Court Opinion

ID: 2793960
Source: CourtListenerOpinion
Date Created: 2015-04-15 20:00:34.9323+00
Date Added: 2024-06-11T11:29:07.456649
License: Public Domain

NOT PRECEDENTIAL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.
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 long-

overdue 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

                                              2
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.
                                                 3
       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

                                               4
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.
                                               5