BRENDAN LINEHAN SHANNON, Bankruptcy Judge.
Before the Court is a Motion (the "Motion")
Bloso's claims stem from a series of investments it made in Jumio, Inc. ("Jumio" or the "Debtor"). Prior to bankruptcy, Jumio operated as an online mobile identity company. Numerous parties invested in and controlled Jumio. Bloso brings suit against those parties based on their alleged misconduct and interactions with Bloso.
To begin, it is beneficial to lay out the various parties involved in this matter. Jumio was a Delaware corporation founded by Daniel Mattes ("Mattes") in 2010. It specialized in online and mobile identity management and credentials authentication. Mattes, Thomas Kastenhofer ("Kastenhofer"), and Chad Starkey ("Starkey") were the founding executives of the company (collectively, the "Officer Defendants"). Mattes is Jumio's former Chief Executive Officer, Kastenhofer is the former Chief Operating Officer, and Starkey is the former Chief Financial Officer and General Counsel. Each is also a former member of Jumio's board of directors (the "Board"). Stuut replaced Mattes as CEO in 2015 after Mattes resigned, and he continues to serve in that capacity.
Saverin, Ong, and the AH Entities were early investors in Jumio. They also served, or designated individuals to serve, on the Board. Bloso alleges that, by March 2011, Saverin owned and controlled 2,885,613 common and 14,514,702 preferred shares of Jumio. The record reflects that Saverin held significant voting authority in Jumio with that number of shares. Weiss is a former Jumio director, and he acted on behalf of the AH Entities. Bloso further alleges that Weiss held significant voting power and directly controlled the AH Entities, using them as an alter ego.
KTI Privatstifung ("KTI"), a foundation organized under the laws of Liechtenstein, was owned and controlled by Kastenhofer. Together, Kastenhofer and KTI controlled large amounts of Jumio common and preferred stock. In similar fashion, Mattes owned and controlled Ampalu Investment, GmbH ("Ampalu," and together with KTI, the Officer Defendants, and the Non-Founder Defendants, the "Defendants"). Both Kastenhofer and Mattes utilized their respective companies as personal investment entities. These parties each held voting power based on the number of shares that they owned and controlled.
Bloso is a British Virgin Islands investment company. Bloso made stock purchases in Jumio during the time period between July 2011 and May 2012 through a series of stock purchase agreements and convertible term note agreements.
As noted, Jumio operated an online mobile identity and credential authentication company. It provided verification products, software, and services that were designed to reduce fraud and to meet regulatory requirements for their customers. As an emerging technology company, Jumio relied on continued cash infusions from investors for business growth. Those early investments were made by, among others, the Non-Founder Defendants.
Bloso began investing in Jumio in 2011. Bloso contends that, at the time it invested in Jumio, Jumio implemented certain accounting practices that resulted in inflated revenue and profit projections. Based on those erroneous revenue reports, Bloso alleges that Saverin and others made public statements indicating that Jumio would expect $100 million in revenue in 2012, when they knew that the correct amount should have been only $2 million. The Defendants continued to make announcements and public representations despite the errors, and they continued to accept additional capital investments. Based on those public representations, "as well as specific representations and assurances made [by Mattes]
Bloso made investments on ten separate occasions. In July 2011, Bloso made two separate stock purchases, one from Mattes and Ampalu and one from Kastenhofer through KTI. In each transaction, Bloso purchased 544,513 shares of common stock for $500,000. In August 2011, Bloso entered into a Convertible Loan Agreement and Convertible Term Note with Mattes and Ampalu in the principal amount of $500,000. In October 2011, Bloso made three separate purchases of stock, all from Mattes and Ampalu. On October 2, Bloso first purchased 1,089,026 shares of common stock for $1,000,000. That same day, Bloso purchased an additional 544,513 shares of common stock for $500,000. Then on October 3, Bloso entered into another Convertible Loan Agreement and Convertible Term Note with Mattes and Ampalu in the principal amount of $1,500,000.
In January 2012, Bloso made three additional purchases. On January 20, Bloso made another purchase for 625,478 shares of common stock from Mattes and Ampalu for $983,822.29 and then made another identical purchase from Kastenhofer through KTI. Next, on January 25,
Bloso alleges that it made these investments and converted its notes based on the public statements and media reports discussed previously, and that the true nature of Jumio's parlous financial condition was not revealed until March 2015. In addition to those alleged public statements and misrepresentations, Bloso also alleges that Mattes falsely represented to Jumio and the Non-Founder Defendants that he spoke for Bloso and controlled its shares. And, Bloso contends that Mattes secretly sold his "founder shares" while selling Jumio shares to Bloso. Bloso makes no allegations that it had contact with any of the Non-Founder Defendants directly.
In the fall of 2014, Jumio hired a new CFO to replace Starkey. The new CFO resigned days later after discovering the revenue recognition errors. A Board-appointed special committee later found those errors to require a complete review and restatement of Jumio's finances. On April 30, 2015, Mattes resigned from Jumio and its Board, and Stuut became Jumio's CEO the following month. Jumio announced its restated financials to its shareholders in September 2015.
Jumio filed its petition for Chapter 11 relief on March 21, 2016. That same day, the Debtor filed a motion to approve the sale of its assets (the "Sale Motion") [Docket No. 15]. The Court entered an order approving the sale in May 2016 (the "Sale Order") [Docket No. 202] over objections made by, among others, Bloso. Under the Asset Purchase Agreement, the buyer purchased substantially all of the Debtor's assets, including "any rights, Claims, or Actions, including Avoidance Actions . . . to the extent relating to or arising against Transferred Employees[.]" Mot. of Non-Founder Civil Action Defs., ¶ 22 (Docket No. 585) (quoting APA, §§ 2.1(s), 2.2(g), 1.1). Transferred Employees included Stuut because he functioned as Jumio's CEO at the time of the sale. Moreover, the Sale Order barred any party from pursuing claims, against the buyer or its officers, which were connected to the Debtor or the purchased assets.
The Debtor filed the Plan in August 2016 [Docket No. 318], and an amended version was filed in October [Docket No. 433]. The Plan established a Liquidating Trust which was authorized, inter alia, to pursue claims against the Officer Defendants and non-released parties. The Plan granted the "exclusive right" to pursue those causes of action to the Liquidating Trustee. Plan, Art. IV.C (Docket No. 433). The Plan proposed to release Saverin, Ong, Weiss, and the AH Entities of all claims or liabilities, either direct or derivative. Importantly, the Plan also contained an opt-out provision for holders of common or preferred interests, whereby they could opt-out of the aforementioned releases.
Bloso exercised its opt-out on September 30, 2016, thus preserving its individual or direct causes of action. The Court subsequently confirmed the Plan on October 21, 2016 over Bloso's objections [Docket No. 482]. But the Court acknowledged on the record in confirming the Plan that shareholders had "the opportunity . . . to opt out and pursue their own claims if they wish[ed] to do so." Transcript re: Ruling (Docket No. 479), at 17:4-5. Bloso had already filed its Opt-out Election Form [Docket No. 350-1] prior to that date.
Bloso filed its original complaint against the Defendants in the Court of Chancery shortly before Confirmation. That Complaint was amended in December 2016 (the "Complaint") [Docket No. 585-3]. Bloso made the following claims in the Complaint:
Soon after Bloso filed its Complaint, the Defendants filed motions to dismiss in the Court of Chancery. The Non-Founder Defendants subsequently filed this Motion to enjoin Bloso from pursuing the Chancery Action. Specifically, the Non-Founder Defendants seek to enjoin Bloso from pursuing Counts I, III, IV, V, VI, VII, VIII, and IX of the Complaint against them,
Bloso contends that the gravamen of the Complaint is a "pattern of misrepresentations and non-disclosures designed to induce Bloso's purchase and retention of shares where it would not have otherwise acted, and then deprive Bloso as an outside shareholder of its rights to be informed and vote and its ability to seek to exit the investment." Obj. to Mot. of Non-Founder Civil Action Defs., ¶39 (Docket No. 614). Bloso thus argues that its claims are direct under Delaware law and pursuable as filed in the Court of Chancery.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334(b) and 157(b). See Binder v. Price Waterhouse & Co., LLP (In re Resorts Int'l, Inc.), 372 F.3d 154, 168-69 (3d Cir. 2004) ("[T]he jurisdiction of the non-Article III bankruptcy courts is limited after confirmation of a plan. But where there is a close nexus to the bankruptcy plan or proceeding, as when a matter affects the interpretation, implementation, consummation, execution, or administration of a confirmed plan or incorporated litigation trust agreement, retention of post-confirmation bankruptcy court jurisdiction is normally appropriate."); see also In re SemCrude, L.P., Nos. 08-11525 (BLS), 8811, 8829, 8836, 8872, 8875, 2011 WL 4711891, at *4 (Bankr. D. Del. Oct. 7, 2011), rev'd in part on other grounds sub nom. Cottonwood P'ship, LLP v. Kivisto (In re SemCrude L.P.), No. 11-1174-SLR, 2012 WL 5554819 (D. Del. Nov. 15, 2012), subsequently rev'd on other grounds, 796 F.3d 310 (3d Cir. 2015) ("The Court agrees . . . that it has, at a minimum, related-to jurisdiction over the Motion to Enjoin. The motion affects the interpretation and administration of the Plan because it requires the Court to determine if the Plan meant to, and did, transfer the claims asserted in the Oklahoma Litigation to the Litigation Trust.").
Furthermore, the Motion is a core matter as it requires a declaration "that the claims alleged [in the Court of Chancery] were once property of [Jumio's] estate and now belong to the [Liquidating] Trust under the Plan and Confirmation Order." In re SemCrude, L.P., 2011 WL 4711891, at *5; see also Williams v. McGreevey (In re Touch Am. Holdings, Inc.), 401 B.R. 107, 117 (Bankr. D. Del. 2009) ("Various courts have concluded that matters requiring a declaration of whether certain property comes within the definition of `property of the estate' as set forth in Bankruptcy Code § 541 are core proceedings.") (citations omitted). Venue is proper in this Court under 28 U.S.C. §§ 1408 and 1409.
With jurisdiction and venue established, "the Court must [now] determine whether the claims asserted by [Bloso] in the state court action are derivative of [the Liquidating Trust's] claims and whether injunctive relief is an appropriate remedy." In re SemCrude, L.P., 2011 WL 4711891, at *1. That is the central issue before the Court in this Motion.
"After a company files for bankruptcy, `creditors lack standing to assert claims that are property of the estate.'" In re Emoral, Inc., 740 F.3d 875, 879 (3d Cir. 2014) (quoting Bd of Trs. of Teamsters Local 863 Pension Fund v. Foodtown, Inc., 296 F.3d 164, 169 (3d Cir. 2002)). The Third Circuit has clarified when causes of action are considered "property of the estate:"
In re Emoral, 740 F.3d at 879 (internal quotations omitted). In corporate law parlance, those "general" claims that belong to the estate can be restated as falling under "[t]he derivative injury rule[, which] holds that a shareholder . . . may not sue for personal injuries that result directly from injuries to the corporation." In re SemCrude, L.P., 796 F.3d at 316 (quoting In re Kaplan, 143 F.3d 807, 811-12 (3d Cir. 1998) (applying Illinois law)); see also Kennedy v. Venrock Assocs., 348 F.3d 584, 589 (7th Cir. 2003) ("When a corporation is injured by a wrongful act but the board of directors refuses to seek legal relief, a shareholder can sue the wrongdoer on behalf of the corporation. Such a suit is known as a derivative suit, and is an asset of the corporation—which means that if . . . the corporation is in bankruptcy, the suit is an asset of the bankruptcy estate.") (citations omitted). In this case, if Bloso's claims constitute derivative claims, which are "property of the estate," they then belong to the estate and may only be pursued by the Liquidating Trustee.
"Whether an action is characterized as direct or derivative is a question of state law."
"Equity dilution claims are typically viewed as derivative under Delaware law." Feldman v. Cutaia, 956 A.2d 644, 655 (Del. Ch. 2007), aff'd, 951 A.2d 727 (Del. 2008). In that same vein, "Delaware courts have long recognized that actions charging mismanagement which depress the value of stock allege a wrong to the corporation; i.e., the stockholders collectively, to be enforced by a derivative action." Kramer v. W. Pac. Indus., Inc., 546 A.2d 348, 353 (Del. 1988) (internal quotation omitted); see also In re RNI Wind Down Corp., 348 B.R. 286, 293 (Bankr. D. Del. 2006) (citations omitted) ("Upon the filing of a bankruptcy petition . . . any claims for injury to the debtor from actionable wrongs committed by the debtor's officers and director become property of the estate under 11 U.S.C. § 541 and the right to bring a derivative action asserting such claims vests exclusively to the trustee."). With respect to the Tooley analysis, "the alleged injury is to the corporation because `it falls upon all shareholders equally and falls only upon the individual shareholder in relation to his proportionate share of stock as a result of the direct injury being done to the corporation.'" Feldman, 956 A.2d at 655 (quoting In re Berkshire Realty Co., Inc., 2002 WL 31888345, at *4 (Del. Ch. Dec. 18, 2002)); see also Moore v. Paladini (In re CD Liquidation Co., LLC), 462 B.R. 124, 132 (Bankr. D. Del. 2011) ("[Plaintiff's] claim that [the transactions] devalued his shares is a classic derivative claim. It flows from harm to the corporation.") (citation omitted).
Director mismanagement claims are "derivative in nature." Thornton v. Bernard Techs., Inc., No. 962-VCN, 2009 WL 426179, at *3 (Del. Ch. Feb. 29, 2009). "When Tooley has been applied to situations similar to those presented by the Plaintiffs[, which are "quintessential director mismanagement claims[,]"] comparable management claims have been found to be derivative instead of direct in nature." Id. (citing Albert v. Alex. Brown Mgmt. Servs., 2005 WL 2130607, at *13 (Del. Ch. Aug. 26, 2005)); see also Kramer, 546 A.2d at 353 ("[W]here a plaintiff shareholder claims that the value of his stock will deteriorate and that the value of his proportionate share of the stock will be decreased as a result of alleged director mismanagement, his cause of action is derivative in nature."). Similarly, claims of waste are "derivative as well." Thornton, 2009 WL 426179, at *3. "[Delaware] case law finds allegations of waste and self-dealing transactions generally to be derivative instead of direct. When a director engages in self-dealing or commits waste, he takes from the corporate treasury and any recovery would flow directly back into the corporate treasury." Id.
Delaware case law is scarce when it comes to whether fraudulent transfer claims are derivative or direct. However, the Court has observed that such claims are "derivative in nature[.]" Astropower Liquidating Tr. v. Xantex Tech., Inc. (In re Astropower Liquidating Tr.), 335 B.R. 309, 328 (Bankr. D. Del. 2005) (citation omitted). Sections 1304 and 1305 under Title 6 of the Delaware Code both center on the protection of creditors against fraudulent transfers of a debtor's assets. In the bankruptcy context, the Bankruptcy Code expressly grants to the trustee rights and powers to avoid fraudulent transfers as a representative of creditors generally. 11 U.S.C. §§ 544, 548. Any recovery from the pursuit of such claims reverts back to the estate. As such, the Court finds that fraudulent transfer claims constitute derivative claims because the alleged injury is to the general creditor body and the recovery returns to the estate. See Thornton, 2009 WL 426179, at *3 (discussing the derivative nature of self-dealing or waste claims when the recovery from such claims would flow back to the corporate treasury).
After review, the Court concludes that Bloso's claims, with the exception of Count II, are all derivative, meriting an injunction.
Count I alleges that the Defendants conspired to deprive Bloso of the value of its Jumio shares. Specifically, Bloso alleges that "multiple unlawful acts" were conducted by the Defendants in furtherance of the conspiracy, such as, among other allegations, making false reports to the media, false statements regarding Jumio's income made to Bloso to induce Bloso's investments, hiding Jumio's true financial condition from Bloso, and operating Jumio without adequate financial and accounting management. Those allegations are derivative claims under Delaware law. Even if they were true, the actions harmed the corporation in general, as opposed to Bloso individually. Essentially, those mismanagement claims would constitute derivative claims because they fall upon all shareholders equally. Furthermore, as noted above, equity dilution claims are typically derivative under Delaware law. Thus, they belong to the Liquidating Trust.
Count III alleges breach of fiduciary duty against the Defendants, alleging specifically that they misled Bloso and failed to remedy prior misrepresentations to Bloso by failing to disclose Jumio's true financial condition, failing to disclose that Mattes had sold his founder shares, failing to disclose Jumio's impending bankruptcy, and failing to deal fairly with Bloso. Those claims fail for the same reasons as does Count I. Any breach of fiduciary duty harms the corporation as well as all of the shareholders together; they do not impact or harm Bloso alone. As such, those claims belong to the Liquidating Trustee to pursue.
Count IV is a fraud claim against the Defendants. Bloso points to the Defendants' duty of accurate and timely disclosure regarding Jumio's financial condition that was owed to Bloso. Bloso alleges that the Defendants committed fraud by their actions, inactions, statements, misstatements, their failure to correct those misstatements, and by allowing Jumio to operate without adequate management and financial controls. Again, none of those claims are direct claims owned by Bloso. If such actions occurred, they harmed the corporation and all shareholders alike.
Count VI is a claim for unjust enrichment and constructive trust.
Count VII is a claim for fraud in the inducement. Bloso alleges that the Defendants acted as direct agents on behalf of parties from whom Bloso acquired its shares. As such, Bloso argues that they are directly liable to it. Again, these claims are general to all shareholders and the corporation alike. Bloso does not contend that the Non-Founder Defendants fraudulently induced Bloso to acquire shares through direct communication. Rather, Bloso alleges that they are directly liable because they acted as agents for other parties. The specific facts alleged in this case show that the Non-Founder Defendants' actions were, if anything, harmful to the corporation and shareholders together, not to Bloso individually, and thus this claim is derivative.
Counts VIII and IX are for fraudulent transfers under the Delaware Code. These counts are brought against Saverin, Ong, Weiss, Kastenhofer, Starkey and Stuut. As discussed previously, these Counts are derivative because the Liquidating Trustee is acting on the creditors behalf generally, and any recovery that is obtained from these claims would return to the estate. As such, they are derivative claims and belong to the Liquidating Trust.
Because the Court finds that the aforementioned claims are derivative and belong to the Liquidating Trust, Bloso is enjoined from pursuing them in the Court of Chancery. Furthermore, Saverin, Ong, Weiss, and the AH Entities were released of all claims or liabilities under the Plan, thus precluding suit against them.
Kastenhofer, Starkey, and Mattes, each filed a joinder and limited objection to the Motion, arguing that the claims are derivative with respect to them as well, and the proposed order should be modified accordingly (Docket Nos. 596, 610, and 623 respectively). The Court agrees, and thus the injunction applies to them as well.
For the foregoing reasons, the Court will grant the Motion and Counts I, III, VI, VIII, and XI in the Complaint will be enjoined with respect to the Defendants. Counts IV, V, and VII will also be enjoined with respect to the Defendants, with the exception of Mattes. The parties are to confer regarding an appropriate form of order and to submit that proposed order under certification of counsel within 14 days of the date hereof.
The court first recognized that Delaware law did not apply, but that the laws of either New York or Florida governed the claims. Id. Despite that fact, the court held that such claims are recognized under the law of those two states, and they constitute direct claims "because they belong to the holders and are ones that only the holders can assert, not claims that could plausibly belong to the issuer corporation. . . ." Id. at 1138. That determination was independent of any analysis under Tooley because "Tooley and its progeny do not, and were never intended to, subject commercial contract actions to a derivative suit requirement. That body of case law was intended to deal with a different subject: determining the line between direct actions for breach of fiduciary duty suits by stockholders and derivative actions for breach of fiduciary duty suits. . . ." Id. (quoting NAF Holdings, LLC v. Li & Fung (Trading) Ltd., 118 A.3d 175, 179 (Del. 2015)). As such, Tooley's test did not apply. Id. at 1139.
While the court reaffirmed its explanation set forth in NAF Holdings pertaining to the narrow scope of Tooley, it stopped short of directly recognizing such claims under Delaware law. Citigroup Inc., 140 A.3d at 1134 ("In that case . . . Delaware law would apply to the merits and we would have to decide whether that holder claim was cognizable at all and, if so, whether it was derivative or not."). Thus, the question remains unclear as to whether such claims are recognized and how analyzed under Delaware law. As one author noted, "the Delaware Supreme Court did not address directly [in Citigroup] the legal cognizability of holder claims. As of today, no Delaware court has ever done so . . . [and as such,] [h]older claims have an unsettled status in Delaware and many other states. There is also no consensus on the legal viability of such claims in those states whose courts have considered them." Edward T. McDermott, Holder Claims—Potential Causes of Action in Delaware and Beyond?, 41 Del. J. Corp. L. 933, 933, 935 (2017).
The Court will not wade into these uncharted waters here, to opine on an issue of state law that the state courts have yet to address. Accordingly, the Court will not recognize such claims under Delaware law before Delaware does.
