rule
59(e)[, which governs motions for reargument,] tracks Federal Rule of Civil Procedure 59(e)”).
34
In re ML/EQ Real Estate P’ship Litig., Consol., 2000 WL 364188, at *1 (Del. Ch. Mar. 22,
2000).
35
Pl.’s Mot. for Limited Reargument ¶ 18.
36
eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 37–38 (Del. Ch. 2010) (emphasis added)
(quoting Litle v. Waters, 1992 WL 25758, at *4 (Del. Ch. Feb. 11, 1992)).
7
does not stand on both sides of the challenged transaction, a plaintiff seeking to rebut
the business judgment rule must plead that any non-pro rata benefit the fiduciary
received was material to her.37 Here, the Plaintiff acknowledges that “the hiring of
individual wholesalers is not technically a contract between RCS and AR Capital.”38
I am aware of no authority supporting the position that, even when a fiduciary does
not stand on both sides of a transaction, entire fairness automatically applies if the
transaction “directly implicates” her interests, regardless of materiality to her.39 To
the extent the Plaintiff is arguing for such a rule, I decline to adopt it.
Next, the Plaintiff claims it has adequately alleged that the decision to
maintain irrationally high staffing levels at RCS was material to the Control
Defendants. A benefit is material if it is so significant, “in the context of the
[fiduciary]’s economic circumstances, as to have made it improbable that [she] could
perform her fiduciary duties to the . . . shareholders without being influenced by her
overriding personal interest.”40 The Court must apply “a subjective ‘actual person’
standard to determine whether a particular director’s interest is material and
debilitating.”41
37
Orman v. Cullman, 794 A.2d 5, 23 (Del. Ch. 2002).
38
Pl.’s Mot. for Limited Reargument ¶ 18.
39
Id.
40
In re Gen. Motors Class H S’holders Litig., 734 A.2d 611, 617 (Del. Ch. 1999).
41
Orman, 794 A.2d at 24.
8
The Plaintiff points out that the Complaint describes each Control
Defendant’s equity stake in AR Capital. For example, Block held a 3.03% interest
in AR Capital, which the Plaintiff says was worth “tens of millions of dollars.”42
The Plaintiff then argues that these valuable equity stakes demonstrate that the
Control Defendants had “a strong motivation to further AR Capital’s interests.”43
That is true, but beside the point. The question is not whether the Control Defendants
generally had an interest in benefiting AR Capital at RCAP’s expense; I have already
recognized the “perverse incentives” created by the misalignment of equity and
control at these two companies.44 Instead, the question is whether the Control
Defendants received material benefits from maintaining RCS’s existing staffing
levels as opposed to firing some (undisclosed) appropriate number of employees.
The Complaint itself is silent as to how many superfluous employees RCS kept on,
or how much additional profit for AR Capital those unnecessary employees helped
generate. That is why I held the Complaint did not “allow me to quantify any benefit
to AR Capital from having additional staff members at RCS push AR Capital
product.”45
42
Pl.’s Mot. for Limited Reargument ¶ 20 n.5.
43
Id. ¶ 20.
44
E.g., RCS Creditor Trust, 2017 WL 5904716, at *6.
45
Id. at *16.
9
According to the Plaintiff, it has alleged enough facts to quantify such
benefits. It states that “during the period when RCS lost more than $62 million . . .
, it raised more than $13 billion in capital – providing AR Capital with an income
stream in perpetuity of approximately $130 million per year.” 46 Again, however,
these allegations do not address the core of the materiality inquiry here: what portion
of these benefits was attributable to the superfluous RCS employees? Absent well-
pled facts answering that question, I cannot evaluate whether the purported
overstaffing at RCS conferred material benefits on the Control Defendants.
Finally, the Plaintiff suggests it can satisfy the materiality requirement simply
by alleging that the Control Defendants’ refusal to fire any RCS employees was
irrational from RCS’s perspective, but made perfect sense for AR Capital.47 To my
mind, that amounts to an allegation that the Control Defendants acted in bad faith by
refusing to cut staff when RCS was experiencing financial difficulties. “[A] plaintiff
may show a lack of good faith by establishing that a [corporate fiduciary’s] decision
46
Pl.’s Mot. for Limited Reargument ¶ 8 (emphasis omitted) (citing Compl. ¶ 60).
47
See Mar. 6, 2018 Oral Arg. Tr. 17:20–18:14 (“MR. HOROWITZ: The second question is -- and
I think it’s an interesting question -- whether, where pre-filing investigation doesn’t allow a
plaintiff to make detailed allegations about the precise economic benefit to the defendants or what
the defendants’ net worth is, for example -- to raise an issue that Your Honor mentioned in the
opinion – so that you could say, ‘Oh, gee, they stood to gain millions of dollars and, given these
defendants’ circumstances, that was probably a corrupting influence,’ can you, alternatively,
satisfy this materiality standard by alleging facts that give rise to a different reasonable inference,
an inference that the decision would have been irrational but for the defendants’ self-interest, so
that the only reasonable explanation for the decision, assuming the defendants’ rationality -- which
I think is a fair assumption to make -- is that they made the decision because of their self-
interest?”).
10
was ‘so far beyond the bounds of reasonable judgment that it seems essentially
inexplicable on any ground other than bad faith.’”48 “This is a high pleading
standard, as Delaware courts typically frame a lack of good faith in terms of
‘intentional’ misconduct.”49 The Complaint does not satisfy this exacting standard.
As just noted, the Plaintiff alleges that RCS should have been firing people when the
business was cratering. Maybe so. But I cannot say that the Control Defendants’
decision to keep on RCS employees in the face of serious financial troubles “lacks
any rationally conceivable basis.”50 Indeed, the Complaint itself acknowledges that
“more salespeople [at RCS] spending more money produced more sales, albeit at a
dramatically slower pace [in light of RCS’s financial difficulties].”51 The Plaintiff’s
bad-faith theory does not rebut the presumptions of the business judgment rule.
Having determined, on examination of the core claim, that the Complaint
sufficiently pleads that the Control Defendants looted the Peter of RCAP to benefit
their Paul—AR Capital—it is, I acknowledge, tempting to follow the Plaintiff’s
suggestion to its conclusion and subject all business decisions at RCAP, including
staffing decisions, to entire fairness review. The core claim, which I have upheld,
involves the purportedly off-market nature of the wholesaling arrangements between
48
Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 63 (Del. Ch. 2015)
(quoting In re J.P. Stevens & Co., Inc. S’holders Litig., 542 A.2d 770, 780–81 (Del. Ch. 1988)).
49
Id.
50
Frederick Hsu Living Trust v. ODN Holding Corp., 2017 WL 1437308, at *25 (Del. Ch. Apr.
14, 2017).
51
Compl. ¶ 67.
11
RCAP and AR Capital. The costs of running RCAP, including RCS’s labor costs,
are part of the entire fairness analysis that I must ultimately undertake. Stand-alone
claims concerning certain business decisions at RCAP—including acquisitions and
staffing levels—are, to my mind, however, insufficiently pled to survive
independent of the core claim. Thus, because the Plaintiff has failed to show that I
“misapprehended the law or the facts so that the outcome of the decision would be
affected,” I deny the Motion for Limited Reargument.52
B. The Remainder of the Motions to Dismiss
As noted above, in my November 30 Memorandum Opinion, I reserved
decision on the Plaintiff’s claims for unjust enrichment and aiding and abetting
breach of fiduciary duty pending supplemental briefing.53 The unjust enrichment
claim is brought against AR Capital, AR Global LLC (the successor to AR
Capital),54 and several wholly owned AR Capital subsidiaries (the “Advisor
Defendants”) that provide “management services” to AR Capital’s investment
52
Bear Stearns Mortg. Funding Trust 2006-SL1 v. EMC Mortg. LLC, 2015 WL 139731, at *8
(Del. Ch. Jan. 12, 2015) (quoting Miles, Inc. v. Cookson Am., Inc., 677 A.2d 505, 506 (Del. Ch.
1995)). The Plaintiff also seeks reargument on the ground that the Defendants never argued for
dismissing the overstaffing claim based on a failure to plead materiality. I disagree with that
characterization of the briefing and argument. See, e.g., Defs.’ Opening Br. 36 (arguing that the
allegations about Weil and Quarto “do not provide a basis for reasonably inferring that these
defendants’ interest in AR Capital was so material to these defendants that they would run RCS
into the ground to benefit AR Capital” (emphasis added)). In any event, because the Plaintiff has
failed to show that reargument is warranted on the merits, I need not address the procedural
argument.
53
RCS Creditor Trust, 2017 WL 5904716, at *17.
54
Id. at *2.
12
vehicles.55 The Advisor Defendants allegedly received the management fees that
would have gone to RCAP (or a wholly owned RCAP subsidiary) if the wholesaling
arrangements between RCAP and AR Capital had been negotiated at arm’s length.56
The aiding and abetting claim is brought against the Control Defendants, Quarto,
and RCAP Holdings LLC (“Holdings”).57 Holdings’ primary asset was the single
share of super-voting RCAP common stock used by the Control Defendants to
control RCAP.58
The Defendants have moved to dismiss the aiding and abetting and unjust
enrichment claims under Court of Chancery Rule 12(b)(6). When reviewing a Rule
12(b)(6) motion,
(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.59
55
Id. at *2, *17. The Advisor Defendants are American Realty Capital Retail Advisor, LLC,
American Finance Advisors, LLC, American Realty Capital Healthcare III Advisors, LLC,
American Realty Capital Hospitality Advisors, LLC, New York City Advisors, LLC, Global Net
Lease Advisors, LLC, American Realty Capital Healthcare II Advisors, LLC, New York Recovery
Advisors, LLC, and BDCA Adviser. Id. at *2.
56
Id. at *5. The Plaintiff also seeks the imposition of a constructive trust to remedy the alleged
unjust enrichment.
57
Id. at *1, *17.
58
Id. at *1.
59
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (footnotes and internal quotation
marks omitted).
13
I need not, however, “accept conclusory allegations unsupported by specific facts or
. . . draw unreasonable inferences in favor of the non-moving party.”60
1. Aiding and Abetting Breach of Fiduciary Duty
The Plaintiff’s aiding and abetting claim is pled in the alternative to its
fiduciary duty claim.61 Specifically, the Plaintiff alleges that, even if the Control
Defendants (and Quarto62) “are determined not to have owed direct fiduciary duties
of care and loyalty to RCAP and/or any of its subsidiaries at any relevant time, each
of these defendants knowingly participated in breaches of fiduciary duty by other
defendants and thus is liable for aiding and abetting such breaches.”63 The
Defendants argue that the aiding and abetting claim must be dismissed because the
Complaint lacks facts suggesting that the Control Defendants knowingly
participated in a breach of fiduciary duty. Alternatively, the Defendants ask me to
dismiss the aiding and abetting count to the extent it relies on alleged breaches of
fiduciary duty dismissed in my November 30 Memorandum Opinion.
To plead a claim for aiding and abetting breach of fiduciary duty, a plaintiff
must allege “(i) the existence of a fiduciary relationship, (ii) a breach of the
fiduciary’s duty, (iii) knowing participation in that breach by the defendants, and
60
Price v. E.I. DuPont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011).
61
Compl. ¶ 132.
62
Because Quarto has already been dismissed from this litigation, I address the aiding and abetting
claim only as it relates to the Control Defendants.
63
Id.
14
(iv) damages proximately caused by the breach.”64 “An adequate pleading of
‘knowing participation’ requires a pleading of scienter.”65 “To establish scienter,
the plaintiff must demonstrate that the aider and abettor had ‘actual or constructive
knowledge that their conduct was legally improper.’”66
At the outset, the Plaintiff does not dispute that its aiding and abetting claim
must be dismissed to the extent it is premised on already dismissed allegations of
breach of fiduciary duty. As noted above, I have dismissed any claim for breach of
fiduciary duty based on the purportedly imprudent acquisitions, the overstaffing at
RCS, and the supposed efforts to facilitate proxy fraud. Thus, I dismiss the
Plaintiff’s claim for aiding and abetting breach of fiduciary duty to the extent it relies
on those purported breaches.67
The aiding and abetting claim survives, however, to the extent it rests on the
core claim in this case: that the “Control Defendants engineered a series of
transactions between RCAP and AR Capital that allegedly siphoned value away
from RCAP and to AR Capital.”68 The Plaintiff brings its aiding and abetting count
64
RBS Capital Mkts., LLC v. Jervis, 129 A.3d 816, 861 (Del. 2015).
65
Cumming v. Edens, 2018 WL 992877, at *26 (Del. Ch. Feb. 20, 2018).
66
RBC Capital Mkts., LLC, 129 A.3d at 862 (emphasis omitted) (quoting Wood v. Baum, 953 A.2d
136, 141 (Del. 2008)).
67
See, e.g., Madison Realty Partners 7, LLC v. Ag ISA, LLC, 2001 WL 406268, at *6 n.19 (Del.
Ch. Apr. 17, 2001) (“The plaintiffs’ claim against Angelo Gordon for aiding and abetting AGGP’s
breaches of fiduciary duty must . . . be dismissed because there is no legally sufficient underlying
claim for breach of fiduciary duty against AGGP.”).
68
RCS Creditor Trust, 2017 WL 5904716, at *10.
15
to address the possibility that any of the Control Defendants may later be found not
to have owed fiduciary duties to RCAP. The Complaint pleads that the Control
Defendants were either officers or directors of RCAP at all relevant times. 69 The
Complaint also supports a reasonable inference that the Control Defendants acted as
a control group with regard to RCAP.70 Thus, at the pleading stage, I may infer that
the Control Defendants owed fiduciary duties to RCAP.71 But what is pled may turn
out not to be true, and it is possible that some of the Control Defendants did not stand
in a fiduciary relation to RCAP at any given time. This Court has allowed plaintiffs
to plead aiding and abetting claims in the alternative to account for this possibility. 72
The Defendants’ only response is that the Plaintiff has failed to adequately
allege that any of the Control Defendants knowingly participated in a breach of
69
Id. at *10 n.156.
70
Id.
71
Id.
72
See Wallace v. Wood, 752 A.2d 1175, 1184 (Del. Ch. 1999) (“This claim [for aiding and abetting
breach of fiduciary duty], which on its face assumes the officers, parents and affiliates to be ‘non-
fiduciaries,’ seems inconsistent with plaintiffs [sic] primary argument that each defendant owes
fiduciary duties to the Limited Partners. Nonetheless, I will not dismiss plaintiffs’ aiding and
abetting claim as I may later decide, after discovery or at trial, that plaintiffs cannot prove the
pleaded requisite control necessary to establish the existence of a fiduciary relationship between
each defendant and the Limited Partnership and/or the Limited Partners. Therefore, plaintiffs may
continue to pursue the inconsistent, conflicting, aiding and abetting claim if they so choose.”
(footnote omitted)); see also In re Nine Sys. Corp. S’holders Litig., 2014 WL 4383127, at *48
(Del. Ch. Sept. 4, 2014) (“[T]he Plaintiffs have standing to bring this aiding and abetting claim
directly against Dwyer, Wren, Javva, and Catalyst. But, because the Court previously concluded
that Wren, Javva, and Catalyst breached their fiduciary duties as a control group, their liability for
aiding and abetting is limited to the extent that they did not constitute a control group. In other
words, the Plaintiffs are limited to one recovery—breach of fiduciary duty or aiding and abetting—
as against Wren, Javva, and Catalyst.”), aff’d sub nom. Fuchs v. Wren Holdings, LLC, 129 A.3d
882 (Del. 2015).
16
fiduciary duty. The Defendants are wrong. I have already held that the Complaint
states a claim against the Control Defendants for breach of the duty of loyalty. That
claim rests on allegations about a self-dealing scheme hatched by the Control
Defendants themselves. Specifically, “by forcing RCAP to bear all the costs of
wholesaling AR Capital’s investment vehicles, the Control Defendants enriched AR
Capital, in which they (together with Schorsch’s wife) held a 100% economic stake,
to the detriment of RCAP, in which they held only a 25% economic interest.”73 This
scheme allegedly involved blatantly off-market arrangements between AR Capital
and RCAP.74 It is reasonably conceivable that each of the Control Defendants
understood that his assistance in looting RCAP for AR Capital’s benefit contributed
to a breach of fiduciary duty.75 Thus, if Schorsch (or any of the other Control
Defendants) happened not to owe fiduciary duties to RCAP during one part of the
scheme, he still could be held liable under an aiding and abetting theory for his
deliberate participation in any self-dealing transactions that took place during that
time. I decline to dismiss the aiding and abetting count.
73
RCS Creditor Trust, 2017 WL 5904716, at *5.
74
Id.
75
See Malpiede v. Townson, 780 A.2d 1075, 1097 (Del. 2001) (“Knowing participation in a
board’s fiduciary breach requires that the third party act with the knowledge that the conduct
advocated or assisted constitutes such a breach.”).
17
2. Unjust Enrichment
The Plaintiff alleges that AR Capital, AR Global (AR Capital’s successor),
and the Advisor Defendants were unjustly enriched “because each received the
benefits of income flowing from sales made and supported by RCAP without
entering into customary arrangements to share advisory and management business
with RCAP on terms consistent with . . . arm’s-length market transactions.”76 In
particular, the Advisor Defendants, which were wholly owned AR Capital
subsidiaries, received management fees that would have gone to RCAP (or an RCAP
subsidiary) but for the Control Defendants’ disloyal conduct. And, under the
wholesaling arrangements between AR Capital and RCAP, AR Capital received
equity in each of the Advisor Defendants, equity that again would have gone to
RCAP had those arrangements been negotiated at arm’s length.77 Assuming, as I
must at the pleading stage, that these allegations are true, the Complaint states a
claim for unjust enrichment.
76
Compl. ¶ 135.
77
See id. ¶ 47 (“In light of the inherent unprofitability of th[e wholesaling] portion of the business,
wholesalers must either: (a) function as a cost center within a larger vertically integrated
organization, or (b) negotiate for a share of the ongoing management economics generated by the
investments they raise, either through a joint venture interest in the advisory, or through
advisor/subadvisor contractual relationship with the sponsor.” (emphasis added)); id. ¶ 55 (noting
that “the off-market nature of RCAP’s existing business arrangements with AR Capital” would be
revealed by information regarding Strat Cap, including that it “received between 20% and 25% of
the ongoing management economics – either through an interest in the entities created to provide
advisory services or through a ‘sub-advisory’ contract” (emphasis added)).
18
“Unjust enrichment is ‘the unjust retention of a benefit to the loss of another,
or the retention of money or property of another against the fundamental principles
of justice or equity and good conscience.’”78 “The elements of unjust enrichment
are: (1) an enrichment, (2) an impoverishment, (3) a relation between the enrichment
and impoverishment, (4) the absence of justification, and (5) the absence of a remedy
provided by law.”79 In evaluating an unjust enrichment claim, I must first determine
“whether a contract already governs the relevant relationship between the parties.”80
“If a contract comprehensively governs the parties’ relationship, then it alone must
provide the measure of the plaintiff’s rights and any claim of unjust enrichment will
be denied.”81 But when a plaintiff alleges that “it is the [contract], itself, that is the
unjust enrichment,” the existence of the contract does not bar the unjust enrichment
claim.82 In other words, “[t]he contract itself is not necessarily the measure of [the]
plaintiff’s right where the claim is premised on an allegation that the contract arose
from wrongdoing (such as breach of fiduciary duty or fraud) or mistake and the
[defendant] has been unjustly enriched by the benefits flowing from the contract.”83
78
Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010) (quoting Fleer Corp. v. Topps Chewing
Gum, Inc., 539 A.2d 1060, 1062 (Del. 1988)).
79
Id.
80
BAE Sys. Info. & Elec. Sys. Integration, Inc. v. Lockheed Martin Corp., 2009 WL 264088, at *7
(Del. Ch. Feb. 3, 2009).
81
Id.
82
McPadden v. Sidhu, 964 A.2d 1262, 1276 (Del. Ch. 2008); accord Great Hill Equity Partners
IV, LP v. SIG Growth Equity Fund I, LLLP, 2014 WL 6703980, at *27 (Del. Ch. Nov. 26, 2014).
83
Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial Practice in the
Delaware Court of Chancery § 12.01[b] (2016) (citing McPadden, 964 A.2d at 1276).
19
The Defendants first argue that the unjust enrichment claim fails because the
conduct at issue was governed by the contracts between the Advisor Defendants, AR
Capital, and RCS. It is true that the Advisor Defendants received management fees
from AR Capital pursuant to a series of advisory agreements. But the core claim in
this case is premised in large part on the allegation that the Control Defendants
breached their fiduciary duties by causing the Advisor Defendants, rather than
RCAP, to receive those management fees. Faithful fiduciaries, the Plaintiff asserts,
would have bargained for RCAP to receive a portion of the “management
economics.”84 Indeed, according to the Plaintiff, that is how wholesalers in the REIT
industry typically make most of their profits. Thus, the Complaint supports a
reasonable inference that the advisory agreements (and the benefits they conferred
on the Advisor Defendants) resulted from the Control Defendants’ breaches of
fiduciary duty. The unjust enrichment claim is therefore not barred by the existence
of binding contracts between AR Capital, RCS, and the Advisor Defendants.85
Next, the Defendants argue that unjust enrichment cannot be invoked against
the Advisor Defendants because they earned the advisory fees they received for work
performed under the advisory agreements. Thus, the Advisor Defendants
84
Compl. ¶ 47.
85
See McPadden, 964 A.2d at 1276 (upholding an unjust enrichment claim where a contract
existed between the parties but the plaintiff alleged that the contract was the product of one of the
defendants’ “manipulative conduct”).
20
supposedly did not receive any benefits to which they were not entitled. Relatedly,
the Defendants point out that the Complaint does not allege the Advisor Defendants
themselves engaged in wrongful conduct. These arguments do not defeat the
Plaintiff’s unjust enrichment claim.
For starters, it is irrelevant that the Advisor Defendants performed actual work
in exchange for receiving advisory fees from AR Capital. The Plaintiff does not
seek to disgorge the gross fees received by the Advisor Defendants; instead, it seeks
only the profits that would have gone to RCAP or an RCAP subsidiary if the Control
Defendants had been faithful fiduciaries.86 Indeed, this is the heart of the Plaintiff’s
core claim: that the Control Defendants breached their fiduciary duties by diverting
the lucrative advisory fees from RCAP to AR Capital subsidiaries. The Complaint
supports a reasonable inference that the Advisor Defendants were not entitled to the
profits realized from those fees. And, contrary to the Defendants’ suggestion, the
Plaintiff need not allege that the Advisor Defendants themselves engaged in
wrongdoing in order to invoke unjust enrichment against them.87 It is sufficient to
plead, as the Plaintiff has here, that the defendant received “benefits that in equity
86
E.g., Sept. 29, 2017 Oral Arg. Tr. 70:7–10.
87
See, e.g., Schock v. Nash, 732 A.2d 217, 232 (Del. Ch. 1999) (“Restitution is permitted even
when the defendant retaining the benefit is not a wrongdoer.”); see also Topps Chewing Gum, Inc.,
539 A.2d at 1063 (“The remedy of restitution may be invoked regardless of whether or not the
party retaining the benefit is found to be a wrongdoer.”).
21
and good conscience he ought not to keep, even though he may have received those
benefits honestly in the first instance.”88
Finally, the Defendants ask me to dismiss the Plaintiff’s “claim” for
imposition of a constructive trust. A constructive trust is not itself a cause of action,
however; instead, it is an equitable remedy designed to “correct the unlawful vesting,
or assertion of, legal title.”89 It is premature, at this stage of the litigation, to discuss
the propriety or applicability of particular equitable remedies.90
III. CONCLUSION
For the reasons stated above, the Plaintiff’s Motion for Limited Reargument
is denied, and the Defendants’ Motions to Dismiss are granted in part and denied in
88
Topps Chewing Gum, Inc., 539 A.2d at 1063 (internal quotation marks and citation omitted).
As noted above, the Complaint also alleges that AR Capital (and its successor, AR Global) were
unjustly enriched when they received equity in the Advisor Defendants, equity that would have
gone to RCAP but for the Control Defendants’ disloyal conduct.
89
Triton Constr. Co., Inc. v. E. Shore Elec. Servs., Inc., 2009 WL 1387115, at *28 (Del. Ch. May
18, 2009) (quoting E. Lake Methodist Episcopal Church, Inc. v. Trs. of Peninsula-Del. Annual
Conference of the United Methodist Church, Inc., 731 A.2d 798, 809 n.4 (Del. 1999)), aff’d, 988
A.2d 938 (Del. 2010); see also VTB Bank v. Navitron Projects Corp., 2014 WL 1691250, at *6
n.60 (Del. Ch. Apr. 28, 2014) (“Under Delaware law, a constructive trust is a remedy, not a
substantive cause of action.”).
90
See, e.g., Crescent/Mach I Partners, L.P. v. Turner, 846 A.2d 963, 991 (Del. Ch. 2000) (“In
response to a motion to dismiss, I simply determine whether plaintiff has stated a claim for which
relief might be granted. If I find that plaintiffs have stated cognizable claims, then ‘the nature of
that relief is not relevant and need not be addressed.’ Because the determination of relief is beyond
the scope of this motion and premature without an established evidentiary record, I will not address
this issue.” (footnotes omitted) (quoting Chaffin v. GNI Grp., Inc., 1999 WL 721569, at *7 (Del.
Ch. Sept. 3, 1999))).
22
part. The parties should submit an appropriate form of order.
Sincerely,
/s/ Sam Glasscock III
Sam Glasscock III
23
RCS Creditor Trust v. Nicholas S. Schorsch
Combined Opinion