Keynetics Inc. v. Keynetics Shareholder Trust

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

KEYNETICS INC., )
)
Plaintiff, )
)
v. ) C.A. No. 2022-0006-JTL
KEYNETICS SHAREHOLDER )
TRUST, )
)
Defendant. )
)
)
KEYNETICS SHAREHOLDER )
TRUST, )
Counterclaim Plaintiff, )
)
v. )
KEYNETICS INC., )
)
Counterclaim Defendant. )
OPINION IMPOSING SANCTIONS FOR CONTEMPT

Date Submitted: November 22, 2024
Date Decided: January 27, 2025

Susan W. Waesco, Jacob Perrone, MORRIS, NICHOLS, ARSHT & TUNNELL LLP,
Wilmington, Delaware; Catherine D. Kevane, Marie C. Bafus, FENWICK & WEST
LLP, California; Attorneys for Plaintiff.

David L. Finger, FINGER & SLANINA, LLC, Wilmington, Delaware; Attorney for
Defendant and Non-Party Gary Lutin.

LASTER, V.C.
A Delaware statutory trust holds shares in an S corporation. The individuals

who contributed the shares to the trust hold beneficial interests in the trust. The

company’s certificate of incorporation imposes transfer restrictions on its shares, and

the parties stipulated to an order applying those same restrictions to transfers of

beneficial interests in the trust. In violation of that order, the trustee has attempted

four transfers. Each time, the company sought relief. Each time, the court granted it.

The court has already held the trust in contempt twice and the trustee in contempt

once.

The trustee has again attempted to transfer beneficial interests in violation of

the transfer restrictions. The court again finds both the trust and trustee in contempt.

Because more limited sanctions have not been effective, this decision appoints a

receiver to dissolve the trust, issues an affirmative injunction requiring the trust to

withdraw its consent for a pending transfer, issues a prohibitive injunction barring

the trustee from managing any trust or other entity holding the company’s stock,

awards the company its expenses in connection with this motion, and holds the

trustee and the individual managing the trustee jointly and severally liable with the

trust for all amounts due.1

1 This decision uses the term “expenses” to refer collectively to attorneys’ fees

and amounts paid out of pocket that might colloquially be called expenses. This is
how Section 145 of the Delaware General Corporation Law deploys the term. See, e.g.,
8 Del C. § 145(a) (authorizing a corporation in a proceeding other than one brought
by or in the right of the corporation to provide indemnification “against expenses
(including attorneys’ fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred”); id. § 145(b) (authorizing a corporation in a proceeding
I. FACTUAL BACKGROUND

The facts are drawn from the parties submissions, documents of record, and

matters suitable for judicial notice. The operative facts are undisputed. 2

A. The Company

Keynetics Inc. (the “Company”) is a Delaware corporation headquartered in

Boise, Idaho. For tax purposes, the Company has elected to operate as a small

business corporation under Subchapter S of the Internal Revenue Code of 1986, as

amended, commonly known as an S corporation.

brought by or in the right of the corporation to provide indemnification “against
expenses including attorneys’ fees) actually and reasonably incurred”); id. § 145(c)
(mandating corporation to indemnify a director or officer who was successful on the
merits or otherwise in defending a proceeding “against expenses (including attorneys’
fees) actually and reasonably incurred”). The out-of-pocket expenses encompassed by
Section 145 are broader than the restricted concept of costs in the statute that
authorizes a prevailing party to recover them. See 10 Del. C. § 5106; Scion
Breckenridge Managing Member, LLC v. ASB Allegiance Real Estate Fund, 68 A.3d
665, 686–88 (Del. 2013).

2 Citations in the form “Compl. ¶___” refer to paragraphs of the operative
complaint. Citations to “First MTE” refer to Keynetics Inc.’s Motion to Enforce Order
and Final Judgment and Motion for Contempt Against Keynetics Shareholder Trust.
Citations to “Second MTE” refer to Keynetics Inc.’s Motion to Enforce Final
Judgments and Fee Award and Motion for Contempt. Citations to “Third MTE” refer
to Keynetics, Inc.’s Motion to Enforce Final Judgments, Fee Award and June 26, 2024
Order and Third Motion for Contempt.” Citations to “[Filing] Ex. [Number]” refer to
exhibits submitted with filings. Citations in the form “Ord. ¶___” refer to paragraphs
of the Order and Final Judgment granted on February 15, 2023. Citations in the form
“Supp. Ord. ¶___” refer to paragraphs of the Supplemental Order and Final Judgment
granted on January 5, 2024. Citations in the form “Second Supp. Ord. ¶___” refer to
paragraphs of the Order Granting Keynetics Inc.’s Motion to Enforce Final
Judgments and Fee Award and Motion for Contempt granted on June 26, 2024.

2
An S corporation is a pass-through entity for federal tax purposes.

Stockholders in an S corporation report the flow-through of income and losses on their

personal tax returns and pay tax at their individual income tax rates. The

stockholders in an S corporation thus avoid double taxation.

To qualify for S corporation status, a corporation must meet specific

requirements. See 26 U.S.C. § 1361(b). One requirement limits an S corporation to

not more than 100 stockholders. Id. § 1361(b)(1)(A). Another provides that an S

corporation cannot “have as a shareholder a person (other than an estate, a trust

described in subsection (c)(2), or an organization described in subsection (c)(6)) who

is not an individual. See id. § 1361(b)(1)(B); 26 C.F.R. § 1.1361-1(f). A transfer of stock

to an impermissible holder risks terminating a corporation’s S corporation status. See

id. § 1362(d)(4).

Under Section 1361(c)(2), one type of eligible stockholder is “[a] trust created

primarily to exercise the voting power of stock transferred to it.” 26 U.S.C. §

1361(c)(2)(A)(iv). This decision uses the term “IRS Voting Trust” to refer to a trust

that qualifies as a voting trust under the Internal Revenue Code.

For tax purposes, “each beneficiary of [an IRS Voting Trust] shall be treated

as a shareholder” in the S corporation. Id. § 1361(c)(2)(B)(iv). In other words, a

transfer of a beneficial interest in an IRS Voting Trust to an ineligible stockholder

can result in the termination of S corporation status.

To protect its S corporation status, the Company’s certificate of incorporation

(the “Charter”) imposes the following transfer restriction:

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If the Corporation determines that a substantial purpose or effect of a
proposed stock transfer would be reasonably likely to adversely affect
the Corporation’s status as an electing small business corporation under
Subchapter S of the Internal Revenue Code, the Corporation may
prohibit such transfer by notice to the proposed transferor.
Furthermore, to ensure compliance with the restrictions referred to
herein, the Corporation may refuse to acknowledge transfers in its books
and records that are made in violation of the foregoing and may issue
appropriate “stop transfer” certificates or instructions.

Charter § 4.3 (the “Charter Restriction”). The Company has also entered into

stockholder agreements with individual stockholders that give the Company a right

of first refusal on any transfer of shares (the “Contractual Restrictions”; jointly with

the Charter Restriction, the “Transfer Restrictions”). Any acquirer of shares must

agree to abide by the Contractual Restrictions. As a matter of Delaware law, the

shares always remain subject to the Charter Restriction. See Ord. ¶ 2; Supp. Ord. ¶

3.

B. The Delaware Trust

In 2019, Gary Lutin, Lewis DePayne, Daniel Henderson, and Steven Rouse

formed a Delaware statutory business trust named the Keynetics Shareholder Trust.

This decision refers to that entity as the “Delaware Trust.” An entity called Fair Value

Investments Inc. is the trustee of the Delaware Trust (the “Trustee”). Gary Lutin

serves as Chairman of the Trustee. In that role, Lutin controls the Trustee. Through

the Trustee, Lutin controls the Delaware Trust.

The Delaware Trust sought to qualify as an IRS Voting Trust. To that end,

DePayne, Henderson, and Rouse contributed shares of Company stock to the

Delaware Trust. In return, they received beneficial interests in the Delaware Trust.

4
The shares that DePayne, Henderson, and Rouse deposited remained subject

to the Charter Restrictions. As the new owner of the shares, the Delaware Trust was

bound by the Charter Restrictions. In addition, as stockholders, DePayne, Henderson,

and Rouse had agreed to the Contract Restrictions. As the successor owner of the

shares, the Delaware Trust was bound by the Contract Restrictions. In addition, each

of the beneficial owners agreed that the beneficial interests they received were

“subject to any applicable restrictions on the Participant’s transfer of shares.” Compl.

Ex. 5–7.

C. The First Attempted Transfer

On August 9, 2021, the Delaware Trust informed the Company that John F.

Tully had agreed to buy beneficial interests in the Delaware Trust. Surprisingly, the

Trustee disputed whether the Transfer Restrictions applied to a transfer of beneficial

interests. For his part, Tully refused to accept the Transfer Restrictions.

On September 8, 2021, the Company notified the Trustee that because Tully

had not agreed to the Transfer Restrictions, the Company would not make an

upcoming distribution to Tully. Technically, any Company-level distribution should

have flowed to the Delaware Trust and then from the Delaware Trust to the owners

of its beneficial interests. But the Company and the Delaware Trust agreed that the

Company would make distributions directly to the holders of beneficial interests. The

Company did not want to make a distribution to Tully because it would imply that

the transfer of beneficial interests had become effective.

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Five day later, the Delaware Trust informed the Company that Tully had

terminated his agreement to buy the beneficial interests. But the Delaware Trust

warned that a new agreement would be negotiated soon.

D. The Second Attempted Transfer

On October 8, 2021, the Trustee informed the Company that the Delaware

Trust and Tully had entered into an agreement dated October 5, 2021 (the “Tully

Agreement”). Under that agreement, the Delaware Trust purported to have

transferred to Tully beneficial interests in the Delaware Trust corresponding to forty

shares of Company stock previously contributed DePayne and Henderson. See Compl.

Ex. 14.

The Company insisted that Tully acknowledge and agree to the Transfer

Restrictions. The Delaware Trust refused and asserted that the Transfer Restrictions

did not apply to a transfer of beneficial interests in the Delaware Trust.

E. The Third, Fourth, And Fifth Attempted Transfers

On November 12, 2021, the Trustee notified the Company of two additional

agreements. The first purported to assign beneficial interests in the Delaware Trust

corresponding to ownership of ten Company shares from DePayne to Tully. The

second purported to assign beneficial interests in the Trust corresponding to

ownership of ten Company shares from Henderson to Tully.

The Company sought confirmation that DePayne and Henderson had required

Tully to agree to be bound by the Transfer Restrictions. See Compl. Ex. 17. The

Trustee maintained that Tully was not bound by the Transfer Restrictions.

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On November 17, 2021, the Trustee informed the Company that another

potential purchaser wanted to acquire beneficial interests in the Delaware Trust. The

Company asked for confirmation that the potential purchaser would abide by the

Transfer Restrictions. See Compl. Ex. 18. The Trustee again claimed that a purchaser

of beneficial interests had no obligation to acknowledge the Transfer Restrictions. See

Compl. Ex. 19.

On December 20, 2021, the Trustee notified the Company of still another

transfer. This time, Rouse purported to transfer to Tully beneficial interests in the

Delaware Trust corresponding to 134,638 shares of the Company’s common stock

(half voting, half non-voting). See Compl. Ex. 12. The Company sent a letter to the

Trustee insisting that Tully agree to be bound by the Transfer Restrictions. See

Compl. Ex. 18. The Trustee again responded that the Transfer Restrictions did not

apply.

F. The Lawsuit

The Company sued the Delaware Trust for breach of the Transfer Restrictions

and to invalidate the transfers. The Company sought injunctive relief to prevent

further impermissible transfers and declaratory relief to ensure any transferees are

bound by the Transfer Restrictions.

The Company sought this relief because even a single transfer of beneficial

interest in the Delaware Trust to an impermissible stockholder could jeopardize its S

corporation status. So too could transfers to new owners that would cause the

Company to exceed 100 stockholders. Because the Trustee took the position that

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transferees were not bound by the Transfer Restrictions, a holder of beneficial

interests in the Delaware Trust could effectuate a sufficient number of downstream

transfers to exceed the 100-stockholder limit.

The parties filed cross-motions judgment on the pleadings. During the hearing,

the Trustee’s counsel agreed that the Transfer Restrictions applied to transfers of

beneficial interests in the Delaware Trust. His agreement on that point resolved the

case. At the end of the hearing, the parties agreed to draft a stipulated order and final

judgment, which the court entered on February 15, 2023 (the “Final Judgment”).

The Final Judgment stated explicitly that beneficial interests in the Delaware

Trust, defined as “Trust Certificates,” were subject to the Transfer Restrictions to the

same extent as Company shares. The pertinent language stated:

The Trust Certificates, including the corresponding beneficial
ownership interests in Keynetics’ common stock held in record name by
the Trust, are bound by, and may only be transferred in compliance
with, applicable laws and any restrictions on ownership or transfer set
forth in: (i) Article 4.3 of Keynetics Inc.’s Amended Certificate of
Incorporation, as amended on June 23, 2010, which is attached as
Exhibit 1 to Keynetics Verified Complaint in the Action; and (ii) the
agreements pursuant to which record ownership of the stock was
originally issued to or acquired by each of Daniel Henderson, Lewis
DePayne and Steven Rouse, which agreements are attached as Exhibits
2 through 4 to Keynetics’ Verified Complaint in the Action.

Ord. ¶ 2. The parties further agreed that the Company could declare all of the

transfers to Tully void unless he confirmed that he would abide by the Transfer

Restrictions. Tully eventually agreed. See First MTE Ex. 6 at 2.

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G. The First Motion to Enforce

On October 19, 2023, the Trustee sent the Company an agreement

contemplating Tully transferring beneficial interests in the Trust corresponding to

twenty shares (half voting, half non-voting) to Keynetics-Clickbank Investments, Inc.

(“Clickbank”). Lutin serves as Clickbank’s President. The Trustee offered the

Company a right of first refusal at a price of $101 per voting share and $99 per non-

voting share. The Trustee purported to offer the right of first refusal voluntarily and

not because of the Transfer Restrictions or the Final Judgment.

Under the Internal Revenue Code, a C corporation is not an eligible

stockholder in an S corporation. 26 § 1361(b)(1)(B); 26 C.F.R. § 1.1361-1(f). Clickbank

was a C corporation, so the transfer would jeopardize the Company’s status as an S

corporation.

On October 30, 2023, the Company sent a stop transfer notice to the Delaware

Trust. The notice instructed the Trustee to treat the transfers as void ab initio.

On November 6, 2023, the Trustee rejected the stop transfer notice, claiming

that the Transfer Restrictions did not bar the attempted assignment. On November

15, the Company moved to enforce the Final Judgment and asked the court to hold

the Delaware Trust in contempt (the “First Motion to Enforce”). On November 29, the

court entered an Order to Show Cause requiring the Delaware Trust to “show cause

why they are not in contempt and why coercive and remedial sanctions should not be

imposed.” Dkt. 69 at 2–3. The Delaware Trust did not respond to the Order to Show

Cause.

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On January 5, 2024, the court entered a Supplemental Order and Final

Judgment (the “Supplemental Judgment”) granting the First Motion to Enforce. The

Supplemental Judgment stated:

As a clarification of the [Final Judgment], and for the avoidance of any
doubt, any transfer, assignment, or attempted transfer or assignment of
any interest in (i) the Trust, (ii) the Trust Certificates, or (iii) the shares
of Keynetics common stock held in record name by the Trust shall be
subject to any and all restrictions on ownership or transfer set forth in
(a) the Charter Transfer Restriction, and (b) the agreements pursuant
to which record ownership of the Keynetics stock was originally issued
to or acquired by each of Daniel Henderson, Lewis DePayne, and Steven
Rouse, which agreements are attached as Exhibits 2 through 4 to
Keynetics’ Verified Complaint in this Action.

Supp. Ord. ¶ 3. The Court held that the assignment agreement to Clickbank violated

the Final Judgment and that the transfers were void ab initio.

As a remedial sanction for its contempt, the Court ordered the Delaware Trust

to pay 100% of the expenses the Company incurred (the “First Fee Award”). The

Company’s counsel filed Rule 88 affidavits documenting $117,450 in expenses. No one

objected to that amount.

H. The Second Motion to Enforce

On February 26, 2024, the day before the deadline for paying the First Fee

Award, the Trustee sent the Company an agreement in which Tully purported to

assign to the Delaware Trust beneficial interests in the Delaware Trust

corresponding to 1,164 shares (half voting and half non-voting). The Trustee offered

the Company a right of first refusal at $101.91 per voting share and $99.91 per non-

voting share. See Second MTE Ex. 4. The Trustee characterized the assignment as an

attempt raise funds so that the Company could pay the First Fee Award.

10
The Company issued a stop transfer notice to the Delaware Trust. The Trustee

responded that “no actions will be taken to proceed with any transaction,” but refused

to sign an acknowledgement that the transaction had been terminated. Second MTE

Ex 8.

On March 4, 2024, the Trustee sent the Company an agreement purporting to

assign Tully’s interests in 100,000 shares (half voting, half non-voting) to Clickbank.

The Trustee offered the Company a right of first refusal at $101.91 per voting share

and $99.91 per non-voting share, for a total price of over $10 million.

On March 6, 2024, the Company sent a stop transfer notice to the Trustee. On

March 8, the Trustee rejected the stop transfer notice on the grounds that “there is

currently no transfer to be stopped.” Second MTE Ex. 12. The Trust claimed the

transfer would become effective “only if some future condition establishes a

termination of the Trust prior to its existing 2026 termination date.” Id.

On April 29, 2024, the Company filed a second motion to enforce final judgment

and for contempt (the “Second Motion to Enforce”). On May 6, the Court ordered the

Delaware Trust to show cause why it was not in contempt. The Delaware Trust did

not respond.

On June 26, 2024, the court held a hearing on the Second Motion to Enforce.

Lutin attended and spoke at the hearing. The court ruled that the Delaware Trust

had not discharged the order to show cause. The court therefore entered an order that

• held the Delaware Trust in contempt of the Final Judgment and First Fee
Award;

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• imposed per diem fine on the Delaware Trust of $3,000 for each day it remained
in contempt;

• declared the transfers void ab initio;

• ordered the Delaware Trust not to proceed with the challenged transfers;

• awarded the Company its expenses (the “Second Fee Award”);

• found Lutin jointly and severally liable with the Trust for the Second Fee
Award;

• imposed a per diem fine on Lutin of $3,000 for each day the Delaware Trust is
in contempt of the Second Fee Award;

• held the Delaware Trust will be dissolved if it fails to pay either the First Fee
Award or the Second Fee Award within thirty days of the entry of the Second
Supplemental Judgment.

Second Supp. Ord. (the “Second Supplemental Judgement”).

I. The Third Motion To Enforce

On July 29, 2024, the Trustee sent the Company an “Agreement for

Assignment of Beneficial Ownership Interests in Common Stock of Keynetics Inc.

Issued to Keynetics Shareholder Trust.” (the “July Assignment”). Third MTE Ex. 1.

In the July Assignment, Tully purported to assign beneficial interests in 10,000

shares (half voting, half non-voting) to Clickbank at a share price of $126 per voting

share and $124 per voting share. On July 31, the Company issued a stop transfer

notice based on the Charter Restriction. The Trustee took the position that the

Charter Restriction did not apply to an assignment of beneficial interests. Third MTE

Ex. 3. On August 12, the Company filed its Motion to Enforce Final Judgment, Fee

Award and June 26, 2024 Order and Third Motion for Contempt (the “Third Motion

to Enforce”).

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II. LEGAL ANALYSIS

The Company seeks to have the Delaware Trust, the Trustee, and Lutin held

in contempt for violating the court’s orders. The court finds that all three are in

contempt. Because all three have repeatedly violated the court’s orders, and because

lesser sanctions have not been effective, the court appoints a receiver to manage the

Delaware Trust. The court also awards the Company its expenses and imposes

liability jointly and severally on the Delaware Trust, the Trustee, and Lutin.

Court of Chancery Rule 70 authorizes the court to hold a party in contempt for

a “failure to obey a restraining or injunctive order, or to obey or to perform any

order . . . .” Ch. Ct. R. 70(b). “When an asserted violation of a court order is the basis

for contempt, the party to be sanctioned must be bound by the order, have clear notice

of it, and nevertheless violate it in a meaningful way.” TransPerfect Glob., Inc. v.

Pincus, 278 A.3d 630, 644 (Del. 2022). The movant has the burden of proof and must

establish the contemptuous conduct by a preponderance of the evidence. Id. If the

movant establishes a prima facie case, the burden shifts to the respondent to show

why they were unable to comply with the order. Id. at 645. A party that has obtained

a court order may seek an order of civil contempt against the opposing party “to coerce

obedience to [the] order.” T.R. Invs. LLC v. Genger, 2012 WL 5471062, at *2 (Del. Ch.

Nov. 9, 2012) (internal quotations omitted).

A. The Delaware Trust’s Ongoing Contempt

The Delaware Trust has repeatedly disregarded the court’s orders. This court

previously ordered the Delaware Trust to pay the Company’s expenses in the amount

13
of $117,450. Dkt. 85 at 2. The court ordered the Delaware Trust to pay that amount

on or before February 27, 2024. See id. at 2. To date, the Delaware Trust has not paid.

After the Delaware Trust failed to pay the award and attempted a third

impermissible transfer, this court held the Delaware Trust “in contempt of the Final

Judgment and Fee Award.” Second Supp. Ord. ¶ 2. To coerce compliance, the court

imposed a per diem fine of $3,000 for each day the Delaware Trust remained in

contempt. Second Supp. Ord. ¶ 3. This court also awarded the Company the expenses

incurred in connection with the Second Motion to Enforce. Second Supp. Ord. ¶ 7.

The Company submitted another Rule 88 affidavit. See Dkt. 110. Through

inadvertent oversight, the court failed to enter an order approving the amount

sought. Even though a portion of the amount could not be disputed, the Delaware

Trust has not paid any amount in compliance with the second contempt order.

By identifying the Delaware Trust’s violations of the court’s orders, the

Company has established a prima facia case of contempt. The Delaware Trust

responds that it cannot be held in contempt because it lacks the funds to comply with

the court’s order.

An inability to comply with an order can be a valid defense to contempt. See

State ex rel. Oberly v. Atlas Sanitation Co., 1988 WL 884894 at *2 (Del. Ch. Aug. 17,

1988). But the Delaware Trust cannot prove impossibility.

The Delaware Trust’s stated reason for not paying the awards is that “[t]he

Trust . . . has no assets of its own.” Dkt. 117 ¶ 15. The Delaware Trust insists it

“merely owns . . . legal title [to the shares of Company common stock it holds], with

14
no beneficial interest,” thus making it “immune from claims of judgment creditors

against the [Delaware] Trust.” Dkt. 117 ¶ 15; see also Dkt. 125 at 34–35. During oral

argument, defense counsel asserted that the Delaware Trust merely owns the “voting

rights” associated with the shares. Dkt. 125 at 35. After the court asked what that

meant, defense counsel elaborated: “Record ownership is transferred to the trust.

Beneficial ownership remains with the beneficiaries.” Dkt. 125 at 38.

The Delaware Trust thus claims that because it has beneficial owners, it

cannot transfer any of its property. In making these arguments, the Delaware Trust

creates confusion by shifting among three different legal relationships.

The first type of relationship is an IRS Voting Trust, which is “[a] trust created

primarily to exercise the voting power of stock transferred to it.” 26 U.S.C. §

1361(c)(2)(A)(iv). An IRS Voting Trust is not a separate type of legal entity. Instead,

a type of entity authorized by another source of law (including the common law) can

qualify as an IRS Voting Trust if it meets the requirements in the IRS regulations. If

it does, then the IRS Voting Trust is a permissible stockholder for an S corporation.

But an IRS Voting Trust is not a distinct entity in its own right.

The second type of relationship is a voting trust authorized by Section 218(a)

of the Delaware General Corporation Law (a “DGCL Voting Trust”). That section

states:

One stockholder or 2 or more stockholders may by agreement in writing
deposit capital stock of an original issue with or transfer capital stock to
any person or persons, or entity or entities authorized to act as trustee,
for the purpose of vesting in such person or persons, entity or entities,
who may be designated voting trustee, or voting trustees, the right to
vote thereon for any period of time determined by such agreement, upon
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the terms and conditions stated in such agreement. The agreement may
contain any other lawful provisions not inconsistent with such purpose.
After delivery of a copy of the agreement to the registered office of the
corporation in this State or the principal place of business of the
corporation, which copy shall be open to the inspection of any
stockholder of the corporation or any beneficiary of the trust under the
agreement daily during business hours, certificates of stock or
uncertificated stock shall be issued to the voting trustee or trustees to
represent any stock of an original issue so deposited with such voting
trustee or trustees, and any certificates of stock or uncertificated stock
so transferred to the voting trustee or trustees shall be surrendered and
cancelled and new certificates or uncertificated stock shall be issued
therefore to the voting trustee or trustees. In the certificate so issued, if
any, it shall be stated that it is issued pursuant to such agreement, and
that fact shall also be stated in the stock ledger of the corporation. The
voting trustee or trustees may vote the stock so issued or transferred
during the period specified in the agreement. Stock standing in the
name of the voting trustee or trustees may be voted either in person or
by proxy, and in voting the stock, the voting trustee or trustees shall
incur no responsibility as stockholder, trustee or otherwise, except for
their own individual malfeasance.

8 Del. C. § 218(a). Under this statute, a common law trust that meets the

requirements of Section 218(a) can qualify as a DGCL Voting Trust. Such a trust

might also qualify as an IRS Voting Trust. But a DGCL Voting Trust is not a thing

in its own right.

The third type of relationship is a statutory trust created under the Delaware

Statutory Trust Act (a “Delaware Statutory Trust”). A Delaware Statutory Trust is a

jural entity that enjoys separate legal personhood. 12 Del. C. § 3801(i). Like other

jural entities, “a statutory trust may be sued for debts and other obligations or

liabilities contracted or incurred by the trustee or other authorized persons . . . .” 12

Del. C. § 3804(a). Not only that, but “[i]n a judicial proceeding involving a trust, the

court, as justice and equity may require, may award costs and expenses, including

16
reasonable attorneys’ fees, to any party, to be paid by another party or from the trust

that is the subject of the controversy.” 12 Del. C. § 3584. This court has ordered a

Delaware Statutory Trust to pay attorneys’ fees and costs. In re David & Joan Traitel

Fam. Tr., 2022 WL 2570793, at *5 (Del. Ch. Jul. 8, 2022), adopted sub nom. In re Joan

Traitel Fam. Tr. 2022 WL 3544379 (Del. Ch. Aug. 16, 2022).

The Delaware Trust is a Delaware Statutory Trust. It might well also qualify

as a DGCL Voting Trust, and the parties seem to agree that it qualifies as an IRS

Voting Trust. The court need not address those questions. What matters for purposes

of a contempt motion is that the Delaware Trust is a jural entity that has the powers

conferred by the Delaware Statutory Trust Act. As a jural entity, the Delaware Trust

can be found in contempt and required to pay a contempt sanction. If the Delaware

Trust lacks funds, a creditor can levy on its assets. Because the Delaware Trust holds

legal title to Company shares, a creditor can reach and levy on those assets. The fact

that the Delaware Trust holds them for the ultimate benefit of holders of beneficial

interests does not matter, any more than the fact that a corporation owns assets for

the ultimate benefit of its stockholders. The Delaware Trust is not a will-o’-the-wisp;

it has no legal basis to claim that satisfying a contempt sanction is impossible.

Additionally, under the Delaware Trust’s governing document, the Trustee

must pay any contempt sanction. By default, a trustee is not liable for the obligation

of a Delaware Statutory Trust simply by virtue of acting as a trustee. The operative

provision states:

Except to the extent otherwise provided in the governing instrument of
a statutory trust, a trustee, when acting in such capacity, shall not be
17
personally liable to any person other than the statutory trust or a
beneficial owner for any act, omission, or obligation of the statutory trust
or any trustee thereof.

12 Del. C. § 3803(b). In this case, however, the governing instrument of the Delaware

Trust provides as follows:

The Trustee will assume responsibility for all costs of the Trust’s duties
relating to a Participant’s Investments, and for management of the
Trust’s operation. The Trust may not charge any costs directly or
indirectly to Participants, including those for engagement of legal
representation that may be required to support Investment rights,
unless such charges are either (a) accepted specifically by each
participant concerned and reported to all Participants or (b) permitted
by an Amendment of these Provisions.

Compl. Ex. 8 at 5. The Delaware Trust’s governing document thus “otherwise

provided.”

Relief can also extend to Lutin, because he has taken responsibility for the

Delaware Trust’s actions. See Dkt. 80 (“Addressing the Court’s likely concern about

the Trust’s previous failure to appear, I [Gary Lutin] want to assure the Court that

this was the result of my personal bad judgment rather than any lack of respect for

the Court.”). Lutin executed the Answer to the Verified Complaint and Verified

Counterclaims. See Dkt. 26 (“I, Gary Lutin, do hereby depose and state that I am duly

authorized to execute this Verification on behalf of defendant Keynetics Shareholder

Trust . . .”). The Delaware Trust did not have counsel from February 15, 2023 to

September 12, 2024. See Dkt. 70; Dkt. 116. During this time, Lutin regularly

corresponded with the Company’s counsel and the court. See Dkt. 80; Dkt. 86; Dkt.

105.

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The Delaware Trust and its Trustee have demonstrated their ability to pay

debts. The Delaware Trust has employed several law firms during this litigation. See

Dkt. 16, Dkt. 41, Dkt. 116. The Delaware Trust also retained counsel during a prior

action. See Keynetics Shareholder Trust v. Keynetics Inc., C.A. No. 2017-0929-SG. And

the Delaware Trust has retained CT Corporation as its resident agent. The Delaware

Trust knows how to pay its creditors when it wants to. Lutin can also pay.

The Delaware Trust’s impossibility defense therefore fails. The Delaware

Trust remains in contempt of the Final Judgment. The Delaware Trust also remains

in contempt for failing to pay the First Fee Award. Because the court never fully

quantified the Second Fee Award the court will not hold the trust in contempt for not

paying the Company’s expenses under the Second Supplemental Judgment, even

though at least some amounts due were not reasonably subject to dispute.

B. The Latest Act Of Contempt

The Company argues that the July Assignment constitutes a further act of

contempt because Tully purported to transfer the beneficial interests in shares of

Company common stock to Clickbank. See Third MTE Ex. 1. The Final Judgment

makes clear that the Transfer Restrictions apply to “Trust Certificates . . . including

the corresponding beneficial ownership interests in Keynetics’ common stock held in

record name by the Voting Trust . . . .” Ord. ¶ 2. The Supplemental Judgment

confirms that the Transfer Restrictions apply to “any interest in (i) the Voting Trust,

(ii) the Trust Certificates, or (iii) the shares of Keynetics common stock held in record

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name by the Voting Trust.” Supp. Ord. ¶ 3. This assignment violates the Final

Judgment. The Delaware Trust again stands in contempt.

C. The Appropriate Remedy

The Company seeks remedies for repeated and ongoing acts of contempt by the

Delaware Trust and the Trustee. The court will appoint a receiver for the Delaware

Trust, award the Company its expenses, and impose liability jointly and severally on

the Delaware Trust, the Trustee, and Lutin.

“The court has broad discretion when formulating a remedy for contempt.”

Gandhi-Kapoor v. Hone Cap. LLC, 305 A.3d 707, 720 (Del. Ch. 2023). The sanctions

can be either civil or criminal. DiSabatino v. Salicete, 671 A.2d 1344, 1348 (Del. 1996).

Sanctions for civil contempt are designed to coerce compliance with a court’s order or

to make an injured party whole. Del. State Bar Ass’n v. Alexander, 386 A.2d 652, 665

(Del. 1978); City of Wilmington v. Gen Teamsters Loc. Union 326, 321 A.2d 123, 125

(Del. 1974). Sanctions for criminal contempt, by contrast, are meant to punish. Gen

Teamsters Loc. Union 326, 321 A.2d at 125.

1. The Injunction

The Company seeks a permanent injunction requiring the Delaware Trust to

withdraw its consent to the July Assignment. To obtain a permanent injunction, “a

party must show (i) actual success on the merits, (ii) the inadequacy of remedies at

law, and (iii) a balancing of the equities that favors an injunction.” In re COVID-

Related Restrictions on Religious Servs., 285 A.3d 1205, 1232–33 (Del. Ch. 2022),

aff’d, 326 A.3d 626 (Del. 2024). “[I]mminent irreparable harm is not a requirement

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for a permanent injunction.” Id. at 1230. Because a permanent injunction is a final

remedy, “what matters is whether there is a basis for equity to act, namely the

absence of an adequate remedy at law.” Id. The need to stop a threat of imminent

irreparable harm is one way to show that a legal remedy would be inadequate, but it

is not the only way. Id.

First, the Company has succeeded on the merits. The July Assignment violates

the Final Judgement, the Supplemental Judgment, and the Second Supplemental

Judgement.

Second, the Company has shown that remedies at law are inadequate. The

July Assignment threatens the Company with the loss of its S corporation status.

Losing S corporation status will affect the Company’s tax structure. Although the loss

could be quantified, doing so reliably would be quite difficult. Injunctive relief is

preferable and warranted. See A.W. Chesterton Co. v. Chesterton, 907 F. Supp. 19, 24

(D. Mass. 1995) (finding loss of S corporation status constituted irreparable harm

under similar circumstances).

Third, the Company has shown that the equities favor relief. In the face of the

Company’s showing of irreparable harm, the Delaware Trust would merely be

required to comply with its own agreements and court orders. Any theoretical harm

to the Delaware Trust is self-inflicted.

The Trustee argues that the request for an injunction is moot, because the

Trustee claims to have committed not to move forward with the assignment. Dkt. 117

¶ 9. That is an empty promise. Given the Trustee’s pattern of behavior, the court has

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every reason to expect the Delaware Trust will attempt to renew the July

Assignment. A mandatory injunction will issue directing the Delaware Trust to

withdraw its consent to the July Assignment. The injunction also will order the

Delaware Trust not to recognize the July Assignment or any similar assignment.

2. Dissolution

The Company next asks the court to dissolve the Delaware Trust. In the Second

Supplemental Judgment, the court warned that it would dissolve the Delaware Trust

if the Delaware Trust failed to pay the First Fee Award and the Second Fee Award

by July 26, 2024. Second Supp. Ord. ¶ 10. Because the court did not fully quantify the

Second Fee Award, this decision does not rely on the Delaware Trust’s failure to pay

it. Instead, the Delaware Trust’s repeated violations of the court’s other orders

warrants equitable dissolution.

As a court of equity, the Court of Chancery “has the power to order the

dissolution of a solvent company and appoint a receiver to administer the winding up

of those assets.” See Weir v. JMACK, Inc., 2008 WL 4379592, at *2 (Del. Ch. Sept. 23,

2008). The court may grant equitable dissolution when “gross mismanagement,

positive misconduct by corporate officers, breach of trust, or extreme circumstances

showing imminent danger of great loss to the corporation which, otherwise, cannot

be prevented.” Id. (quoting Carlson v. Hallinan, 925 A.2d 506 (Del. Ch. 2006)); In re

Shawe & Elting LLC, 2015 WL 4874733, at *33 (Del. Ch. Aug. 13, 2015) (“The

doctrine of equitable dissolution . . . may be invoked in . . . situations involving

egregious misconduct in the exercise of one’s fiduciary responsibilities.”).

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Equitable dissolution extends to alternative entities. See In re Carlisle Etcetera

LLC, 114 A.3d 592, 606 (Del. Ch. 2015). Delaware entities “take[] advantage of

benefits that the State of Delaware provides, and because dissolution is not an

exclusively private matter, the State of Delaware retain an interest in having the

Court of Chancery available, when equity demands, to hear a petition to dissolve” a

Delaware entity. Id. These principles carry over to Delaware Statutory Trusts. See

Grand Acq. LLC v. Passco Indian Springs DST, 145 A.3d 990, 995–96 (Del. Ch. 2016),

aff’d, 158 A.3d 449 (Del. 2017).

Where a nonparty seeks equitable dissolution, “that petitioner must ‘explain’

in a ‘convincing manner’ why th[e] court should ‘invoke equitable principles . . . .’” See

SolarReserve CSP Hldgs., LLC v. Tonopah Solar Energy, LLC, 2020 WL 1291638, at

*5 (Del. Ch. Mar. 18, 2020) (quoting Absalom Absalom Tr. v. Saint Gervais LLC, 2019

WL 2655787, at *6 (Del. Ch. June 27. 2019)). The Company has made the necessary

showing.

Under the Trustee’s direction, the Delaware Trust has repeatedly violated this

court’s orders. The court has entered two orders to stop transfers that threaten the

Company’s S corporation status. The Delaware Trust has not complied. The per diem

fine has not been sufficient. Nor have the awards of expense. A more serious sanction

is warranted. See Delaware State Bar Ass’n, 386 A.2d at 665. The Delaware Trust,

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the Trustee, and Lutin also seem to believe they are beyond the reach of this court.

These actions demonstrate a pattern of positive misconduct.3

By separate order, the court will appoint a receiver to take charge of the

Delaware Trust, cause it to comply with the court’s prior orders, wind down its

operations in a manner that does not jeopardize the Company’s status as an S

Corporation, and terminate the Delaware Trust’s existence. The receiver may seek to

enforce the court’s orders against the Trustee and Lutin. The receiver may recover

the expenses of the receivership from the Delaware Trust’s assets, the Trustee, or

Lutin.

3. A Per Diem Fine Remains An Appropriate Sanction

The Company requests per diem sanctions for each day the Delaware Trust

and the Trustee remain in contempt. Because the court is appointing a receiver, the

court will not impose a per diem fee at this time. If the receiver meets with resistance,

the receiver may seek the imposition of a per diem fee as a coercive sanction.

4. The Company’s Expenses

The Company seeks to recover the expenses incurred pursing the Third Motion

to Enforce. “When a party has been held in contempt, the party injured by the

contempt is entitled to an award of expenses for bringing the contempt motion as part

3 See Dkt. 73, Ex. A (attempting to extend the deadline to appear rather than

comply with the judgement); Dkt. 95, Ex. 4 (attempting to assign the interests of a
participant in the trust). Compare Dkt. 95, Ex. 5 (informing the Company that the
Delaware Trust had financing to pay the judgment), and Dkt. 95, Ex. 6 (admitting to
the Company the Delaware Trust cannot pay the overdue judgment).

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of the remedy that is necessary to make that party whole.” Gandhi-Kapoor v. Hone

Cap. LLC, 305 A.3d 707, 723 (Del. Ch. 2023).

The court awards the Company its expenses (the “Third Fee Award”). The

Company will submit a Rule 88 affidavit.

The Delaware Trust has not paid either the First Fee Award of $117,450 or the

Second Fee Award. By oversight, the court neglected to rule on the reasonableness of

the Company expenses for purposes of the Second Fee Award. Having done so, the

court finds that the $109,793 that the Company sought is reasonable and approved.

“In Delaware, prejudgment interest is awarded as a matter of right. Such

interest is to be computed from the date payment is due.” Citadel Hldg. Corp. v.

Roven, 603 A.2d 818, 826 (Del. 1992) (citation omitted). The Company is entitled to

pre-judgment interest at the legal rate, compounded quarterly, until the date of

payment. Interest on the First Fee Award runs from February 27, 2024. Interest on

the Second Fee Award runs from the date of this Opinion. Interest on the Third Fee

Award will accrue from the date the court approves the application.

5. Sanctions On The Trustee And Lutin

The Company seeks an order (i) holding the Trustee and Lutin jointly and

severally liable for the amounts due from the Delaware Trust and (ii) prohibiting the

Trustee and Lutin from being involved with any trust or other entity that holds or

manages investments in the Company. The Trustee and Lutin are non-parties, but

“in appropriate circumstances, an order can be enforced against non-parties.” Deutsch

v. ZST Digit. Networks, Inc., 2018 WL 3005822, at *10 (Del. Ch. June 14, 2018).

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“[W]hen obedience to an order may be lawfully enforced against a person who is not

a party, that person is liable to the same process for enforcing obedience to the order

as if that person were a party.” Ch. Ct. R. 71. A court order “generally binds not only

the named parties, but also ‘those identified with them in interest, in privity with

them, represented by them or subject to their control.’” Deutsch, 2018 WL 3005822,

at *10 (quoting Regal Knitwear Co. v. NLRB, 324 U.S. 9, 14 (1945)). This doctrine

ensures “that a party cannot nullify or evade an order ‘by carrying out prohibited acts

through aiders and abettors, although they were not parties to the original

proceeding.’” Deutsch, 2018 WL 3005822, at *10 (Regal Knitwear Co. v. NLRB, 324

U.S. 9, 14 (1945)).

Lutin bears responsibility for the Delaware Trust’s actions. He is the sole

decision-maker for the Trustee and the Delaware Trust. See Dkt. 80 at 1, Dkt. 59 at

3, 68; Dkt. 94 at 19–22. He alone decides whether the Trustee and the Delaware Trust

comply with Transfer Restrictions or the court’s orders. See Compl. Ex. 8 (outlining

the powers of the Trustee and the role of Fair Value Investments, Inc.).

Lutin and the Trustee are therefore jointly and severally liable with the

Delaware Trust for the amounts due. To avoid further iterations of the same

recurring problems, a permanent injunction will issue barring Lutin and the Trustee

from participating in any trust or other entity that holds and manages investments

in the Company’s stock. The circumstances warrant this extraordinary remedy.

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III. CONCLUSION

For the foregoing reasons, the Company’s Third Motion to Enforce is granted.

The Company must submit a form of order on notice to the Trustee and the Delaware

Trust. The Company also must identify three candidates to serve as receiver.

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