Court Opinion

ID: 2704896
Source: CourtListenerOpinion
Date Created: 2014-08-04 22:04:49.873717+00
Date Added: 2024-06-11T12:55:01.326275
License: Public Domain

COURT OF CHANCERY
                                                OF THE
                                          STATE OF DELAWARE
ABIGAIL M. LEGROW
 MASTER IN CHANCERY                                                              NEW CASTLE COUNTY COURTHOUSE
                                                                                500 NORTH KING STREET, SUITE 11400
                                                                                    WILMINGTON, DE 19801-3734

                                        Final Report: July 1, 2014
                                        Submitted: June 11, 2014

      Alan L. Lucas                                      Jackie and Della Miller
      Linn County Correctional Center                    1120 37th Street
      P.O. Box 608                                       Des Moines, IA 50311
      Cedar Rapids, IA 52406-0608
                                                         Francis and Gwen Miller
      Dwight and Carol Miller                            204 12th Street NW
      103 15th Street SE                                 Mason City, IA 50401
      Mason City, IA 50401

                                    Theodore J. Tacconelli
                                    Rick S. Miller
                                    Ferry Joseph & Pearce, P.A.
                                    P.O. Box 1351
                                    Wilmington, DE 19899

                Re:   Alan L. Lucas, et al. v. Alan Hanson, et al.
                      C.A. No. 9424-ML

      Dear Counsel and Parties:

                I am in receipt of the defendants‟ motions to dismiss the amended complaint in the

      above-captioned action, along with the plaintiff‟s response to those motions. For the

      reasons that follow, I recommend that the Court dismiss without prejudice the amended

      complaint because the plaintiff has not alleged sufficient facts to establish that (i) he has

      standing to maintain this action, and (ii) this Court has personal jurisdiction over certain

      of the defendants. This is my final report on these motions.
C.A. No. 9424-ML
July 1, 2014
Page 2

BACKGROUND

       The following facts are drawn from the complaint, giving the plaintiff the benefit

of all reasonable inferences.       This case involves Covenant Investment Fund LP

(“Covenant”), a Delaware limited partnership created in 2007.                Prosapia Capital

Management LLC (“Prosapia Capital”) is the general partner and a limited partner of

Covenant.1 Prosapia Capital is a wholly-owned subsidiary of Prosapia Financial LLC

(“Prosapia Financial”).2 The plaintiff, Alan Lucas (“Lucas”) is the operating manager of

both Prosapia Capital and Prosapia Financial and is a member of Prosapia Financial.3

       The defendants are current or “disassociated” limited partners of Covenant, none

of whom are residents of Delaware.4 The complaint does not allege that any of the

defendants participated in the management of Covenant. According to the Amended

Complaint, after Prosapia Capital became general partner, it expended some of

Covenant‟s funds to conduct an audit, hire contractors, and purchase a corporate vehicle,

and took steps to liquidate Covenant‟s fiber optic utility rights and assets, with an

ultimate goal of purchasing a large hotel and convention center.5 Some of the limited

partners objected to this plan for Covenant‟s future. In June 2011, Lucas was charged in

1
  Am. Compl. for Declaratory J. and Prelim. Inj. (hereinafter “Am. Compl.”) ¶ 16
2
  Id. ¶ 17.
3
  Id. ¶¶ 2, 19.
4
  Id. ¶¶ 3-11. The term “disassociated” is drawn from the complaint. The plaintiff uses the term
to refer to limited partners who allegedly received final distributions and withdraws from
Covenant in 2009. Id. ¶ 23.
5
  Id. ¶ 24
C.A. No. 9424-ML
July 1, 2014
Page 3

Iowa with theft and ongoing criminal conduct associated with the expenditure and

liquidation of Covenant‟s funds and assets.6

       Lucas was convicted on October 23, 2013 and was sentenced on March 14, 2014

to 25 years in prison. In connection with the criminal proceedings, Iowa declared “that

the cash held in [Covenant‟s] account was the property of the [named defendants],” and

should have been distributed to the named defendants when Prosapia Capital became

Covenant‟s general partner.7 After his conviction, but before the sentencing, Lucas filed

this action seeking declaratory and injunctive relief and arguing that “Iowa‟s attempt to

force distributions of company assets is the regulation of the internal affairs of a

Delaware entity with no ties to Iowa in violation of the commerce clause, due process

clause and full faith and credit clause of the United States Constitution.”8 Although the

Amended Complaint appears to seek declaratory and injunctive relief regarding whether

Iowa‟s prosecution of Lucas violated his constitutional rights,9 Lucas maintains that he

seeks only an injunction prohibiting the named defendants from receiving Covenant‟s

funds as restitution, explaining that “the actions by the State of Iowa and the underlying

constitutional implications are only alleged to establish that the only proper way for the
6
  Id. ¶ 26.
7
  Id.
8
  Id.
9
  See, e.g. Am. Compl. Prayer for Relief p. 20 (alleging that “[t]he State of Iowa violated the due
process, full faith and credit, and commerce clauses of the United States Constitution when Iowa
initiated a criminal prosecution of Lucas for actions undertaken as Operating Manager of the
General Partner of Covenant. In essence, Lucas‟s conduct that is not only legal, but is required
under Delaware partnership law, has been deemed illegal under Iowa law”); id. p. 22, ¶ 4
(seeking a declaration that “[w]hen the State of Iowa imposed criminal sanctions on Alan Lucas
for directing the partnership to not issue distributions or dissolve the partnership, it was acting
extraterritorially in violation of the Commerce Clause of the United States Constitution”).
C.A. No. 9424-ML
July 1, 2014
Page 4

defendants to receive a distribution or disbursement from [Covenant] is by initiating a

derivative action in this Court.”10 The defendants filed a series of motions to dismiss the

Amended Complaint.        Alan Hanson, Patty Hanson, and Marcella Hosch moved to

dismiss (the “Hanson/Hosch Motion”) on the basis that Lucas lacks standing to pursue

this action because there is no allegation in the Amended Complaint that Lucas is a

limited or general partner of Covenant. Dwight Miller, Carol Miller, Jackie Miller, Della

Miller, Francis Miller, and Gwen Miller (collectively, the “Miller Defendants”) moved to

dismiss the claims against them for lack of personal jurisdiction and for failure to state a

claim.

ANALYSIS

         Pursuant to Rule 12(b)(6), this Court may grant a motion to dismiss for failure to

state a claim if a complaint does not assert sufficient facts that, if proven, would entitle

the plaintiff to relief. The governing pleading standard in Delaware to survive a motion

to dismiss is “reasonable „conceivability.‟”11 That is, when considering such a motion, a

court must

               accept all well-pleaded factual allegations in the Complaint as
               true, accept even vague allegations in the Complaint as “well-
               pleaded” if they provide the defendant notice of the claim,
               draw all reasonable inferences in favor of the plaintiff, and
               deny the motion unless the plaintiff could not recover under

10
   Lucas‟s Resp. to Defs. Hansons‟ and Hosch‟s Motion to Dismiss (hereinafter “Resp. to
Hanson/Hosch”) at 2-4.
11
   Central Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 537 (Del.
2011) (footnote omitted).
C.A. No. 9424-ML
July 1, 2014
Page 5

              any reasonably conceivable set of circumstances susceptible
              of proof.12

This “conceivability” standard asks whether there is a “possibility” of recovery. 13 If the

well-pleaded factual allegations of the complaint would entitle the plaintiff to relief under

a reasonably conceivable set of circumstances, the Court must deny the motion to

dismiss.14

       In response to the Hanson/Hosch motion, Lucas concedes the Amended Complaint

does not allege that he is a limited partner of Covenant, but contends the absence of that

allegation merely is an oversight, asserts that he is in fact a limited partner of Covenant,

and urges the Court to “constructively amend” the Amended Complaint to add the

allegation that Lucas has a limited partnership interest in Covenant.15 On a motion to

dismiss, however, I cannot look outside the complaint for facts to support it,16 and there is

no basis in this Court‟s rules or precedent for a “constructive amendment” to the

pleadings at this stage in the proceedings. I therefore recommend that the Court dismiss

the Amended Complaint without prejudice to Lucas‟s ability to file a second amended

complaint. Although the Hanson and Hosch defendants urge that any such amendment

would be futile because the claims Lucas seeks to pursue are derivative, and he is not a

proper derivative plaintiff, those arguments were raised in the reply brief and are best

12
   Id. (citing Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002)).
13
   Id. at 537 & n.13.
14
   Id. at 536.
15
   Resp. to Hanson/Hosch at 5-6.
16
   Shintom Co., Ltd. v. Audiovox Corp., 2005 WL 1138740, at *4 n.8 (Del. Ch. May 4, 2005).
C.A. No. 9424-ML
July 1, 2014
Page 6

considered on a more complete record after Lucas has been given an opportunity to

respond.

       The Miller Defendants also moved to dismiss on the basis that this Court lacks

personal jurisdiction over them for purposes of deciding Lucas‟s claims.17 When a

defendant moves to dismiss for want of personal jurisdiction, it is the plaintiff‟s burden to

show a basis for the Court to exercise jurisdiction over a nonresident defendant. 18 “In

determining whether it has personal jurisdiction over a nonresident defendant, the court

will generally engage in a two-step analysis.         First, was service of process on the

nonresident authorized by statute?       Second, does the exercise of jurisdiction, in the

context presented, comport with due process?”19

       Lucas‟s response to the Miller Defendants‟ Motion to Dismiss does not identify

the statute he contends authorized service of process over the Miller Defendants,

although I presume he relies on the State‟s long arm statute, 10 Del. C. § 3104. Even if

Lucas properly identified a statutory provision and alleged sufficient facts to meet the

terms of that statute, however, he also makes no effort to satisfy any “minimum contacts”

analysis. Instead, Lucas argues that the Miller Defendants consented to the jurisdiction

of this Court by signing Covenant‟s partnership agreement.20 Although a defendant may

waive her defense based on personal jurisdiction by expressly consenting to jurisdiction

17
   The Hanson/Hosch motion does not raise personal jurisdiction as a basis for dismissal, and I
therefore have not considered this Court‟s jurisdiction over those defendants.
18
   Albert v. Alex. Brown Mgmt. Servs., 2005 WL 2130607, at *14 (Del. Ch. Aug. 26, 2005).
19
   Id. (citing LaNuova D & B, S.P.A. v. Bowe Co., 513 A.2d 764, 768 (Del. 1986)).
20
   Consolidated Resp. to Miller Defs. Mot. to Dismiss (hereinafter “Resp. to Miller Defs.”) at 3,
4 (citing Sections 14.05 and 14.06 of the partnership agreement).
C.A. No. 9424-ML
July 1, 2014
Page 7

by contract,21 and although such consent eliminates the need for a minimum contacts

analysis,22 Lucas has not filed with the Court a copy of the partnership agreement, and I

therefore cannot determine whether the Miller Defendants in fact consented to

jurisdiction. Because Lucas has not met his burden to establish a basis for this Court to

exercise jurisdiction over the Miller Defendants, all of whom are residents of Iowa, I

recommend that the Court grant the Miller Defendants‟ motion to dismiss, without

prejudice to an amended pleading that establishes a basis by which the Court may

exercise jurisdiction over those defendants.

CONCLUSION

       For the foregoing reasons, I recommend that the Court grant the motions to

dismiss without prejudice. This is my final report and exceptions may be taken in

accordance with Rule 144.

                                           Sincerely,

                                    /s/ Abigail M. LeGrow
                                      Master in Chancery

21
   Hornberger Mgmt. Co. v. Haws & Tingle Gen. Contrs., 768 A.2d 983, 987 (Del. Super. 2000);
see also Werner v. Miller Tech. Mgmt., L.P., 831 A.2d 318, 331 (Del. Ch. 2003) (stating that
parties can choose to avail themselves of Delaware law through a forum selection clause); cf. Del
Pharm., Inc. v. Access Pharm., Inc., 2004 WL 1631355, at *1 (Del. Ch. July 16, 2004)
(enforcing a forum selection clause, which chose New York as the exclusive forum for
adjudication, to dismiss suit).
22
   Hornberger, 768 A.2d at 987; USH Ventures v. Global Telesystems Group, Inc., 1998 WL
281250, at *8 (Del. Super. Ct. May 21, 1998).