B.A.S.S. Group, LLC v. Coastal Supply Co., Inc., No. 3743-VCP (Del. Ch. June 19, 2009), read opinion here.
Kevin Brady, a highly respected Delaware litigator, provides the following synopsis for this opinion.
Vice Chancellor Parsons addressed cross motions for summary judgment in an action where after embezzling funds from his employer, defendant Coastal Supply Co., Inc., John M. Burkett used the funds to form B.A.S.S. Group, LLC (“BASS”) with his friend Joseph H. Webb, III. With the funds, BASS purchased real estate. When BASS discovered the embezzlement, it fired Burkett. It also entered into an arrangement for Burkett to transfer the property back to Coastal.
Webb brought an individual and derivative action to nullify the transfer and seek other relief for breaches of fiduciary duty by Burkett. Coastal counterclaimed for, among other things, unjust enrichment, conversion, and restitution in the form of a constructive trust over the property. BASS and Webb moved for summary judgment to void the transfer. Coastal moved for summary judgment on its claims for unjust enrichment and conversion. The Court granted Coastal’s motions and denied the rest.
Voiding the Transfer; Authority — Actual or Alleged
The Court considered whether (1) Burkett had authority to transfer the property and whether (2) Burkett received consideration for the transfer. The determination for whether Burkett acted with actual authority hinged upon whether he acted in “good faith” as set forth in a power of attorney section of the BASS LLC agreement. Under that provision, Burkett was authorized to make such a transaction provided he acted in “good faith.” With no context-specific definition for good faith in the agreement and with disputed facts as to Burkett’s state of mind when transferring the Property to Coastal, the Court denied BASS and Webb’s summary judgment motion.
The Court also considered whether Burkett acted with apparent authority, but noted that factual discrepancies also existed here. The record failed to indicate the actions of BASS or Webb that Coastal relied upon in forming its alleged belief as to Burkett’s authority. Notably, prior to obtaining the deed, Coastal had no knowledge of Webb’s membership in BASS or of the contents of the BASS LLC agreement.
The analysis regarding whether valid consideration was paid for the Property was also fraught with factual discrepancies. Unresolved in the record was whether the de minimis consideration of $10 was paid and whether consideration had been exchanged as a result of the restitution agreement, to which BASS was a party. Therefore, BASS and Webb’s motion for summary judgment on the basis of invalid consideration was denied.
Much of Coastal’s counterclaim for unjust enrichment required little discussion: BASS was enriched by the embezzled funds; Coastal was thereby impoverished; both the enrichment and impoverishment were causally related by the embezzlement; and both the enrichment and impoverishment arose without justification. Yet Webb contended he and BASS were innocent parties and as such they should not be penalized for what Burkett did. The Court was unpersuaded because: (i) Burkett’s actions as a member of BASS are imputed to the entity as an officer, director, or manager of an entity; and (ii) Delaware law permits restitution even when the recipient is innocent of wrongdoing.
For a constructive trust to be a remedy, it must be imposed “upon specific property [or] identifiable proceeds of specific property, and even money so long as it resides in an identifiable fund to which the plaintiff can trace ownership.” Here, the Court imposed a constructive trust because: (i) the embezzled funds could be traced to the Property (Burkett testified that the funds ultimately went from Coastal to Burkett’s personal bank account and finally to a cashiers check that was issued to the seller of the Property); and (ii) BASS, as the recipient of the funds, was not a bona fide purchaser (Burkett’s knowledge that the funds were embezzled was imputed to BASS).
The Court also noted that “Delaware courts consistently imputed to a corporation the knowledge of an officer or director of the corporation acting on its behalf.” The Court went on to state that “I see no reason why the rule would be different for a member of an LLC who has management rights.” Interestingly, the Court identified one outstanding issue: which party would be entitled to any profit made on the sale of the Property beyond the amount owed Coastal to make it whole.
To succeed on its summary judgment motion for conversion, Coastal had to prove that: (i) it had a property interest in the Property; (ii) it had the right to possess the Property; and (iii) the Property was converted by BASS. The Court found that Coastal was entitled to a damage award equal to the embezzled funds “plus interest at the legal rate from the date those funds were contributed to BASS.”