Delaware Business Litigation Report

Chancery Dismisses Contract, Dissolution, and Direct Claims, But Upholds Derivative Claim for Alleged Transfer of Funds Between Medicinal Marijuana Entities

BET FRX LLC v. Myers, C.A. No. 2019-0894-KSJM (Del. Ch. Apr. 27, 2022)
A minority member of a limited liability company had invested $8 million in the LLC. The LLC owned a majority interest in an entity that held a Pennsylvania medical marijuana grower and processor license. In addition to obtaining its membership interest, the plaintiff’s investment also secured appointment rights for one of the three manager positions, rights to participate in board decisions, and a veto right over sixteen types of actions. Ultimately, the plaintiff brought a series of claims in the Court of Chancery, alleging that the other members and their principals had funneled the plaintiff’s investment into a company that they owned—an Ohio-based medical marijuana company—via intercompany loans that were not being repaid and coverage of other corporate expenses. Defendants sought to dismiss all claims.

The Court of Chancery dismissed all claims except the derivative claim. The Court explained that the contractual claim was deficient because it failed to allege the breach of any provision of the LLC agreement. In dismissing the implied covenant claim, the Court noted that the claim was directed against two entities, but that the complaint did not contain sufficient allegations concerning actions taken by those entities, or that the defendants had breached an implied covenant. The Court dismissed the judicial dissolution claim because mere disagreement among managers, or even fiduciary duty breaches, is an insufficient basis for the extreme remedy of judicial dissolution. The Court next found that plaintiff’s alleged direct claim failed to state a claim because it was actually derivative, since the co-managers alleged misconduct involved harm to the LLC itself, and the LLC would receive the benefit of any recovery. Finally, the Court upheld the plaintiff’s derivative claim, which the Court found was non-exculpated under the LLC agreement because it involved allegations of self-dealing in the transfer of funds from the LLC to the Ohio-based company that the defendants owned.

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