Delaware Business Litigation Report

Chancery Declines to Apply Status Quo Order to Prevent Sale of Litigant’s Personal Interest in Indirect Foreign Subsidiary of Delaware LLC

Carlos Eduardo Lorefice Lynch v. R. Angel Gonzalez Gonzalez, C.A. No. 2019-0356-MTZ (Del. Ch. June 22, 2020)

In this control dispute, the Delaware Court of Chancery denied a motion to amend a status quo order, finding that the proposed amendment would require the Court to enforce orders beyond its jurisdictional purview. 

One plaintiff in the action, Carlos Eduardo Lorefice Lynch (“Lynch”) allegedly owned a 65% interest in a Delaware LLC named Grupo Belleville Holdings, LLC (“Belleville”). Plaintiffs filed the action in the Court of Chancery seeking injunctive and declaratory relief arising from the allegedly fraudulent attempt of the defendants to strip Lynch of his ownership interest in Belleville. In June 2019, the Court of Chancery entered a status quo order (“SQO”) intending to “maintain the status quo concerning the operations and management of Belleville” during the pendency of the litigation.

After Lynch entered into a transaction to sell his personal minority interest in a foreign indirect subsidiary of Belleville, the defendants argued that such action was precluded by the SQO. Thereafter, the plaintiffs sought a declaration that the action was valid under the status quo order, and the defendants sought an amendment of the SQO having the effect of an injunction to prevent such action.

The plaintiffs argued that the Court’s in rem jurisdiction in a Section 18-110 proceeding is limited to the property at interest in the dispute. In this case, according to the plaintiffs, that jurisdiction was limited to only “Belleville and its management and control.” In no way did Lynch’s personal ownership interest in Belleville’s indirect subsidiary “belong[] to Belleville.” In response to plaintiffs’ jurisdictional arguments, defendants argued that the subsidiary in which Lynch held an interest was a Belleville asset, albeit an indirect asset, and was therefore part of the dispute.

The Court rejected the defendants’ arguments that the SQO should be amended to include a prohibition on the sale. The Court reasoned that in actions under Section 18-110 of the Limited Liability Company Act, “status quo orders are intended to preserve the ownership and assets of the subject company while litigation over ownership or control is pending.” The Court noted that “[w]hile Belleville’s indirect subsidiaries may be considered its ‘assets,’ the SQO properly addresses Belleville’s direct holdings … but not the subsidiaries themselves and their ownership structures.” According to the Court, Section 110 in rem jurisdiction allows the Court to determine “who validly holds office as a manager of a Delaware limited liability company.” While the Court may enter status quo orders to prevent the disposition of property that is the subject of the action, the indirect foreign subsidiary at issue was “twice removed from Belleville[.]” While Belleville owned an indirect majority interest in the subsidiary, that “relationship [was] insufficient without more” to fall under the Court’s in rem jurisdiction. Further, as the sale of the assets did not bear on Belleville’s management and control, it was not properly before the Court in a Section 110 action. Accordingly, the Court declined to amend the SQO to prevent the sale of Lynch’s ownership interest in the indirect foreign subsidiary.

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