Buerger v. Apfel, C.A. No. 6539-VCL (Del. Ch. March 15, 2012).
Whether equitable tolling could save claims that would otherwise be barred by the applicable statute of limitations or latches, which defendants argued should block any challenge to certain stock options and other related-party transactions.
The disputed transactions involve a company that sells fragrances and related products over the internet. The company is controlled by Dennis Apfel and his two sons who collectively own 68% of the outstanding stock and comprise the entire board of directors. Plaintiffs invested $100,000 in the start-up and received a 30% equity stake. Those two plaintiffs now own 19%. The company raised $500,000 through a reverse merger with a publicly listed company and its stock was traded on the NASDAQ from 1999 until 2005 when it effected a reverse split and delisted. At that time it also stopped sending financial statements and other information to its stockholders. The common stock of the company continues to trade in the over-the-counter market.
The complaint challenges a series of transactions involving affiliated companies and the Apfel family.
The procedural posture of this case was presented on a motion for judgment on the pleadings pursuant to Court of Chancery Rule 12(c). The Court noted cases finding that the Rule 12(c) standard has been described as almost identical to the Rule 12(b)(6) standard and favors the plaintiffs to the extent that the Court must draw all reasonable inferences from undisputed facts in a light most favorable to the non-moving party. The Court disregarded affidavits and a host of documents that the defendants attempted to use to support their Rule 12(c) motion.
The parties agreed that the “presumptive limitations” for latches in this case is 3 years, based on Section 8106 of Title 10 of the Delaware Code. The parties did not argue that the limitations should be extended to account for the efforts they made to obtain books and records pursuant to DGCL Section 220.
However, the Court noted at footnote 1 several cases that it cited for the proposition that the applicable statute of limitations was tolled during the pendency of a Section 220 action.
The complaint alleged breach of fiduciary duties in connection with the adoption by the 3 members of the Apfel family of employment agreements that they each adopted and which provided for allegedly excessive compensation. (The agreements were adopted in round robin fashion with 2 of the 3 family members voting at a time for the agreement of the one who abstained.)
In connection with the approval by the 3-member “all Apfel” board of the compensation agreements at issue, the Court observed the following principle: “When fiduciaries have the power to terminate or modify an agreement, the decision to leave the agreement in place and continue to receive self-dealing benefits can be challenged as a breach of duty.”
Employment Agreements–Terminable Upon 30 Days’ Notice
Although the original adoption of the employment agreement was time-barred, the Court observed that the company could terminate the employment agreement on 30 days notice and each of the Apfels had the power to amend the employment agreement at their convenience. Therefore, the Court determined that the plaintiffs may challenge the fairness of the failure to terminate or modify the employment agreement during the period from March 18, 2008 through the present. See Teachers’ Ret. Sys. of LA. v. Aidinoff, 900 A.2d 654, 666 (Del. Ch. 2006)).
In addition to serving as a part-time CEO of the company, one of the Apfels, Dennis, also serves as a named partner in a law firm that specializes in divorce work and family law. Since 2006, the company provided Dennis’ firm with office space in its headquarters. There was no written lease and the firm does not pay rent. Rather the parties have an informal “rent-for-services arrangement.” The Court observed that: “It is reasonably conceivable at the pleadings stage that the company would not have much need for divorce work.” Based on the reasoning in the Aidinoff case, cited above, the Court reasoned that the plaintiffs could challenge the sublease from March 18, 2008 onward because the company had the ability to terminate the informal arrangement at any time. However, challenges to the sublease for the period prior to March 18, 2008 were barred by latches.
Personal Loan to Jason Apfel
The issue arose about whether the claim based on the terms of a loan dispersed in June of 2007 were time barred. The Court determined that the plaintiffs did not meet the pleading requirement for equitable tolling because they failed to identify the date when they learned of the loan. Without this information, the Court explained that the doctrine of equitable tolling could not be applied. However, the Court reasoned that,
“Fairness requires that the plaintiffs be granted leave to amend their complaint to cure its isolated omission. Because the defendants have filed the operative motion under Rule 12(c), Rule 15(aaa) does not limit the plaintiffs’ ability to plead.”
Ct. Ch. R. 15(aaa) requirement that presents a binary choice to either respond to a motion to dismiss or amend one’s complaint, does not apply to Rule 12(c) motions.
Other Amendments Allowed
The Court allowed 60 days for an amended complaint to be filed to clarify for purposes of determining the applicability of equitable tolling, the exact date when the plaintiffs learned of the challenged transactions, including a challenge to a loan made to a company wholly-owned by the Apfel family, as well as the decision to form and fund an entity wholly-owned by the Apfel family.
This delightfully short 11-page opinion may have been animated by the awareness by the Court that the applicable fiduciary duties were not being strictly observed, and the Court’s determination that fairness required giving the plaintiffs another opportunity to plead their claims so that all the allegedly egregious breaches of fiduciary duty would not be time-barred.