# Kapila v. Lewis

> District Court, M.D. Florida · July 17, 2020

URL: https://www.frixlaw.com/law-library/cases/10105512

## Case

- **Court:** District Court, M.D. Florida
- **Decided:** July 17, 2020
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/10105512

## How later opinions describe it (automated extraction)

- holding that “if there was a breach of fiduciary duty by conduct [of the parent’s directors], the proper defendant is the parent itself, as the parent corporation, not the directors of [the parent].”

## Opinion text

UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
TAMPA DIVISION

SONEET R. KAPILA,

Plaintiff,

v. CASE NO. 8:19-cv-1800-T-23TGW

JONATHAN LEWIS,

Defendant.
__________________________________/

ORDER

Confronted with financial distress and a foreseeable, catastrophic liability that
later materialized, the former managers of Laser Spine Institute, LLC and the
affiliated entities (collectively, LSI) allegedly (1) formed a Delaware holding entity,
LSI Holdco LLC, to acquire LSI; (2) caused LSI’s assets to serve as collateral for a
$150 million loan to LSI; (3) distributed $110 million of the loan proceeds to the
managers in exchange for each manager’s interest in Holdco; and (4) amended
Holdco’s LLC agreement — according to the assignee — to ratify the distribution, to
eliminate the managers’ fiduciary duties, and to release Holdco’s claims against the
managers.
The loan, the distribution, and the state-court judgment allegedly caused LSI
to become insolvent and abruptly to cease operating. In accord with Florida law,
LSI appointed an assignee, Soneet R. Kapila, to pursue claims on behalf of LSI. In
four removed actions, each of which the clerk-reassigned to me, the assignee sues a
former manager of Holdco.1 In the original complaint in each action, the assignee
asserted one count for breach of fiduciary duty. After the former managers
reportedly informed the assignee about Delaware’s three-year limitation for breach of

fiduciary duty, the assignee permissively amended the complaint to add seven
counts.
BACKGROUND
The amended complaint alleges the following facts, which are presumed true
in resolving the motions to dismiss. In 2005, LSI formed as an LLC under Florida

law and opened a surgical facility in Tampa, Florida. During the next few years, LSI
formed wholly-owned subsidiaries that operated surgical facilities throughout the
United States. LSI eventually became a national spine-focused orthopedic chain that
performed more than 100,000 procedures in five states and employed more than 600
persons. By 2014, LSI had generated gross revenues exceeding $265 million.

In 2006, Laserscopic Spinal Centers of America sued LSI in the Thirteenth
Judicial Circuit, Hillsborough County, Florida, and claimed that LSI had
misappropriated Laserscopic’s spinal surgery procedure, had poached Laserscopic’s
employees and patients, and had stolen Laserscopic’s confidential information.
Following a bench trial in 2012, the circuit court held LSI liable and awarded

1 No party has moved to consolidate the pending actions, and the benefits of consolidation
appear not to outweigh the procedural confusion typically attending consolidation.
Laserscopic actual damages but declined to award disgorgement damages.
Laserscopic appealed and demanded disgorgement damages — LSI’s profits
resulting from the misappropriation — exceeding $260 million.
Foreseeing the possibility of catastrophic liability if Laserscopic prevailed on

appeal, the managers of LSI allegedly “concocted” a scheme to “loot” LSI’s assets
and to insulate the managers from liability. In December 2012, after Laserscopic
appealed, the managers formed Holdco LLC under Delaware law, caused Holdco to
become the sole member of LSI, and acquired membership interests in Holdco
equivalent to the managers’ membership interest in LSI. During the pendency of the

state-court appeal, the managers of Holdco discovered deficiencies in LSI’s financial
reporting and in 2015 wrote down $34 million in receivables and established a $22.5
million reserve for bad debt. In July 2015, while the appeal pended, the managers of
Holdco caused substantially all of LSI’s assets to serve as collateral for a $150 million
loan from Texas Capital Bank. After LSI received the loan proceeds, the managers

of Holdco caused LSI to transfer $110 million to Holdco and caused Holdco to
distribute the $110 million to the managers as a dividend in exchange for each
manager’s membership interest in Holdco.
After the dividend distribution, LSI’s financial performance deteriorated and
LSI rapidly became unable to satisfy the repayment obligations to Texas Capital

Bank, which in 2016 issued notices of default on the loan. In November 2016, LSI
and Texas Capital Bank entered a release agreement under which Texas Capital
Bank agreed not to “commence . . . any Action against any one or more Investors
with respect to any claims arising out of or related to the [dividend distributions].”
On the day of the release agreement, the managers of Holdco revised Holdco’s LLC
agreement. According to the assignee, this revision (1) eliminated the managers’

fiduciary duties to Holdco, (2) ratified the dividend distribution, and (3) released any
claim for breach of fiduciary duty. Two months later, in January 2017, the Second
District Court of Appeal reversed-in-part the circuit court’s judgment and instructed
the circuit court to award Laserscopic disgorgement damages exceeding $260
million. In March 2019, LSI ceased business operations, and soon after LSI and

Holdco — in accord with Florida law — authorized the assignee to pursue claims on
behalf of LSI and Holdco.
In Count I, the assignee claims that by distributing the dividends the former
managers of Holdco breached a fiduciary duty to LSI, Holdco’s wholly-owned
subsidiary. In Count II, the assignee claims that by distributing the dividends, the

former managers of Holdco breached a fiduciary duty to Holdco. In Count III, the
assignee claims that by amending Holdco’s LLC agreement — purportedly to
insulate themselves from liability — the former managers of Holdco breached a
fiduciary duty to Holdco. In Count IV, the assignee claims a slew of other breaches
of fiduciary duty on behalf of the fourteen LSI entities. In Counts V–VIII, the

assignee claims avoidance and recovery under Florida’s and Delaware’s Uniform
Fraudulent Transfer Acts.
DISCUSSION
Although the conclusions of law in this order remain tentative because this
order discusses complicated and apparently unresolved issues of Delaware corporate
law (a regime rife with subtle distinctions and traps for the unwary or uninitiated),

the assignee adequately alleges facts suggesting breach of fiduciary duty and
permitting further development of the record. But as the careful reader might infer
from the subsequent discussion, the assignee confronts difficult, perhaps
insurmountable, obstacles to prevailing on the merits.
A. Count I

In Count I, the assignee claims under Florida law that each member breached
the fiduciary duty of loyalty to LSI (1) by causing LSI to enter the $150 million
lending agreement and (2) by transferring the loan proceeds to Holdco for “no
consideration and in furtherance of the [managers’] own self-interest.” Moving to
dismiss, the managers argue that, because Holdco is a Delaware LLC and because

under Delaware law a fiduciary of a parent owes no fiduciary duty to a wholly-
owned subsidiary, the managers of Holdco owe no fiduciary duty to LSI. Trenwick
Am. Litig. Tr. v. Ernst & Young, L.L.P., 906 A.2d 168, 191 (Del. Ch. 2006) (“[A]
subsidiary board is permitted to act to benefit its parent, not simply the subsidiary

itself, for the obvious reason that wholly-owned subsidiaries are formed by parents to
benefit the parents, and not for their own sake.”)
Attempting to avoid Trenwick, the assignee relies on In re USACafes, L.P. Litig.,
600 A.2d 43 (Del. Ch. 1991), which recognizes that the fiduciary of a partnership’s
managing partner owes limited fiduciary duties to the partnership and the limited
partners if the affiliate exerts “substantial control” over the partnership’s assets.

Other Delaware chancery decisions, such as Bay Center Apartments Owner, LLC v.
Emery Bay PKI, LLC, 2009 WL 1124451, at *9 (Del. Ch. 2009), extend these
fiduciary duties to a fiduciary of an LLC’s managing member.2 Accordingly, the
assignee argues that under Delaware law the fiduciaries (here, the managers) of the
managing member (here, Holdco) of the LLC (here, LSI) owe fiduciary duties to LSI

because the managers exerted “substantial control” by causing substantially all of
LSI’s assets to serve as collateral for a $150 million loan, $110 million of which
Holdco paid for each manager’s membership interest in Holdco.
The assignee’s argument misses the mark. The limited fiduciary duties under
USACafes arise only if the subsidiary has a minority shareholder. Trenwick, 906 A.2d

at 192 n.66 (“Although it is said in general terms that a parent corporation owes a
fiduciary obligation to its subsidiaries, this obligation does not arise as such unless
the subsidiary has minority stockholders”); Gotham v. Hallwood Realty Pr’s, L.P., 1998
WL 832631, *5 (Del. Ch. 1998) (noting that “the general partner . . . owes the
limited partners fiduciary duties, not the management of the general partner, even

2 In Bay Center, however, the “defendants [did] not challenge the general applicability of
[the USACafes] doctrine in the LLC context.”)
though they make the decisions for that business entity.”) In each decision cited by
the assignee, a fiduciary of the parent allegedly exploited the subsidiary at the
expense of a minority shareholder of the subsidiary. The assignee cites no Delaware
decision holding that a wholly-owned subsidiary can sue a parent’s fiduciary for

breach of a fiduciary duty, and Trenwick holds the opposite. Trenwick, 906 A.2d at
194 (holding that “if there was a breach of fiduciary duty by conduct [of the parent’s
directors], the proper defendant is the parent itself, as the parent corporation, not the
directors of [the parent].”)
Because the assignee alleges no facts suggesting that the LSI subsidiary has a

shareholder other than Holdco (in fact, the assignee alleges that Holdco is “the sole
member and owner of LSI”) or that the assignee has standing to pursue a claim on
behalf of a minority shareholder of LSI, Count I fails to state a claim.3
B. Count II
In Count II, the assignee claims under Delaware law that the managers

breached the fiduciary duty of loyalty to Holdco by distributing $110 million to the

3 Although not cited by the parties, In re TOUSA, Inc., 437 B.R. 447 (Bankr. S.D. Fla. 2010),
applies Delaware law and USACafes to hold that the directors of a parent owe fiduciary duties to the
creditors of an insolvent subsidiary wholly owned by the parent if the directors of the parent caused
the subsidiary’s insolvency. Although the assignee alleges that the managers of Holdco caused LSI’s
insolvency and damaged LSI’s creditors, Count I alleges that the managers breached fiduciary duties
to LSI — not to a creditor. Also, TOUSA appears inapplicable because under the Delaware LLC Act
a creditor of an LLC cannot assert a derivative action on behalf of the LLC. CML V, LLC v. Bax, 6
A.3d 238, 239 (Del. Ch. 2010); see also R. Silberglied & B. Rohrbacher, TOUSA, USACafes, and the
Fiduciary Duties of a Parent's Directors upon a Subsidiary’s Insolvency, NORTON ANNUAL SURVEY
OF BANKRUPTCY LAW 33 (an article from which the assignee apparently quotes without
attribution).
managers despite the financial precariousness of Holdco and despite foreseeable,
catastrophic liability in state court. Moving to dismiss, each manager argues that the
three-year limitation under Chapter 10, Section 8106, Delaware Code, bars the claim
because the distribution occurred in July 2015, but the assignee began the first action

against a director in June 2019, more than three years later. (Doc. 20 at ¶¶ 44, 47)
In response, the assignee attempts to invoke equitable tolling of the statutory
limitation. Under Delaware law, a claim of self-dealing against a fiduciary is tolled
even in the absence of evidence that the fiduciary concealed the self-dealing. Weiss v.
Swanson, 948 A.2d 433, 451 (Del. Ch. 2008). But equitable tolling persists “only

until the plaintiff is on inquiry notice of their cause of action.” Microsoft Corp. v.
Amphus, Inc., 2013 WL 5899003, at *17 (Del. Ch. 2013). Delaware law imposes
inquiry notice if the plaintiff has “sufficient knowledge to raise their suspicions to the
point where persons of ordinary intelligence and prudence would commence an
investigation that, if pursued would lead to discovery of the injury.” Pomeranz v.

Museum P’rs, P.P., 2005 WL 217039, at *3 (Del. Ch. 2005). The assignee argues that,
because each manager of Holdco allegedly breached the fiduciary duty of loyalty by
approving the dividend distribution, “Holdco . . . did not have any reason to know”
about the alleged breach of fiduciary duty until the assignee “was granted control of

[LSI and Holdco]” and discovered the allegedly conflicted distribution. (Doc. 22 at
11)
The assignee’s response to the motion to dismiss remains agnostic about
whether Holdco’s receiving inquiry notice or the assignee’s receiving inquiry notice
halts the equitable tolling. The assignee cites Microsoft Corp., which suggests that this
issue remains unresolved under Delaware law. Microsoft Corp., 2013 WL 5899003, at

*18–19, n.9 (finding “intuitively appealing” the argument that “a shareholder’s right
to assert a cause of action derivatively on behalf of a corporation should be no
greater than the corporation’s right to pursue the claim directly” but collecting
Delaware decisions that focus on the time the derivative plaintiff — not the
corporation — had inquiry notice about the breach of fiduciary duty).

But even if the application of equitable tolling depends on Holdco’s receiving
inquiry notice and not the assignee’s receiving inquiry notice, the assignee alleges a
plausible — but not conclusive — basis to invoke equitable tolling. Specifically, the
assignee alleges that Holdco lacked inquiry notice about the conflicted distribution
because the knowledge of a conflicted fiduciary “is not imputed to the corporation

for purposes of holding those fiduciaries liable for the harm they caused to the
corporation.” In re Am. Intern. Grp., Inc., 965 A.2d 763, 803 (Del. Ch. 2009).
Because “each and every fiduciary” of Holdco allegedly engaged in self-dealing (by
authorizing the dividend distribution) at the expense of Holdco, Count II plausibly
alleges that Holdco lacked inquiry notice about the alleged breach of fiduciary duty

and plausibly alleges a basis to invoke equitable tolling.
C. Count III
In Count III, the assignee claims under Delaware law that each manager
breached a fiduciary duty to Holdco by “fail[ing] to pursue the claims . . . to recover”
the dividend distribution and by revising Holdco’s LLC agreement after the dividend

distribution (1) to eliminate retroactively the managers’ fiduciary duties, (2) to ratify
the dividend distribution, and (3) to release Holdco’s claims against the managers.4
Moving to dismiss, the managers argue that Delaware law permits an LLC to
eliminate prospectively a manager’s fiduciary duties, AM Gen. Holdings LLC v. The
Renco Grp., Inc., C.A., 2016 WL 4440476, at *15 (Del. Ch. 2016), and that the

revision to the LLC agreement contains no suggestion that the managers intended to
eliminate retroactively a fiduciary duty. AgroFresh, Inc. v. MirTech, Inc., 257
F.Supp.3d 643, 661 (D. Del. 2017) (“Where there is not an earlier effective date and
the intent to make an agreement retroactive is not clear on the face of the contract,

courts decline to hold modifications retroactive.”) And because the revision to the
LLC agreement does not eliminate retroactively the managers’ fiduciary duties, the
managers argue that no alleged facts plausibly suggest an attempt by the managers to
insulate themselves from liability resulting from the alleged self-dealing. Rather, the
managers argue that the assignee urges a strained interpretation of the revised LLC

4 Count III strikes the reader as an insurance against a possible dismissal of Count II as time
barred. In other words, Count III asserts that, even if the allegedly conflicted distribution occurred
outside the limitation period, the managers nonetheless breached the fiduciary duty of loyalty by
attempting to insulate themselves from liability resulting from the allegedly conflicted distribution,
which attempt at insulation occurred within the applicable limitation.
agreement to contrive a breach of fiduciary duty (the attempt at insulation from
liability) occurring within the limitation.
In response, the assignee argues that the managers ignore other revisions to
the LLC agreement in which the managers (according to the assignee) released

Holdco’s claims against the managers and ratified the allegedly conflicted
distribution. In other words, the assignee argues that even if the revision to the LLC
agreement eliminated only prospective breaches of fiduciary duty, the cumulative
effect of these other revisions insulates the managers from liability resulting from the
allegedly conflicted distribution.

The managers have the better argument. First, the revision to eliminate
fiduciary duties, Section 3.6(d) of the LLC agreement, states that “all fiduciary duties
of any Manager . . . are hereby eliminated . . . to the maximum extent permitted by
applicable law.” This elimination revision contains no suggestion “on the face of the
contract” to eliminate retroactively a fiduciary duty. AgroFresh, Inc., 257 F.Supp.3d

at 661. Because the elimination revision contains no suggestion of retroactive
application, the elimination revision does not — as the assignee maintains —
eliminate a breach of fiduciary duty occurring before the revision.
Second, the revised LLC agreement releases claims “by each member . . .
against the present and former Members” and “by each Member . . . against the

Company.” Although the release revision releases the members’ claims against each
other and against Holdco, the release revision does not — as the assignee maintains
— release Holdco’s claims against the managers. Accordingly, the release revision
evidences no attempt by the managers to insulate themselves from liability resulting
from the allegedly conflicted distribution.
Third, the ratification revision cited by the assignee states that “each member

hereby . . . ratifies, approves, and consents to all actions taken on or prior to the date
hereof by each manager . . . .” Although each member ratifies the transaction, the
ratification revision causes the managers — not Holdco — to ratify the dividend
distribution. Regardless, the assignee cites no Delaware law showing that an entity
cannot void a conflicted ratification or that a conflicted ratification otherwise bars

the entity from pursuing claims against a conflicted director.
Under a plain reading of the revised LLC agreement, no provision cited by the
assignee releases Holdco’s claims against the managers, eliminates retroactively the
managers’ fiduciary duties, or otherwise insulates the managers from any claim
against the managers. A conclusive determination, however, remains premature on

this motion to dismiss. If on summary judgment the assignee presents a factual
record to invoke the equitable tolling of Count II (the claim that the dividend
distribution breached the duty of loyalty under Delaware law), the revised LLC
agreement — under the managers’ interpretation urged in the motion to dismiss and
the reply — constitutes no impediment to the assignee’s pursuing Count II. But if on

summary judgment the assignee fails to present a factual record to invoke the
equitable tolling of Count II, any impediment in the revised LLC agreement to the
assignee’s pursuing Count II becomes irrelevant both because the purportedly
released claims are barred by the applicable limitation and because the assignee
neither alleges facts nor cites Delaware law suggesting that the conflicted release of a
time-barred claim entitles Holdco to damages. Although the managers have the

better interpretation of the LLC agreement, this order reserves determination until
summary judgment and the presentation of a developed factual record.
D. Count IV
In Count IV, the assignee alleges that the managers of Holdco breached under
Florida law a fiduciary duty to each of the fourteen LSI entities by committing

“wrongful acts” other than the acts underlying Counts I–III. In a paragraph
spanning a page and a half of the amended complaint, the assignee lists in
conclusory fashion fifteen alleged breaches of fiduciary duty and asserts these claims
on behalf of fourteen entities.5 Moving to dismiss Count IV, the managers argue

5 In full, that paragraph states, “Without limitation, Defendant breached his fiduciary duties,
including the duty of loyalty, care and good faith, by committing the Wrongful Acts as detailed
above and by (i) failing to implement or follow, or to otherwise cause the implementation and
following of, adequate safeguards or controls in regard to financial reporting; (ii) failing to
implement or follow, or to otherwise cause the implementation and following of adequate
safeguards and controls in regard to material business, operational, and regulatory functions;
(iii) while the Companies were insolvent or not paying their debts as they became due, failing to
undertake sufficient and adequate measures to ensure that payments to third parties did not
constitute preferential or fraudulent transfers which could result in a loss of assets of the Companies;
(iv) while the Companies were insolvent or not paying its debts as they became due, causing or
otherwise abdicating his duties by allowing the Companies’ assets and enterprise value to continue
(continued…)
persuasively that Count IV contravenes Rule 8, Federal Rules of Civil Procedure,
(1) by failing to fairly notify the managers about the facts on which the assignee relies
to support each count, (2) by failing to allege facts supporting each element of these
fifteen conceptually distinct claims, (3) by asserting breaches of fiduciary duty

redundant of Counts I–III, and (4) by claiming under Florida law the breach of a
fiduciary owed to entities formed in a state other than Florida. The managers
observation rings true that “[t]he universe of facts that could even conceivably
support the breaches discussed in [paragraph 132] is ill-defined, but in any event
considerably smaller than the facts generally alleged in Plaintiff’s Amended

Complaint.” Count IV, a “laundry list” of Delaware corporate law buzzwords,
warrants dismissal for failure to comply with Rule 8, Federal Rules of Civil
Procedure.

to decrease in value; (v) while the Companies were insolvent or not paying their debts as they
became due, failing to cause the Companies to file insolvency proceedings as soon as reasonably
practical, necessary or appropriate; (vi) failing to ensure that the Companies were not engaging in or
otherwise permitting corporate waste; (vii) permitting the Companies to engage in corporate waste;
(viii) permitting the Companies to engage in certain preferential or fraudulent transfers, which
resulted in a loss of assets of the Companies; (ix) permitting the Companies’ assets and enterprise
value to decrease in value; (x) failing to fully or adequately inform himself in regard to material
business, operational, regulatory or financial decisions affecting the Companies; (xi) failing to cause
to implement or follow adequate safeguards and controls, including WARN Act compliance;
(xii) the continuation or implementation of self-insurance programs for employees, health insurance
and malpractice insurance at a time that the Companies were insolvent knowing that the Companies
were unable to cover their self-insured retention or pay medical bills, leaving those individuals
without any health or malpractice coverage when the Companies closed, resulting in claims against
the Companies that should have been covered by insurance; (xiii) failing to pursue claims and causes
of action to recover the Dividend Distributions, which constituted not only fraudulent transfers but
also a violation of applicable law at the time; (xiv) concocting a scheme to insulate himself from
liability through a series of restructuring and assignment transactions; and (xv) other breaches and
proximately caused damages as may be ascertained through discovery.” (Doc. 20 at ¶ 132)
E. Counts V-VHUI
Suing for declaratory relief and suing under Florida’s and Delaware’s Uniform
Fraudulent Transfer Acts, the assignee in Counts V—VIII claims avoidance and
recovery of the “Cover-Up Transfers,” which the amended complaint defines as the
managers’ attempts to insulate themselves from liability resulting from the dividend
distribution. Moving to dismiss, the managers argue that the assignee’s allegations
bely the contention that the managers attempted to insulate themselves from liability.
However, as explained above in the discussion of Count III, resolution of this
argument is better reserved until summary judgment and the presentation of a more
developed record.
CONCLUSION
The motion (Doc. 21) to dismiss is GRANTED-IN-PART, and Counts I and
IV are DISMISSED. No later than JULY 31, 2020, the assignee may amend the
complaint.
ORDERED in Tampa, Florida, on July 17, 2020.

AIAN WA dyeleny
STEVEND.MERRYDAY __
UNITED STATES DISTRICT JUDGE

-15-

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10105512. Public record. Not legal advice.