2015 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

4-15-2015

Stanley Weiss v. e-Scrub Systems Inc

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"Stanley Weiss v. e-Scrub Systems Inc" (2015). 2015 Decisions. Paper 384.

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NOT PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

____________

No. 14-4178

____________

STANLEY WEISS, 

derivatively on behalf of e-Scrub Systems, Inc,

Appellant

v.

E-SCRUB SYSTEMS INC; 

RALPH GENUARIO; MAIJA HARKONEN; 

JOHN PACKARD; ELIZABETH RICHARDSON

____________

On Appeal from the United States District Court 

for the District of Delaware

(D.C. No. 1-13-cv-00710)

District Judge: Honorable Gregory M. Sleet

____________

Submitted Under Third Circuit LAR 34.1(a)

March 23, 2015

Before: HARDIMAN, GREENAWAY, Jr. and KRAUSE, Circuit Judges.

(Filed: April 15, 2015)

____________

OPINION*

____________

 

* This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does 

not constitute binding precedent.
2

HARDIMAN, Circuit Judge.

Attorney Stanley Weiss appeals the District Court’s order dismissing his derivative 

action. We will affirm.

I

In February 2010, Weiss obtained a $100,150 judgment in New Jersey state court 

against his former client, eScrub Systems, Inc., and its founder and CEO, Ralph Genuario. 

A few years later, in a proceeding to enforce that judgment, the Circuit Court for the City 

of Alexandria, Virginia, held Genuario in contempt and fined eScrub $10,000 to cover 

Weiss’s costs. 

Unable to collect on either judgment, Weiss filed a derivative action in the United 

States District Court for the District of Delaware, claiming that eScrub’s directors 

(Defendants) breached their fiduciary duties by failing to mitigate the company’s financial 

woes. Specifically, Weiss claimed Defendants knew that eScrub was in severe financial 

difficulty and that Genuario was an incompetent CEO, but they failed to exercise control 

over the company or implement a reporting system that would have enabled proper 

oversight. At a minimum, Weiss argued, Defendants should have to pay eScrub’s longoverdue attorney’s fees. 

The District Court dismissed Weiss’s complaint, finding that Weiss lacked standing 

to bring a derivative action on eScrub’s behalf. We will affirm for essentially the same 
3

reasons.1

II

We exercise plenary review of the District Court’s order dismissing Weiss’s 

complaint. Freedman v. Redstone, 753 F.3d 416, 423 (3d Cir. 2014). Like the District 

Court, we accept the complaint’s factual allegations as true and construe them in the light 

most favorable to Weiss. Id. (citing Jones v. ABN Amro Mortg. Grp., Inc., 606 F.3d 119, 

123 (3d Cir. 2010)). “To survive a motion to dismiss, a complaint must contain sufficient 

factual matter, accepted as true, to state a claim to relief that is plausible on its face.” 

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks omitted). 

III

Under Delaware law, creditors of an insolvent corporation have standing to bring 

derivative suits against corporate directors for breaches of fiduciary duties. N. Am. 

Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 101 (Del. 2007). A 

corporation is insolvent if (1) its liabilities exceed its assets such that there is no reasonable 

prospect the business will succeed; or (2) it is unable to meet obligations as they come due 

in the ordinary course of business. Buckley v. O’Hanlon, 2007 WL 956947, at *7 (D. Del. 

Mar. 28, 2007) (citing Prod. Res. Grp., LLC v. NCT Grp., Inc., 863 A.2d 772, 782 (Del. 

Ch. 2004)).

 

1 The District Court had diversity jurisdiction under 28 U.S.C. § 1332. We have 

jurisdiction over Weiss’s appeal under 28 U.S.C. § 1291.
4

The District Court correctly found that Weiss lacks standing because he failed to 

adequately plead facts demonstrating eScrub’s insolvency. For starters, Weiss did not allege

that eScrub filed for bankruptcy. Nor did he allege that eScrub’s liabilities exceeded its 

assets or that it was unable to pay its obligations as they came due. Instead, Weiss tried to 

plead insolvency through three factual allegations. First, he cited the deposition of John 

Packard, who served as a director of eScrub from 2002 until early 2009. Packard testified 

that in November 2007 the company had a “cash flow problem,” App. 90, was “running out 

of money,” App. 92, and was “behind the eight ball for having any money for that whole 

period of time,” id. When asked if eScrub went bankrupt, Packard responded that he was 

uncertain, but “saw something that showed their stock was worthless.” Dkt. No. 21, App. 

1. We agree with the District Court that this speculation does not provide a plausible 

showing of insolvency under Delaware law. Second, Weiss noted that eScrub didn’t pay 

legal bills to several of its attorneys. But the company’s failure to pay these bills does not

show its inability to do so. Indeed, Weiss’s complaint suggests eScrub didn’t pay his legal 

bills because—rightly or wrongly—it wasn’t satisfied with his work. See App. 35 (Compl. 

¶ 11(b)). Third, Weiss alleges that eScrub failed to pay its Delaware franchise tax from 

2009 forward or the sums required to keep its existing and pending patents alive. But these 

anecdotal indicators of financial difficulty do not satisfy Weiss’s burden to allege that 

eScrub was insolvent. Furthermore, we agree with the District Court that even if Weiss had 

sufficiently pleaded insolvency, he lacks standing because the only evidence he marshals of 
5

alleged wrongdoing (i.e., Packard’s failure to mitigate eScrub’s financial problems) 

occurred in November 2007, and Weiss himself didn’t become a potential creditor until he 

was hired in December 2007.2

Weiss argues that “it is incomprehensible” that the District Court lacked subject 

matter jurisdiction because it had diversity jurisdiction. Weiss Br. 4–5. But while everyone 

agrees the District Court had diversity jurisdiction, that sheds no light on the question of 

standing. And “[a]bsent Article III standing, a federal court does not have subject matter 

jurisdiction to address a plaintiff’s claims, and they must be dismissed.” Taliaferro v. 

Darby Twp. Zoning Bd., 458 F.3d 181, 188 (3d Cir. 2006).

In sum, because Weiss did not allege facts to support a plausible claim of insolvency, 

the District Court did not err in concluding he lacked standing to sue. We will affirm.

 

2 Defendants raise several other reasons why dismissal is appropriate. We find these 

arguments largely persuasive, but need not address them in light of our disposition.