Red Black Tree D.O.O. v. Hotel Credits, Inc., et al.

Background

Red Black Tree D.O.O. (RBT) sued Hotel Credits, Inc. (HCI), formerly known as Porter and Sail, Inc., and others. RBT and HCI had agreed in 2015 that RBT would develop digital concierge technology for HCI. RBT alleged that HCI stopped paying its invoices in 2018, leaving unpaid balances exceeding $1.5 million.

HCI’s revenues fell substantially in 2020 during the COVID-19 pandemic, and it stopped operating in 2021. In February 2021, HCI sold a substantial portion of its assets to Luxury Escapes for AU$100,000, approximately US$65,000. RBT later dismissed its claims against additional defendants. The operative complaint asserted breach-of-contract and account-stated claims against HCI only, and fraudulent-transfer, alter-ego, and derivative fiduciary-duty claims against Deepak Shrivastava. Shrivastava was HCI’s chief financial officer.

After discovery, Shrivastava moved for summary judgment under Rule 56. Summary judgment allows a court to decide a claim without a trial when there is no genuine dispute about a fact that could affect the result and the moving party is entitled to judgment under the law.

Fraudulent-transfer claims

RBT alleged that HCI’s sale of assets to Luxury Escapes was a constructively fraudulent transfer because AU$100,000 was not reasonably equivalent to the value of the assets. RBT also argued in its opposition brief, for the first time, that Shrivastava made actually fraudulent withdrawals from HCI’s bank account between 2018 and 2021.

The court rejected the new theory concerning the bank-account withdrawals because it did not appear in the complaint and RBT could not identify evidence that Shrivastava made the transfers with intent to hinder, delay, or defraud HCI’s creditors. The court also rejected the claims concerning the Luxury Escapes transaction. RBT had produced older valuation documents from 2018 and 2019, but the court found that they did not show the value of the assets in 2021, after the pandemic had affected HCI’s revenues and business prospects. Because RBT produced no admissible evidence that HCI received less than reasonably equivalent value, the court granted summary judgment to Shrivastava on Counts Three and Four and dismissed the fraudulent-transfer claims against him.

Alter-ego claim

RBT’s alter-ego claim sought to treat HCI and Shrivastava as legally the same person or entity. The parties agreed that Delaware law applied. Under that law, RBT had to show both that HCI’s operations were mingled with those of its owner and that treating HCI as a separate entity would cause fraud or similar unfairness.

RBT’s principal allegation was that Shrivastava paid HCI’s debts, including RBT’s invoices, from his personal bank account. The court found no supporting evidence and noted that bank statements showed payments to RBT came from HCI’s account. RBT also pointed to $1,200 in wine purchases on HCI’s debit card, but the record did not show whether the purchases were for corporate entertainment. The court held that HCI’s insolvency, the absence of some internal governance documents, and the limited evidence of personal expenses were insufficient. HCI had its own bank account, offices, phone number, computer system, board of directors, and legal counsel. The court concluded that no reasonable jury could find that HCI was Shrivastava’s alter ego. It granted summary judgment on Count Five and dismissed the alter-ego claim.

Derivative fiduciary-duty claim

RBT brought a derivative claim on HCI’s behalf for breach of fiduciary duty. Although RBT was not an HCI shareholder, the court noted that Delaware law allows creditors of an insolvent corporation to bring derivative claims against directors for breaches of fiduciary duties.

RBT argued that Shrivastava breached duties of loyalty and good faith by failing to obtain the approval of a majority of HCI’s preferred shareholders before the Luxury Escapes sale. RBT also argued that he breached the duty of care by failing to conduct due diligence. The court explained that HCI’s certificate of incorporation required written consent or an affirmative vote from a majority of preferred shareholders for a transaction disposing of all or substantially all of HCI’s assets. The court found that HCI’s board appeared to have approved the transaction without satisfying that requirement; discussing the deal with shareholders was not the same as obtaining the required approval.

The court nevertheless held that the apparent charter violation did not amount to bad faith under Delaware law. RBT had not shown that the transaction was for less than equivalent value or was harmful to HCI and its stockholders. RBT also had not produced evidence that Shrivastava or the board lacked independence, acted without a rational business purpose, or used a grossly negligent decision-making process. The court therefore granted summary judgment on Count Six and dismissed RBT’s derivative fiduciary-duty claim.

Disposition

The court granted Shrivastava’s motion for summary judgment. It dismissed with prejudice the claims against Shrivastava and directed the clerk to close the motion.