IMO Dissolution of Arctic Ease

Citation: Not availableDocket: 8932-VCMR

Court: Court of Chancery of Delaware; December 8, 2016; Delaware; State Appellate Court

Original Court Document: View Document

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In the dissolution case of Arctic Ease, LLC, members of the company have initiated third-party complaints against another member and its affiliates, alleging breach of fiduciary duty, misrepresentation, and fraud. The third-party defendants have moved to dismiss the claims due to lack of personal jurisdiction and failure to state a valid claim. The court determined that it does not possess personal jurisdiction over the defendants and granted the dismissal motions.

The case's background involves Summetria, LLC, which was established in 2008 and is the sole owner of Arctic Ease, LLC, a company focused on cryotherapy products. The Forden Entities own 60% of Summetria, while the Heck Parties own 20%, and Costar Partners, LLC owns the remaining 20%, with William Cohen and Mitchel Weinberger as members of Costar. Carol Forden is the Managing Member of Summetria according to its operating agreement.

In 2012, Arctic Ease and Summetria required additional capital, leading Cohen to provide a $1 million loan, later extended and increased. Cohen negotiated bridge financing for Arctic Ease through CSG Re Partners, LLC, and was actively involved in the company’s operations, including marketing efforts and facilitating contracts. The Heck Parties claimed Cohen acted in an investor relations capacity and provided updates about the business, but there is no evidence that proposed board members were formally added to the board.

On April 29, 2013, Cohen informed Forden that CSG required him to guarantee bridge financing, a term Cohen found unacceptable. Forden did not receive a term sheet for this financing, and by May 5, 2013, Cohen stated he would refuse the financing due to conflicts with his role as the sole Class A member of Summetria. Cohen resigned from Summetria's board on May 8, 2013, and later, on June 20, notified Summetria of its default on the Cohen Note. In July 2013, Summetria and Arctic Ease defaulted on loans secured by their assets, and AE2, Inc. acquired the rights to these loans, subsequently foreclosing on their assets on July 29, 2013. Cohen orchestrated the purchase of these assets by Gawi, LLC, a company he controls, along with other parties, which the plaintiffs allege was part of his plan. 

On September 20, 2013, the Forden Entities sought the dissolution of Arctic Ease and Summetria and filed third-party claims against the Cohen Parties for breach of fiduciary duty, fraud, misrepresentation, and related claims. The Cohen Parties moved to dismiss these claims for lack of personal jurisdiction and failure to state a claim. The Heck Parties and Forden Entities opposed, asserting personal jurisdiction under Delaware’s long-arm statute and requesting jurisdictional discovery. The court granted the motions to dismiss for lack of personal jurisdiction, not addressing other dismissal grounds. 

Under Delaware law, personal jurisdiction requires statutory service of process and minimum contacts with the forum for due process. The plaintiff must establish a prima facie case for jurisdiction, which can include evidence beyond the complaint. Courts must be cautious in asserting jurisdiction over nonresidents with minimal ties to Delaware. The Delaware long-arm statute allows for personal jurisdiction over nonresidents who transact business or cause injury within the state, with the Court of Chancery interpreting it to extend jurisdiction to the fullest extent permissible under due process.

To establish personal jurisdiction over a party in Delaware without consent, the due process clause requires "minimum contacts." Merely owning interests in a Delaware entity is insufficient for this purpose. Delaware's LLC Act includes an implied consent provision allowing jurisdiction over those managing Delaware LLCs in business-related actions. Section 18-109(a) identifies two types of managers: (1) those defined in the LLC agreement, and (2) individuals who materially participate in management. The U.S. District Court has clarified that alleged managers involved in financial functions do not qualify as materially participating unless they have a control or decision-making role. The Delaware Supreme Court has accepted a conspiracy theory for jurisdiction, permitting courts to assert jurisdiction over a non-resident conspirator if certain conditions are met, including the existence of a conspiracy, membership in it, and a substantial act occurring in Delaware.

In the case at hand, A. William Cohen is argued to be a manager of Summetria under Section 18-109(a)(i) due to his original board membership and voting power. However, this argument is rejected because the Summetria LLC Agreement designates Forden as the sole manager with exclusive authority over the company’s operations. The agreement prohibits other members from participating in management unless authorized by the managing member. Section 8.10 of the agreement limits the board’s authority, further supporting that Cohen does not qualify as a manager. Additionally, while evidence suggests Cohen materially participated in management activities under Section 18-109(a)(ii), this does not alter his status as a non-manager per the LLC Agreement's stipulations.

Allegations against Cohen fail to demonstrate the necessary control or decision-making authority for material participation in Summetria's management as required by Section 18-109(a)(ii). The federal case Wakley Ltd. v. Ensotran LLC serves as a relevant precedent, where personal jurisdiction was not exercised over individuals performing high-level services for a Delaware LLC because their authority was subordinate to the board. Similarly, Cohen's actions, such as negotiating a distribution agreement and arranging financing, were also subject to Forden’s authority under the Summetria LLC Agreement. The Heck Parties' claims that Cohen usurped Forden's power to terminate Heck are contradicted by their own allegations that both Forden and Cohen were involved in the termination. Furthermore, Cohen's suggestion to add board members does not imply he usurped management power, as there is no evidence that these individuals were actually appointed. The request for jurisdictional discovery by the Heck Parties is denied, as it lacks a basis for establishing personal jurisdiction. The court requires more than speculative inquiries into jurisdiction; sufficient grounds must exist before discovery is permitted. Additionally, the Heck Parties have access to relevant information regarding Cohen’s management role without needing further discovery. The Forden Entities' assertion of jurisdiction under Delaware's long-arm statute is unsupported, as no specific acts by Cohen in Delaware are alleged, and his only connection is through indirect ownership of a Delaware LLC interest, which does not suffice for jurisdiction.

Mitchel Weinberger, Costar Partners, LLC, and Gawi, LLC are not alleged to have any contact with Delaware or consented to its personal jurisdiction, nor is there any claim that Weinberger manages a Delaware entity. The Forden Entities argued for personal jurisdiction over Weinberger based on a conspiracy theory; however, this theory cannot independently establish jurisdiction. It requires an agency relationship with at least one conspirator who is subject to jurisdiction, which is not present as neither Cohen nor any other alleged conspirator is subject to this Court’s jurisdiction. Consequently, the third-party complaints fail to show that Weinberger, Costar, or Gawi are subject to personal jurisdiction under the conspiracy theory. The motions to dismiss the Forden Entities’ and Heck Parties’ third-party complaints are granted due to lack of personal jurisdiction.