Opinion
Nos. X08-CV04-4002494S, X08-CV05-4003381S
March 11, 2008
Memorandum of Decision on Defendants' Motions to Dismiss the Complaints
The motion to dismiss of the defendants Star Gas Partners L.P. and Star Gas LLC was filed on January 20, 2005. The operative motion to dismiss of the defendants Trauber and Sevin is dated June 29, 2007 and tracks the language of the earlier-filed motion and incorporates the memoranda of law and declaration and exhibits filed by Star Gas Partners L.P. and Star Gas LLC in support of the January 20, 2005 motion to dismiss.
Procedural and Factual Background
The plaintiffs Marie J. Beers and Paula Wood-Dyer allege that they hold and have held at all relevant times limited partnership "units" in the nominal defendant Star Gas Partners, L.P. The plaintiffs purport to bring this action derivatively on behalf of Star Gas Partners L.P. ("Star Gas") against its general partner, Star Gas, LLC, ("the LLC") a Delaware limited liability company, and against the chairman of the LLC's board of directors, Irik P. Sevin, who also serves as Chief Executive Officer of the LLC, and against the Chief Financial Officer of the LLC, Ami Traubner.
The parties have stipulated that the complaint in the Beers case is the operative complaint for both cases, and that the allegations of that complaint should be taken as true for purposes of adjudicating these motions to dismiss. Accordingly the factual background recited herein is summarized from the November 24, 2004 compliant in the Beers case.
Star Gas is a diversified home energy distributor and services provider headquartered in Stamford, Connecticut, which at relevant times through various subsidiaries specialized in the home heating oil and propane business. It is organized as a Delaware master limited partnership. Its limited partnership interests, designated as "units," are publicly traded on the New York Stock Exchange. As of September 30, 1993 there were 30.7 million common units and 3.1 million senior subordinated units outstanding.
The complaint in this action is brought to redress wrongs allegedly committed by the defendants in breach of their duties and responsibilities to the plaintiffs. The causes of action alleged include breach of fiduciary duty, gross negligence, breach of duty of loyalty (alleged insider trading of the defendant Traubner) and waste of assets. The action arises out of a loss in value suffered by Star Gas on October 18, 2004 when the LLC announced that Star Gas had suffered a substantial earnings decline in fiscal 2004, which was expected to continue into fiscal 2005, due to severe customer attrition caused by problems with an internal structuring program (called the "Business Process Improvement Program") and by an inability to pass on increased oil prices to its customers. Allegedly in response to these developments and the announcement that quarterly distributions to the limited partners would be discontinued, the price of Star Gas common units fell from a closing price of $21.60 per unit on October 15, 2004 to a closing price of $4.32 on October 18, 2004 — an 80% reduction. The plaintiffs claim that Star Gas, the limited partnership, has been severely damaged by these developments which were allegedly caused by the defendants' failure to exercise reasonable and prudent supervision over the management, policies, practices, controls, and financial affairs of the limited partnership with particular reference to the initiation of the "Business Process Improvement Program" which the plaintiffs characterize as a "disastrous reorganization" and to the inability to maintain profit margins on heating oil sales and failure to properly hedge against increasing heating oil prices.
Prior to commencing suit the plaintiffs admittedly made no pre-litigation demand on the LLC or the directors of the LLC who are its decision-making body. The plaintiffs allege in the complaint that no such demand was made on the LLC because such demand "would be futile and is excused as LLC is neither independent nor disinterested in the claims asserted herein." (Complaint, ¶ 50.) The specific allegations of futility will be reviewed in the following discussion.
Now before the court is the defendants' motion to dismiss the complaint on the ground that the plaintiffs lack standing to bring these actions, and the court therefore lacks subject matter jurisdiction, because plaintiffs failed to make demand on Star Gas's general partner Star Gas, LLC, before commencing suit. The defendant's position is that the pre-litigation demand should have been made on the LLC by issuing demand on the LLC's decision-making body — its board of directors — and that there are no allegations of futility in making a demand on the directors, a majority of whom were "outside directors" at the time suit was commenced. (At the time this suit was commenced in 2004 the LLC was governed by a five-person board of directors only one of whom — Irik P. Sevin — has been sued in this action, along with the LLC itself. The three "outside directors" and the other director Audrey Sevin have not been sued.) The defendants also claim, alternatively, that even if the pre-litigation demand should have been made on the LLC itself as general partner, the plaintiff has not satisfied the applicable requirement of particularized pleading of facts demonstrating futility of demand.
Discussion A. Applicable Law
The parties are in agreement that the decisive issues before the court — whether the prelitigation demand in this case would go to the LLC as an entity or to its governing body the board of directors of the LLC; and whether or not there are adequate allegations of futility of pre-litigation demand are to be decided under Delaware law. Although the court was initially skeptical that a question of subject matter jurisdiction to maintain a civil action in the Superior Court of Connecticut would be governed by the law of any jurisdiction other than Connecticut, the court is now satisfied that the parties are correct and that in the particular circumstances raised by the present posture of this case, Delaware law controls.
Both Connecticut and Delaware have enacted versions of the Revised Uniform Limited Partnership Act. Both states, as part of that uniform act have virtually identical enactments which allow a limited partner to bring an action in the right of a limited partnership to recover a judgment in its favor ". . . if general partners with authority to do so have refused to bring the action or if an effort to cause those general partners to bring the action is not likely to succeed." Conn. Gen. Stat. § 34-34a; 6 Delaware Code § 17-1001. The statutes of both states also provide that: "In a derivative action, the complaint shall set forth with particularity the effort of the plaintiff to secure initiation of the action by a general partner or the reasons for not making the effort." Conn. Gen. Stat. § 34-34c; 6 Delaware Code § 17-1003. The statutes of both states also provide that, subject to their state constitutions, the laws of the state or jurisdiction ". . . under which a foreign limited partnership is organized govern its organization and internal affairs and the liability of its limited partners." Conn. Gen. Stat. § 34-38f; 6 Delaware Code § 17-901. The making of a demand on a general partner to start a lawsuit in the name of a limited partnership, and the effect of the general partner's failure or refusal to start or maintain that lawsuit seem to the court clearly to be matters of "internal affairs" of the limited partnership which by statute would be governed by the law of the state where the limited partnership has been organized.
The wording of the Delaware Code provision is slightly different: it says ". . . the efforts, if any, to secure initiation . . ."
By looking to the closely analogous area of derivative actions brought against a foreign corporation in the Connecticut Superior Court, there is confirmation that issues of standing to sue derivatively are governed by the law of the state of corporate organization. See Metcoff v. Lebovics, Docket No. X-06 CV05-5000521S, Superior Court, Judicial District of Waterbury, Complex Litigation Docket at Waterbury (August 17, 2007, Stevens, J.), 2007 Ct.Sup. 14539, 44 CLR 107 (Delaware law applied as to adequacy of pre-suit demand in derivative action brought by corporate creditor), and Miller v. Alaire, Docket No. X-05 CV05-4007126S, Superior Court, Judicial District of Stamford/Norwalk, Complex Litigation Docket at Stamford (May 24, 2006, Shea, J.), 2006 Ct.Sup. 9711. (In derivative action brought on behalf of a New York corporation, to determine adequacy of pre-suit demand the court looks first to Connecticut law [Conn. Gen. Stat. § 33-727 which defers to New York law.)
Conn. Gen. Stat. § 33-727 provides: "In any derivative proceeding in the right of a foreign corporation, the matters covered by sections 33-720 to 33-727, inclusive [pertaining to derivative proceedings] shall be governed by the laws of the jurisdiction of the foreign corporation except for sections 33-723, 33-725, and 33-726." Standing to bring a shareholder derivative action is governed by § 33-721; pre-suit demand is governed by § 33-722. Both these subjects, under § 33-727, would be governed by the law of the state of incorporation.
The contested issues relating to pre-suit demand raised by the defendants' motion to dismiss will therefore be decided under Delaware law.
B. Absence/Futility of Pre-Suit Demand
The requirement of demand before initiating a derivative action is a matter of standing, and a condition precedent to the action. The right to bring a derivative action does not come into being until the plaintiff has made a demand on the corporation [or the general partner of a limited partnership] and that demand has been refused, or until that plaintiff has demonstrated that such a demand would have been futile. Musto v. Optic Care Eye Health Centers, Inc., Docket No. CV99-0359863S, Superior Court, Judicial District of Fairfield at Bridgeport (June 15, 1999, Melville, J.); 1999 Conn.Super.LEXIS 1574. If the plaintiff fails to make adequate demand or a showing of futility, the court lacks subject matter jurisdiction over the plaintiff's derivative claims and a dismissal is the appropriate remedy. Id. The law of Delaware is the same. See Litman v. Prudential-Bache Properties, Inc., 1993 Westlaw 5922 (Del.Ch. 1993) (" Litman II"). The threshold issue in this case is whether the pre-suit demand — had one been made — would have properly been directed to the LLC entity Star Gas, LLC as the general partner of Star Gas, or to the decision-making body of the LLC, its board of directors. Futility of demand cannot be addressed without knowing precisely to whom the demand would be directed.
Drawing on the corporate model, the defendants argue that the demand would have to be directed to the board of directors as the decision-making body of the LLC. The plaintiffs, on the other hand, point to the Delaware statute applicable specifically to derivative actions on behalf of a limited partnership which provide that such an action can only be brought ". . . if general partners with authority to do so have refused to bring the action or if an effort to cause those general partners to bring the action is not likely to succeed" (§ 17-1001, supra) and can only be sustained if ". . . the complaint shall set forth with particularity the effort of the plaintiff to secure initiation of the action by a general partner or the reasons for not making the effort." (§ 17-1003, supra). Plaintiffs correctly point out that the LLC entity, Star Gas, LLC is the general partner of the Star Gas limited partnership — not the individuals who make up the board of directors of the LLC. There is no Delaware appellate case which decides this issue.
See Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984).
Delaware Court of Chancery Rules § 23.1(a) contains a similar pleading requirement for limited partnership derivative actions.
Plaintiffs rely on Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., 1998 Del.Ch.LEXIS 226 in which this issue was squarely presented and decisively determined. The defendant, Hallwood moved to dismiss the derivative claim on the grounds that the plaintiff had failed to plead facts showing demand futility, asserting that, "as a matter of law, a corporate general partner is incapable itself of making a decision, interested or disinterested, and that, therefore, the body to which Gotham was obligated to make demand was not Hallwood's general partner, HRC, but HRC's board of directors." Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., supra, 1998 Del.Ch.LEXIS 226, *14. In response, Gotham contended that under the Delaware limited partnership statutes and case law, the general partner, HRC, rather than its board of directors, was the entity to which demand should be made or should be shown to be futile. Id., *15.
The Chancery Court expressly rejected Hallwood's argument that a limited partner challenging a corporate general partner's acts must make pre-suit demand to the corporate general partner's board of directors. Vice Chancellor Steele stated:
I reject the argument that a limited partner challenging a corporate general partner's acts must make pre-suit demand to the corporate general partner's board of directors . . . Limited partnership cases dealing with demand against a corporate general partner discuss demand in relation to the corporation itself, not its internal decision making apparatus. Id., at *5
The Chancery Court continued that a rule requiring a demand on the general partner's board of directors "defies logic":
It would require the Court to look into the form of entity of each general partner in order to determine whether the entity's internal decisionmaking individuals (or aggregate of individuals if that decisionmaker was also a business entity) were independent. This would undermine this state's established policy of respecting the legal fiction of the business entity. It runs counter to the notion of the business judgment rule because it accords the business entity no role as general partner. Hallwood's proposed rule looks not to the person owing the fiduciary duty, but to individuals who make decisions in that entity's best interest. Furthermore, Hallwood's approach runs counter to the contractual freedom granted parties to a limited partnership by DRULPA § 17-1101(c) because it forces them to treat a corporate general partner's board of directors as the de facto general partner. DRULPA already permits a limited partnership to appoint individuals as general partner, and Hallwood's partners could have elected to individually appoint the directors of HRC as its general partners. No pre suit demand rule should force that result here because it would ignore the reality that 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. I have found no case where the general partner was a corporation and the issue was whether, in those circumstances, the demand must be made to the corporation or to the corporate general partner's board. The fact that the general partner is a corporation is a fortuity; many general partners are not. Therefore, it should be sufficient to make the demand upon the general partner, whatever its form. The manner in which the response to the demand is made will depend upon whatever form of internal governance the general partner utilizes, but that issue is purely internal and should be of no concern to a court.
Id.,*18
Defendants dispute that Gotham represents a definitive statement of Delaware law on this subject, characterizing its holding as an "idiosyncratic proposition" that "has not been accepted by a single reported decision applying Delaware law or that of any other state." (Defendant's Reply Memorandum, p. 3.) Rather, claim the defendants, the decisions addressing demand futility in limited partnership derivative actions "consistently review demand futility by addressing the independence and disinterestedness of the board . . ." Id. The cases cited by defendants, however, do not bear this argument out. Aronson, supra, fn. 5 is a corporate derivative action where there was no issue of the entity/decision-maker distinction because corporations are always governed by boards of directors consisting of individuals. Liftman II, supra, which predates Gotham by about five years, is a derivative action on behalf of a limited partnership wherein the plaintiff limited partners claimed that demand on the corporate general partners was excused due to the general partners' self-interest, bias, and fraud. In deciding that demand was not excused, the court initially discussed the statutory requirement that demand be made on the general partner and then, in discussing arguments of demand futility advanced by the plaintiffs, sidestepped into evaluation of the claims of conflicts of interest and divided loyalty of the directors of the general partner without discussion or analysis of the entity/director distinction. Defendants cite Dean v. Dick, 1999 WL 413400 (Del.Ch. 1999) (Demand excused as futile where only party against whom relief was sought was 100% owner of the general partner) as a post- Gotham Delaware Chancery Court decision on limited partnership demand futility strictly based an analysis of the owner's obvious conflict of interest without citing Gotham or going into the entity/director distinction. Dean, however, was decided only seven months after Gotham, which might well account for the failure to cite Gotham, but, more importantly, Dean is not inconsistent with Gotham where Chancellor Steele said:
This same merging of identity of the general partner with its directors is evident in a Connecticut limited partnership derivative action case. See Sarafaty v. PNN Enterprises, Docket No. CV02-02802255S, Superior Court, Judicial District of New Haven at Meriden, (July 24, 2007, Taylor, J.); 2007 Ct.Sup. 12909 (Demand found to be futile based on direct conflict of interest of individual who was president, CEO, treasurer and director of the corporate general partner, without discussion or analysis of the distinction between the general partner as an entity and its management/director personnel.) Depending on the factual situations presented, and the arguments made pro and con as to demand futility, there is often no need to analyze the distinction.
Although the presence of a majority of interested directors within a corporate general partner might be one way of demonstrating demand futility as to the corporate general partner, there is nothing in DRULPA [Delaware Revised Uniform Limited Partnership Act] that even hints at Hallwood's proposition that HRC's board of directors is the organizational subcomponent to which Gotham's demand should be made. Limited partnership cases dealing with demand against a corporate general partner discuss demand in relation to the corporation itself, not its internal decisionmaking apparatus. (Emphasis added.) Gotham, supra, *5.
The same may be said of Trump v. Cheng, 2006 N.Y. Misc. LEXIS 2465, decided under Delaware law. In finding that limited partner Donald Trump was not excused from making demand on the general partner, the New York court looked to the allegations made by Trump concerning claimed conflicts of interest of the general partner's directors, without referencing or citing Gotham, but, as indicated above, that approach is not inconsistent with Gotham.
Gotham is a ten-year-old decision of a renowned Delaware court, authored by a distinguished Delaware jurist on a fine point that would not often be at issue, because the disinterestedness of a general partner's directors is more likely than not in most cases the only claim as to the disinterestedness of the general partner itself. The fact that Gotham has not been cited in subsequent Delaware limited partnership derivative cases does not mean that it has been rejected as the law of Delaware as to that fine point of law. It has not been rejected or criticized by any subsequent Delaware decision nor has any such decision necessarily been inconsistent with the Gotham rationale. Defendant's argument that Gotham should be rejected because it rests on erroneous premises antithetical to fundamental principles of Delaware law is an argument more properly addressed by a Delaware court, which has not happened. This court will therefore follow and apply Gotham in deciding this motion to dismiss.
Vice Chancellor Steele is now the Chief Justice of Delaware.
Although the parties have advocated vigorously over the applicability of Gotham to the decision on this motion to dismiss, the distinction between the Star Gas, LLC entity as general partner and the board of directors of the LLC relates primarily and directly to only one aspect of plaintiff's demand futility claim. Plaintiffs claim that demand on Star Gas, LLC would have been futile because that entity has conceded "a structural conflict" confirming that it cannot act independently in a United States Securities and Exchange Commission Form 10-K for Star Gas Partners, L.P. and Star Gas Finance Company for the fiscal year ended September 30, 2004 (Def. Ex. 1). In that document which was filed on behalf of the limited partnership by the LLC as general partner, and signed by the entire board of directors of the LLC, (Ex 1, p. 68), the statements are made at p. 21 that:
Star Gas Finance Company is not involved in this lawsuit.
The complaint in this case was served on December 2, 2004.
Conflicts have arisen and could arise in the future as a result of relationships between the general partner and its affiliates, on the one hand, and Star Gas Propane or the Partnership [Star Gas Partners, L.P.] and its limited partners, on the other hand. As a result of these conflicts the general partner may favor its own interests and those of its affiliates over the interests of the unitholders. The nature of these conflicts is ongoing and includes the following considerations: . . . The general partner controls the enforcement of obligations owed to the Partnership by the general partner . . .
Such general disclosures in a publicly filed document that there are possible conflicts of interest which "may" arise fail to satisfy the demand futility requirement of an actual conflict which would negate the board's disinterestedness. Litman II, supra, at *4. ("It is a common clause in prospectuses and its presence does not demonstrate that any actual conflict has occurred for demand futility purposes.") Furthermore, the "concession" in the 10K Form is not alleged in the complaint. It first appeared in this litigation in the plaintiff's objection and memorandum of law in opposition to the instant motion to dismiss, and was marked as an exhibit at the hearing for oral argument on this motion. It is fundamental that particularized allegations of demand futility must be alleged in the complaint to withstand a motion to dismiss. 6 Delaware Code § 17-1003; Aronson, supra, at 814; Braddock v. Zimmerman, 906 A.2d 776, 786 (Del. 2006). Rales, supra, at 934. Since the "concession" in the Form 10K is not pleaded in plaintiff's operative complaint, it cannot be considered in support of plaintiff's claim of demand futility.
The plaintiff's remaining claims of demand futility, although couched conclusively in terms of the interest or lack of independence of the LLC itself, are closely intertwined with alleged disinterestedness or lack of independence of the two individual defendants one of whom was a director and CEO of the LLC. These allegations, set forth in complaint ¶¶ 50-61 under the heading "Demand is Excused for Futility" must be examined individually to see if they satisfy the Delaware requirement for particularized pleading to excuse a pre-trial demand on the ground of futility.
The oft-cited Delaware rule for determining adequacy of a showing of demand futility before commencing a corporate derivative action is the two-pronged Aronson test, which requires that a court deciding a claim of demand futility ". . . must decide whether, under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment." Aronson v. Lewis, supra, 473 A.2d at 814. Subsequent case law has established that the Aronson test is meant to apply to challenged approved decisions of a corporate board [or, under Gotham, a general partner of a limited partner] and, under each prong, the focus is on the board's role in the challenged transaction, where the derivative plaintiff must overcome the powerful presumptions of the business judgment rule before being permitted to pursue the derivative claim. Pogostin v. Rice, 480 A.2d 619, 624 (Del. 1984). See also III Ernest L. Folk, III, Rodman Ward, Jr., and Edward P. Welch. Folk on the Delaware General Corporation Law § 327.4.1.1 ("Demand is excused under this step [ Aronson step one] only if a reasonable doubt is raised concerning the disinterestedness or independence of the board majority approving the challenged transaction." (Emphasis added.)) When, however, the derivative challenge is not directed to a decision made by the corporate board [or the general partner], but rather there is a claim of inaction by the board [or general partner] where there is no conscious decision to act or refrain from acting, it becomes impossible to perform the essential inquiry contemplated by Aronson — whether there has been action in conformity with the business judgment rule in approving the challenged transaction — and Aronson does not apply. The demand futility test in derivative claims of inaction is stated in Rales v. Blansard, 634 A.2d 927 (Del. 1993):
See Rosenfeld v. Metal Selling Corp., 229 Conn. 771, 787 (1994) for a description of the business judgment doctrine under Connecticut law, which insulates legitimate business decisions made in circumstances free from serious conflicts of interest from most forms of judicial review.
. . . it is appropriate in these situations to examine whether the board that would be addressing the demand can impartially consider its merits without being influenced by improper considerations. Thus, 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. If the derivative plaintiff satisfies this burden, then demand will be excused as futile. Rales, supra at 934.
Most of the plaintiff's demand futility allegations are based on inaction or failure to act. For example the complaint alleges:
failing to exercise reasonable and prudent supervision over the management, policies, practices, controls and financial affairs of the Partnership (¶ 51);
inadequate "sham" internal controls regarding financing and hedging transactions (§ 53);
lack of internal controls to prevent the presentation of false and misleading financial results (§ 59); and
abdication of the LLC's duties and responsibilities to the Partnership (§ 59)
Plaintiff has not satisfied the Rales test which would permit her to make these claims derivatively without demand. There are no particularized allegations that the general partner in December of 2004 when this action was commenced would have been unable to respond to a demand with an independent, disinterested decision. Plaintiff alleges that "Sevin controls the operation of the LLC" (§ 60), but the only specific factual allegation to back up that claim of control is that defendant Sevin is the son of Director and CFO Audrey Sevin (complaint ¶¶ 6, 18) and that "Defendant Sevin is the Chairman of LLC's board of directors and serves as LLC's Chief Executive Officer, which positions he has held since 1999" (¶ 17). But the complaint alleges that ". . . the LLC is managed by a board of directors, of which Sevin is the Chairman." (¶ 16.) The only way the LLC could have responded to a demand to bring this action would have been by a vote in late 2004 by its board of directors. (See Rales, supra at 935 as to the boards' responsibilities of investigation and weighing of alternatives when faced with a demand for litigation.) The parties stipulated at oral argument that in December 2004 that board consisted of five persons: Defendant Irik Sevin, his mother Audrey Sevin, and three "outside" directors. Even under Gotham, the very nature of the Rales inquiry under these particular circumstances would necessarily have to focus on the independence and disinterestedness of the LLC directors, which under Gotham is sometimes "one of the ways" to test the independence and disinterestedness of the LLC. ( Gotham, supra, *5.) The claim of familial relationship alone unsupported by facts demonstrating that family members are beholden to one another is not enough to establish that Audrey Sevin would lack independence. See, e.g. Siebert v. Harper Rowe Publishers, Inc. No. Civ.A. 6639, 1984 W121874 (Del.Ch. Dec 5, 1984), where the chancery court held that a director could not be disabled from considering a demand simply because the director's cousin was a fellow officer and director of the company. The court emphasized that the mere identification of a familial relationship, without more, was "insufficient to demonstrate domination and control by the interested director." Id. at *3. There are no facts alleged supporting a conclusion that Audrey Sevin was dominated and controlled by, or beholden to her son (or, for that matter, the opposite). She was a partial owner of the LLC in her own right (complaint ¶ 16) which would tend to demonstrate independence as a director. More importantly, there are absolutely no allegations of any lack of independence of the three outside directors, who have not been sued and are not even identified or mentioned in the complaint. There is no factual allegation of dominance or control of any nature over them by defendant Sevin or that they were beholden in any way to him. Since they were a majority of the board at the time, the lack of any such allegation would be determinative of the independence issue.
The plaintiff also alleges that the LLC general partner would be influenced by an improper interest in responding to demand to bring this lawsuit because "a substantial likelihood exists that LLC is liable to the Partnership because the wrongful actions and/or inactions constitute breaches of its fiduciary duties . . . owed to the Partnership" (¶ 59) and that "Defendant Sevin, who controls LLC as its Chairman of the Board and Chief Executive Officer are named as defendants in the Class Actions and face a substantial likelihood of liability for causing the Partnership to misstate its financial results . . ." (¶ 60). To the extent that the claim of risk likelihood is based on the allegations of misrepresentation and the damage thereby caused (complaint ¶¶ 54-57) that argument is foreclosed by the dismissal of the Class Actions. But there are also allegations of risk likelihood of the LLC because of the allegations of breach of fiduciary duties, etc. in this action. Plaintiff claims in her memorandum that these allegations are properly considered under the "second prong" of the " Aronson" test, but in the present analysis of the allegations of inaction or failure to act by the LLC, the Aronson test yields to the Rales focus on the board of directors which would have had to decide on a response to a demand to bring this action. In carrying out their responsibilities in response to a litigation demand, "the board must be able to act free of personal financial interest and improper extraneous influences." Rales, supra, at 935. As previously discussed, by virtue of the allegations of board management of the LLC in ¶ 16 of complaint, the allegations of personal liability risk of defendants Sevin and Trauber in ¶ 60, and the substantive provisions of Delaware law as to the board's duties of investigation and weighing of alternatives when faced with a demand for litigation, the focus regarding that decision has to be on the board of directors as the managing body of the LLC. Under Gotham, this would be another instance where the disinterestedness of the LLC would have to be evaluated by the "one [other] way" mentioned in that opinion by looking to the disinterestedness of the board of directors having hypothetically received a demand for litigation. The responsibilities of the entity and its board under these particular circumstances are too intertwined to focus exclusively on the abstract LLC entity. The determinative fact in assessing the propriety of a board reaction to a hypothetical litigation demand late in 2004 is that a majority of that board, the three outside directors, faced no risk of liability at all. They were not sued in the Class Actions. They are not defendants in this action. (Nor, for that matter is 2004 director Audrey Sevin.) There is no allegation of any act or omission that would subject them to personal liability if this case were to proceed. Nothing has been alleged that would cast any doubt on the ability of a majority of the LLC board to exercise its independent and disinterested judgment in responding to a demand for litigation. The plaintiffs have not satisfied their burden under Rales to be excused from demand as to the allegations of inactivity or failure to act by the general partner.
The "Class Actions" refer to federal civil lawsuits for alleged securities fraud brought by certain Star Gas LP unit holders in 2004 against the LLC, Irik Sevin, Audrey Sevin, Hanseatic Americas, Inc., Paul Biddleman, Ami Trauber, and three investment banks. The cases were brought in the U.S. District Court for the District of Connecticut, and consolidated sub nom In Re Star Gas Securities Litigation, No. 3:04CV1766 (JBA). The cases were dismissed on August 21, 2006 by order of Judge Arterton under Federal Rules of Civil Procedure 9(b) and 12(b)(6) for failure to allege the existence of any actionable misrepresentation or omission under the federal securities statutes.
The allegation of breach of fiduciary duty by implementation of a failed "Business Process Improvement Program" (complaint, § 55) does implicate an affirmative decision of the general partner that would be assessed under the test of Aronson v. Lewis, supra. The "first prong" of Aronson is whether there is a reasonable doubt based on the allegations of the complaint that the directors [or here, the general partner] are disinterested and independent. The "second prong" is whether or not the challenged transaction was otherwise the product of a valid exercise of business judgment. Satisfaction of the Aronson test is measured with reference to the challenged transaction, the decision to implement the Business Process Improvement Program. Pogostin v. Rice, supra. There are few allegations of the circumstances surrounding the implementation of that program. It is alleged in ¶ 24 that on December 4, 2003 "defendants [Star Gas LLC, Ami Traubner, and Irik P. Sevin] caused Star Gas to announce results for its fiscal fourth quarter and year ended September 30, 2003" which announcement included a report on the success of the "Business Process Improvement Program . . . which has developed and evolved over the past five years" and "took a major step towards completion this past April [April 2003]." The clear implication is that the Business Process Improvement Program was implemented sometime in 1998 and took a major step toward completion five years later in 1993. The complaint further alleges in ¶ 17, however, that "From 1993 through 1999, Sevin served as Chairman of Star Gas Corporation, the predecessor general partner." Nothing else is alleged about the corporation which was the general partner of Star Gas, LP at the relevant time in 1998. There is no allegation of stock ownership of that corporation. There is no indication if it was governed by a board of directors or, as is likely, if it was, how many directors made up the board, what their interests were, whether or not they were independent or "outside" directors, what relationships, if any they might have had with the defendants herein, or what risk of liability, if any, the corporation and/or its directors might have been exposed to in 1998 by implementing the Business Process Improvement Program. Consequently the plaintiff has totally failed to meet her burden under 6 Delaware Code § 17-1003 of alleging particular facts which would cast a reasonable doubt on the independence or disinterestedness of the implementation of that program, or which would cast doubt on the application of the business judgment rule to that decision. No futility of demand has therefore been established with regard to the claims regarding the Business Process Improvement Program.
If the plaintiff's claim, although not pleaded, is that the general partner sometime after Star Gas LLC became the general partner in or about 1999 has liability for continuing the Business Process Improvement Program in effect or failing to discontinue that program, that would be a claim of inaction or failure to act governed by the foregoing analysis of the Rales test, and demand futility would not be established.
There are allegations in the complaint's `Third Cause of Action" of breach of defendant Ami Trauber's duty of loyalty by insider trading of Star Gas LP units in May of 1994. The defendants in their reply memorandum at fn. 17 characterize this claim as "abandoned" by the plaintiff and plaintiff has not alluded to that claim in its memorandum or at oral argument. In any event there is no allegation that Mr. Traubner was ever a director of the LLC, and this allegation would seem therefore to have no bearing on the claim of demand futility. The court will therefore not address it further.
Also, it is not necessary because of the court's rulings herein to discuss the defendants' argument that the plaintiff's claims cannot establish demand futility because they are excused by exculpatory provisions in of the Star Gas LP Limited Partnership Agreement.
Order
For the Foregoing reasons the defendants' motions to dismiss the complaint are granted.