Manichaean Capital, LLC v. Exela Technologies, Inc.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

MANICHAEAN CAPITAL, LLC, )
CHARLES CASCARILLA, )
EMIL KHAN WOODS, )
LGC FOUNDATION, INC. and )
IMAGO DEI FOUNDATION, INC., )
)
Plaintiffs, )
)
v. ) C.A. No. 2020-0601-JRS
)
EXELA TECHNOLOGIES, INC., )
EX-SIGMA LLC, )
BANCTEC (PUERTO RICO), INC. )
BANCTEC GROUP, LLC )
BANCTEC INTERMEDIATE HOLDING, INC. )
BANCTEC, INC. )
BILLSMART SOLUTIONS, LLC )
BTC INTERNATIONAL HOLDINGS, INC. )
BTC VENTURES, INC. )
CHARTER LASON, INC. )
CORPSOURCEHOLDINGS, LLC )
DELIVEREX LLC )
DFG UK, LLC )
DFG2 HOLDINGS, LLC )
DFG2, LLC )
ECONOMIC RESEARCH SERVICES, INC. )
EXELA INTERMEDIATE HOLDINGS LLC )
EXELA INTERMEDIATE LLC )
EXELA FINANCE INC. )
EXELA ENTERPRISE SOLUTIONS, INC. )
EXELA RECEIVABLES HOLDCO LLC )
EXELA RE LLC )
EXELA RECEIVABLES 1, LLC )
EXELA RECEIVABLES 2, LLC )
FTS PARENT, INC. )
HOV ENTERPRISE SOLUTIONS, INC. )
HOV SERVICES, INC. )
HOV SERVICES, LLC )
J&B SOFTWARE, INC. )
KINSELLA MEDIA, LLC )
LASON INTERNATIONAL, INC. )
MANAGED CARE PROFESSIONAL, LLC )
PANGEA ACQUISITIONS, INC. )
RC4 CAPITAL, LLC )
REGULUS AMERICA, LLC )
REGULUS GROUP II, LLC )
REGULUS GROUP, LLC )
REGULUS HOLDING, INC. )
REGULUS INTEGRATED SOLUTIONS, LLC )
REGULUS WEST, LLC )
RUSTIC CANYON III, LLC )
SOURCECORP BPS, INC. )
SOURCECORP BPS NORTHERN )
CALIFORNIA INC. )
SOURCEHOV HEALTHCARE, INC. )
SOURCEHOV HOLDINGS, INC. )
SOURCEHOV LLC )
SOURCECORP LEGAL, INC. )
SOURCECORP, INCORPORATED )
TRAC HOLDINGS, LLC )
TRANSCENTRA, INC. )
UNITED INFORMATION SERVICES, INC. )
SOURCECORP MANAGEMENT, INC. )
)
Defendants. )

OPINION

Date Submitted: February 25, 2021
Date Decided: May 25, 2021
Rudolf Koch, Esquire, Matthew W. Murphy, Esquire and Andrew L. Milam, Esquire
of Richards, Layton & Finger, P.A., Wilmington, Delaware; Samuel J. Lieberman,
Esquire and Alexander H. McCabe, Esquire of Sadis & Goldberg LLP of New York,
New York; and Steven K. Davidson, Esquire, Michael J. Baratz, Esquire, Claire
Schachter, Esquire and Lauren Goldschmidt, Esquire of Steptoe & Johnson LLP,
Washington, DC, Attorneys for Plaintiffs.

T. Brad Davey, Esquire, Matthew F. Davis, Esquire and Andrew H. Sauder, Esquire
of Potter Anderson & Corroon LLP, Wilmington, Delaware and Jennifer Barrett,
Esquire, Dennis H. Hranitzky, Esquire and Blair Adams, Esquire of Quinn Emanuel
Urquhart & Sullivan, LLP, New York, New York, Attorneys for Defendants.

SLIGHTS, Vice Chancellor
Under the Delaware General Corporation Law, a board of director’s decision

to cause the company it serves to merge leaves the company’s stockholders with one

of two options: participate in the merger as negotiated by the board, or dissent to the

merger and seek statutory appraisal. It has not always been this way. At common

law, all major corporate decisions, including whether to merge, required unanimous

stockholder consent, providing each and every shareholder an effective veto power

over any corporate transaction.1 That veto right created an unhealthy phenomenon

known as “nuisance blocking,” where a single stockholder could withhold consent

to a merger in order to extract hold up consideration. This dynamic, and others,

prompted the Delaware General Assembly to create a statutory right of appraisal as

a means to quash the minority’s blocking right while also addressing the non-

consensual taking of the stockholders’ property (their stock).2

1
In re Appraisal of Transkaryotic Therapies, Inc., 2007 WL 1378345, at *3 (Del. Ch.
May 2, 2007) (“Historically, all major corporate decisions required unanimous shareholder
consent. This requirement created a veto power and allowed even a single shareholder to
obstruct corporate action.”).
2
Id.

1
The plaintiffs here, former stockholders of SourceHOV Holdings, Inc.,

(“SourceHOV Holdings”)3 dissented when presented with the decision of the

SourceHOV Holdings board of directors to merge the company with Exela

Technologies, Inc., and then sought statutory appraisal of their SourceHOV

Holdings shares. They pursued their appraisal rights at great costs, both opportunity

and financial, and were vindicated in their efforts when the court awarded them an

appraisal judgment reflecting their shares were worth well in excess of what they

were offered in the merger. SourceHOV Holdings appealed and the plaintiffs

prevailed again. Following the entry of final judgment, the court entered a charging

order against SourceHOV Holdings’ interests in its subsidiaries to facilitate the

payment of the judgment. Yet the judgment remains unsatisfied.

Confronted with the highly unusual circumstance where an appraisal

judgment debtor cannot or will not pay, the plaintiffs in this action, and in a parallel

action, 4 seek to hold Exela (as acquirer) and its affiliated entities accountable for the

appraisal judgment.5 According to the plaintiffs, as the appraisal action was nearing

3
There are several “SourceHOV” entities involved in this action. For the sake of precision,
and at the risk of occasional redundancy, I will refer to SourceHOV Holdings by its full
name.
4
Manichaean v. Chadha, et al., No. 2020-0711-JRS, 2021 WL 229480 (Del. Ch. Aug. 27,
2020) (COMPLAINT).
5
See generally Verified Compl. (“Compl.”) (D.I. 1).

2
its inevitable conclusion, and since the appraisal judgment and subsequent charging

order were entered against SourceHOV Holdings, Exela and its subsidiaries have

been executing a scheme to prevent post-merger SourceHOV Holdings from paying

the judgment.

Against this backdrop, the plaintiffs seek to hold Exela and its subsidiaries

liable under two theories: (1) given the abuse of corporate form by Exela and its

subsidiaries, principally through fraudulent maneuvers, the Court should pierce the

SourceHOV Holdings corporate veil upwards to reach Exela and downwards to

reach SourceHOV Holdings’ solvent subsidiaries so that Plaintiffs can enforce their

charging order against these entities; and (2) given that Exela now holds a 100%

stake in SourceHOV Holdings but has refused to pay all SourceHOV Holdings

stockholders for their share of the company, the Court should determine that Exela

was unjustly enriched and order it to pay the plaintiffs restitution in the amount of

the appraisal judgment plus interest.

Plaintiffs’ well-pled allegations support a reasonable inference that Exela,

lacking in corporate formality, engaged in a transaction, as described in the

plaintiffs’ complaint, for the purpose of preventing funds that would otherwise flow

from SourceHOV Holdings’ subsidiaries directly to SourceHOV Holdings to flow

instead directly to Exela, thereby leaving the judgment debtor unable to satisfy the

plaintiffs’ appraisal judgment. Because the charging order requires any money

3
flowing through SourceHOV Holdings first to be paid to the judgment creditors,

including the plaintiffs, Exela’s participation in a scheme to deprive SourceHOV

Holdings of those funds has conceivably rendered the charging order worthless

parchment. This supports the plaintiffs’ prayer for relief in the form of traditional

veil-piercing (i.e., piercing SourceHOV Holdings’ corporate veil to reach upwards

to Exela).

It is likewise reasonably conceivable that SourceHOV Holdings’ subsidiaries

knowingly participated in the wrongful scheme, such that the plaintiffs’ prayer for

relief in the form of reverse veil-piercing (i.e., piercing SourceHOV Holdings’

corporate veil to reach downwards to its wholly owned subsidiaries) is likewise

appropriate. The legality of reverse veil-piercing appears to be a matter of first

impression in Delaware. After carefully reviewing the justifications for and against

the adoption of reverse veil-piercing, I find that this equitable remedy (or right) is

an appropriate means, in limited circumstances, to remedy fraud and injustice.6

Under the framework set out below, the plaintiffs’ claim for reverse veil-piercing,

which, again, seeks to hold SourceHOV Holdings’ subsidiaries liable for its debts,

is, I believe, viable as a matter of Delaware law.

6
See Medi-Tec of Egypt Corp. v. Bausch & Lomb Surg., 2004 WL 415251, at *2 (Del. Ch.
Mar. 4, 2004) (noting “it is not necessarily clear under Delaware law whether veil piercing
is an equitable right or an equitable remedy”).

4
On the other hand, the plaintiffs’ claim for unjust enrichment is not viable

because the charging order, as a matter of law, prevents the use of equitable claims

and remedies, such as unjust enrichment, as separate means to reach LLC assets that

are subject to the charging order. The unjust enrichment claim, consequently, must

be dismissed.

The procedural posture in which these issues are presented to the Court is a

motion to dismiss all claims under Court of Chancery Rule 12(b)(6). For reasons

stated below, the motion is granted in part and denied in part.

I. BACKGROUND

I have drawn the facts from well-pled allegations in the Verified Complaint

(the “Complaint”) and documents incorporated by reference or integral to that

pleading.7 For purposes of the motion, I accept as true the Complaint’s well-pled

factual allegations and draw all reasonable inferences in the plaintiffs’ favor. 8

A. Parties

Plaintiff, Manichaean Capital, LLC, a Delaware LLC, along with individual

plaintiffs, Charles Cascarilla and Emil Woods, both New York residents, and LGC

Foundation, Inc. and Imago Dei Foundation, Inc., both Ohio corporations,

7
Compl.; Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 320 (Del. 2004) (noting
that on a motion to dismiss, the Court may consider documents that are “incorporated by
reference” or “integral” to the complaint).
8
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002).

5
(collectively, “Plaintiffs”), were equity holders in SourceHOV Holdings prior to its

acquisition by Exela in a merger consummated on July 12, 2017. 9

Defendant, Exela, a Delaware corporation, sits atop a network of “resident

and non-resident direct and indirect subsidiaries,” many of which have been named

as defendants here (the “Exela Subsidiaries”).10 Exela operates in the business

process automation space.

The Exela Subsidiaries include: Ex-Sigma LLC, the Delaware LLC formed to

combine with SourceHOV Holdings in the Merger, SourceHOV Holdings, the

surviving entity from the Merger, SourceHOV, LLC, an entity immediately below

SourceHOV Holdings in which SourceHOV Holdings maintains a 100%

membership interest, and then a number of subsidiary LLCs, which I refer to as the

“SourceHOV Subsidiaries.”11 The Exela network is depicted in the chart below:

Remainder of Page Intentionally Left Blank

9
Compl. ¶¶ 12–16, 33.
10
Compl. ¶¶ 17, 19–21.
11
Compl. ¶¶ 17–21.

6
Exela Technologies

Exela Intermediate

SourceHOV Holdings, LLC

Exela Subsidiaries
SourceHOV, LLC

SourceHOV Subsidiaries

B. The Merger

On July 12, 2017, SourceHOV Holdings merged with Ex-Sigma LLC and Ex-

Sigma Merger Sub, Inc., in a transaction whereby each share of SourceHOV

Holdings common stock was converted into a right to receive one membership unit

of Ex-Sigma LLC (the “Merger”). 12 Prior to the Merger, Plaintiffs held 10,304

shares of common stock in SourceHOV Holdings.13 The creation of Ex-Sigma and

subsequent conversion of stock was a preliminary step to effectuate the merger of

SourceHOV Holdings into SourceHOV Merger Sub, with SourceHOV Holdings

12
Compl. ¶ 33.
13
Compl. ¶ 31.

7
emerging as the surviving entity. 14 The Merger made SourceHOV Holdings an

indirect subsidiary of Quinpario Acquisition Corp. 2, which was later renamed

Exela.15

Under the Consent, Waiver and Amendment to the Business Combination

Agreement (the “Modification Agreement”), dated June 15, 2017, any Merger

consideration was to be delivered to Ex-Sigma LLC without deductions for

dissenting shares.16 The Modification Agreement declared that if a stockholder

sought appraisal, Ex-Sigma would send that stockholder’s equity interests in

SourceHOV Holdings to Exela. 17

C. The Appraisal Action

Plaintiffs expressly dissented with respect to the Merger and, on

September 27, 2017, filed an appraisal action in this court (the “Appraisal

Action”). 18 This Court issued its post-trial memorandum opinion on January 30,

14
Compl. ¶ 34.
15
Id. For a more comprehensive discussion of the mechanics of the Merger, interested
readers are referred to Manichaean Cap., LLC v. SourceHOV Hldgs., Inc., 2020
WL 496606, at *7 (Del. Ch. Jan. 30, 2020), aff’d, 2021 WL 225817 (Del. Jan. 22, 2021)
(“Manichaean Appraisal Action”).
16
Compl. ¶¶ 54, 57.
17
Compl. ¶ 57.
18
Compl. ¶¶ 35–36.

8
2021. 19 As is typical in appraisal litigation, the parties’ experts were miles apart in

their determinations of SourceHOV Holdings’ fair value as of the Merger. For

reasons stated in the post-trial opinion, the Court, in large measure, adopted the

petitioners’ fair value evidence and appraised the fair value of their shares in

SourceHOV Holdings at the time of the Merger at $4,591 per share.20 This valued

the petitioners’ stake at $57,684,471 plus interest, significantly above the

consideration they would have received in the Merger.21 The Court entered its final

judgment to this effect on March 26, 2020 (the “Appraisal Judgment”).22

SourceHOV Holdings moved for reargument and then for a new trial; both motions

were denied.23 SourceHOV Holdings appealed the Appraisal Judgment and our

Supreme Court summarily affirmed. 24

19
Compl. ¶ 40.
20
Compl. ¶ 37; Manichaean Appraisal Action, 2020 WL 496606, at *2.
21
Compl. ¶ 50.
22
Manichaean Cap., LLC v. SourceHOV Hldgs., Inc., 2020 WL 1511189 (Del. Ch.
Mar. 26, 2020) (ORDER) (“Manichaean Appraisal Action Final Order”).
23
Manichaean Cap., LLC v. SourceHOV Hldgs., Inc., 2020 WL 1166067 (Del. Ch.
Mar. 11, 2020); Manichaean Cap., LLC v. SourceHOV Hldgs., Inc., 2020 WL 3097678
(Del. Ch. June 11, 2020); Compl. ¶¶ 41, 44.
24
Compl. ¶ 45; SourceHOV Hldgs., Inc. v. Manichaean Cap., LLC, 2021 WL 225817
(Del. Jan. 22, 2021) (ORDER).

9
While the appeal was pending, Plaintiffs sent a demand letter to SourceHOV

Holdings requesting immediate payment of the Appraisal Judgment.25 As of the

filing of this lawsuit, none of that judgment had been paid.26 According to Plaintiffs,

when Ex-Sigma transferred Plaintiffs’ SourceHOV Holdings shares to Exela over

their dissent to the Merger, shares that constituted 6.5% of SourceHOV Holdings’

outstanding stock, and then Exela subsequently failed to pay the $57.6 million owed

for that stock as determined by the Appraisal Judgment, Exela, in essence, seized

Plaintiffs’ property without paying for it. 27

D. The Charging Order

On July 15, 2020, Plaintiffs filed a Motion for Charging Order against

SourceHOV Holding’s membership interest in SourceHOV, LLC. 28 The Court

granted the Motion on August 15, 2020. 29 The charging order mandated that

“[a]ny and all distributions made by SourceHOV, LLC and payable to SourceHOV

Holdings, Inc. in respect of SourceHOV Holdings, Inc.’s membership interest in

25
Compl. ¶ 47.
26
Compl. ¶ 50. Since the filing, the Court was advised in related litigation that SourceHOV
has paid $1 million toward the judgment. Manichaean v. Chadha, et al., C.A. No. 2020-
0711-JRS (D.I. 73).
27
Compl. ¶ 62.
28
Compl. ¶ 49.
29
Manichaean Cap., LLC v. SourceHOV Hldgs., Inc., 2020 WL 5074386 (Del. Ch.
Aug. 25, 2020) (ORDER).

10
SourceHOV, LLC shall be paid to [Plaintiffs]” (the “Charging Order”).30 In other

words, to the extent Exela, as parent of SourceHOV Holdings, wishes to receive

distributions from its subsidiaries below SourceHOV Holdings, any money that

flows through SourceHOV Holdings must first be paid to Plaintiffs as SourceHOV

Holdings’ judgment creditors before it reaches Exela.

E. The A/R Facility

On January 10, 2020, mere weeks before this Court’s decision in the Appraisal

Action, Exela, through its subsidiaries, entered into a $160 million accounts

receivable securitization facility (the “A/R Facility”).31 To facilitate the transaction,

Exela created two entities, Exela Receivables Holdco LLC (“Receivables Holdco”)

and Exela Receivables I LLC (“Receivables I”). 32 Under the First Tier Purchase and

Sale Agreement, thirteen of the SourceHOV Subsidiaries sold their accounts

receivable to Receivables Holdco. 33 Then, under the Second Tier Purchase

Agreement, Receivables Holdco sold those receivables to Receivables I.34 Under

the Loan and Security Agreement, Receivables I then pledged the receivables as

30
Id. at ¶ 3.
31
Compl. ¶ 136.
32
Compl. ¶¶ 136–39.
33
Compl. ¶ 138.
34
Compl. ¶ 139.

11
collateral for loans and letters of credit to be issued to Receivables I. 35 More

specifically, Receivables I pledged certain collection accounts, including sixteen

“Interim Collection Accounts,” all but three of which were accounts owned directly

by the SourceHOV Subsidiaries.36 The A/R Facility permitted value once held by

the SourceHOV Subsidiaries to be held by Exela’s indirect subsidiary, allowing a

diversion of funds around SourceHOV Holdings and directly into the coffers of

Exela.37

II. ANALYSIS

The standard for deciding a Motion to Dismiss under Court of Chancery

Rule 12(b)(6) is well-settled:

(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
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. 38

35
Compl. ¶ 140.
36
Compl. ¶ 141.
37
Compl. ¶ 144.
38
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (citation omitted).

12
A. The Rationale for Statutory Appraisal

The creation of a statutory appraisal right was a significant step forward in the

development of our corporate law. Before then, at common law, “an arbitrary

minority” could prevent a transformative transaction with the wave of a hand,

holding the majority hostage to their whim. 39 The appraisal right granted under

8 Del. C. § 262 is a “statutory right . . . given [to] the shareholder as compensation

for the abrogation of the common law rule that a single shareholder could block a

merger.” 40 The right is significant and reflects the reality that our law now allows a

corporation’s majority owners to force a sale of the corporation, and the minority’s

equity in the corporation, without minority consent and even when the price paid in

the transaction may be deemed by the minority to be inadequate. For this result to

make sense, the dissenting shareholders must have a means to secure fair value

through a proper appraisal of their shares. 41 And, importantly, the dissenting

39
Salomon Bros. Inc. v. Interstate Bakeries Corp., 576 A.2d 650, 651 (Del. Ch. 1989).
40
Id. (quoting Francis I. duPont & Co. v. Universal City Studios, 343 A.2d 629, 634
(Del. Ch. 1975)).
41
Saul Levmore & Hideki Kanda, The Appraisal Remedy and the Goals of Corporate Law,
32 UCLA L. Rev. 429, 434 (1985) (“The conventional view is built on the idea that
appraisal statutes have sought to protect minority shareholders. . . . [A]ppraisal retains the
flavor of minority veto power.”). See also Matter of Appraisal of Ford Hldgs. Pref.
S’holders, 698 A.2d 973, 976 (Del. Ch. 1997) (Allen, C.) (holding that statutory appraisal
rights are among those set forth in the Delaware General Corporation Law that are
“mandatory”).

13
shareholder should, absent compelling circumstances, actually get paid the fair value

of “that which has been taken from him.” 42 Anything less frustrates the origin and

purpose of the statutory appraisal remedy.

In the ordinary course, when judgment debtors fail to pay, the legal remedies

of a charging order against a judgment debtor’s LLC interests or a writ of execution

against the judgment debtor’s assets are available as tools for collection. 43 This

Opinion considers what options are available to the judgment debtor in an appraisal

action if, after a plaintiff receives a writ of execution or charging order, an appraisal

judgment is still left unpaid. In considering the question, it is useful to remember

that in appraisal actions, it is the acquirer, not the target, who is “the real party in

interest on the respondent’s side of the case.” 44

42
Tri-Cont’l Corp. v. Battye, 74 A.2d 71, 72 (Del. 1950); see also ONTI, Inc. v. Integra
Bank, 751 A.2d 904, 929 (Del. Ch. 1999) (“[The] appraisal statute [has a] goal of
preventing the . . . corporation from retaining unjust benefits from the use of the dissenting
shareholders’ funds.”).
43
6 Del. C. § 18-703(a); Manichaean Appraisal Action Final Order, 2020 WL 1511189,
at *1 (“This Final Order and Judgment may be enforced in Delaware by the issuance of
writs of execution substantially in the form and with the same effect as those used in
Delaware Superior Court, as provided in Court of Chancery Rule 69(a), and by any other
means allowed by applicable law or procedure in any jurisdiction where enforcement is
sought.”).
44
In re Appraisal of Columbia Pipeline Gp., Inc., 2019 WL 3778370, at *17 (Del. Ch.
Aug. 12, 2019) (“Although technically the respondent in an appraisal proceeding is the
surviving company, the acquirer is typically the real party in interest on the respondent’s
side of the case.”); see also In re Stillwater Mining Co., 2019 WL 3943851, at *1 (Del. Ch.
Aug. 21, 2019) (“The respondent in an appraisal proceeding is technically the surviving
corporation, but the real party in interest is the acquirer.”); E. Thom Rumberger, Jr.,
14
B. The Impact of the Charging Order

Upon request by a judgment creditor of a member of a Delaware limited

liability company, the court “may charge the limited liability company interest of

the judgment debtor to satisfy the judgment.”45 Once entered, the charging order

acts as a lien on the judgment debtor’s membership interest.46 Importantly, 6 Del. C.

§ 18-703(d) provides that “a charging order is the exclusive remedy by which a

judgment creditor of a member or a member’s assignee may satisfy a judgment out

of the judgment debtor’s limited liability company interest and attachment,

garnishment, foreclosure or other legal or equitable remedies are not available to the

judgment creditor . . . .” 47 In this regard, Section 18-703(e) makes clear that a

creditor who obtains a charging order does not maintain “any right to obtain

The Acquisition and Sale of Emerging Growth Companies: The M & A Exit § 11:33
(2d ed. 2017) (“From an acquirer’s perspective, target stockholders pursuing appraisal
rights create uncertainty as to how much [the] acquirer will have to pay for the shares of
target.”); Joseph Evan Calio, New Appraisals of Old Problems: Reflections on the
Delaware Appraisal Proceeding, 32 Am. Bus. L.J. 1, 68 n.64 (1994) (“[E]ither in the
market or in an appraisal the acquiror pays the entire bill no matter how it is apportioned.”);
Ethan Klingberg & Yavor Efremov, Delaware’s M&A Wildcard-Appraisal Rights,
9 No. 2 M & A Law. 1 (June 2005) (discussing the effects of dissenting target shareholders
on the acquirer’s pre- and post-acquisition role).
45
6 Del. C. § 18-703(a).
46
6 Del. C. § 18-703(b).
47
6 Del. C. § 18-703(d).

15
possession of, or otherwise exercise legal or equitable remedies with respect to, the

property of the limited liability company.” 48

While the charging order statute clearly limits the types of actions a judgment

creditor may take against a debtor to fulfill its judgment once the charging order is

in hand, it does not limit the means by which the judgment debtor may enforce the

charging order itself. To the extent a judgment creditor seeks merely to define which

entities are (or should be) subject to the charging order, that action is not barred by

the charging order statute. That is precisely what Plaintiffs’ veil-piercing claims

seek to do here.

On the other hand, if a judgment creditor seeks to bypass its charging order to

enforce its judgment through “other legal or equitable remedies,” that action is

barred by statute and must be dismissed. 49 That is what Plaintiffs seek to do through

their unjust enrichment claim. I address the effects of the Charging Order more

specifically below as I address each of Plaintiffs’ claims in turn.50

48
6 Del. C. § 18-703(e).
49
6 Del. C. § 18-703(d).
50
I note that Defendants have not argued that the charging order bars Plaintiffs’ traditional
veil-piercing claim but have argued that it bars the reverse veil-piercing claim.
Defs.’ Opening Brief in Supp. of Mot. to Dismiss the Verified Compl. (D.I. 11) (“OB”)
at 21. This is likely because a charging order is the exclusive remedy as against a judgment
debtor’s LLC interests and SourceHOV’s LLC interests sit below SourceHOV Holdings,
hence the claim for reverse veil-piercing.

16
C. Traditional Veil-Piercing

Plaintiffs allege that Exela’s undercapitalization of its subsidiary

(SourceHOV Holdings), lack of corporate separateness and subsequent attempts to

divert funds away from SourceHOV Holdings to avoid the claims of its creditors

provide ample bases to pierce SourceHOV Holdings’ corporate veil to reach up the

chain to Exela. “Delaware public policy disfavors disregarding the separate legal

existence of business entities.”51 With that said, in “exceptional case[s],” corporate

veil-piercing is necessary and appropriate. 52

Delaware courts consider a number of factors in determining whether to

disregard the corporate form and pierce the corporate veil, including: “(1) whether

the company was adequately capitalized for the undertaking; (2) whether the

company was solvent; (3) whether corporate formalities were observed; (4) whether

the dominant shareholder siphoned company funds; and (5) whether, in general, the

company simply functioned as a facade for the dominant shareholder.”53 While

these factors are useful, any single one of them is not determinative. An ultimate

51
Paul Elton, LLC v. Rommel Del., LLC, 2020 WL 2203708, at *14 (Del. Ch. May 7,
2020); see also Wallace ex rel. Cencom Cable Income P’rs II, L.P. v. Wood, 752 A.2d
1175, 1183 (Del. Ch. 1999) (“Persuading a Delaware court to disregard the corporate entity
is a difficult task.” (quoting Harco Nat’l Ins. Co. v. Green Farms, Inc., 1989 WL 110537,
at *4 (Del. Ch. Sept. 19, 1989))).
52
Vichi v. Koninklijke Philips Elecs. N.V., 62 A.3d 26, 49 (Del. Ch. 2012).
53
Doberstein v. G-P Indus., Inc., 2015 WL 6606484, at *4 (Del. Ch. Oct. 30, 2015).

17
decision regarding veil-piercing is largely based on some combination of these

factors, in addition to “an overall element of injustice or unfairness.”54

As to the specific factors, Plaintiffs make a compelling case in their Complaint

that Exela and SourceHOV Holdings “operate[] as a single economic entity such that

it would be inequitable for this Court to uphold a legal distinction between them.” 55

First, accepting the allegations in the Complaint as true, it is reasonably conceivable

that SourceHOV Holdings is insolvent and that its insolvency, at least in part, is the

result of Exela’s undercapitalization of SourceHOV Holdings. Insolvency is

adequately pled if a plaintiff’s allegations allow a reasonable inference of either

“(1) a deficiency of assets below liabilities with no reasonable prospect that the

business can be successfully continued in the face thereof or (2) an inability to meet

maturing obligations as they fall due in the ordinary course of business.’”56

54
Id.; see also Gadsden v. Home Pres. Co., 2004 WL 485468, at *4 (Del. Ch. Feb. 20,
2004, revised Mar. 12, 2004) (“A court of equity will disregard the separate legal existence
of a corporation where it is shown that the corporate form has been used to perpetrate a
fraud or similar injustice.”); United States v. Golden Acres, Inc., 702 F. Supp. 1097, 1104
(D. Del. 1988) (“[N]o single factor could justify a decision to disregard the corporate entity,
but . . . some combination of them [is] required, and . . . an overall element of injustice or
unfairness must always be present . . . .”).
55
Mabon, Nugent & Co. v. Texas Am. Energy Corp., 1990 WL 44267, at *5 (Del. Ch.
Apr. 12, 1990).
56
N. Am. Cath. Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 98
(Del. 2007) (cleaned up).

18
SourceHOV Holdings is a holding company with no direct operating assets.57

In fact, its only asset is its membership interest in SourceHOV, LLC, which in turn

holds interests in its solvent subsidiaries. 58 SourceHOV Holdings has no bank

account, money market account or brokerage account. 59 With those facts as

background, the Complaint alleges funds that once flowed up from the SourceHOV

Subsidiaries to SourceHOV Holdings as a matter of course, are now bypassing

SourceHOV Holdings and flowing directly to Exela. 60 According to Plaintiffs, this

arrangement was put in place by Exela and others while the likelihood that

SourceHOV Holdings would face a substantial appraisal judgment was well known

to all involved in the A/R Facility. 61 Now that SourceHOV Holdings has no funds,

and no prospect of securing funds, it is unable to meet its obligations as they become

due, and it is at least reasonably conceivable that it will never be able to do so. The

fact that certain of the SourceHOV Subsidiaries might be profitable, say Plaintiffs,

does not suggest that SourceHOV Holdings itself is solvent, absent evidence that

57
Compl. ¶ 82.
58
Compl. ¶ 84.
59
Id.
60
Compl. ¶ 29.
61
Compl. ¶ 148.

19
such money flows through SourceHOV Holdings, which, according to the

Complaint, is not and may never again be the case.

The Complaint’s case for veil-piercing does not rest on insolvency alone.62

It alleges that Exela was aware of SourceHOV Holdings’ potential liability long ago

and yet made a deliberate decision to undercapitalize the entity. 63 Exela knew at the

time it acquired SourceHOV Holdings that dissenting shareholders would be entitled

to the fair value of their shares.64 Indeed, Exela recognized in its Form 10-K, filed

on March 16, 2018, that there was a risk of a significant loss associated with the

Appraisal Action.65 It corrected its past filings in an 8-K filed on March 17, 2020,

and was even more explicit in disclosing that the obligation to pay fair value to

dissenting shareholders represented an obligation on the date the Appraisal Action

was filed in September 2017. 66 Yet, notwithstanding its recognition of substantial

exposure to the appraisal petitioners, Exela made the deliberate decision to avoid

62
Defendants argue that insolvency, alone, is not enough to pierce the corporate veil.
Mason v. Network of Wilm., Inc., 2005 WL 1653954, at *4 (Del. Ch. July 1, 2005)
(“[I]nsolvency, with nothing more, is not sufficient to warrant the piercing of the corporate
veil”). I agree. But Plaintiffs allege more.
63
Compl. ¶¶ 87–103.
64
Compl. ¶ 87.
65
Compl. ¶ 94.
66
Compl. ¶ 98.

20
flowing funds through SourceHOV Holdings.67 With funds either remaining at the

subsidiary level or potentially flowing around SourceHOV Holdings to Exela, there

is no way for Plaintiffs to enforce their judgment against SourceHOV Holdings.68

Beyond the apparently deliberate effort to starve SourceHOV Holdings of

cash, Plaintiffs further allege that Exela failed to observe certain corporate

formalities. Specifically, Plaintiffs allege that Exela: (1) is headquartered at the

same address as SourceHOV Holdings,69 (2) has failed to maintain proper business

registrations for SourceHOV Holdings,70 (3) has significantly overlapping personnel

with SourceHOV Holdings, 71 (4) has referred to Exela and its subsidiaries as one

67
Compl. ¶¶ 6, 28.
68
Compl. ¶¶ 7, 29.
69
Compl. ¶ 125.
70
Compl. ¶ 126.
71
Compl. ¶ 129 (“Chadha was the principal stockholder of SourceHOV immediately prior
to the business combination and is now Exela’s Executive Chairman. Ronald Cogburn is
the Chief Operating Officer of Exela and an officer, director, general partner, or manager
of SourceHOV LLC. Jim Reynolds is a member of Exela’s board of directors and treasurer
of SourceHOV LLC. Mark Fairchild is president of Exela Smart Office and president of
SourceHOV LLC. Shrikant Sortur is the Chief Financial Officer of Exela and an officer
of SourceHOV LLC. Eric Mengwall serves as secretary for both Exela and
SourceHOV LLC.”).

21
combined enterprise in SEC filings 72 and (5) requires SourceHOV Holdings to

obtain Exela’s consent before SourceHOV Holdings may pay its own creditors.73

With concerns about insolvency, undercapitalization and corporate

formalities well pled, Plaintiffs turn next to the fraud and injustice associated with

the A/R Facility. “Acts intended to leave a debtor judgment proof are sufficient to

show fraud and injustice.”74 Plaintiffs compellingly allege that fraud and injustice

has resulted and will result from the diversion of funds from SourceHOV Holdings

to Exela in an explicit attempt to avoid payment of the Appraisal Judgment.

As mentioned, Exela knew that SourceHOV Holdings would be required to pay a

judgment of some amount, at the latest, when Plaintiffs sent their appraisal demand

in September 2017.75 The extent of that exposure became all too clear as the

appraisal petitioners developed evidence, including expert valuation evidence, that

72
Compl. ¶ 131.
73
Compl. ¶ 133. Again, Defendants argue that the failure to observe corporate formalities,
alone, is not sufficient to well-plead veil-piercing. Wenske v. Blue Bell Creameries, Inc.,
2018 WL 5994971, at *6 (Del. Ch. Nov. 13, 2018) (“A parent corporation is not liable for
the acts of its subsidiary merely because it owns (and votes) a majority of the subsidiary’s
stock or shares common shareholders, directors or officers with the subsidiary.”). Once
again, I agree. But, a combination of insolvency, intentional undercapitalization and a lack
of corporate formalities, coupled with valid claims of fraud and injustice, is enough to meet
Plaintiffs’ pleading stage burden.
74
Compagnie des Grands Hotels d’Afrique S.A. v. Starwood Cap. Gp. Glob. I LLC,
2019 WL 148454, at *5 (D. Del. Jan. 9, 2019).
75
Compl. ¶¶ 35–36.

22
the fair value of SourceHOV Holdings was exponentially greater than the price paid

in the Merger. This evidence was presented at trial in June 2019, summarized in

post-trial oral arguments in October 2019, then relied upon in the Court’s post-trial

decision issued on January 30, 2020. 76 Yet, mere weeks before entry of the

judgment, on January 10, 2020, Defendants entered into the A/R Facility. 77

According to the Complaint, and as discussed above, the A/R Facility created

a structure whereby thirteen of the SourceHOV Subsidiaries sold certain receivables

to Receivables Holdco, and those receivables were subsequently sold to

Receivables I.78 As designed, Receivables I, an indirect subsidiary of Exela but not

SourceHOV Holdings, pledged those receivables as collateral under the Loan and

Security Agreement in exchange for money paid by the lender under the facility.79

Exela is the guarantor for all moneys borrowed under the A/R Facility and is the

servicer on the Loan and Security Agreement.80 According to Plaintiffs’ well-pled

allegations, the receivables pledged were not Exela’s to pledge and yet, as a result

76
Compl. ¶¶ 38, 40.
77
Compl. ¶¶ 39, 136.
78
Compl. ¶¶ 138–139.
79
Compl. ¶ 140.
80
Compl. ¶¶ 136, 140.

23
of the pledge, accounts receivable income that should flow up to SourceHOV

Holdings no longer does.81

Defendants take issue with the Complaint’s pled characterization of the

A/R Facility. The arguments are granular and, if accepted, would re-write Plaintiffs’

pleading. To be sure, the A/R Facility is a complicated transaction. And

Defendants’ characterization of it may well prove to be the better one. But this is

not the time to make that potentially dispositive determination, particularly given the

fact-intensive intricacies of the transaction.82 Taking Plaintiffs’ well-pled

characterization as fact, it is reasonably conceivable the A/R Facility was created in

order deliberately to prevent funds from flowing through SourceHOV Holdings and

to enable SourceHOV Holdings to avoid its obligations to creditors, including, and

perhaps especially, Plaintiffs. Assuming the pled facts are true, it is reasonably

81
Compl. ¶ 144.
82
Doe 30’s Mother v. Bradley, 58 A.3d 429, 445 (Del. Super. Ct. 2012) (“While it is true
that the Court need not accept conclusory assertions as true when deciding a motion to
dismiss, the Court will not adjudicate contested issues of fact on a motion to dismiss, nor
will it deem a pleading inadequate under Rule 12(b)(6) simply because a defendant presents
facts that appear to contradict those plead by the plaintiff.”); Malpiede v. Townson,
780 A.2d 1075, 1082 (Del. 2001) (“[On] a motion to dismiss . . . the Court of Chancery
may not resolve material factual disputes . . . .”); Windy City Invs. Hldgs., LLC v. Tchrs.
Ins. & Annuity Ass’n of Am., 2019 WL 2339932, at *10 (Del. Ch. May 31, 2019)
(“[Defendant’s] efforts to refute [plaintiff’s] version of the facts are not appropriate at the
motion to dismiss stage, where [plaintiff] has pled its allegations adequately.”).

24
conceivable that it is necessary to pierce the SourceHOV Holdings corporate veil to

avoid fraud and injustice.

D. Reverse Veil-Piercing

The question of whether and to what extent courts of Delaware should allow

so-called reverse veil-piercing is one of first impression. This is not to say that

parties in litigation have not asked our courts to authorize reverse veil-piercing.

They have. But our courts have yet to accept or deny the claim.83 For reasons

explained below, I am satisfied that Delaware law allows for reverse veil-piercing

in limited circumstances and in circumscribed execution.

The Mechanics of Reverse Veil-Piercing and its Proper Application

At its most basic level, reverse veil-piercing involves the imposition of

liability on a business organization for the liabilities of its owners. 84 In the

parent/subsidiary context, “where the subsidiary is a mere alter ego of the

83
See, e.g., Cancan Dev., LLC v. Manno, 2015 WL 3400789, at *22 (Del. Ch. May 27,
2015), aff’d, 132 A.3d 750 (Del. 2016) (noting that “[h]ad the claim [for reverse veil-
piercing] been properly presented” it “might have prevailed,” but because “[n]o one
grappled with the different implications” of reverse veil-piercing and traditional veil-
piercing, the claim failed for lack of adequate prosecution); Spring Real Estate, LLC v.
Echo/RT Hldgs., LLC, 2016 WL 769586, at *3 (Del. Ch. Feb. 18, 2016) (explaining the
doctrine of “reverse veil-piercing” but ultimately declining to address its validity).
84
Sky Cable, LLC v. DIRECTV, Inc., 886 F.3d 375, 385 (4th Cir. 2018) (“Reverse veil
piercing attaches liability to the entity for a judgment against the individuals who hold an
ownership interest in that entity.”); Litchfield Asset Mgmt. Corp. v. Howell, 799 A.2d 298,
311 (2002) (Conn. App. Ct. 2002) (defining reverse veil-piercing as when “the assets of
the corporate entities [are] made available to pay the personal debts of an owner”).

25
parent . . . the Court [will] treat the assets of the subsidiary as those of the parent.”85

As the doctrine has evolved, courts now recognize two variants of reverse veil-

piercing: insider and outsider reverse veil-piercing. 86 Insider reverse veil-piercing

is implicated where “the controlling [member] urges the court to disregard the

corporate entity that otherwise separates the [member] from the corporation.” 87

Outsider reverse veil-piercing is implicated where “an outside third party, frequently

a creditor, urges a court to render a company liable on a judgment against its

member.”88 Given Plaintiffs are creditors of SourceHOV Holdings, the single

member and 100% owner of SourceHOV LLC, which in turn is the single member

and owner of the SourceHOV Subsidiaries, and Plaintiffs seek to hold the

subsidiaries liable for a judgment held against the member, this case concerns

outsider veil-piercing.

The case associated with the first substantive treatment of reverse veil-

piercing is Judge Learned Hand’s decision in Kingston Dry Dock Co. v. Lake

85
Spring Real Estate, 2016 WL 769586, at *3.
86
Sky Cable, 886 F.3d at 385.
87
Id. (quoting 1 W. Fletcher, Fletcher Cyclopedia of the Law of Corporations § 41 (2017));
McKay v. Longman, 211 A.3d 20, 45 (Conn. 2019) (“Insider reverse veil piercing is
applicable to cases in which the plaintiff is a corporate insider seeking to disregard the
corporate form for his own benefit.”).
88
Sky Cable, 886 F.3d at 385; C.F. Tr., Inc. v. First Flight, L.P., 306 F.3d 126, 134
(4th Cir. 2002).

26
Champlain Transp. Co. 89 There, the court considered a trial court order allowing a

judgment creditor to seize property of a subsidiary controlled by the judgment debtor

in satisfaction of the judgment. 90 In refreshingly short order, Judge Hand found that

reverse veil-piercing was not warranted. In doing so, he observed that the subsidiary

had not “interpose[d] in any way in the conduct of [the parent’s] affairs.”91 He also

emphasized that “[s]o long as the law allows associated groups to maintain an

independent unity, its sanction is not so easily evaded, and persons dealing with

either do so upon the faith of the undertaking of that one which they may select.”92

And so began the reverse veil-piercing debate. Since then, many courts have adopted

the doctrine, while others have shied away. 93

89
Kingston Dry Dock Co. v. Lake Champlain Transp. Co., 31 F.2d 265 (2d Cir. 1929).
90
Id. at 266.
91
Id. at 267.
92
Id.
93
See, e.g., Sky Cable, 886 F.3d at 386–88 (concluding that Delaware would accept reverse
veil-piercing); Litchfield, 799 A.2d 298 (accepting reverse veil-piercing); C.F. Tr., Inc. v.
First Flight L.P., 580 S.E.2d 806 (Va. 2003) (same); LFC Mktg. Gp., Inc. v. Loomis, 8 P.3d
841 (Nev. 2000) (same); State v. Easton, 647 N.Y.S.2d 904 (N.Y. Sup. Ct. 1995) (same);
Stoebner v. Lingenfelter, 115 F.3d 576 (8th Cir. 1997) (same); Permian Petrol. Co. v.
Petroleos Mexicanos, 934 F.2d 635 (5th Cir. 1991) (same). Contra Acree v. McMahan,
585 S.E.2d 873 (Ga. 2003) (rejecting reverse veil-piercing); Postal Instant Press, Inc. v.
Kaswa Corp., 77 Cal. Rptr. 3d 96 (Cal. Ct. App. 2008) (same); Cascade Energy and Metals
Corp. v. Banks, 896 F.2d 1557 (10th Cir. 1990) (same).

27
Courts declining to allow reverse veil-piercing have relied primarily, and

understandably, on a desire to protect innocent parties. This is revealed in the two

most often cited state court decisions rejecting reverse veil-piercing, Acree v.

McMahan94 and Postal Instant Press, Inc. v. Kaswa Corp.95 In Acree, the Supreme

Court of Georgia rejected reverse veil-piercing, holding that the risk reverse piercing

would facilitate harm, through judicial decree, to innocent shareholders and third-

party creditors could not adequately be managed by the courts. 96 In Postal Instant

Press, a California appellate court rejected reverse veil-piercing on similar

grounds.97

The concerns expressed in Acree and Postal Instant Press are well-founded.

To start, reverse veil-piercing has the potential to bypass normal judgement

collection procedures by permitting the judgment creditor of a parent to jump in front

94
585 S.E.2d at 874 (“We reject reverse piercing, at least to the extent that it would allow
an ‘outsider,’ such as a third-party creditor, to pierce the veil in order to reach a
corporation’s assets to satisfy claims against an individual corporate insider.”); id. at 874–
75 (noting that the “particular concern” implicated by reverse piercing is not only harm to
“non-culpable third-party shareholders” but also harm to other “[c]orporate creditors”).
95
77 Cal. Rptr. 3d at 101 (“Our independent research and analysis lead us to reject outside
reverse piercing.”); id. at 103 (observing that “non-culpable shareholders” would be
prejudiced by allowing reverse veil-piercing).
96
Acree, 585 S.E.2d at 874–75.
97
Kaswa, 77 Cal. Rptr. 3d at 102–04.

28
of the subsidiary’s creditors.98 For obvious reasons, this dynamic would “unsettle

the expectations of corporate creditors who understand their loans to be secured . . .

by corporate assets” and could lead to corporate creditors “insist[ing] on being

compensated for the increased risk of default posed by outside reverse-piercing

claims.”99 As (if not more) important, “to the extent that the corporation has other

non-culpable shareholders, they obviously will be prejudiced if the corporation’s

assets can be attached directly.”100 Courts rejecting reverse veil-piercing have

emphasized that the risk of harm to innocent stakeholders is often avoidable because

judgment creditors can invoke other claims and remedies to achieve the same

outcome.101

The risks that reverse veil-piercing may be used as a blunt instrument to harm

innocent parties, and to disrupt the expectations of arms-length bargaining, while

real, do not, in my view, justify the rejection of reverse veil-piercing outright.

98
Cascade, 896 F.2d at 1577.
99
Floyd v. I.R.S. U.S., 151 F.3d 1295, 1299 (10th Cir. 1998).
100
Cascade, 896 F.2d at 1577. As was the case in Kingston, the backdrop often animating
these concerns is the very real possibility that, in many instances, the subsidiary itself has
not engaged in any wrongdoing. See Kingston, 31 F.2d at 267.
101
Cascade, 896 F.2d at 1577 (“[W]e are inclined to conclude that more traditional theories
of conversion, fraudulent conveyance of assets, respondeat superior and agency law are
adequate to deal with situations where one seeks to recover from a corporation for the
wrongful conduct committed by a controlling stockholder without the necessity to invent
a new theory of liability.”).

29
Rather, the recognition of the risks creates an opportunity to manage them, and to

do so in a manner that serves the interests of equity.102

In C.F. Trust, Inc. v. First Flight L.P., the Supreme Court of Virginia adopted

reverse veil-piercing upon observing that, at their most basic level, traditional and

reverse veil-piercing claims both seek to prevent the same sort of wrongdoing: abuse

of the corporate form and fraud.103 The court recognized the risk that reverse veil-

piercing could negatively impact innocent third-parties and defined the reverse veil-

piercing standard expressly to manage that risk. 104 Specifically, the court held that

a plaintiff asking the court to authorize reverse veil-piercing, in addition to proving

the elements required to justify traditional veil-piercing, must also demonstrate that

reverse veil-piercing will not cause harm to “innocent investors . . . [or] innocent

102
See, e.g., Mattingly L. Firm, P.C. v. Henson, 466 P.3d 590, 596 (Okla. Civ. App. 2019)
(“We also acknowledge, however, that these concerns may be lessened or eliminated in the
presence of particular facts, such as ‘where a corporation is controlled by a single
shareholder [and] there are . . . no third-party shareholders to be unfairly prejudiced by
disregarding the corporate form.’” (alteration in original) (citation omitted)).
103
580 S.E.2d at 810–11; see also Comm’r of Env’t Prot. v. State Five Indus. Park, Inc.,
37 A.3d 724, 741 (Conn. 2012) (“Put differently, if an individual and a corporation are
indistinguishable by virtue of the individual’s own acts, the corporate veil should be subject
to piercing in either direction. Thus, both traditional piercing and reverse piercing attempt
to rectify the same inequity . . . .”).
104
C.F. Tr., 580 S.E.2d at 811.

30
secured and unsecured creditors,” and that there are no other legal or equitable

remedies “availab[le] . . . [for] the creditor [to] pursue.”105

Similarly, in In re Phillips, the Supreme Court of Colorado determined that

outside reverse veil-piercing claims must be permitted when justice so requires

“[d]ue to the similarities and parallel goals achieved in outside reverse piercing and

traditional piercing.”106 The court then clarified that, in evaluating reverse veil-

piercing claims, courts must first make the traditional determinations of whether the

subsidiary is an alter ego of the parent and whether the subsidiary is being used in

perpetration of fraud or injustice.107 Then the court must assess whether there is an

inequitable result that can be remedied by piercing.108 And finally, before

authorizing the piercing, the court must consider whether innocent shareholders or

creditors would be prejudiced as a result of the piercing. 109

105
Id.; see also Loomis, 8 P.3d at 847 (noting that “there are other equities to be considered
in the reverse piercing situation—namely, whether the rights of innocent shareholders or
creditors are harmed by the pierce”).
106
139 P.3d 639, 645 (Colo. 2006) (“Due to the similarities and parallel goals achieved in
outside reverse piercing and traditional piercing, we hold that Colorado law permits outside
reverse piercing when justice so requires.”).
107
Id. at 646.
108
Id.
109
Id.

31
In the only case cited by the parties that purported to apply Delaware law,

Sky Cable, the court likewise acknowledged the risks of reverse veil-piercing and

then addressed how limits on the doctrine would adequately manage those risks.110

As with other courts that have adopted reverse veil-piercing, the Fourth Circuit

found it difficult to justify an outright rejection of the doctrine when “the same

considerations that justify [traditional] piercing [of] the corporate veil” are at work

to justify a plaintiff’s request to “pierc[e] the veil in reverse.”111 In the traditional

veil-piercing context, Delaware courts have forcefully stated that “Delaware has a

powerful interest of its own in preventing the entities that it charters from being used

as vehicles for fraud. Delaware’s legitimacy as a chartering jurisdiction depends on

it.”112 With this in mind, the Sky Cable court noted that if reverse veil-piercing was

not available, such that an alter ego entity could not be held liable for its member’s

debts under any circumstance, “fraudulent members could hide assets in plain sight

to avoid paying a judgment.”113 To address this unacceptable outcome, the court

held that where: (1) an LLC has a single member, (2) that LLC is the member’s alter

ego, and (3) that member is using the LLC as a fraudulent shield against judgment

110
Sky Cable, 886 F.3d at 387.
111
Id. (alteration in original) (internal quotations omitted).
112
NACCO Indus., Inc. v. Applica Inc., 997 A.2d 1, 26 (Del. Ch. 2009).
113
Sky Cable, 886 F.3d at 387.

32
creditors, reverse veil-piercing is a tool available to the court to avoid fraud and

injustice when other legal and equitable means are unavailing.114

Delaware embraces and will protect “corporate separateness”115; but

Delaware will not countenance the use of the corporate form as a means to facilitate

fraud or injustice. 116 Mindful of the need to balance these important policies, and

taking the lead from First Flight, Phillips and Sky Cable, I am satisfied there is a

place for a carefully circumscribed reverse veil-piercing rule within Delaware

law. 117

114
Id. at 387–88.
115
See NAMA Hldgs, LLC v. Related WMC LLC, 2014 WL 6436647, at *26 (Del. Ch.
Nov. 17, 2014) (“Delaware law respects corporate separateness”); Pauley Petrol., Inc. v.
Cont’l Oil Co., 231 A.2d 450, 454 (Del. Ch. 1967) (“[T]he law must and does respect the
separateness of the corporate entity. . . .”). This notion of “corporate separateness”
includes, of course, the presumptive understanding that “shareholders in a corporation are
not liable for the obligations of the enterprise beyond the capital that they contribute in
exchange for their shares.” Robert B. Thompson, Piercing the Corporate Veil:
An Empirical Study, 76 Cornell L. Rev. 1036, 1039 (1991).
116
NACCO Indus., 997 A.2d at 26; see also Martin v. D.B. Martin Co., 88 A. 612, 614
(Del. Ch. 1913) (“[T]he fiction of a legal corporate entity should be ignored when it has
been used as a shield for fraudulent or other illegal acts.”); Paul v. Univ. Motor Sales Co.,
278 N.W. 714, 720 (Mich. 1938) (noting that corporate separateness will be set aside if
“the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud,
or defend crime,” in which cases “the law will regard the corporation as an association of
persons” individually liable for the acts of the entity); cf. In re Massey Energy Co.,
2011 WL 2176479, at *20 (Del. Ch. May 31, 2011) (“Delaware law does not charter law
breakers.”)
117
Kingston, 31 F.2d at 267 (noting that the instances where reverse veil-piercing might be
justified “must be extremely rare”).

33
In defining the rule, I begin by stressing that I am not endorsing “insider”

reverse veil-piercing. 118 The rule stated here applies only to “outsider” reverse veil-

piercing. Also at the threshold, it must be emphasized that, just like with traditional

veil-piercing, reverse veil-piercing should be sanctioned only in the most

“exceptional circumstances.” 119 The framework outlined here to evaluate reverse

veil-piercing claims comes with an express recognition that such claims, if not

guided by appropriate standards, can threaten innocent third-party creditors and

shareholders and lead to a host of unpredictable outcomes for these constituencies.120

Only in cases alleging egregious facts, coupled with the lack of real and substantial

118
I note that commentators and courts take different views of insider reverse piercing.
See David G. Epstein & Jake Weiss, The Fourth Circuit, “Suem” and Reverse Veil
Piercing in Delaware, 70 S.C. Law Rev. 1189, 1207–08 (Summer 2019) (observing that
most “courts and commentators” agree that inside reverse veil piercing is not sustainable
since there is no equity to be served by “allowing a company’s veil to be pierced for the
benefit of the individuals who themselves have created the company” (citation omitted)).
But see Gregory S. Crespi, The Reverse Pierce Doctrine: Applying Appropriate Standards,
16 J. Corp. L. 33, 69 (1990) (“Crespi”) (endorsing a rule that would allow “insider” reverse
veil-piercing in limited circumstances). To be clear, I am not endorsing or rejecting
“insider” reverse veil-piercing because that claim is not implicated here.
119
Vichi, 62 A.3d at 49.
120
See Cascade, 896 F.2d at 1577; Crespi, at 64 (observing that outside reverse veil-
piercing “will prevent the shareholders of a corporation from shielding corporate assets
from claims against a controlling insider; as a result, the general expectations of investors
that their corporations will be free from liability for claims against corporate insiders may
be impaired,” thereby “reduc[ing] the usefulness of the corporate form as a vehicle for
raising and deploying capital”); id. at *64–65 (noting that the “existing body of corporate
disregard jurisprudence in the standard corporate creditor veil-piercing context is
consequently [] more applicable here than in the insider reverse piercing context”).

34
prejudice to third parties, should the court even consider utilizing the reverse veil-

piercing doctrine.121 With prejudice to third-parties in mind and a framework

designed to deal with such concerns, however, reverse veil-piercing can act as a

deterrent to owners of companies, particularly those that are closely held, from

shuffling their assets among their controlled entities with the express purpose of

avoiding a judgment.

The natural starting place when reviewing a claim for reverse veil-piercing

are the traditional factors Delaware courts consider when reviewing a traditional

veil-piercing claim—the so-called “alter ego” factors that include insolvency,

undercapitalization, commingling of corporate and personal funds, the absence of

corporate formalities, and whether the subsidiary is simply a facade for the owner.122

The court should then ask whether the owner is utilizing the corporate form to

perpetuate fraud or an injustice. 123 This inquiry should focus on additional factors,

including “(1) the degree to which allowing a reverse pierce would impair the

legitimate expectations of any adversely affected shareholders who are not

121
Sky Cable, LLC v. Coley, 2016 WL 3926492, at *1 (W.D. Va. July 18, 2016) (adopting
reverse veil-piercing, in part, because “[t]he facts of [the] case [were] egregious”).
122
See Doberstein, 2015 WL 6606484, at *4; see also Litchfield, 799 A.2d at 311
(observing that “the direction of the piercing was immaterial where the general tests
supporting it ha[ve] been met”).
123
Doberstein, 2015 WL 6606484, at *4.

35
responsible for the conduct of the insider that gave rise to the reverse pierce claim,

and the degree to which allowing a reverse pierce would establish a precedent

troubling to shareholders generally; (2) the degree to which the corporate entity

whose disregard is sought has exercised dominion and control over the insider who

is subject to the claim by the party seeking a reverse pierce; (3) the degree to which

the injury alleged by the person seeking a reverse pierce is related to the corporate

entity’s dominion and control of the insider, or to that person’s reasonable reliance

upon a lack of separate entity status between the insider and the corporate entity;

(4) the degree to which the public convenience, as articulated by [the Delaware

General Corporation Law and Delaware’s common law], would be served by

allowing a reverse pierce; (5) the extent and severity of the wrongful conduct, if any,

engaged in by the corporate entity whose disregard is sought by the insider; (6) the

possibility that the person seeking the reverse pierce is himself guilty of wrongful

conduct sufficient to bar him from obtaining equitable relief”; (7) the extent to which

the reverse pierce will harm innocent third-party creditors of the entity the plaintiff

seeks to reach; and (8) the extent to which other claims or remedies are practically

available to the creditor at law or in equity to recover the debt.124 Fundamentally,

124
Crespi, at 68. I recognize that, as a practical matter, the consideration of whether the
reverse pierce will cause harm to innocent third parties will substantially limit the
doctrine’s application. See id. (“A review of the case law suggests that most, if not all,
outsider reverse piercing claims will be denied if the above standards are reasonably
applied regardless of the precise balance struck among the factors.”); see also id. at 69
36
reverse veil-piercing, like traditional veil-piercing, is rooted in equity, and the court

must consider all relevant factors, including those just noted, to reach an equitable

result. 125

Applying this framework, Delaware courts will be well-equipped to handle

the varying concerns courts and commentators have rightfully expressed regarding

reverse veil-piercing. The expectations of third-party creditors and investors will be

well-protected.126 And the “public convenience” factor will require “the balancing

of the social value of upholding the legitimate expectations of the affected corporate

creditors or debtors, applying a rebuttable presumption in favor of assuring such

expectations, against the importance of the policies served by allowing a reverse

pierce under the particular circumstances involved.”127

(“The proper scope of this equitable doctrine . . . would appear to be limited to closely held
firms in which a single insider, or a small group of insiders acting in concert, holds all or
virtually all economic claims.”). Borrowing from our “bad faith” jurisprudence in the
fiduciary duty context, the case meeting this rigid framework for reverse veil-piercing can
safely be classified as a “rare bird.” In re Chelsea Therapeutics Int’l Ltd. S’holders Litig.,
2016 WL 3044721, at *1 (Del. Ch. May 20, 2016) (describing a finding of bad faith as “a
rara avis” or “rare bird” in the fiduciary duty context). Of course, the fact the doctrine will
rarely be invoked by the court to reach assets does not suggest that it should be unavailable
to aggrieved creditors in all instances as a matter of law.
125
See C.F. Tr., 580 S.E.2d at 810.
126
Cascade, 896 F.2d at 1577.
127
Crespi, at 51.

37
Plaintiffs’ Reverse Veil-Piercing Claim Is Well-Pled

After carefully reviewing the Complaint, I am satisfied this is one of those

“exceptional circumstances” where a plaintiff has well pled a basis for reverse veil-

piercing. It is at least reasonably conceivable that the SourceHOV Subsidiaries are

alter egos of SourceHOV Holdings and that the subsidiaries have actively

participated in a scheme to defraud or work an injustice against SourceHOV

Holdings creditors, like Plaintiffs, by diverting funds that would normally flow to

SourceHOV Holdings away from that entity to Exela. At this stage, from the well

pled allegations in the Complaint, I see no innocent shareholders or creditors of the

SourceHOV Subsidiaries that would be harmed by reverse veil-piercing, nor any

potential alternative claims at law or in equity, as against the SourceHOV

Subsidiaries or SourceHOV Holdings itself, that would for certain remedy the

harm.128

Beginning with the “alter ego” factors, as previously discussed, the Complaint

well-pleads facts that allow a reasonable inference that SourceHOV Holdings is

insolvent and that it is undercapitalized.129 The Complaint also pleads a reasonably

conceivable basis to conclude that corporate formalities have not been maintained

128
In other words, it is reasonably conceivable that reverse veil-piercing will be the only
means by which Plaintiffs may collect the Appraisal Judgment.
129
Compl. ¶¶ 8, 82, 84.

38
since the Merger. As alleged, all of the Exela entities, including SourceHOV

Holdings and the SourceHOV Subsidiaries, have overlapping personnel and

directors130 and share the same offices;131 many of the SourceHOV Subsidiaries do

not have updated corporate registrations;132 the entities have failed to maintain

accurate or complete corporate records;133 Exela must give its approval before

SourceHOV Holdings can pay debts;134 and all Exela-related entities have been

collectively referred to as one Exela-controlled enterprise in SEC filings. 135

Turning to the broader fraud or injustice inquiry, the question here is whether

the subsidiaries are being used to perpetuate fraud or injustice against a judgment

creditor of their parent. Certain of the SourceHOV Subsidiaries’ active participation

in a potential fraudulent or unjust scheme, as pled, is evident with a glance at the

First Tier Purchase and Sale Agreement associated with the A/R Facility.136 Under

130
Compl. ¶¶ 78, 130 (“Shirkant Sortur on July 12, 2017, signed onto an agreement as
authorized signatory for thirty-eight difference SourceHOV subsidiaries in connection with
Exela’s $1.35 billion in financing . . . .”).
131
Compl. ¶ 125.
132
Compl. ¶ 126.
133
Compl. ¶ 132.
134
Compl. ¶ 133.
135
Compl. ¶ 131.
136
Compl. ¶ 138.

39
this agreement, thirteen of the SourceHOV Subsidiaries sold their receivables to

another one of Exela’s indirect subsidiaries.137 The Complaint alleges that the

managers of these SourceHOV Subsidiaries knew about SourceHOV Holdings’

inadequate capitalization and, knowing that certain of their proceeds would

otherwise go to the judgment creditors of SourceHOV Holdings, they actively

“divert[ed] assets away from SourceHOV by pledging certain accounts receivable

as collateral for a $160 million accounts receivable security facility.”138

As mentioned in the discussion of traditional veil-piercing, discovery will bear out

whether (or not) Plaintiffs accurately describe the mechanics and purpose of the

A/R Facility in the Complaint. For now, accepting those allegations as true, it is

reasonably conceivable that certain SourceHOV Subsidiaries used the A/R Facility

to prevent their proceeds from going to SourceHOV Holdings’ judgment creditors.

Specific allegations of intentional acts aimed at avoiding judgments through the use

of legal constructs are sufficient to well plead fraud under traditional veil-piercing,

and the review of such pled facts in support of a reverse veil-piercing claim is no

different.139

137
Id.
138
Compl. ¶ 28.
139
Compagnie des Grands Hotels, 2019 WL 148454, at *5 (“Acts intended to leave a
debtor judgment proof are sufficient to show fraud and injustice”).

40
Finally, the Complaint well pleads a bases to infer that Plaintiffs will be able

to satisfy the additional elements to sustain a reverse veil-piercing claim. I address

them briefly in turn.

Impairment of expectations of adversely affected shareholders. The

Complaint pleads no basis to infer that other owners of SourceHOV Holdings or the

SourceHOV Subsidiaries will be adversely affected by reverse veil-piercing. The

SourceHOV Subsidiaries indirectly are wholly owned by SourceHOV Holdings,

which in turn is wholly-owned by Exela. 140 Thus, all entities involved in the alleged

scheme to starve SourceHOV Holdings of funds are connected by unified

ownership. 141

The exercise of dominion and control and degree to which that caused

Plaintiffs’ injury. According to the Complaint, Exela and certain of the

SourceHOV Subsidiaries agreed to the A/R Facility without the involvement or

consent, and to the detriment of, the dormant SourceHOV Holdings. 142 This allows

140
Compl. ¶¶ 82–84.
141
Kingston, 31 F.2d at 267 (noting that reverse veil-piercing may be appropriate when the
subsidiary “interpose[s] … in the conduct of [the parent’s] affairs”); Compl. ¶ 138; OB at 1
(“[SourceHOV Holdings] owns 100% of the membership interests of SourceHOV, LLC,
which in turn owns several profitable portfolio companies.”).
142
Compl. ¶ 28.

41
a pleading-stage inference of dominion and control causing injury to Plaintiffs

sufficient to justify reverse veil-piercing.

The public convenience as articulated by the DGCL and Delaware

Common Law. As noted at the outset, Delaware’s statutory appraisal scheme

eliminated the minority stockholder’s common law right to prevent a merger and

replaced it with a mandatory statutory right to obtain the fair value of what is to be

taken from the minority stockholder via the merger (his shares) over his dissent.

Plaintiffs allege, “Exela and SourceHOV have retained all of the benefits of the

[Merger] at issue in the Appraisal Action without paying compensation for

Plaintiffs’ dissenting shares and are using their corporate structure as a sham in an

attempt to render SourceHOV ‘judgment proof.’”143 The Complaint then alleges

that the scheme by which the SourceHOV Subsidiaries have agreed to channel funds

directly to Exela is “fundamentally inequitable because Exela’s own financial

statements recognize the [Appraisal] Judgment as ultimately Exela’s liability, given

its 100% control over SourceHOV.”144 Reverse veil-piercing, in this circumstance,

would serve the public convenience as expressed in Delaware’s appraisal statute.

143
Compl. ¶ 2.
144
Compl. ¶ 3 (emphasis in original).

42
The extent of the wrongful activity. The Complaint well-pleads that Exela

and the SourceHOV Subsidiaries (with SourceHOV Holdings’ acquiescence) have

initiated a scheme to ensure that Exela retains the significant value of Plaintiffs’

ownership in pre-Merger SourceHOV Holdings, interest taken over Plaintiffs’

dissent to the Merger, without paying a nickel for that equity. If true, this is the sort

of wrongful conduct that justifies reverse veil-piercing.

Plaintiffs’ wrongful conduct. There is no basis in the Complaint to infer that

Plaintiffs themselves have engaged in wrongful conduct that would disable them

from calling upon equity to address their harm. They lawfully dissented to the

Merger, properly sought statutory appraisal of their SourceHOV Holdings shares,

prevailed at trial, prevailed on appeal, obtained a final judgment and diligently

sought to execute on that judgment.

Harm to innocent third-party creditors. There is no basis in the Complaint

to infer that reverse veil-piercing will cause harm to innocent third-party creditors.

In this regard, Defendants argue that because the SourceHOV Subsidiaries are

primary obligors on certain debt at a level above SourceHOV Holdings, those debt

holders will be prejudiced if SourceHOV Holdings’ judgment creditors can hold

those subsidiaries liable for the Appraisal Judgment.145 To be clear, factual

145
Defs.’ Reply Br. in Supp. of Mot. to Dismiss the Verified Compl. (D.I. 17) at 10.

43
allegations related to SourceHOV Holdings’ or the SourceHOV Subsidiaries’ third-

party creditors are not in the Complaint, and for now at least, my analysis is confined

to the “four corners” of that pleading. 146

Other claims or remedies at law or equity. As for the existence of other

claims or remedies, it does not appear that other remedies exist to serve the ultimate

purpose the reverse veil-piercing claim is meant to serve here: to enforce the

Charging Order held against SourceHOV Holdings. While certain jurisdictions

consider the availability of “conversion, fraudulent conveyance of assets, respondeat

superior and agency law” as relevant when considering this factor, no such argument

has been developed here apart from a reference to the existence of such remedies in

other jurisdictions. 147 In any event, it is not clear at this nascent stage of the

proceedings that enforcement of the properly placed Charging Order can be achieved

through means other than reverse veil-piercing. With that said, it may well be that

Defendants will be able to demonstrate that traditional judgment collection measures

are adequate and that reverse piercing, therefore, would be unnecessarily extreme

146
Malpiede, 780 A.2d at 1090; see also Savor, 812 A.2d at 896–97 (noting that the trial
court may not speculate as to facts that may be developed in discovery when adjudicating
a motion to dismiss the complaint).
147
Floyd, 151 F.3d at 1299; OB at 20.

44
and inappropriate.148 But, for now, I see no reason to dismiss the claim on the basis

that some other (as yet to be identified) means to collect the Appraisal Judgment

may be available to Plaintiffs.149

The Charging Order Does Not Prohibit Reverse Veil-Piercing

Section 18-703(d) provides that when a judgment creditor obtains a charging

order with respect to a member’s LLC interests, that order functions as the exclusive

remedy by which the judgment creditor may satisfy its judgment.150 The statute

explicitly prohibits a judgment creditor from pursuing claims for “attachment,

garnishment, foreclosure or other legal or equitable remedies” against the judgment

148
Cascade, 896 F.2d at 1577 (expressing concerns about using reverse veil-piercing to
“bypass[] normal judgment-collection procedures”).
149
I note that courts and commentators have focused on a number of other concerns that
have no bearing on reverse veil-piercing’s application in this case, so I need not address
them. First, some argue that reverse veil-piercing is not appropriate when the plaintiff is a
voluntary contractual creditor rather than a judgment creditor. Floyd, 151 F.3d at 1299–
1300. Here, Plaintiffs are judgment creditors. Second, some argue that a reverse veil-
piercing plaintiff should not get to attach a corporation’s assets directly and then force a
sale of those assets. Id. at 1299 (“[T]hird parties may be unfairly prejudiced if the
corporation’s assets can be attached directly.”). Plaintiffs have not sought a forced sale of
any of the SourceHOV Subsidiaries or any of their assets. Third, there is a concern that
innocent shareholders will be prejudiced if reverse veil-piercing is permitted in cases where
the judgment debtor merely controls rather than owns shares in the company to be reached
by the pierce. Ariella M. Lvov, Preserving Limited Liability: Mitigating the Inequities of
Reverse Veil Piercing with A Comprehensive Framework, 18 U.C. Davis Bus. L.J. 161,
179 (2018). This case regards ownership not mere control.
150
6 Del. C. § 18-703(d).

45
debtor’s interest in the LLC.151 The canon of construction, ejusdem generis,

provides that “where general language follows an enumeration of persons or things,

by words of a particular and specific meaning, such general words are not to be

construed in their widest extent, but are to be held as applying only to persons or

things of the same general kind or class as those specifically mentioned.”152

So construed, the phrase “other legal or equitable remedies” in Section 18-703(d) is

modified by the specific list of remedies mentioned before that phrase. And the

remedies listed “involve traditional common law actions by which a creditor may

seize particular property of a debtor.”153

This construction makes perfect sense; each of the enumerated remedies are

other means by which to force the judgment debtor to pay a creditor’s judgment and,

thus, would be displaced by the exclusive statutory remedy of the charging order.

The reverse veil-piercing claim, as asserted here, does not rest on or invoke a remedy

other than the charging order; it, instead, seeks a judicially sanctioned expansion of

the entities against whom the Charging Order may be enforced. In other words, if

the court determines that the SourceHOV Subsidiaries fall under the purview of the

151
Id.
152
Aspen Advisors LLC v. United Artists Theatre Co., 861 A.2d 1251, 1265 (Del. 2004)
(citation omitted).
153
Sky Cable, 886 F.3d at 388.

46
Charging Order, then Plaintiffs’ only remedy against those entities would still be

enforcement of the Charging Order. Any attempt to pursue separate legal or

equitable claims, or to seek attachment, garnishment or foreclosure against any one

of those entities would be barred by statute.

The implication of a successful reverse veil-piercing claim here, as pled, is

that the SourceHOV Subsidiaries are alter egos of SourceHOV Holdings and that

“the ultimate part[ies] in interest, the [subsidiaries], [should] be regarded in law and

fact as the sole party in a particular transaction.”154 If Section 18-703(d)–(e)

prevented the application of reverse veil-piercing, judgment debtors, their parents

and their subsidiaries would be incentivized to facilitate the movement of funds from

parent to subsidiary, and perhaps back again, to avoid a judgment against the entity

in between.155 There is no basis to conclude the General Assembly intended that

result when it enacted the charging order statute.

E. Plaintiffs’ Unjust Enrichment Claim Fails to State a Claim

Unjust enrichment is defined as “the unjust retention of a benefit to the loss

of another, or the retention of money or property of another against the fundamental

154
Pauley Petrol. Inc. v. Cont’l Oil Co., 239 A.2d 629, 633 (Del. 1968).
155
Sky Cable, 886 F.3d at 389.

47
principles of justice or equity and good conscience.”156 Plaintiffs allege Exela was

enriched by obtaining all of SourceHOV Holdings assets without paying full

compensation by virtue of the failure to pay for Plaintiffs’ dissenting shares.157 They

further allege SourceHOV Holdings’ failure to pay the approximately $57 million

Appraisal Judgment resulted in an impoverishment to Plaintiffs because that was

money owed to them as the fair value of the property that has been taken from

them. 158

For its part, Exela argues that it was not enriched, but rather impoverished, as

a result of the Merger, the Appraisal Action and the Appraisal Judgment.159 More

relevant here, Exela also argues that Plaintiffs unjust enrichment claim fails because

they have an adequate (and exclusive) remedy in the form of the Charging Order

against SourceHOV Holdings.160 On this latter point, I agree.

156
Fleer Corp. v. Topps Chewing Gum, Inc., 539 A.2d 1060, 1062 (Del.1988); see also
Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010) (laying out the elements of unjust
enrichment).
157
Compl. ¶ 65.
158
Compl. ¶ 71.
159
OB at 24–25 (maintaining that the Merger was not accretive, and that the Appraisal
Action and Appraisal Judgment have only exacerbated the losses).
160
OB at 24–26.

48
Plaintiffs cite Mehta v. Smurfit-Stone Container Corp. in support of their

unjust enrichment claim. 161 There, a shareholder who notified the company it would

seek statutory appraisal of its shares in dissent of a merger ultimately failed to perfect

its appraisal rights in the statutorily required 120-day period.162 Notwithstanding the

failure to seek appraisal, Rock-Ten withheld the merger consideration from the

plaintiff, arguing the stockholder made its election and yet failed to execute on its

appraisal right through no fault of the company.163 The court held the denial of

merger consideration to the plaintiffs amounted to an enrichment of Rock-Ten

because it received the full benefit of its bargain by merging with Smurfit-Stone, yet

had not paid the full price it agreed to pay (by withholding consideration to the

dissenting shareholders). 164

Unlike in Mehta, where the plaintiff might not have had any legal claim or

remedy by which to recover the merger consideration owed to it, Plaintiffs have an

adequate remedy in the form of the Appraisal Judgment and Charging Order. That

order provides that, to the extent any dollar flows through SourceHOV Holdings by

distribution from a subsidiary, it must first be paid to Plaintiffs before flowing up to

161
2014 WL 5438534, at *4 (Del. Ch. Oct. 20, 2014).
162
Id.
163
Id. at *5.
164
Id.

49
Exela. Plaintiffs argue the Charging Order clearly is not adequate because the

judgment has not yet been paid. But, in this context, that is not what adequacy

means. “[T]o be ‘adequate,’ a [] remedy must be available as a matter of right, be

full, fair and complete, and be as practical to the ends of justice and to prompt

administration as the remedy in equity.”165 A charging order, as a remedy, was

practically available to Plaintiffs and they, in fact, sought and received that remedy.

The fact the Charging Order has yet to deliver satisfaction does not mean it is legally

inadequate.

Moreover, the charging order statute declares that the charging order is the

judgment creditor’s exclusive remedy under the circumstances.166 The unjust

enrichment claim is not merely an action to expand the Charging Order’s application

to other entities, as is the case with the veil-piercing claims; it is a claim that, if

successful, will side-step the Charging Order completely as a means to obtain a new

judgment on a new claim. The “exclusive remedy” language of the statute prevents

that result. Accordingly, Plaintiffs’ unjust enrichment claim must be dismissed.

165
Travelers Cas. & Sur. Co. of Am. v. Colonial Sch. Dist., 2001 WL 287482, at *3
(Del. Ch. Mar. 16, 2001) (citation omitted).
166
6 Del. C. § 18-703(d); see also 6 Del. C. § 18-703(e) (“No creditor of a member or of a
member's assignee shall have any right to obtain possession of, or otherwise exercise legal
or equitable remedies with respect to, the property of the limited liability company.”).

50
III. CONCLUSION

For the foregoing reasons, the Motion to Dismiss is GRANTED as to Count I

but DENIED as to Count II.

IT IS SO ORDERED.

Manichaean Capital, LLC v. Exela Technologies, Inc.

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