Jeff Lipman v. GPB Capital Holdings LLC

J
   IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

JEFF LIPMAN and CAROL LIPMAN,            )
derivatively on behalf of GPB            )
HOLDINGS II, LP and GPB                  )
AUTOMOTIVE PORTFOLIO, LP                 )
                                         )
                  Plaintiffs,            )
                                         )
      v.                                 ) C.A. No. 2020-0054-SG
                                         )
GPB CAPITAL HOLDINGS LLC, a              )
Delaware limited liability company,      )
DAVID GENTILE, JEFFREY LASH,             )
and JEFFRY SCHNEIDER,                    )
                                         )
                  Defendants,            )
                                         )
       and                               )
                                         )
GPB HOLDINGS II, LP, a Delaware          )
limited partnership, and GPB             )
AUTOMOTIVE PORTFOLIO, LP, a              )
Delaware limited partnership,            )
                                         )
                   Nominal Defendants.   )

                        MEMORANDUM OPINION

                      Date Submitted: October 26, 2020
                      Date Decided: November 18, 2020

Marcus E. Montejo and Stephen D. Dargitz, of PRICKETT, JONES & ELLIOTT,
P.A., Wilmington, Delaware; OF COUNSEL: Chet B. Waldman and Adam J.
Blander of WOLF POPPER LLP, New York, New York, Attorneys for Plaintiffs Jeff
Lipman and Carol Lipman.

Patricia L. Enerio and Elizabeth A. DeFelice, of HEYMAN ENERIO GATTUSO &
HIRZEL LLP, Wilmington, Delaware; OF COUNSEL: Tab K. Rosenfeld, Steven M.
Kaplan, and Nicole E. Meyer, of ROSENFELD & KAPLAN, LLP, New York, New
York, Attorneys for Defendant GPB Capital Holdings LLC and Nominal Defendants
GPB Holdings II, LP and GPB Automotive Portfolio, LP.

Jacob R. Kirkham, of KOBRE & KIM LLP, Wilmington, Delaware; OF COUNSEL:
William McGovern and Leif T. Simonson, of KOBRE & KIM LLP, New York, New
York, Attorneys for Defendant David Gentile.

Michael W. McDermott and Richard I. G. Jones Jr., of BERGER HARRIS LLP,
Wilmington, Delaware; OF COUNSEL: Jeffrey Schreiber and Richard J. Jancasz, of
MEISTER SEELIG & FEIN LLP, New York, New York, Attorneys for Defendant
Jeffry Schneider.

David A. Felice, of BAILEY & GLASSER, LLP, Wilmington, Delaware; OF
COUNSEL: Kevin D. Galbraith, of LAW OFFICE OF KEVIN GALBRAITH, LLC,
New York, New York, Attorneys for Defendant Jeffrey Lash.




GLASSCOCK, Vice Chancellor

                                      1
      This matter involves allegations that the controller of a general partner and his

associates looted the general partner’s constituent partnerships. The Plaintiffs are

limited partners; they seek to proceed derivatively on behalf of the partnerships. The

individual Defendants are the alleged controller, David Gentile, and two alleged

associates of Gentile, Jeffrey Lash and Jeffry Schneider. The Defendant General

Partner is a Delaware LLC, GPB Capital Holdings (“GPB”). The Defendants have

moved to dismiss; this Memorandum Opinion addresses those motions.

      The primary contention of the individual Defendants is that only GPB owes

fiduciary duties to the limited partnerships. Accordingly, Gentile cannot have

breached such duties, and Lash and Schneider cannot have aided and abetted any

breach, the allegations of which form the gravamen of the Complaint. I find,

however, that the allegations of the Complaint, together with the reasonable

inferences therefrom, are sufficient to sustain a claim that Gentile used his control

over GPB to cause it to breach duties to the partnerships, that he used his control to

usurp partnership assets, that this exercise of control imposed fiduciary duties on

Gentile in way of the partnerships, which he breached, and that Lash and Schneider

aided and abetted such breaches.

      To proceed derivatively on behalf of a partnership, a limited partner must first

have made a demand that the general partner undertake the litigation, or demonstrate

via the pleadings that such demand should be excused as futile. Here, the Plaintiffs


                                          2
made no demand against GPB, and the Defendants contend that demand is not

excused. I find that the allegations of the Complaint, which incorporate in the

pleadings several independent legal actions involving the Partnerships, make the

threat of liability to the general partner, and its controller, such that it is reasonably

conceivable that the general partner could not bring its business judgment to bear on

any demand involving these allegations. Accordingly, demand is excused and the

Plaintiffs may proceed derivatively.

       My reasoning follows a recitation of the factual background, below.


                                   I. BACKGROUND 1

       A. The Parties

       Nominal Defendant GPB Holdings II (“Holdings II”) is a Delaware limited

partnership.2 It was formed in 2015 to acquire and operate automotive retail,

healthcare, and information technology companies.3

       Nominal Defendant GPB Automotive Portfolio, LP (“Auto,” and together

with “Holdings II,” the “Partnerships) is a Delaware limited partnership. 4 Auto was

formed in 2013 to acquire and operate automotive dealerships. 5


1
  The facts, except where otherwise noted, are drawn from the Verified Derivative Complaint
(“Compl.”), Dkt. No. 1, and exhibits or documents incorporated therein, and are presumed true for
the purposes of these Motions to Dismiss.
2
  Compl. ¶ 7.
3
  Compl. ¶ 7.
4
  Compl. ¶ 8.
5
  Compl. ¶ 8.

                                               3
       Plaintiffs Jeff Lipman and Carol Lipman are limited partners of both Holdings

II and Auto and were limited partners at the time of the wrongs alleged in the

Complaint.6 They invested $550,000 in Holdings II and $200,000 in Auto.7

       Defendant GPB Capital Holdings, LLC is a Delaware limited liability

company that holds itself out to be a “New York-based alternative asset management

firm that seeks to acquire income-producing private companies.” 8 It operates as a

holding company and manages several investment funds in different industries.9

GPB was the general partner of both Holdings II and Auto at the time of all alleged

breaches of fiduciary duty. 10 Both Auto and Holdings II share an office with GPB.11

       Defendant David Gentile is the founder, sole member, and Chief Executive

Officer of GPB. 12 In that capacity, Gentile is actively involved in the day-to-day

operations of the Partnerships and in marketing to the Partnerships’ limited

partners.13




6
  Compl. ¶ 6.
7
  Compl. ¶ 6.
8
   GPB Capital Alternative Asset Management, https://gpb-cap.com/ (last visited November 18,
2020).
9
  Compl. ¶ 11.
10
   Compl. ¶ 9.
11
   Compl. ¶¶ 7–9.
12
   Compl. ¶ 12.
13
   Compl. ¶ 12; Stephen D. Dargitz’s Ltr. Enclosing Massachusetts Enforcement Action Compl.,
Ex. A (“Mass. Enforcement Compl.”) at 2, Dkt. No. 60.

                                             4
      Defendant Jeffrey Lash is one of GPB’s former automotive retail directors

and managed many of the retail dealerships in which GPB had majority control.14

      Defendant Jeffry Schneider is the founder of Ascendant Alternative

Strategies, LLC (“Ascendant Alternative”). Ascendant Alternative is an investment

firm that was the exclusive dealer manager of GPB’s funds. 15 Ascendant Alternative

has received a subpoena from the Securities and Exchange Commission (the “SEC”)

in connection with the SEC’s investigation of GPB.16 An administrative complaint

filed by the Enforcement Section of the Massachusetts Securities Division of the

Office of the Secretary of the Commonwealth (“Massachusetts Enforcement

Complaint”) alleges that Ascendant Alternative is owned and controlled by “persons

includ[ing] Gentile and Schneider.” 17

      B. Factual Overview

      In 2013, Gentile created GPB to acquire “middle market, income-producing

companies, regardless of a specific fund’s strategy.” 18 To obtain financing for these

acquisitions, “Gentile offered high sales commissions to financial professionals to

sell his funds”19 and told investors that they would receive monthly distributions




14
   Compl. ¶ 13.
15
   Compl. ¶ 14.
16
   Compl. ¶ 14.
17
   Mass. Enforcement Compl. 3–4.
18
   Mass. Enforcement Compl. 2–3.
19
   Mass. Enforcement Compl. 3.

                                          5
providing an 8% annual rate of return. 20 GPB also hired a broker-dealer branch

office called Ascendant Capital, LLC (“Ascendant Capital”) to facilitate the

marketing and sale of its funds.21        Ascendant Capital is wholly-owned by

Schneider.22 In 2017, Ascendant Capital became a branch office of Ascendant

Alternative, and Gentile engaged Schneider, Ascendant Capital’s founder and sole

owner, to draft key documents and attend internal GPB executive meetings. Gentile

also gave Schneider the exclusive right to sell GPB funds.23

              1. The DiBre Allegations

       In July, 2017, GPB sued one of its former automotive retail directors, Patrick

DiBre, alleging that he had failed to complete auto dealership sales valued at $40

million. 24 In a counterclaim filed in March, 2018 (the “DiBre Counterclaim”), DiBre

alleged that “senior GPB executives had engaged in a pattern of self-dealing,

effectively diverting Partnership assets to themselves without disclosing their self-

interested transactions.” 25 The Plaintiffs incorporated the counterclaim by reference

to its detailed allegations:

       DiBre alleged that: (i) Gentile and Schneider indirectly purchased
       property on which a dealership [was] located and charged the
       dealership rent; (ii) Gentile and Schneider received undisclosed
       stipends from dealerships acquired by GPB; (iii) Gentile and Schneider

20
   Compl. ¶ 15.
21
   Mass. Enforcement Compl. 3.
22
   Mass. Enforcement Compl. 3.
23
   Mass. Enforcement Compl. 3.
24
   Compl. ¶ 17.
25
   Compl. ¶ 17.

                                          6
       created an entity, LSG, to which they directed more than $4 million
       from reinsurance funds and manufacturer rebates that should have gone
       to dealerships and ultimately to the Partnerships; (iv) Gentile engaged
       his father’s accounting firm to perform approximately $100,000 worth
       of services each month, and those services either were not performed
       or were overbilled; (v) Gentile and Schneider expensed various luxury
       items for their own personal use; and (vi) Gentile and Schneider
       overstated the purchase price for dealerships and then redirected the
       overage to themselves in the form of ‘acquisition fees.’26

              2. The Rosenberg Allegations

       Plaintiffs also incorporated by reference allegations made in a complaint filed

by David Rosenberg (the “Rosenberg Complaint”), the CEO of Prime Automotive

Group, which is “a network of automotive dealerships” that is “one of the

Defendants’ largest investments.”27 The Rosenberg Complaint was a result of

GPB’s failure to pay $5.9 million that was allegedly owed under a March 1, 2019

Amended and Restated Repurchase Agreement. 28 According to the Rosenberg

Complaint, GPB refused to pay Rosenberg and sought to replace him as CEO of

Prime Automotive in retaliation for his reporting of GPB’s alleged financial

misconduct to the Partnerships’ auditor, EisnerAmper LLP (“EisnerAmper”). 29 That

financial misconduct included Gentile and Lash engaging in fictitious transactions




26
   Compl. ¶ 17.
27
   Ltr. to the Court from Stephen D. Dargitz, Exhibit, Rosenberg Compl. ¶ 4, Dkt. No. 66.
28
   Compl. ¶ 18.
29
   Compl. ¶ 18; Transmittal Decl. of Elizabeth A. DeFelice (“DeFelice Decl.”), Ex. F, at 2, Dkt.
No. 28.

                                               7
and other improper procedures to enrich themselves and inflate the Partnerships’

financial results.30 Specifically:

       Gentile and Lash . . . funneled nearly $2,000,000 in revenue to entities
       they controlled, including some under the guise of “management fees.”
       For the year 2015, $201,7076 [sic] was transferred to Emdykycol, Inc.,
       and $201,706 was transferred to Jachirijo, Inc., an entity owned by
       Gentile. Upon information and belief, Emdykycol, Inc. is owned by
       [both] Lash and . . . Gentile. Dealership funds have also been siphoned
       off to LSG Auto Wholesale, an entity named for Lash, Schneider (a
       close associate of Gentile), and Gentile. Upon information and belief,
       the payments described above served no legitimate purpose nor were
       they disclosed to investors. . . .

       [U]pon information and belief . . . (i) Lash improperly drew an advance
       of $750,000 that he labelled a “retention bonus,” which he then
       distributed to himself and others; (ii) Lash and others inexplicably
       received approximately $100,000 worth of sporting vehicles and
       equipment after the close of a dealership purchase, suggesting a
       kickback arrangement; and (iii) Lash and others orchestrated kickback
       payments to themselves of $100 per vehicle for every Canadian used
       car purchase. 31

              3. Problems with the Partnerships’ Financial Statements

       This alleged financial misconduct caused GPB to be unable to pay the

promised monthly distributions amounting to an 8% annual rate of return.32 To

retain the veneer of being able to pay these distributions, GPB used individual capital

accounts of limited partners to fund distributions—essentially returning the limited

partners’ own capital to them under the guise of “distributions.” Such a scheme is,



30
   Compl. ¶ 19.
31
   Compl. ¶¶ 20–21.
32
   Compl. ¶ 22.

                                          8
of course, not sustainable, and in December, 2017, GPB reported, in a letter to the

Partnerships’ limited partners, that the Partnerships had failed to meet performance

expectations in 2018 and would likely have an intangible asset impairment charge.33

In that letter, GPB also indicated that it intended to divest certain underperforming

assets and it would provide more detail in forthcoming audited financial

statements.34

       Those details never arrived. As of the date of the filing of the Complaint,

GPB has not filed its audited financial statements for the Partnerships for the years

2017 or 2018.35 And although GPB announced in the summer of 2018 that its 2015

and 2016 financial statements would need to be restated, those restatements have

also not been released. 36 GPB also did not disclose the reason for the restatement.37

       On July 27, 2018, Auto’s auditor, Crowe LLP (“Crowe”), attempted to resign,

stating in a resignation letter that it:

       concluded the scope of [its] audits would be expanded significantly
       based on information that [it had] obtained through July 26, 2018,
       related to the ongoing investigation of certain claims against the
       Company and certain officers, as well as significant related party
       activity. Even with the expanded audit procedures, which [it has] not
       completed, [it did] not believe [it would] be able to obtain sufficient
       reliable evidence to support issuing an unqualified opinion.



33
   Compl. ¶ 24.
34
   Compl. ¶¶ 24–25.
35
   Compl. ¶¶ 32, 42.
36
   Compl. ¶¶ 26, 32, 42.
37
   Compl. ¶ 27.

                                           9
       In light of the item above and work performed to date, [Crowe]
       believe[d] internal controls [were] not sufficient to develop reliable
       financial statements.

       Based on various changes within management during the audit period
       and information obtained through July 26, 2018, [it did] not believe [it
       was] in a position to rely on management’s representations related to
       the audits identified below [regarding Auto and GPB Prime Holdings,
       LLC].

       As previously communicated to [GPB], information came to [Crowe’s]
       attention that caused [it] to believe that the previously issued GPB
       Automotive Portfolio, LP 2015 financial statements, which were
       audited by other auditors, were materially misstated. [Crowe]
       understand[s] that at this time management has concluded those
       financial statements require restatement; however, management has not
       come to their conclusion on the impact of the restatement on subsequent
       period financial statements.38

       Further, Crowe wrote a second resignation letter also dated to July 27, 2018,

which stated that it was resigning as auditor for GPB itself, as well as other funds

owned by GPB, because of material misstatements in the 2016 financial statements

for those entities.39 Crowe mentioned in that letter that its audit reports on those

statements should no longer be relied upon. 40

       In response to Crowe’s attempted resignation, Gentile and other GPB officers

met with Crowe to convince it to stay on while management attempted to address

the material deficiencies identified in the resignation letters.41 GPB’s officers


38
   Compl. ¶ 27.
39
   Compl. ¶ 28.
40
   Compl. ¶ 28. Neither letter, I note, was attached to the Complaint nor provided by Defendants
in their Motions to Dismiss briefing.
41
   Compl. ¶ 29.

                                              10
represented to Crowe that StoneTurn Group LLC (“StoneTurn”) was investigating

and expressed confidence that StoneTurn would soon be able to address the

deficiencies so that Crowe could continue its audits.42 Thereafter, on August 2,

2018, Crowe sent two letters to GPB rescinding its July 27th resignation letters but

stating that it would cease working until more information was produced so that it

could make a final resignation decision. 43 Crowe also clarified that it had not

changed its overall conclusion that the 2015 and 2016 financial statements for

several of GPB’s funds would need to be restated.44

       On September 26, 2018, Crowe sent GPB a follow-up letter confirming its

decision to resign as auditor for Auto. 45 GPB did not disclose this information until

six weeks later, on November 9, 2018. 46        GPB’s disclosure, moreover, only

mentioned that Crowe’s resignation was due to perceived risks that Crowe

determined fell outside its internal risk tolerance parameters.47 It did not mention

Crowe’s issues with GPB’s materially misstated financials, its inability to trust

managements’ representations, or the lack of internal controls mentioned in Crowe’s

resignation letter. 48



42
   Compl. ¶ 29.
43
   Compl. ¶ 30.
44
   Compl. ¶ 30.
45
   Compl. ¶ 31.
46
   Compl. ¶¶ 31, 34.
47
   Compl. ¶ 34.
48
   Compl. ¶ 34.

                                         11
       Also in November of 2018, GPB announced that it was temporarily

suspending redemptions by limited partners and not accepting new capital from

investors, pending its attempt to resolve accounting and financial reporting issues at

the Partnerships.49 By this point, investors were expecting restated 2015 and 2016

financials as well as audited 2017 financial statements that had not yet been

provided.     However, in March, 2019, GPB informed limited partners of the

Partnerships that it would not be providing Schedule K-1 documents before the April

15, 2019 tax filing deadline.50 And when April arrived, GPB disclosed that the

audits of the Partnerships were being delayed due to internal deficiencies.51 GPB

again provided a deadline for the financial statements: June 30, 2019 for the June,

2017 audits and September 30, 2019 for the June, 2018 audits. 52

       The June 30th deadline was, again, not met. 53 GPB informed limited partners,

in June, 2019, that the audits for 2016, 2017, and 2018 would all be released on

September 30, 2019.54 And, in September, 2019, GPB again delayed the deadline,

stating that as a result of SEC and FBI investigations, it expected that audits would

be completed by the end of 2019. 55 In November of 2019, GPB’s entire Audit



49
   Compl. ¶ 33.
50
   Compl. ¶ 37.
51
   Compl. ¶ 38.
52
   Compl. ¶ 38.
53
   Compl. ¶ 39.
54
   Compl. ¶ 39.
55
   Compl. ¶ 41.

                                         12
Committee resigned and GPB’s new auditor suspended its pending work

indefinitely. 56 As a result, as of the filing of the Complaint, GPB has still not

released audited financial statements for the years 2015 through 2018.57

              4. The Related SEC and FBI Investigations

       In October, 2019, a federal indictment was unsealed—that indictment charged

GPB’s Managing Director and Chief Compliance Officer, Michael Cohn, with

obstruction of justice relating to an SEC investigation of GPB.58 According to the

indictment, Cohn worked for the SEC’s Enforcement Division from September,

2018, until October, 2018. 59 While there, he retrieved information concerning an

investigation of GPB. 60 At the same time, he interviewed with GPB and related that

he had inside information about the SEC’s investigation.61 GPB hired Cohn for an

executive position and paid him $400,000 a year—a position he began in October of

2018, right after leaving the SEC. 62 After the indictment was unsealed, GPB

scrubbed all mentions of Cohn from its website. 63




56
   Compl. ¶¶ 42, 45.
57
   Compl. ¶ 42.
58
   Compl. ¶ 43.
59
   Compl. ¶ 43.
60
   Compl. ¶ 43.
61
   Compl. ¶ 43.
62
   Compl. ¶ 43.
63
   Compl. ¶ 43.

                                        13
              5. The Partnerships’ Current Situation

       The Partnerships are now under several investigative proceedings and are the

subject of arbitrations and litigation relating to the problems detailed above.64 For

example, the SEC is still investigating the possibility of securities fraud in

connection with the marketing of the Partnerships.65        The Financial Industry

Regulatory Authority (“FINRA”) is also investigating the Partnerships, and

investors have filed arbitrations with FINRA against broker-dealers who sold them

units in the Partnerships. 66 And the Commonwealth of Massachusetts is also

investigating broker-dealers that helped GPB market the Partnerships.67

       In addition, the involvement of GPB and its executives in other investigations

and litigation tends to rope the Partnerships into the chaos. For example, in the

summer of 2018, the U.S. Attorney for the Eastern District of New York subpoenaed

GPB as part of a joint investigation of the FBI and the New York City Business

Integrity Commission (the “BIC”) targeting GPB’s waste management fund. On

February 28, 2019, both the FBI and the BIC raided GPB’s Manhattan office—an

office it shares with the Partnerships.




64
   Compl. ¶ 46.
65
   Compl. ¶ 47.
66
   Compl. ¶ 48.
67
   Compl. ¶ 49.

                                          14
       The uncertainty caused Fidelity Investment’s National Financial Services to

announce that it would need to remove GPB’s private placements—such as the

Partnerships—from its platform within 90 days if it could not determine their true

value.68 GPB, in response, admitted that the value of its portfolio had declined from

approximately $1.8 billion to approximately $1.1 billion.69 In particular, GPB

reported on December 31, 2018, that Holdings II had lost 25.4% of its fair market

value and Auto had lost 39% of its fair market value. 70

       C. Procedural History

       The Plaintiffs made a demand on GPB for an inspection of the Partnerships’

books and records relating to, among other things, the failure to provide audited

financial statements on August 30, 2019.71 On January 28, 2020, the Plaintiffs filed

a derivative Complaint, seeking declaratory relief that GPB, Gentile, Lash, and

Schneider had either breached fiduciary duties to the Partnerships and/or aided and

abetted breaches of fiduciary duty and monetary damages. 72 On April 8, 2020,

Schneider, GPB, Holdings II, Auto, and Gentile filed their Motions to Stay or

Dismiss.73 Lash joined the other Defendants’ Motions to Stay or Dismiss on May


68
   Compl. ¶ 57.
69
   Compl. ¶ 57.
70
   Compl. ¶ 58.
71
   Compl. ¶ 40.
72
   Compl., Relief Requested, ¶¶ a–b, e.
73
   Def. Jeffry Schneider’s Mot. To Stay or Dismiss, Dkt. No. 26; Defs. GPB Capital Holdings LLC
and Nominal Defs. GPB Holdings II, LP and GPB Automotive Portfolio, LP Mot. To Dismiss or
Stay, Dkt. No. 28; Def. David Gentile’s Mot. To Stay or Dismiss, Dkt. No. 29.

                                              15
11, 2020. 74 I heard oral argument on the Motions on July 7, 2020, and denied the

Defendants’ Motions to Stay from the bench. 75 What remains are their Motions to

Dismiss, which I now largely deny.

                                      II. ANALYSIS

       The Defendants collectively make four arguments that apply to all the

Defendants in favor of their Motions to Dismiss, and which I will address before

turning to the defendant-specific arguments.           First, the Defendants argue that

demand is not excused because GPB’s potential liability is insufficient to render it

unable to exercise its business judgment. Second, the Defendants contend that the

Plaintiffs’ own allegations, i.e., allegations not sourced from other pleadings,

constitute only a failure to provide financial statements, which is a breach of the

Limited Partnership Agreements, but not a breach of fiduciary duties. This argument

relies on the assumption that incorporation of factual allegations from other

pleadings has either less force than a factual allegation raised by the Plaintiffs from

their own knowledge or no force at all—a contention that has implications for both

the demand futility issue and the breach of fiduciary duty issue and which I discuss

in Section II.B. infra. Third, the Defendants point to the Limited Partnership

Agreements of the Partnerships, which contain a limitation of liability provision, and


74
  Def. Jeffrey Lash’s Joinder in Briefs in Support of Mot. To Dismiss or Stay, Dkt. No. 35.
75
 Tr. of July 7, 2020, Oral Arg. Via Zoom on Defs.’ Mots. To Dismiss or Stay and Rulings of the
Court on Defs.’ Mots. To Stay, at 25, Dkt. No. 64.

                                             16
argue that it means that fiduciaries may only be held liable for bad faith. That

provision provides that

      [t]he General Partner and its Affiliates shall not be liable to the
      Partnership or any Partner for . . . liabilities incurred . . . in connection
      with or resulting from . . . any decisions made by, or actions taken or not
      taken by, the General Partner or its Affiliates, so long as [they] . . . acted
      in good faith and in a manner [they] reasonably believed to be in, or not
      opposed to, the best interests of the Partnership and [their] conduct did
      not constitute gross negligence, fraud, or willful or wanton
      misconduct.76

The Complaint, per the Defendants, does not state a claim for bad faith against GPB

or Gentile. And fourth, the Defendants argue that no breach of fiduciary duty has

occurred—and therefore no aiding and abetting can have occurred—because GPB’s

duty to disclose financial statements is a contractual duty rather than a fiduciary one.

      I find none of these arguments persuasive and conclude that it is reasonably

conceivable that GPB has breached its fiduciary duties to the Partnerships. I further

find it reasonably conceivable that Gentile, as the undisputed controller of GPB,

owes fiduciary duties to the Partnerships because it is reasonably conceivable that

he exercised control over the Partnerships’ assets. Finally, I find it reasonably

conceivable that Schneider and Lash knowingly participated in Gentile’s alleged




76
  Def. Jeffry Schneider’s Opening Br. in Supp. of Mot. To Stay or Dismiss 22 (“Schneider
Opening Br.”), Dkt. No. 27.

                                           17
breaches of fiduciary duty. Accordingly, the Defendants’ Motions to Dismiss the

substantive counts are denied.77

       A. Demand is excused as to all the Defendants.

       Under 

6 Del. C

. § 17-1001, a limited partner seeking to proceed derivatively

must make a demand on the general partner to pursue the claim, unless such a

demand would be “not likely to succeed.” The Defendants collectively argue that

demand is not excused because the Plaintiffs have failed to make “any allegations as

to the management of GPB . . ., its officers or its management committees.”78 They

contend that the Plaintiffs’ allegations regarding demand futility “are too general and

conclusory to satisfy Delaware law.” 79 In applying the demand requirement of the

Limited Partnership Act, our courts have mined much of the rich vein of law existing

in regard to the similar demand requirement imposed by Rule 23.1 in the corporate

arena.80 Pertinent here, to excuse demand on a general partner on futility grounds,

supportive facts (like those sufficient to excuse demand under Rule 23.1) must be

pled “with particularity;” 81 conclusory assertions are insufficient to sustain the



77
   The Plaintiffs also sought declaratory relief. Compl. ¶ 79. Because that relief is duplicative of
the counts alleging breaches of fiduciary duty, I dismiss the count for declaratory judgment without
prejudice, Section II.D. infra.
78
   Schneider Opening Br. 17.
79
   The GPB Defendants’ Opening Br. in Supp. of their Mot. To Dismiss or Stay (“GPB Opening
Br.”) 18, Dkt. No. 28.
80
   See, e.g., Seaford Funding Ltd. P’ship v. M&M Assocs. II, L.P., 

672 A.2d 66

, 70 (Del. Ch. 1995)
(“[C]orporate standards apply to limited partnerships in the ‘demand excused’ analysis.”).
81
   

6 Del. C

. § 17-1003.

                                                18
burden. There are differences in the application of the two demand requirements,

however, as I address below.

       The Complaint alleges that demand would be futile here. The Defendants

argue that the allegations lack specificity, in that they omit details about how the

general partner is managed. The Defendants suggest that I import corporate demand

law, which in this situation would require that I employ the test set out by our

Supreme Court in Rales v. Blasband: could those who direct the entity bring their

business judgment to bear on behalf of the entity in considering the demand at

issue? 82 Because the Complaint omits the details of how GPB is managed, the

Defendants contend that the Plaintiffs cannot meet their burden to demonstrate that

it is reasonably conceivable that demand is futile. The arguments of the Defendants,

however, fail to note that demand here would be made on the entity, GPB, and not

its directors or managers. 83 They also omit two important details pled in the

complaint: (i) GPB is wholly owned and therefore controlled by Gentile, its CEO,

and (ii) Gentile is alleged, with particularity, to have wrongfully diverted funds of

the partnerships to himself and the other individual defendants.




82
   

634 A.2d 927

, 934 (Del. 1993) (“[A] court must determine whether or not the particularized
factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the
time the complaint is filed, the board of directors could have properly exercised its independent
and disinterested business judgment in responding to a demand.”).
83
   Gotham v. Hallwood Realty Partners, L.P., 

1998 WL 832631

, at *5 (Del. Ch. Nov. 10, 1998).

                                                19
       Before proceeding with this analysis, it is worth noting that, although Gentile

is implicated in the demand futility analysis, had the Plaintiffs sought to make a

demand, that demand would not be made upon Gentile himself, nor upon the

managers of GPB. Where the general partner of a partnership is an entity rather than

a person, “it should be sufficient to make the demand upon the general partner,

whatever its form.” 84 After all, “it is the general partner who owes the limited

partners fiduciary duties, not the management of the general partner, even though

they make the decisions for that business entity.” 85 Thus, “in the case of a corporate

[or other entity] general partner, the demand excusal inquiry focuses on the general

partner itself (as an entity),” and not on those who direct corporate affairs. 86

       Why should this be? Demand in the corporate context is on a board composed

of human beings, each of whom is presumed to be acting in the corporate interest,

but each liable to self-interest and divided loyalties that may cause the board to be

unable to bring its business judgement to bear, excusing demand. With respect to

general partners of limited partnerships, these are—not always, but typically—

entities themselves. Here, the general partner is a limited liability company. Such

entities have no lusts to slake, no egos to protect, no dreams of wealth or power and

no sense of duty to others. Their existence is solely maintained by the human beings


84

Id. 85


Id. 86

   Wenske v. Blue Bell Creameries, Inc., 

2018 WL 3337531

, at *18 (Del. Ch. July 6, 2019).

                                              20
who control them. Because the Plaintiffs have failed to allege who those managers

are, or any specific reasons they would be unable to bring their business judgment

to bear upon demand, the Defendants argue that the Complaint fails to satisfy Rales.

But this argument misses the mark. GPB is the general partner whose fiduciary duty

runs to the Partnerships.87 The mangers of GPB, in contrast, owe duties to GPB and

its beneficial owner, not the Partnerships. If GPB (or Gentile) has a substantial risk

of liability or harm from the pursuit of this litigation, GPB’s managers cannot be

expected, in light of their duty to GPB, to cause GPB to approve the litigation upon

Plaintiffs’ demand. That is why the focus must be on the entity general partner, and

not its directors or managers. 88

       However, whether demand on GPB is excused depends on whether the

Plaintiffs have “pled particularized facts raising a pleading-stage doubt about the

independence” of GPB. 89 Gentile is the sole member—and therefore controller—of

GPB. 90 By definition, then, GPB is not independent of Gentile. This would be of



87
   See Gotham, 

1998 WL 832631

, at *5 (“[I]t is the general partner who owes the limited partners
fiduciary duties, not the management of the general partner, even though they make the decisions
for that business entity.”).
88

Id. (rejecting the “proposed

rule” that the Court should consider the “form of entity of each
general partner in order to determine whether the entity’s internal decision making individuals . . .
were independent” because it “looks not to the person owing the fiduciary duty, but to individuals
who make decisions in that entity’s best interest” (emphasis added)).
89
   Delaware Cty. Employees Ret. Fund v. Sanchez, 

124 A.3d 1017

, 1020 (Del. 2015) (internal
quotation marks omitted).
90
   Kahn v. Lynch Commc’n Sys., Inc., 

638 A.2d 1110

, 1113 (Del. 1994) (noting that a shareholder
is “only” a controller “if it owns a majority interest in or exercises control over the business affairs
of the corporation” (emphasis removed)).

                                                  21
no moment if the Complaint had nothing to do with Gentile. But that is not the

case—indeed, Gentile’s conduct, which includes exercising control of the

Partnerships through GPB, is at the very heart of the Plaintiffs’ Complaint.

       “A general partner has ‘a disabling interest for pre-suit demand purposes’

when it faces a ‘substantial likelihood’ of liability in connection with the derivative

claim(s) asserted against it.”91 The same can be said for general partners controlled

by individuals or entities that face a substantial likelihood of liability in connection

with such claims. Here, the Plaintiffs have alleged that Gentile engaged in self-

dealing conduct that harmed the Partnerships. Those specific self-dealing-conduct

allegations are not unique to this case—indeed, they appear in at least three different

litigations where Gentile is a defendant and which are incorporated into the

Complaint: the DiBre Counterclaim, the Rosenberg Complaint, and the

Massachusetts Enforcement Complaint.                 The allegations in these three cases

complement each other. 92 For example, the Complaint alleges, by reference to the

DiBre Counterclaim, that “Gentile and Schneider created an entity, LSG, to which

they directed more than $4 million from reinsurance funds and manufacturer rebates

that should have gone to dealerships and ultimately to the Partnerships.”93 Similarly,



91
   Wenske, 

2018 WL 3337531

, at *18 (quoting Ryan v. Gifford, 

918 A.2d 341

, 355 (Del. Ch.
2007)).
92
   At least one of these pleadings is accompanied by a verification attesting to the accuracy of the
facts alleged.
93
   Compl. ¶ 17.

                                                22
the Complaint notes that the Rosenberg Complaint alleges that “[d]ealership funds

have also been siphoned off to LSG Auto Wholesale, an entity named for Lash,

Schneider (a close associate of Gentile), and Gentile.”94 And the Massachusetts

Enforcement Complaint alleges that “LSG Auto (owned partially by Gentile and

Lash), received payments from GPB Capital-owned dealerships, without ever

disclosing this fact to investors.” 95

       Thus, any litigation—including the litigation before me—aimed at

determining whether those allegations are true could lead to liability in all litigations

where Gentile may be liable for that conduct. If these allegations prove true, Gentile

faces a substantial likelihood of liability, which in turn makes prosecution of this

matter by a Gentile-controlled entity problematic.96 It is reasonably conceivable that

GPB is unable to evaluate a demand using its business judgment, because the

litigation that the Plaintiffs advocate risks substantial liability against its controller.

Although the Plaintiffs’ demand would be made on GPB, Gentile’s control of GPB

and his substantial likelihood of liability stemming from the Complaint and those

facts that may come to light in this litigation are particularized allegations that make

it reasonably conceivable that GPB would be unable to exercise its business



94
   Compl. ¶ 20.
95
   Mass. Enforcement Compl. 7–8.
96
   The Defendants’ rebuttal regarding the Partnerships’ Limited Partnership Agreements does not
persuade me that Gentile will not face a substantial likelihood of liability for reasons addressed in
part II.B.1. infra.

                                                23
judgment with regards to any demand made in connection with the Plaintiffs’

allegations.

         The allegations of the Complaint also involve GPB directly. The Complaint

alleges that GPB has refused to provide financial reporting called for in its formative

documents. The Defendants contend that this is merely a contractual obligation

running directly to the limited partners, and not a part of any demand in way of

derivative litigation. But the Complaint goes beyond that—it alleges that the

repeated failures to provide required financials are part of a scheme to hide the

financial depredations to the Partnerships wreaked by Gentile and his confreres.97

The duty to disclose may be contractual, but a disloyal or grossly negligent failure

to meet that contractual obligation invokes fiduciary duties.

         Demand is also futile as to Gentile’s alleged associates, Lash and Schneider.

Lash and Schneider are alleged to have aided and abetted Gentile’s and GPB’s

breaches of fiduciary duty; thus, a finding of liability for them is conditioned on

liability for Gentile and GPB. Because GPB is unable to exercise its business

judgment with regards to its own or Gentile’s potential liability, it is reasonably

conceivable that third-party liability conditioned on such liability is also not a

possibility GPB can consider in the exercise of its business judgment.




97
     Compl. ¶ 23.

                                           24
       The Defendants make much of our precedent stating that demand “is not

excused solely because the directors would be deciding to sue themselves.”98 True.

Departure from this rubric would make allegations that demand is excused self-

proving. But such language must work in tandem with the well-established rule that

“[a] general partner has ‘a disabling interest for pre-suit demand purposes’ when it

faces a ‘substantial likelihood’ of liability in connection with the derivative claim(s)

asserted against it.”99 Departure from this rubric would render faithless fiduciaries

immune to judicial review. This is not a case where demand is being excused solely

because GPB is a named defendant. Here, the Complaint directly implicates conduct

by GPB and its controller, Gentile, in tandem with Lash and Schneider, which could

result in a substantial likelihood of liability for Gentile, in this case or in combination

with others. Accordingly, demand is excused.

       B. The Plaintiffs have stated a claim for breach of fiduciary duty against
       GPB and Gentile.

       I pause here to address the Defendants’ argument that the Complaint is

improperly regurgitating allegations in other pleadings. Without addressing the

logical or persuasive force of allegations incorporated by reference, I first note that,

under Delaware Court of Chancery Rule 10, “[s]tatements in a pleading may be



98
   Schneider Opening Br. 19 (quoting In re Citigroup Inc. S’holder Deriv. Litig., 

964 A.2d 106

,
121 (Del. Ch. 2009)).
99
   Wenske v. Blue Bell Creameries, Inc., 

2018 WL 3337531

, at *18 (quoting Ryan v. Gifford, 

918 A.2d 341

, 355 (Del. Ch. 2007)).

                                              25
adopted by reference in a different part of the same pleading or in another pleading

or in any motion.”100 Second, I need not address the full effect of allegations

incorporated by reference in this matter, given that we are at the Motion to Dismiss

stage and the Complaint need only give the Defendants notice of the claims against

them. 101 As explained above, with regards to demand futility, the existence of

several other litigations that specifically allege Gentile’s self-dealing operation of

GPB’s portfolio companies means Gentile’s exposure to potential liability from

those allegations is not insignificant, implicating GPB’s ability to respond to a

demand. With regards to the Motions to Dismiss for failure to state claims of

breaches of fiduciary duty under Rule 12(b)(6), the need for specific pleading is

absent.102 The complaint must simply allege facts that, if true, and together with the

reasonable inferences therefrom, make it reasonably conceivable that the elements

of breach of fiduciary duty are met: that a defendant was bound by such duty, and

breached it. Here, GPB is a general partner and owes fiduciary duties to the limited

partners. The remaining question is allegations of breach. I need not give the

incorporated allegations the full force of allegations made from the Plaintiffs’ own



100
    Emphasis added.
101
    Malpiede v. Townson, 

780 A.2d 1075

, 1083 (Del. 2001) (The motion to dismiss “standard is
based on the ‘notice pleading’ requirement established in Ct. Ch. R. 8(e) and is ‘less stringent than
the standard applied when evaluating whether a pre-suit demand has been excused in a stockholder
derivative suit filed pursuant to Chancery Rule 23.1.’”) (quoting Solomon v. Pathe Commc’ns
Corp., 

672 A.2d 35

, 38 (Del. 1996)).
102

Id. 26

knowledge to find that the incorporated allegations were sufficient to allege breaches

of duty, and to fulfill the notice function of the Complaint by putting the Defendants

on notice of the allegations against them. Accordingly, I need not decide whether to

give full weight to the incorporated allegations. I find the Complaint sufficient to

state a claim under Court of Chancery Rule 12(b)(6).

                 1. The Limited Partnership Agreements of the Partnerships do not
                 limit liability for all breaches of fiduciary duty except bad faith.

          The Defendants make one overarching defense regarding liability for breaches

of fiduciary duty: notwithstanding that the general fiduciary duties inhere in the

General Partner, the Partnerships’ Limited Liability Agreements contain damages

exculpation provisions for breaches of fiduciary duty by GPB and its affiliates. As

I stated above, that provision, which is the same in both Auto and Holdings II’s

Limited Partnership Agreements, provides that

          [t]he General Partner and its Affiliates shall not be liable to the
          Partnership or any Partner for . . . liabilities incurred . . . in connection
          with or resulting from . . . any decisions made by, or actions taken or not
          taken by, the General Partner or its Affiliates, so long as [they] . . . acted
          in good faith and in a manner [they] reasonably believed to be in, or not
          opposed to, the best interests of the Partnership and [their] conduct did
          not constitute gross negligence, fraud, or willful or wanton
          misconduct.103




103
      Schneider Opening Br. 22.

                                               27
       The Defendants point out that this safe harbor applies to the actions of Gentile;

because he controls GBP, he is a designated “affiliate” of GPB under the LPA.104

The Defendants argue that this limitation means that they cannot be liable unless the

Plaintiffs allege and make a reasonably conceivable showing of bad faith, which (per

the Defendants) they have not done. I disagree with this interpretation of the Limited

Partnership Agreements. First, the Defendants’ interpretation would cause the entire

provision after the term “acted in good faith” to be surplusage—and I must avoid a

construction that renders contractual language meaningless or surplusage.105

Second, the Defendants appear to be confusing the conjunctive nature of the

provision’s conditions precedent for a disjunctive one; their interpretation, as I

understand it, is that liability is limited if the conduct is in good faith or in a manner

that is not opposed to the best interests of the Partnership, or not grossly negligent,

fraudulent, or willful or wanton misconduct. They thus arrive at a much more

expansive limitation on liability. But that is not what the provision says.

       Indeed, a plain reading of the provision shows that the provision’s limitation

on liability applies only when all three conditions are met, instead of requiring only

one condition. Specifically, in order for the provision to take effect, the liability must



104
    DeFelice Decl., Ex. A at 4; see David Gentile’s Reply Joinder in support of Mot. To Stay or
Dismiss and Reply Br. in support of Mot. To Stay or Dismiss 6, Dkt. No. 57.
105
    Sunline Commercial Carriers, Inc. v. CITGO Petroleum Corp., 

206 A.3d 836

, 846 (Del.
2019) (“The contract must also be read as a whole, giving meaning to each term and avoiding an
interpretation that would render any term ‘mere surplusage.’”).

                                              28
be in connection to actions taken “in good faith and in a manner . . . reasonably

believed to be in, or not opposed to, the best interests of the Partnership and” the

actions must “not constitute gross negligence, fraud, or willful or wanton

misconduct.” In other words, although the Defendants are correct that the safe

harbor provision does not exculpate liability connected to actions taken in bad faith,

they are not correct that bad faith actions are the only conduct to which exculpation

will not apply. For example, because one of the three conditions precedent is that

the actions “must not constitute gross negligence,” liability stemming from grossly

negligent conduct would also not be eliminated.

       Nor can it be said that the three conditions precedent all mean the same

thing—i.e., no bad faith. It is well-settled under Delaware law that gross negligence

is not bad faith.106 Here, the alleged wrongdoings include the extraction of wealth

from the Partnerships and to the controller. By definition, such extraction is opposed

to the best interests of the Partnerships and fails to satisfy the conditions precedent

to the limitation on liability provision. 107




106
     In re Walt Disney Co. Derivative Litig., 

906 A.2d 27

, 64–65 (Del. 2006) (“[T]o afford
guidance[,] we address the issue of whether gross negligence (including a failure to inform one’s
self of available material facts), without more, can also constitute bad faith. The answer is clearly
no.”).
107
    In any event, if, as alleged, Gentile intentionally looted the partnerships, and used his control
over GPB to cause it to cease financial reporting to cover up his malfeasance, those cannot be
actions in good faith.

                                                29
             2. The Plaintiffs have stated a claim for breach of fiduciary duty
             against GPB.

      Next, the Defendants argue that the Plaintiffs have failed to state a claim for

breach of fiduciary duty against GPB. They contend that the only allegations

regarding GPB’s conduct “are centered around . . . [GPB’s] alleged failure to provide

audited financial statements or alleged misstatements within the financials.”108 Such

claims, according to the Defendants, are breach of contract claims because the duty

to provide audited financial statements is provided for in the Partnerships’ Limited

Partnership Agreements. 109 For their part, the Plaintiffs contend that GPB has

breached more than a contractual duty to provide audited financial statements—they

contend that GPB has engaged in self-dealing at the direction of Gentile. 110

      I agree with the Plaintiffs’ characterization of the Complaint. First, the

allegations regarding financial statements go beyond simply failure to meet

contractual duties: the reasonable inference from the Complaint is that Gentile

caused the Partnerships to promise an 8% annual return on investment, and that he

and his associates diverted funds belonging to the Partnerships rendering that

impossible. Accordingly, Gentile and GPB were reduced to employing the left-

handed Ponzi scheme of paying contributions out of the limited partners’ capital




108
    Schneider Opening Br. 20–21; see GPB Opening Br. 20–21.
109
    Schneider Opening Br. 20–21; see GPB Opening Br. 20–21.
110
    Compl. ¶¶ 3, 17, 20–21.

                                           30
account to preserve the façade of profitability, to the detriment of the Partnerships.

Ultimately, GPB had to breach its financial reporting requirements to conceal the

foregoing and permit it to continue. These are not actions taken in good faith or in

the interest of the partnership.

       Second, the Defendants ignore the fact that Gentile—the sole owner and

CEO—controls GPB as a matter of Delaware law. To the extent that Gentile

engaged in self-dealing transactions or transactions that were opposed to the

Partnerships’ best interests, GPB would have been the vehicle through which Gentile

operated and GPB would have breached its fiduciary duties by virtue of allowing

Gentile to use it in that manner. The allegations that Gentile caused GPB to act

against the best interests of the Partnerships are reasonably conceivable based on the

Complaint.

              3. The Plaintiffs have stated a claim for breach of fiduciary duty
              against Gentile.

       As to Gentile, the Defendants argue that he does not owe any fiduciary duties

to the Partnerships because the “Plaintiffs make no attempt to plead that Mr. Gentile

in fact exerted control over the assets of Automotive or Holdings II, much less that

he used that control to his own benefit at the expense of the partnerships.” 111 The

Plaintiffs counter that Gentile’s position—that a general partner’s controller does


111
   Def. David Gentile’s Joinder in Br. in Supp. of Mot. To Stay or Dismiss and Opening Br. in
Supp. of Mot. To Stay or Dismiss 4 (“Gentile Opening Br.”), Dkt. No. 30.

                                             31
not owe fiduciary duties to the limited partnership unless the controller exerts control

over the limited partnership’s assets—is “wrong as a matter of law.” 112

       Preliminarily, I note that the Plaintiffs’ statement that “‘[u]nder settled

precedent,’ such controlling persons [as officers of a general partner] are deemed

‘fiduciaries of the limited partners, and subject to liability for implementing unfair,

self-dealing transactions’” 113 overstates then-Vice Chancellor Strine’s opinion,

which it cites. That case, Gotham Partners, L.P. v. Hallwood Realty Partners, L.P.,

when quoted in full, states that “[u]nder settled precedent, directors of corporate

general partners of limited partnerships have been held to be fiduciaries of the

limited partners, and subject to liability for implementing unfair, self-dealing

transactions.” 114 Gotham Partners does not say that such controllers “are deemed”

fiduciaries; it only says they have been so deemed in some precedent cases—in other

words, where adequate allegations of wrongful exercise of control exist.

       However, I conclude at this pleading stage that Gentile does indeed owe

fiduciary duties to the Partnerships and that it is reasonably conceivable that he

violated them. “Under the . . . largely unquestioned precedent of USACafes,” 115 “a

corporate general partner’s fiduciary duties to the limited partnership may extend to


112
    Pls.’ Omnibus Answering Br. in Opp’n to Defs.’ Mots. To Dismiss and Mots. To Stay 48 (Pls.’
Answering Br.”), Dkt. No. 36.
113
    Pls.’ Answering Br. 47 (emphasis added).
114
    

795 A.2d 1

(Del. Ch. 2001) (emphasis added).
115
    Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., 

2000 WL 1476663

, at *19 (Del. Ch.
Sept. 27, 2000).

                                              32
the general partner’s controllers, if such persons exercise control over the limited

partnership’s property.” 116 Contrary to Gentile’s Opening Brief, which claims the

Complaint “makes no attempt to plead” control over the Partnership’s assets, the

Complaint alleges that “Gentile and Schneider created an entity, LSG, to which they

directed more than $4 million from reinsurance funds and manufacturer rebates that

should have gone to dealerships and ultimately to the Partnerships.” 117 That

allegation, if true, would mean Gentile exercised control over funds that belonged to

the Partnerships and thus owed fiduciary duties to the Partnerships—control that I

must infer at this pleading stage that he asserted by using GPB’s position as the

Partnerships’ general partner. This Court has held in the corporate context that

“[l]iability for breach of fiduciary duty . . . extends to outsiders who effectively

controlled the corporation.” 118 The same follows for limited partnerships—those

who effectively control a partnership, via control of its assets, owe fiduciary duties

to the entity. 119



116
    Wenske v. Blue Bell Creameries, Inc., 

2018 WL 3337531

, at *17 (Del. Ch. July 6, 2018) (citing
In re USACafes, L.P. Litig., 

600 A.2d 43

(Del Ch. 1991) (emphasis added)).
117
    Compl. ¶ 17 (emphasis added). Most of the allegations in the Complaint concern self-dealing
using assets of GPB-owned entities without specifying which entity. However, at this stage of the
proceedings, such allegations are sufficient, to my mind, to show a reasonable conceivability that
the Defendants may have engaged in self-dealing using assets of the Partnerships.
118
    In re Ezcorp Inc. Consulting Agreement Derivative Litig., 

2016 WL 301245

, at *9 (Del. Ch.
Jan. 25, 2016).
119
    

USACafes, 600 A.2d at 48

(“I understand the principle of fiduciary duty, stated most generally,
to be that one who controls property of another may not, without implied or express agreement,
intentionally use that property in a way that benefits the holder of the control to the detriment of
the property or its beneficial owner.”).

                                                33
      The Complaint has incorporated pleadings that allege that Gentile engaged in

several self-dealing transactions, including siphoning $4 million in funds into LSG,

transferring $201,706 to other entities under his control, and diverting $2,000,000 in

revenue to entities under his control under the guise of management fees. 120 Such

allegations are sufficient to support a reasonable conceivability that Gentile

exercised control over the assets of the Partnerships via his control of GPB and

accordingly owes the Partnerships fiduciary duties. Further, those same allegations

of self-dealing extraction of the Partnerships’ assets are sufficient to show a

reasonable conceivability that Gentile has breached his fiduciary duties to the

Partnerships.

      C. The Plaintiffs have stated a claim for aiding and abetting a breach of
      fiduciary duty against Schneider and Lash.

      For an aiding and abetting claim to survive a motion to dismiss, the Complaint

must allege facts that show a reasonable conceivability of: “‘(1) the existence of a

fiduciary relationship, (2) a breach of the fiduciary’s duty, . . . (3) knowing

participation in that breach by the defendants,’ and (4) damages proximately caused

by the breach.” 121 I have already found it reasonably conceivable that both GPB and

Gentile owed and breached fiduciary duties to the detriment of the Partnerships,




120
  Compl. ¶¶ 17, 20.
121
   Malpiede v. Townson, 

780 A.2d 1075

, 1096 (Del. 2001) (quoting Penn Mart Realty Co. v.
Becker, 

298 A.2d 349

, 351 (Del. Ch. 1972)).

                                          34
satisfying elements (1), (2), and (4). The third element, “knowing participation,” is

commonly described as having two prongs: knowledge and participation. In other

words, the Plaintiffs must show scienter—i.e., that it is reasonably conceivable that

“the alleged aider and abettor knew that the fiduciary [was] breaching his fiduciary

duty and then . . . participate[d], in some way, in that breach.” 122 This pleading

requirement is stringent. It prevents exposing to liability those who innocently deal

with a faithless fiduciary. 123

       The Plaintiffs have alleged that Lash and Schneider both participated in at

least one of Gentile’s self-dealing transactions. Specifically, Lash is alleged to have

“funneled nearly $2,000,000 in revenue to entities [Gentile and Lash] controlled,

including some under the guise of ‘management fees.’ For the year 2015, $201,7076

[sic] was transferred to Emdykycol, Inc. . . . . Upon information and belief,

Emdykycol, Inc. is owned by Lash and . . . Gentile.”124 And Schneider is alleged to

have “created an entity, LSG, to which [he and Gentile] directed more than $4

million from reinsurance funds and manufacturer rebates that should have gone to




122
    In re Xura, Inc. Stockholder Litig., 

2019 WL 3063599

, at *3 (Del. Ch. July 12, 2019).
123
    For example, this Court has previously noted that “arm’s-length bargaining is privileged and
does not, absent actual collusion and facilitation of fiduciary wrongdoing, constitute aiding and
abetting.” Morgan v. Cash, 

2010 WL 2803746

, at *8 (Del. Ch. July 16, 2010). This “long-
standing rule . . . helps to safeguard the market for corporate control by facilitating the bargaining
that is central to the American model of capitalism.”

Id. 124

    Compl. ¶ 20.

                                                 35
dealerships and ultimately to the Partnerships.”125 Accordingly, the participation

prong of the third element of aiding and abetting is satisfied.

       Whether Lash and Schneider are alleged to have known about the fiduciary

duty breach requires closer analysis. Schneider, at least, is alleged to have been

heavily involved in the marketing of GPB’s dealerships, which may have included

the Partnerships, at the direction of Gentile. 126 According to the allegations of the

Massachusetts Enforcement Complaint, “[t]he line between Gentile, Schneider,

GPB . . . , and Ascendant Alterative Strategies and Ascendant Capital is blurred

beyond recognition. The firms even share office space in Austin, Texas. The only

difference between GPB Capital and the Ascendant entities is the e-mail addresses

used. Gentile profited directly whenever GPB . . . paid Ascendant Alternative

Strategies selling commissions.”127 Schneider’s involvement at Gentile’s request

and his alleged involvement with GPB make it reasonably conceivable—at this

pleading stage—that he both knew that Gentile owed fiduciary duties to the limited

partnerships Schneider was marketing and knew that Gentile was breaching those

duties. Lash, on the other hand, was directly employed by GPB; by dint of his

employment, he would have known that Gentile controlled GPB and through it, the




125
    Compl. ¶ 17.
126
    Mass. Enforcement Compl. 3.
127
    Mass. Enforcement Compl. 4.

                                          36
Partnerships, and thus would have owed fiduciary duties and was breaching them. 128

While the scienter pleading requirement is stringent, at the motion-to-dismiss stage,

all reasonable inferences must be drawn in favor of the Plaintiffs. 129 Accordingly, I

conclude that Lash’s employment by GPB and Schneider’s involvement with GPB

create a reasonable conceivability that they knew that Gentile owed fiduciary duties

to the Partnerships, he was breaching those duties by self-dealing, and they

participated in those breaches.

      D. The Plaintiffs’ request for declaratory judgment is redundant and is
      dismissed without prejudice.

      The Plaintiffs request a declaration from this Court that “GPB has engaged in

gross negligence or willful misconduct which has had a material effect on the

Partnerships.”130   They seek this declaration because the Limited Partnership

Agreements of the Partnerships provide that the limited partners may vote to remove

the General Partner after a judicial finding of such conduct.131 However, both the

gross negligence and willful misconduct alleged in this case, if they had material

effects on the Partnerships, would involve breaches of fiduciary duties.

      “Declaratory Judgment is a statutory action; it is meant to provide relief in

situations where a claim is ripe but would not support an action under common-law


128
    Compl. ¶ 13; see Mass. Enforcement Compl. 5.
129
    Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 

27 A.3d 531

, 536 (Del.
2011).
130
    Compl. ¶ 78.
131
    Compl. ¶77.

                                           37
pleading rules.”132 That is not the case here. Any finding of gross negligence or

willful misconduct here would be congruent with the elements of the fiduciary duty

claims I have found adequately alleged. The declaratory judgment count is thus

duplicative of the breach of fiduciary duty counts, and is dismissed.

                                 III. CONCLUSION

      The Defendants’ Motions to Dismiss are DENIED in part and GRANTED in

part. The parties should submit a form of order consistent with this Memorandum

Opinion.




132
   Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 

2014 WL 6703980

, at
*29 (Del. Ch. Nov. 26, 2014) (emphasis added).



                                            38

Add comment

By

Recent Posts

Recent Comments