[00:00:00] Speaker 05:
Case number 25-7112, Marion Koster and Koster Realty LLC appellants versus Stephen Eschwatt et al. Mr. Ross, the appellant is bound for the appellees.

[00:00:11] Speaker 04:
Good morning, Your Honors.

[00:00:16] Speaker 04:
The district court's grant of summary judgment was error both procedurally and substantively. Procedurally, the district court erred in granting summary judgment on a ground not raised in defendant's summary judgment motion or its supporting memorandum, namely that the actions that we allege constituted breaches of fiduciary duties were protected by the business judgment rule in Delaware. Defendants did not make that argument in their summary judgment motion. Instead, they argued that there's no evidence at all in the record that the defendants committed the acts that we allege constituted fiduciary breaches and that the collateral stoppel doctrine barred one of our claims.

[00:01:01] Speaker 04:
In fact, nowhere in their summary judgment motion or in their 23-page opposition or supporting memorandum did they even mention the business judgment rule or the entire fairness standard. There's no mention of that whatsoever. As the Seventh Circuit held in Malhotra, a case that we cite in our reply brief, when a party moves for summary judgment on ground A...

[00:01:24] Speaker 04:
The opposing party is not required to argue ground B when that ground could have been raised by the moving party, but they chose not to. And that's exactly what we have here, Your Honors. Defendants who are represented by highly skilled counsel decided for whatever reason not to move for summary judgment on the ground that if we committed the acts that Costa alleges we did, they're protected by the business judgment rule.

[00:01:50] Speaker 06:
Instead...

[00:01:51] Speaker 03:
I take some of that, but I read their motion, their summary judgment motion, a little broader than just saying we did not intentionally suppress profits. They do say, to your point, they do say we did not intentionally suppress profits. But I think they also say...

[00:02:14] Speaker 03:
And even if we did, it was legal and fair. And they've got some quotes here. I'm curious why you think they don't basically say what I'm saying they say.

[00:02:28] Speaker 03:
Your experts do not identify a single transaction whereby money was improperly or unlawfully transferred to any SPE. So they're not saying no money was transferred. They're just saying the transfers were not improper or unlawful. They say, quote, servicing the related entities is what UIP was established to do. So, again, they're saying it could be read to be saying it wasn't established to make a profit. It was established to service the related entities.

[00:02:56] Speaker 03:
And then last quote here, any assertion that such transactions represent evidence of fraud or malfeasance ignores the basic structure of UIP as contemplated from its inception.

[00:03:06] Speaker 04:
Yeah, so that goes to what standard applies. Under the entire fairness standard, if that applies, it's their burden to show that everything was entirely fair. They didn't put forward evidence doing that. And the district court erroneously held that it was our burden to show under the business judgment rule that, A, it didn't apply, and, B, it wasn't satisfied here.

[00:03:23] Speaker 03:
So that's why the standard— But isn't the business judgment rule the default? And then if you want—that's how defaults work. If you don't want it to be—if you don't want the default to be applied, the burden is on you to rebut— That it's the default, that the default is the appropriate standard.

[00:03:39] Speaker 04:
That would have been true if they had moved for summary judgment on the ground that their acts did not violate the business judgment rule.

[00:03:45] Speaker 03:
I guess that's what I'm saying is I think they sort of did.

[00:03:50] Speaker 03:
Those three quotes are sort of saying like these acts that you allege were not improper. They didn't violate the rules.

[00:04:00] Speaker 04:
Well, nowhere do they mention the business judgment rule in their supporting memorandum.

[00:04:05] Speaker 03:
It's often the case you don't mention the defaults.

[00:04:12] Speaker 03:
It's the exception to the default that you'd be expected to mention if you don't want the default to apply.

[00:04:17] Speaker 04:
Well, they argue that there's no evidence that these acts happened.

[00:04:23] Speaker 03:
They did, but then I thought they made it in the alternative argument that even if these acts did happen, you know, A, B, C, not improper. This is what UIP was supposed to do. No evidence of fraud or malfeasance.

[00:04:36] Speaker 04:
Well, we certainly weren't on notice that they were contending.

[00:04:40] Speaker 04:
They were certainly aware of the issue of the entire fairness rule versus the business judgment standard because in Koster 1 in the Court of Chancery, before then-Vice Chancellor McCormick got to the analysis, she spent a lot of effort in her opinion discussing whether the entire fairness standard applied to our claim there or whether the business judgment rule applied, and she determined that the entire fairness standard applied. So we were not on notice when we prepared our lengthy opposition brief that they were contending that what we alleged, that they were on both sides of these numerous transactions, that they took the position that the entire fairness standard did not apply.

[00:05:17] Speaker 04:
Had they taken that position, we would have had the obligation under Rule 56C to put forward evidence, A, that Schwart and Bunnell were corporate fiduciaries. In other words, they're either controlling stockholders or board members, and B, that they stood on both sides of the transactions that we challenged. If we established both of those facts, then the entire fairness standard would apply. But they didn't do that. They just said, oh, this stuff didn't happen, or their experts can't prove that any specific transaction was... Were you unnoticed from their motion?

[00:05:50] Speaker 04:
We were not.

[00:05:51] Speaker 00:
Wait, can I finish my sentence? Sorry. I apologize. Maybe it'll still be the same answer. But were you unnoticed that when they made the statements Judge Walker referenced, that they were saying, that they were arguing that...

[00:06:09] Speaker 00:
even if we intentionally ran this not to have a profit, that decision fell within the business judgment rule. Did those three sentences he mentioned put you on notice that they were doing that alternative argument, or did you understand them to be simply statements about, and therefore it wasn't improper, it wasn't unlawful.

[00:06:38] Speaker 04:
The latter, Your Honor. We specifically know in our opposition brief at footnote seven that they hadn't raised the issue of which standard applied. And if they had, the entire fairness standard applies because we alleged that they were on both sides of the transactions.

[00:06:55] Speaker 00:
What happens if...

[00:06:57] Speaker 00:
a summary judgment the movement the movement makes arguments that at least 98 of which clearly are simply pushing one theory here we didn't intentionally run this to not make a profit um and then there are some ambiguous lines that could be read as consistent with that or alternative arguments What is, what's, who has the burden of putting the court and the other side on notice?

[00:07:27] Speaker 04:
The move-in does. The move-in does, Your Honor. Under civil tax, the Supreme Court opinion interpreting Rule 56, it's incumbent upon the moving party under Rule 56 to identify each of the grounds on which it's moving. Do you have a text in your appellate opening brief to our court?

[00:07:43] Speaker 04:
I don't believe so, but we certainly cited it in our reply because they invoked 56.

[00:07:48] Speaker 04:
Can you forfeit arguments that are raised for the first time in a reply? We did make the argument that the district court erred in granting summary judgment on a ground and on an issue not raised in their summary judgment motion and supporting memorandum. We clearly made that argument in our opening brief, Your Honor. But I will acknowledge that we did not cite the seal of text.

[00:08:08] Speaker 00:
Can you forfeit controlling case law? I think the Supreme Court said otherwise.

[00:08:13] Speaker 05:
I actually don't know the answer to that, Your Honor.

[00:08:15] Speaker 00:
Sorry. Absolutely.

[00:08:16] Speaker 05:
A little bit of an odd position to imagine a summary judgment question divorced from any inquiry about the underlying legal rule.

[00:08:33] Speaker 05:
Well, I mean, the summary judgment is depends on whether there are disputed issues of material fact and the substantive law what's material so i mean seems seems odd to have a kind of law-free summary judgment motion in the way that you're attributing to your friends on the other side i think the district court would have been entirely uh uh

[00:09:09] Speaker 04:
It would have been entirely reasonable for the district court to rule there's a genuine issue of material fact as to which standard applies and either request supplemental briefing under Rule 56F on that issue or deny summary judgment with leave to file another one.

[00:09:24] Speaker 04:
But we certainly were on – they were taking the position, as we understood their brief, and I think it's any fair reading of the brief, that, hey, we didn't commit these acts. So it didn't matter which standard applied because if we didn't do these things – We have no liability regardless of what standard applies. That was certainly the thrust of their brief. They did not rely on or cite the eBay case that the district court relied upon for the proposition that it's perfectly okay under Delaware law not to run a corp, an ink, for profit.

[00:09:56] Speaker 04:
They did not raise that issue in their opening memorandum.

[00:09:59] Speaker 05:
You now seek to challenge some...

[00:10:05] Speaker 05:
more specific actions like the interest-free loans and things of that nature you think they did they deny the existence of the loan they deny that there was any material loan made that affected our client in any adverse way

[00:10:24] Speaker 04:
And they couldn't deny the so-called consulting fee payments. So that's why they moved.

[00:10:30] Speaker 05:
I mean, but that's my point, that there are specific acts at issue and you're contesting the legal consequence of those. I just I don't know how you do that, how one can do that.

[00:10:45] Speaker 05:
without a debate about are we assessing these acts under the business judgment standard or the complete fairness standard?

[00:10:55] Speaker 04:
Well, with respect to the consulting fees, they knew they couldn't deny those. They clearly stood on both sides of those transactions. So with respect to that one claim, that one issue, they said, oh, collateral estoppel applies because of the holding in Delaware. So that's why they made the collateral estoppel argument. because they couldn't deny that. Everything else, they said, oh, there's no evidence. Costa had to call it discovery and all these experts, but there's no evidence that we actually did these things.

[00:11:22] Speaker 03:
I thought this is, I think Judge Katz's first question, but I wasn't sure what your answer was.

[00:11:27] Speaker 03:
A loan was made, and they did not deny that a loan was made. Is that correct?

[00:11:38] Speaker 04:
There were...

[00:11:43] Speaker 04:
They deny that there was anything improper about it. That's correct.

[00:11:48] Speaker 03:
But they did not deny that the loans were made.

[00:11:51] Speaker 04:
Right. But they had other justifications for why it didn't cause any damages to my client, such that it would be a breach of fiduciary duty.

[00:12:02] Speaker 00:
I just had one question quickly about, just to make sure I understand the scope of the summary judgment issues for us. Okay.

[00:12:12] Speaker 00:
You have counts in your complaint for aiding and abetting and civil conspiracy and declaratory and injunctive relief, but you haven't challenged the district court's dismissal of those claims.

[00:12:24] Speaker 00:
You haven't argued about aiding and abetting or civil conspiracy or declaratory and injunctive relief as opposed to monetary relief going either to the corporation or to you, your client.

[00:12:35] Speaker 04:
The focus of our appeal is the breach of fiduciary duty claims. That's correct, Your Honor.

[00:12:39] UNKNOWN:
Okay.

[00:12:40] Speaker 00:
And then you have a number of other counts that seem to raise direct rather than derivative claims. But I haven't taken your, but tell me if I'm wrong, I have not read your brief before us is to be challenging the summary judgment as to those direct claims that you're here on the breach of fiduciary duties and derivative claims. Is that right? As a derivative claim?

[00:13:02] Speaker 04:
We believe it's both a direct and a derivative claim.

[00:13:06] Speaker 00:
Have you argued before us? My understanding of the brief before us was all about derivative claims on behalf of the corporation.

[00:13:18] Speaker 04:
We did not intend for it to read that way. We believe that my client, Mrs. Koster, has direct claims against Mr. Bonnell and Mr. Schwat for breaching fiduciary duties they owe her. Their capacity is controlling stockholders and as board members. So we don't read those as derivative claims.

[00:13:36] Speaker 00:
Well, because the other, again, I read the other side's brief to us to be arguing that you only have derivative claims. You can't have direct claims against them. And you did not I didn't see you countering that argument in your red brief other than to say give us a pro rata share, which really is a framework for analysis and derivative claims.

[00:14:00] Speaker 04:
Right. We didn't address that issue because the district court didn't reach it.

[00:14:03] Speaker 00:
Well, it granted summary judgment on all claims. You don't still have your – is it your view that the district court did not rule on the direct claims?

[00:14:11] Speaker 04:
Not at all, Your Honor. So let me clarify. So the issue that we've briefed in our red brief is whether, to the extent there are – Your blue brief, I apologize.

[00:14:23] Speaker 04:
The blue brief, to the extent there are derivative claims – on which damages are ultimately awarded whether they go they can go directly to her which we argue under delaware case law absolutely they can under these facts yeah i understand that versus uh to the corporation but you didn't challenge i guess i didn't see you challenging dismissal of your direct claims they aren't viable you only have derivative claims well we thought we were appealing all the entire summary judgment order okay all right

[00:14:57] Speaker 05:
So unless the panel has— Suppose we get over the forfeiture argument that you're pressing, just on the merits.

[00:15:07] Speaker 05:
How do we know that Schwab was a controlling shareholder? I mean, it's 50-50. The premise of one of your Delaware actions was that— The corporation is hopelessly deadlocked, which implies absence of control by either shareholder.

[00:15:35] Speaker 04:
Under the con case that we cite at Delaware, the Supreme Court case. So for the first three years and four months after Mr. Koster passed away until the stock sale on August 15th, 2018, Mr. Schwab was a 50 percent stockholder. My client was a 50 percent stockholder. However, he was chairman of the board. My client did not have a board seat. He was also CEO of the company. All the testimony in which we would have put in the record had this issue mentioned. uh been engaged in the summary judgment motion by the defendants he ruled uip with an iron fist and but now basically did what he was told by schwab so you know if we had been allowed to put in evidence it's over it's overwhelming that he was in fact a controlling stockholder

[00:16:19] Speaker 05:
I mean, one gets that sense from just looking at this. I didn't see a lot of evidence beyond that. And maybe that just comes back to the question of whose burden it is.

[00:16:34] Speaker 04:
Right. Had they engaged on that issue by moving for summary judgment on the issue of which standard applied? Absolutely. We would have put all that extensive record evidence into the record in opposing the summary judgment motion. Absolutely.

[00:16:49] Speaker 05:
And I assume you would give me roughly the same kind of answer vis-a-vis the board, which...

[00:16:58] Speaker 05:
At least formally, Schwab has only one vote out of three, and we don't know a whole lot about Bunnell and Cox.

[00:17:07] Speaker 04:
So the evidence, unfortunately, Mr. Cox is no longer with us. The evidence, and it's abundant in both in discovery in this case and discovery elsewhere, including Delaware and some ancillary cases, that Mr. Cox was very subordinate to Schwab and Bunnell, did whatever he was told, was CFO in name only. In practice, he just took instruction. He never once disagreed with anything they suggested. So the evidence is powerful there as well.

[00:17:37] Speaker 04:
that Schwart and Bunnell following the stock sale in August 2018.

[00:17:41] Speaker 05:
Is all of that in the summary judgment record?

[00:17:43] Speaker 04:
It's not because we didn't think we needed to put it in.

[00:17:46] Speaker 05:
Again, we're circling back to the question whose burden it was.

[00:17:50] Speaker 04:
Right. And that highlights from our perspective, the unfairness of not being on notice that this was going to be an issue on which the district court would roll. I got it. Thank you.

[00:17:57] Speaker 00:
Thank you very much, counsel.

[00:18:04] Speaker 01:
Thank you. May it please the court, Deborah Baum on behalf of the defendants. Mrs. Koster was the plaintiff below. She had the burden of proof. We moved for summary judgment on the principal basis, as the court has noted, that there was simply no evidence to support any of her theories. The default standard in fiduciary duty claims under Delaware law, the baseline, as the Delaware Supreme Court has repeatedly said, is the business judgment rule.

[00:18:36] Speaker 01:
We moved under Rule 56C for summary judgment saying there's really no evidence of any of this violation of breach of fiduciary duty. Yes, certain interest-free loans were made. They've been doing that for years between companies that basically were co-owned.

[00:18:59] Speaker 01:
And yes, they paid bonuses, consulting fees to the owners the same way they had for years. But there's no evidence of what The plaintiff had claimed to the court in seeking wide-ranging discovery of these siphoning money out of the company to the harm of its now one-third shareholder, Mrs. Koster. We said, simply didn't happen.

[00:19:26] Speaker 01:
Did we say, and by the way, Your Honor should apply the business judgment rule, which is the default standard in our moving papers? We did not. But it's the default standard.

[00:19:38] Speaker 01:
They had the burden. Excuse me. Sorry.

[00:19:42] Speaker 05:
I mean, it might be the default standard, but we didn't do any of the facts alleged. There's a different argument from if we did, it's fine under the business judgment rule.

[00:20:01] Speaker 01:
Well, I think we argued both, really. I said the primary argument was there's no evidence of any of this. And we did say there's no evidence that any of this violates Delaware law. And there's the whole collateral estoppel issue because the Delaware Supreme Court is the this.

[00:20:19] Speaker 00:
But when you say this didn't violate, because it wasn't at all clear to me that you were arguing that even if we intentionally suppress profits in a way to prevent Ms. Foster from getting dividends or payments, that's okay under the business judgment. Where is that? Can you tell me the pages in your summary judgment brief where you argue that to the district?

[00:20:47] Speaker 01:
And, Your Honor, I don't think we argued it that way. Okay.

[00:20:52] Speaker 01:
To be clear.

[00:20:53] Speaker 00:
No, I understood your... Oh, please, please.

[00:20:56] Speaker 01:
The plaintiff has the burden under Solitex, under Rule 56, to come forward and say, here's all the evidence as to why there is evidence of a breach of fiduciary duty. We said no evidence of a breach of fiduciary duty. She had the burden to come forward and say... Here's evidence of a breach of fiduciary duty, and here's evidence of why you should apply the entire fairness standard.

[00:21:25] Speaker 00:
I understand, but let me get into the problem here, because the district court didn't say there's no dispute of material fact as to whether there was a breach of of fiduciary duty. What the district court said was, I'm assuming, even if I assume you intentionally suppress the profits, that was okay under Delaware law. Something you hadn't argued. And then said, it was also okay because Ms. Koster had a chance to invest in the SPEs. Something else that you were not arguing is a basis for summary judgment.

[00:21:58] Speaker 00:
Well, part of... Am I right that neither of those two grounds were argued by you for summary judgment?

[00:22:03] Speaker 01:
I think we did argue that she had not been denied any value.

[00:22:08] Speaker 00:
That's a different thing from...

[00:22:13] Speaker 00:
Well, you didn't. What the district court did was I'm assuming you intentionally suppressed profits and Delaware law allowed you to do that. Well, you had that intent to suppress profits, whereas your argument seemed to be, one, we didn't. There were all these profits.

[00:22:29] Speaker 00:
And two, you don't have any evidence that these transactions you don't like happened.

[00:22:36] Speaker 00:
were designed to get you as opposed to that was how we did things. As you just said, that's how we do things.

[00:22:45] Speaker 01:
Well, I think the court did find, Your Honor, that, and I quote, the plaintiff failed to prove that defendants ran UIP in a way that denied her value in her ownership of the company.

[00:22:59] Speaker 00:
Plaintiffs don't have to prove something to summary judgment. They just have to raise a disputed question of material fact at summary judgment.

[00:23:06] Speaker 01:
Well, I understood the court's order to be that they had not come forward with evidence. But then he did go on. The court did go.

[00:23:12] Speaker 00:
But the court needs to find no dispute of material fact. You have to look at the factual record presented by both sides. I understand your argument to be that the district court could have ruled that way. But there seems to be quite a disconnect. You're arguing one thing.

[00:23:31] Speaker 00:
They're arguing another thing. And the district court sort of said, well, I got door number three.

[00:23:38] Speaker 00:
And so that's what's very confusing to me.

[00:23:43] Speaker 00:
That's the problem here.

[00:23:45] Speaker 01:
Yes. Well, I think part of the issue was just to give a little bit more context here. There's a very sort of far-reaching complaint. The Delaware Supreme Court en banc had ruled and said the underlying transactions that initially were the bedrock of their complaint, the Delaware Supreme Court said That didn't violate, that was not a breach of anyone's fiduciary duty. So those claims were out of it. It was not entirely clear what was left. And they went to the court and said, we need, we think they're siphoning money out of the company and giving it to themselves, basically.

[00:24:24] Speaker 01:
We think they're all, we need discovery to be able to show you that money is going out to these individuals to the detriment of our client who's a third owner.

[00:24:35] Speaker 01:
And there were all kinds of things sort of in the background. It wasn't crystallized exactly what they were even arguing, but they went to the court and said, we want discovery of all the financials. They got bank records for the individuals, for the LLCs, the individual entities that were the owners. They got... their bank records they got ledgers of all the 12 they got to identify 12 different spe's different projects got all the records of all of them and then came back with expert reports that didn't identify any of the kinds of things they said they thought they could find so

[00:25:15] Speaker 00:
Yes.

[00:25:17] Speaker 00:
Your argument was they didn't have evidence of this siphoning off of self-benefit.

[00:25:23] Speaker 01:
And they came back and said, yes, but you are running it. They came back, and they're in response.

[00:25:31] Speaker 00:
So you've had this discovery, and you guys look and go, there's nothing here about them siphoning money off into their own pockets. And so then you, understandably, file a motion for summary judgment saying there's no there there as to siphoning off money into their pockets. Correct. And they come back with their opposition, but you chose to do summary judgment on that theory. Understandably, that's the course of discovery. Correct. But the district court doesn't say that.

[00:26:02] Speaker 00:
That's the problem. The district court does not grant summary judgment on the ground. There was no dispute of material fact, genuine dispute of material fact as to the siphoning either for self-benefit or siphoning away from Mrs. Koster.

[00:26:19] Speaker 00:
The district court instead says, assuming there is.

[00:26:23] Speaker 00:
That's fine under Delaware law, which is just a very different argument. And then the separate argument that the district court relied on, and even if you're doing this, she was offered a chance to participate in this siphoning process.

[00:26:41] Speaker 00:
Yeah, so she was offered the opportunity to invest in the SPEs, right? And so those are the two things the district court ruled on, which just, I mean, it's not, this is not a you problem. This is the question here is the district court wasn't responsive to the argument that you guys were making based on the discovery record. Right.

[00:26:59] Speaker 01:
I think your honor is correct in that the district court perhaps didn't use the words no issue of material fact in the finding, but the court said there's no evidence of this. No evidence. Not just there's not a material issue, but there's no evidence of what they're claiming. here. And the siphoning off, as we've referred to it, is something different, I think, than investment in these SPEs.

[00:27:29] Speaker 01:
It's a different thing.

[00:27:34] Speaker 01:
Basically, what they came to the court to say is, we think money is being taken out of the company wrongfully.

[00:27:41] Speaker 00:
Where is this no evidence statement? Which one are you referring to?

[00:27:45] Speaker 01:
Well, I think there are a number of them.

[00:27:48] Speaker 01:
In the court's opinion at page 11 of 17, I think I have a joint appendix site to that, 2861.

[00:28:01] Speaker 00:
The court... I unfortunately have a Westlaw version.

[00:28:04] Speaker 01:
I'm sorry. That's my fault. It's page 11 of the court's order. Now, I thought I had it here at the podium. I don't.

[00:28:15] Speaker 01:
But the court said their plaintiffs failed to prove that defendants ran UIP in a way that denied her value in her ownership of the company.

[00:28:26] Speaker 00:
Denying value is not the same thing as saying there's no...

[00:28:31] Speaker 00:
issue of material fact as to that's denying her value. That's right. Different question.

[00:28:40] Speaker 01:
But I can keep going. Plaintiff has come plaintiff fails to make the case in terms of the consulting fees. Plaintiff fails to make the case that these payments were improper. and resulted in a breach. She offers no proof regarding the board's knowledge and consideration of the consulting agreements. And then plaintiff has come forward with no proof about the fees other than their payment. That's at page 15, joint appendix 2865.

[00:29:06] Speaker 00:
I mean, all of this was, because District Court did this all through the framework of saying, Running UIP, this is their heading, running UIP at breakeven is not a breach of fiduciary duty.

[00:29:22] Speaker 00:
Right. And then under the... If you have run it at breakeven, do you ask for summary judgment on the ground that taking their argument at face value, running it at breakeven...

[00:29:37] Speaker 00:
is consistent with fiduciary duty?

[00:29:39] Speaker 01:
Well, certainly on our reply, we did. They came back and said, but you ran it at breakeven, and that's a violation of Delaware law. And we came back in our reply and said, essentially, no, it's not. We disagree. And to the extent that I heard...

[00:29:55] Speaker 00:
Because it was within business judgment rule?

[00:29:58] Speaker 01:
Well, because the entire fairness standard didn't apply, and they argued it.

[00:30:02] Speaker 00:
The reason the fairness doctrine doesn't apply is not an argument that something is lawful.

[00:30:08] Speaker 01:
Well, we said both. We said it's lawful because the Delaware courts have said it's lawful. And the business judgment rule is the default standard. And we said under eBay, and we had arguments about this in the hearing on summary judgment. I heard a lot of and read a lot in their briefs about there not being an opportunity to argue these things. The court held an extensive hearing on the motion for summary judgment. And asked specifically in the entire Fairness Rule, the applicability of the entire Fairness Rule was discussed at length.

[00:30:43] Speaker 01:
And this is at Joint Appendix 2892 and forward. It goes on for pages.

[00:30:49] Speaker 00:
So you were relying for your law on In re tradis.

[00:30:55] Speaker 00:
Right? That was about Revlon duties at a sale. Yes. Yes. Ron Perlman. Yes. eBay versus Newmark, which I actually think hurts.

[00:31:04] Speaker 01:
Well, I think the plaintiff relied on eBay and said you can't run a company not for profit. Right. And what... I think the court correctly... What they said there. Well, it said... It's a little bit nuanced, Your Honor. What it said was, if you're a Delaware corporation, you can't just be philanthropic, period. And it said, we're not saying that you can't have corporate... You can't have things for culture. There has to be a proper corporate purpose.

[00:31:35] Speaker 00:
And what... If you look at it through this lens, right, you can't forego profits just because...

[00:31:41] Speaker 00:
You want to do this other thing over here. And as long as you're doing it, you can do these terrible things as long as you are making value for your shareholders. But I mean, when all these SPEs make money, does that increase the value for UIP shareholders or just for SPE shareholders? For, well, the concept, and this was brief. I'm just asking a fact question. When money is made, when a decision is made to take money out of the corporation, put it into these SPEs, and let's say the SPE works out, let's say two of them work out really well and make a ton of money.

[00:32:20] Speaker 00:
Who gets that money?

[00:32:22] Speaker 01:
if I may, Your Honor, that's a slightly faulty premise. The money doesn't come out of the entity UIP into the SPEs. The way it works is, and this is all explained in the Delaware opinions, the concept was, and a lot of real estate companies are set up this way, the owners have their three subsidiaries, a contractor, a property manager, an asset manager.

[00:32:51] Speaker 01:
And the principals themselves invest their own money in these special purpose entities. They invest in a new project. And they typically have a big equity partner, a big lender that owns the majority of it. But the way they create value, as Mrs. Koster's late husband said and is quoted in many of these opinions as saying, the way we create value is in managing these properties managing these investments of ours through our entities.

[00:33:25] Speaker 01:
In fact, the properties are the ones, those special purpose entities pay money to UIP for property management services, for asset management services, for construction.

[00:33:37] Speaker 00:
So I understand the structure. I want to get back to my straightforward question, okay? Yep.

[00:33:44] Speaker 00:
When an SPE makes money, Does that, and let's assume maybe two of the shareholders are invested in that SPE, but not a third of UIP, okay? So that SPE makes money.

[00:34:02] Speaker 00:
Does that increase the value of the shares of UIP itself, including for those who have not invested in the SPE?

[00:34:13] Speaker 01:
Yes. It can in two ways, but in one way if they don't invest.

[00:34:19] Speaker 00:
Not it can. Did it?

[00:34:21] Speaker 01:
Yes.

[00:34:24] Speaker 01:
And that's what the court found, and that is what was briefed and held by the Delaware Supreme Court as well, which was it was created to create value for the shareholders in A, providing them an opportunity, providing shareholders these opportunities. They source.

[00:34:47] Speaker 00:
That's what they do. That's separate. I'm just trying to understand if value over here also increases value here at UIP because...

[00:34:57] Speaker 01:
Yes, in a second way, too, because those entities, those properties are the vast majority. They do some third-party work as well. But the vast majority of the income that UIP gets through construction, through property management, they're doing property management services for these SPEs.

[00:35:16] Speaker 00:
So that doesn't mean you're increasing value if that money keeps going out into these other investments. It's not going out. It's coming in.

[00:35:24] Speaker 00:
So are they running a break-even, or does it mean they're making profits?

[00:35:26] Speaker 01:
They made this much less profit. I think they said in the last, whatever, six years that they had records of or that their experts analyzed, they made about a 5.48% profit on average over that period. The industry average was 6%. Mm-hmm.

[00:35:45] Speaker 00:
So they said... I understand you definitely made that argument. Yeah, you could have made a little bit better. There was no... The profits were being made.

[00:35:54] Speaker 00:
That was a fact argument to the district court.

[00:35:57] Speaker 01:
But the money comes in from the SPEs, from those properties for whom they provide property management services. So it's essentially we're going out and we're sourcing one of the things that the principals did. It just sounds like

[00:36:15] Speaker 00:
the genuine dispute of material fact. You're saying, no, profits were coming in. Your value was going up. Her argument is my value stayed flat.

[00:36:25] Speaker 00:
I was paid no money.

[00:36:28] Speaker 00:
Dividends or shares were distributed. Nothing. That's just a, and I understand your explanation, but this sounds like a genuine dispute of material fact.

[00:36:39] Speaker 01:
Well, the court found that there was no evidence that she did not benefit from the value that was created within the entity and that there was no...

[00:36:54] Speaker 01:
Under Delaware law, there was no requirement, no legal requirement that shareholder value take the form.

[00:37:03] Speaker 00:
She wasn't deprived of value. It's not the same thing as she wasn't paid value. She's not saying losing money. She's saying I'm just sitting here staying flat. District court found no deprivation of value.

[00:37:18] Speaker 01:
Right. The district court found that there was nothing being done to deprive. Well, in a breach of fiduciary duty claim, I think you do have to claim that you were damaged, that you were deprived of value.

[00:37:30] Speaker 00:
But I think she did that through.

[00:37:34] Speaker 00:
Look, you were taking all this money, spending it out there. All this money was being made by you guys. Right. Well, I'm not saying any of this is I'm not making anything about fact findings, true or false. I'm just trying to describe my understanding of the arguments. Well, all this money, tons of money was being made over here. And meanwhile, I'm sitting here flat. So that's just a different it's just a disconnect between I think you had your arguments understandable based on the discovery.

[00:38:00] Speaker 00:
She had hers and then the district court just seemed to have.

[00:38:04] Speaker 00:
a completely different take on it.

[00:38:06] Speaker 01:
Well, I think part of the district court's take was part of the value or the principal value that was being created here was the opportunity, sourcing opportunities to invest in these projects, real estate projects. That's why they were founded.

[00:38:25] Speaker 00:
That's only value if you have the resources to make those investments. That was her argument. I didn't have those resources.

[00:38:32] Speaker 01:
I changed my mind. I don't want to do it anymore. Mm-hmm. Or I don't have the resources to do it. Whatever it is.

[00:38:38] Speaker 00:
So that's not value to her.

[00:38:39] Speaker 01:
The record did show, just to be clear, that since her husband passed, she had been paid $2.8 million in distributions from these SPEs.

[00:38:52] Speaker 00:
Some pre-existing investments by her husband.

[00:38:54] Speaker 01:
Yes, because she decided then, I don't want to do it anymore. So the question is, when you've created a company whose purpose is to source investments, to give opportunities to the principals to invest in these deals, and then the deals in turn create revenue for the company, do you have to change your model and not do that anymore?

[00:39:17] Speaker 00:
It's not that they were... I just think that's the very question under eBay. If you have a corporation...

[00:39:25] Speaker 00:
And your argument is, well, we're going to adopt this business strategy over here that's going to not have value made in this, we'll call it the UIP, the spoke here, or the center, the hub, I guess.

[00:39:40] Speaker 00:
Instead, all the value is going to be created out here in these SPEs for those who have the money to invest in SPEs. Is that consistent with eBay versus Newmark?

[00:39:52] Speaker 01:
Well, I think it is, Your Honor, because eBay says you have to maximize value. It doesn't say you have to get every last dime. It says in a unique situation in 2010—it's a 2010 decision— You can't run it as a nonprofit in perpetuity. You can't force that on the next generation.

[00:40:15] Speaker 00:
But Trados... There's fact arguments about whether that's in fact what was going on. But Trados, three years later... It's a different test. That's the test for maximizing value in a sale, regardless of whether you like the way the new owner is going to run the company. But... But the holding— This isn't a Revlon situation.

[00:40:35] Speaker 01:
But what it talked about was the duty—what does—the question in both, really, was what does the duty of loyalty mandate in terms of maximizing value? And what Trotto said was the duty of loyalty mandates that directors maximize the value of the corporation over the long term for the benefit of the providers of equity capital. Value, of course, does not just mean cash. It could mean an ownership interest in an entity.

[00:41:04] Speaker 01:
a package of other securities or some combination with or without cash that will deliver greater value.

[00:41:10] Speaker 00:
All which are given to the corporation's shareholders, not that they have to go invest for on their own. I'm sorry, I've taken up a lot of time.

[00:41:18] Speaker 01:
Right, but it's an opportunity. And then what the court found was there was no demonstration here, no facts here to show that she was deprived of anything.

[00:41:32] Speaker 05:
I want to continue the same general line of questioning, but take a step back. The facts, whether this was losing money, breaking even, making money, whatever.

[00:41:49] Speaker 05:
I take the district court to have adopted a legal theory that.

[00:41:56] Speaker 05:
It does not violate Delaware law for one corporation to be run in order to maximize benefits for owners of a different corporation. It's not a question of...

[00:42:18] Speaker 05:
defining value in some long-term sense or in some expansive sense to account for, you know, feeling good about corporate philanthropy or anything like that. This is something entirely different. This is... It is. This is...

[00:42:40] Speaker 05:
One entity can be run to benefit shareholders of a different entity, and that sounds remarkable to me.

[00:42:47] Speaker 01:
Well, it's not you're run to benefit shareholders of a different entity. It's run to benefit your own shareholders by providing them opportunities through these other entities.

[00:43:00] Speaker 05:
To be clear... I mean, it doesn't.

[00:43:02] Speaker 01:
I think this... If...

[00:43:07] Speaker 05:
If UIP is designed to make as much money as possible for the owners of the SPEs, that's great if all those companies have the same owners, but they don't right now.

[00:43:26] Speaker 01:
And it has been, but they all have the opportunity. They all have the opportunity. To be clear, the Delaware Chancery Court, now Chancellor McCormick, and the Delaware Supreme Court en banc found that this was the way this company was run.

[00:43:46] Speaker 01:
And no one said, whoa, you can't do that. I mean, they had a breach of fiduciary duty claim there related to the business of this very company. They made factual findings that this was the purpose for which it was created and how it had been run for years. And there was no suggestion.

[00:44:08] Speaker 05:
There does seem to be...

[00:44:12] Speaker 05:
a general comfort in the Delaware Supreme Court in this arrangement. And we're sitting in diversity. I get that. I'm a little nervous about this. But this issue was not before them.

[00:44:28] Speaker 05:
They were just focused on the fairness of the price for the third guy to buy in, Bruggen, I think, to buy into the company.

[00:44:38] Speaker 01:
Well, yes and no, Your Honor. Yes, insofar as the entire fairness talks about process, for sure, and value. But the way they got at value was, and the way the valuation is done in a situation like that, is to look at net cash flows. And that's why the issues of these bonuses or consulting fees came up. They said, oh, they're paying outsized bonuses. They're doing this. And they raised the entire issue. That was a big issue. And I tried the case. It was there.

[00:45:09] Speaker 01:
It was a huge issue, was they're trying to run it break even. They're not trying to make money. That was a big issue that went into the entire fairness calculus. So it was very much front and center in the court.

[00:45:23] Speaker 05:
um and so so you and they said best authority for delaware court's blessing this model are The litigation in this case to date, Entratos?

[00:45:37] Speaker 01:
I think so, yes. I think that's right, Your Honor. Okay. Because it was, to be clear, that issue was front and center. The testimony that they cite, you know, a lot of that was from the Delaware litigation because that question was front and center there in the entire fairness analysis. Okay.

[00:45:59] Speaker 01:
unless the court has anything else. I thank you very much.

[00:46:02] Speaker 00:
Thank you very much.

[00:46:05] Speaker 00:
Mr. Ross, we'll give you two minutes, please.

[00:46:09] Speaker 04:
Thank you, Your Honor. I heard my friend Ms. Baum say that it was our burden on summary judgment to prove our claims, and that's fundamentally the error the district court made here. It was our burden on summary judgment to prove our claims, that the siphoning of money and all the other things. That's not true when we're the non-moving party. Our burden is exactly what Judge Millett identified, is to show that there's a genuine issue of material fact. And that's what we did in spades.

[00:46:40] Speaker 04:
Below, if you look at our opposition brief and the extensive record evidence cited in it and submitted as exhibits at the summary judgment stage. And if we were to go to trial, if we were permitted to go to trial, there would be abundant evidence that, although my client has received some distributions, really almost all of them in the couple years after Mr. Koster passed.

[00:47:01] Speaker 04:
She hasn't received anything material, anything above four figures in the last six or seven years. She's had to sell her house because she doesn't have any money. The record would show if we went to trial that Schwab and Bunnell are very wealthy. It's because of the money they've made through the SBEs and a function of paying themselves so-called consulting fees. Even though millions of dollars in consulting fees, even though they're full-time, highly paid UIP executives, my client hasn't received any consulting fee, any dividend, any distribution, or anything of value as a result of her one-third ownership of UIP and one-half ownership prior to the stock sale in August of 2018.

[00:47:42] Speaker 04:
Thank you.

[00:47:45] Speaker 03:
You want to ask a question? Sorry. Sure.

[00:47:51] Speaker 03:
Sorry, Ms. Baum mentioned the hearing transcript. When I looked at the page, she mentioned 2894 and the district for I said, well, only if it's an entire fairness review. Otherwise, it's your burden. It's your burden, is it not, to at least show entire fairness applies. Then Ms. Koster's attorney said, well, they stand on both sides of the transaction. The court said, no, one shareholder does.

[00:48:23] Speaker 03:
That seems like you had every opportunity at the district court to, number one, you had notice that the district court was considering these issues, and number two, you had every opportunity to make an argument to the district court. And if you felt like you hadn't had an opportunity to produce evidence that would create a dispute of material fact, you had an opportunity to tell the district court, no, look, that's not what the summary judgment motion was about. We've been blindsided here.

[00:48:54] Speaker 03:
Give us an opportunity, show what we've discovered and put that.

[00:48:59] Speaker 03:
It just seems like you're telling us now you didn't have the opportunity to make the argument that I'm reading on page 2894.

[00:49:06] Speaker 04:
Well, we didn't have an opportunity to submit briefing and evidence. Did you ask for it in the hearing?

[00:49:11] Speaker 03:
Not at the hearing. The judge seems to be very, you know, telegraphing.

[00:49:18] Speaker 03:
It's going to matter to me whether it's entire fairness or whether it's business judgment. It's going to matter to me whether they stand on both sides of the transaction or whether we should do each transaction individually. And so then only one person is one third known. It just seems like district court is saying this is the opinion I'm thinking about writing. And at no point does Ms. Costner's attorney say, wait, wait, wait, wait, that's not the that's not the issue presented in the summary judgment motion.

[00:49:43] Speaker 03:
This is not fair. We didn't get noticed. We didn't have an opportunity to put evidence into the record that would create a dispute of material fact.

[00:49:50] Speaker 04:
In all fairness, my recollection of that transcript is that we did make that point.

[00:49:55] Speaker 03:
And I didn't mean to state with my last point as declarative as I did, so that was my mistake. But I didn't see it on page 2894, so that's why I'm bringing it up now. I'm asking you, if you did make that point, where?

[00:50:11] Speaker 04:
I don't have the transcript site.

[00:50:15] Speaker 04:
Well, actually, maybe I do.

[00:50:20] Speaker 04:
So given the history of this case and how long it had been pending before the district court, it was quite clear to us that asking for additional briefing or turning the oral argument, based on the docket entry, it was clear the December 2024 proceeding was going to be oral argument on the pending summary judgment, which had been pending for a long time. It would have been very poorly received by the district court, in our view, if we'd asked introduce exhibits. And I was just going to say that Ms. Baum would have been pounding the table saying this is improper.

[00:50:53] Speaker 04:
So we didn't view it as an opportunity and asking for additional briefing again would have, we had appeared before the district court a number of times. It was quite obvious to us if we asked for that, we would risk alienating the district court. Fair enough.

[00:51:07] Speaker 00:
I just wanted to follow up on that. Yeah.

[00:51:12] Speaker 00:
discord didn't end up relying on that point anyhow because it didn't it didn't get to the are they on both sides issue but it struck me as troubling to think of them and what the discord said as well in this entity uh schwartz invested and then and this one bunnell's invested but they were I taught your theory. The case was if they were in this together and it's like, yeah, I'll vote for you on this one. You vote for me on this one. We are jointly invested in these either jointly invested in the S.P.E.s or it was it was just a practice of them always supporting the other ones.

[00:51:50] Speaker 00:
If they weren't jointly in a particular S.P.E., they would always support that. I think knowing that they would turn around and support them in their S.P.E.

[00:51:59] Speaker 04:
So virtually all of the SBEs, both Schwab and Bunnell, are jointly invested.

[00:52:02] Speaker 00:
Right.

[00:52:03] Speaker 04:
So that's not maybe one legacy one, but that would be an outlier. They're almost always.

[00:52:09] Speaker 00:
Right.

[00:52:11] Speaker 00:
So they're definitely on both sides of the transaction if they're then voting for it and then benefiting from it.

[00:52:16] Speaker 02:
Absolutely, Your Honor.

[00:52:16] Speaker 00:
So the district court statement was just inaccurate.

[00:52:18] Speaker 02:
Correct. I think it was talking about.

[00:52:21] Speaker 02:
maybe the consulting fees. And I think... That was with respect to the consulting fees.

[00:52:27] Speaker 00:
Okay, I misunderstood that. But even then, if they're each approving each other's consulting fee...

[00:52:32] Speaker 00:
You're in the same situation, are you not?

[00:52:34] Speaker 03:
I agree 100%. And did you put evidence into the record that it was a quid pro quo? It was law-growing. I'll vote for yours if you vote for mine.

[00:52:41] Speaker 04:
No, we would have had to raise the issue of what standard applied. But they did not contest. In fact, they conceded the fact that the consulting fees had been made to the tune of millions of dollars.

[00:52:50] Speaker 03:
They didn't consult that they were made, which I think cuts against you because it... Yes, it was it was crime for summary judgment. They weren't arguing about what happened. They were arguing you were arguing about whether it was legal, whether it was fair. And as for whether it was legal and whether it was fair, the district court is telling you, I think.

[00:53:11] Speaker 03:
that there was someone, I think that it was, what's the right phrasing here? Oh, you were saying they got together and decided to pay themselves consulting fees, sort of in the implication is as a quid pro quo. And the court said, where's the proof of that? I mean, you can't just come in and say that. I'm quoting.

[00:53:37] Speaker 03:
And then you your attorney said something here. And then the court says only if it's an entire fairness review. Otherwise, it's your burden. It's your burden. Just seems like it's like I'm reading. It's like I'm reading the appellate briefs.

[00:53:48] Speaker 04:
But it underscores the centrality of which standard applied. And we cited case law in our briefs. It's often dispositive under Delaware law, which applies. We didn't get to brief that issue. And by the time we got into the hearing and the district court was asking these questions, it was too late. There was no briefing.

[00:54:08] Speaker 04:
It was our strong sense. We thought about perhaps asking for post-hearing briefing, but we decided it would just absolutely not be well-received.

[00:54:18] Speaker 04:
The case law doesn't require it. Rule 56 doesn't require it. We were blindsided. We didn't think that the district court would rule the way it did. We were surprised when we saw that it was all business judgment rule and that we had not met our burden because we didn't see ourselves as having any burden under Rule 56C other than to show that genuine issues of material fact existed on the issues, the factual issues they filed their summary judgment motion on. And we did just that. If they had raised the issue of which standard applied, absolutely we would have had a burden, and we would have met that burden.

[00:54:52] Speaker 00:
Does the record have evidence that they were in cahoots on the consulting fees?

[00:54:58] Speaker 00:
Did you get evidence of that in discovery? I scratch your back, you scratch mine. I'll get my consultant fee, you'll get yours.

[00:55:05] Speaker 04:
Well, the evidence is that they approved each other's. Can we get into the exact... you know, motivation. Uh, but yes, the record would show that they did it consistently. And our theory is that those were, uh, uh, UIP profits that should have been distributed equally to the shareholders.

[00:55:29] Speaker 00:
That was your legal theory. What I'm asking is, so you say you had evidence, at least of a pattern of them approving each other's consulting fees. Absolutely. But you never cited or referenced that pattern anywhere in your summary judgment briefing.

[00:55:41] Speaker 04:
We did not because it was our understanding that it was their burden under the entire fairness rule to show that those were entirely fair transactions.

[00:55:49] Speaker 00:
Well, you don't get to the entire fairness doctrine unless you first prove this. I think maybe the district court's question, you got to show that you got to come forward with evidence, rebutting the business judgment rule, showing that they were in fact on both sides. That's why I asked. So you had evidence there on both sides. And if you wanted to get an entire fairness land, you had to come forward with evidence saying, no, judge, they were on both sides.

[00:56:15] Speaker 04:
I think that on both sides was conceded, and I want to go back to the key.

[00:56:18] Speaker 00:
On both sides? As in, I got a consulting fee, or Swat got a consulting fee, Bunnell got a consulting fee. They may have conceded that, but that they were approving these distributions for each other, right?

[00:56:38] Speaker 00:
To be clear. If we don't have to get into mens rea at this point or their intent, I would always consistently do it for you and you would only consistently do it for me and that's sucking money out of UIP.

[00:56:51] Speaker 00:
Why isn't it a problem that you just didn't, you could have said orally to the district court judge, we have that evidence. We have that evidence. We didn't include in our brief because of this seems to be sort of a moving target for us.

[00:57:07] Speaker 00:
But to not say we have that evidence, it's deposition X, Y, Z. Point the district court to it.

[00:57:14] Speaker 04:
So I want to emphasize... At least file a supplemental...

[00:57:18] Speaker 00:
Letters on the district court saying here's where that evidence is.

[00:57:21] Speaker 04:
If your honor looks at their summary judgment memorandum with respect to the consulting fee payments, which really couldn't be disputed, it couldn't really be disputed there on both sides. They focused on collateral stoppage because they knew there was a problem. And then they had this argument that I think is a big stretch for multiple reasons.

[00:57:40] Speaker 04:
that, well, the Delaware litigation collaterally stops Koster from advancing that argument here. That was the focus. That's what we were prepared to discuss going into the December 2024 oral argument on summary judgment, not whether they stood on both sides.

[00:57:55] Speaker 00:
And just, again, it underscores the fact that we were effectively... So is your point that entire fairness doctrine is triggered just by showing...

[00:58:07] Speaker 00:
Or having it conceded factually that there was a pattern of them each getting these consulting fees that the third shareholder was not getting.

[00:58:18] Speaker 04:
We would have to show two things to invoke the entire fairness standard.

[00:58:20] Speaker 00:
One, that they were corporate fiduciaries, which really isn't... I'm putting that aside for now because this question was only about the, are they on both sides? And if you look in isolation...

[00:58:30] Speaker 00:
At each consulting fee, there's only one shareholder on the receiving, sort of on both sides, on the receiving end and the voting end.

[00:58:38] Speaker 00:
But if you look at the pattern, I think, whether they would call it a pattern, but whether there were X number of consulting fees for Schwartz, X number of consulting fees for Bunnell, that money is being paid out of UIP.

[00:58:52] Speaker 04:
Yeah, our expert report.

[00:58:53] Speaker 00:
Zero consulting fees for Mr. Koster. Those...

[00:58:58] Speaker 04:
Our expert report, Mr. McDonald's expert report, details all of that in a schedule, showing the pattern. The consulting fees happened on the same date. And they're different amounts because Schwab was more senior. But, yes, that evidence.

[00:59:10] Speaker 00:
So your point is that those facts were not disputed.

[00:59:14] Speaker 04:
Correct.

[00:59:17] Speaker 00:
What I'm asking is, is there more to trigger to overcome the business judgment rule? Do you have to show intent? Yes.

[00:59:26] Speaker 04:
No, we have to show that they were in cahoots.

[00:59:31] Speaker 00:
Do you have to show that in cahoots to overcome the business judgment rule or is simply a schedule of payments for two thirds of the shareholders from which the third shareholder is admitted is enough?

[00:59:45] Speaker 04:
I just don't know this question to overcome. The answer is yes. As long as they're on both sides and they're corporate fiduciaries, the entire fairness standard applies. And it's their burden to say, no, no, no.

[00:59:54] Speaker 00:
Is it a transaction-by-transaction question? Or is it... Because, like I said, you could look at each transaction and go, no, there's only Mr. Schwat on both sides on that one. No, I'm looking at this one. Only Mr. Bunnell is on both sides of this one. Is that how it's applied? Or is it, if you show a pattern... I think it's both. Then is it...

[01:00:18] Speaker 00:
Well, you've got a problem with one at a time, because it just squirts rates to one at a time. But if you have the pattern, and the pattern's the problem, then the fact of dates and times and these amounts wasn't disputed. And so you're putting it on...

[01:00:38] Speaker 04:
So the district court on the consulting fee issue focused on Schwat and Bunnell's capacity as board members. And he said, the district court said, well, there's a third board member, Mr. Cox. And so, you know, if Mr. Bunnell was receiving a consulting fee, then, well, Schwat and Cox approved it. It's completely different when it comes to Schwat and Bunnell's capacity as stockholders because Cox was not a stockholder. There are only three stockholders, Schwat, Bunnell, and Koster.

[01:01:09] Speaker 04:
So each time they're giving themselves what we think were profit distributions masquerading as consulting fees, they're teaming up against the interests of my clients. My client was saying that.

[01:01:21] Speaker 05:
There was no... Your key point is they're teaming up.

[01:01:26] Speaker 05:
Yes, they're... Might or might not be true.

[01:01:30] Speaker 05:
Yes, and I think that it's certainly... I mean, as a formal matter, it's still... You don't have a majority of shareholders or a majority of the board being conflicted.

[01:01:44] Speaker 04:
And that's the importance of the entire fairness standard.

[01:01:46] Speaker 00:
If we show that there are... You don't get to the entire fairness standard until you overcome the business judgment rule, and you keep going, well, they were on both sides, and the district court... We're going in circles here, I feel like. The district court said...

[01:01:59] Speaker 00:
Show me the proof that when Mr. Schwat got X consulting fee, Mr. Bunnell was in on it.

[01:02:13] Speaker 04:
Well, we cited in our summary judgment opposition the schedule prepared by our expert, Mr. McDonald, showing that there was this pattern. It was very consistent. And I think at trial, if it ever went there, we would have to show by a preponderance of the evidence, in circumstantial evidence, would be enough that they were, in fact, in cahoots. Now, getting a smoking gun and writing, these guys are too smart to do that. But we could certainly have a jury reasonably infer. From the pattern. Correct, Your Honor.

[01:02:44] Speaker 03:
I mean, you could look at... I bet the three of us almost always vote the same way in the cases we hear. But it's never me voting with Judge Millett because she voted with me in another case or me voting with Judge Kess in another case. I think just showing that, yeah, they frequently voted the same doesn't show that they were log rolling.

[01:03:06] Speaker 04:
So I think Delaware law is different on this. Delaware law...

[01:03:11] Speaker 04:
looks askance at controlling stockholders, giving themselves what are called non-rateable benefits, monies, to some of the stockholders but not others, which is exactly what you have here.

[01:03:23] Speaker 00:
There are cases that says just a pattern like this.

[01:03:29] Speaker 04:
Sure, yeah.

[01:03:30] Speaker 00:
You don't need to show intentional...

[01:03:35] Speaker 00:
got log rolling or scratching each other's back, or I'll do it for you, you do it for me. Again, because that intent to exclude the third shareholder, you just, the pattern is enough.

[01:03:45] Speaker 04:
I would, I don't have a specific case saying that because this is kind of an unusual fact pattern.

[01:03:52] Speaker 04:
But yes, I think, again, we go back to showing by preponderance, the evidence that there was this, this cooperation as evidenced by the pattern and the fact that Koster never got anything in the way of a custody.

[01:04:05] Speaker 00:
And you'd say she also wasn't getting... She didn't even know about these. Right. Well, right. She also wasn't getting, she didn't have viable SP opportunities. She wasn't getting all these, I guess, in context of the whole picture you want to present to jury, you would say the jury could then look at this pattern and find that.

[01:04:22] Speaker 04:
That's exactly right, Your Honor.

[01:04:23] Speaker 00:
And that pattern was in your summary judgment opposition.

[01:04:27] Speaker 00:
Certainly, yes. Or you cited to the expert? Yes.

[01:04:32] Speaker 04:
Yes, we did.

[01:04:33] Speaker 00:
I thought you said the table was in there, or that was- It's a scheduler table. Was in your opposition?

[01:04:38] Speaker 04:
Oh, yeah. It was cited in. It was in our statement of material facts. We cite to it. I think it's about the 119 range in our individual statement, the numerated statement of fact. Mm-hmm. Now, if they had told Koster about these consulting fee payments and she approved it, obviously there'd be no claim. Or there were some other shareholders that were informed, reasonably informed and approved. Maybe it would be okay. But when you have a situation where two stockholders are giving themselves millions of dollars and one stockholder doesn't even know about it and it's not getting the same monies, that's not okay under Delaware law.

[01:05:09] Speaker 00:
Did your complaint allege that Vanilla was a controlling stockholder?

[01:05:14] Speaker 04:
No, we did not.

[01:05:18] Speaker 00:
Did you argue that at summary judgment that he was?

[01:05:20] Speaker 04:
We argued in our summary judgment opposition that Schwan and Bunnell owed fiduciary duties to Koster.

[01:05:26] Speaker 00:
I'm asking a smaller question than that. Did you argue in your summary judgment opposition that, aha, now we have the evidence Bunnell was also by himself a controlling stockholder?

[01:05:38] Speaker 04:
We argued that he had fiduciary duties to Koster as a controlling stockholder. Yes.

[01:05:45] Speaker 00:
So you argued he was a controlling stockholder?

[01:05:47] Speaker 04:
We said that explicitly in the summary judgment opposition.

[01:05:49] Speaker 00:
I'm just wondering why you're not saying yes to my question. Yes, we argued he was a controlling stockholder.

[01:05:53] Speaker 04:
You asked whether we asserted that in a complaint.

[01:05:55] Speaker 00:
And then I said at summary judgment, did you say, aha, now we have the evidence he's a controlling stockholder?

[01:06:02] Speaker 04:
My answer was going to be too long-winded, but succinctly it's yes.

[01:06:09] Speaker 00:
Thanks. All right. Thank you. All right. Thank you very much, counsel. The case is submitted.