Court Opinion

ID: 4224760
Source: CourtListenerOpinion
Date Created: 2017-11-30 16:06:39.735744+00
Date Added: 2024-06-11T14:41:54.798388
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

RCS CREDITOR TRUST,                    )
                                       )
                 Plaintiff,            )
                                       )
      v.                               ) C.A. No. 2017-0178-SG
                                       )
NICHOLAS S. SCHORSCH, EDWARD           )
M. WEIL, JR., WILLIAM KAHANE,          )
PETER M. BUDKO, BRIAN S.               )
BLOCK, LOUISA QUARTO, RCAP             )
HOLDINGS LLC, AR CAPITAL, LLC,         )
AR GLOBAL INVESTMENTS, LLC,            )
AMERICAN REALTY CAPITAL                )
RETAIL ADVISOR, LLC, AMERICAN          )
FINANCE ADVISORS, LLC,                 )
AMERICAN REALTY CAPITAL                )
HEALTHCARE III ADVISORS, LLC,          )
AMERICAN REALTY CAPITAL                )
HOSPITALITY ADVISORS, LLC,             )
NEW YORK CITY ADVISORS, LLC,           )
GLOBAL NET LEASE ADVISORS,             )
LLC, AMERICAN REALTY CAPITAL           )
HEALTHCARE II ADVISORS, LLC,           )
NEW YORK RECOVERY ADVISORS,            )
LLC, and BDCA ADVISER, LLC,            )
                                       )
                 Defendants.           )

                       MEMORANDUM OPINION

                    Date Submitted: September 29, 2017
                     Date Decided: November 30, 2017

Philip Trainer, Jr. and Marie M. Degnan, of ASHBY & GEDDES, Wilmington,
Delaware; OF COUNSEL: John P. Coffey, Gregory A. Horowitz, Jeffrey S.
Trachtman, Eileen Patt, and Jeffrey Dunlap, of KRAMER LEVIN NAFTALIS &
FRANKEL, New York, New York, Attorneys for Plaintiff.
Stephen P. Lamb and Meghan M. Dougherty, of PAUL, WEISS, RIFKIND,
WHARTON & GARRISON LLP, Wilmington, Delaware; OF COUNSEL: Allan J.
Arffa, Gregory F. Laufer, and Jeremy A. Benjamin, of PAUL, WEISS, RIFKIND,
WHARTON & GARRISON LLP, New York, New York, Attorneys for Defendants
Nicholas S. Schorsch, Edward M. Weil, Jr., William Kahane, Peter M. Budko, Louisa
Quarto, RCAP Holdings LLC, AR Capital, LLC, AR Global Investments, LLC,
American Realty Capital Retail Advisor, LLC, American Finance Advisors, LLC,
American Realty Capital Healthcare III Advisors, LLC, American Realty Capital
Hospitality Advisors, LLC, New York City Advisors, LLC, Global Net Lease Advisors,
LLC, American Realty Capital Healthcare II Advisors, LLC, New York Recovery
Advisors, LLC, and BDCA Adviser, LLC.

Elizabeth A. Sloan, of BALLARD SPAHR LLP, Wilmington, Delaware; OF
COUNSEL: Michael C. Miller and Michael G. Scavelli, of STEPTOE & JOHNSON
LLP, New York, New York; Lara E. Romansic, of STEPTOE & JOHNSON LLP,
Washington, DC, Attorneys for Defendant Brian S. Block.

GLASSCOCK, Vice Chancellor
      This matter involves real estate investment trusts—REITs—and the reader

will find that here, as is common in the REIT industry, the business structure

described comprises a confusing blizzard of entities, making the structure difficult

to comprehend without weary effort. The Plaintiff’s contentions are simple enough,

however. Certain of the Defendants created an entity, AR Capital LLC, to develop

and manage REITs.        They formed another entity, RCS Capital Corporation

(“RCAP”), which, through subsidiaries, was responsible for marketing and

distributing, and providing other services, in connection with AR Capital investment

products. These Defendants owned 100% of AR Capital, but took RCAP public,

retaining only a minority interest in RCAP. Through retention of a single share of

super-voting common stock, however, they ensured that they retained control of

RCAP. Thereafter, they structured operation of the entities in a way that maximized

profits at AR Capital, and that assigned expenses to RCAP, to the detriment of the

non-controlling stockholders of that entity.

      According to the Plaintiff, these Defendants, as controllers, directors, or

officers of RCAP, owed fiduciary duties to the non-controlling stockholders of

RCAP, which duties they have breached, aided and abetted by an entity they

controlled and an officer of one of RCAP’s subsidiaries. The Defendants have

moved to dismiss several, but not all, causes of action in the Complaint. For the

reasons that follow, the Defendants’ Motions are granted in part and denied in part.

                                          1
                                    I. BACKGROUND1

       A. The Parties and Relevant Non-Parties

               1. Entities

       Plaintiff RCS Creditor Trust was formed as part of the joint Chapter 11

reorganization plan for RCAP and affiliated entities.2 The plan assigned the Plaintiff

certain causes of action belonging to RCAP’s debtors, “including those asserted in

this action.”3

       RCAP was a Delaware corporation that maintained its principal place of

business in New York City.4 RCAP was incorporated in December 2012, and it

served as a holding company for several businesses, including a wholesale broker-

dealer known as Realty Capital Securities (“RCS”) and an investment bank.5 RCAP

went public on June 5, 2013, and filed for Chapter 11 bankruptcy on January 31,

2016.6

       Defendant RCAP Holdings LLC (“Holdings”) is a Delaware limited liability

company whose principal place of business is in New York City.7 Holdings’ primary

1
  The facts, drawn from the Plaintiff’s Complaint, from documents incorporated by reference
therein, and from matters of which I may take judicial notice, are presumed true for purposes of
evaluating the Defendants’ Motions to Dismiss. I recite only those facts necessary to decide those
Motions.
2
  Compl. ¶ 14.
3
  Id.
4
  Id. ¶ 15.
5
  Id. ¶¶ 15, 31.
6
  Id. ¶ 15.
7
  Id. ¶ 16.

                                                2
asset was the sole outstanding share of RCAP’s Class B common stock, “which had

the same economic rights as a share of Class A common stock but voted as 50% plus

one vote of the outstanding common stock of [RCAP].”8

        Defendant AR Capital LLC is a Delaware limited liability company with a

principal place of business in New York City.9 AR Capital creates and manages

non-traded investment vehicles, primarily REITs.10 “AR Capital is the largest

creator and sponsor of REITs in the United States.”11 Its non-traded REIT offerings

include “healthcare, hospitality, grocery anchored retail, real estate debt, anchored

core retail, global sale-leaseback, and New York office and retail real estate.”12

        Defendant AR Global Investments LLC is a Delaware limited liability

company that maintains its principal place of business in New York City; it is

“publicly held out as ‘the successor to AR Capital’s business’ and is functionally

identical to AR Capital.”13 For ease of reference, I call both AR Global and AR

Capital “AR Capital.”

        Each AR Capital investment vehicle receives “management services” from a

separate, wholly owned AR Capital subsidiary.14 The AR Capital entities that

8
  Id.
9
  Id. ¶ 24.
10
   Id. ¶¶ 2, 24.
11
   Id. ¶ 24.
12
   Id.
13
   Id.
14
   Id. ¶ 25.

                                          3
provide these services do not employ anyone; instead, they “provide the required

services entirely through employees of AR Capital and related entities.”15 I refer to

these wholly owned AR Capital subsidiaries as the “Advisor Defendants,” and they

include Defendants American Realty Capital Retail Advisor, LLC, American

Finance Advisors, LLC, American Realty Capital Healthcare III Advisors, LLC,

American Realty Capital Hospitality Advisors, LLC, New York City Advisors, LLC,

Global Net Lease Advisors, LLC, American Realty Capital Healthcare II Advisors,

LLC, New York Recovery Advisors, LLC, and BDCA Adviser.16

        Non-party American Realty Capital Properties, Inc. (“ARCP”) is a publicly

traded REIT that, in October 2014, became implicated in a “massive” accounting

fraud.17

                2. Individuals

        Defendant Nicholas S. Schorsch was the Executive Chairman of RCAP’s

Board of Directors until he resigned on December 30, 2014.18 Schorsch also served

as the Chairman, CEO, and controlling owner of AR Capital, which he helped found

and in which he holds a 56.02% membership interest.19 Schorsch maintains “a

similar ownership interest in Holdings,” and from 2010 to October 1, 2014, he served

15
   Id.
16
   Id. ¶¶ 25(a)–(i).
17
   Id. ¶¶ 26, 68, 74.
18
   Id. ¶ 17.
19
   Id.

                                         4
as the CEO of ARCP, which he created and controlled.20 Non-party Shelly D.

Schorsch, Nicholas’s wife, holds a 7.54% interest in AR Capital.21

        Defendant William M. Kahane was RCAP’s CEO until his resignation on

September 21, 2014.22 Kahane was an RCAP director until December 30, 2014, and

he served on ARCP’s Board of Directors until June 24, 2014.23 Kahane helped found

AR Capital, in which he holds a 13.5% ownership interest.24 Like Schorsch, Kahane

maintains a similar ownership interest in Holdings.25

        Defendant Edward M. Weil, Jr. served on RCAP’s Board of Directors at all

relevant times, and was RCAP’s CEO from September 22, 2014, until November

17, 2015.26 Weil served as AR Capital’s President and COO.27 He also served as

ARCP’s President, COO, Executive Vice President, Treasurer, and Director at

various points from 2012 through 2014.28 Weil maintains a 3.51% membership

interest in AR Capital, and holds a similar interest in Holdings.29

20
   Id. ¶¶ 17, 26.
21
   Id. ¶ 17.
22
   Id. ¶ 18.
23
   Id.
24
   Id.
25
   Id.
26
   Id. ¶ 19.
27
   Id.
28
   Id.
29
   Id.

                                          5
        Defendant Peter M. Budko served as an RCAP director at all relevant times,

and he was AR Capital’s Chief Investment Officer and Executive Vice President.30

Budko also held the positions of Chief Investment Officer and Executive Vice

President at ARCP from 2010 to 2014.31 Budko owns a 16.4% membership interest

in AR Capital, and he maintains a similar ownership interest in Holdings.32

        Defendant Brian S. Block served on RCAP’s Board of Directors from

February 2013 to July 2014, during which time he also worked as RCAP’s CFO.33

Block has served as AR Capital’s Executive Vice President and CFO, and as of June

2014, he owned a 3.03% membership interest in AR Capital and a similar interest in

Holdings.34    Starting in December 2010, Block served as ARCP’s CFO and

Executive Vice President, and he became Treasurer in December 2013.35 Block was

asked to step down from ARCP on October 28, 2014, and he was eventually indicted

for conspiracy and securities fraud in the United States District Court for the

Southern District of New York.36

        The Complaint alleges that “[a]t all relevant times, . . . Kahane, Weil, Budko,

and Block have done Schorsch’s bidding, acting at his direction and control – and

30
   Id. ¶ 20.
31
   Id.
32
   Id.
33
   Id. ¶ 21.
34
   Id.
35
   Id.
36
   Id.

                                           6
have been compensated handsomely for so doing.”37 I refer to Schorsch, Weil,

Kahane, Budko, and Block as the “Control Defendants.”

        Defendant Louisa Quarto was RCS’s president from January 2012 through

January 2016, during which time she also served as Executive Vice President for AR

Capital.38 The Complaint alleges that “[a]t all relevant times Quarto has been

economically dependent on, acted at the direction of, and given her undivided loyalty

to, the Control Defendants.”39 I refer to all defendants save Block as the “ARC

Parties.”

        B. Factual Overview

                   1. AR Capital, RCAP, and the Control Defendants’ Scheme

        Schorsch and Kahane founded AR Capital in 2007 to enter the business of

creating and sponsoring non-traded REITs—that is, REITs that are not listed on an

exchange.40 They were soon joined by Weil, Budko, and Block, who received

ownership interests in AR Capital.41 In 2008, the Control Defendants formed RCS

to distribute AR Capital’s investment products.42 While AR Capital was initially

unprofitable, by 2009 and 2010 it was well on its way to becoming “the market

37
   Id. ¶ 28.
38
   Id. ¶ 23.
39
   Id.
40
   Id. ¶¶ 4, 28.
41
   Id. ¶ 28.
42
   Id. ¶ 29.

                                             7
leader in the non-traded REIT space.”43 From 2010 to 2012, the Control Defendants

continued to expand their REIT business, creating funds that spanned several hard

asset classes.44 RCS was responsible for distributing the AR Capital investment

products associated with these funds.45

        According to the Complaint, AR Capital was very profitable, but the Control

Defendants wanted more.46 So they hatched a scheme “to make the REIT business

even more lucrative by off-loading a key part of their expenses on third parties while

retaining all of the profit.”47

        The Control Defendants carried out the first step of this scheme in December

2012, when they formed RCAP as a holding company for (i) RCS, (ii) an investment

bank “that also provided transaction management services to direct investment

programs and their sponsors,” and (iii) a transfer agent “that acted as registrar and

transfer agent for direct investment programs and registered investment companies

sponsored, co-sponsored, or advised by RCAP’s affiliated companies.”48            The

Control Defendants initially owned 100% of RCAP, so that “the profits and losses

of AR Capital and RCAP were fungible.”49

43
   Id.
44
   Id. ¶ 30.
45
   Id.
46
   Id.
47
   Id.
48
   Id. ¶ 31.
49
   Id. ¶ 32.

                                          8
        In the next step of the scheme, the Control Defendants took RCAP public in

June 2013, creating “third-party resources at RCAP to dedicate toward growing AR

Capital.”50 The next spring, RCAP started purchasing several retail broker-dealers,

including Cetera Financial Holdings LLC, which RCAP bought for about $1.1

billion.51 About a month after RCAP acquired Cetera, RCAP had another public

offering and raised $385 million.52

        As a result of the initial and secondary public offerings, the Control

Defendants reduced their economic interest in RCAP to about 25%, an interest they

held through their ownership of Holdings; yet they continued to control RCAP

because they held (again through Holdings) an RCAP B share that gave them

majority voting power.53 Crucially, the Control Defendants (along with Schorsch’s

wife) remained 100% owners of AR Capital throughout this time.54 The crux of the

Complaint, as I will explain in more detail below, is that the Control Defendants

exploited this ownership structure—in which they held a significantly greater

economic interest in AR Capital than in RCAP—to enrich themselves at the expense

of RCAP.55          The following chart, taken from the Complaint, summarizes the

50
   Id. ¶ 33.
51
   Id. ¶ 34.
52
   Id. ¶ 35.
53
   Id. ¶¶ 37, 39.
54
   Id. ¶ 2.
55
   Id. ¶¶ 2–3.

                                           9
connections among the Control Defendants, AR Capital, RCAP, and these entities’

subsidiaries as of the completion of the secondary public offering in 2014:56

                 2. The Control Defendants Engage in Self-Dealing Transactions
                 Involving AR Capital and RCAP

          To understand the significance of these ownership structures to the Control

Defendants’ scheme, some background on the non-traded REIT industry and AR

Capital’s role in it is necessary. AR Capital typically forms investment vehicles “by

56
     Id. ¶ 36. “Wholesale” in this chart refers to RCS.

                                                  10
purchasing hard assets such as real estate, which are placed into a tax advantaged

REIT or [Business Development Company] structure.”57 AR Capital is responsible

for overseeing the fund, and that entails “obtaining debt financing; buying, selling,

and managing assets; and ultimately deciding when and how to sell the business,

take it public, or wind it down.”58 AR Capital itself does not perform these services,

however; that falls to the Advisor Defendants, a set of wholly owned AR Capital

entities.59 Nevertheless, AR Capital receives compensation for the management

services provided by its subsidiaries, and this compensation includes

       ongoing asset management fees, typically equal to a percentage (around
       1%) of assets under management, or fixed annual fees of similar
       magnitude; asset acquisition and disposition fees; substantial bonuses
       upon consummation of a “liquidity event” (such as selling the REIT or
       taking it public); and various forms of profit sharing sometimes referred
       to as a “promote.”60

According to the Complaint, “[a] typical promote might give AR Capital, through

its advisor subsidiary, 15% of the REIT’s annual profits above 6%.”61

       Meanwhile, RCAP, through RCS, performed the “arduous” task of

“marketing the AR Capital products to retail broker-dealers and, ultimately, to

57
   Id. ¶ 44.
58
   Id.
59
   Id. The Complaint is a little unclear on who exactly provides these advisory services. On the
one hand, as I just recited, it says that the services are provided through the Advisor Defendants.
Id. On the other hand, it asserts that the Advisor Defendants “have no employees” and that the
services are in fact provided “entirely through employees of AR Capital and related entities.” Id.
¶ 25.
60
   Id. ¶ 44.
61
   Id.

                                                11
financial advisors who would then sell the product to their ‘mass affluent’ retail

clients.”62 RCAP distributed all of AR Capital’s investment products, making AR

Capital “dependent upon RCAP for its growth and survival.”63 Volume was (and

remains) critical to AR Capital’s profitability, and it earned more fees when RCS

sold more AR Capital product to retail investors.64 Yet, for the reasons explained

below, RCAP did not share in AR Capital’s success.

        Rules promulgated by the Financial Industry Regulatory Authority, Inc.

(“FINRA”) restrict the amount of compensation that parties involved in the public

offering of a REIT can receive. Specifically, FINRA Rule 3210 provides that sales

commissions and expenses cannot be more than 10% of the investment amount. 65

“Typically, this 10% ‘load’ is split, with 7% devoted to incentivizing the financial

advisor and 3% ‘allowed’ to the wholesale broker-dealer, of which 1% to 2% is paid

as ‘reallowance’ to the retail broker-dealer.”66 According to the Complaint, this

payment structure means that a wholesaler such as RCS cannot achieve reasonable

profitability as a standalone business.67 Indeed, no company has ever managed that

feat.68 Thus, wholesalers have two options: either “(a) function as a cost center

62
   Id. ¶ 45.
63
   Id.
64
   Id.
65
   Id. ¶ 46.
66
   Id.
67
   Id. ¶ 47.
68
   Id.

                                        12
within a larger vertically integrated organization [as RCS originally functioned], or

(b) negotiate for a share of the ongoing management economics generated by the

investments they raise, either through a joint venture interest in the advisory, or

through advisor/subadvisor contractual relationship with the sponsor.”69

        Before RCAP went public in 2013, RCS was a cost center within AR

Capital,70 and the Plaintiff has no quarrel with that arrangement. As the Plaintiff

puts it, when the Control Defendants were the sole owners of RCAP, “the profits

and losses of AR Capital and RCAP were fungible – defendants would be moving

money from one pocket to another.”71          That all changed when the Control

Defendants took RCAP public and reduced their economic stake in RCAP to 25%.

After the spin-off and public offerings, the Control Defendants used their voting

control of RCAP to cause RCS to continue operating as a cost center for AR Capital,

of which they (along with Schorsch’s wife) remained the sole owners.72 In other

words, RCAP provided significant benefits to AR Capital by wholesaling its

investment funds, but RCAP received only 1% to 2% of the investment amount.

According to the Complaint, that is “an arrangement no third party wholesaler

negotiating on an arms’-length basis would accept.”73

69
   Id.
70
   Id. ¶ 48.
71
   Id. ¶ 32.
72
   Id. ¶ 48.
73
   Id.

                                         13
       As an example of an arrangement that an independent wholesaler would

accept, the Plaintiff points to AR Capital’s dealings with Phillips Edison &

Company, a REIT sponsor specializing in grocery-anchored shopping centers.74

Phillips Edison created the Phillips Edison Grocery Center REIT I (“PECO I”) in

2010.75 Phillips Edison was unable to wholesale PECO I on its own, so it sought the

services of RCS, at the time a wholly owned subsidiary of AR Capital.76 In exchange

for having RCS wholesale PECO I, the Control Defendants persuaded Phillips

Edison to provide a separate AR Capital subsidiary with a slice of the advisory fees.77

PECO I contracted with this AR Capital subsidiary to serve as the REIT’s nominal

advisor, and “a Phillips Edison-owned entity serv[ed] as sub-advisor.”78 I say the

AR Capital subsidiary was a “nominal” advisor because it was the Phillips Edison-

owned advisory entity that actually performed most of the management services for

PECO I.79      Thus, “[w]hile Phillips Edison, through [its] advisor [entity], did

essentially all of the substantive work, 22.5% of the ‘promote’ went to the Control

Defendants, through [the] ARC [advisor entity].”80 According to the Plaintiff, this

74
   Id. ¶ 50.
75
   Id.
76
   Id.
77
   Id.
78
   Id.
79
   Id.
80
    Id. After the accounting fraud at ARCP surfaced, Phillips Edison terminated the advisor
agreements between its REITs and the AR Capital advisor entities. Id. ¶ 52. Quarto was involved
in the negotiations over restructuring the arrangements, and she “insisted that AR Capital should

                                               14
is a typical example of a market-standard arrangement between a REIT sponsor and

a wholesaler.

       In contrast to the Phillips-Edison situation just described, the Control

Defendants, instead of causing the recently spun-off RCAP to bargain for a slice of

the advisory fees, forced RCAP (through RCS) to continue wholesaling AR

Capital’s REITs in off-market arrangements.81 In these arrangements, the advisory

fees went, in toto, to the Advisor Defendants, which were wholly owned AR Capital

subsidiaries.82 This is the core of the Control Defendants’ alleged scheme: by

forcing RCAP to bear all the costs of wholesaling AR Capital’s investment vehicles,

the Control Defendants enriched AR Capital, in which they (together with

Schorsch’s wife) held a 100% economic stake, to the detriment of RCAP, in which

they held only a 25% economic interest. And detriment there was. According to the

Plaintiff, RCS’s profitability “plummeted in the quarters after the Control

Defendants sold a stake to outside investors in 2013, remaining mostly in the red

retain ‘our’ share of the management economics – with ‘our’ referring to the Control Defendants
to whom she was loyal.” Id.
81
   Id. ¶ 54.
82
   Id. ¶¶ 25(a)–(i). The Defendants argue that this fee structure was disclosed to RCAP investors
in the prospectus for the initial public offering. The prospectus noted that RCAP “generally
receives commissions of up to 7.0% of gross offering proceeds for funds raised through the
participating independent broker-dealer channel, all of which are redistributed as third-party
commissions, in accordance with industry practices.” Arffa Aff. Ex. 4 at F-12. It went on to state
that RCAP “generally receives up to 3.0% of the gross proceeds from the sale of common stock
as a dealer manager fee and also receives fees from the sale of common stock through registered
investment advisors.” Id.

                                               15
regardless of how much it raised.”83 But because those losses were suffered mostly

by RCAP’s public stockholders, and AR Capital benefited handsomely from

RCAP’s misfortune, the Control Defendants had no incentive to ensure that RCAP

received its due.

       I pause to describe RCAP’s management structure as it existed when the

misconduct just described took place. When RCAP was created, no independent

directors sat on its Board.84 Independent directors did join the RCAP Board in early

2013 in anticipation of the initial public offering.85 But these directors never

reviewed any of the “existing and new business arrangements (including periodic

renewals and amendments of existing contracts) between RCAP and other Schorsch

entities.”86 Indeed, all of RCAP’s deals with AR Capital were “negotiated and agreed

to on both sides . . . by the Control Defendants and [those loyal to them].”87 And the

Control Defendants (together with Quarto) allegedly concealed from the Board the

off-market nature of the arrangements between AR Capital and RCAP.88 For

example, in October 2013, the Control Defendants were considering acquiring

83
   Compl. ¶ 60.
84
   Id. ¶ 54.
85
   Id. The Complaint does not describe the precise composition of the RCAP Board. Nonetheless,
the Plaintiff’s counsel said at oral argument that “[t]he board of RCAP at all times had a majority
of interested directors.” Sept. 29, 2017 Oral Arg. Tr. 44:8–9.
86
   Compl. ¶ 54.
87
   Id. ¶ 57.
88
   Id. ¶ 54.

                                                16
Strategic Capital Partners LLC (“Strat Cap”), an independent wholesaler.89 On

October 3, an RCS employee sent Weil and Quarto a slide deck summarizing the

deals Strat Cap had with the REITs it wholesaled; in those deals, and unlike RCAP

in its arrangements with AR Capital, Strat Cap received 20% to 25% of the advisory

fees.90 Because this information would reveal that RCAP was getting a raw deal

from AR Capital, “it was excluded from the single slide deck provided to the RCAP

Board of Directors to obtain their written consent to the Strat Cap acquisition on

October 23, 2013.”91

               3. The Control Defendants Overstaff RCS

        According to the Plaintiff, the Control Defendants’ disloyalty to RCAP did

not stop at the lopsided arrangements between AR Capital and RCAP. The Plaintiff

also alleges that the Control Defendants caused RCAP “to maintain an irrational and

unsustainable staffing level for . . . [RCS], even as that business cratered.”92 Hiring

and keeping on too many people was bad for RCAP, but that did not bother the

Control Defendants, who received “continuing benefits from even modest additional

sales of AR Capital products.”93 That is because, as noted above, volume was crucial

89
   Id. ¶ 55.
90
   Id.
91
   Id.
92
   Id. ¶ 58.
93
   Id.

                                          17
to AR Capital’s success, and the way to achieve more volume was to increase staff

at RCS, the entity responsible for wholesale distribution of AR Capital’s products.94

        Before RCAP went public in June 2013, it was “modestly profitable when it

raised $1 billion or more of equity in a given quarter.”95 But after the initial public

offering, RCAP’s “profitability plummeted . . . remaining mostly in the red

regardless of how much it raised.”96 As discussed above, the Plaintiff ascribes the

change in RCAP’s fortunes to the misalignment between control and equity created

by the ownership structures of RCAP and AR Capital. These ownership structures

created perverse incentives for the Control Defendants, who, once RCAP went

public, increased RCS’s staff and “stubbornly maintained the same high staffing

levels despite declining profitability.”97 Specifically, RCS kept on 190 to 200

employees between December 2013 and August 2015, even though RCS’s “business

was dying throughout 2015, with devastating losses that ultimately drove RCAP into

bankruptcy.”98 Again, while these staffing levels were irrational from RCAP’s

perspective, they benefited AR Capital, “which bore none of the costs but benefitted

from having available the maximum capacity to push product.”99 RCS did not start

94
   Id.
95
   Id. ¶ 60.
96
   Id.
97
   Id. ¶ 63.
98
   Id. ¶ 64.
99
   Id.

                                          18
firing people in large numbers until November 2015, when it was already winding

down.100

               4. The Control Defendants Cause RCAP to Make Imprudent
               Acquisitions

       The Plaintiff alleges that the Control Defendants had RCAP pursue

acquisitions that served AR Capital’s interests rather than RCAP’s.101 First, in May

2014, RCAP agreed to purchase Strat Cap, a wholesaler of non-traded investment

vehicles that competed with AR Capital.102 Before this acquisition took place,

RCAP’s management had told public investors that it intended “to grow its retail

broker-dealer business and deemphasize” wholesaling.103 Nonetheless, Schorsch

and the other Control Defendants pushed the Strat Cap Acquisition because it would

benefit AR Capital.104 Specifically, the acquisition would “reduc[e] competition

with AR Capital’s products by eliminating an independent wholesaler that had

facilitated distribution of smaller, non-traded funds; and (2) open[] up new lines of

distribution for AR Capital products by providing access to national, full-service

100
    Id. The Plaintiff alleges that Quarto, RCS’s President, received a “risk assessment” in July
2014 “showing that [RCS] had far more salespeople than their nearest competitors,” and
“reveal[ing] that [RCS] was hosting too many large events to attract business, without focusing on
basic cost management.” Id. ¶ 65. But neither Quarto nor anyone else in RCAP’s management
did anything about it. Id. Moreover, Quarto “knew the arrangements [between RCAP and AR
Capital] were off-market, and failed to disclose and indeed affirmatively hid that information from
the independent directors in connection with new transactions.” Id. ¶ 54.
101
    Id. ¶ 89.
102
    Id. ¶ 90.
103
    Id. ¶ 42.
104
    Id. ¶ 90.

                                                19
broker-dealers, known colloquially as ‘wire houses.’”105 RCAP paid $77.5 million

to acquire Strat Cap, and the deal “was rushed through board approval without a

meeting, through written consent on the basis of a single powerpoint deck containing

a single page ‘valuation analysis.’”106 The Control Defendants did not tell the Board

that they “intended to require Strat Cap to distribute AR Capital products on the

same abusive terms they were already imposing on [RCS].”107 According to the

Plaintiff, the Strat Cap acquisition turned out poorly for RCAP, and toward the end

of 2015, RCAP was forced to sell Strat Cap back to its previous owner for $8.8

million and the waiver of several earn-out obligations.108

       The Plaintiff also challenges RCAP’s acquisition of Snyder Kearney LLC, a

deal designed solely “to defang a critic of AR Capital products.”109 Snyder Kearney

was a law firm that performed “due diligence on alternative investment product

offerings for broker-dealers, serving a function much like rating agencies and equity

analysts do with respect to publicly traded investments.”110 Snyder Kearney was a

thorn in AR Capital’s side, having “frequently identified problems in AR Capital

105
    Id.
106
    Id. ¶¶ 91–92. As noted above, the RCAP Board was not told that “Strat Cap’s historic record
of positive EBITDA was the result of running wholesale distribution on arms’-length terms,
bargaining for a percentage of their clients’ [advisory fees] in order to earn a reasonable return.”
Id. ¶ 92.
107
    Id.
108
    Id. ¶ 94.
109
    Id. ¶ 95.
110
    Id. ¶ 96.

                                                20
products.”111 So, in order to remove the threat posed by Snyder Kearney, Schorsch

had RCAP “acquire all of the firm’s assets and hire all of its employees in exchange

for a payment of $10,092,000 to Todd Snyder and John Kearney.”112 The law firm

was dissolved and transformed into “SK Research,” “an in-house RCAP research

arm.”113 The deal was approved solely by the RCAP Board’s Executive Committee,

which consisted of Schorsch, Kahane, Weil, Budko, and Block. 114 The Plaintiff

alleges that no reasonable person could believe the acquisition would serve RCAP’s

interests, primarily because “SK Research would never be taken seriously by the

investment community as an independent and objective source of research, in light

of the glaring perception of conflict of interest that inevitably came with being

owned by a Schorsch-controlled company.”115 Like the Strat Cap acquisition, the

SK Research acquisition “was an economic disaster for RCAP,” and RCAP sold all

of SK Research’s assets back to Snyder and Kearney for about $1 million.116

        Another transaction that, according to the Plaintiff, benefited AR Capital at

the expense of RCAP, was RCAP’s acquisition of a majority interest in Docupace

Technologies, which produced “back-office software for broker-dealers.”117 This

111
    Id. ¶ 97.
112
    Id.
113
    Id.
114
    Id. ¶ 98.
115
    Id. ¶ 99.
116
    Id. ¶ 101.
117
    Id. ¶ 102.

                                          21
software was intended to make it easier for retail-broker dealers to process orders

for non-traded investment products.118 AR Capital wanted to develop the software

so that retail broker-dealers would be better equipped to sell its investment vehicles,

“[b]ut the acquisition had no business rationale for RCAP, which is not a technology

company and already had adequate back-office software solutions in place.”119 As

with the Snyder Kearney acquisition, the Docupace deal was approved only by the

RCAP Board’s Executive Committee, which did not contain any independent

directors.120 Moreover, “[t]he unanimous written consent approved by the RCAP

executive committee included a requirement that Docupace enter into a product

agreement with AR Capital upon execution of the acquisition’s Contribution

Agreement.”121 RCAP paid “$35.4 million in cash and common stock, plus up to

$48 million in 2015 and 2016 if certain earnings targets were met,” to acquire its

interest in Docupace.122 Docupace did not do well after RCAP bought a majority

interest in it, “generat[ing] only $7.5 million in gross revenues and incurr[ing] more

than $5.3 million in net pre-tax losses (before impairment).”123 After it filed for

118
    Id.
119
    Id.
120
    Id. ¶ 103.
121
    Id. ¶ 106.
122
    Id. ¶ 103.
123
    Id. ¶ 108.

                                          22
bankruptcy, RCAP sold its interest in Docupace back to Docupace’s management

for $9 million.124

               5. Proxy Fraud

       In November 2014, Schorsch and his colleagues were implicated in an

accounting fraud scandal at ARCP, a publicly traded REIT they controlled.125 The

scandal “taint[ed] all AR Capital products and all Schorsch-related businesses.”126

The Control Defendants tried to address this situation by arranging for a partial buy-

out of AR Capital by Apollo Global Management, the well-known private equity

fund.127 Apollo would not buy AR Capital unless it could purchase RCS as well.128

Thus, Schorsch told a Special Committee of independent RCAP directors, who were

already contemplating a restructuring for RCAP, that the Control Defendants would

block any deal for RCAP except for the one Schorsch was negotiating with

Apollo.129 Despite Schorsch’s warning, the RCAP Special Committee obtained an

investment proposal from “a large and well-respected private investment firm” to

the tune of $300 to $350 million.130 Apollo had proposed a deal for only $100

124
    Id.
125
    Id. ¶ 8.
126
    Id.
127
    Id. ¶ 110.
128
    Id.
129
    Id. ¶¶ 109–10.
130
    Id. ¶ 111.

                                         23
million, yet Schorsch “demanded that the[ Special Committee members] ‘put their

pencils down’ on anything other than his favored Apollo deal.”131

       In August 2015, the Control Defendants reached agreement with Apollo on

several transactions, including Apollo’s purchase of RCS for about $20 million

(subject to a possible downward adjustment) and Apollo’s acquisition of 60% of AR

Capital’s business for $378 million in cash and stock (subject to a half-billion dollars

in potential upward adjustment).132 The AR Capital component of the deal required

AR Capital to amend the charters of some of its investment funds to, among other

things, “increase the power of the investment fund boards and decrease the ability

of shareholders to remove or make demands of board members.”133 These changes

could not be enacted unless fund investors gave their approval.134 In addition to

hiring a proxy solicitation firm to solicit the approvals, the Control Defendants and

those loyal to them “placed extraordinary pressure on [RCS] employees to deliver

the required proxies.”135 RCS employees did not receive proxy solicitation training,

and they did not have a script for investor calls.136

131
    Id. ¶¶ 111–12.
132
    Id. ¶ 113. Apollo also agreed to purchase $25 million of RCAP preferred stock and to enter
“an off-market strategic partnership agreement . . . [with] RCAP that would require RCAP to
distribute Apollo investment products on terms equal to or better than the already-favorable
treatment being accorded to AR Capital products.” Id.
133
    Id. ¶ 115.
134
    Id. ¶ 116.
135
    Id.
136
    Id. ¶ 117.

                                             24
       The Massachusetts Securities Division (the “MSD”) eventually filed an

administrative complaint against RCS alleging that its employees, acting under

pressure from management, “acted to ‘steamroll’ shareholders into voting in favor

of management, including at least two instances where [RCS] employees

impersonated shareholders to vote their shares.”137 “In December 2015, RCS

entered into a consent order essentially stipulating to the accuracy of all of the

allegations in the complaint, paying a $3 million fine, and agreeing to permanently

discontinue wholesale operations in Massachusetts.”138 By this point, Apollo and

AR Capital had terminated the agreements to acquire 60% of AR Capital’s business

and to purchase RCS.139

       C. This Litigation

       The Plaintiff filed its Complaint on March 8, 2017. The Complaint contains

three counts. Count I is brought against Holdings, the Control Defendants, and

Quarto, and it alleges that they breached their duties of care and loyalty in connection

with the conduct outlined above.140 Count II is brought in the alternative against the

same defendants, and it asserts that even if these defendants did not owe fiduciary

137
    Id. ¶ 120.
138
    Id. ¶ 122. According to the Complaint, “[w]hile the MSD complaint identified only two specific
instances of impersonation, RCAP’s outside counsel uncovered numerous additional serious
instances of misconduct during the summer and fall of 2015, all related to proxy efforts for the
benefit of AR Capital.” Id. ¶ 121.
139
    Id. ¶¶ 119, 122.
140
    Id. ¶¶ 126–30.

                                               25
duties to RCAP or its subsidiaries at the relevant times, they nevertheless are liable

for aiding and abetting breaches of fiduciary duty by other defendants.141 Count III

is brought against AR Capital, AR Global, and the Advisor Defendants, and it alleges

that each of these defendants was unjustly enriched by the conduct described above,

and that such conduct warrants the imposition of a constructive trust.142

       The ARC Parties moved to partially dismiss the Complaint on May 26, 2017.

The ARC Parties seek dismissal of every aspect of the Complaint except for the

allegations challenging the never-consummated Apollo transaction and the decision

to acquire Cole Capital Partners, LLC, Cole Capital Advisors, Inc., and various Cole

Capital subsidiaries from ARCP.143 Block joins in the arguments for dismissal

advanced by the ARC Parties. I heard oral argument on the Defendants’ Motions to

Dismiss on September 29, 2017.

                                        II. ANALYSIS

       The Defendants have moved to partially dismiss the Complaint under Court

of Chancery Rule 12(b)(6). When reviewing such a motion,

       (i) all well-pleaded factual allegations are accepted as true; (ii) even
       vague allegations are well-pleaded if they give the opposing party
       notice of the claim; (iii) the Court must draw all reasonable inferences

141
    Id. ¶¶ 131–33.
142
    Id. ¶¶ 134–39.
143
    See ARC Parties’ Reply Br. 3 (noting that the ARC Parties do not move to dismiss allegations
relating to the Cole Capital and Apollo deals); Sept. 29, 2017 Oral Arg. Tr. 7:15–20 (“THE
COURT: And if you’re successful, what will be left of the complaint? MR. ARFFA: The only
thing -- two things, I should say, that would be allowed are the allegations as to the Cole Capital
transaction and the allegations as to the Apollo transaction.”).

                                                26
       in favor of the non-moving party; and (iv) dismissal is inappropriate
       unless the plaintiff would not be entitled to recover under any
       reasonably conceivable set of circumstances susceptible of proof.144

I need not, however, “accept conclusory allegations unsupported by specific facts or

. . . draw unreasonable inferences in favor of the non-moving party.”145

       At oral argument, counsel for the Plaintiff and the ARC Parties suggested that

the “core” claim in this case involves the allegation that the Control Defendants used

their control over RCAP to cause it to enter into off-market arrangements with AR

Capital, which they and Schorsch’s wife wholly owned.146 The Plaintiff challenges

other decisions allegedly designed to benefit AR Capital at RCAP’s expense, though

the Control Defendants did not stand on both sides of those transactions. And the

Plaintiff brings claims for aiding and abetting breaches of fiduciary duty and unjust

enrichment. I first address the Defendants’ arguments for dismissing the core

fiduciary duty claim. I then turn to the proxy fraud allegations and the other

allegedly self-interested transactions and decisions challenged by the Plaintiff. I

next address the Defendants’ argument that Quarto and Holdings should be

dismissed from this action. I end by discussing the Plaintiff’s claims for unjust

enrichment and aiding and abetting.

144
    Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (footnotes and internal quotation
marks omitted).
145
    Price v. E.I. DuPont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011).
146
    E.g., Sept. 29, 2017 Oral Arg. Tr. 8:21–9:10, 47:1–6.

                                              27
       A. The Core Claim

       As I just noted, the Complaint focuses primarily on a series of allegedly self-

dealing transactions in which the Control Defendants caused RCAP, which they

collectively controlled but in which they held only a 25% economic stake, to serve

as a cost center for AR Capital, in which they (along with Schorsch’s wife) retained

a 100% ownership interest. These allegations state a claim for breach of the duty of

loyalty against the Control Defendants.

       “The business judgment rule is the default standard of review” for evaluating

the decisions of corporate fiduciaries.147 Under that rule, a decision made by

informed and loyal corporate fiduciaries “will not be overturned by the courts unless

it cannot be ‘attributed to any rational business purpose.’”148 The plaintiff bears the

burden of proof in attempting to rebut the presumption created by the business

judgment rule.149 A plaintiff seeking to rebut the presumption “‘assumes the burden

147
    Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 457 (Del. Ch. 2011).
148
    Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993) (quoting Sinclair Oil Corp. v.
Levien, 280 A.2d 717, 720 (Del. 1971)); see also eBay Domestic Holdings, Inc. v. Newmark, 16
A.3d 1, 36 (Del. Ch. 2010) (“Under the business judgment rule, when a party challenges the
decisions of a board of directors, the Court begins with the ‘presumption that in making a business
decision the directors of a corporation acted on an informed basis, in good faith and in the honest
belief that the action taken was in the best interests of the company.’” (quoting Unitrin, Inc. v. Am.
Gen. Corp., 651 A.2d 1361, 1373 (Del. 1995))).
149
    Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53, 64 (Del. 1989).

                                                 28
of providing evidence that [corporate fiduciaries], in reaching their challenged

decision,’ breached their duty of loyalty or care.”150

       “[T]he duty of loyalty mandates that the best interest of the corporation and

its shareholders takes precedence over any interest possessed by a director, officer

or controlling shareholder and not shared by the stockholders generally.”151 The

duty of loyalty is implicated when a corporate fiduciary “appear[s] on both sides of

a transaction or . . . receiv[es] a personal benefit from a transaction not received by

the shareholders generally.”152 “If corporate fiduciaries stand on both sides of a

challenged transaction, . . . the burden shifts to the fiduciaries to demonstrate the

‘entire fairness’ of the transaction.”153 A plaintiff alleging that corporate fiduciaries

stood on both sides of a challenged transaction need not plead that they received a

material benefit from the deal.154 And if the plaintiff alleges facts that invoke the

entire fairness standard, dismissal via a Rule 12(b)(6) motion is typically

inappropriate.155

150
    Huff Energy Fund, L.P. v. Gershen, 2016 WL 5462958, at *11 (Del. Ch. Sept. 29, 2016)
(quoting Cede & Co., 634 A.2d at 361).
151
    Cede & Co., 634 A.2d at 361.
152
    Id. at 362.
153
    Oliver v. Boston Univ., 2006 WL 1064169, at *18 (Del. Ch. Apr. 14, 2006).
154
    London v. Tyrrell, 2008 WL 2505435, at *5 (Del. Ch. June 24, 2008); see also Orman v.
Cullman, 794 A.2d 5, 25 n.50 (Del. Ch. 2002) (“[W]henever a director stands on both sides of the
challenged transaction he is deemed interested and allegations of materiality have not been
required.”).
155
    Orman, 794 A.2d at 20 n.36; see also In re KKR Fin. Holdings LLC S’holder Litig., 101 A.3d
980, 990 (Del. Ch. 2014) (“If the plaintiff is able to rebut the business judgment presumption,
dismissal at this stage of the litigation would, in all likelihood, be inappropriate.”), aff’d sub nom.
Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015).

                                                 29
       The Complaint in this case adequately alleges that the Control Defendants

owed fiduciary duties to RCAP. In addition to serving as officers or directors of

RCAP, these individuals exercised effective control over the company through their

collective ownership of Holdings, which held a B share in RCAP that conferred

majority voting power.156 Despite their role as fiduciaries for RCAP’s public

stockholders, the Control Defendants engineered a series of transactions between

RCAP and AR Capital that allegedly siphoned value away from RCAP and to AR

Capital. The incentive to engage in these self-dealing transactions arose from the

Control Defendants’ ownership of a significantly larger economic stake in AR

Capital than in RCAP. Moreover, none of the transactions that form the basis of the

Plaintiff’s core claim were approved by a majority of disinterested and independent

directors.157 Instead, “[e]very one of [RCS]’s business deals with RCAP was

negotiated and agreed to on both sides . . . by the Control Defendants and their

minions.”158 The Control Defendants were therefore squarely on both sides of the

156
    Compl. ¶¶ 17–21, 37. Because all of the Control Defendants served as either directors or
officers of RCAP at the relevant times, they owed fiduciary duties to RCAP and its stockholders.
See Gantler v. Stephens, 965 A.2d 695, 708–09 (Del. 2009) (“[O]fficers of Delaware corporations,
like directors, owe fiduciary duties of care and loyalty, and . . . the fiduciary duties of officers are
the same as those of directors.”). The Complaint also supports an inference that the Control
Defendants acted as a control group with respect to RCAP. See Frank v. Elgamal, 2014 WL
957550, at *18 (Del. Ch. Mar. 10, 2014) (“A group of stockholders, none of whom individually
qualifies as a controlling stockholder, may collectively be considered a control group that is
analogous, for standard of review purposes, to a controlling stockholder.”).
157
    Compl. ¶ 54.
158
    Id. ¶ 57. I am aware of the long line of Delaware cases holding that “the entire fairness
framework governs any transaction between a controller and the controlled corporation in which
the controller receives a non-ratable benefit.” In re Ezcorp Inc. Consulting Agreement Derivative

                                                  30
challenged wholesaling agreements between AR Capital and RCAP. That invokes

entire fairness review, which in turn precludes dismissal of the core claim on a Rule

12(b)(6) motion.159

       The Defendants offer several reasons for dismissing the core claim. None of

them persuade. First, the Defendants argue that because the conduct underlying the

core claim occurred before RCAP went public, it could not form the basis of a

fiduciary duty claim against the Control Defendants, who did not owe any duties to

RCAP’s prospective stockholders.              True, under Anadarko Petroleum Corp. v.

Litig., 2016 WL 301245, at *11 (Del. Ch. Jan. 25, 2016), reconsideration granted in part, 2016
WL 727771 (Del. Ch. Feb. 23, 2016). These cases often rest on the concern that “directors laboring
in the shadow of a controlling stockholder face a threat of implicit coercion because of the
controller’s ability to not support the director’s re-nomination or re-election, or to take the more
aggressive step of removing the director.” Id. at *20; see also Larkin v. Shah, 2016 WL 4485447,
at *9 (Del. Ch. Aug. 25, 2016) (“[C]ases where the controller stands on both sides of the transaction
present a particularly compelling reason to apply entire fairness: both corporate decision-making
bodies to which Delaware courts ardently defer—the board of directors and disinterested voting
stockholders—are considered compromised by the controller’s influence.”). The case before me,
however, is more straightforward. As I just noted, all of the challenged deals between RCAP and
AR Capital were engineered and approved solely by the Control Defendants. I therefore analyze
the core claim as a simple case of self-dealing by the Control Defendants.
159
    Where a complaint invokes entire fairness review, dismissal under Rule 12(b)(6) is typically
inappropriate. Dismissal may be appropriate in cases where the defendant shows “that the
challenged transaction was entirely fair based solely on the allegations of the complaint and the
documents integral to it.” Hamilton Partners, L.P. v. Highland Capital Mgmt., L.P., 2014 WL
1813340, at *12 (Del. Ch. May 7, 2014). But the Defendants have not tried to make that showing
here. And for good reason: all the Plaintiff must do at this stage is “allege some facts that tend to
show that the transaction[s] w[ere] not fair.” Solomon v. Pathe Commc’ns Corp., 1995 WL
250374, at *5 (Del. Ch. Apr. 21, 1995), aff’d, 672 A.2d 35 (Del. 1996). Entire fairness has two
components: fair dealing and fair price. Cede & Co., 634 A.2d at 361. It is reasonably conceivable
that the transactions on which the core claim is premised were not the product of fair dealing, since
they were engineered and approved by conflicted fiduciaries. See Cinerama, Inc. v. Technicolor,
Inc., 663 A.2d 1156, 1173 (Del. 1995) (“The independence of the bargaining parties is a well-
recognized touchstone of fair dealing.”). And I can infer unfair price from the Complaint’s detailed
allegations about the off-market nature of the arrangements between AR Capital and RCAP.

                                                31
Panhandle Eastern Corp., 545 A.2d 1171, 1177 (Del. 1988), fiduciary duties do not

run to prospective stockholders.160 But the Defendants’ Anadarko argument rests on

a false premise. RCAP went public in June 2013.161 While several allegedly off-

market deals between AR Capital and RCAP predate the initial public offering, the

Control Defendants continued to cause RCAP to agree to such deals after it went

public. Indeed, four of the nine advisory agreements that allegedly enriched AR

Capital at RCAP’s expense were entered after RCAP’s initial public offering.162 In

other words, the Control Defendants did not stop engaging in self-dealing

transactions involving RCAP and AR Capital once RCAP went public; those deals

continued to be made even after the Control Defendants assumed fiduciary

obligations to RCAP’s public stockholders. Anadarko does not compel dismissal of

the core claim.

       The Defendants also argue that the core claim fails because it rests on the

assumption that the Control Defendants should have caused RCS to adopt an illegal

business model. As discussed above, FINRA Rule 3210 prohibits a wholesale

broker-dealer such as RCS from receiving compensation exceeding 10% of the

160
    See 1 R. Franklin Balotti & Jesse A. Finkelstein, Balotti and Finkelstein’s Delaware Law of
Corporations and Business Organizations § 4.16 (3d ed. 2017) (“Although fiduciary duties are
owed to stockholders, they do not run to prospective stockholders.” (citing Anadarko, 545 A.2d at
1177)).
161
    Compl. ¶ 15.
162
    Id. ¶¶ 25(a)–(i).

                                               32
investment amount.163 Under the Defendants’ reading of the Complaint, the Control

Defendants should have caused RCS to receive a slice of the advisory fees for the

AR Capital investment products it wholesaled. The problem, according to the

Defendants, is that such an arrangement would violate FINRA’s restrictions on the

amount of fees wholesalers such as RCS may charge in connection with investment

products they distribute. Since Delaware does not “charter lawbreakers,”164 so the

argument goes, the Plaintiff’s core claim cannot stand.

       It is true that the Complaint is less than precise about who, exactly, should

have received the advisory fees that went to the Advisor Defendants. The Complaint

decries “dealer-manager agreements that obligated [RCS] to distribute AR Capital

product without receiving any share of the ongoing management economics.”165

That points to RCS as the entity to which the advisory fees should have gone, an

arrangement that the Plaintiff appears to concede would be illegal.166 But the

Complaint also suggests a different possibility: that RCAP should have created

separate entities to receive advisory fees in connection with AR Capital-sponsored

investment vehicles.         For example, the Complaint describes AR Capital’s

163
    Id. ¶ 46.
164
    In re Massey Energy Co., 2011 WL 2176479, at *20 (Del. Ch. May 31, 2011); see also Kandell
v. Niv, 2017 WL 4334149, at *2 (Del. Ch. Sept. 29, 2017) (“Where directors knowingly cause or
permit a Delaware corporation to violate positive law, they have acted in bad faith, and are liable
to the corporation for resulting damages.”).
165
    Compl. ¶ 54.
166
    See Pl.’s Answering Br. 43 (“FINRA restricts only the compensation that RCS as wholesaler
could earn for wholesale distribution” (emphasis in original)).

                                                33
arrangements with Phillips Edison, which sought out the Control Defendants before

RCAP’s initial public offering to retain RCS as a wholesaler for one of Phillips

Edison’s REITs.167 In exchange for receiving RCS’s wholesaling services, Phillips

Edison agreed to provide an AR Capital subsidiary (American Realty Capital

Advisors II LLC) with a slice of the advisory fees.168 This AR Capital subsidiary

did not do much advising, and the actual work of managing the REIT’s day-to-day

operations fell to a Phillips Edison-owned sub-advisor.169

       One reading of this section of the Complaint is that RCAP should have done

what AR Capital did with Phillips Edison—that is, set up separate advisory

subsidiaries that would receive a portion of the advisory fees in connection with AR

Capital-sponsored REITs wholesaled by RCS. This reading finds support in the

allegation that independent wholesalers cannot maintain profitability unless they

“negotiate for a share of the ongoing management economics generated by the

investments they raise, either through a joint venture interest in the advisory, or

through advisor/subadvisor contractual relationship with the sponsor.”170 The

Defendants do not argue that the type of arrangement suggested by the Phillips

Edison example would be illegal. Given the plaintiff-friendly standard that governs

167
    Compl. ¶ 50.
168
    Id.
169
    Id.
170
    Id. ¶ 47 (emphasis added).

                                        34
a motion to dismiss, the Complaint’s arguably equivocal allegations about the

business model that the Control Defendants would have had RCAP adopt in the

context of arm’s-length bargaining do not warrant dismissing the core fiduciary duty

claim.171 Ultimately, I need not identify, at this stage, what a loyal board would have

provided to find that the Complaint adequately alleges that the structure actually

imposed was unfair.

       Next, the Defendants argue that the core claim is not reasonably conceivable

because the allegedly unfair arrangements between RCAP and AR Capital “were

fully disclosed to the financial markets and investors, who nevertheless supported

and invested in RCAP.”172 Put differently, anyone who cared to know could learn

about RCS’s business model from public documents, yet investors purchased stock

in light of those disclosures, which included the supposedly off-market deals

challenged in the Complaint. That, according to the Defendants, suggests that I

should simply reject as unsupported the Complaint’s detailed allegations about the

Control Defendants’ scheme to enrich themselves by exploiting RCAP.

       I decline the invitation. First, I cannot say on this record that the disclosures

the Defendants point to tell the whole story, at least from the Plaintiff’s perspective.

171
    See Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 27 A.3d 531, 536 (Del.
2011) (holding that courts must “accept even vague allegations in the Complaint as ‘well-pleaded’
if they provide the defendant notice of the claim”).
172
    ARC Parties’ Opening Br. 32.

                                               35
The prospectus for RCAP’s initial public offering disclosed, for example, that RCAP

“generally receives up to 3.0% of the gross proceeds from the sale of common stock

as a dealer manager fee and also receives fees from the sale of common stock through

registered investment advisors.”173 But the prospectus did not discuss a key aspect

of the Plaintiff’s core claim: the allegedly off-market and largely unprofitable nature

of such an arrangement. In sum, the Defendants’ argument presents an explicitly

factual question: Given that the challenged arrangements were supposedly disclosed

to investors, some of whom nevertheless chose to invest, could the deals between

RCAP and AR Capital really have been as disadvantageous to RCAP as the Plaintiff

suggests? I cannot resolve that question on a Rule 12(b)(6) motion.174

       Finally, the Defendants try to recast the core claim as a corporate opportunity

claim. Having done so, the Defendants then suggest that the Plaintiff has failed to

adequately allege the usurpation of a corporate opportunity belonging to RCAP. Our

Supreme Court has established the following test for evaluating corporate

opportunity claims:

       [A] corporate officer or director may not take a business opportunity
       for his own if: (1) the corporation is financially able to exploit the
       opportunity; (2) the opportunity is within the corporation’s line of
       business; (3) the corporation has an interest or expectancy in the

173
   Arffa Aff. Ex. 4 at F-12.
174
    See Malpiede v. Townson, 780 A.2d 1075, 1082 (Del. 2001) (“Because a motion to dismiss
under Chancery Rule 12(b)(6) must be decided without the benefit of a factual record, the Court
of Chancery may not resolve material factual disputes; instead, the court is required to assume as
true the well-pleaded allegations in the complaint.”).

                                               36
       opportunity; and (4) by taking the opportunity for his own, the
       corporate fiduciary will thereby be placed in a position inimicable to
       his duties to the corporation.175

The Defendants read the Complaint to allege that the Control Defendants took for

themselves the opportunity to receive advisory fees in connection with AR Capital-

sponsored investment funds. In the Defendants’ interpretation of the Complaint, that

opportunity is alleged to have belonged to RCAP, not the Control Defendants. But

the Complaint does not have to be read that way. As I said above, the Control

Defendants allegedly stood on both sides of a series of transactions between AR

Capital and RCAP. That is a “classic example[] of . . . self-interest in a business

transaction,”176 and there is no need to invoke the corporate opportunity doctrine in

order to find that the transactions at the heart of the core claim trigger entire fairness

review. Moreover, at oral argument, the Plaintiff’s counsel said that it never

intended to pursue a corporate opportunity claim.177 Thus, I will not shoehorn the

Plaintiff’s allegations into a theory of liability that, according to the Defendants at

least, cannot survive a motion to dismiss.178

175
    Broz v. Cellular Info. Sys., Inc., 673 A.2d 148, 155 (Del. 1996).
176
    Cede & Co., 634 A.2d at 362.
177
    See Sept. 29, 2017 Oral Arg. Tr. 50:24–51:5 (“MR. HOROWITZ: [W]e did not characterize
this as a usurpation of corporate opportunity claim. They did. I think there was one place in the
complaint where they said something about it being a usurpation of corporate opportunity, but
that’s not how it’s pled. It’s a breach of duty of loyalty claim.”).
178
    See In re Tyson Foods, Inc., 919 A.2d 563, 601 (Del. Ch. 2007) (rejecting the defendants’
“attempt to recharacterize [a breach of contract claim] as a fiduciary duty claim in order to draw
themselves within the protection of the [Section 102(b)(7)] exculpatory clause”). At oral
argument, counsel for the ARC Parties pointed to a provision in RCAP’s charter that purportedly

                                               37
       B. The Proxy Fraud

       According to the Plaintiff, the Control Defendants breached their fiduciary

duties when they facilitated proxy fraud committed by RCS employees. The Control

Defendants needed investors in AR Capital funds to approve charter amendments so

that Apollo’s acquisition of a majority stake in AR Capital—along with its purchase

of RCS—could go forward. The Control Defendants favored the Apollo deal—in

which Apollo would not buy AR Capital unless it could have RCS too—because

they thought Apollo’s acquisition of a majority stake in AR Capital would help

“cleanse the ongoing taint of the accounting fraud [at ARCP].”179 The Control

Defendants therefore hired a proxy solicitation firm to get the required approvals,

but that was not all they did to get the desired proxies.                  They also “placed

extraordinary pressure on [RCS] employees to deliver the required proxies.”180

These employees did not receive training in proxy solicitation, and they did not have

a script for investor calls.181        RCS eventually paid a $3 million fine to the

Massachusetts Securities Division after that body filed an administrative complaint

waived any duty held by AR Capital to refrain from engaging in similar business activities as
RCAP. Sept. 29, 2017 Oral Arg. Tr. 18:15–20:20. The Defendants did not mention that charter
provision in briefing, so they have waived any reliance on it. Fortis Advisors LLC v. Shire US
Holdings, Inc., 2017 WL 3420751, at *8 n.32 (Del. Ch. Aug. 9. 2017). And even if I were to
consider the charter provision, it would not help the Defendants, because I have already concluded
that the Plaintiff’s core claim need not be viewed as one sounding in usurpation of corporate
opportunity.
179
    Pl.’s Answering Br. 30.
180
    Compl. ¶ 116.
181
    Id. ¶ 117.

                                               38
against RCS alleging that its employees, under pressure from management, “acted

to ‘steamroll’ shareholders into voting in favor of management, including at least

two instances where [RCS] employees impersonated shareholders to vote their

shares.”182

      At the outset, the allegations about proxy fraud at RCS are ancillary to the

Plaintiff’s challenge to the Apollo transaction itself, which the Defendants do not

move to dismiss. Thus, to the extent that these allegations are relevant to an

evaluation of the Apollo deal, they will be addressed at a later stage of this litigation.

Standing alone, however, the proxy fraud allegations do not state a claim for breach

of fiduciary duty.    True, when corporate fiduciaries “intentionally cause their

corporation to violate positive law, they act in bad faith; this state does not ‘charter

lawbreakers.’”183 But the Complaint alleges only that “the Control Defendants and

their minions placed extraordinary pressure on [RCS] employees to deliver the

required proxies.”184 There is nothing illegal about that, at least absent additional

allegations suggesting that the “pressure” exerted by the Control Defendants

involved directions to commit unlawful conduct. Moreover, the Plaintiff does not

even attempt to assert a Caremark claim, which requires a showing that “(a) the

182
    Id. ¶ 120.
183
    Kandell, 2017 WL 4334149, at *16 (quoting In re Massey Energy Co., 2011 WL 2176479, at
*20).
184
    Id. ¶ 116.

                                           39
directors utterly failed to implement any reporting or information system or

controls; or (b) having implemented such a system or controls, consciously failed to

monitor or oversee its operations thus disabling themselves from being informed of

risks or problems requiring their attention.”185 I find that the proxy fraud allegations

cannot by themselves support a claim for breach of fiduciary duty.

       C. The Allegedly Self-Interested Acquisitions and the Decision to Overstaff
       RCS

       The Plaintiff does not limit its fiduciary duty claim to the self-dealing

transactions and proxy fraud discussed above.               It also challenges the Control

Defendants’ decision to cause RCAP to acquire Strat Cap, Docupace, and Snyder

Kearney. The Control Defendants did not stand on both sides of these acquisitions,

but the deals were allegedly pursued because they would benefit AR Capital, not

RCAP. That, according to the Plaintiff, makes the Control Defendants interested in

these transactions, thereby triggering entire fairness review.186 The Plaintiff also

attacks the Control Defendants’ decision to maintain high levels of staffing at RCS

despite its declining fortunes, a decision that the Plaintiff alleges similarly benefited

AR Capital at RCAP’s expense. The Plaintiff appears to argue that the Control

Defendants were interested in RCS’s overstaffing because of the benefits it provided

185
   Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006).
186
    See Pl.’s Answering Br. 52 (“The Complaint’s allegations regarding the three challenged
acquisitions easily meet th[e] standard [for establishing directorial interest in a transaction],
because each was undertaken primarily to serve the interests of AR Capital and bestowed
significant benefits upon the Control Defendants not shared by RCAP’s public shareholders.”).

                                               40
to AR Capital.187 The explanation for all of these decisions supposedly lies in the

Control Defendants’ holding a larger economic stake in AR Capital than in RCAP,

which they nevertheless controlled through the B share.

       Because the Control Defendants did not stand on both sides of the challenged

acquisitions or staffing decisions, they do not involve the kind of evident self-dealing

that of itself triggers entire fairness review.188 Instead, the Plaintiff’s theory is that

the Control Defendants received financial benefits from these decisions that were

not shared with RCAP’s other stockholders. That is one way to demonstrate that a

corporate fiduciary is interested in a transaction.189 But “in the absence of self-

dealing, it is not enough to establish the interest of a [corporate fiduciary] by alleging

that he received any benefit not equally shared by the stockholders. Such benefit

must be alleged to be material to that [fiduciary].”190 A benefit is material if it is so

significant, “in the context of the [fiduciary]’s economic circumstances, as to have

187
    See Id. at 48 (“The Complaint alleges that the Control Defendants, seeking to drive sales
regardless of the impact on RCAP, caused RCS to maintain inappropriately high staffing levels
and continue pouring money into marketing efforts even as the business steeply declined. This
reckless spending benefitted AR Capital, which enjoyed all of the upside of moving more product
and increasing its income from assets under management while off-loading 75% of the costs onto
RCAP’s public shareholders.”).
188
    See London, 2008 WL 2505435, at *5 (noting that when a director stands on both sides of a
transaction, “the plaintiff need not show that the director received some sort of material benefit”
in order for him to be deemed interested in the transaction).
189
    See, e.g., Globis Partners, L.P. v. Plumtree Software, Inc., 2007 WL 4292024, at *5 (Del. Ch.
Nov. 30, 2007) (“A director is considered interested when he will receive
a personal financial benefit from a transaction that is not equally shared by the stockholders . . .
.” (citing Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984))).
190
    Orman, 794 A.2d at 23.

                                                41
made it improbable that [she] could perform her fiduciary duties to the . . .

shareholders without being influenced by her overriding personal interest.”191 The

Plaintiff does not dispute that, to show a disabling interest, it must adequately allege

that each of the challenged decisions conferred a material benefit on the Control

Defendants.192

       The Plaintiff’s attack on these allegedly interested acquisitions and staffing

decisions suffers from a fatal flaw. The Complaint lacks any facts suggesting that

the benefits these decisions provided to the Control Defendants were material to

them. For starters, there are no specific allegations about the Control Defendants’

economic circumstances, though the Complaint does say that these individuals are

“immensely wealthy.”193 Without more concrete information about the Control

Defendants’ financial circumstances, I cannot determine whether the benefits they

191
    In re Gen. Motors Class H S’holders Litig., 734 A.2d 611, 617 (Del. Ch. 1999); accord Orman,
794 A.2d at 25 n.50 (stating that the benefit alleged to have created a disabling interest must be
“of such subjective material significance to th[e] particular director that it is reasonable to question
whether that director objectively considered the advisability of the challenged transaction to the
corporation and its shareholders”).
192
    See Sept. 29, 2017 Oral Arg. Tr. 50:4–7, 50:9–12 (“MR. HOROWITZ: But I would think
implicit in [Aronson’s description of the standard for establishing a disabling interest] is Your
Honor has to find it reasonably conceivable that that non-pro rata benefit was sufficient to have a
material impact on the defendants’ decision-making. . . . I say that, Your Honor, because I’m
confident that we’ve alleged sufficient facts with regard to each of these transactions to satisfy that
standard.”).
193
    Compl. ¶ 2.

                                                  42
purportedly received from the challenged decisions were so important to them that

their impartiality was compromised.194

       The Plaintiff also fails to make any attempt to quantify the financial benefits

conferred by the challenged decisions. The Control Defendants caused RCAP to

acquire Snyder Kearney in an attempt “to defang a critic of AR Capital products.”195

I am left to speculate, however, about the economic impact of Snyder Kearney’s

criticism on AR Capital’s business. Equally speculative is the financial benefit to

AR Capital from RCAP’s acquisition of Docupace, which produced “back-office

software for broker-dealers.”196          According to the Plaintiff, that software was

important to AR Capital because it would enable retail broker-dealers to more

effectively sell AR Capital’s investment products. Again, however, there are no

specific allegations about the actual or expected economic impact of the Docupace

acquisition on AR Capital.197 The same gap exists in the allegations about the

194
     See, e.g., LC Capital Master Fund, Ltd. v. James, 990 A.2d 435, 453 (Del. Ch. 2010)
(“[$500,000] would be material to most Americans. But most Americans are not corporate
directors, and do not have a $5.6 million stake of common stock in any company. And, the
plaintiffs have not advanced any reason to believe that the hypothetical 10% shift [in merger
consideration to the preferred] would be important to Jurika. The man could be as rich as Croesus
or Jimmy Buffett. The plaintiffs have a burden here and they have not even tried to meet it.”); cf.
Chester Cty. Emps.’ Ret. Fund v. New Residential Inv. Corp., 2017 WL 4461131, at *8–9 (Del.
Ch. Oct. 6, 2017) (refusing to find that two directors’ receipt of director fees was material to them
simply because one was retired and the other was “not wealthy”).
195
    Compl. ¶ 95.
196
    Id. ¶ 102.
197
    The Complaint alleges that, as part of the acquisition of Docupace, “AR Capital was guaranteed
access to Docupace’s products and services.” Id. ¶ 106. But the Complaint does not specify the
economic benefit AR Capital received from that access.

                                                43
supposedly irrational staffing decisions at RCS. The Complaint alleges that having

so many employees at RCS “made sense only for AR Capital, which bore none of

the costs but benefitted from having available the maximum capacity to push

product.”198 But the Plaintiff provides no details that allow me to quantify any

benefit to AR Capital from having additional staff members at RCS push AR Capital

product. That prevents me from evaluating the materiality of such benefits to the

Control Defendants. Finally, RCAP’s acquisition of Strat Cap, a wholesaler of non-

traded investment vehicles, was allegedly designed to reduce competition with AR

Capital and provide “access to national, full-service broker-dealers, known

colloquially as ‘wire houses.’”199 But, for reasons I have already explained, I cannot

determine whether those benefits materially affected the Control Defendants’ ability

to bring their business judgment to bear on the acquisition.200

       By creating and using super-voting stock to maintain control over RCAP

despite holding only a minority interest, the Control Defendants put themselves in a

position where their decisions as fiduciaries to RCAP invite suspicion. Nonetheless,

I must dismiss those causes of action where the Defendants do not appear on both

sides of the transaction. As I have explained, to survive a motion to dismiss in these

198
    Id. ¶ 64.
199
    Id. ¶ 90.
200
    As with the Docupace acquisition, the Strat Cap deal included a requirement that Strat Cap
“distribute AR Capital products on the same abusive terms the[ Control Defendants] were already
imposing on [RCS].” Id. ¶ 92. Yet the Plaintiff fails to offer any specifics about the scale of this
distribution and its economic effect on AR Capital.

                                                44
circumstances, based on allegations that the Control Defendants received an

ancillary benefit not shared by all stockholders, requires pleading that the benefit so

received was sufficiently material to overcome fiduciary duties. Otherwise, every

business decision taken by the Control Defendants would be subject to entire fairness

review. That is not our law. The Plaintiff has failed to allege facts suggesting that

the Control Defendants had a disabling interest in any of the challenged acquisitions

or the decision to overstaff RCS. These decisions therefore receive the protection

of the business judgment rule, and any fiduciary duty claim premised on them is

dismissed.201

       D. Quarto and Holdings

       The Defendants ask me to dismiss Louisa Quarto from this action. Quarto

served as RCS’s president from January 2012 through January 2016; she was also

an Executive Vice President at AR Capital during that time. The Complaint alleges

that in October 2013, when the Control Defendants were contemplating the Strat

Cap acquisition, an RCS employee sent Quarto and Edward Weil “an overview of

Strat Cap’s business.”202 The overview revealed that, unlike RCAP, Strat Cap

201
    See Solomon v. Armstrong, 747 A.2d 1098, 1118 (Del. Ch. 1999) (“[I]t is well established that
when a party challenges a director’s action based on a claim of the director’s debilitating pecuniary
self-interest, that party must allege that the director’s interest is material to that director. This
simple statement of the law was pointed out by defendants during oral argument (and in their
briefs), yet plaintiffs persist in failing to allege materiality or even to meet the argument.
Consequently, these allegations fail to rebut the business judgment standard of review.” (footnote
omitted)).
202
    Compl. ¶ 55.

                                                45
“received between 20% and 25% of the ongoing management economics” from the

REITs it distributed “in addition to the standard (legally constrained) 3% dealer-

manager fees.”203 That information, however, “was excluded from the single slide

deck provided to the RCAP Board of Directors to obtain their written consent to the

Strat Cap acquisition on October 23, 2013.”204 These allegations fail to support an

inference that Quarto breached her fiduciary duties. Indeed, the Plaintiff does not

even say who removed this information from the slide deck, or whether Quarto was

actually involved in the preparation of the slides.

       The Complaint also alleges that Quarto knew RCS “had far more salespeople

than [its] nearest competitors.”205 The Plaintiff fails to explain how that knowledge

suggests disloyal conduct on Quarto’s part; indeed, one would expect RCS’s

President to know such things.        The Complaint further asserts that Quarto

“affirmatively hid” from RCAP’s independent directors information about the off-

market nature of the arrangements between RCAP and AR Capital.206 But that

allegation is conclusory, and is too vague to support an inference that Quarto

breached any duty owed to RCAP or RCS. The Plaintiff attempts to support the

concealment allegation by pointing to the incident with the slide deck, but as I just

203
    Id.
204
    Id. (emphasis added).
205
    Id. ¶ 65.
206
    Id. ¶ 54.

                                          46
noted, the Complaint does not allege that Quarto actually removed the relevant

information from the slides. Finally, the Plaintiff cannot premise any fiduciary duty

claim against Quarto on her conduct during the negotiations with Phillips Edison

over the restructuring of the deal between the AR Capital advisor subsidiaries and

the Phillips Edison REITs. While the Complaint alleges that Quarto fought for AR

Capital’s interests during those negotiations, there is no reason think such behavior

was disloyal to RCS. After all, the arrangements at issue were between AR Capital

entities and Phillips Edison, and neither RCAP nor RCS was involved in them in

any way.207 That Quarto participated in wrongdoing is, like any malign behavior on

the part of mankind, conceivable; the Plaintiff fails to plead facts that make it

reasonably conceivable, however. Since the Complaint fails to adequately allege

that Quarto breached her fiduciary duties, or that she aided and abetted such breaches

by others,208 she must be dismissed from this action.

       The Defendants also argue that Holdings should be dismissed from this case.

Holdings is a Delaware limited liability company whose primary asset was the

207
    When asked at oral argument to explain what Quarto’s fiduciary duties required her to do during
those negotiations, counsel for the Plaintiff conceded that “there was nothing she could have done
because the horse had already left the barn.” Sept. 29, 2017 Oral Arg. Tr. 77:6–12.
208
    See In re Dole Food Co., Inc. S’holder Litig., 2015 WL 5052214, at *41 (Del. Ch. Aug. 27,
2015) (noting that an aiding and abetting claim “has four elements: (i) the existence of a fiduciary
relationship, (ii) a breach of the fiduciary’s duty, (iii) knowing participation in the breach, and (iv)
damages proximately caused by the breach,” and emphasizing that “the element of ‘knowing
participation’ requires that the secondary actor have provided ‘substantial assistance’ to the
primary violator’”).

                                                  47
RCAP B share that enabled the Control Defendants to exercise control over RCAP.

The Plaintiff suggests that “Holdings is properly included as a defendant because it

was the instrumentality through which the Control Defendants exercised dominion

over RCAP.”209 In support of this argument, the Plaintiff cites In re Ezcorp Inc.

Consulting Agreement Derivative Litigation, in which Vice Chancellor Laster held

that a plaintiff could bring fiduciary duty and abetting and abetting claims against

the entities through which a controlling stockholder exercised control over a

corporation he allegedly looted.210 I agree with the Plaintiff that Ezcorp controls

here. The Control Defendants’ alleged scheme to enrich themselves depended on

maintaining voting control over RCAP despite their 25% economic stake. They

exercised that control through Holdings, whose main asset was the RCAP B share

that conferred majority voting power. In other words, Holdings was “the vehicle[]

through which [the Control Defendants] controlled [RCAP].”211 Thus, I decline to

dismiss Holdings from this action.212

209
    Pl.’s Answering Br. 36.
210
    2016 WL 301245, at *10–11, 31.
211
    Id. at *10.
212
    The Defendants argue that the relevant holdings in Ezcorp were “reversed on reconsideration
by the same court one month later.” ARC Parties Reply Br. 33 n.14. Not quite. The Court did
not disturb its ruling that the plaintiff stated an aiding and abetting claim against the entities
through which the controlling stockholder allegedly looted the corporation he controlled. In re
Ezcorp Inc. Consulting Agreement Derivative Litig., 2016 WL 727771, at *1–2. True, the Court
narrowed the scope of the fiduciary duty count by holding that it did not encompass a claim against
the entities through which control was exercised. Id. at *1. But that decision did not rest on the
Court’s recognition that it had misapplied the legal standard for holding such entities liable for
breaches of fiduciary duty. Instead, the issue was whether the Court had “misapplied the operative
pleading standards in an unprecedented way that violated [the controlling stockholder’s]

                                                48
       E. Unjust Enrichment and Aiding and Abetting

       The Plaintiff brings a claim for unjust enrichment against AR Capital, AR

Global, and the Advisor Defendants, along with a claim for aiding and abetting

against Holdings and the Control Defendants.213 Unjust enrichment, I note, invokes

an equitable remedy of disgorgement that involves issues of fact. Because the core

fiduciary duty claim survives the Defendants’ Motions to Dismiss, I find it prudent

to reserve decision on the arguments for dismissing the unjust enrichment and aiding

and abetting claims, pending supplemental briefing, should any party desire it, on

the viability of these claims in light of this Memorandum Opinion.

                                     III. CONCLUSION

       For the foregoing reasons, the Defendants’ Motions to Dismiss are granted in

part, denied in part, and reserved in part. The parties should submit an appropriate

form of order.

constitutional right to due process by depriving him of an unbiased decision-maker.” Id.
Specifically, the controlling stockholder argued that it was improper for the Court to find that the
complaint stated a breach of fiduciary duty claim against the entities in question when “the
plaintiffs technically did not sue [them].” 2016 WL 301245, at *11. In any event, while the Court
agreed to narrow the scope of the fiduciary duty count, it also granted leave to amend precisely
because the complaint alleged facts that stated a claim against the entities through which the
corporation was purportedly looted. 2016 WL 727771, at *1.
213
    The Complaint also names Quarto in the aiding and abetting count, but I have already held that
she must be dismissed from this action.

                                                49