IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
LILLY LEA PERRY, )
)
Plaintiff, )
)
v. ) C.A. No. 2017-0290-VCL
)
DIETER WALTER NEUPERT and CÔTE )
D’AZUR ESTATE CORPORATION, )
)
Defendants. )
------------------------------------------------------ )
CÔTE D’AZUR ESTATE )
CORPORATION, )
)
Counterclaim Plaintiff, )
)
v. )
)
LILLY LEA PERRY, )
)
Counterclaim Defendant. )
MEMORANDUM OPINION
Date Submitted: November 29, 2017
Date Decided: December 6, 2017
Jeremy D. Anderson, FISH & RICHARDSON P.C., Wilmington, Delaware; Attorney for
Lilly Lea Perry.
Douglas D. Hermann, James H. S. Levine, PEPPER HAMILTON LLP; Attorneys for
Dieter Walter Neupert and Côte d’Azur Estate Corporation.
LASTER, V.C.
The parties dispute who owns the equity of defendant Côte D’Azur Estate
Corporation (the “Company”). The parties also dispute whether defendant Dieter Walter
Neupert had authority to convert the Company from a limited liability company to a
corporation, as he did by causing the filing of a certificate of conversion with the
Delaware Secretary of State on June 30, 2016.
Plaintiff Lilly Lea Perry contends that her husband, Israel Igo Perry, owned all of
the Company’s equity when he died in 2015, such that she now owns all of its equity as
his sole heir. She claims that Neupert lacked authority to convert the Company into a
corporation. The Company and Neupert contend that, in 2013, before he died, Israel1
transferred all of the equity to a private Liechtenstein foundation (the “Foundation”),
which still owns it today.2 They claim that the Foundation executed an unlimited power
of attorney in favor of Neupert, which gave him the requisite authority to file the
certificate of conversion.
Lilly has moved to join the Foundation as an involuntary counterclaim plaintiff
pursuant to Court of Chancery Rule 19. This decision holds that the Foundation is a party
which should be joined for a just resolution of the dispute. Nevertheless, because it
1
To avoid confusion, this decision uses first names to refer to members of the
Perry family. Some of the documents that the parties have submitted refer to Lilly as
“LLP” and Israel as “IIP.”
2
The defendants aver that when Israel transferred his equity in the Company to the
Foundation, it was named the Ludwig-Polzer-Hoditz Foundation. It later changed its
name to the BGO Foundation. The name change does not matter for purposes of this
decision.
1
appears that the Foundation can be served under the Delaware Long-Arm Statute, it is not
necessary, at this stage, for the court to consider adding the Foundation as an involuntary
counterclaim plaintiff.3 Lilly shall add the Foundation to the case as an additional relief
3
This decision expresses no opinion about whether the “now atrophied process” of
sequestration might be available in this case. Cable Advert. Networks, Inc. v. DeWoody,
632 A.2d 1383, 1386-87 (Del. Ch. 1997). The sequestration statute and the related
procedure for foreign attachment permit a court to attach Delaware-sitused property to
compel a nonresident’s appearance. See 10 Del. C. §§ 365-66. The United States
Supreme Court held that sequestering nonresident directors’ stock as a means of asserting
jurisdiction for in personam proceedings for breaches of fiduciary duty violated due
process. Shaffer v. Heitner, 433 U.S. 16 (1977). Since Shaffer, some Delaware authorities
have indicated that the Delaware situs of corporate stock, either standing alone or in
conjunction with other contacts, could be sufficient to support jurisdiction in disputes
over the legal existence, rights, characteristics, or attributes of the shares, or even
potentially the ownership of the shares. See Onescreen Inc. v. Hudgens, 2010 WL
122937, *4-6 (Del. Ch. Mar. 30, 2010) (collecting cases). In Onescreen, Vice Chancellor
Parsons considered these authorities and held that a corporation could not rely on the
Delaware situs of its shares to support jurisdiction in a suit to rescind transfers of
preferred stock from its former CEO to other individuals where the transferees lacked
other contacts with the State of Delaware. Id. at *6.
This case is arguably distinguishable in at least two respects. First, the Foundation
is said to have acquired ownership of 100% of the equity of a Delaware corporation,
which has been held to constitute a significant (albeit not automatically dispositive)
contact with this jurisdiction. See Sternberg v. O’Neill, 550 A.2d 1105, 1119-22 (Del.
1988) (finding that minimum contacts existed for purposes of a double-derivative action
where non-Delaware entity both acquired sole ownership of a Delaware subsidiary and
subsequently operated the subsidiary as a Delaware entity for more than thirty years).
Second, the Foundation is a foreign entity that the defendants claim made a cross-border
acquisition of shares. In his concurring opinion in Shaffer, Justice Stevens indicated that a
cross-border purchase of shares might be sufficient to cause the purchaser to be subject to
jurisdiction in the courts of the domiciliary state for traditional in rem matters. Shaffer,
433 U.S. at 218 (observing that “[i]f I visit another State, or acquire real estate or open a
bank account in it, I knowingly assume some risk that the State will exercise its power
over my property or my person while there” and positing that “[p]erhaps the same
consequences should flow from the purchase of stock of a corporation organized under
the laws of a foreign nation, because to some limited extent one’s property and affairs
2
defendant by serving it with process under the Long-Arm Statute. Once served, the
Foundation may raise any defenses that it believes it possesses. In addition, if Lilly
wishes to seek to have the Foundation realigned as a counterclaim plaintiff, she may file a
suitable motion.
At this point, the court need not reach the question of whether to add the
Foundation as an involuntary plaintiff under the last sentence of Rule 19(a). The relevant
language only permits the court to add an absent party as an involuntary plaintiff “in a
proper case,” which is a term of art under the rule.4 Determining that a proceeding is “a
proper case” carries significance, because “[i]t is generally agreed that [the involuntary
plaintiff provision of Rule 19(a)], derived from Independent Wireless Tel. Co. v. Radio
Corp. of Am., 269 U.S. 59 (1926), permits involuntary joinder as a plaintiff of a party
over whom there is otherwise no personal jurisdiction, and further means that the party so
then become subject to the laws of the nation of domicile of the corporation” and that
“because a foreign investment is sufficiently unusual to make it appropriate to require the
investor to study the ramifications of his decision”); see also Papendick v. Bosch, 419
A.2d 147, 153-54 (Del. 1979) (noting potential relevance of defendant’s status as a
foreign entity but declining to address the question where another jurisdictional avenue
existed).
4
Ch. Ct. R. 19(a). See generally 7 Charles Alan Wright et al., Federal Practice
and Procedure § 1605 (3d ed. 2001) [hereinafter Federal Practice]; Jean F. Rydstrom,
Annotation, What Constitutes “Proper Case” Within Meaning of Provision of Rule 19(a)
of Federal Rules of Civil Procedure That When Person Who Should Join as Plaintiff
Refuses to Do So, He May Be Made Involuntary Plaintiff “In a Proper Case,” 20 A.L.R.
Fed. 193 (1974 & Supp.).
3
joined will be bound by res judicata.”5 If the Foundation, after being served, refuses to
appear and successfully contests jurisdiction, then the question of adding the Foundation
as an involuntary plaintiff under Rule 19(a) will become ripe.
I. FACTUAL BACKGROUND
The facts are drawn from the pleadings, the documents that the pleadings
incorporate by reference, and the documents that the parties submitted in connection with
the Rule 19 motion. This is a procedural decision, and the court has not yet conducted an
evidentiary hearing. The descriptions of the factual background in this decision therefore
does not represent a set of factual findings, but rather how the record appears at this
preliminary stage.
A. Lilly’s Claim To Own All Of The Company’s Equity
Israel died on March 18, 2015.6 Lilly is Israel’s surviving spouse.7 At the time of
his death, he was a non-domiciled resident of the United Kingdom, where proceedings
5
June F. Entman, Compulsory Joinder of Compensating Insurers: Federal Rule of
Civil Procedure 19 and the Role of Substantive Law, 45 Case W. Res. L. Rev. 1, 27 n.108
(1994); accord Rydstrom, supra, § 2 (explaining that, when the “proper case”
requirement is met, “the absentee may be named a plaintiff against his will, and he will
be bound by any judgment rendered on principles of res judicata”).
6
Answer ¶¶ 1, 12 (admitting this fact).
7
See Answer ¶ 1 (admitting Lilly’s status as surviving spouse).
4
involving his estate are pending.8 Lilly contends that she is the sole beneficiary of Israel’s
estate.9
8
See Compl. ¶ 1. In this litigation, the defendants made the following
representation to the court about Israel’s estate planning: “During his lifetime, to benefit
his family members, Israel carefully crafted an estate plan, using multiple entities to hold
his wealth, while retaining few assets as his personal property.” Resp. ¶ 11. In an
affidavit filed in the probate proceeding, Neupert provided a different description of the
level of planning and the resulting degree of certainty that characterized Israel’s estate:
So far as [Israel’s] worldwide estate is concerned, I am not at this stage able
to give even an approximate assessment of its value. Many of the assets to
which the Testator was beneficially entitled were held under trusts or
through nominee entities or persons. Furthermore, as I have already
mentioned, [Israel] tended to conduct his affairs informally, and often
through undocumented oral arrangements. He frequently disposed of
interests in assets during his lifetime while appearing to retain absolute use
of them. This means that it is necessary to assess the ownership very
carefully in each case and I have been working to collect the evidence in
order to take the necessary advice in the relevant jurisdictions. Whether or
not they will be technically regarded as forming part of his estate in the
jurisdiction in which they are located will depend partly on the details of
the arrangements, and partly on the relevant local law.
Resp. Ex. 3 ¶ 37. The tension between these depictions foreshadows a pattern of
inconsistent statements by the defendants.
9
See Compl. ¶ 2. In this litigation, the defendants have represented to the court
that Lilly’s contention “is not accurate” because Lilly and Israel had two daughters and
four grandchildren, who are also his heirs. Resp. ¶ 9 n.2. In email correspondence, by
contrast, Neupert referred to Lilly as Israel’s sole heir. See Reply Ex. 4 (describing Lilly
as “the only heir to the UK assets”); Reply Ex. 7, at 1 (describing Lilly as “the sole heir
to the LLC shares”); Reply Ex. 8, at 1 (describing Lilly as “sole heir” under Israel’s will).
In his affidavit in the probate proceeding, Neupert likewise stated that “the only
beneficiary under the English Will is the Testator’s widow.” Resp. Ex. 3 ¶ 94.
5
The parties agree that, during his lifetime, Israel accumulated significant wealth.
One of his assets was a villa in the south of France called La Treille (the “Villa”).10 Lilly
values the property at approximately €25 million.11
To hold title to the Villa, Israel caused the Company to be formed on May 1,
2001.12 It was a single-member Delaware limited liability company, and Israel served as
the sole member of the LLC.13 Lilly contends that, until the events giving rise to this
litigation, she believed that this state of affairs had persisted until Israel’s death. In other
words, when Israel died, the Company was still an LLC, and Israel was still the sole
member of the Company. The operating agreement for the Company did not provide for
it to dissolve upon the death of its sole member.14 Consequently, upon his death, Israel’s
membership interest in the Company became an asset of his estate.
10
See Compl. ¶ 1; accord Resp. ¶ 17 (“Israel formed Côte d’Azur to own a villa in
the South of France.”)
11
Compl. ¶ 1. Neupert appears to have obtained an estimate that placed the market
value of the Villa at €12-15 million. See Resp. Ex. 9.
12
Compl. ¶ 10 & Ex. C. In its counterclaim, the Company contends that Israel
formed the LLC on April 17, 2001. Countercl. ¶ 3. Lilly admits this fact. Countercl.
Answer ¶ 3. The certificate of formation reflects that it was filed on May 1, 2001, making
that the date of formation for purposes of Delaware law. See 6 Del. C. § 18-2019(b) (“A
limited liability company is formed at the time of the filing of the initial certificate of
formation in the office of the Secretary of State or at any later date or time specified in
the certificate of formation . . . .”).
13
Compl. ¶ 11.
14
See Compl. ¶¶ 19-21; 6 Del. C. § 18-801(b).
6
Lilly contends that, as Israel’s sole heir, she became the sole owner of the
membership interest. In this litigation, the defendants have rejected Lilly’s contention as
“inexplicable” and “confusing at best.”15 Yet, in email correspondence, Neupert
embraced precisely this theory when he authorized a French attorney to represent to the
French taxation authorities that Lilly immediately gained title to the Company’s equity
upon Israel’s death.16 The apparent source of the defendants’ current confusion is that the
shares initially became the property of Israel’s estate and, because the estate remains in
probate, Lilly has not yet received title. Moreover, her claim is junior to any debts owed
by the estate.17 To my mind, Lilly’s resulting claim is neither inexplicable nor confusing.
At best, she is taking the same position that Neupert did. At worst, she is claiming an
equitable interest as Israel’s heir.
15
Resp. ¶ 31 (describing Lilly’s claim as “based on an inexplicable theory that,
because she is Israel’s surviving spouse and self-proclaimed sole beneficiary, the
membership interest transferred to her automatically upon [Israel’s] death.”); Tr. at 9
(defense counsel criticizing Lilly’s theory that she could inherit the equity in the
Company as “a confusing theory of ownership”).
16
Reply Ex. 7, at 1 (“As I told you that according to the Last Will of Mr. Perry, his
widow, Mrs. Lilly Perry, is the sole heir to the LLC shares, so automatically upon the
death she becomes the new owner (without any further legal action).”).
17
According to Neupert’s affidavit in the probate proceeding, the estate faces
significant debts and could be insolvent. See Resp. Ex. 3 ¶¶ 26-35, 50-55. If Neupert is
correct about the estate’s liabilities, and if Lilly is correct that Israel owned the sole
membership interest in the Company at the time of his death, then this litigation could
result in a determination that would make the Company’s equity available to the estate’s
creditors.
7
B. Lilly’s Dispute With Neupert
Neupert was one of Israel’s long-time business associates.18 He is a Swiss attorney
and is the senior partner at Neupert Vuille Partners, a law firm based in Zurich,
Switzerland.19 In an affidavit dated February 23, 2017, which Neupert filed in the probate
proceedings and which the defendants submitted here, Neupert described himself as “an
advocate specializing in aviation, banking, tax and cross-jurisdictional corporate law in
Switzerland.”20
Lilly alleges that, shortly after Israel’s death, Neupert approached her about a plan
to rent out the Villa. She alleges that Neupert provided her with a written consent that
would have appointed Neupert as a manager of the Company so that he could carry out
the plan.21 The record contains an email from Neupert attaching a written consent by
which Lilly, as sole member of the Company, would appoint Neupert as a manager.22
Lilly did not sign the consent. Lilly contends that, after she refused, Neupert
embarked on a scheme to take control of the Company. To accomplish this, on June 30,
2016, Neupert caused a certificate of conversion to be filed with the Delaware Secretary
18
Answer ¶ 3 (admitting this fact).
19
Answer ¶ 7 (admitting this fact).
20
Resp. Ex. 3 ¶ 1.
21
See Compl. ¶ 14.
22
Reply Ex. 11, at 2.
8
of State that converted the Company from an LLC into a corporation.23 The certificate
listed Neupert as the President of the Company.24 Neupert also caused a new certificate
of incorporation to be filed for the Company that authorized the issuance of up to 10,000
shares of common stock.25
Lilly alleges that, after converting the Company into a corporation and taking
control of it by purporting to be its President, Neupert registered the Company in France
as a leasing company, consistent with his original scheme to rent out the Villa.26 Lilly
found out about Neupert’s actions after her tax lawyers called and asked why she had
registered the Company in France, given the tax liabilities that action would trigger.27
Lilly contends that Neupert had no authority to file the certificate of conversion
and that, under the Company’s operating agreement, only the sole member could act on
behalf of the Company.28 Lilly contends that Neupert had no authority to act on behalf of
Israel’s estate.29 Although Israel had named Neupert as the executor of his estate, Lilly
23
See Compl. ¶ 15 & Ex. C, at 2.
24
See Compl. Ex. C, at 2. The defendants admit that the certificates were filed, but
they point out that a corporate service company performed the filing. See Answer ¶ 8.
25
See Compl. Ex. C.
26
See Compl. ¶ 22.
27
See Compl. ¶ 23.
28
See Compl. ¶¶ 17-18 & Ex. A ¶ 10.
29
See Compl. ¶ 21.
9
challenged his appointment in the probate proceedings. To date, Neupert has never been
appointed to that role.30
Lilly promptly filed suit in this court. Her complaint contains five counts:
Count I asserts a claim for fraud against Neupert.
Count II asserts a claim against Neupert for violations of the Delaware
Uniform Deceptive Trade Practices Act.
Count III asserts a claim against Neupert for tortious interference with Lilly’s
rights under the Company’s operating agreement.
Count IV asserts a claim against Neupert for conversion.
Count V asserts a claim against Neupert for unjust enrichment.
Lilly named the Company as a defendant so that the court could grant her the relief she
seeks, including an order invalidating the conversion of the Company from an LLC into a
corporation.31
C. The Defendants’ Contentions
Neupert answered the Complaint and raised affirmative defenses. In his only non-
conclusory affirmative defense, he asserts that “[t]he Complaint fails, in whole or in part,
because Plaintiff was not a member of [the Company], is not a stockholder of [the
Company], and lacks standing to bring her claims.”32
30
Answer ¶ 7 (admitting this fact). In emails, Neupert nevertheless described
himself as the executor of the estate and purported to make representations and offered to
sign declarations in that capacity. See, e.g., Reply Exs. 2, 6, 7, 10.
31
Compl. at 12.
32
Answer at 17.
10
The Company joined in Neupert’s answer to the Complaint and his affirmative
defenses. The Company also asserted a counterclaim seeking a declaration that Lilly was
neither a member of the Company nor a stockholder post-conversion.33 The counterclaim
alleges that, on May 1, 2013, before his death and while the Company remained an LLC,
Israel assigned the sole member interest in the Company to the Foundation. 34 The
Company alleges that, by operation of law, the Foundation became a member of the
Company through the assignment.35
To evidence the transfer, both the Company and Neupert rely on a single-page
document, titled “Deed of Assignment,” ostensibly dated May 1, 2013. The document has
a signature line for Israel and a signature line for an individual named Dieter Naeff to
sign on behalf of the Foundation. Illegible signatures appear above the lines. Neither
signature is notarized or attested in any way.
In its entirety, the Deed of Assignment states:
The Undersigned, Israel I. Perry, born 23 April 1942, Israeli Passport No.
10922443 herewith assigns the entire share capital of the following
companies
1. Greetnwin.com Inc, Delaware/USA
2. Solid Virgin Islands Ltd, BVI
33
Based on defense counsel’s answers to the court’s questions during oral
argument on the Rule 19 motion, it appears that Neupert was the sole director of the
Company when Lilly commenced this litigation. Counsel represented that Neupert added
a second director sometime in September 2017, after Lilly filed suit. See Tr. at 16-17.
34
Countercl. ¶ 4.
35
See Countercl. ¶ 5; 6 Del. C. § 18-704(a)(3).
11
3. Cote d’Azur Estate LLC, Delaware/USA
4. The Heritage Collection
as well as
all of the pieces of art listed in the
ARTLID List (pending approval by SOCA
of the items contained in their Chattel List)
to the [Foundation]
a foundation according to Liechtenstein Law
The assignee herewith accepts the aforementioned assignments.36
Neupert averred in the probate proceedings that the Deed of Assignment validly
transferred the sole member interest of the Company to the Foundation as of May 1,
2013.37
D. The Current Dispute
Lilly filed an answer to the counterclaim in which she denied the validity of the
Deed of Assignment. In addition to other affirmative defenses, she asserted that the
counterclaim should be dismissed for failure to join a necessary party. On August 31,
2017, Lilly moved, pursuant to Rule 19, to join the Foundation as an involuntary
counterclaim plaintiff or, in the alternative, to dismiss the Company’s counterclaim and
affirmative defenses for failure to join a necessary party.
36
Answer Ex. A.
37
Resp. ¶ 20 (“Dieter unequivocally averred that Israel had assigned his Côte
d’Azur interest to the Foundation in 2013.”); accord Resp. Ex. 3 ¶ 61.
12
E. Evidence Of Fraud
Both sides submitted documents in support of their positions on the Rule 19
motion. Of particular importance, Lilly submitted what appear to be emails from Neupert
and representatives of the Foundation that directly contradict the positions that Neupert
and the Company have taken before this court.
To recapitulate, Neupert and the Company have asserted that the following facts
are true:
The Foundation has been the only owner of the equity of the Company since May
1, 2013.38
Because the Foundation had been the owner of the equity of the Company since
May 1, 2013, it was impossible to the point of “inexplicable” that Lilly could
inherit the equity of the Company under Israel’s will.39
Because of the transfer, Lilly cannot prove that she has any ownership interest in
the Company, whether direct or indirect, beneficial or otherwise, except to the
extent that Lilly is one of the beneficiaries of the Foundation itself.40
Contrary to the defendants’ assertions, the record at this preliminary stage indicates that,
until disputes arose, Neupert, the Company, and representatives of the Foundation (i)
described the Deed of Assignment as unsigned and ineffective, (ii) maintained that Israel
Resp. ¶ 18 (“As a result, beginning May 1, 2013, the Foundation has been the
38
only owner of Côte d’Azur.”).
Resp. ¶ 31 (describing Lilly’s claim as “based on an inexplicable theory that,
39
because she is Israel’s surviving spouse and self-proclaimed sole beneficiary, the
membership interest transferred to her automatically upon [Israel’s] death”).
40
See Resp. ¶ 5 (asserting that Lilly cannot prove that she has any ownership
interest in the Company); see also id. ¶ 13 (describing Lilly as one of the beneficiaries of
the Foundation).
13
was the sole owner of the equity in the Company until his death, (iii) recognized that
Lilly stood to inherit the equity as Israel’s heir, and (iv) treated Lilly as the sole member
of the Company.
My impression, at this preliminary stage, is that the Foundation is an estate
planning vehicle that Israel and Neupert established with the assistance of Lopag Trust
(“Lopag”). In his affidavit in the probate proceeding, Neupert described Lopag as
follows:
Lopag is a commercial trust company set up in 1989 and registered on the
Liechtenstein commercial register. I was one of the founding members of
Lopag and was until 18 November 2016 a member of its Board of Trustees.
At one time I also had a small shareholding in the company, but I disposed
of that interest at the same time as retiring from the Board, so as to avoid
any accusation of impropriety . . . .41
Although the record on this point remains incomplete, a document that the defendants
submitted from 2013 identifies the three members of the governing board of the
Foundation as Dominick Naeff, Markus Giger, and Louis Oehri.42 Naeff and Oehri
43
appear to be principals of Lopag. As noted, Naeff purported to sign the Deed of
Assignment on behalf of the Foundation.44
41
Resp. Ex. 3 ¶ 43.
42
See Resp. Ex. 2, at 2 (listing Naeff, Giger, and Oehri as members of the board of
the Foundation as of June 12, 2013). Some documents spell Naeff’s name as “Näff.” For
consistency, this decision uses Naeff.
43
See Tr. at 18-19; see also Lopag, www.lopag.li/en/ (last visited Dec. 3, 2017)
(identifying principals of firm).
44
See Answer Ex. A.
14
The emails that Lilly has submitted indicate that, after Israel’s death, Naeff did not
view the Deed of Assignment as effective, nor did he think the Foundation owned any
equity in the Company. In an email dated March 27, 2015, sent two weeks after Israel’s
death, a lawyer for Tamar Perry, Lilly’s and Israel’s daughter, asked Naeff about the
Deed of Assignment, copying Neupert.45 The subject of the email is direct and to the
point: “[H]erewith is an assignment of Cote d Azure and Greetnwin – pls check.”46 Naeff
emailed back the next day, copying Neupert and stating:
This assignment is known to us, but it was never executed as far as we are
aware. And I’m glad about it with respect to Cote d Azure since reporting
obligations in France (relevant due to the Villa in France) became very
strict in the meantime and we have to plan the transfer into THE LIZA
TRUST carefully now. Who can inform us about the actual
shareholders/directors of Cote d Azure?47
This email indicates that, as of March 2015, two weeks after Israel’s death, the
Foundation representative who purportedly executed the Deed of Assignment did not
think it was valid or that the Foundation owned any equity in the Company.
Later that year, in December 2015, Naeff reiterated his belief about the ownership
of the Company in an email exchange with Tamar. He again copied Neupert.48 The
45
The sender appears to be Israel Wolnerman, whom Neupert describes in his
affidavit as “Tamar’s Israeli layer [sic].” Resp. Ex. 3 ¶ 92.
46
Reply Ex. 1.
47
Id. Naeff also copied Ann Naeff-Oehri, who appears to be another principal of
Lopag.
48
Reply Ex. 5, at 1. He also copied Naeff-Oehri, Omri Yadlin, and Neil Duggan.
Yadlin appears to be one of the trustees of various trusts that Israel created. Duggan
15
exchange concerned operational details of the Villa, including replacing employees there.
Naeff made clear that the action had to be authorized by Israel’s estate, because the estate
owned the equity in the Company: “La Treille is held by Cote d’Azur Real Estate and
[as] such part of the estate. We are neither shareholders nor directors, so we can only act
based on goodwill of the involved.”49 As Naeff apparently saw it, the Foundation did not
own the equity of the Company; it was part of Israel’s estate. If the Deed of Assignment
had been valid and the Foundation had owned all of the Company’s equity since 2013,
then Naeff’s response could not have been true.
The emails that Lilly has submitted also indicate that, after Israel’s death, Neupert
did not view the Deed of Assignment as effective, nor did he think the Foundation owned
the equity of the Company. Rather, he thought that Israel owned the equity when he died
and that it was part of the estate, which was subject to probate in the United Kingdom. In
an email dated August 12, 2015, sent three months after Israel’s death, an individual
named Danny Cohen contacted Neupert and Naeff regarding a question Lilly had asked
about “payments for safekeeping of the villa.”50 Neupert responded, copying Naeff and
Tamar:
appears to be a member of the governing board of the Swiss Protector Association, an
entity which Neupert founded and which serves as the protector of at least one of the
trusts that Israel created. See Resp. Ex. 3 ¶¶ 24, 32, 42-46. Lopag serves as the trustee for
each of the trusts. Id. ¶ 43.
49
Reply Ex. 5, at 1.
50
Reply Ex. 2.
16
Thanks Danny – while approving the contents of your mail we should not
forget that formally all agreements concerning the Villa should be
concluded by the owner, ie. Cote d’Azur Real Estate LLC, Delaware
How far are we with retrieving the company documents and who should
contact the French Tax Advisers concerning the disclosure of the new
beneficial owners?
Formally the late Mr. Perry had declared to be the sole shareholder of the
company, so – from a legal point of view – the shares in the Company fall
under the UK Probate . . . (with my being responsible to declare all the
assets as executor).51
As Neupert apparently understood matters, the Foundation did not acquire all of the
Company’s equity in 2013. Instead, Israel was the “sole shareholder” when he died, so
“from a legal point of view,” the shares became part of Israel’s estate. If the Deed of
Assignment had been valid, Neupert’s statements could not have been true.
Three months later, in November 2015, Neupert sent a series of emails in which he
reiterated his belief that Israel had continued to own all of the Company’s equity and his
expectation that it would pass to Lilly through the probate process. In an email dated
November 23, 2015, Tamar’s lawyer asked Neupert whether he had access to Israel’s
bank accounts.52 Neupert responded as follows:
[A]s I indicated to Tami we first have to apply for probate and in this
application we will have to list all personal assets of IIP (all bank accounts
whether in the UK or worldwide as well as all the shares held by IIP, for
instance the Cote d’Azur Real Estate LLC)[.]
51
Id.
52
Reply Ex. 3.
17
Then we can sort out the financial relations between the Estate of IIP and
the Structure[.]53
Two days later, Neupert dictated an email to Tamar, copying Naeff, Yadlin, and Duggan:
As your mother [Lilly] is still – until she has signed an Agreement
renouncing some or all of her claims – the only heir to the UK assets of
your father (including bank accounts and shares in companies held
personally by your father), I have to answer her questions regarding the
Will and the assets. The assets certainly include the shares in Cote d’Azur
Real Estate LL.C. [sic].54
Both emails indicate that, as of November 2015, Neupert believed that Israel owned all of
the equity of the Company when he died and that it would pass to Lilly in the probate
proceeding. If the Deed of Assignment had been valid, these statements could not have
been true.
Neupert appears to have continued to hold the same beliefs in March 2016, when
he communicated with an attorney who was representing Israel’s estate and the Company
before the French tax authorities in proceedings regarding the Villa. In an email dated
March 29, 2016, Neupert provided the attorney with the following information:
You might know that the US has no such thing as a commercial registry
– we are trying therefore to get a Certificate of Incumbency which
would show that I am the legitimate Director of the company now (as
Executor of the Last Will of Mr Perry).
As this will take another few weeks, at present I could offer you a
confirmation letter to the effect, that I, as Executor of the Last Will, can
certify that Mr Perry was the owner of Cote d’Azur LLC from the
53
Id. He also copied Naeff and Tamar.
54
Reply Ex. 4.
18
incorporation until his death. If this would be helpful, maybe you can
send me a draft in French which would satisfy the tax inspector.55
If the Deed of Assignment was valid, such that Israel did not own the shares when he
died, then Neupert was proposing to give false information to the French tax inspector.
After the French attorney responded with questions, Neupert dictated and sent a
response through his secretary on March 30, 2016. He copied Naeff and Tamar. In the
email, Neupert stated the following:
May I first of all point out that I have been involved in French/Spanish
real estate investments for 40 years, that I have lectured on tax
implications of cross border real estate investments and that I have won
the first landmark case concerning the 3% flat tax at the Cour de
Cassation back in 1983.
So what I can offer for the time being, is a confirmation of the
ownership of Mr. Perry in my capacity as Director of Cote d’Azure
Estate LLC (I do not have to mention that Mr Perry has passed away
because I hope to have the Certificate of Incumbency when the French
tax inspector or inspectrice will be asking for it[)].
I assume that you need an actual power of attorney by the Director of
the company?
Regarding the 3% declaration, I would be very cautious to make a false
declaration concerning the ownership as of January 1, 2016 (I had a
nasty experience in another case). I would say that as the ownership of
the LLC was undetermined on Jan 1st 2016, it is actually still correct to
mention that Mr Perry (or his estate) was the owner at the time. We can
search for a possible position of the French Tax Authorities on this very
specific case, but I would be surprised to find any. In any event, saying
that Mrs Perry was the owner on Jan 1st 2016 is also probably a wrong
statement, wouldn’t it?
* * *
55
Reply Ex. 6.
19
Summing up, I would suggest that you prepare a French declaration I can
sign as Director and at the same time, I think you need a new power of
attorney (it looks funny if I sign a Certificate as a Director and you are still
using a PoA from a deceased person).56
Neupert’s statements in this email are consistent with a belief that Israel owned the equity
of the Company at his death such that the equity became part of his estate. They are
inconsistent with the Foundation having owned the equity since 2013.
After receiving Neupert’s response, the tax lawyer asked additional questions. At
this point, Neupert shifted away from treating the shares as owned by the estate to
embrace precisely the same position regarding ownership that Lilly has advanced in this
proceeding:
I told you that according to the Last Will of Mr Perry, his widow, Mrs Lilly
Perry, is the sole heir to the LLC shares, so automatically upon the death
she becomes the new owner (without any further legal action). In my
opinion it would be a bad idea to say the estate is the owner, because then
the tax office will immediately ask who the other family members might be
in the hope of getting 40% inheritance tax from the daughters.57
If the Deed of Assignment was valid, then Neupert’s description of Lilly’s ownership
position would have been false, and he would have been proposing to provide false
information to the French tax authorities.
Tax counsel appears to have been concerned about making these representations to
the French government. Tax counsel subsequently asked for confirmation that “Cote
56
Reply Ex. 7, at 2-3. Neupert also copied Yadlin, Dugan, Naeff, and Tamar.
Id. at 1. In a later exchange, Neupert also wrote, “As the Executor of the Last
57
Will of Mr. Perry I can only reiterate that Mrs. Lilly Perry inherits the shares of the
LLC.” Reply Ex. 9, at 2.
20
d’Azur LLC was not contributed to the trust constituted by Mr Perry (to our knowledge
this is not the case).”58 In an email dated May 4, 2016, Neupert formally authorized tax
counsel to “declare Lilly Perry as [the] only shareholder of the Cote d’Azur LLC by
inheritance from her late husband Israel Perry according to his Last Will.” 59 He also
promised tax counsel that he would “be able to send you (within the next few weeks) a
declaration signed by me as CEO of the LLC that Israel Perry was indeed the owner of
the shares until his Death on 18 March 2015—you already have my confirmation as
Executor of the Last Will.”60
During his email exchanges with tax counsel, Neupert made reference to “further
papers from Delaware.”61 Neupert later received “from Delaware” a document that could
be provided to the French tax authorities to confirm that Neupert was authorized to speak
on behalf of the Company.62 The document was titled “Written Consent of Members of
Cote D’Azue [sic] Estate LLC,” was dated “as of March 30, 2016,” would have
appointed Neupert as a manager of the Company, and identified “Lilly Perry” as the sole
member of the Company.63 The plan to have Lilly execute a member consent as the sole
58
Reply Ex. 9, at 4.
59
Id. at 2.
60
Reply Ex. 10, at 1.
61
Reply Ex. 7, at 1.
62
Reply Ex. 11, at 2.
63
Id.
21
member of the Company “as of March 30, 2016” is inconsistent with the concept that
Israel transferred his equity to the Foundation three years earlier.
Lilly alleges that she refused to sign the written consent. Consistent with her
account, it is only at this point that Neupert and the representatives of the Foundation
appear to have started treating the Foundation as the owner of the equity. The record
contains an “unlimited power of attorney” that a Foundation representative executed on
May 2, 2016 (the signature is illegible).64 It granted Neupert the power to perform “all
legal acts” including
Extrajudicial representation; representation before all courts of law,
administrative authorities, and arbitral tribunals; entry into agreements as to
jurisdiction, including venue and arbitration agreements; filing appeals;
issuing disclaimers; entering into settlements; acknowledging and
withdrawing civil actions; executions of judgment and agreed settlements;
receiving and issuing securities, payments, and other objects of litigation;
instituting and conducting debt collection procedures, including the filing
of creditor recovery actions; representation in inheritance matters, public
registrations and recordings, and land registry matters; representation in
criminal matters, in particular the institution/filing and withdrawal of
criminal actions and demands for prosecution.65
Neupert used the authority granted by the power of attorney to execute the certificate of
conversion on June 29, 2016.66 It was filed on June 30.67 He also used the authority
64
Mot. Ex. E.
65
Id.
66
Resp. Ex. 3 ¶ 64.
67
See Compl. ¶ 15 & Ex. C, at 1.
22
granted by the power of attorney to cause the filing of a new certificate of incorporation
for the Company that authorized the issuance of up to 10,000 shares of common stock.68
The very next day, on July 1, 2016, Neupert convened an organizational meeting
of the board of directors of the Company at his law offices in Switzerland.69 According to
the minutes, Neupert already was Chairman of the Board, an individual named Tanja
Tandler already was the Secretary, and the two of them together constituted a quorum of
the board of directors.70 According to the minutes, they appointed Naeff, Oehri, and
Giger as directors of the Company.71 As noted, these three individuals were members of
the board of the Foundation in 2013,72 and Naeff was the individual who purportedly
signed the Deed of Assignment on behalf of the Foundation. During the meeting, Neupert
and Tandler issued 10,000 shares of Company stock to the Foundation.73
These documents provide substantial support for Lilly’s contention that Israel’s
purported transfer of his member interest to the Foundation in 2013 is a recent invention.
It is worth noting that it does not necessarily follow from the record that Neupert took
68
Compl. ¶ 16 & Ex. C, at 4.
69
Mot. Ex. F, at 1.
70
Id.
71
Id. at 2.
72
See Resp. Ex. 2, at 2 (listing Oehri, Giger, and Naeff as members of board of
Foundation); Mot. Ex. F, at 1 (appointing Oehri, Giger, and Naeff as directors).
73
See Mot. Ex. A.
23
these actions to benefit himself personally. For example, Neupert appears to have taken
alternative positions regarding ownership of the Company with the French tax authorities
in an effort to help Israel’s heirs avoid French taxes. It seems possible that he decided to
take the position that the Foundation had acquired ownership of the Company in 2013 so
that the equity of the Company would not become part of Israel’s estate and subject to the
claims of its creditors. At this preliminary stage, it is not possible to make definitive
findings regarding the ownership of the Company or Neupert’s actions and motives.
II. LEGAL ANALYSIS
Lilly has moved to join the Foundation as a counterclaim plaintiff pursuant to Rule
19(a). That rule states:
Persons to be joined if feasible. A person who is subject to service of
process and whose joinder will not deprive the Court of jurisdiction over
the subject matter of the action shall be joined as a party in the action if
(1) in the person’s absence complete relief cannot be accorded among those
already parties, or
(2) the person claims an interest relating to the subject of the action and is
so situated that the disposition of the action in the person’s absence may
(i) as a practical matter, impair or impede the person’s ability to
protect that interest or
(ii) leave any of the persons already parties subject to a substantial
risk of incurring double, multiple, or otherwise inconsistent obligations by
reason of the claimed interest.
If the person has not been so joined, the Court shall order that the person be
made a party.
24
If the person should join as a plaintiff but refuses to do so, the person may
be made a defendant, or in a proper case, an involuntary plaintiff.74
Under Rule 13(h), Rule 19 applies equally to counterclaims and cross-claims.75
If the court concludes that a party should be joined under Rule 19(a), but joinder is
not feasible, then Rule 19(b) calls upon to the court to “determine whether in equity and
good conscience the action should proceed among the parties before it, or should be
dismissed, the absent person thus regarded as indispensable.”76 Rule 19(b) provides “a
non-exhaustive list” of factors for the court to consider when determining whether the
action can proceed without the party’s involvement.77 This decision does not reach the
issue raised by Rule 19(b) because it concludes that joinder is feasible.78
74
Ct. Ch. R. 19(a) (formatting added).
75
Ct. Ch. R. 13(h) (“Persons other than those made parties to the original action
may be made parties to a counterclaim or cross-claim in accordance with the provisions
of Rules 19 and 20.”).
76
Ct. Ch. R. 19(b).
77
Sample v. Morgan, 914 A.2d 647, 674 (Del. Ch. 2007) (Strine, V.C.).
78
Hughes Tool Co. v. Fawcett Publications, Inc., 350 A.2d 341, 345-46 (Del.
1971) (“In the view we take of the case, [Rule 19(b)], which applies only when it has
been shown that the person involved ‘cannot be made a party,’ is not relevant. There has
been no showing that Hughes cannot be made a party and thus we do not reach the
balancing test.”).
25
A. The Foundation Should Be Joined.
Under Rule 19(a)(1), an absent party should be joined if “in the person’s absence
complete relief cannot be accorded among those already parties.” 79 Under Rule 19(a)(2),
an absent party also should be joined if “the person claims an interest relating to the
subject of the action,” and the disposition of the action may “(i) as a practical matter,
impair or impede the person’s ability to protect that interest or (ii) leave any of the
persons already parties subject to a substantial risk of incurring double, multiple, or
otherwise inconsistent obligations by reason of the claimed interest.”80 The Foundation’s
claim to own all of the Company’s equity as a result of the Deed of Assignment satisfies
both criteria for purposes of the dispute in this case.
Delaware decisions recognize that when litigation places at issue the validity or
enforceability of property rights, such as a party’s rights under an agreement, then the
holders of the property rights have an interest in the subject matter of the action such that
they should be joined as parties.81 In Elster v. American Airlines, Inc., for example, this
court stated that “[a]ll parties to a contract sought to be cancelled are indispensable
parties to the suit for cancellation unless it is obvious that one not joined has no interest
79
Ct. Ch. R. 19(a)(1).
80
Ct. Ch. R. 19(a)(2).
81
See NuVasive, Inc. v. Lanx, Inc., 2012 WL 2866004, at *2-3 (Del. Ch. July 11,
2012) (holding that absent current and former employees were parties who should be
joined in an action in which their former employer sued a third party for tortious
interference with their employment agreements and sought a declaratory judgment
regarding the breadth of restrictive covenants in the agreements).
26
whatever in the subject matter of the suit.”82 The court held that holders of options should
be joined in a case where the plaintiff sought to cancel the options as void or to enjoin the
issuance of shares under those agreements.83 And this court stated flatly in Hodson v.
Hodson Corp. that “[i]t is the rule, long settled in this state, that the owner of shares of
stock in a Delaware corporation is an indispensable party to an action to cancel such
shares . . . .”84
As Chancellor Allen explained, early Delaware decisions, like Elster, reasoned
formalistically to declare parties “indispensable” based on their status.85 The current rule
calls for a more nuanced inquiry in which the court first determines whether an absent
party should be joined under Rule 19(a) and then evaluates multiple factors under Rule
19(b) to determine whether the litigation should go forward when it is not feasible to join
the absent party.86 The multi-factor analysis under Rule 19(b) “has afforded courts the
opportunity to consider a richer factual context in determining whether a party is
dispensable or not,” or, in other words, when determining whether the action can proceed
82
106 A.2d 202, 204 (Del. Ch. 1954).
83
Id.
84
80 A.2d 180, 181 (Del. Ch. 1951) (citations omitted) (finding owner of shares
was indispensable in action claiming that shares were issued fraudulently and seeking to
require the surrender or cancellation of the shares).
85
Commonwealth Assocs. v. Providence Health Care, Inc., 1993 WL 432779, at
*9 (Del. Ch. 1993) (Allen, C.). See generally Federal Practice, supra, § 1601 (describing
history of Federal Rule of Civil Procedure 19 and effect of 1966 revisions to the rule).
86
Commonwealth Assocs., 1993 WL 432779, at *10-11.
27
notwithstanding the absence of a party that otherwise should be joined.87 To my mind, the
older cases remain informative for the first step of the analysis when assessing whether
the absentee is a party that should be joined.
In this case, the Company’s counterclaim seeks a declaratory judgment that the
Deed of Assignment validly transferred all of the equity of the Company from Israel to
the Foundation. Neupert’s and the Company’s second affirmative defense asserts the
same thing. The counterclaim and the affirmative defense necessarily place at issue the
validity of the Deed of Assignment and raise the question of who owned the shares. To
grant the relief the Company seeks or to uphold the related affirmative defense, this court
must hold that the Foundation is the owner of the shares. To deny the relief the Company
seeks or to reject the related affirmative defense, this court must reject the Foundation’s
claim to the shares. Similarly, now that the defendants have introduced the Deed of
Assignment into the litigation, if the court were to grant the relief that Lilly seeks, it
necessarily would call into question the Deed of Assignment, because the relief Lilly
seeks encompasses a determination that she owns all of the equity of the Company.
As a result, there is a substantial risk that the court cannot accord complete relief
in the Foundation’s absence. A ruling against the defendants and in favor of Lilly would
determine that, as among them, and for purposes of Delaware law, Lilly owns the shares
and, potentially, that the Company is still an LLC. That ruling would not bind the
87
Id. at *10.
28
Foundation directly. Further proceedings would be required that would involve questions
about the preclusive effect of this court’s decision, among other matters. Even if not
technically binding, a ruling may impair the Foundation’s rights as a practical matter. 88 A
ruling in favor of the defendants would avoid this problem, but the outcome of this
litigation is far from clear. At this preliminary stage, there is meaningful
contemporaneous evidence that supports Lilly’s claims.
A decision against the defendants and in favor of Lilly will also, as a practical
matter, impair or impede the Foundation’s ability to protect its interests in the shares.
Such a decision would call into question the Foundation’s title to the shares. It also would
leave the Company facing a substantial risk of incurring double or otherwise inconsistent
obligations, because this court would have determined that Lilly owned the shares, yet
the Foundation might still claim that it owned the shares. Once again, a ruling in favor of
the defendants would avoid these problems, but it is not possible, at this preliminary
stage, to predict how the litigation will unfold.
Because those tests under Rule 19(a) are met, the Foundation is a party that should
be joined, if feasible.
88
See Federal Practice, supra, §§ 1602, 1604.
29
B. The Foundation Is Subject To Service Of Process.
The first sentence of Rule 19(a) limits the class of absent parties who “shall be
joined as a party in the action” to those persons who are “subject to service of process.” 89
Technically, Rule 19(a) speaks in terms of whether the absent party “is subject to service
of process,” not whether the absent party is subject to personal jurisdiction. The rule
appears to contemplate that if service can be effected, then the absent party should be
joined and served, at which point the absent party can raise Rule 12 defenses on its own
behalf.
In this case, Lilly proposes to serve the Foundation under the Long-Arm Statute,
which makes availability of service co-extensive with the question of personal
jurisdiction. The Long-Arm Statute provides that a list of enumerated acts “constitute
legal presence within the State.”90 The statute further provides that “[a]ny person who
commits any of the acts hereinafter enumerated thereby submits to the jurisdiction of the
Delaware courts.”91 The statute permits service of process on such a person in one of four
ways:
(1) By personal delivery in the manner prescribed for service within this
State.
89
Ct. Ch. R. 19(a).
90
10 Del. C. § 3104(b).
91
Id.
30
(2) In the manner provided or prescribed by the law of the place in which
the service is made for service in that place in an action in any of its courts
of general jurisdiction.
(3) By any form of mail addressed to the person to be served and requiring
a signed receipt.
(4) As directed by a court.92
Determining whether a Delaware court can exercise personal jurisdiction under the
Long-Arm Statute requires a two-step analysis.93 In the first step, the court must
determine whether the plaintiff can satisfy the statutory requirements for the assertion of
jurisdiction.94 In the second step, the court must determine whether exercising personal
jurisdiction over the defendant passes muster under the Due Process Clause of the United
States Constitution.95 To avoid due process problems, “a nonresident defendant must
have sufficient ‘minimum contacts with [the forum state] such that the maintenance of
the suit does not offend traditional notions of fair play and substantial justice.’”96
92
Id. § 3104(d).
93
See Matthew v. Fläkt Woods Gp. SA, 56 A.3d 1023, 1027 (Del. 2012).
94
Id.
95
Id.
96
Id. (alteration in original) (quoting Int’l Shoe Co. v. Washington, 326 U.S. 310,
316 (1945)).
31
The Long-Arm Statute is to be “broadly construed to confer jurisdiction to the
maximum extent possible under the Due Process Clause.” 97 For purposes of the due
process analysis, “[t]he well-established point of departure is that certain ‘minimum
contacts’ must exist between a State and a nonresident defendant before that State can
exercise personal jurisdiction over him.”98 The question is whether the defendants had
sufficient minimum contacts with Delaware such that “compelling [them] to defend
[themselves] in the State would be consistent with the ‘traditional notions of fair play and
substantial justice’.”99
The Delaware Supreme Court has adopted what is known as the conspiracy theory
of jurisdiction.100 Under this theory,
a conspirator who is absent from the forum state is subject to the
jurisdiction of the court, assuming he is properly served under state law, if
the plaintiff can make a factual showing that: (1) a conspiracy to defraud
97
Hercules Inc. v. Leu Tr. & Banking (Bah.) Ltd., 611 A.2d 476, 480 (Del. 1992);
accord LaNuova D & B, S.p.A. v. Bowe Co., Inc., 513 A.2d 764, 768 (Del. 1986); see
also Sample v. Morgan, 935 A.2d 1046, 1056 (Del. Ch. 2007) (Strine, V.C.) (“[T]rial
courts must give a broad reading to the terms of the long-arm statute, in order to
effectuate the statute’s intent to ensure that this state’s court may exercise jurisdiction to
the full limits permissible under the Due Process Clause. In other words, the Supreme
Court has instructed that trial courts should permit service under § 3104 if the statutory
language plausibly permits service, and rely upon a Due Process analysis to screen out
uses of the statute that sweep too broadly.” (footnote omitted)).
98
Moore v. Little Giant Indus., Inc., 513 F. Supp. 1043, 1048 (D. Del. 1981)
(quoting Int’l Shoe, 326 U.S. at 316), aff’d, 681 F.2d 807 (3d Cir. 1982).
99
Waters v. Deutz Corp., 479 A.2d 273, 276 (Del. 1984) (quoting Int’l Shoe, 326
U.S. at 316).
100
Fläkt Woods, 56 A.3d at 1027.
32
existed; (2) the defendant was a member of that conspiracy; (3) a
substantial act or substantial effect in furtherance of the conspiracy
occurred in the forum state; (4) the defendant knew or had reason to know
of the act in the forum state or that acts outside the forum state would have
an effect in the forum state; and (5) the act in, or effect on, the forum state
was a direct and foreseeable result of the conduct in furtherance of the
conspiracy.101
The theory “is based on the legal principle that one conspirator’s acts are attributable to
the other conspirators.”102 Thus, “if the purposeful act or acts of one conspirator are of a
nature and quality that would subject the actor to the jurisdiction of the court, all of the
conspirators are subject to the jurisdiction of the court.”103
Delaware decisions have not explained consistently how the conspiracy theory
corresponds to the two-prong jurisdictional test.104 In my view, the five elements of the
Istituto Bancario test functionally encompass both prongs of the jurisdictional test. The
first three Istituto Bancario elements address the statutory prong of the test. The fourth
and fifth Istituto Bancario elements address the constitutional prong of the test.105
101
Istituto Bancario Italiano SpA v. Hunter Eng’g Co., 449 A.2d 210, 225 (Del.
1982).
102
Fläkt Woods, 56 A.3d at 1027.
103
Istituto Bancario, 449 A.2d at 222.
104
See Donald J. Wolfe & Michael A. Pittenger, Corporate and Commercial
Practice in the Delaware Court of Chancery § 3.04[b] (2012) (describing approaches).
105
See Virtus Capital L.P. v. Eastman Chem. Co., 2015 WL 580553, at *12 (Del.
Ch. Feb. 11, 2015).
33
The first three Istituto Bancario elements encompass the statutory prong by
speaking to the requirements of the Long-Arm Statute. The statute provides for
jurisdiction in circumstances that include the following:
(c) As to a cause of action brought by any person arising from any of the
acts enumerated in this section, a court may exercise personal jurisdiction
over any nonresident, or a personal representative, who in person or
through an agent:
(1) Transacts any business or performs any character of work or service in
the State;
(2) Contracts to supply services or things in this State;
(3) Causes tortious injury in the State by an act or omission in this State . . .
.106
“[A] single transaction is sufficient to confer jurisdiction where the claim is based on that
transaction.”107 The third Istituto Bancario element—whether a “substantial act or
substantial effect in furtherance of the conspiracy occurred in the forum state”—
corresponds with the statutory availability of jurisdiction over a party that has transacted
business in the state, performed work in the state, or caused tortious injury in the state
through an act or omission in the state.
106
10 Del. C. § 3104(c)(1)-(3).
107
Crescent/Mach I P’rs, L.P. v. Turner, 846 A.2d 963, 978 (Del. Ch. 2000)
(internal quotation marks omitted) (quoting Kahn v. Lynch Commc’n Sys., 1989 WL
99800, at *4 (Del. Ch. Aug. 24, 1989)); accord LaNuova, 513 A.2d at 768.
34
The plain language of the Long-Arm Statute recognizes that forum-directed
activity can be accomplished “through an agent.”108 The first and second Istituto
Bancario elements—the existence of a conspiracy and the defendant’s membership in
it—provide grounds for imputing the jurisdiction-conferring act to the defendant under
agency principles, because “conspirators are considered agents for jurisdictional
purposes.”109
It remains true that the conspiracy theory itself is not an independent basis for
jurisdiction that alleviates the need to establish a statutory hook in Section 3104. 110 But
the first, second, and third Istituto Bancario elements correspond sufficiently with the
requirements of Section 3104 such that satisfying the former accomplishes the latter.
Analytical overlap is equally present for the constitutional prong. The fourth and
fifth Istituto Bancario elements—whether the defendant “knew or had reason to know of”
the forum-directed activity and the degree to which the forum-directed activity was “a
direct and foreseeable result of the conduct in furtherance of the conspiracy”—speak to
due process and whether there are sufficient minimum contacts between the defendant
and the forum such that the defendant could reasonably anticipate being sued there.111
108
10 Del. C. § 3104(c).
109
Hercules, 611 A.2d at 481; accord Carlton Invs. v. TLC Beatrice Int’l Hldgs.,
Inc., 1995 WL 694397, at *12 (Del. Ch. Nov. 21, 1995) (Allen, C.).
110
Hercules, 611 A.2d at 482 n.6.
111
See Carlton Invs., 1995 WL 694397, at *12.
35
[A] defendant who has so voluntarily participated in a conspiracy with
knowledge of its acts in or effects in the forum state can be said to have
purposefully availed himself of the privilege of conducting activities in the
forum state, thereby fairly invoking the benefits and burdens of its laws.112
The “participation is a substantial contact with the jurisdiction of a nature and quality that
it is reasonable and fair to require the defendant to come and defend an action there.”113
In my view, therefore, if a plaintiff can address satisfactorily all five elements of
the conspiracy theory, then the plaintiff will have met both prongs of the jurisdictional
test. This decision therefore uses the conspiracy theory as the framework for analysis.
a. The Foundation’s Role In The Conspiracy
The first and second Istituto Bancario elements ask whether a conspiracy existed
and whether the defendant was a member of the conspiracy.114 Although Istituto
Bancario literally speaks in terms of a “conspiracy to defraud,” the principle is not
limited to that particular tort.115
112
Istituto Bancario, 449 A.2d at 225.
113
Id.; accord Hercules, 611 A.2d at 482 n.6 (explaining that the conspiracy
theory “provides a framework with which to analyze a foreign defendant’s contacts with
Delaware”).
114
449 A.2d at 225.
115
See id. at 222-25 (describing underlying theory without fraud-based limitation);
Carsanaro v. Bloodhound Techs., Inc., 65 A.3d 618, 635-36 (Del. Ch. 2013) (noting that
conspiracy theory encompasses claims for breach of fiduciary duty and aiding and
abetting); Hamilton P’rs, L.P. v. Englard, 11 A.3d 1180, 1197 (Del. Ch. 2010) (same);
Crescent/Mach, 846 A.2d at 977 (rejecting construction of Istituto Bancario that would
require a “specific allegation that [the defendants] agreed to conspire ‘to defraud’
minority stockholders”).
36
For jurisdictional purposes, the record at this preliminary stage provides adequate
support for Lilly’s claim that Neupert and the Foundation engaged in a conspiracy to
deprive her of her ownership interest in the Company.116 The record indicates that, until
as late as March 2016, both Neupert and representatives of the Foundation believed that
Israel was the sole member of the Company when he died on March 18, 2015, and that
Lilly stood to inherit sole ownership of the Company as his only heir. At best for the
defendants, Neupert took inconsistent positions as to whether (i) Lilly automatically
became the owner of the membership interest when Israel died or (ii) the membership
interest became the property of Israel’s estate and would pass to Lilly through probate.117
What Neupert did not say is that the Foundation had owned the membership interest since
March 2013. To the contrary, when asked about the Deed of Assignment just two weeks
after Israel’s death, a Foundation representative stated, “[t]his assignment is known to us,
116
The defendants contend that this court can consider only the allegations in
Lilly’s complaint when evaluating jurisdiction. Doing so would be inequitable because
the existence of the Deed of Assignment is an affirmative defense that the defendants
raised, and the counterclaim for a declaratory judgment establishing the validity of the
Deed of Assignment is something the Company asserted. Regardless, when evaluating a
Rule 12(b)(2) motion asserting lack of jurisdiction, the court is not limited to the
allegations of the complaint and can consider other evidence of record. See, e.g., Hart
Hldg. Co., Inc. v. Drexel Burnham Lambert, Inc., 593 A.2d 535, 538-39 (Del. Ch. 1991)
(Allen, C.). In my view, the current situation calls for the same approach.
117
See Reply Ex. 7, at 2 & Ex. 9, at 2.
37
but it was never executed as far as we are aware . . . . Who can inform us about the actual
shareholders/directors of Cote d Azure?”118
But, after Lilly declined to execute the member consent that would have made
Neupert a manager of the Company, it appears that Neupert and the Foundation decided
to create some alternative facts. At this point, the Foundation executed an unlimited
power of attorney, dated May 2, 2016, that purported to grant Neupert authority to act on
behalf of the Company. On June 29 and 30, Neupert used that authority to execute and
cause to be filed the certificate of conversion that named him as President of the
Company and a certificate of incorporation for the Company that authorized the issuance
of 10,000 shares. On July 1, Neupert convened a meeting of the board of directors of the
Company at which he and a colleague (i) appointed three representatives of the
Foundation as directors of the Company and (ii) issued all 10,000 shares to the
Foundation.
This course of conduct supports a reasonable inference that the Foundation and
Neupert conspired to deprive Lilly of her interest in the Company. In the five counts of
her complaint, Lilly pleads theories by which Neupert’s actions constituted tortious
conduct, with the two most obvious being fraud and conversion.119 The documentary
record as a whole, as well as the timing and results of Neupert’s actions, support a
118
Reply Ex. 1.
119
See Compl. ¶¶ 24-29, 40-43.
38
reasonable inference that the Foundation acted in concert with Neupert. The Foundation
purported to give him the authority to act, and it received the benefit of his actions. For
purposes of the conspiracy theory of jurisdiction, Lilly has provided sufficient basis to
believe that Neupert and the Foundation conspired to engage in tortious conduct.
b. The Forum-Related Acts
The third Istituto Bancario element asks whether “a substantial act or substantial
effect in furtherance of the conspiracy occurred in the forum state.”120 Filing a corporate
instrument in Delaware to facilitate the challenged transaction satisfies this element.121
The record plainly reflects that Neupert engaged in Delaware-directed activity
sufficient to satisfy the third Istituto Bancario element and to provide the statutory
prerequisite for jurisdiction under Section 3104(c)(1). Neupert signed the certificate of
conversion and caused it to be filed with the Delaware Secretary of State. This act
converted the Company from an LLC to a corporation and purported to recognize
120
449 A.2d at 225.
121
See, e.g., Fläkt Woods, 56 A.3d at 1027 (certificate of cancellation);
Carsanaro, 65 A.3d at 635 (various certificates required by Delaware General
Corporation Law for challenged transactions, including certificates of amendment,
certificates of designation, certificates of correction, and certificate of cancellation);
Benihana of Tokyo, Inc. v. Benihana, Inc., 2005 WL 583828, at *8 (Del. Ch. Feb. 4,
2005) (certificate of designations); Gibralt Capital Corp. v. Smith, 2001 WL 647837, at
*6 (Del. Ch. May 9, 2001) (certificate of designations); Crescent/Mach, 846 A.2d at 977
(certificate of merger). See generally 1 R. Franklin Balotti & Jesse A. Finkelstein, The
Delaware Law of Corporations and Business Organizations § 13.4[B] (3d ed. 2014)
(“[t]he filing of corporate instruments with the Delaware Secretary of State may also
constitute an action in Delaware sufficient to support jurisdiction”).
39
Neupert as the President of the Company. Neupert also caused the filing of a certificate of
incorporation for the Company that authorized the issuance of up to 10,000 shares of
common stock. Neupert then used the authority ostensibly provided by these certificates
to convene a meeting of the board of directors of the Company. At that meeting, he and a
colleague purported to issue all 10,000 shares of the Company to the Foundation and to
appoint three Foundation representatives as directors.
Neupert has suggested that, because a registered agent actually filed the
certificates, the filings cannot be attributed to him for jurisdictional purposes. It is
reasonably inferable that the services company acted as Neupert’s agent. The plain
language of the Long-Arm Statute recognizes that forum-directed activity can be
accomplished “through an agent.”122
c. The Foundation’s Knowledge Of The Forum-Related Acts
The fourth and fifth Istituto Bancario elements evaluate whether “the defendant
knew or had reason to know of the act in the forum state” and the degree to which “the
act in . . . the forum state was a direct and foreseeable result of the conduct in furtherance
of the conspiracy.”123 In substance, these elements require allegations “from which one
can infer that a foreign defendant knew or should have known that the conspiracy would
122
10 Del. C. § 3104(c).
123
449 A.2d at 225.
40
have a Delaware nexus.”124 Actual knowledge is not required; “the applicable standard is
whether the foreign [defendant] knew or should have known [about the] activity in
Delaware.”125
At the current procedural stage, it is readily inferable that the Foundation knew or
should have known about Neupert’s forum-directed activity. The Company was a
Delaware entity, and the emails that Lilly has submitted reflect that the Foundation
representatives had longstanding knowledge of its existence and status. Foundation
representatives sent emails addressing the ownership of the Company, and they were
copied on emails in which Neupert expressed his views about the ownership of the
Company. Until Lilly refused to sign the member consent, both Neupert and the
Foundation representatives held the view that Israel owned all of the Company’s equity
when he died. After the dispute with Lilly arose, the Foundation granted Neupert an
“unlimited power of attorney” that gave Neupert the power to perform “all legal acts”
including “[e]xtrajudicial representation” and “representation in . . . public registrations
and records.”126 The power of attorney referred to the Company as “Cote d’Azur Estate
LLC/Corp., Delaware.”127 This reference indicates both that the Foundation knew the
Company was a Delaware entity and that Neupert planned to use his authority to convert
124
Fläkt Woods, 56 A.3d at 1024.
125
Id.
126
Mot. Ex. E.
127
Id.
41
the Company from an “LLC” into a “Corp.” After doing so, Neupert convened a meeting
of the board of the Company at which he and a colleague issued all of the Company’s
equity to the Foundation and appointed three representatives of the Foundation as
directors of the Company. Under the circumstances, it is reasonable to infer that the
Foundation knew or should have known that Neupert would be making a filing with the
Delaware Secretary of State to convert the Company from an LLC to a corporation.
C. The Foundation Shall Be Joined As A Party.
Rule 19(a) states that if an absent party should be joined under Rule 19(a), but “the
person has not been so joined,” then “the Court shall order that the person be made a
party.”128 This decision has concluded that the Foundation should be joined and that the
Foundation is subject to service under the Long-Arm Statute. Because Lilly is the party
who wishes to add the Foundation, it makes sense for her to take the steps necessary to
serve the Foundation with process.
Lilly contends that the Foundation should be added as a counterclaim plaintiff.
Rule 19(a) states that “[i]f the person should join as a plaintiff but refuses to do so, the
person may be made a defendant, or in a proper case, an involuntary plaintiff.”129 The
logical role for the Foundation is indeed as a counterclaim plaintiff asserting the same
claim as the Company regarding the validity of the Deed of Assignment. If the
128
Ct. Ch. R. 19(a).
129
Id.
42
Foundation refuses to join as a plaintiff, then Lilly will add the Foundation as a relief
defendant. If she wishes, Lilly can seek to have the Foundation realigned as a
counterclaim plaintiff.130
Lilly has sought to join the Foundation as an involuntary plaintiff. That issue is not
yet ripe. As noted, Rule 19(a) limits the availability of that relief to “a proper case,”
which is a term of art under the rule. 131 When the involuntary-plaintiff doctrine applies, it
provides a separate and independent basis for this court to exercise personal
jurisdiction.132 To invoke that doctrine, the absent party should not otherwise be subject
to jurisdiction.
Whether this is “a proper case” for adding the Foundation as an involuntary
plaintiff presents an interesting question. At present, however, the court need not decide
it, because it appears that the Foundation is subject to service of process under the Long-
Arm Statute. If the Foundation demonstrates that it is not otherwise possible to effect
service on or exercise jurisdiction over the Foundation, then Lilly may renew her request.
III. CONCLUSION
The Foundation is a party which should be joined for a just resolution of this
dispute. For purposes of Lilly’s claims, the Foundation can be served under the Long-
Arm Statute. Lilly shall add the Foundation as a relief defendant, subject to the
130
See Federal Practice, supra, § 1605; Rydstrom, supra, § 2.
131
See Rydstrom, supra, § 2; Federal Practice, supra, § 1606.
132
See, e.g., Entman, supra, at 27 n.108.
43
Foundation being realigned for good cause shown as a counterclaim plaintiff. If
warranted, Lilly can renew her request to have the Foundation added as an involuntary
plaintiff, provided that Lilly can show that this is “a proper case” within the meaning of
Rule 19(a).
44
Perry v. Neupert
Combined Opinion