In the recent decision of Schoenmann v. Irvin, et al., C.A. No. 2021-0326-SG (Del. Ch. Jun. 2, 2022), the Delaware Court of Chancery denied in part and granted in part Defendants’ motion to dismiss Plaintiff’s direct and derivative claims against Clear Align, LLC and its President, CEO and majority Board member, Angelique Irvin. While some uncommon issues were addressed, the Court took note of the “plaintiff-friendly inferences that attend a motion to dismiss” (slip op. at 26) and found that certain claims were “reasonably conceivable” and thus survived the motion to dismiss.
First, Defendant Irvin sought dismissal of Schoenmann’s claim that Irvin had breached Clear Align’s LLC Agreement by making non-pro rata distributions to herself on the basis that the statute of limitations had run. Schoenmann argued the statute had been tolled based on his reasonable reliance on Irvin as a fiduciary, and Irvin countered that Schoenmann had information rights as a Board member and should be held to a higher knowledge standard. The Court found that the facts pled led to a reasonable inference that Irvin had potentially kept certain Board operations from Schoenmann and, thus, the statute of limitations could be found to have tolled. For those years not barred by the statute, Vice Chancellor Glasscock found the allegations “skimpy” but sufficiently pled such that the claim was reasonably conceivable, and Irvin could defendant against it. (Mem. Op. at 27.)
Second, the Court of Chancery found that Schoenmann failed to state a claim that Irvin breached the implied covenant of good faith and fair dealing when she removed Schoenmann from the Board for initiating an internal investigation. The Company’s LLC Agreement expressly authorized Irvin to remove a director with or without cause and, under Delaware law, a claim for breach of the implied covenant cannot stand if the conduct is allowed by corporate agreement.
Next, Defendants asked the Court to dismiss Schoenmann’s derivative claims on the grounds that he did not adequately plead that a demand made upon the Board of Directors would have been futile. This claim was complicated by the frequently changing composition of the Board, as well as pleadings that Irvin often disregarded corporate formalities and documentation. Giving the Plaintiff the benefit of reasonable inferences, though, Vice Chancellor Glasscock found that Schoenmann had satisfied this standard through facts pled which suggest Irvin’s position could exert considerable influence over other Board members, such that the majority of members could not exercise disinterested judgment had a demand been issued.
Having established demand futility, Plaintiff’s derivative breach of fiduciary duty claim against Irvin was allowed to proceed. However, Vice Chancellor found that Schoenmann had not adequately pled his derivative claim for breach of contract as there was simply no contractual basis for the claim.
Key Takeaway: Litigants pursuing a motion to dismiss should be aware that the Court of Chancery will resolve all inferences or questions of fact in the plaintiff’s favor. Nonetheless, a claim may be susceptible to dismissal, even under Delaware’s plaintiff-friendly pleading standard, when it is unsupported by the underlying contract at issue.
Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware. You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.