Bamford v. Penfold, L.P.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

JOSEPH C. BAMFORD and YOUNG MIN BAN, )
)
Plaintiffs, )
)
v. )
) C.A. No. 2019-0005-JTL
PENFOLD, L.P.; DELAWARE VALLEY )
REGIONAL CENTER, LLC; WEST 36TH, INC.; )
JOSEPH MANHEIM; and REATH & CO., LLC; )
)
Defendants. )

MEMORANDUM OPINION

Date Submitted: December 4, 2019
Date Decided: February 28, 2020

David J. Margules, Elizabeth A. Sloan, Brittany M. Giusini, BALLARD SPAHR LLP,
Wilmington, Delaware, Wallace G. Hilke, Mark S. Enslin, BALLARD SPAHR LLP,
Minneapolis, Minnesota; Counsel for Plaintiff Joseph C. Bamford.

Jeffrey S. Cianciulli, WEIR & PARTNERS, Wilmington, Delaware, Peter N. Kessler,
KUTAK ROCK LLP, Philadelphia, Pennsylvania; Counsel for Plaintiff Young Min Ban.

John G. Day, PRICKETT, JONES & ELLIOT, P.A., Wilmington, Delaware; Marc R.
Rosen, Joshua K. Bromberg, KLEINBERG, KAPLAN, WOLFF & COHEN, P.C., New
York, New York; Counsel for Defendants West 36th, Inc., Joseph Manheim, and Reath &
Co., LLC.

William B. Chandler III, Bradley D. Sorrels, Shannon E. German, Daniyal M. Iqbal,
WILSON SONSINI GOODRICH & ROSATI, P.C., Wilmington, Delaware; Counsel for
Defendants Penfold, L.P. and Delaware Valley Regional Center, LLC.

LASTER, V.C.
 Before the events giving rise to this litigation, defendant Joseph Manheim and

plaintiff Joseph Bamford were close friends for over twenty years. For at least a decade,

Manheim served as Bamford’s trusted financial and business advisor.

In 2012, at Manheim’s request, Bamford provided startup capital for Delaware

Valley Regional Center, LLC (“DVRC”), a company co-founded by Manheim and plaintiff

Young Min Ban. DVRC facilitates investments by foreign nationals in infrastructure

projects in the United States, thereby helping the foreign nationals qualify for specialized

visas. In 2015, Bamford made an additional investment in DVRC.

In connection with the 2015 investment, Manheim, Ban, and Bamford documented

that each held a 30% membership interest in DVRC. Defendant West 36th, Inc.

(“WestCo”) held the remaining 10% membership interest and served as DVRC’s manager.

Manheim, Ban, and Bamford comprised WestCo’s board of directors (the “WestCo

Board”). Manheim controlled WestCo and had the power to name the members of the

WestCo Board, but Manheim’s control over WestCo was not inviolate. A portion of

Bamford’s investment in DVRC took the form of a loan to WestCo that was convertible

into a majority stake.

By 2016, DVRC was thriving, and Manheim wanted to solidify his control over the

entity. To achieve this outcome, Manheim needed to neuter Bamford and Ban’s rights as

holders of a majority of the membership interests in DVRC. He also needed to prevent the

convertible debt from providing a path to control over WestCo.

Manheim achieved both goals by convincing Bamford and Ban to go along with a
restructuring of their interests (the “Reorganization”). He told Bamford and Ban that it was

advisable from a tax standpoint to create a holding company structure. To accomplish this,

they would contribute their 90% membership interest in DVRC to defendant Penfold, L.P.,

a newly created Delaware limited partnership, and each of them would receive a one-third

equity interest in Penfold. Ban agreed as long as (i) each one-third interest in Penfold

carried equal economic and governance rights and (ii) they also co-owned the general

partnership interest equally. Bamford trusted Manheim completely, so he did not make any

demands. But Manheim needed Bamford to waive the conversion feature in WestCo’s debt,

so Manheim told Bamford that imminent federal legislation would restrict the ability of a

foreign national to exercise control over an enterprise like DVRC. Bamford is a British

citizen. Manheim claimed that by implementing the Reorganization and waiving the

conversion feature, they could avoid any adverse consequences from the legislation. In

reality, there was no pending legislation.

During these discussions, Manheim represented to Ban and Bamford that he had not

drafted the limited partnership agreement for Penfold. In truth, the limited partnership

agreement already existed and named Manheim and defendant Reath & Co., LLC

(“ReathCo”) as Penfold’s only general partners. Manheim controlled ReathCo.

After the Reorganization, Bamford and Ban could not exercise any of the voting or

other governance rights that they previously held as members of DVRC, because Penfold

held those interests. Only the general partners of Penfold could cause Penfold to exercise

its rights as a member of DVRC, and Bamford and Ban were not general partners of

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Penfold. Nor could the conversion feature in WestCo’s debt provide a path to control over

WestCo, because that feature had been waived.

After the Reorganization, Manheim added his brother and another friend to the

WestCo Board, creating a majority that could outvote Bamford and Ban if they ever

opposed him. Having secured his control over WestCo and DVRC, Manheim caused

DVRC to pay lucrative management fees to ReathCo. He also engaged in other interested

transactions. The plaintiffs believe that Manheim has misappropriated approximately $5.9

million.

At first, Ban and Bamford did not suspect that anything was amiss. Ban was

involved in the day-to-day management of DVRC, and by 2017, he had noticed and started

objecting to Manheim’s insider transactions. Manheim initially ignored Ban, then put him

on leave, then removed him from his roles with DVRC and as a member of the WestCo

Board. Bamford did not suspect anything was wrong until early 2018. After Bamford

requested books and records to investigate his concerns, Manheim removed him from the

WestCo Board.

Ban and Bamford brought this action. Their complaint contains thirteen counts, and

the defendants moved to dismiss eleven of them for failure to state claims on which relief

can be granted. This decision dismisses three counts in their entirety and a fourth count in

part. The motion is otherwise denied.

I. FACTUAL BACKGROUND

The facts are drawn from the operative complaint and five exhibits submitted by the

parties. Two were incorporated by reference in the complaint, and so may be considered at

3
the pleading stage. See Winshall v. Viacom Int’l, Inc., 76 A.3d 808, 818 (Del. 2013). Two

are filings with the Delaware Secretary of State and subject to judicial notice. See Malpiede

v. Townson, 780 A.2d 1075, 1090 (Del. 2001). The fifth is the public record of Ban’s

admission to the Pennsylvania State Bar, which is also subject to judicial notice. See D.R.E.

201(b)(2). The incorporation of documents by reference does not change the pleading

standard. At this stage of the proceedings, the complaint’s allegations are assumed to be

true, and the plaintiff receives the benefit of all reasonable inferences, including inferences

drawn from documents.

The complaint refers to and describes provisions in various agreements. With one

exception, the parties did not provide those agreements. Because “the proper interpretation

of language in a contract is a question of law,” and “a motion to dismiss is a proper

framework for determining the meaning of contract language,” it would have been helpful

to have the omitted agreements. See Allied Capital Corp. v. GC-Sun Hldgs., L.P., 910 A.2d

1020, 1030 (Del. Ch. 2006). Without them, this decision relies on the descriptions in the

complaint, drawing reasonable inferences in the plaintiffs’ favor.

A. Bamford And Manheim

Bamford and Manheim have known each other for more than twenty-five years.

During that time, they developed “a relationship that was closer than most brothers.”

Compl. ¶ 26. They met when Bamford was sixteen years old, and Manheim was dating

Bamford’s sister. Until the events leading to this lawsuit, Manheim was Bamford’s closest

friend for the better part of nineteen years. When Bamford was twenty-one, he joined

Alcoholics Anonymous, and Manheim acted as Bamford’s sponsor for the next decade.

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The two regularly socialized and travelled together. Manheim and his wife even spent their

honeymoon vacationing with Bamford. Their families were also close, and each became

the godfather to the other’s children. Bamford’s children referred to Manheim as “Uncle

Joe,” and Manheim’s children used the same term of affection for Bamford.

In addition to their close personal friendship, Bamford relied on Manheim as his

financial and business advisor. In 2010, when Manheim was starting an investment fund,

Bamford invested $6.7 million. After the fund failed, resulting in a significant loss for

Bamford, he opened an account with Goldman Sachs, funded it with $2 million, and gave

Manheim full access to and control over the account. Manheim also advised Bamford on

family litigation matters and a bond deal. Bamford listed Manheim as his financial advisor

with his accountants, giving Manheim access to Bamford’s personal financial information.

Manheim regularly communicated with Bamford’s accountants and assisted with

Bamford’s tax issues.

According to the complaint, “Bamford was relatively unsophisticated with respect

to complex business structures, financing and tax-related issues, and Manheim had superior

knowledge, information and experience with respect to such structures, financing and tax

issues.” Id. ¶ 27. Manheim was well aware of the trust that Bamford placed in him.

Manheim’s “elevator speech” touted the fact that he oversaw Bamford’s finances and

family business.

When Manheim structured a transaction or investment for Bamford, he would send

the documents to Bamford and tell him to sign. Bamford would sign the documents,

trusting that Manheim was looking out for his interests and giving him truthful information.

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On some occasions, Manheim would send documents to Bamford’s assistant and ask her

to obtain Bamford’s signature. Bamford would routinely sign the documents, having placed

his full confidence in Manheim.

B. DVRC

In 2012, Manheim and Ban formed DVRC as a manager-managed Delaware limited

liability company. Through DVRC, Manheim and Ban would solicit capital from foreign

nationals, then invest it in public infrastructure projects in the United Sates. By making

these investments, the foreign nationals could qualify for visas under the EB-5 Immigration

Investor Program.

Manheim asked Bamford to fund the start-up costs for the business, and Bamford

invested $500,000. Three years later, in June 2015, Bamford invested another $500,000.

In connection with the June 2015 investment, Manheim, Ban, and Bamford

confirmed the ownership structure of DVRC and their respective rights. They agreed that

Manheim, Ban, and Bamford each owned a 30% membership interest in DVRC. WestCo

held the remaining 10% membership interest and served as DVRC’s manager. Manheim

controlled WestCo, but WestCo had entered into a loan agreement with East 63rd Ltd.

(“EastCo”), a United Kingdom private limited company, that gave EastCo the right to

convert its loan into a majority equity stake in WestCo. Bamford and Manheim jointly

owned EastCo.

Manheim, Ban, and Bamford comprised the WestCo Board. According to the

complaint, Manheim told the plaintiffs that WestCo’s role as manager of DVRC was

limited to “handl[ing] expenses for DVRC, and only handl[ing] expenses—it would not

6
truly receive the profits of DVRC.” Id. ¶ 41. Bamford and Ban understood that DVRC’s

profits would be split equally among Manheim, Ban, and Bamford.

Manheim and Ban ran DVRC’s day-to-day operations. Manheim took responsibility

for DVRC’s financial affairs, including paying expenses, making distributions, and

keeping its books and records for tax purposes. At some point in 2015, Manheim tried to

involve ReathCo, a company that he controlled. After Ban objected, Manheim represented

that ReathCo would not be involved in DVRC’s operations or management. Contrary to

that representation, Manheim caused DVRC and WestCo to distribute $372,000 to

ReathCo in 2015. See id. Ex. A. The complaint alleges that ReathCo did not provide any

services in exchange for the payments.

C. The Reorganization

By 2016, it had become clear that DVRC would be successful. DVRC had obtained

millions of dollars in investments from foreign nationals, which DVRC has deployed into

three major infrastructure projects. DVRC generated substantial profits by collecting a

percentage of the interest that the sponsors of the infrastructure projects paid to the foreign

investors. The time horizons for the investments were lengthy, so DVRC could expect to

generate substantial profits for years to come. Manheim wanted to secure control over

DVRC and its cash flows.

In early and mid-2016, Manheim had multiple one-on-one conversations with Ban

about forming a holding company for DVRC. Manheim told Ban that the holding company

structure would generate tax benefits and could be used as an investment vehicle for future

ventures. Ban expressed skepticism but agreed “on the condition that [the holding

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company] would be jointly owned one third by each of Bamford, Ban and Manheim, and

that the General Partner would also be jointly owned and jointly controlled by each of

Bamford, Ban and Manheim.” Id. ¶ 46.

During the same period, Manheim had multiple “one-on-one telephone calls and . .

. face-to-face conversations” with Bamford about the benefits of forming a holding

company for DVRC and the need for EastCo to waive its right to convert its debt into a

majority of WestCo’s equity. Id. ¶ 54. As with Ban, Manheim told Bamford that the holding

company structure would generate tax benefits and could be used as an investment vehicle

for future ventures. He also told Bamford that there was imminent federal legislation that

would restrict the ability of a foreign national to exercise control over a company engaged

in the type of visa-facilitating business that DVRC conducted. Bamford is a British citizen,

so the purported legislation would have affected DVRC. Manheim told Bamford that

converting to the holding company structure would protect DVRC and Bamford’s

investment from the implications of the pending legislation. He also told Bamford that it

was necessary to waive the conversion rights in WestCo’s debt to comply with the pending

legislation. Given his trust in Manheim, Bamford agreed to implement the holding

company structure and waive the conversion rights. In reality, there was no pending

legislation.

While these discussions were going on, Manheim formed Penfold by filing a

certificate of limited partnership with the Delaware Secretary of State. Although Manheim

had previously told Ban that ReathCo would not have anything to do with DVRC, the

certificate named ReathCo as Penfold’s general partner. Manheim also prepared a limited

8
partnership agreement for Penfold. It named Manheim, Bamford, and Ban as Penfold’s

only limited partners, each with a one-third partnership interest. It named Manheim and

ReathCo as Penfold’s only general partners.

To effectuate the Reorganization, Manheim prepared a two-page contribution

agreement. See Dkt. 91 Ex. B (the “Contribution Agreement” or “CA”). Pursuant to its

terms, Manheim, Ban, and Bamford would contribute their membership interests in DVRC

to Penfold. Consistent with Manheim’s representation to Ban, the Contribution Agreement

recited that “each of Parties [sic] is the record and beneficial owners of 1/3 of all of the

share capital, securities, shares or other equity interests of any kind (collectively, Parties

own 100% of Penfold) of Penfold.” Id. at 1.

Section 1 of the Contribution Agreement provided that “upon execution of this

Agreement, Parties hereby will contribute to Penfold, their membership interests held in

DVRC.” Id. § 1. The balance of the two-page agreement consisted of recitals and

miscellaneous provisions.

The bulk of the second page was devoted to a section titled “Parties Financial

Acknowledgments.” Id. § 3.2 (the “Financial Acknowledgments”). This section recited that

the parties “further acknowledge and agree to the following”:

a. Parties has [sic] knowledge and experience in financial, tax and business
matters to enable Parties to evaluate the merits and risks of the contribution
in Penfold and to make an informed decision about the contribution of
membership interests in Penfold. Parties understands [sic] that Parties’
contribution in Penfold involves risk and Parties understands [sic] all of the
associated risks.

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 b. Parties has [sic] been advised and given the opportunity to seek expert
legal, tax and accounting advice in connection with Parties’ contribution in
the [sic] Penfold.

c. All financial statements, documents, records, and books pertaining to the
[sic] Penfold has [sic] been made available to Parties for inspection by
Parties’ representatives. Parties and Parties’ representatives have had the
opportunity to ask questions to, and receive answers from Penfold or a
representative of Penfold concerning Parties’ contribution in the [sic]
Penfold; and all such questions have been answered to Parties’ full
satisfaction. No oral representations have been made or oral information
furnished to Parties of [sic] Parties’ representatives in connection with
Parties’ contribution in Penfold.

d. The terms of this Agreement have been negotiated by Parties, and this
Agreement fully and properly reflects the agreement of the parties.

Id.

Bamford, Ban, and Manheim signed the Contribution Agreement in their personal

capacities. Manheim signed it on behalf of Penfold. The Contribution Agreement was dated

as of June 10, 2016, making the Reorganization effective on that date.

D. Manheim’s Insider Transactions

Both before and after the Reorganization, Manheim engaged in related-party

transactions with DVRC. Manheim is an avid polo player, and polo is a costly hobby. In

November 2014, Manheim set up a company called Polo Logistics. Ban believes that

Manheim funded it with money from WestCo, used it to support his polo hobby, and caused

DVRC to reimburse Polo Logistics directly or through WestCo for his polo-related

expenses, including hay for his horses. See Compl. ¶ 73.

After the Reorganization, in early 2017, Manheim added his brother, Frank

Manheim (“Frank”), and his friend, Albert Mezzaroba, to the WestCo Board. Ban objected,

but Manheim added them anyway. The addition of Frank and Mezzaroba meant that

10
Manheim controlled a three-vote majority that could outvote Ban and Bamford if they ever

opposed him.

With Frank and Mezzaroba on the WestCo Board, Manheim began engaging more

freely in related-party transactions. Over Ban’s objections, he caused DVRC to pay

management fees to ReathCo, and he transferred money directly from DVRC and WestCo

to ReathCo. Manheim also took loans from DVRC and WestCo. See id. ¶¶ 79–91. Bamford

was not aware of the transactions. He continued to trust Manheim and usually did not attend

meetings of the WestCo Board.

In 2017 and 2018, Manheim increased the amounts that DVRC paid to ReathCo.

Historically, DVRC had paid most of its operating expenses from its own accounts,

including the costs for payroll and marketing that were its largest outlays. Manheim began

paying DVRC’s operating expenses out of ReathCo, then causing DVRC to pay ReathCo.

For example, the minutes of a meeting of the WestCo Board in June 2017 record the

following discussion: “Move all executives off of DVRC payroll to [ReathCo] or new

entity . . . . Compensation will be transferred for [Frank] and [Mezzaroba]. Further, Board

will evaluate [ReathCo] vs. new entity as appropriate vehicle for executives and executive

operations going forward.” Id. ¶ 107. Although the WestCo Board never approved using

ReathCo as a management vehicle, Manheim caused WestCo and DVRC to transfer $1

million to ReathCo during the second half of 2017. See id. Ex. A. During this period,

DVRC continued to pay compensation to its own executives and employees. Id. ¶ 108.

By running DVRC’s expenses through ReathCo, Manheim made his actions less

transparent and interfered with the ability of the WestCo Board to monitor his activities.

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Ban regularly questioned DVRC’s expenses and asked for a breakdown of the amounts

that ReathCo was paying on DVRC’s behalf. Manheim never gave Ban any information.

Instead, Manheim reacted angrily and accused Ban of “not being a team player.” Id. ¶ 82.

During 2018, Ban observed additional transfers from DVRC to Manheim or his

entities, including:

 Two wire transfers in the amount of $100,000 from DVRC to Friends of Work
to Ride, a charity that Manheim formed.

 Two wire transfers from WestCo to pay for a car for Manheim, including a
transfer in the amount of $50,431.94.

 Approximately $1 million in transfers from DVRC to ReathCo.

Ban believes that by May 2018, Manheim had received approximately $5.8 million from

DVRC. Ban had received approximately $2.8 million. Bamford had received

approximately $1.8 million.

E. Bamford Becomes Concerned.

Bamford was not involved in the day-to-day operations of DVRC. He relied on

Manheim to operate the business. Bamford had no idea that after the Reorganization,

Manheim had increased the scope of his related-party transactions or that Ban was

objecting to Manheim’s conduct.

In January 2018, DVRC made a distribution in the amount of $1 million. Bamford

understood that DVRC would make an additional distribution in the amount of $700,000

later that year. Then Manheim told Bamford that no additional distributions would be made

in 2018. This was the second financial issue involving the Company that affected Bamford

personally. Manheim had previously caused WestCo to default on its loan from EastCo,

12
which Bamford had funded, but Bamford had not pressed Manheim to cure the default

because he trusted him.

Now, Bamford became concerned. He tried to gain an understanding of DVRC’s

revenues and expenses. He even sent one of his accountants to visit DVRC’s offices, but

the accountant was not given access to any records. Bamford became worried that

Manheim was concealing information from him.

Bamford contacted Ban. Bamford had never previously spoken with Ban without

Manheim present. Ban told Bamford that Manheim had suspended him from his duties at

DVRC. This caused Bamford to become more concerned, because he understood that Ban

was running virtually all of DVRC’s daily operations. Shortly thereafter, Bamford asked

Manheim how Ban was performing, and Manheim responded that everything was “fine.”

Id. ¶ 91. That misrepresentation increased Bamford’s level of concern. In subsequent

conversations with Ban, Bamford learned about Manheim’s mismanagement of DVRC and

the volume of interested transactions.

In June 2018, Manheim terminated Ban from his positions with DVRC and removed

him from the WestCo Board. Manheim previously had convinced Ban to characterize his

salary as a loan for tax purposes, promising him that the loan would be forgiven. Manheim

joined Ban by characterizing his own salary as a loan. After terminating Ban, Manheim

demanded repayment of Ban’s loan (but did not repay his own).

On June 27, 2018, Manheim filed an amendment to Penfold’s certificate of limited

partnership with the Delaware Secretary of State. The amendment named Manheim as an

additional general partner of Penfold. Dkt. 91 Ex. C.

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F. The Books And Records Action

In July 2018, Bamford sent a demand for books and records to DVRC. Because of

the Reorganization, Bamford was no longer a member of DVRC. Instead, he was a limited

partner in Penfold, the entity that owned a 90% membership interest in DVRC. Manheim

would only give Bamford access to books and records if he “acknowledg[ed] that (a) the

Contribution Agreement was valid and (b) he was bound by the terms of the Penfold

Partnership Agreement.” Compl. ¶ 94. Bamford declined.

In early August 2018, Manheim provided Bamford with limited access to

documents. The inspection took place at ReathCo’s offices, where Manheim runs DVRC,

Penfold, and WestCo. Manheim did not produce any financial records for 2018.

Later that month, Manheim took $1.8 million from DVRC to repay EastCo’s loan

to WestCo. Manheim refused to permit EastCo to release any funds to Bamford. Shortly

thereafter, Manheim notified Bamford that he had been removed from the WestCo Board.

In October 2018, Bamford filed a books and records action. Manheim made a

supplemental production, and the action was dismissed without prejudice.

Bamford hired a forensic accounting firm to analyze the records. The firm

determined that Manheim had misappropriated $5.9 million between 2014 and 2018. This

was in addition to $1.85 million in distributions that Manheim received from DVRC and

Penfold.

G. This Litigation

On January 9, 2019, Bamford filed this action. In April, Ban intervened. The

plaintiffs filed a consolidated complaint, and the defendants answered and moved to

14
dismiss the vast majority of the counts. The plaintiffs then amended their complaint. The

defendants answered, renewed their motion to dismiss, and caused DVRC to assert a

counterclaim against Ban to recover the loans that Ban says reflect his compensation.

The currently operative complaint contains thirteen counts:

 In Count I, the plaintiffs assert a derivative claim on behalf of Penfold for breach of
fiduciary duty against Manheim and ReathCo.

 In Count II, the plaintiffs assert a derivative claim on behalf of DVRC for breach of
fiduciary duty against Manheim and WestCo.

 In Count III, the plaintiffs assert a derivative claim on behalf of Penfold for fraud
against Manheim and ReathCo.

 In Count IV, the plaintiffs assert a derivative claim on behalf of Penfold for breach
of contract against Manheim and ReathCo.

 In Count V, the plaintiffs assert a derivative claim on behalf of DVRC for fraud
against Manheim, WestCo, and ReathCo.

 In Count VI, the plaintiffs assert personal claims for conversion against Manheim.

 In Count VII, Bamford asserts a personal claim for breach of fiduciary duty against
Manheim.

 In Count VIII, Bamford asserts a personal claim for common law fraud against
Manheim.

 In Count IX, Ban asserts a personal claim for common law fraud against Manheim.

 In Count X, the plaintiffs assert direct claims on their own behalf and a derivative
claim on Penfold’s behalf for unjust enrichment against Manheim.

 In Count XI, Bamford asserts a personal claim for negligent misrepresentation
against Manheim.

 In Count XII, Ban asserts a personal claim for negligent misrepresentation against
Manheim.

 In Count XIII, the plaintiffs seek a declaration that Penfold’s limited partnership
agreement is void.

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The defendants answered Counts I and XIII and moved to dismiss the other counts.

II. LEGAL ANALYSIS

The defendants have moved to dismiss Counts II through XII for failing to state a

claim on which relief can be granted. See Ch. Ct. R. 12(b)(6). When considering such a

motion, a court applying Delaware law (i) accepts as true all well-pleaded factual

allegations in the complaint, (ii) credits vague allegations if they give the opposing party

notice of the claim, and (iii) draws all reasonable inferences in favor of the plaintiffs.

Central Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 535 (Del.

2011). Dismissal is inappropriate “unless the plaintiff would not be entitled to recover

under any reasonably conceivable set of circumstances.” Id.

This decision starts with the counts that the plaintiffs have asserted in their personal

capacities, because those are the most straightforward. This decision next turns to the

claims that the plaintiffs have asserted derivatively, where the defendants contend that the

Reorganization deprived the plaintiffs of their standing to sue. Having dealt with the

standing arguments, this decision addresses the few merits-related challenges to the

derivative claims.

A. Count VII: Bamford’s Personal Claim Against Manheim For Breach Of
Fiduciary Duty

In Count VII, Bamford asserts a personal claim for breach of fiduciary duty against

Manheim. Bamford maintains that Manheim acted as his fiduciary by virtue of his role as

Bamford’s trusted financial advisor, together with their longstanding friendship that rose

to a level of familial closeness. Bamford contends that because of Manheim’s status as his

16
personal fiduciary, Manheim was obligated to act loyally by pursuing Bamford’s personal

best interests throughout the events giving rise to this litigation, regardless of what other

formal roles Bamford and Manheim might have occupied at the time.

For followers of this court’s jurisprudence, this is a relatively uncommon claim. In

the type of case most commonly pursued in this court, a stockholder sues the directors of a

corporation for breaching the fiduciary duties they owe to the corporation and its

undifferentiated equity. In that setting, the stockholder can sue derivatively on behalf of

the corporation or directly on behalf of its equity holders, but the claim is a feature of the

bundle of property rights represented by shares; it is not personal to the individual that

happens to hold the shares.1 Bamford’s claim is personal to him. From a structural

standpoint, the alleged fiduciary relationship parallels other person-to-person fiduciary

relationships, such as an agent’s duties to his principal or a guardian’s duties to her ward.

To bring a claim for breach of fiduciary duty, a plaintiff must establish “(1) that a

fiduciary duty existed and (2) that the defendant breached that duty.” Beard Research, Inc.

1
See Urdan v. WR Capital P’rs, LLC, 2019 WL 3891720, at *8, *11 (Del. Ch. Aug.
19, 2019) (noting that “[t]he right to sue derivatively is a property right associated with
share ownership” and that “[l]ike the right to assert a derivative claim, the right to assert a
direct claim is a property right associated with the shares”); In re Activision Blizzard, Inc.
S’holder Litig., 124 A.3d 1025, 1043–57 (Del. Ch. 2015) (distinguishing among direct
claims, derivative claims, dual-natured claims, and personal claims); see also Hutchison v.
Bernhard, 220 A.2d 782, 783–84 (Del. Ch. 1965) (determining that plaintiff who sold
shares no longer had standing to pursue derivative claim); 12B Carol A. Jones, Fletcher’s
Cyclopedia of the Law of Corporations § 5908, at 490–91 (2009) (explaining that in a
corporate derivative action “[t]he corporation is not merely a formal party, but is an
indispensable party to the action” and that “[t]he shareholder, as a nominal party, has no
right, title, or interest in the claim itself”).

17
v. Kates, 8 A.3d 573, 601 (Del. Ch. 2010). The only issue in dispute at the pleading stage

is whether Manheim owed fiduciary duties to Bamford.

At bottom, “[a] fiduciary relationship is a situation where one person reposes special

trust in and reliance on the judgment of another or where a special duty exists on the part

of one person in another to protect the interests of another.” Cheese Shop Int’l, Inc. v.

Steele, 303 A.2d 689, 690 (Del. Ch.), rev’d on other grounds, 311 A.2d 870 (Del. 1973);

accord Metro Ambulance, Inc. v. E. Med. Billing, Inc., 1995 WL 409015, at *2 (Del. Ch.

July 5, 1995). “[T]he question of whether or not the particular relationship . . . rise[s] to

fiduciary status is one of fact.” White v. Lamborn, 1977 WL 9612, at *4 (Del. Ch. Mar. 16,

1977). “[C]ourts have consciously refused to delineate those situations where a fiduciary

relationship may exist . . . because in the ramifications of human activity, it is undesirable

to fix a rigid limitation on the application of such a salutary principle.” Swain v. Moore, 71

A.2d 264, 294 (Del. Ch. 1950).

Multiple factors can contribute to a judicial finding that a fiduciary relationship

exists. See Narrowstep, Inc. v. Onstream Media Corp., 2010 WL 5422405, at *14 (Del.

Ch. Dec. 22, 2010). Here, the complaint cites factors that support a reasonable inference

that Manheim acted as Bamford’s fiduciary.

The first factor is Manheim’s role as Bamford’s financial advisor. “Agents are

fiduciaries when they are authorized to ‘alter the legal relations between the principal and

third persons . . . .’” Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 901 A.2d 106 (Del. 2006)

(quoting Restatement (Second) of Agency § 12 (Am. L. Inst. 1958)). “The hallmark of a

fiduciary relationship is that one person has the power to exercise control over the property

18
of another as if it were her own.”2 Financial advisors and brokers act as fiduciaries when

managing and investing their clients’ funds. See O’Malley v. Borris, 742 A.2d 845, 849

(Del. 1999) (explaining that a stock broker owes fiduciary duties to his client); Goodrich

v. E.F. Hutton Gp., Inc., 1991 WL 101367, at *2 (Del. Ch. June 7, 1991) (inferring at

pleading stage that fiduciary relationship existed between investment advisor and client).

Manheim served as Bamford’s financial advisor for over ten years and, in that

capacity, controlled and managed Bamford’s property. At one point, Manheim managed

$6.7 million of Bamford’s money. After that venture failed, Bamford deposited $2 million

into a Goldman Sachs investment account and gave Manheim authority over the account.

2
Sokol Hldgs., Inc. v. Dorsey & Whitney, LLP, 2009 WL 2501542, at *3 (Del. Ch.
Aug. 5, 2009); see Stewart v. Wilm. Tr. SP Servs., Inc., 112 A.3d 271, 297 (Del. Ch. 2015)
(“Inherent in the fiduciary relationship, ‘which derives from the law of trusts,’ is that the
fiduciary exercise control over the property of another . . . .” (quoting Crosse v. BCBSD,
Inc., 836 A.2d 492, 495 (Del. 2003))); Dickerson v. Murray, 2015 WL 447607, at *5 (Del.
Super. Feb. 3, 2015) (“Customarily, a fiduciary is one who is entrusted with the power to
manage and control the property of another.” (internal quotation marks omitted)); Weil v.
Morgan Stanley DW Inc., 877 A.2d 1024, 1036–37 (Del. Ch. 2005) (“Typically, fiduciary
duties are imposed when someone exercises dominion and control over the assets and
property of another such that the controlling person should be prohibited from dealing with
those assets and property in a manner than unfairly profits himself.”); Bond Purchase,
L.L.C. v. Patriot Tax Credit Props., L.P., 746 A.2d 842, 864 (Del. Ch. 1999) (“[A]
fiduciary is typically one who is entrusted with the power to manage and control the
property of another”); In re USACafes, L.P. Litig., 600 A.2d 43, 48 (Del. Ch. 1991) (“I
understand the principle of fiduciary duty, stated most generally, to be that one who
controls property of another may not, without implied or express agreement, intentionally
use that property in a way that benefits the holder of the control to the detriment of the
property or its beneficial owner.”); see also Forsythe v. ESC Fund Mgmt. Co. (U.S.), Inc.,
2007 WL 2982247, at *10 (Del. Ch. Oct. 9, 2007) (inferring at pleading stage that fiduciary
relationship existed because “the Investment Advisor . . . ratified investment decisions, and
had authority to purchase and sell investments for the Fund”).

19
Manheim did not just have discretionary trading authority; he had full access to and control

over the account. Manheim also provided financial and business advice to Bamford more

generally. He advised him on pending litigation involving his family and on a potential

bond deal. As a matter of practice, whenever Bamford considered a business transaction,

he would consult with Manheim in some fashion. Manheim understood that Bamford

thought of him as a trusted advisor and cultivated that role. He routinely held himself out

to others as Bamford’s financial advisor, and his “elevator speech” informed people that

he oversaw Bamford’s finances and his family business. See Compl. ¶¶ 27–30.

A second factor indicating a fiduciary relationship is when a person has

“unrestricted access” to another person’s confidential information.3 As a result of

Manheim’s status as Bamford’s trusted financial and business advisor, Bamford routinely

provided Manheim with confidential information. Between 2015 and 2018, Manheim had

deep familiarity with Bamford’s personal affairs, regularly assisted Bamford with tax

issues, and communicated with Bamford’s accountants. Indeed, Bamford listed Manheim

as his financial advisor with his accountants, giving Manheim the ability to access

3
Total Care Physicians, P.A. v. O’Hara, 798 A.2d 1043, 1058 (Del. Super. 2001);
see Breakaway Sols., Inc. v. Morgan Stanley & Co., 2005 WL 3488497, at *2–3 (Del. Ch.
Dec. 8, 2005) (inferring at pleading stage that fiduciary relationship existed between
underwriters and client where complaint alleged that client provided underwriters with
“confidential and proprietary information,” that underwriters “had superior knowledge,
information and experience concerning the underwriting and IPO process,” and that client
“relied upon the Defendants’ expertise” (internal quotation marks and alterations omitted));
see also McMahon v. New Castle Assocs., 532 A.2d 601, 605 (Del. Ch. 1987) (noting
absence of any “element of confidentiality” in determining that parties had a
“straightforward commercial relationship”).

20
Bamford’s financial information directly and provide his accountants with instructions and

advice. Bamford regularly and openly shared confidential financial information with

Manheim with the expectation that Manheim would use the information to provide him

with advice. After Bamford questioned Manheim’s actions in connection with the events

giving rise to this case, Manheim demonstrated that he possessed confidential information

about Bamford’s finances by threatening Bamford with adverse tax consequences unless

he acquiesced to Manheim’s conduct. See Compl. ¶ 31.

A third factor indicating a fiduciary relationship is when a person has “superior

knowledge and experience” on which another person relies.4 The complaint pleads that

Bamford “was relatively unsophisticated with respect to complex business structures,

financing and tax-related issues, and Manheim had superior knowledge, information and

experience with respect to such structures, financing and tax issues.” Compl. ¶ 27. The

complaint pleads at length that Manheim acted as Bamford’s trusted financial and business

advisor. It also pleads that Manheim structured financial transactions for Bamford and

4
Breakaway, 2005 WL 3488497, at *3; see Petenbrink v. Superior Home Builders,
Inc., 1999 WL 1223786, at *2 (Del. Super. Nov. 1, 1999) (“[W]here the party in whom
trust and confidence is placed has superior knowledge of or a high degree of expertise in
the matter covered by the contract, then the relationship between those parties is fiduciary
in nature.” (internal quotation marks omitted)); 37 C.J.S. Fraud § 8, Westlaw (database
updated Feb. 2020) (“A fiduciary or confidential relationship is characterized by a unique
degree of trust and confidence between the parties, one of whom has superior knowledge,
skill, or expertise and is under a duty to represent the interests of the other.”); see also
Solutia Inc. v. FMC Corp., 456 F. Supp. 2d 429 (S.D.N.Y. 2006) (explaining New York
law recognizes that “a fiduciary duty may arise from a business transaction where
defendant had superior expertise or knowledge about some subject . . .” (internal quotation
marks omitted)).

21
assisted Bamford with tax and accounting issues. These allegations provide support for a

reasonable inference that Bamford was less sophisticated than Manheim and relied on

Manheim’s superior knowledge and expertise. According to the complaint, Bamford relied

on Manheim to such a degree that if Manheim ever wanted Bamford to sign a document,

he could send it to Bamford’s assistant. The assistant would give it to Bamford, who would

routinely sign documents in reliance on his relationship with Manheim. See id. ¶ 32.

The final factor for purposes of this case is Manheim and Bamford’s lengthy

friendship, which reached a level of familial intimacy. “[M]ere personal friendship” is not

sufficient to establish a fiduciary relationship. Clark v. Davenport, 2019 WL 3230928, at

*15 (Del. Ch. July 18, 2019). But close friendships that resemble familial relationships can

take on a fiduciary character. See White, 1977 WL 9612, at *4; Swain, 71 A.2d at 267.

At the pleading stage, the complaint’s allegations of a deep and intimate friendship

are sufficiently strong to contribute to an inference of a fiduciary relationship. Bamford

and Manheim have known each other for more than twenty-five years and were best friends

for the better part of nineteen years. During that time, they developed “a relationship that

was closer than most brothers.” Compl. ¶ 26. They met when Bamford was sixteen years

old, and Manheim was dating Bamford’s sister. When Bamford was twenty-one, he joined

Alcoholics Anonymous, and Manheim acted as his sponsor for the next decade. They

regularly socialized and vacationed together. They were so close that Manheim and his

wife spent their honeymoon vacationing with Bamford. Their families became close as

well. Manheim served as the godfather to Bamford’s children, who called Manheim “Uncle

22
Joe.” Bamford likewise served as the godfather to Manheim’s children, who used the same

term of affection to refer to Bamford.

Taken as a whole, these allegations support a reasonable inference of a fiduciary

relationship. Manheim served as Bamford’s financial advisor. He exercised control over

significant assets and oversaw Bamford’s personal finances. Bamford trusted and relied on

Manheim, who had superior knowledge and expertise. All of their interactions took place

in the context of a close and intimate friendship that reached a familial level.

To defeat this pleading-stage inference, Manheim cites a representation in the

Financial Acknowledgments of the Contribution Agreement that states, “[Bamford] has

knowledge and experience in financial, tax and business matters to enable [Bamford] to

evaluate the merits and risks of the contribution in Penfold and to make an informed

decision about the contribution.” CA § 3.2.a. That statement is a single representation in a

single agreement for a single transaction. Manheim structured the transaction, prepared the

Contribution Agreement, and convinced Bamford to sign it. At most, it addresses

Bamford’s competence in financial, tax, and business matters, not the extent to which he

relied on Manheim or whether Manheim acted as Bamford’s fiduciary.

To infer from a single representation in the agreement at the heart of this lawsuit

that Bamford did not place special trust in Manheim would require the court to draw a

pleading-stage inference in favor of Manheim. At the pleading stage, the plaintiffs benefit

from all reasonable inferences. In this case, a reasonable inference can be drawn that

Manheim exploited his fiduciary relationship with Bamford by asking him to sign the

Contribution Agreement, which Bamford did in reliance on the person he trusted.

23
 The complaint thus pleads a reasonable inference that Manheim was Bamford’s

fiduciary. Manheim did not move to dismiss Count VII on any grounds other than the

failure to plead a fiduciary relationship. Therefore, the motion to dismiss as to Count VII

is denied.

B. Counts VIII And IX: The Plaintiffs’ Personal Claims Against Manheim For
Common Law Fraud

In Counts VIII and IX, the plaintiffs assert personal claims against Manheim for

common law fraud. Ban advances a claim of fraud based on the characterization of his

compensation as a loan. Both Bamford and Ban assert claims of fraud that challenge the

Reorganization.

To state a claim for common law fraud, a complaint must plead the following

elements:

1) a false representation, usually one of fact, made by the defendants;

2) the defendant’s knowledge or belief that the representation was false,
or was made with reckless indifference to the truth;

3) an intent to induce the plaintiff to act or to refrain from acting;

4) the plaintiff’s action or inaction taken in justifiable reliance upon the
representation; and

5) damage to the plaintiff as a result of such reliance.

Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1074 (Del. 1983). The first element can

be satisfied if a defendant deliberately conceals a material fact or remains silent about a

material fact in the face of a duty to speak. Id.; accord Nicolet, Inc. v. Nutt, 525 A.2d 146,

149 (Del. 1987).

24
 Under Court of Chancery Rule 9(b), “[i]n all averments of fraud or mistake, the

circumstances constituting fraud or mistake shall be stated with particularity. Malice,

intent, knowledge and other condition of mind of a person may be averred generally.”

“Court of Chancery Rule 9(b) is identical to Federal Rule of Civil Procedure 9(b).” Desert

Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199, 1208

n.15 (Del. 1993). When interpreting Court of Chancery Rule 9(b), Delaware courts have

relied on both state and federal authorities.5

A leading treatise on the Federal Rules of Civil Procedure summarizes the

particularity requirement as follows:

The innumerable federal cases on the subject of alleging fraud suggest that it
is prudent for the practicing lawyer to plead all of the elements of fraud and
to do so in some detail—whenever that is possible—even though some of
them actually are not the “circumstances” to which Rule 9(b) applies. In point
of fact, the reference to “circumstances” in the rule is to matters such as the
time, place, and contents of the false representations or omissions, as well as
the identity of the person making the misrepresentation or failing to make a
complete disclosure and what that defendant obtained thereby. A formulation
popular among courts analogizes the standard to “the who, what, when,
where, and how: the first paragraph of any newspaper story.”

5A Arthur R. Miller et al., Federal Practice and Procedure § 1297 (4th ed.), Westlaw

(database updated Aug. 2019) [hereinafter Wright & Miller] (footnotes omitted). “A

5
See, e.g., id. at 1208; Quadrant Structured Prods. Co., Ltd. v. Vertin (Quadrant I),
102 A.3d 155, 198 (Del. Ch. 2014); Trenwick Am. Litig. Tr. v. Ernst & Young, L.L.P., 906
A.2d 168, 208 n.112 (Del. Ch. 2006), aff’d sub nom. Trenwick Am. Litig. Tr. v. Billett, 931
A.2d 438 (Del. 2007) (TABLE); Joyce v. RCN Corp., 2003 WL 21517864, at *3 n.12 (Del.
Ch. July 1, 2003); State ex rel. Brady v. Publ’rs Clearing House, 787 A.2d 111, 115 & n.13
(Del. Ch. 2001); York Linings v. Roach, 1999 WL 608850, at *2 & n.8 (Del. Ch. July 28,
1999).

25
pleading that simply alleges the technical elements of fraud without providing such

underlying supporting details will not satisfy the rule’s pleading-with-particularity

requirements.” Id. The “most basic consideration” when evaluating particularity is “how

much detail is necessary to give adequate notice to an adverse party and to enable that party

to prepare a responsive pleading.” Id. § 1298.

Delaware follows these principles and generally calls upon plaintiffs to frame their

allegations using the newspaper-story format by alleging “(1) the time, place, and contents

of the false representation; (2) the identity of the person making the representation; and (3)

what the person intended to gain by making the representations.” Abry P’rs V, L.P. v. F &

W Acq. LLC, 891 A.2d 1032, 1050 (Del. Ch. 2006). Yet Delaware law also recognizes that

“[t]he test of whether an attempted pleading of fraud states sufficient ‘circumstances’ to

satisfy Rule 9 is not scientific.” Kahn Bros. & Co., Inc. Profit Sharing Plan & Tr. v.

Fischbach Corp., 1989 WL 109406, at *4 (Del. Ch. Sept. 19, 1989). As Chancellor Allen

explained, “Generally, it may be said that an allegation of fraud is legally sufficient under

Rule 9(b) if it informs defendants of the precise transactions at issue, and the fraud alleged

to have occurred in those transactions, so as to place defendants on notice of the precise

misconduct with which they are charged.” Id. (internal quotation marks and alterations

omitted). Put differently, “the plaintiff is required to allege the circumstances of the fraud

with detail sufficient to apprise the defendant of the basis for the claim.” Abry, 891 A.2d

at 1050; accord H-M Wexford LLC v. Encorp., 832 A.2d 129, 145 (Del. Ch. 2003). “[A]

plaintiff need not allege evidentiary details.” Cont’l Ill. Nat’l Bank & Tr. Co. of Chicago

v. Hunt Int’l Res. Corp., 1987 WL 55826, at *6 (Del. Ch. Feb. 27, 1987).

26
 In the current case, the defendants’ principal arguments about the complaint’s lack

of particularity turn on its failure to identify a precise date, time, and place when the false

representations were made. As to these issues,

Delaware courts have adopted the reasoning of the Third Circuit in [Seville
Industrial Machinery Corp. v. Southmost Machinery Corp., 742 F.2d 786 (3d
Cir. 1984)] and consistently found that the date, place, and time allegations
are not required so long as the pleadings put defendants on notice of the
misconduct with which they are charged and protect defendants against false
charges of immoral or fraudulent behavior.

Yavar Rzayev, LLC v. Roffman, 2015 WL 5167930, at *4 (Del. Super. Aug. 31, 2015)

(collecting authorities); accord LVI Gp. Invs., LLC v. NCM Gp. Hldgs., LLC, 2017 WL

1174438, at *4 (Del. Ch. Mar. 29, 2019) (“[L]ack of specificity as to date, place, and time

are not fatal, provided that the pleadings put defendants on sufficient notice of the actual

misconduct with which they are charged.”). “[A]n excessive focus on particularity [as to

these matters] could impair the flexibility and the just determination of cases.” Sammons

v. Hartford Underwriters Ins. Co., 2010 WL 1267222, at *4 (Del. Super. Apr. 1, 2010).

1. Ban’s Fraud Claim About His Compensation

Ban claims that in early 2017, Manheim fraudulently induced him to characterize

the salary he had received in 2015 and 2016 as a loan from DVRC. Manheim told Ban that

DVRC would forgive his loan, thereby generating a tax loss for DVRC that would be

passed through to its members. Manheim said that he was characterizing his own salary in

the same way. See Compl. ¶¶ 67–68. Manheim issued Form 1099s to Ban that documented

the loan forgiveness, and as late as September 2017, made tax filings that treated the

compensation DVRC paid to Ban and other executives as loans that had been written off.

27
See id. ¶ 69. In 2018, however, after Ban began objecting to Manheim’s actions, Manheim

reversed the write-offs, and he subsequently caused DVRC to sue Ban in this action to

recover the purported loans. See id. ¶ 70. Ban alleges that he relied on Manheim’s

representations to his detriment by giving up compensation to which he was entitled and

subjecting himself to the loan claim. See id. ¶ 71.

These allegations are sufficiently particularized to give Manheim fair notice about

the specific nature of the charges against him so that he can frame a responsive pleading.

As a result, the allegations fulfill the core purpose of Rule 9(b). Ban has not identified a

precise date, time, and place when Manheim made the misrepresentations, nor has he

attempted to put specific words into Manheim’s mouth, but he has described the time frame

and the substance of the representations in sufficient detail so that Manheim has fair notice

of the allegations against him. Ban has also made specific references to tax filings, such as

Form 1099s and a tax filing by DVRC in September 2017. Manheim is not facing vague

or generalized charges of immoral or fraudulent behavior. He knows what Ban contends

that he did. He can admit or deny it in a responsive pleading, gather information to defend

himself, and frame appropriate discovery.

Other than relying on Rule 9(b), Manheim does not identify any other grounds for

dismissing Ban’s fraud claim based on his compensation. Accordingly, the motion to

dismiss as to Count IX is denied as to this aspect of Ban’s fraud claim.

28
 2. The Plaintiffs’ Fraud Claims Based On Oral Misrepresentations
About The Reorganization

Both Ban and Bamford claim that Manheim made oral representations that induced

them to enter into the Reorganization. Manheim responds that their allegations are not

sufficiently particularized. He also contends that Ban and Bamford disclaimed any reliance

on oral misrepresentations.

a. Ban’s Claim Is Sufficiently Particularized.

Ban alleges that to induce him to enter into the Reorganization, Manheim told him

that Penfold’s general partner would be jointly owned and controlled by Bamford, Ban,

and Manheim. See Compl. ¶ 46. He alleges that Manheim made the representation in

“multiple one-on-one conversations between early and mid-2016.” Id. ¶ 45; see id. ¶ 178.

The complaint also alleges that

Manheim agreed to Ban’s requirements of joint ownership and control. Also
in one-on-one conversations between early and mid-2016, Manheim agreed
with Ban that no governing documents would be finalized without sign-off
by each of Ban and Bamford. Indeed, Manheim assured Ban in 2016 that no
final documents were in place, and that the three partners would only settle
on final documents and structure for Penfold and its General Partner if all
three of them could agree on such structure.

Id. ¶ 49; see id. ¶ 178.

As with Ban’s allegations about his compensation, these allegations are sufficiently

particularized to give Manheim fair notice about the specific charges against him so that

he can frame a responsive pleading. The allegations thus fulfill the core purpose of Rule

9(b). Here again, Ban has not identified a precise date, time, and place when the

representations took place, but he has provided a detailed description of the nature of

29
Manheim’s statements and adequate context to inform Manheim about what Ban contends

he did. Manheim is not facing vague or generalized charges of immoral or fraudulent

behavior. As with the loan charges, Manheim has fair notice of the nature of Ban’s

allegations, can admit or deny them in a responsive pleading, can gather information to

defend himself, and can frame appropriate discovery.

These allegations are sufficient to meet the particularity requirement. Rule 9(b) does

not provide grounds for dismissing this aspect of Ban’s fraud claim.

b. Bamford’s Claim Is Sufficiently Particularized.

Like Ban, Bamford claims that Manheim made oral representations that induced

him to enter into the Reorganization, but Bamford’s claim differs from Ban’s. According

to Bamford,

In one-on-one telephone calls and one or more face-to-face conversations in
the first half of 2016, Manheim told Bamford he had to contribute his
interests in DVRC to a new limited partnership, Penfold, which would
effectively act as a holding company. Manheim falsely represented that this
transfer was necessary to promote the health of DVRC, to protect Bamford’s
economic and voting interests, to make the investment more tax efficient,
and because of imminent legislation restricting the ability of foreign
nationals to exercise control over [companies in the same business] as DVRC
....

Compl. ¶ 54. Bamford later contends that Manheim’s “misrepresentations included that the

transfer of Bamford’s interests in DVRC was necessary to promote the health of DVRC,

to protect Bamford’s economic and voting interests, and to make the investment more tax

efficient.” Id. ¶ 170. Bamford further asserts Manheim made oral representations about

imminent federal legislation in order to fraudulently induce Bamford to waive the

conversion feature in WestCo’s debt. Id. ¶ 64.

30
 These allegations are sufficiently particularized. They detail the specific content of

Manheim’s misrepresentations, the time frame when they occurred, and the medium (one-

on-one phone calls). Bamford has not identified a precise date and time when the

representations took place, but he has provided a detailed description of Manheim’s

statements and ample context. Here again, Manheim is not facing vague or generalized

charges of immoral or fraudulent behavior. He has fair notice of the nature of Bamford’s

allegations against him, can either admit or deny them in a responsive pleading, can gather

information to defend himself, and can frame appropriate discovery.

These allegations are sufficient to meet the particularity requirement. Rule 9(b) does

not provide grounds for dismissing this aspect of Bamford’s fraud claim.

c. The Financial Acknowledgments

To state a claim for common law fraud, a plaintiff must allege reasonable reliance

on the false representations. Manheim argues that even if he made false oral representations

to the plaintiffs, they cannot plead reasonable reliance because in the Financial

Acknowledgements, they represented that Manheim had not made any oral representations.

Sophisticated parties bargaining at arms’ length can agree to limit the information

on which they have relied to the written representations in the contract, and such a provision

will be enforced. Prairie Capital III, L.P. v. Double E Hldg. Corp., 132 A.3d 35, 50 (Del.

Ch. 2015). A sophisticated party cannot promise in a written agreement “that it will not

rely on promises and representations outside of the agreement and then shirk its own

bargain in favor of a ‘but we did rely on those other representations’ fraudulent inducement

claim.” Abry, 891 A.2d at 1057.

31
 For sophisticated parties to achieve this result, their contract “must contain language

that, when read together, can be said to add up to a clear anti-reliance clause by which the

plaintiff has contractually promised that it did not rely upon statements outside the

contract’s four corners in deciding to sign the contract.” Kronenberg v. Katz, 872 A.2d 568,

593 (Del. Ch. 2004). “[A] specific formula, such as the two words ‘disclaim reliance,’” is

not required. Prairie Capital, 132 A.3d at 51 (quoting Anvil Hldg. Corp. v. Iron Acq. Co.,

Inc., 2013 WL 2249655, at *8 (Del. Ch. May 17, 2013)). That said, “murky integration

clauses, or standard integration clauses without explicit anti-reliance representations, will

not relieve a party of its oral and extra-contractual fraudulent representations.” Abry, 891

A.2d at 1059.

In Anvil, this court held that a combination of provisions in a detailed stock purchase

agreement that had been negotiated at arms’ length between sophisticated parties was not

sufficiently specific to foreclose reliance on extra-contractual representations. 2013 WL

2249655, at *8. One provision stated that except for representations and warranties found

in the agreement, “neither the Company nor any Seller ‘makes any other express or implied

representation or warranty with respect to the Company . . . or any Seller or the transactions

contemplated by this Agreement.’” Id. (alteration in original). The other provision was a

standard integration clause. Id.

In Prairie Capital, this court held that a combination of provisions in a detailed

stock purchase agreement that had been negotiated at arms’ length between sophisticated

parties was sufficiently specific to foreclose reliance on extra-contractual representations.

132 A.3d at 50–51. The principal provision stated:

32
 The Buyer acknowledges that it has conducted to its satisfaction an
independent investigation of the financial condition, operations, assets,
liabilities and properties of the Double E Companies. In making its
determination to proceed with the Transaction, the Buyer has relied on (a)
the results of its own independent investigation and (b) the representations
and warranties of the Double E Parties expressly and specifically set forth in
this Agreement, including the Schedules. SUCH REPRESENTATIONS
AND WARRANTIES BY THE DOUBLE E PARTIES CONSTITUTE THE
SOLE AND EXCLUSIVE REPRESENTATIONS AND WARRANTIES
OF THE DOUBLE E PARTIES TO THE BUYER IN CONNECTION
WITH THE TRANSACTION, AND THE BUYER UNDERSTANDS,
ACKNOWLEDGES, AND AGREES THAT ALL OTHER
REPRESENTATIONS AND WARRANTIES OF ANY KIND OR
NATURE EXPRESS OR IMPLIED (INCLUDING, BUT NOT LIMITED
TO, ANY RELATING TO THE FUTURE OR HISTORICAL FINANCIAL
CONDITION, RESULTS OF OPERATIONS, ASSETS OR LIABILITIES
OR PROSPECTS OF DOUBLE E AND THE SUBSIDIARIES) ARE
SPECIFICALLY DISCLAIMED BY THE DOUBLE E PARTIES.

Id. at 50 (internal quotation marks omitted). The stock purchase agreement then backed up

this provision with a standard integration clause. Id.

In this case, the pertinent language in the Financial Acknowledgments states that

“Parties and Parties’ representatives have had the opportunity to ask questions to, and

receive answers from Penfold or a representative of Penfold concerning Parties’

contribution in . . . Penfold” and that “[n]o oral representations have been made or oral

information furnished to Parties or Parties’ representatives in connection with Parties’

contribution in Penfold.” CA § 3.2.c. The Contribution Agreement also contains a standard

integration clause. See id. § 2.2.

These provisions more closely resemble the inadequate combination in Anvil than

the clearer, more detailed, and ultimately sufficient combination in Prairie Capital. The

33
closer resemblance to the Anvil provisions counsels in favor of not dismissing the plaintiffs’

fraud claims at the pleading stage.

More importantly, it is reasonable to infer in this case that the provisions were not

negotiated at arms’ length by sophisticated parties in a context where both sides were fully

aware of the implications of agreeing to contractual limitations on the scope of the

information that the plaintiffs had received. The contractual freedom to craft contracts that

insulate parties from false statements extends only to sophisticated parties.6 It is not a

license for wily actors to take advantage of their fellow citizens.7

6
See, e.g., Abry, 891 A.2d at 1035 (“Delaware law permits sophisticated
commercial parties to craft contracts that insulate a seller from a rescission claim for a
contractual false statement of fact that was not intentionally made.”); id. at 1061 (“We also
respect the ability of sophisticated businesses, such as the Buyer and Seller, to make their
own judgments about the risk they should bear and the due diligence they undertake,
recognizing that such parties are able to price factors such as limits on liability.”); id. at
1061–62 (“[T]he common law ought to be especially chary about relieving sophisticated
business entities of the burden of freely negotiated contracts.”); H-M Wexford, 832 A.2d at
142 n.18 (“[S]ophisticated parties to negotiated commercial contracts may not reasonably
rely on information that they contractually agreed did not form a part of the basis for their
decision to contract.”).
7
See Norton v. Poplos, 443 A.2d 1, 6–7 (Del. 1982) (rejecting argument that merger
clause prevented a potential buyer of a building from relying on a misrepresentation as to
zoning); Webster v. Palm Beach Ocean Realty Co., 139 A. 457, 460 (Del. Ch. 1927)
(holding in case involving an unsophisticated party that “[a] perpetrator of fraud cannot
close the lips of his innocent victim by getting him blindly to agree in advance not to
complain against it”); see also MBIA Ins. Corp. v. Royal Indem. Co., 426 F.3d 204, 214–
18 (3d Cir. 2005) (discussing Norton and distinguishing between sophisticated and
unsophisticated parties); Kronenberg, 872 A.2d at 590 (same); Great Lakes Chem. Corp.
v. Pharmacia Corp., 788 A.2d 544, 555 (Del. Ch. 2001) (same).

34
 For reasons discussed previously, the complaint pleads facts which support the

reasonable inferences that Manheim acted as Bamford’s fiduciary and that Bamford relied

on his greater sophistication in business matters. Ban also had ample reasons to trust

Manheim, including their status as long-time business partners and co-founders of DVRC.

The pled facts suggest that the parties did not approach the Reorganization as a negotiated

transaction in which they were bargaining at arms’ length. The complaint adequately pleads

that Manheim pitched the Reorganization as a mere reshuffling of their ownership interests

that resulted in a change in form, not of substance. The Contribution Agreement itself

reflects the informal nature of the transaction. Unlike the lengthy and heavily lawyered

stock purchase agreements at issue in Anvil and Prairie Capital, the Contribution

Agreement is a two-page document with just one implementing clause. At the pleading

stage, there does not appear to be anything that would have put Bamford or Ban on notice

that they needed to shift out of a mode in which they could trust their business partner,

fiduciary, and friend and into the bare-knuckle world of adversarial negotiations.

The defendants attempt to establish that the plaintiffs are sophisticated by relying

on other statements in the Financial Acknowledgments. Those statements recite that

“Parties understands [sic] that Parties’ contribution in Penfold involves risk,” “Parties

understands [sic] all of the associated risks,” and the parties could “evaluate the merits and

risks of the contribution in Penfold and [could] make an informed decision about the

contribution.” CA § 3.2.a. At the pleading stage, it is reasonable to infer that Manheim

crafted these statements in an effort to insulate from challenge the very transaction in which

he took advantage of the trust of his friends and business partners. To rely on them

35
conclusively at the pleading stage would be to permit Manheim to insulate himself from

claims for fraud brought by less sophisticated individuals in a scenario where it is

reasonable to infer that the provisions themselves were the product of fraud.

At a later stage of the case, the evidence may show that the Financial

Acknowledgements should be given effect. At the pleading stage, they do not prevent the

plaintiffs from advancing their fraud claims based on oral misrepresentations.

3. The Plaintiffs’ Fraud Claim Based On The Ownership Recital

Both plaintiffs assert that a recital in the Contribution Agreement misled them into

believing that they would jointly control Penfold with Manheim. The recital in question

stated: “[E]ach of Parties is the record and beneficial owners of 1/3 of all of the share

capital, securities, shares or other equity interests of any kind (collectively, Parties own

100% of Penfold) of Penfold.” Id. at 1 (the “Ownership Recital”). The plaintiffs have stated

a claim for fraud based on the Ownership Recital.

The plaintiffs contend that the Ownership Recital falsely implied that the three

principals collectively would own the holding company and control it, yet under the actual

Penfold structure, only Manheim and ReathCo serve as its general partners and have the

ability to control it. According to the picture painted by the complaint, Ban and Bamford

have not been given any meaningful rights in their capacities as limited partners of Penfold.

The Ownership Recital represents that the three principals—Ban, Bamford, and

Manheim—will share equal ownership of all of the “equity interests of any kind” in the

holding company. The Delaware Limited Partnership Act (the “LP Act”) describes the

equity interests in a limited partnership generally as the “partnership interest.” 6 Del. C. §

36
17-101(15). The overarching partnership interest is then divided between the limited

partners and the general partners or among different classes or groups of limited partners

and general partners in accordance with the terms of the limited partnership agreement.8

General partners and limited partners invariably have different governance rights, with the

former having the general power to manage the entity or participate in its management and

the latter having a more limited set of governance rights that typically encompasses the

8
See id. §§ 17-302 & 17-405. Numerous authorities on limited partnerships discuss
the division of the partnership interest into a general partnership interest and a limited
partnership interest. See, e.g., Sandra K. Miller & Karie Davis-Nozemack, Toward
Consistent Fiduciary Duties for Publicly Traded Entities, 68 Fla. L. Rev. 263, 268–69
(2016); John Goodgame, Master Limited Partnership Governance, 60 Bus. Law. 471, 471–
72 (2005); Robert W. Hamilton, Corporate General Partners of Limited Partnerships, 1 J.
Small & Emerging Bus. L. 73, 97 (1997); Conrad E.J. Everhard, The Limited Partnership
Interest: Is It A Security? Changing Times, 17 Del. J. Corp. L. 441, 446–52 (1992).
Numerous cases reflect this division. See, e.g., Lawrence v. Cohn, 932 F. Supp. 564, 567
(S.D.N.Y. 1996); In re Asian Yard P’rs, 1995 WL 1781675, at *1 (Bankr. D. Del. Sept.
18, 1995); In re Integrated Res., Inc., 1990 WL 325414, at *2 (Bankr. S.D.N.Y. Oct. 22,
1990); Allen v. El Paso Pipeline GP Co., L.L.C., 113 A.3d 167, 172 (Del. Ch. 2014), aff’d,
2015 WL 803053 (Del. 2015) (ORDER); Natural Energy Dev., Inc. v. Shakespeare-One
Ltd. P’ship, 2013 WL 3809250, at *3 (Del. Ch. July 22, 2013); Lonergan v. EPE Hldgs.,
LLC, 5 A.3d 1008, 1012 (Del. Ch. 2010); Sonet v. Timber Co., L.P., 722 A.2d 319, 321
(Del. Ch. 1998); Nuevo El Barrio Rehabilitacion De Vivienda y Economia, Inc. v. Moreight
Realty Corp., 907 N.Y.S.2d 438, 2009 WL 5895336, at *1 (N.Y. Sup. Ct. Nov. 16, 2009)
(TABLE) (subsequent history omitted); How Small Can a Partner’s Interest Be: Is 0.1%
(Or 0.01%) the ‘New’ 1%?, 114 J. Tax’n 186, 186 (2011); Michael L. Marchbanks, How
Should Dual Capacity Partners Be Treated for Income Tax Purposes?, 8 J. P’ship Tax’n
146, 147 (1990). Although a limited partnership agreement often expressly divides the
partnership interest into a limited partnership interest and a general partnership interest, the
distinction exists regardless of any formal delineation. Given the structure of a limited
partnership, and because of the inherent differences between limited partner and general
partner rights under the LP Act, there will invariably be a de facto division.

37
right to vote on particular issues or transactions. Limited partners have some voting rights

by default; others must be granted in the limited partnership agreement.9

The complaint supports a reasonable inference that the limited partners in Penfold

effectively have no governance rights, while the general partners have all of the governance

rights. It is reasonable to infer that for purposes of the Ownership Recital, the limited

partnership interests and the general partnership interests in Penfold are different kinds of

“equity interests.” The Ownership Recital represented that Bamford, Ban, and Manheim

would each own “1/3 of all of the . . . equity interests of any kind.” It is reasonable to infer

that the Ownership Recital was false because Bamford, Ban, and Manheim do not each

own “1/3 of all of the . . . equity interests of any kind.” Bamford, Ban, and Manheim each

own one-third of the limited partnership interest, but Manheim and ReathCo own all of the

general partnership interest. For the Ownership Recital to be correct, Bamford, Ban, and

Manheim would have to each own one-third of the general partnership interest in addition

to each owning one-third of the limited partnership interest.10

9
See 6 Del. C. §§ 17-211(b), 17-216(b), 17-219(b), 17-302(f), 17-801(2).
10
It is also reasonable to infer that the Ownership Recital was false because of its
representation that Bamford, Ban, and Manheim would own all of the equity of the holding
company. According to the complaint, Penfold has three limited partners (Bamford, Ban,
and Manheim) and two general partners (Manheim and ReathCo). If Manheim and
ReathCo own a portion of the partnership interest as general partners, then this leaves less
than 100% of the partnership interest to be divvied up among Bamford, Ban, and Manheim
as limited partners. It is therefore reasonable to infer that Bamford, Ban, and Manheim do
not each own one-third of the partnership interest. It is true that a limited partnership
agreement can admit limited partners or general partners who do not have a partnership
interest, meaning that there is a theoretical state of the world in which the Ownership
Recital could be accurate in this respect. See 6 Del. C. §§ 17-301(d) & 17-401(a). The

38
 The defendants argue against an inference of fraud by arguing that the Ownership

Recital only refers to economic rights and does not imply anything about management or

governance rights. According to the defendants, the plain meaning of the terms used in the

Ownership Recital—capital, securities, shares, and equity—all refer to an economic share

in an entity without any other connotations. They argue that the plaintiffs received their

due because as limited partners, they each receive a one-third interest in the economic

returns of the holding company.

This argument construes the Ownership Recital too narrowly. Equity interests

typically comprise a bundle of rights that includes both economic rights (like the right to

receive dividends or distributions) and governance rights (like the right to vote). That fact

is readily understood for shares of common stock in a corporation, which by default carry

the economic rights to receive dividends and the value of the residual claim in dissolution

while at the same time carrying governance rights that include the right to elect or remove

directors, the power to amend bylaws, and the right to vote on major corporate changes,

such as mergers, charter amendments, sales of all or substantially all assets, and

question at the pleading stage is not whether it is theoretically possible that the defendants
might prevail, but rather whether it is reasonably conceivable that the plaintiffs have a
claim. The plaintiffs are entitled to the reasonable inference at the pleading stage that the
Penfold partnership agreement did not admit general partners who did not receive any of
the partnership interest. The plaintiffs are therefore entitled to the reasonable inference at
the pleading stage that the Ownership Recital was false when it represented that Bamford,
Ban, and Manheim would own all of the equity of the holding company.

39
dissolution.11 A representation that three individuals will own all of the shares of a

corporation carries the connotation that they will jointly enjoy the benefit of its economic

success and jointly control all of its voting power. A representation that three individuals

will own all of the “equity interests of any kind” issued by the corporation would indicate

that if the corporation issued a class of voting shares and a class of non-voting shares, then

the individuals would collectively own both.

When drafting the Contribution Agreement, Manheim chose to frame the

Ownership Recital using terms from the corporate context—capital, securities, shares, and

equity. He further chose to make the representations that “collectively, Parties own 100%

of Penfold” and that each own “1/3 of all of the . . . equity interests of any kind.” It was

reasonable for the plaintiffs to believe that Ban, Bamford, and Manheim collectively would

own 100% of the equity of Penfold, with each having an equal ability to influence the

direction of the entity by voting at the equity-holder level or otherwise exercising

governance rights. For purposes of a limited partnership, Ban and Bamford could

reasonably infer that together, they would own 66 2/3% of the limited partnership interest

and 66 2/3% of the general partnership interest. At a minimum, as the holders of two-thirds

of the entity’s s voting power, they would be able to exercise meaningful governance rights.

11
See, e.g., 8 Del. C. § 109(a) (bylaws); id. § 141(k) (removal of directors); id. §
216(2) (electing directors); id. § 242(b)(1) (amendments to the certificate of incorporation);
id. § 251(c) (mergers); id. § 275(b) (dissolution).

40
Instead, according to the complaint, they found themselves locked into Penfold as limited

partners without any meaningful governance rights.

The complaint thus supports a reasonable inference that the Ownership Recital was

false. It can provide the basis for a claim of common law fraud.

4. The Plaintiffs’ Claim That Manheim Remained Silent In The
Face Of A Duty To Speak

Ban and Bamford both contend that when asking them to go along with the

Reorganization, Manheim “failed to disclose material facts that he was under a legal

obligation to disclose.” Compl. ¶¶ 173, 180. Both assert that Manheim failed to disclose

“that the real purpose behind the agreement was to ensure that Manheim would have full

control over the DVRC Entities” and that if Ban and Bamford “entered into the

[Contribution Agreement and related documents], [their] economic, voting, and other

rights would be harmed.” Id. Ban additionally contends that Manheim failed to disclose

that “he would unilaterally create the structure for his own benefit.” Id. ¶ 180. Bamford

contends that Manheim failed to disclose “that Manheim had previously set up Penfold and

made himself and [ReathCo] the only general partners.” Id. ¶ 173.

“Generally, a duty to disclose arises when there is a fiduciary or other similar

relationship of trust between the parties or where the custom or course of dealing between

the parties merits disclosure.” MetCap Sec. LLC v. Pearl Senior Care, Inc., 2007 WL

1498989, at *5 (Del. Ch. May 16, 2007); see Matthews Office Designs, Inc. v. Taub Invs.,

647 A.2d 382, 382 (Del. 1994) (TABLE). At the time of the Reorganization, Manheim

owed fiduciary duties to Bamford and Ban in multiple capacities. First, in his role as

41
Bamford’s trusted financial and business advisor and close friend, Manheim was a

fiduciary for Bamford personally. See Part II.A, supra. Second, as a director of WestCo,

Manheim owed a duty to provide full information to Bamford and Ban in their capacities

as fellow members of the WestCo Board.12 Third, as an officer of DVRC, Manheim owed

a duty to provide full information to Bamford and Ban in their capacities as members of

the WestCo Board.13 Fourth, as the party that controlled WestCo, the managing member of

12
See Thorpe v. CERBCO, Inc., 676 A.2d 436, 442 (Del. 1996) (holding that where
directors were approached about a purchase of a corporate asset, they “should have
informed the CERBCO board” and “breached [their] duty of loyalty” by not informing
their fellow directors); In re Emerging Commc’ns Inc. S’holders Litig., 2004 WL 1305745,
at *34 (Del. Ch. May 3, 2004, revised June 4, 2004) (holding that “[f]or [a director] to have
participated in the board’s . . . deliberations [on a transaction] and vote as an ECM director
without disclosing this contemporaneously negotiated compensation arrangement, was
misleading to [his] fellow directors and a breach of his fiduciary duty owed to them and to
ECM”); Hollinger Int’l, Inc. v. Black, 844 A.2d 1022, 1061 (Del. Ch. 2004) (holding that
director “violated his fiduciary duty of loyalty by, among other acts . . . misleading his
fellow directors about his conduct and failing to disclose his dealings with the Barclays,
under circumstances in which full disclosure was obviously expected”); HMG/Courtland
Props., Inc. v. Gray, 749 A.2d 94, 119 (Del. Ch. 1999) (explaining that directors have an
“unremitting obligation to deal candidly with their fellow directors” (internal quotation
marks omitted)); Hoover Indus., Inc. v. Chase, 1988 WL 73758, at *2 (Del. Ch. July 13,
1988) (“The intentional failure or refusal of a director to disclose to the board a defalcation
or scheme to defraud the corporation of which he has learned, itself constitutes a wrong . .
. .”); see also Am. L. Inst., Principles of Corporate Governance: Analysis and
Recommendations § 5.02(a)(1) cmt. (1994) (“A director or senior executive owes a duty to
the corporation not only to avoid misleading it by misstatements and omissions, but
affirmatively to disclose the material facts known to the director or senior executive.”).
13
See Mills Acq. Co. v. Macmillan, Inc., 559 A.2d 1261, 1283 (Del. 1989) (holding
that chairman and CEO breached his fiduciary duty through “knowing concealment” of
information “at the critical board meeting” in light of the “duty of disclosure under the
circumstances”); Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 781 (Del. Ch. 2016)
(“Officers also have a duty to provide the board of directors with the information that the
directors need to perform their statutory and fiduciary roles.”), abrogated on other grounds
by Tiger v. Boast Apparel, Inc., 214 A.3d 933 (Del. 2019); Bomarko, Inc. v. Int’l

42
DVRC, Manheim owed a fiduciary duty to Bamford and Ban as members of DVRC. See

USACafes, 600 A.2d at 48.

The parties dispute what information Manheim had a duty to disclose. Both sides

analogize to standards used for directors of a corporation where the “scope and

requirements” of the duty to disclose “depend on context.” In re Wayport, Inc. Litig., 76

A.3d 296, 314 (Del. Ch. 2013).

The plaintiffs argue that the Reorganization was analogous to “a request for

stockholder action,” i.e. “[w]hen directors submit to the stockholders a transaction that

requires stockholder approval (such as a merger, sale of assets, or charter amendment) or

which requires a stockholder investment decision (such as tendering shares or making an

appraisal election).” Id. In that setting, directors have a duty to “exercise reasonable care

Telecharge, Inc., 794 A.2d 1161, 1187 (Del. Ch. 1999) (observing that corporation had a
“strong claim” against Chairman and CEO for failing to disclose his interest in a transaction
to the board); see also In re Walt Disney Co. Deriv. Litig., 907 A.2d 693, 760 (Del. Ch.
2005) (criticizing CEO for failing to keep directors informed about hiring and termination
of president), aff’d, 906 A.2d 27 (Del. 2006); cf. Hampshire Gp., Ltd. v. Kuttner, 2010 WL
2739995, at *34 (Del. Ch. July 12, 2010) (“[W]hen a corporate officer is aware of financial
misreporting that involves high-level management and that has evaded the corporation’s
auditors, and nonetheless certifies that he is not aware of any material weakness in the
company’s internal controls, he is making a false statement and failing to bring material
information to the board, in breach of his duty of loyalty.”); Ryan v. Gifford, 935 A.2d 258,
272 (Del. Ch. 2007) (holding that complaint stated claim for breach of the duty of loyalty
against CFO and vice president who knew about backdating but “kept silent”). See
generally Restatement (Third) of Agency § 8.11 (Am. L. Inst. 2006) (describing agent’s
duty to provide principal with facts that the agent knows); Donald C. Langevoort, Agency
Law Inside the Corporation: Problems of Candor and Knowledge, 71 U. Cin. L.Rev. 1187,
1191–1208 (2003) (discussing duty of candor for officers under agency principles and
corporate law).

43
to disclose all facts that are material to the stockholders’ consideration of the transaction .

. . .” Id. (internal quotation marks omitted). “‘An omitted fact is material if there is a

substantial likelihood that a reasonable stockholder would consider it important in deciding

how to vote.’” Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985) (quoting TSC

Indus. v. Northway, 426 U.S. 438, 449 (1976)); accord Morrison v. Berry, 191 A.3d 268,

282 (Del. 2018).

Manheim argues that the Reorganization was analogous to a situation in which “a

corporate fiduciary buys shares directly from or sells shares directly to an existing outside

stockholder.” Wayport, 76 A.3d at 315. In that scenario, a director has a fiduciary duty to

disclose information in the context of a private stock sale “only when a director is possessed

of special knowledge of future plans or secret resources and deliberately misleads a

stockholder who is ignorant of them.” Lank v. Steiner, 224 A.2d 242, 244 (Del. 1966); see

Wayport, 76 A.3d at 315.

Given the different fiduciary capacities in which Manheim acted, it is not clear to

me that a director’s duty to disclose information to stockholders provides the appropriate

legal analogy. But accepting the parties’ framework for purposes of this decision, the

Reorganization is analogous to a request for stockholder action. By asking the plaintiffs to

participate in the Reorganization, Manheim asked the plaintiffs to exchange their equity

interests in DVRC for equity interests in Penfold. That transaction was comparable to an

44
exchange offer, which constitutes a request for stockholder action where the duty to

disclose all material information applies.14

Under that standard, it is reasonable to infer that the governance structure of Penfold

was material information. A reasonable investor in Bamford and Ban’s position would have

considered it important to know that Manheim would control Penfold and through it,

DVRC. A reasonable investor in Bamford and Ban’s position would also have considered

it important to know that they would not own any of the general partnership interest in

Penfold or have any influence over the identity of the general partner.15

The Reorganization is not analogous to a direct purchase of shares where the special

facts doctrine would apply. Manheim did not offer to buy the plaintiffs’ interests in DVRC.

Had he done so, then the stark context of that scenario would have made clear to the

14
See, e.g., Gradient OC Master, Ltd. v. NBC Universal Inc., 930 A.2d 104, 129
(Del. Ch. 2007) (explaining that duty of disclosure applies when a board requests
stockholder action, as when making a recommendation in connection with an exchange
offer); Raskin v. Birmingham Steel Corp., 1990 WL 193326, at *5 (Del. Ch. Dec. 4, 1990)
(explaining that “[t]he state law duty of candor arises when the board elects to or has a duty
to seek shareholder action” and identifying as an example “in a tender offer or exchange
offer”); see also Pfeffer v. Redstone, 965 A.2d 676, 685 (Del. 2009) (analyzing claim for
breach of duty of disclosure in connection with exchange offer).
15
The defendants argue that the disclosures the plaintiffs seek would amount to self-
flagellation, which Delaware law does not require. The complaint frames the omitted facts
tendentiously, but the allegations boil down to a claim that Manheim failed to inform the
plaintiffs about the governance structure of Penfold, including the fact that he would
control the entity and that they would not have any governance rights. That is factual
information that could have been disclosed in neutral terms. It did not require self-
flagellation. It might not have reflected well on Manheim, but that is only because
(according to the complaint) he was radically changing the governance structure of the
entity in a self-interested manner and to the detriment of his business partners.

45
plaintiffs that Manheim had shifted into an adversarial posture and was bargaining at arm’s

length such that they could not expect him to be acting collaboratively as their trusted

business partner and long-time fiduciary. Rather than proceeding openly in that fashion,

Manheim portrayed the Reorganization as a change in the form of their business

relationship but not its substance. At the pleading stage, nothing about the transaction

appears likely to have put the plaintiffs on notice that Manheim had shifted into an

adversarial mode. Instead, the allegations of the complaint suggest that Manheim

encouraged the plaintiffs’ trust and took advantage of it. The special facts doctrine

therefore does not apply.

Manheim also contends any disclosures about his control over Penfold were

unnecessary because Penfold’s certificate of limited partnership was filed publicly with the

Delaware Secretary of State on March 18, 2016. See Dkt. 91 Ex. A. It listed ReathCo as

Penfold’s only general partner. Id. Manheim contends that “[i]t obviously is not fraud to

fail to disclose material information that one’s own investigation from public sources

provides.” Citron v. Steego Corp., 1988 WL 94738, at *7 (Del. Ch. Sept. 9, 1988).

The certificate of limited partnership did not put the plaintiffs on notice that

Manheim planned to assert full control over Penfold while depriving them of any

governance rights. To create a limited partnership, the certificate of formation must name

a general partner. See 6 Del. C. § 17-201(a)(3). The plaintiffs thus reasonably could have

inferred that Manheim named ReathCo as Penfold’s general partner to facilitate the

creation of the entity. Nothing about Penfold or its general partner was written in stone.

After the Reorganization, which took place three months later, Manheim could have

46
fulfilled the commitments he made orally and in the Ownership Recital by issuing interests

in ReathCo to the plaintiffs so that Manheim, Ban, and Bamford each owned one-third of

the equity and governance rights in that entity. Or the parties could have agreed in Penfold’s

limited partnership agreement to replace ReathCo with a different general partner that they

would own equally, or with themselves individually as general partners. See id. § 17-

401(b). If the identity of the general partner changed, then the parties simply would have

had to file an amended certificate of formation. See id. § 17-202. Other possible avenues

doubtless existed. What matters for present purposes is that the contents of Penfold’s

original certificate of formation did not pre-emptively satisfy Manheim’s duty of

disclosure.

Manheim also argues that the plaintiffs’ duty-to-speak claims are nothing more than

a re-framing of their affirmative claims for fraud and should be dismissed on that ground.

See Prairie Capital, 132 A.3d at 52. Although there is some overlap, there are also arguable

differences. In any event, the plaintiffs can plead in the alternative. See Ch. Ct. R. 8(a).

The plaintiffs have pled adequately that Manheim engaged in fraud by failing to

disclose material facts that he was under a legal obligation to disclose. The motion to

dismiss this aspect of the fraud claim is denied.

5. Damages

In his last argument for dismissal, Manheim contends that the plaintiffs failed to

plead damages with particularity. Even when a plaintiff asserts a fraud claim, damages do

not have to be pled with particularity. What has to be pled with particularity are “the

circumstances constituting fraud or mistake.” Ch. Ct. R. 9(b). Unless a complaint seeks

47
special damages, damages can be pled generally. Ch. Ct. R. 9(g). A plaintiff must plead

some harm, but “[p]roof of . . . damages and of their certainty need not be offered in the

complaint in order to state a claim.” Anglo Am. Sec. Fund, L.P. v. S.R. Glob. Int’l Fund,

L.P., 829 A.2d 143, 156 (Del. Ch. 2003).

The complaint adequately pleads that the plaintiffs suffered harm as a result of

Manheim’s fraud. Ban pleads that he lost compensation that was instead characterized as

a loan, and he is now facing a claim by DVRC to recover the loan. Ban and Bamford plead

that they entered into the Reorganization, thereby giving up membership interests in DVRC

that they otherwise would possess today. This is sufficient.

6. The Plaintiffs Have Stated Claims For Common Law Fraud.

Counts VIII and IX state claims for common law fraud. The defendants’ motion to

dismiss these claims is denied.

C. Counts XI And XII: The Plaintiffs’ Personal Claims Against Manheim For
Negligent Misrepresentation

In Counts XI and XII of the complaint, Bamford and Ban restate their claims for

common law fraud as claims for negligent misrepresentation. A claim for negligent

misrepresentation must satisfy all of the elements of a claim for common law fraud, except

that it substitutes negligence for scienter. Donald W. Wolfe & Michael A.

Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery §

2.03[b][1][iii], at 2-36 to -37 (2d ed. 2019) (collecting authorities). The particularity

48
requirement of Rule 9(b) applies equally to a claim for negligent misrepresentation. See

Otto Candies, LLC v. KPMG LLP, 2019 WL 994050, at *7 (Del. Ch. Feb. 28, 2019).

Under Delaware law, the threshold requirement for a claim of negligent

misrepresentation is the existence of either “(i) a special relationship between the parties

over which equity takes jurisdiction (like a fiduciary relationship) or (ii) justification for a

remedy that only equity can afford.” Fortis Advisors LLC v. Dialog Semiconductor PLC,

2015 WL 401371, at *9 (Del. Ch. Jan. 30, 2015). This decision has explained that when

speaking (or failing to speak) in connection with the Reorganization, Manheim was acting

as a fiduciary. See Part II.B.4, supra. The claims for common law fraud relating to the

Reorganization survived dismissal, and the element of scienter did not play a meaningful

role in the analysis. The analysis is therefore the same for the claims for negligent

misrepresentation that relate to the Reorganization. As to those claims, the motion to

dismiss Counts XI and XII is denied.

The outcome is different for Ban’s claim of fraud against Manheim based on his

compensation. Ban did not articulate any reason to think that Manheim was acting as a

fiduciary for Ban when convincing him to treat his compensation as a loan, nor is there any

reason to believe that a special equitable remedy (as opposed to damages) is required to

make Ban whole. Count XII is therefore dismissed to the extent it addresses Ban’s

compensation.

D. Count VI: The Plaintiffs’ Personal Claims For Conversion

In Count VI, the plaintiffs claim that Manheim wrongfully converted the plaintiffs’

membership interests in DVRC. This count states a claim on which relief can be granted.

49
 Conversion is “any distinct act of dominion wrongfully exerted over the property of

another, in denial of [the plaintiff’s] right, or inconsistent with it.” Drug, Inc. v. Hunt, 168

A. 87, 93 (Del. 1933); accord Arnold v. Soc’y for Saving Bancorp, Inc., 678 A.2d 533, 536

(Del. 1996). The types of property that can be converted include intangible property like

shares of stock.16

The defendants contend that membership interests in an LLC are different and

cannot be converted. That assertion runs contrary to a prior decision of this court, which

held that a defendant engaged in conversion by exercising unlawful dominion over the

membership interests in an LLC. See Perry v. Neupert, 2019 WL 719000, at *24–25 (Del.

Ch. Feb. 15, 2019). It also runs contrary to the broader trend in the treatment of intangible

property.

It was first held that the conversion of a document in which intangible rights
were merged permitted recovery of damages for the appropriation of the
rights so identified with it . . . . Then . . . it came to be recognized by a number
of courts that the recovery was for the interference with the intangible rights
themselves, and that the conversion of the document was merely the means
by which this was accomplished. The final step, which a good many courts
have taken, was the recognition that there may be “conversion” of such an

16
See Mastellone v. Argo Oil Corp., 82 A.2d 379, 382–83 (Del. 1951); Drug, 168
A. at 93; cf. Payne v. Elliot, 54 Cal. 339, 342 (Cal. 1880) (“It is, therefore, the ‘shares of
stock’ which constitute the property which belongs to the shareholder. Otherwise, the
property would be in the certificate; but the certificate is only evidence of the property; and
it is not the only evidence, for a transfer on the books of the corporation, without the
issuance of a certificate, vests title in the shareholder: the certificate is, therefore, but
additional evidence of title, and if trover is maintainable for the certificate, there is no valid
reason why it is not also maintainable for the thing itself which the certificate represents.”).

50
 intangible right, of a kind customarily identified with and merged in a
document, even though the document is not itself converted.17

Today, a party engages in conversion if he “effectively prevents the exercise of intangible

rights of the kind customarily merged in a document,” whether or not “the document is . .

. itself converted.” Restatement (Second) of Torts § 242(2).

There is no basis for treating a share of stock in a corporation and a membership

interest in an LLC differently for purposes of conversion. A share of stock represents a

bundle of rights defined by the laws of the chartering state and the corporation’s certificate

of incorporation and bylaws. A membership interest in an LLC represents a bundle of rights

defined by the laws of the chartering state, any substantive provisions in the certificate of

formation (typically none), and the LLC agreement. Just as a share of stock is subject to

conversion, so too is a membership interest in an LLC.

“A conversion may be committed by intentionally . . . dispossessing another of a

chattel . . . .” Id. § 223(a). “A dispossession may be committed by intentionally . . .

obtaining possession of a chattel from another by fraud or duress . . . .” Id. § 221(b). “Assent

to the actor’s taking possession of the chattel given under such circumstances is ineffectual

to constitute a consent to the taking.” Id. cmt. d.

17
Restatement (Second) of Torts § 242 cmt. e (Am. L. Inst. 1965); see Carlton Invs.
v. TLC Beatrice Int’l Hldgs., Inc., 1995 WL 694397, at *16 (Del. Ch. Nov. 21 1995)
(“Following a modern trend, Delaware courts have tentatively expanded the doctrine to
encompass some intangible goods where the intangible property relations are merged into
a document.”); cf. Fremont Indem. Co. v. Fremont Gen. Corp., 55 Cal. Rptr. 3d 621, 638
(Cal. App. Ct. 2007) (recognizing conversion of net operating loss).

51
 The plaintiffs allege that Manheim obtained their membership interests in DVRC

through fraud. As discussed above, the plaintiffs have stated claims for fraud in connection

with the Reorganization. Therefore, the complaint states a claim against Manheim for

conversion. The motion to dismiss as to Count VI is denied.

E. Count II: The Plaintiffs’ Double-Derivative Claim For Breach Of Fiduciary
Duty On Behalf Of DVRC

In Count II, the plaintiffs seek on behalf of DVRC to recover from Manheim and

WestCo. They contend that Manheim and WestCo breached their fiduciary duties by

engaging in interested transactions and otherwise harming DVRC. Manheim and WestCo

contend that the plaintiffs lack standing to assert a derivative claim on DVRC’s behalf.

The standing argument turns on the implications of the Reorganization. Count II

challenges conduct that occurred both before the Reorganization and after the

Reorganization. The analysis differs depending on when the conduct took place.

1. Conduct Before The Reorganization

Manheim and WestCo contend that the plaintiffs lack standing to bring claims on

behalf of DVRC for conduct that occurred before the Reorganization because they are no

longer members of DVRC. This argument fails because the plaintiffs have double-

derivative standing to assert these claims. Put differently, they can sue on behalf of Penfold

to have Penfold assert these claims on behalf of DVRC.

a. Penfold’s Statutory Standing

As a member of DVRC, Penfold has standing to assert claims derivatively on behalf

of DVRC. Section 18-1002 of the Delaware Limited Liability Company Act (the “LLC

52
Act”) requires that “[i]n a derivative action, the plaintiff must be a member or an assignee

of a limited liability company interest at the time of bringing the action.” 6 Del. C. § 18-

1002. For purposes of the claims asserted in this litigation, Penfold was a member of DVRC

at the time of the bringing of the action, easily satisfying the requirement.

The complexity for purposes of this case arises because of the alternative entity

version of the contemporaneous ownership requirement.18 Section 18-1002 states that in

18
The contemporaneous ownership requirement arose as a limitation on the ability
of stockholders to bring derivative actions on behalf of corporations. Delaware had long
rejected the contemporaneous ownership requirement, consistent with the common law
rule in a majority of jurisdictions. See Rosenthal v. Burry Biscuit Corp., 60 A.2d 106, 110–
11 (Del. Ch. 1948). See generally Activision, 124 A.3d at 1046–49; Quadrant I, 102 A.3d
at 177–82. In 1945, the Delaware General Assembly established the contemporaneous
ownership requirement by enacting what is now Section 327 of the Delaware General
Corporation Law, 8 Del. C. § 327, which remains the only section of the DGCL that
addresses derivative actions. Commentators from the nineteen century until the present day
have criticized the contemporaneous ownership requirement as illogical and inconsistent
with the policy rationales that have been advanced to support it. See, e.g., Robert C. Clark,
Corporate Law § 15.4, at 651 (1986); 2 George D. Hornstein, Corporation Law & Practice
§ 712, at 195 (1959); Henry Winthrop Ballantine, Ballantine on Corporations § 148, at
352–53 (rev. ed. 1946); 6 Seymor D. Thompson & Joseph W. Thompson, Commentaries
on the Law of Corporations § 4638, at 538 (3d ed. 1927); 1 Victor A. Morawetz, The Law
of Private Corporations § 266, at 253–54 (2d ed. 1886); see also Note, Corporations—
Uniform Stock Transfer Act—Effect on Minnesota Law—Negotiability of Shares—Right of
Subsequent Transferee to Sue, 23 Minn. L. Rev. 484, 488 n.30 (1939) (explaining that “a
subsequent transferee of shares in a corporation should be able to maintain a derivative
suit” and observing that “[t]his appears to be the majority position”); Note, Stockholder’s
Suit for Wrong Which Occurred Before Complainant Acquired Stock, 68 U.S. L. Rev. 169,
169 (1934) (noting that “[i]n most of the jurisdictions in which the question has been
presented, it has been held that in the absence of special circumstances a stockholder’s suit
may be brought by one who was not a stockholder at the time of the transaction of which
he complains”); see id. at 172–75 (drawing on reasoning of cases to criticize
contemporaneous ownership requirement). Although I respect that the General Assembly
has imposed the contemporaneous ownership requirement by statute, and it therefore
reflects the law of Delaware that I am bound to apply, my sympathies lie with the critics.

53
addition to being a member or an assignee at the time of bringing the action, the plaintiff

must either have been a member or assignee

(1) [a]t the time of the transaction of which the plaintiff complains; or

(2) [t]he plaintiff’s status as a member or an assignee of a limited liability
company interest had devolved upon the plaintiff by operation of law or
pursuant to the terms of the limited liability company agreement from a
person who was a member or an assignee of a limited liability company
interest at the time of the transaction.

6 Del. C. § 18-1002. The defendants observe that for conduct that predated the

Reorganization, Penfold was not and could not have been a member of DVRC when the

challenged transactions took place. Penfold did not exist until March 2016, and it did not

become a member of DVRC until June of that year.

See generally J. Travis Laster, Goodbye to the Contemporaneous Ownership Requirement,
33 Del. J. Corp. L. 673 (2008)

A provocative article suggests that the statutory limitations on corporate derivative
actions that legislatures adopted in the mid-twentieth century may have their roots in anti-
Semitism. See generally Lawrence E. Mitchell, Gentleman’s Agreement: The Antisemitic
Origins of Restrictions on Stockholder Litigation, 36 Queen’s L.J. 71 (2010). In 1944, the
New York legislature adopted a suite of statutory limitations on derivative actions that
included a security-for-expenses requirement and a contemporaneous ownership
requirement. See id. at 72 & n.1. Professor Mitchell has argued that the legislation was
influenced by the anti-Semitic prejudices of the predominantly non-Jewish defense bar and
their reaction to the perceived prevalence with which predominantly Jewish lawyers
represented plaintiffs in stockholder derivative actions challenging the corporate
establishment. The New York initiative had widespread influence, as “[p]assage of the
New York statute inspired a burst of heated attacks on the derivative suit as an abusive and
corrupt device from supporters of business interests throughout the country.” Donna I.
Dennis, Contrivance and Collusion: The Corporate Origins of Shareholder Derivative
Litigation in the United States, 67 Rutgers U. L. Rev. 1479, 1520 (2015). Delaware notably
did not adopt a security-for-expenses statute, but it seems likely that the 1945 enactment
of Section 327 was spurred by the New York initiative.

54
 Under Section 18-1002(2), however, Penfold has standing to assert derivative

claims on behalf of DVRC based on conduct that predated the Reorganization because

Penfold became a member of DVRC “pursuant to the terms of a limited liability company

agreement from a person who was a member or an assignee of a limited liability company

interest at the time of the transaction.” Bamford, Ban, and Manheim were members of

DVRC from 2012 until the Reorganization. They accordingly were members “at the time

of” the pre-Reorganization transactions that are challenged in Count II. Penfold became a

member after Bamford, Ban, and Manheim contributed their membership interests to

Penfold under the Contribution Agreement, making Penfold at least an assignee of their

membership interests. Manheim structured the Reorganization, so it is reasonable to infer

that the contribution took place “pursuant to the terms of [DVRC’s] limited liability

company agreement.” See Flynn v. Bachow, 1998 WL 671273, at *1 (Del. Ch. Sept. 18,

1998) (interpreting analogous provision in the Delaware Limited Partnership Act as

requiring plaintiff to have “acquired a partnership interest from a person who was a partner

at the time of the transaction”); Martin I. Lubaroff et al., Lubaroff & Altman on Delaware

Limited Partnerships § 10.02, at 10-18 (2d ed. 2020) (same). Penfold thus has standing to

assert derivative claims on behalf of DVRC.

“‘Any claim belonging to the [entity] may, in appropriate circumstances, be asserted

in a derivative action,’ including claims that do—and claims that do not—involve [entity]

55
mismanagement or breach of fiduciary duty.”19 One of the claims belonging to Penfold is

its right to sue derivatively on behalf of DVRC. A party that has standing to sue derivatively

on behalf of Penfold in turn has standing to cause Penfold to assert derivative claims on

behalf of DVRC.

b. The Plaintiffs’ Statutory Standing

To be able to sue derivatively on behalf of Penfold, Ban and Bamford must meet

the requirements of Section 17-1002 of the LP Act. Those requirements track Section 18-

1002 of the LLC Act and state:

In a derivative action, the plaintiff must be a partner or an assignee of a
partnership interest at the time of bringing the action and:

(1) At the time of the transaction of which the plaintiff complains; or

(2) The plaintiff’s status as a partner or an assignee of a partnership interest
had devolved upon the plaintiff by operation of law or pursuant to the terms
of the partnership agreement from a person who was a partner or an assignee
of a partnership interest at the time of the transaction.

6 Del. C. § 17-1002. Like Penfold, Bamford and Ban were partners “at the time of bringing

the action.” The debate surrounds the second requirement, which necessitates that they

either (i) have been partners “[a]t the time of the transaction of which the plaintiff

19
3 Stephen A. Radin, The Business Judgment Rule 3612 (6th ed. 2009) (quoting
Midland Food Servs., LLC v. Castle Hill Hldgs. V, LLC, 792 A.2d 920, 931 (Del. Ch.
1999)); accord 1 R. Franklin Balotti & Jesse A. Finkelstein, Delaware Law of
Corporations & Business Organizations § 13.10, at 13-26 (3d ed. 2020) (explaining that a
derivative action can be used to assert any “corporate right that the corporation has refused
for one reason or another to assert”); see Urdan, 2019 WL 3891720, at *8–11 (discussing
historical development of derivative actions).

56
complains” or (ii) have received their interest “by operation of law” or “pursuant to the

terms of the partnership agreement” from “a person who was.”

The Delaware Supreme Court has held that when an investor in a parent entity seeks

to litigate derivative claims on behalf of its subsidiary, and when an intervening transaction

and the strict operation of the contemporaneous ownership requirement would cut off the

ability of parent investors to sue, then the wrong for purposes of analyzing the

contemporaneous ownership requirement at the parent-entity level is the failure of the

parent to cause the subsidiary to assert its claims. See Lambrecht v. O’Neal, 3 A.3d 277,

283 (Del. 2010). In that setting, the analysis does not require comparing when the investor

in the parent entity acquired its interest with when the subsidiary’s claim arose. Id.

The Lambrecht decision addressed the ability of a stockholder of a parent

corporation to assert double-derivative claims on behalf of the parent corporation’s wholly

owned subsidiary. The subsidiary’s claims indisputably arose before the stockholder

acquired its shares in the parent corporation, so if the contemporaneous ownership

requirement required measuring the subsidiary’s claims against the point when the parent

stockholder acquired its shares, then the parent stockholder would not have had standing.

The Delaware Supreme Court nevertheless held that the stockholder could sue derivatively

to cause the parent entity to assert its subsidiary’s claim, reasoning that “[o]therwise there

would be no procedural vehicle to remedy the claimed wrongdoing in cases where the

parent company board’s decision not to enforce the subsidiary’s claim is unprotected by

the business judgment rule.” Id. The Delaware Supreme Court thus evaluated the parent-

57
level wrong as the parent’s failure (or inability) to cause the subsidiary to assert the claim.

See id.

The prerequisites for the rule in Lambrecht apply in this case. Bamford, Ban, and

Manheim are the only human beings with equity interests in Penfold. Manheim will not

sue himself, nor will he cause ReathCo (which he controls) to bring suit. As a result, if

Bamford and Ban lack standing to sue, then there will be “no procedural vehicle to remedy

the claimed wrongdoing.” Id.20

The Delaware Supreme Court’s decision in Lambrecht was ultimately a pragmatic

and policy-driven decision that took a realistic and practical approach to double-derivative

actions. See Hamilton P’rs v. Englard, 11 A.3d 1180, 1205 (Del. Ch. 2010). It is thus worth

noting that just as the principal policy rationale from Lambrecht applies fully in this case

20
The defendants have not meaningfully attempted to invoke Rule 23.1, implicitly
recognizing that making demand on Manheim and ReathCo would have been futile. In a
single sentence in their reply brief, the defendants asserted that “though the Complaint
alleges in broad strokes that ‘Manheim, [WestCo] and [ReathCo] are incapable of making
an independent and disinterested decision to investigate the allegations contained herein,’
there are no allegations setting forth DVRC’s or [WestCo’s] governance structures or why
it would be futile to make a demand on Penfold to demand that DVRC’s managing member
brings Counts II and V on behalf of DVRC.” Dkt. 133 at 4 (citation omitted). To the
contrary, the complaint pleads facts supporting a reasonable inference that Manheim
controls ReathCo and WestCo, making demand futile.

In another by-the-way argument in their reply brief, the defendants objected to the
plaintiffs’ ability to sue derivatively because the “[p]laintiffs have not filed an affidavit in
accordance with Rule 23.1(b) in their capacity as a representative plaintiff on behalf of
DVRC (or Penfold).” Dkt. 133 at 4 n.4. The plaintiffs have leave to cure this procedural
oversight. If they fail to do so, then the defendants can renew their motion for dismissal on
that basis.

58
(otherwise no one could sue), it is equally true that none of the policy reasons that have

been cited traditionally to support the contemporaneous ownership requirement apply on

these facts. Delaware courts have most often asserted that the contemporaneous ownership

requirement exists to “‘to prevent what has been considered an evil, namely the purchasing

of shares in order to maintain a derivative action designed to attack a transaction which

occurred prior to the purchase of the stock.’” Schoon v. Smith, 953 A.2d 196, 203 (Del.

2008) (quoting Burry Biscuit, 60 A.2d at 111). That concern does not apply here. Ban and

Bamford owned 60% of the equity in DVRC before the Reorganization and could sue

derivatively for any wrongs. After the Reorganization, they still beneficially own 60% of

the equity in DVRC, yet the defendants say they cannot sue derivatively for any wrongs.

They have not bought into a lawsuit.

The more recent justification for the contemporaneous ownership requirement that

Delaware courts have offered is the goal of preventing “strike suits.” See Laster, supra, at

688–91. This case is not a strike suit. It attacks self-dealing conduct by Manheim and

entities that he controls. Not surprisingly, the defendants have not made any meaningful

effort to dismiss the claims on the merits.

Under the statutory provisions of the LP Act and the principles articulated in

Lambrecht, Ban and Bamford have standing to sue derivatively on behalf of Penfold to

cause it to assert the claims that it can bring derivatively on behalf of DVRC. The plaintiffs

59
thus have standing to assert double-derivative claims for misconduct that preceded the

Reorganization.21

c. Double-Derivative Actions For Alternative Entities

In a Hail Mary argument, Manheim and WestCo posit that Delaware law does not

recognize double-derivative actions in the alternative entity space. There is no authority to

support that counter-intuitive proposition. Instead, this court has held that an investor in an

entity that was a member of an LLC could assert a double-derivative claim on behalf of the

LLC. See Reid v. Siniscalchi, 2014 WL 6589342, at *13 (Del. Ch. 2014). The United States

District Court for the Southern District of New York similarly concluded that an investor

in an entity that was a limited partner in a Delaware limited partnership could assert a

double-derivative claim on behalf of the limited partnership. See Yale M. Fishman 1998

Ins. Trust v. Phila. Fin. Life Assurance Co., 2016 WL 2347921, at *4 (S.D.N.Y. May 3,

2016). The leading treatise on the LLC Act does not suggest any limitation on double-

derivative claims and cites Reid with approval. See Robert L. Symonds, Jr. & Matthew J.

O’Toole, Symonds & O’Toole on Delaware Limited Liability Companies §§ 5.19[D], 9.09

& n.303 (2d ed. & Supp. 2019). Another treatise notes that Delaware “recognizes double

21
Lambrecht involved a wholly owned subsidiary, and the Delaware Supreme Court
has cautioned that it has never ruled on whether a plaintiff has double-derivative standing
when the parent entity does not own 100% of the subsidiary. See Lambrecht, 3 A.2d at 283
n.14. In this case, Penfold owns 90% of the membership interests in DVRC, making this
issue potentially pertinent. The parties, however, did not raise it, so this decision does not
address it.

60
derivative actions involving limited partnerships.” 2 William E. Knepper & Dan A. Bailey,

Liability of Corporate Officers and Directors § 18.01 n.46 (8th ed. 2019).

The foundation (and sole support) for the defendants’ argument against double-

derivative actions in the alternative entity space is CML V, LLC v. Bax, 28 A.3d 1037 (Del.

2011), a decision that did not address double-derivative actions. Bax addressed whether a

creditor of an insolvent LLC had standing to assert a derivative claim. Id. at 1041. Reading

Section 18-1002 narrowly, the high court held that a creditor of an insolvent LLC was

neither a member nor an assignee and therefore lacked standing to sue. Id. The Bax decision

has no implications for the current case, where the double-derivative claim satisfies the

statutory requirements of both Section 18-1002 of the LLC Act and Section 17-1002 of the

LP Act.

The defendants further argue that the plaintiffs cannot invoke double-derivative

standing because their complaint did not articulate that legal theory. “So long as claimant

alleges facts in his description of a series of events from which [a claim] may reasonably

be inferred and makes a specific claim for the relief he hopes to obtain, he need not

announce with any greater particularity the precise legal theory he is using.” Michaelson

v. Duncan, 407 A.2d 211, 217 (Del. 1979). In this case, the complaint alleges that the

plaintiffs are limited partners of Penfold and that Penfold holds a membership interest in

DVRC. From those allegations, it may reasonably be inferred that the plaintiffs have

double-derivative standing.

61
 d. An Alternative-Entity Version Of The Continuous
Ownership Requirement

The defendants further argue that the plaintiffs’ claims fail to clear the continuous

ownership requirement, an additional common law hurdle that Delaware has imposed on

stockholders seeking to sue derivatively. The Delaware Supreme Court established this

requirement in 1984 by stating expansively that “a derivative shareholder must not only be

a stockholder at the time of the alleged wrong and at [the] time of commencement of suit

but that he must also maintain shareholder status throughout the litigation.” Lewis v.

Anderson, 477 A.2d 1040, 1046 (Del. 1984). Applying this rule after the closing of a

reverse triangular merger in which the stockholder plaintiffs had their shares converted into

shares of the acquiring company, the Delaware Supreme Court held that “a corporate

merger destroys derivative standing of former shareholders of the merged corporation from

instituting or pursuing derivative claims” that were the property of the acquired company.

Id. at 1047. The high court later restated the rule as follows: “A plaintiff who ceases to be

a shareholder, whether by reason of a merger or for any other reason, loses standing to

continue a derivative suit.” Id. at 1049.22 The Delaware Supreme Court has applied this

22
A close look at the citations in Lewis v. Anderson suggests that the Delaware
Supreme Court’s formulation drew on an expansive paraphrasing of the longstanding
common law rule that the right to assert a derivative claim is a property right associated
with the plaintiff’s shares of stock that passes to a buyer of the shares if the plaintiff sells.
Chancellor Seitz applied this settled rule in Hutchinson v. Bernhard, 220 A.2d 782 (Del.
Ch. 1965), agreeing that the plaintiff lost standing to sue derivatively when she voluntarily
sold her shares to a third-party buyer because the right to sue passed with the shares. Id. at
783–84. Citing Hutchinson, the district court in Heit v. Tenneco, Inc., 319 F. Supp. 884 (D.
Del. 1970), reframed the rule more broadly: “Under Delaware law, a plaintiff, bringing a
derivative suit on behalf of a corporation, must be a stockholder of the corporation at the

62
rule to limited partnerships and presumably would apply it to LLCs. See El Paso Pipeline

GP Co., L.L.C. v. Brinckerhoff, 152 A.3d 1248, 1265 (Del. 2016).

When creating the continuous ownership requirement, the Delaware Supreme Court

also recognized two exceptions to it, both of which apply in this case. See Lewis v.

Anderson, 477 A.2d at 1046 n.10. One is the reorganization exception, which applies when

the transaction that otherwise would deprive the plaintiffs of standing “is essentially a

reorganization that does not affect the plaintiff’s relative ownership in the post-merger

enterprise.” Ark. Teacher Ret. Sys. v. Countrywide Fin. Corp., 75 A.3d 888, 894 (Del.

2013). Like the continuous ownership requirement itself, the reorganization exception has

been discussed most often in the context of mergers, but nothing about the rationale for the

exception limits it to that context. It can apply to any transaction that amounts to little more

than a “corporate reshuffling” of ownership interests. Lewis v. Ward, 852 A.2d 896, 904

(Del. 2004); see Schreiber v. Carney, 447 A.2d 17, 22 (Del. Ch. 1982).

time he commences the suit and must maintain that status throughout the course of the
litigation.” Id. at 886. The Court of Chancery adopted Heit’s broader framing in Harff v.
Kerkorian, 324 A.2d 215 (Del. Ch. 1974), stating: “But Delaware law seems clear that
stockholder status at the time of the transaction being attacked and throughout the litigation
is essential.” Id. at 219 (citing Hutchison and Heit)), aff’d in part, rev’d in part on other
grounds, 347 A.2d 133 (Del. 1975). The trial court decision in Lewis v. Anderson followed
Harff and Heit’s paraphrasing of Hutchinson, expressing the rule as follows: “Stated as a
general principle it is well established under Delaware law that a plaintiff bringing a
derivative suit on behalf of a corporation must be a stockholder of the corporation at the
time that he commences the suit and that he must maintain that status throughout the course
of the litigation.” Lewis v. Anderson, 453 A.2d 474, 476 (Del. Ch. 1982) (citing Heit, Harff,
and Hutchison)) (subsequent history omitted). On appeal, the Delaware Supreme Court
adopted the trial court’s statement of the law, thereby generating what is now known as the
continuous ownership requirement. Lewis v. Anderson, 477 A.2d at 1041, 1046.

63
 The Reorganization was the epitome of a corporate reshuffling. The only parties to

the Reorganization were Penfold, a newly formed holding company, and Bamford, Ban,

and Manheim. Before the Reorganization, Penfold was a shell without any assets or

operating business. After the Reorganization, Penfold held only the membership interests

that Manheim, Ban, and Bamford contributed to it. According to Manheim’s

representations to the plaintiffs, no one’s economic interests changed. Bamford, Ban, and

Manheim went from a situation in which they each held a 30% interest in DVRC to a

situation in which they each held a one-third interest in an entity holding a 90% interest in

DVRC. The reshuffling of their ownership stake from a direct interest to an indirect interest

should not prevent them from pursuing claims that they previously possessed and could

assert. See Helfand v. Gambee, 136 A.2d 558, 562 (Del. Ch. 1957). The reorganization

exception therefore applies.

The second exception recognized in Lewis v. Anderson applies when a plaintiff loses

standing based on a “merger [that] itself is the subject of a claim of fraud, being perpetrated

merely to deprive shareholders of their standing to bring or maintain a derivative action.”

Countrywide, 75 A.3d at 894. Although some decisions have interpreted the adverb

“merely” to mean that the exclusive purpose of the transaction must be to deprive

stockholders of standing, such a cabined approach would deprive the exception of any

efficacy. The exception applies when “a principal purpose” of the transaction is the

elimination of standing to assert derivative claims” Merritt v. Colonial Foods, Inc., 505

A.2d 757, 763 (Del.Ch.1986); see Brinckerhoff v. Texas E. Prod. Pipeline Co., LLC, 986

A.2d 370, 383 (Del. Ch. 2010). As with the reorganization exception, the fraud exception

64
has been discussed in the context of mergers, but the broader principle is not limited to that

species of transaction.

In this case, the plaintiffs have pled successfully that Manheim fraudulently induced

them to contribute their membership interests to DVRC. Manheim was a sophisticated

individual who had engaged in interested transactions involving DVRC and who intended

to continue that practice more aggressively after the Reorganization. It is reasonable to

infer that Manheim understood that the Reorganization would interfere with the plaintiffs’

ability to bring derivative claims and that he pursued the Reorganization, at least in part,

for that reason. The complaint calls into question Manheim’s other justifications for the

Reorganization, making it reasonable to infer at the pleading stage that interfering with the

plaintiffs’ ability to bring derivative claims was a principal reason for Manheim’s pursuit

of the Reorganization. The fraud exception therefore applies.

The defendants finally contend that the plaintiffs cannot take advantage of any

equitable exceptions to the continuous ownership requirement because the entities in

question are not corporations. To support this contention, they again rely on Bax. That

decision did not address equitable exceptions to standing doctrines. It addressed whether a

creditor of an insolvent LLC could assert a derivative claim. Bax, 28 A.3d at 1043. The

Delaware Supreme Court held that it could not, citing “[t]he plain language of 6 Del. C. §

18-1002,” which only granted standing to members and assignees. Id. at 1041.

The creditor in Bax asked the Delaware Supreme Court to expand the parties who

could sue derivatively, contending that the high court could do so as a matter of equity. In

support of this argument, the creditor cited Section 18-1104 of the LLC Act, which then

65
stated, “In any case not provided for in this chapter, the rules of law and equity, including

the law merchant, shall govern.” 6 Del. C. § 18-1104 (2011). Applying the plain meaning

of that section, the Delaware Supreme Court explained that

what this means is that where the General Assembly has not defined a right,
remedy, or obligation with respect to an LLC, courts should apply the
common law. It follows that if the General Assembly has defined a right,
remedy, or obligation with respect to an LLC, courts cannot interpret the
common law to override the express provisions the General Assembly
adopted. Supplementing express provisions is altogether different from
displacing them or interpreting them out of existence under the guise of
articulating and applying equitable principles.

Bax, 28 A.3d at 1045.23

The sections on derivative standing in the LLC Act and LP Act do not address what

happens when the transaction that would deprive a plaintiff of standing is tainted by fraud.

They also do not address what happens when the transaction is a reorganization that

amounts to a reshuffling of the existing ownership interests. In these settings, under the

current version of Section 18-1104, “the rules of law and equity, including the rules of law

and equity relating to fiduciary duties and the law merchant, shall govern.” 6 Del. C. § 18-

1104; accord 6 Del. C. § 17-1104. The Bax decision therefore does not foreclose the

availability of equitable exceptions.

23
The Bax decision adopted a strongly contractarian view of LLCs. In 2013, the
General Assembly amended Section 18-1104 to provide as follows: “In any case not
provided for in this chapter, the rules of law and equity, including the rules of law and
equity relating to fiduciary duties and the law merchant, shall govern.” 6 Del. C. § 18-1104;
see H.B. 126, 147th Gen. Assem. § 8 (2013). The amendment made clear that default
principles of fiduciary duty apply under the LLC Act and rejected the purely contractarian
view of LLCs. See In re Carlisle Etcetera LLC, 114 A.3d 592, 605 (Del. Ch. 2015).

66
 Viewing the issue more broadly, the continuous ownership requirement is itself a

judicially created doctrine that the Delaware Supreme Court has applied to alternative

entities. It seems logical that the high court would have intended to apply both the general

rule and its recognized exceptions, not just the general rule.

The plaintiffs therefore have standing to bring double-derivative claims on behalf

of DVRC to address misconduct that occurred before the Reorganization. That reshuffling

of their interests, which at this stage of the case inferably resulted from fraud, does not

foreclose them from pursuing their double-derivative claims.

2. Conduct After The Reorganization

Manheim and WestCo also contend that the plaintiffs lack standing to bring claims

on behalf of DVRC for conduct that occurred after the Reorganization, citing the fact that

they are no longer members of DVRC. As with pre-Reorganization conduct, this argument

fails because the plaintiffs have double-derivative standing to assert these claims.

For the reasons already discussed, Penfold has standing as a member in DVRC to

assert claims derivatively on behalf of DVRC. See 6 Del. C. § 18-1002. For conduct that

occurred after the Reorganization, Penfold was both a member at the time of bringing the

action and at the time of the conduct of which the plaintiff complains.

As limited partners in Penfold, Bamford and Ban can sue derivatively to cause

Penfold to assert its right to sue derivatively on behalf of DVRC. See 6 Del. C. § 17-1002.

Bamford and Ban were partners “at the time of bringing the action.” For post-

Reorganization conduct, they also were partners “[a]t the time of the transaction of which

the plaintiff complains.” Bamford and Ban have also held their limited partnership interests

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in Penfold continuously since the Reorganization, which means they have held their limited

partnership interests continuously since any post-Reorganization misconduct occurred.

Bamford and Ban thus have standing to assert double-derivative claims on behalf of DVRC

for post-Reorganization conduct.

F. Counts III And V: The Plaintiffs’ Derivative And Double-Derivative Claims
On Behalf Of Penfold And DVRC For Fraud Against Manheim And His
Affiliates

In Count III of the complaint, the plaintiffs assert a derivative claim on behalf of

Penfold which contends that Manheim and ReathCo defrauded Penfold by engaging in self-

dealing transactions. In Count V, plaintiffs have sued derivatively on behalf of Penfold to

cause it to assert a derivative claim to similar effect on behalf of DVRC and against

Manheim, WestCo, and ReathCo. These claims are dismissed.

The claims asserted in Counts III and V attempt to use the language of fraud to

recover for self-dealing. Count III alleges that Manheim and ReathCo defrauded Penfold

by concealing their self-dealing from Penfold. Compl. ¶ 140. The complaint alleges:

141. Manheim’s and [ReathCo’s] acts, statements, and/or omissions
were misleading and deceptive and done with the intent that Penfold’s
partnership would rely on those acts, statements and/or omissions to the
partnership’s detriment.

142. Penfold acted in justifiable reliance upon those acts, statements,
and/or omissions, by not taking steps it otherwise would to stop Manheim
and [ReathCo’s] harmful conduct.

143. As a result of Penfold’s reliance on Manheim’s and [ReathCo’s]
fraudulent misrepresentations and/or omissions Penfold has suffered
significant damages, including actual damages for breach of contract, loss of
unpaid dividends, costs, and attorneys’ fees.

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Count V contains similar allegations, but advances them on behalf of DVRC and against

Manheim, WestCo, and ReathCo.

It is of course possible for an entity to be defrauded, including by individuals who

serve as its directors, officers, or agents. In this case, however, the fraud claims are the

functional equivalent of claims that Penfold’s and DVRC’s fiduciaries breached their

duties by engaging in self-interested transactions. “[T]he breach of fiduciary duty count

confronts directly the implications of the fiduciary relationship, rendering the constructive

fraud count redundant and superfluous.” Wayport, 76 A.3d at 327; see Parfi Hldg. AB v.

Mirror Image Internet, Inc., 794 A.2d 1211, 1236–37 (Del. Ch. 2001), rev’d on other

grounds, 817 A.2d 149 (Del. 2002).

Count V duplicates and is subsumed within the double-derivative claim for breach

of fiduciary duty that the plaintiffs asserted in Count II. See Part II.E, supra. Count III

duplicates and is subsumed within the derivative claim for breach of fiduciary duty that the

plaintiffs asserted in Count I and which the defendants did not move to dismiss. At this

stage, it is not reasonably conceivable that there could be a set of facts where the plaintiffs

could prevail on Counts III and V unless they also prevailed on their more apt claims for

breach of fiduciary duty.24 Counts III and V are therefore dismissed.

24
As to Count V and its overlap with Count II, this is an oversimplification. Count
V names Manheim, WestCo, and ReathCo as the alleged fraudsters. Count II names
Manheim and WestCo as the allegedly faithless fiduciaries. The claim for fraud in Count
V thus seeks to reach ReathCo, while the claim for breach of fiduciary in Count II does
not. Count II nevertheless seeks to hold Manheim and WestCo liable for conduct involving

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ReathCo, such as for transfers to ReathCo. Manheim controls ReathCo, making him
accountable for these transactions.

As a practical matter, the omission of ReathCo from Count II does not seem likely
to be significant. If Manheim caused DVRC to engage in an interested transaction with
ReathCo, such that ReathCo could be liable under the plaintiffs’ fraud theory, then
Manheim would likely be liable as a fiduciary for having caused the transaction to take
place. Conversely, it seems unlikely that the plaintiffs might obtain a judgment against
Manheim for breach of fiduciary duty, yet not be able to collect because the assets sat
within ReathCo.

From the standpoint of procedural purity, the naming of ReathCo in Count V would
seem to require embarking on an analysis of the plaintiffs’ conceptually difficult fraud
claim so as to determine whether to preserve a pleading-stage right of action against
ReathCo, albeit one that seems unlikely to have real world value. Given the other demands
of my docket, that is an unappetizing prospect. Nor do the parties seem particularly
interested in the answer, since they did not regard the omission of ReathCo from Count II
as something worth emphasizing in their briefs. There is also an obvious solution that
plaintiffs routinely deploy, which is to name the affiliate as an alleged aider and abetter.
When a breach of fiduciary duty claim survives against an affiliate’s controller, then the
aiding and abetting claim against the affiliate generally survives as well, both because the
knowledge of the controller is imputed to the affiliate for purposes of the knowing
participation requirement, and because the viable claim for breach of duty against the
controller satisfies the other elements of the aiding and abetting claim.

For now I will decline to engage in a detailed parsing of the theoretically non-
duplicative fraud claim against ReathCo. If discovery suggests a role for this claim, then
subject to the law of the case doctrine, the plaintiffs may seek to revisit the interlocutory
dismissal of Count II for good cause shown. See Quadrant Structured Prods. Co., Ltd. v.
Vertin (Quadrant II), 2014 WL 5465535, at *5 (Del. Ch. Oct. 28, 2014). The plaintiffs may
also address any pleading-stage gap through an aiding and abetting claim. An amendment
to assert such an obvious claim at the outset of the case is not prejudicial to the defendants,
and there is good reason to think that it is technically unnecessary. The Court of Chancery
Rules are modeled on the Federal Rules of Civil Procedure, and the Wright & Miller
treatise explains at length why the federal rules do not require count-specific causes of
action that subsequently confine for the duration of the litigation the legal theories available
to the pleader and the trial judge. See Wright & Miller, supra, § 1219 (explaining why
“[t]he federal rules effectively abolish the restrictive theory of the pleadings doctrine”). I
have elsewhere explained (albeit in a transcript ruling) why I believe the same is true under
the Delaware rules. See In re EZCorp. Inc. Consulting Agreement Deriv. Litig., C.A. No.
9962-VCL, tr. at 72-90 (Del. Ch. Feb. 22, 2016).

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G. Count IV: The Plaintiffs’ Derivative Claim On Behalf Of Penfold For Breach
Of Its Limited Partnership Agreement

In Count IV, the plaintiffs bring a breach of contract claim derivatively on behalf of

Penfold and against Manheim and ReathCo for breach of Penfold’s limited partnership

agreement. “In order to survive a motion to dismiss for failure to state a breach of contract

claim, the plaintiff must demonstrate: first, the existence of the contract, whether express

or implied; second, the breach of an obligation imposed by that contract; and third, the

resultant damage to the plaintiff.” VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606,

612 (Del. 2003). “Proof of [alleged] damages and their certainty need not be offered in the

complaint in order to state a claim.” Anglo Am., 829 A.2d at 156.

The complaint alleges that under Penfold’s limited partnership agreement, “the

General Partner must indemnify Penfold and the limited partners for any loss, damage or

liability, including reasonable attorneys’ fees, due to or arising out of the General Partner’s

‘fraud or willful malfeasance.’” Compl. ¶ 63. Elsewhere, the complaint describes the

provision somewhat differently. See id. ¶ 145. Because the former allegation is more

favorable to the plaintiffs, the court adopts it for purposes of the motion to dismiss.

Although primarily directed to the fraud claim asserted against ReathCo, my
comment about the plaintiffs’ ability to revisit this interlocutory ruling applies to Counts
III and V as a whole. The predictive power of the human mind is limited, so it is necessarily
possible that the seemingly inconceivable may prove factual. If discovery suggests a
scenario where Counts III and V would have independent heft, then subject to the law of
the case doctrine, the plaintiffs may seek to revisit this interlocutory dismissal for good
cause shown. See Quadrant II, 2014 WL 5465535, at *5.

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 The complaint alleges that the defendants engaged in fraudulent and intentional

misconduct that harmed Penfold and its limited partners. The complaint alleges that

Manheim and ReathCo are Penfold’s general partners. Based on the allegations in the

complaint, Manheim and ReathCo have an obligation to indemnify Penfold and its limited

partners for any harm they cause due to fraud or willful malfeasance. They have not done

so, resulting in a claim for breach. Although it seems unlikely that the provision actually

operates as the complaint alleges, the parties have not provided the court with a copy of

the limited partnership agreement, so the court must accept the allegations of the complaint.

The defendants contend that the indemnification claim is not ripe because “[t]here

has been no finding of fraud or willful malfeasance by either Manheim or [ReathCo].” Dkt.

133 at 13. “[I]ndemnification claims do not typically ripen until after the merits of an action

have been decided, and all appeals have been resolved.” Hampshire, 2010 WL 2739995,

at *53. It seems likely that the provision would require a finding of fraud or willful

malfeasance before a claim for indemnification could be ripe, but no one submitted a copy

of the limited partnership agreement. At the pleading stage, the court must accept the

allegations of the complaint, which advance the admittedly counterintuitive position that

Manheim and ReathCo currently have an obligation to indemnify Penfold and its limited

partners.

For present purposes, the motion to dismiss Count IV is denied. A motion for

summary judgment may provide an efficient vehicle for addressing this claim.

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H. Count X: The Plaintiffs’ Derivative Claim On Behalf Of Penfold For Unjust
Enrichment

In Count X, the plaintiffs assert a derivative claim for unjust enrichment on behalf

of Penfold against Manheim to recover the compensation and other benefits that he has

extracted.25 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. Nemec v.

Shrader, 991 A.2d 1120, 1130 (Del. 2010).

A claim for unjust enrichment claim is usually a fallback claim. In a situation where

a plaintiff proves a primary claim against one defendant, such as a claim for breach of

fiduciary duty, but another defendant is not primarily liable and yet reaped the benefits of

the wrongdoing, then unjust enrichment can provide a means of holding the other defendant

accountable. If both defendants are primarily liable, then the claim for unjust enrichment

will be duplicative and unnecessary. At the pleading stage, when there is uncertainty about

how the case will play out, it makes sense to preserve the claim for unjust enrichment and

permit the plaintiff to plead in the alternative. See Dubroff v. Wren Hldgs., LLC, 2011 WL

5137175, at *11 (Del. Ch. Oct. 28, 2011).

25
The plaintiffs also purport to assert a direct claim for unjust enrichment,
contending that they have been deprived as equity holders of distributions and other
benefits that they otherwise would have received if Manheim had not taken the money. A
claim for unjust enrichment can be personal, direct, or derivative, depending on the facts
alleged. See Urdan, 2019 WL 3891720, at *20-21. Here, the allegations focus on self-
dealing payments that Manheim caused Penfold to make, so the clam is exclusively
derivative. See El Paso, 152 A.3d at 1260–65.

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 In this case, it is not reasonably conceivable that the claim for unjust enrichment

will serve any purpose. The claim seeks to recover from Manheim, who is the primary

wrongdoer under all of the other theories in the complaint. It is not reasonably conceivable

that the enrichment Manheim has received could prove to be unjust without Manheim

having been held liable on one of the other claims. Count X is therefore dismissed.

III. CONCLUSION

The defendants’ motion to dismiss is granted as to Counts III, V, and X in their

entirety. The defendants’ motion to dismiss is granted as to Count XII with respect to Ban’s

claim for negligent misrepresentation based on his compensation. The defendants’ motion

to dismiss is otherwise denied.

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