In re EZCORP Inc. Consulting Agreement Deriv. Litig.

Delaware Court of Chancery · 2016 · Corporations

130 A.3d 934 (2016)

Updated August 22, 2026

CorporationsDerivative litigationRule 15(aaa)DismissalDemand and representative standingDelawareCourt of ChanceryRule 23.1

Facts

EZCORP entered into consulting agreements with Madison Park, an entity affiliated with controlling stockholder Phillip Ean Cohen, with monthly payments increasing over time. Love and Farrell served on the audit committee that approved the 2012 and 2013 agreements, and Beal, Love, and Farrell approved the 2014 agreement. The plaintiff filed a derivative complaint asserting fiduciary-duty, waste, aiding-and-abetting, and unjust-enrichment claims, and the outside directors moved to dismiss under Rules 12(b)(6) and 23.1. After the Delaware Supreme Court decided Cornerstone, plaintiff's counsel concluded the complaint did not plead non-exculpated claims against those outside directors and sought a dismissal without prejudice.

Issue

When a derivative plaintiff has filed an answering brief opposing a motion to dismiss and then seeks to dismiss claims against director defendants, must the dismissal be with prejudice only as to the named plaintiff under Rule 15(aaa), or may the directors obtain a dismissal with prejudice binding all potential plaintiffs? Also, did the plaintiff show good cause for a without-prejudice dismissal?

Rule

Under Court of Chancery Rule 15(aaa), if a plaintiff responds to a Rule 12(b)(6) or Rule 23.1 motion by filing an answering brief instead of timely amending, and the complaint is dismissed, the dismissal is with prejudice; in complaints brought pursuant to Rules 23 or 23.1, it is with prejudice only as to the named plaintiffs, unless the court finds good cause that dismissal with prejudice would not be just under all the circumstances. Before a derivative plaintiff survives Rule 23.1 or otherwise receives authority from the board to proceed, the plaintiff lacks authority to bind the corporation or other stockholders, and due process bars a judgment 'as to the world.'

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Nina Alvarez, a stockholder of Lakeshore Devices, Inc., filed a derivative action in Delaware challenging payments approved by several outside directors. The directors moved to dismiss under Rules 12(b)(6) and 23.1, Nina filed an answering brief instead of amending, and the court later concluded the complaint should be dismissed.

What is the most likely effect of the dismissal under Delaware Court of Chancery Rule 15(aaa)?

Explanation. Rule 15(aaa) provides that when a plaintiff responds to a Rule 12(b)(6) or Rule 23.1 motion by filing an answering brief instead of timely amending, and dismissal is warranted, the dismissal is with prejudice. In a derivative action, however, that with-prejudice effect runs only to the named plaintiff, absent good cause for a without-prejudice dismissal. The court rejected any broader world-binding effect before representative authority exists.