Cred Inc. Liquidation Trust v. Uphold HQ Inc. et al

Filing 32

MEMORANDUM OPINION. Signed by Judge Maryellen Noreika on 3/27/2024. (dlw)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
In re:

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CRED INC., et al.,
Debtors.
CRED INC. LIQUIDATION TRUST,
Appellant,
v.
UPHOLD HQ INC., et al.,
Appellees.

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Chapter 11
Case No. 20-12836 (JTD)
(Jointly Administered)
(Bankr. D. Del.)

C.A. No. 23-461 (MN)
Adv. Proc. No. 22-50398 (JTD)
BAP No. 23-00020

MEMORANDUM OPINION
Darren Azman, Andrew B. Kratenstein, Joseph B. Evans, Max J. Kellogg, MCDERMOTT WILL &
EMERY LLP, New York, NY; David R. Hurst, MCDERMOTT WILL & EMERY LLP, Wilmington,
DE – Attorneys for Appellant Cred Inc. Liquidation Trust.
Douglas W. Greene, Jorian L. Rose, Genevieve G. York-Erwin, Michael A. Sabella, Zachary R.
Taylor, BAKER & HOSTETLER LLP, New York, NY; Jeffrey J. Lyons, BAKER & HOSTETLER LLP,
Wilmington, DE – Attorneys for Appellees Uphold HQ Inc., et al.

March 27, 2024
Wilmington, Delaware

NOREIKA, U.S. District Judge
This appeal arises from the chapter 11 cases of Cred Inc. (“Cred”) and certain affiliates
(together “the Debtors”) in an adversary proceeding initiated by the Cred Inc. Liquidation Trust
(“the Trust”) against defendants-appellees Uphold HQ Inc., Uphold Inc., and Uphold Ltd.
(together, “Uphold”), in which the Trust seeks to hold Uphold liable in connection with the loss
of hundreds of millions of dollars’ worth of cryptocurrency invested in the Debtors’
cryptocurrency lending platform. Pending before the Court is the Trust’s appeal of the Bankruptcy
Court’s April 13, 2023 Order (Adv. D.I. 37) 1 (“the Order”) and accompanying Opinion, In re Cred
Inc., 650 B.R. 803 (Bankr. D. Del. 2023) (“the Opinion”), which granted Uphold’s motion to
dismiss (Adv. D.I. 5, 6) (“the Motion to Dismiss”) the Trust’s complaint (Adv. D.I. 3; A00004A00574) (“the Complaint”) for failure to state a claim and dismissed the Complaint in its entirety.
The Trust has appealed the Bankruptcy Court’s dismissal of Counts I and II, which alleged that
Uphold aided and abetted Cred’s officers’ and directors’ breaches of fiduciary duty. The Trust
also appeals the Bankruptcy Court’s dismissal of the Complaint with prejudice. For the reasons
set forth below, the Court will affirm the Order.
I.

BACKGROUND
A.

Brief Factual Background

Uphold was founded in 2013 by its former CEO Juan Pablo Thieriot “(Thieriot”).
(Complaint ¶ 18). Uphold is a multi-asset cryptocurrency exchange, on which users can buy and
sell cryptocurrencies, fiat currencies, equities, and precious metals. (Id. ¶ 41). Uphold provides
1

The docket of the adversary proceeding, captioned Cred. Inc. Liquidating Trust v. Uphold
HQ Inc., Adv. No. 22-50398 (JTD) is cited herein as “Adv. D.I. .” The docket of the
chapter 11 cases, captioned In re Cred Inc., et al., No. 20-12836 (JTD), is cited herein as
“B.D.I. __.” The appendix filed in support of the Trust’s opening brief (D.I. 13-16) and
the appendix filed in support of Uphold’s answering brief (D.I. 22-25) are cited herein as
“A__.”
1

retail customers with a digital money platform (“the Uphold Platform”) for transacting and storing
cryptocurrency and markets itself as easy to use for new cryptocurrency investors. (Id. ¶ 42).
In February of 2018, Uphold engaged Daniel Schatt (“Schatt”) to provide advisory
services. (Id. ¶ 19). Shortly thereafter, in April of 2018, Schatt was appointed as a director on the
board of Uphold, Ltd. (Id. ¶¶ 43-44). In May of 2018, Schatt, along with Lu Hua (“Hua”)
organized Cred. (Id. ¶ 19). Cred was a cryptocurrency yield-earning platform. Yield-earning
platforms borrow cryptocurrency from their customers with a promise to pay them back at a later
date with interest, essentially providing their customers unsecured notes. (Id. ¶ 39). The company
seeks to earn a greater yield on the loaned cryptocurrency than it owes the customer, usually
through re-lending or cryptocurrency trading strategies. (Id. ¶ 59). Yield-earning platforms are
generally risky due to their promises of high returns (often in excess of 8-12%), the volatility of
cryptocurrency prices, and a lack of a clearly applicable regulatory scheme. (Id. ¶¶ 40, 122).
Schatt and Hua were fifty percent (50%) co-owners of Cred. (Id. ¶ 54). At all relevant
times, Schatt was Cred’s CEO and a director on its board. (Id. ¶ 53). Hua was the second of
Cred’s two directors and was also the founder of a Chinese micro-lending platform called
moKredit (“moKredit”). (Complaint at 6, n.10).
In June of 2018, Schatt introduced Thieriot to Hua, and the next month Uphold and Schatt
began discussing a joint venture to create a yield earning program and eventually entered into a
series of agreements to govern same. (Id. ¶ 57). There were two primary agreements between
Uphold (specifically, Uphold HQ) and Cred concerning Uphold’s making CredEarn accessible
through the Uphold platform. The central agreement between the parties (which governed any
subsequent scope of work agreements, or “SOWs”) was the Master Services Agreement, dated
July 13, 2018 (“the MSA”). (A00667-677); (A00628). The MSA granted each party certain rights

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as against the other—including the right to terminate the MSA—and clearly delineated the
contractual relationship between Uphold HQ and Cred:
Relationship of Parties. The Parties acknowledge that this is a
business relationship based on the express provisions of this
Agreement and no partnership, joint venture, agency, fiduciary or
employment relationship is intended or created by this Agreement.
(A00674). On or around January 16, 2019, Cred and Uphold entered into a Statement of Work
(“the SOW #3”) which governed the CredEarn offering specifically. (Complaint ¶ 94 & Ex. O).
Pursuant to the SOW, Uphold would integrate CredEarn on its website and mobile application and,
in exchange, Cred would pay Uphold a commission in the form of a service fee (“the Uphold
Fees”) for sending its customers to Cred. (Id. ¶¶ 96-98 and Ex. O). The Uphold Fees that Cred
was required to pay under the SOW were in addition to the interest it owed to CredEarn customers
and were paid to Uphold regardless of whether Cred made a profit from the loan. (Id. ¶ 99). The
SOW provided that “all risk of loss of principal loan by [Cred] from [Uphold’s customers] shall
be borne by [Cred].” (Id. ¶ 120 and Ex. O).
On January 23, 2019, CredEarn launched. All CredEarn’s initial customers were driven to
CredEarn by Uphold. (Id. ¶ 138). Since only a very small percentage of customers discovered the
CredEarn website independently from Uphold, Cred and Uphold primarily targeted customers
through jointly created advertisements disseminated by Uphold throughout the lifecycle of
CredEarn, starting from its launch in early 2019 up until late 2020. (Id. ¶¶ 102, 140-141, 206).
These marketing materials stated that Cred made loans to “reputable companies.” (Id. ¶¶ 216220). Other marketing materials falsely claimed that CredEarn was “safe,” “secured,” “insured,”
and “fully hedged.” (Id. ¶¶ 270-273).
In order to generate enough yield to satisfy the promised 8-12% return to CredEarn
customers and Uphold’s commission, Cred took “huge risks.” (Id. ¶ 158). The vast majority

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(90%) of the cryptocurrency Cred received from CredEarn customers was lent to moKredit, who
would then loan the funds to its customers, who were primarily video gamers. (Id. ¶¶ 159, 168).
Cred and moKredit’s relationship was governed by a series of agreements, several of which were
not executed until long after Cred had loaned moKredit tens of millions of dollars of customer
cryptocurrency.

(Id. ¶¶ 171-177).

Although the moKredit Agreements (as defined in the

Complaint at ¶ 174) granted Cred security interests in moKredit’s accounts, inventory, equipment,
instruments and securities, Cred never perfected them. (Id. ¶¶ 200-201). Additionally, when
moKredit failed to repay principal on its loans as required by the moKredit Agreements, Cred
would simply allow moKredit to roll the principal owed to the next tranche. (Id. ¶¶ 198-99).
Whereas Cred and moKredit only transacted with each other in fiat currency or “stable”
cryptocurrency—cryptocurrency whose value is pegged to a stable asset such as the U.S. Dollar
or gold (“Stablecoins”)—Cred owed its customers Bitcoin (“BTC”) and other cryptocurrencies.
Thus, Cred bore the risk of loss if BTC or other cryptocurrencies increased in value during the life
of the CredEarn loan. (Id. ¶ 185). In an effort to mitigate this risk, Cred hired an unlicensed and
unregistered trading firm (“the Trading Firm”) to enter into options, futures, and perpetual swaps
for Cred in order to hedge against an increase in the price of cryptocurrency. (Id. ¶ 192). The
Trading Firm enabled Cred to make risky trades that were otherwise unavailable to U.S. persons
and entities. (Id. ¶¶ 23-24, 190). “Cred’s highly leveraged trading strategy left Cred exposed to
having its cryptocurrency positions depleted entirely” due to normal price fluctuations.
(Id. ¶¶ 272-73).
Throughout 2019 and 2020, as Cred continued to take on debt, it suffered loss after loss in
trading, hacks, and thefts—including by its Chief Capital Officer, James Alexander—which were
ultimately more than it could recover from. (Id. ¶¶ 25, 367, 422-427).

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B.

Additional Well Pled Facts Accepted as True

After addressing the required first step in considering a motion to dismiss—“separating the
conclusions from well-pled facts” contained in the Complaint—the Bankruptcy Court’s thorough
Opinion sets forth the “facts taken from the Complaint” which “are accepted as true for the
purposes of the Opinion.” In re Cred Inc., 650 B.R. at 814. Those facts include the joint venture
discussions between Schatt, Thieriot, Hua; how customers participated in the CredEarn Program;
CredEarn’s launch; Cred’s risky business plan, including its transactions with moKredit and the
Trading Agent; and Cred’s decline and the resulting losses. See id. at 814-20. Relevant to this
appeal, there does not appear to be any dispute as to the well pled facts, only what inferences may
be drawn from them. As the Court writes primarily for the parties, those facts are not repeated
here. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in
the Opinion.
C.

Procedural Background

The Debtors filed these chapter 11 cases on November 7, 2020. On December 23, 2020,
the Bankruptcy Court appointed an Examiner to “investigate allegations of fraud, dishonesty,
incompetence, misconduct, mismanagement, or irregularity in the management of the affairs of
[Cred] of or by current or former management of the debtors, and otherwise perform the duties of
an examiner, as set forth in Bankruptcy Code.” (A890). The Report concluded that Cred’s demise
was the result of internal mismanagement:
The specific causative event was a “flash crash” in cryptocurrency
trading value in March 2020 . . . The Examiner believes, however,
that the firm’s failure is more aptly attributed to dereliction in
corporate responsibility. Swings in crypto currency trading value
were, after all, a foreseen aspect of the firm’s business model. But,
Cred’s corporate managers did not run the business to effectively
counterbalance such risk, as was promised to customers. This
dereliction was grave. Noticeable failures include, among other
things: (1) un-systemic, chaotic, and, in some instances, non5

existent diligence, accounting, and compliance functions;
(ii) allowance for currency migration to non-Cred entities operating
in mainland China (moKredit), without legal or practical capacity to
repatriate capital as and when requested/needed by Cred; and
(iii) allocation of important managerial and operating functions to
an individual with an extremely worrisome past. Cred, it seems,
excelled at its marketing objectives; but, its failures in the most basic
of business functions portended its eventual demise.
(A00892-893). On March 11, 2021, Cred confirmed its liquidating plan (B.D.I. 629-1) (“the
Plan”), which approved a liquidation trust agreement (B.D.I. 579-1) (“the Trust Agreement”) and
created the Trust to liquidate the Debtors’ assets for the benefit of creditors. (Plan §§ 1.84,
12.3(c)). The Debtors’ assets were transferred to the Trust, including various causes of action.
The Trust reviewed Cred’s records and data to estimate total losses—including the liabilities and
obligations resulting from Cred’s collapse—and arrived at a total of approximately $783,946,276.
(Complaint ¶¶ 461, 464).
On July 22, 2022, the Trust commenced the adversary proceeding underlying this Appeal.
Among other things, the Complaint alleged that five Cred insiders breached their fiduciary duties
to Cred—Schatt, Hua, Alexander, Joe Podulka, and Daniel Wheeler. (A00084). These insiders
are not, however, named as defendants in the Complaint. (See A000812 (Judge Dorsey: “[W]hy
doesn’t the Complaint also bring claims against the ones who actually committed the fiduciary
violations?”)). The Trust had previously entered into settlement and cooperation agreements with
the Cred insiders for their breaches of fiduciary duties. (See A00832). Counts I and II of the
Complaint sought to hold Uphold liable for aiding and abetting those breaches of fiduciary duties.
Uphold moved to dismiss the Complaint. (Adv. D.I. 5). On January 11, 2023, the Bankruptcy
Court heard argument on the Motion to Dismiss. (Adv. D.I. 34; A00785-831). On April 13, 2023,
the Bankruptcy Court issued its Order and accompanying Opinion dismissing all counts with
prejudice.

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On April 26, 2023, the Trust filed a notice of appeal. (D.I. 1). The appeal is fully briefed.
(D.I. 11, 26, 28, 30, 31). The Court did not hear oral argument because the facts and legal
arguments are adequately presented in the briefs and record, and the decisional process would not
be significantly aided by oral argument.
II.

JURISDICTION AND STANDARDS OF REVIEW
The Court has jurisdiction to hear an appeal from a final judgment of the bankruptcy court

pursuant to 28 U.S.C. § 158(a)(1). A bankruptcy court’s dismissal of a claim as failing to state a
cause of action is subject to de novo review. In re LMI Legacy Holdings, Inc., 625 B.R. 268, 278
(D. Del. 2020) (citing Gelman v. State Farm Mut. Auto. Ins. Co., 583 F.3d 187, 190 (3d Cir. 2009)).
A bankruptcy court’s order dismissing claims with prejudice and denying an opportunity to amend
the complaint is reviewed for abuse of discretion. Id. (citing Lorenz v. CSX Corp., 1 F.3d 1406,
1413 (3d Cir. 1993)).
III.

DISCUSSION
The Bankruptcy Court dismissed with prejudice Counts I and II of the Complaint pursuant

to Federal Rule of Civil Procedure 12(b)(6), made applicable to the adversary proceeding pursuant
to Federal Rule of Bankruptcy Procedure 7012, “for failure to state a claim upon which relief can
be granted.” Pursuant to Rule 12(b)(6), “courts must consider the complaint in its entirety, as well
as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in
particular, documents incorporated into the complaint by reference, and matters of which a court
may take judicial notice.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007)
(citing 5B Wright & Miller § 1357 (3d ed. 2004 and Supp. 2007)).
To survive a motion to dismiss, “a complaint must contain sufficient factual matter,
accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “A claim
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has facial plausibility when the plaintiff pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.” Sheridan v. NGK
Metals Corp., 609 F.3d 239, 263 n.27 (3d Cir. 2010).
This plausibility standard requires more than a mere possibility that a defendant is liable to
the plaintiff. Iqbal, 556 U.S. at 678. When a complaint pleads facts that are merely “consistent
with a defendant's liability,” it “stops short of the line between possibility and plausibility of
entitlement to relief.” Twombly, 550 U.S. at 557. The facts alleged must nudge the plaintiff’s
claims “across the line from conceivable to plausible.” Id. at 570. Although in a motion to dismiss
all well-pleaded facts are accepted as true, the trial court need not accept as true conclusory
statements, statements of law, or unwarranted inferences cast as factual allegations. See Twombly,
550 U.S. at 555-57.
A.

Dismissal of Count I – Aiding and Abetting Breach of the Fiduciary Duty of
Care

The Trust argues that the Bankruptcy Court erred in dismissing Count I of the Complaint,
which asserts that Uphold aided and abetted Cred’s directors’ and officers’ breaches of their
fiduciary duty of care. (See D.I. 11 at 21-45). The Trust argues that, rather than construing the
Complaint’s allegations as a whole and resolving inferences in favor of the Trust—as required on
a motion to dismiss—the Bankruptcy Court improperly weighed factual evidence. (Id. at 19). As
to the determination that the Trust’s allegations were insufficient to give rise to a reasonable
inference that Uphold knowingly participated in the breaches of the fiduciary duty of care, the
Trust argues that the Bankruptcy Court ignored or downplayed dozens of well-supported factual
allegations that, when taken individually or collectively, create a plausible inference that Uphold
knew and understood the risks associated with CredEarn and, in aid of Cred’s directors and officers

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breaches of their fiduciary duties, misrepresented those risks to the detriment not only of Uphold’s
customers, but to Cred. (Id.).
To state a claim for aiding and abetting a breach of fiduciary duty under Delaware law, a
plaintiff must plead “(1) the existence of a fiduciary relationship, (2) a breach of the fiduciary’s
duty . . . (3) knowing participation in that breach by the defendants, and (4) damages proximately
caused by the breach.” In re PMTS Liquidating Corp., 526 B.R. 536, 546 (D. Del. 2014) (citing
Shamrock Holdings v. Arenson, 456 F.Supp.2d 599, 610 (D. Del. 2006)); Malpiede v. Townson,
780 A.2d 1075, 1096 (Del. 2001). “As with standard fiduciary duty claims, any general allegations
are subject to the general pleading requirements of Rule 8(a) while any fraudulent allegations are
subject to the heightened pleading requirements of Rule 9([b]).” In re Liquid Holdings Grp., Inc.,
2018 WL 2759301, at *15-16, (Bankr. D. Del. June 6, 2018). 2
1.

Pleading Standard for “Knowing Participation”

To establish knowing participation, “one must demonstrate that the party knew that the
other’s conduct constituted a breach of a fiduciary duty and gave substantial assistance or
encouragement to the other in committing that breach.” Bd. of Trs. of Teamsters v. Foodtown,
Inc., 296 F.3d 164, 174 (3d Cir. 2002) (citation omitted). Knowing participation involves two
concepts: knowledge and participation. New Enter. Assocs. 14, L.P. v. Rich, 292 A.3d 112, 175
(Del. Ch. 2023). To establish knowledge, “the plaintiff must demonstrate that the aider and abettor
had actual or constructive knowledge that their conduct was legally improper.” RBC Cap.
Markets, LLC v. Jervis, 129 A.3d 816, 862 (Del. 2015) (internal quotation marks omitted); In re
NewStarcom Holdings, Inc., 547 B.R. 106, 119 (Bankr. D. Del. 2019). “[A]ctual knowledge
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The Trust disputed the applicability of Rule 9(b) to these claims. The Bankruptcy Court
had no need to resolve this issue, as the claims failed under the more lenient Rule 8(a)
pleading standard. As this Court ultimately agrees that dismissal is appropriate under Rule
8(a), it need not address this issue either.
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requires that the alleged aider and abettor act ‘knowingly, intentionally, or with reckless
indifference . . . that is, with an illicit state of mind.’” In re DSI Renal Holdings, LLC, 2020 WL
7054390, at *6 (Bankr. D. Del. Dec. 2, 2020) (quoting RBC Capital, 129 A.3d at 862).
“[C]onstructive knowledge may be found ‘only if a fiduciary breaches its duty in an inherently
wrongful manner’ by engaging in conduct ‘so egregious’ so as to put a third party on notice of a
breach.” Id. (quoting In re NewStarcom Holdings, Inc., 547 B.R. at 124). Whether a defendant
acted with actual or constructive knowledge is a question of fact. See RBC Cap. Markets, LLC,
129 A.3d at 862.
To satisfy the requirement of participation, it is sufficient to allege that the third party
“participated in the [fiduciary] decisions, conspired with [the fiduciary], or otherwise caused the
[fiduciary] to make the decisions at issue.” Malpiede, 780 A.2d at 1098. A third party can
participate in a fiduciary breach by facilitating or inducing a breach of the duty of care. See In re
PLX Tech. Inc. S’holders Litig., 2018 WL 5018535, at *48 (Del. Ch. Oct. 16, 2018), aff’d, 211
A.3d 137 (Del. 2019). Consistent with these principles, the Restatement (Second) of Torts
explains that a defendant can be secondarily liable for “harm resulting . . . from the tortious conduct
of another” if the defendant:
(a) does a tortious act in concert with the other or pursuant to a
common design with him, or
(b) knows that the other’s conduct constitutes a breach of duty and
gives substantial assistance or encouragement to the other so to
conduct himself, or
(c) gives substantial assistance to the other in accomplishing a
tortious result and his own conduct, separately considered,
constitutes a breach of duty to the third person.
Restatement (Second) of Torts § 876 (1979). A comment on clause (b) states: “If the
encouragement or assistance is a substantial factor in causing the resulting tort, the one giving it is

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himself a tortfeasor and is responsible for the consequences of the other’s act.” Id. cmt. d. Under
the Restatement, giving “substantial assistance or encouragement” to the fiduciary in breaching its
duty is sufficient to satisfy the participation requirement.
2.

The Factual Allegations Do Not Support a Reasonable Inference of
Knowledge

The Bankruptcy Court concluded that the Trust did not sufficiently plead Uphold’s
knowing participation in any director’s or officer’s breach of the duty of care, as the Complaint
was “devoid of allegations that show both: 1) Uphold knew of the problems at Cred; and
2) knowledge of the problems would have necessarily led Uphold to conclude that the Cred
executives were breaching their fiduciary duties.” In re Cred Inc., 650 B.R. at 823. The
Bankruptcy Court summarized the allegations of the Complaint relating to knowing participation
as, at most, involving “[t]he presence of suspicious circumstances” and found that this “alone is
not enough.” Id. The Trust’s primary issue on appeal is that the Bankruptcy Court failed “to
assess the Complaint’s allegations in their entirety,” and instead “broke [them] down . . . into five
separate buckets, and separately addressed each one in isolation.” (D.I. 11 at 26). Failing to
consider the allegations in their entirety, the Trust asserts, the Bankruptcy Court failed to draw the
“reasonable inference” that Uphold knew Cred executives were breaching their fiduciary duties,
including by (with Uphold’s substantial assistance) falsely touting CredEarn as “safe,” “insured,”
and “secure.” (Id.).
The Opinion reflects, however, that the Bankruptcy Court separated the factual allegations
from conclusory ones and analyzed whether the factual allegations raised a reasonable inference
that Uphold knew of the underlying breaches of the duty of care, and that its actions would assist
those breaches. That the Bankruptcy Court categorized the Complaint’s factual allegations for
explanatory purposes does not established that it analyzed them in isolation. The allegations the

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Trust cites in its appeal, considered together in their entirety, fall short of “nudg[ing] the plaintiff’s
claims across the line from conceivable to plausible.” Twombly, 550 U.S. at 570.
a.

The Uphold-Cred Business Arrangement

The Bankruptcy Court found that “while the Complaint alleges that Uphold knew
generalities about Cred’s risky business model . . . it does not include allegations that show Uphold
knew the details that might have alerted it that Cred’s relationship with MoKredit was a problem.”
In re Cred Inc., 650 B.R. at 824. The Trust challenges this determination on appeal, arguing that
the Complaint alleges far more than just “generalities,” and its allegations detail how:
Uphold planned to launch under its own name, and how Uphold
developed the yield-earning program with Cred. (A00015 ¶¶ 5861.) The Complaint explains that, in CredEarn’s planning stages,
Uphold’s senior executives met with Hua and the MoKredit team
“multiple times” which provided the basis for Uphold to understand
the yield-earning model applicable to the CredEarn (and previously
UpholdEarn) program. (A00037 ¶ 210.) The Complaint also cites
testimony and other evidence demonstrating that Uphold fully
understood Cred’s business model, including MoKredit’s role in
that model.
(D.I. 11 at 27 (citing A00038-39 ¶¶ 211-212 (Schatt’s testimony confirming that JP Thieriot and
others at Uphold “were fully aware” of Cred’s business model, including that, in connection with
the CredEarn program, Cred would be relending its loans to moKredit, and that moKredit was then
relending to videogamers))). The Complaint also alleges that “despite co-developing the program
and planning to launch and market it under its own name, Uphold and Cred insiders decided to
shift all of the risks of the yield-earning program to Cred” and that, in so doing, “Uphold sought
to reap the benefits of consistent transaction fees, building its crypto wallet-holder base, and
attracting new customers.” (Id. at 28-29). The Bankruptcy Court failed to recognize that “[s]uch
an advantageous position is a basis to infer knowing participation,” the Trust asserts. (Id. at 29
(citing In re: IH 1, Inc. Miller v. Kirkland & Ellis LLP, 2016 WL 6394296, at *28 (Bankr. D. Del.

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Sept. 28, 2016) (“The Court may infer such knowledge where the alleged aider and abetter gained
an advantage from the [fiduciaries’] breach of its duties.”)).
These allegations, separated from conclusory statements, raise a reasonable inference that:
(1) Uphold initially planned to launch the yield earning program, but ultimately Cred launched it;
(2) Uphold executives met with Hua “multiple times” and understood that moKredit lent primarily
to Chinese video gamers; (3) SOW #3 allocated the risk of loss of customer funds to Cred; and
(4) Uphold hoped that offering CredEarn on the Uphold platform would attract new customers to
Uphold. (See D.I. 11 at 26-30). The most that can reasonably be inferred from these facts is that
Uphold and Cred negotiated a business deal. The allegations provide no factual basis to infer that
Uphold “fully” knew about all of the particular risks attendant to Cred’s business (beyond the wellknown fact that cryptocurrency prices fluctuate), and as the Bankruptcy Court correctly found,
knowledge that a business deal is risky does not “equate to knowledge of a breach of fiduciary
duty.” In re Cred Inc., B.R. 650 at 824. Assuming Uphold’s knowledge of Cred’s risky business
model, it cannot be inferred from such an allegation that Uphold also knew that such a business
model, as the Trust asserts, “forced Cred to take on additional debt in a fiscally irresponsible
manner and by misusing corporate assets.” (D.I. 11 at 30). As for the allocation of risk, given that
Cred had sole discretion over how it lent out customer funds and sole responsibility to return
customer funds, it is unremarkable that Cred also bore the risk of loss of funds under SOW #3.
b.

Knowledge of Cred’s Dire Financial Situation

The Trust argues that the Complaint asserts not merely Uphold’s knowledge of Cred’s
risky business model, but additionally Uphold’s knowledge of Cred’s dire financial situation,
based on this portion of Schatt’s deposition testimony, as cited in the Complaint:
Q: Did you ever tell Uphold about any hedging losses that Cred
experienced?

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A: I believe I did.
(A00074; A00548). The complaint alleges that Schatt also informed Uphold about moKredit’s
failure to pay under the parties loan and security agreement (Complaint ¶¶ 171-177) as well as
Alexander’s theft and the resulting lawsuit. (A00073 ¶ 415, A00075 ¶ 424; A00078 ¶ 444,
A00546-A00550). Taken together, the Trust asserts, these allegations support a reasonable
inference that Uphold knew that the offers and directors were breaching their duty of care through
the “systematic failure of management to act within the bounds of reason in running the company.”
(D.I. 11 at 34 (citing A00851)). The Bankruptcy Court inappropriately disregarded Schatt’s
testimony, the Trust argues, finding it alleged “only that Uphold was told something regarding
Cred experiencing trading losses and an executive’s theft.” In re Cred Inc., 650 B.R. at 824. The
Bankruptcy Court further failed to resolve competing factual inferences in the Trust’s favor, the
Trust asserts, based on its conclusion that: “[i]t is just as reasonable to conclude from these
allegations that Schatt told Uphold that the hedging losses and theft were not cause for concern as
it is to conclude that he told Uphold that Cred was on the precipice of bankruptcy.” (Id.).
The Court finds no support for the Trust’s argument that the Bankruptcy Court failed to
consider Schatt’s somewhat vague testimony, and the quoted excerpt from the Opinion does not
demonstrate that the Bankruptcy Court improperly weighed “competing factual inferences,” as the
Trust asserts; rather, it indicates that nothing can be reasonably inferred from Schatt’s statements
with respect to Uphold’s knowledge or culpable mindset: in other words, assuming the truth of
Schatt’s deposition testimony, the Bankruptcy Court could not reasonably infer Uphold’s
knowledge of a fiduciary duty breach based on its knowledge of Cred’s hedging losses or an
insider’s theft.

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c.

Constructive Knowledge of Certain Uphold Executives

The Trust asserts that, at the very least, Uphold had constructive knowledge of the fiduciary
breaches, demonstrated by multiple Uphold executives and officers communicating their concerns
about Cred’s business model and mismanagement. For example:
“[U]pon receipt of a CredEarn marketing email claiming that Cred
was offering up to a 9% interest return through CredEarn, Uphold
CFO Lee Hansen (“Hansen”) forwarded the email to Thieriot and
Uphold’s Chief Revenue Officer Robin O'Connell (“O’Connell”)
asking “How can they do this?” In response, O'Connell responded
‘Magic?’”
Former Uphold Board member Steckel stated about an investor: “As
with me, he will be curious and doubtful as to the risk [t]aken
by [C]red to guarantee such a return . . . .”
Steckel further stated: “The lack of visibility around the way Cred
deploys its money and recourse is a conversation that [Thieriot]
and I have engaged in before. As the amount of money that has
been sent to Cred has increased significantly, their procedures and
the protections afforded to our customers should be reviewed. A
failure on their part would not just be a problem for our customer
but also almost automatically result in lawsuits against Uphold.”
(Complaint ¶¶ 296, 297, 300 & Exs. MM, NN). According to the Trust, the Bankruptcy Court
impermissibly drew inferences in Uphold’s favor, determining in that the allegations “demonstrate
that there were red flags[,] [b]ut that is not enough to establish the required knowledge to state a
claim for aiding and abetting breach of fiduciary duty.” In re Cred Inc., 650 B.R. at 827. Citing
several cases in support, the Trust argues that Delaware law is clear that knowing participation
may be found on constructive knowledge, where the fiduciaries’ conduct is “so egregious” so as
to put a third party on notice of a breach. (D.I. 11 at 36). According to the Trust, these
communications reflect that, “in addition to Schatt, at least Thieriot, Hansen, O’Connell, and
Steckel knew and/or were put on notice of the various Cred executives’ breaches.” (Id.).

15

The Trust is correct that a fiduciary’s conduct may be so egregious as to put a third party
on notice of a breach. See e.g., In re USA Cafes, L.P. Litig., 600 A.2d 43, 56 (Del. Ch. 1991)
(knowledge of breach inferred from participation in transaction where nearly 25% of purchase
price was paid directly to target’s directors and officers); Firefighters’ Pension Sys. of City of
Kansas City, Missouri Tr. v. Presidio, Inc., 251 A.3d 212, 275 (Del. Ch. 2021) (knowledge of
breach inferred where defendant shared unauthorized information with third party to manipulate
sale process, misled the board, and entered into last minute agreement to increase its own success
fee); Park Lawn Corp. v. PlotBox Inc., 2021 WL 5038751, at *3 (D. Del. Oct. 29, 2021) (denying
dismissal of aiding and abetting claim against competitor defendant alleged to have assisted
plaintiff’s CEO in CEO’s attempt to poach plaintiff’s technology expert, finding defendant knew
it was dealing with competitor’s CEO and therefore had constructive knowledge of CEO’s
fiduciary duties). Knowledge of egregious conduct, however, cannot be inferred by Uphold’s
communications.

Rather, the emails merely reflect that three individuals within Uphold

questioned how Cred could deliver a 9-10% interest return to CredEarn customers; they do not
raise an inference of fiduciary conduct so egregious as to put them on notice of a breach. The
communications further undermine the inference, urged by the Trust, that Uphold “fully knew” all
aspects of Cred’s business and reflect instead that Uphold had limited visibility into CredEarn’s
operations and management. (See D.I. 11 at 35 (noting Steckel’s “curiosity” and “lack of visibility
around the way Cred deploys its money”)).
The Court agrees that the most that can be inferred from these emails is that certain
employees at certain times had doubts, while other Trust exhibits support an inference that Cred
was in fact delivering the advertised interest return to CredEarn customers for some time. (See,
e.g., A00409 (internal Uphold email noting that as late as 5/4/20, Cred had been “paying the

16

interest” on CredEarn loans); A00358 (5/14/20 email from D. Wheeler stating that Cred did not
have “any retail CredEarn defaults” and that “Cred has gone through three severe crypto market
corrections and has met all of its redemption/interest commitments”). Giving the Trust the benefit
of every reasonable inference, the Bankruptcy Court concluded that these allegations “[a]t best, []
demonstrate that there were red flags,” but were not enough to establish knowledge of the alleged
breaches. In re Cred Inc., 650 B.R. at 827.
d.

False Marketing Materials

The Trust disputes the Bankruptcy Court’s determination that, “while the Complaint
alleges that Uphold knew [the marketing materials] were false, it includes no facts to support that
conclusion.” Id. at 824. The Court agrees, however, that the allegations cited by the Trust largely
repeat its prior assertions: because Uphold (i) knew about Cred’s business model, (ii) knew that
Cred had a hedging strategy, (iii) was informed by Schatt about “hedging losses” at some point in
time, (iv) had a few individuals question how Cred could pay its advertised interest rate, and
(v) was aware that insurance was important to customers—Uphold therefore must have known
that CredEarn was not lending to “reputable companies,” and was not “secured,” “guaranteed,”
“insured,” or “fully hedged,” rendering its marketing materials false. As the Bankruptcy Court
correctly observed—and the Trust does not dispute on appeal—all of the exhibits the Trust relies
upon in arguing that the marketing materials were false were internal Cred emails not shared with
anyone at Uphold. In re Cred Inc., 650 B.R. at 825 (“[W]hile the Trust cites to internal Cred
emails discussing the fact that the marketing materials should not include references to insurance
. . . there is nothing in the Complaint that demonstrates anyone at Uphold was informed about
Cred’s lack of insurance coverage.”); (A00607-610). The only exhibit bearing upon Uphold’s
knowledge of the veracity of CredEarn’s marketing materials is an exhibit demonstrating that
Uphold’s CEO actually believed CredEarn was fully hedged and secure. (A00049). The Court
17

agrees it would be unreasonable to infer, based on the above allegations, that Uphold knew Cred
marketing materials were false.
e.

Imputing Schatt’s Knowledge of Cred’s Mismanagement to
Uphold

The Trust challenges the Bankruptcy Court’s determination that Schatt’s knowledge cannot
be imputed to Uphold. (See D.I. 11 at 39-41). “The general rule is that a director’s knowledge is
imputed to the corporation because directors have the authority and ability to act on behalf of the
corporation.” In re AMC Invs., LLC, 637 B.R. 43, 59 (Bankr. D. Del. 2022). Here, Schatt’s
knowledge should be imputed to Uphold, the Trust argues, because Schatt used the same
knowledge while acting for both Uphold and Cred. See NAMA Holdings, LLC v. Related WMC
LLC, 2014 WL 6436647, at *28 (Del. Ch. Nov. 17, 2014) (finding an imputation of knowledge
where an officer “could not segregate the information he learned while acting on behalf of Related
Sub[sidiary] and that he necessarily used that information when acting for Related Parent”). In
rejecting this imputation, the Trust argues, the Bankruptcy Court ruled on issues of fact not
resolvable on a motion to dismiss and made improper inferences in favor of Uphold. See, e.g., In
re Maxus Energy Corp., 641 B.R. 467, 513 (Bankr. D. Del. 2022) (“the issue of whether to impute
the Defendants’ knowledge or intent to Maxus is one of fact”).
But as Uphold correctly points out, the only factual allegation the Trust relies on in support
of imputation is the fact that Schatt was a director at both Cred and Uphold Ltd. “The fact that
two or more corporations have officers or agents in common will not of itself impute the
knowledge gained by such officers [or agents] while acting for one corporation to another
corporation in which they also hold office.” NAMA Holdings, 2014 WL 6436647, at *27; A00776
n.8). The bare assertion of Schatt’s dual roles is insufficient as a matter of law to impute Schatt’s
knowledge of Cred’s internal mismanagement to Uphold. More importantly, Schatt was a director

18

of Uphold, Ltd., not Uphold HQ—the entity that executed SOW #3 with Cred and was solely
responsible for the CredEarn offering on the Uphold platform. There are no allegations to support
a reasonable inference that Uphold Ltd. was involved with overseeing or implementing the
CredEarn offering. CredEarn is never mentioned in any of the Uphold Ltd. Board minutes attached
to the Complaint. (A00519-533). Ultimately, there was no issue of fact to resolve here, 3 and no
reason to impute Schatt’s knowledge of Cred’s internal mismanagement to Uphold Ltd., or any
other Uphold entity. The Court must agree with the Bankruptcy Court’s conclusion that “[t]here
is nothing in the Complaint . . . that would support the conclusion that Uphold, Ltd. was involved
with the CredEarn program at all,” such that “imputing Schatt’s knowledge to Uphold, Ltd. does
nothing to assist the Trust in establishing that Uphold HQ, Inc. had the knowledge necessary to
support the Trust’s claim.” In re Cred Inc., 650 B.R. at 826.
The fact that the Bankruptcy Court organized the factual allegations into “five buckets” for
purposes of its analysis is of no moment. In sum, considering the Complaint in its entirety, the
Bankruptcy Court correctly determined that the factual allegations did not give rise to a reasonable
inference that Uphold knew about Cred insiders’ mismanagement of Cred, or that by offering

3

The Trust asserts that Schatt was a director of each Uphold entity. (D.I. 11 at 40 n.12).
The only facts the Trust has furnished concerning Schatt’s role as a director are the Uphold
Ltd. board minutes. (A00519-533). As the Bankruptcy Court noted, “Although the
Complaint states only that Schatt ‘served on Uphold’s Board of Directors’ (where ‘Uphold’
is defined as including all three of the defendants), the board meeting minutes attached to
the Complaint show that Schatt was a director of Uphold, Ltd.”. In re Cred Inc., 650 B.R.
at 826. In its reply brief, the Trust argued for the first time that a joint brief filed by Uphold
and Dan Schatt Cred’s former CEO in an unrelated state court case several years ago shows
that Schatt was in fact a director of Uphold HQ. In post briefing letters, the parties disputed
whether this Court should take judicial notice of the document and whether it should
consider the argument. (See D.I. 30, 31). As it was not presented to the Bankruptcy Court
or referenced in the opening brief, it will not be considered here.
19

CredEarn on the Uphold platform, Uphold would be assisting in that mismanagement—both of
which the Trust is required to adequately plead.
3.

The Factual Allegations Do Not Support a Reasonable Inference of
Substantial Assistance
a.

Designing, Controlling, and Facilitating CredEarn

As the Trust correctly asserts, a third party can participate in a fiduciary breach by
facilitating or inducing a breach of the duty of care. See In re PLX Tech., 2018 WL 5018535, at
*48; see also In re OODC, LLC, 321 B.R. 128, 144 (Bankr. D. Del. 2005) (finding that a trustee
adequately alleged aiding and abetting because defendants were “aware of these activities and
participated in them by extending loans to the Debtor to facilitate the actions of Carter and Large”).
Here, the Trust argues, Cred executives breached their fiduciary duties not only “from a systemic
failure of management to act within the bounds of reason in running the company” but also because
Cred’s entire business model forced Cred to take on “additional debt in a fiscally irresponsible
manner” and by misusing corporate assets. And, according to the Trust, Uphold’s co-design of
and control over CredEarn, together with Uphold’s marketing, were services that facilitated the
breaches. (D.I. 11 at 41-42).
The Complaint alleges that: Uphold co-designed the CredEarn program with Schatt
(Complaint ¶¶ 58-63, 79-80, 87, 136-40); Cred was “100% dependent on Uphold” to launch and
be successful (id. ¶ 313), thus Uphold was able to exercise control over Cred; that Uphold also
controlled Cred and the CredEarn program by the terms of the SOW, which provided that Cred
bore all the risk and that Cred would not change its requirements under the CredEarn Offering
without Uphold’s prior written consent (id. ¶ 105); and that Uphold comingled Cred’s and
CredEarn customers’ cryptocurrency, resulting in its functional and financial control over Cred.
(id. ¶¶ 113, 116). The Trust argues that the Bankruptcy Court failed to consider these allegations

20

in their entirety and further cites case law supporting the proposition that allegations of control
such as those contained in the Complaint have been held to create a plausible inference of knowing
participation. See In re Advance Nanotech, Inc., 2014 WL 1320145, at *7 (Bankr. D. Del. Apr. 2,
2014).
The Bankruptcy Court determined that, “[E]ven if the Trust could establish that Uphold
exerted contractual and function[al] control over Cred, it fails to explain how such control would
have ‘assisted’ the purported breaches of fiduciary duty.” In re Cred Inc., 650 B.R. at 829. The
Court agrees. Taking all of these allegations as true, they are merely of the sort “consistent with a
defendant’s liability,” which “stops short of the line between possibility and plausibility of
entitlement to relief.” Twombly, 550 U.S. at 557. There are no facts to support a reasonable
inference that Cred was “100% dependent on Uphold,” only an email from March 15, 2019 (less
than two months after CredEarn’s launch) wherein Schatt stated that Cred was “100% dependent
on Uphold for our revenue at this time.” (A00410; A00778) (emphasis added). As Uphold points
out, that says nothing about CredEarn’s dependency (or lack thereof) at any later time, and various
exhibits demonstrate that Cred later offered CredEarn on at least eleven other platforms beyond
Uphold’s. The governing agreements, including SOW #3, establish that Cred retained control over
CredEarn subject to modest restrictions that required mutual assent, and the MSA granted Cred
the right to terminate SOW #3.
The allegations do not support a reasonable inference that Uphold controlled CredEarn,
much less in any way that would have assisted Cred insiders in mismanaging Cred.
b.

Disseminating False Marketing Materials

The factual allegations do not support a reasonable inference that Uphold substantially
assisted in Cred insiders’ breaches of care by disseminating false marketing materials either.
According to the Trust, the Complaint attaches myriad examples of Uphold’s marketing of
21

CredEarn. (¶¶ 206, 215-16, 220, 228-30, 247-50; A00289-326; A00332-36; A00341-51; A0037076). The Trust further asserts that any factual questions regarding how much Uphold marketed
CredEarn and whether that activity amounts to substantial assistance are not appropriately resolved
on a motion to dismiss. The Court agrees with the Trust. Here, however, no facts are pleaded to
support an inference that Uphold knew any such marketing materials were false, defeating the
“knowing participation” element. Rather the operative agreements demonstrate that Cred retained
primary control over marketing CredEarn under SOW #3 and that Uphold allowed Cred to market
CredEarn on Uphold’s platform. (See A00366 (Cred marketing guidelines requiring Cred approval
of CredEarn marketing materials published by Uphold); A00430 (11/28/19 email from L.
Westerfield (Uphold): “[O]ur role is to provide distribution for content; Cred and others provide
content”)). Considering the Complaint in its entirety, the Bankruptcy Court correctly determined
that the factual allegations did not give rise to a reasonable inference that Uphold substantially
assisted in any breach of the duty of care.
B.

Dismissal of Count II—Aiding and Abetting Breach of the Fiduciary Duties of
Loyalty and Good Faith

The Trust argues that the Bankruptcy Court erred in dismissing Count II of the Complaint,
which asserted that that Uphold aided and abetted the Cred officers’ and directors’ breaches of
fiduciary duty of loyalty and good faith. The Bankruptcy Court erroneously found no breach of
loyalty by Schatt and Hua, the Trust argues, despite those individuals being on both sides of the
negotiating table on transactions and arrangements that were vastly unfair and detrimental to Cred.
(See D.I. 11 at 49-54).
The Trust asserts three underlying breaches of Schatt’s and Hua’s duties of loyalty and
good faith: (i) creation and dissemination of the same false marketing discussed in connection with
Count I; (ii) Schatt’s entering into SOW #3, which allegedly benefitted Uphold to the detriment of

22

Cred; and (iii) Hua’s entering into a business relationship between Cred and moKredit that
disproportionately benefitted moKredit to the detriment of Cred. (See id.). The Bankruptcy Court
properly rejected each of these theories.
With respect to the false marketing materials, the Bankruptcy Court found that even
accepting the factual allegations as true, nothing “support[ed] the conclusion that Schatt or Hua
acted intentionally in disregarding their duties.” In re Cred Inc., 650 B.R. at 831; see also In re
Old Bpsush Inc., 2021 WL 4453595, *12 (D. Del. Sept. 29, 2021) (“A very extreme set of facts is
required to sustain a disloyalty claim premised on the notion that disinterested directors or officers
were intentionally disregarding their duties.”) (cleaned up). The Court agrees. The Complaint is
devoid of any factual allegations supporting an inference that Schatt or Hua knew at any time
before the market crash in March 2020 that CredEarn’s hedging strategies were deficient or that
CredEarn was otherwise inadequately insured or secured, or that they intentionally caused
CredEarn to be so. The Trust exhibits show that as late as June 2020, Cred insiders believed they
could return Cred to profitability by the end of the year. But even assuming that Complaint alleged
facts supporting a reasonable inference that the creation and/or dissemination of Cred marketing
materials constituted an underlying breach of loyalty or good faith, no facts suggest that Uphold
knowingly participated in disseminating false marketing materials. And the Complaint contains
no allegations indicating that Uphold had anything to do with any alleged failure by Schatt or Hua
to properly hedge, secure, or insure CredEarn loans.
With respect to SOW #3, the Bankruptcy Court concluded that the mere fact that Schatt
was a director at both Cred and Uphold Ltd. is not enough to support a reasonable inference of a
self-interested transaction. “To establish a breach of the fiduciary duty of loyalty, plaintiffs must
show that the [individual] either (1) stood on both sides of the transaction and dictated its terms in

23

a self-dealing way, or (2) received in the transaction a personal benefit that was not enjoyed by the
shareholders generally.” In re Coca-Cola Enters., 2007 Del. Ch. LEXIS 147, at *12 (Del. Ch.
Oct. 17, 2007). The Trust objects on bases similar to those discussed above in connection with
Count I—essentially that Uphold “controlled” Cred (and “exploited” Schatt) and forced Cred into
a bad deal (D.I. 11 at 49-50). Those arguments fail here as well. The facts pleaded do not support
a reasonable inference that this was anything other than an arms’ length agreement. Schatt was a
director at Uphold Ltd., not Uphold HQ (the entity that contracted with Cred in SOW #3), and thus
was not on both sides of the transaction. There are no factual allegations that Schatt was involved
in negotiating the SOW #3 or stood to gain any personal benefit for negotiating in Uphold’s favor.
Finally, the Bankruptcy Court correctly concluded that the moKredit-Cred business
relationship could not give rise to an aiding and abetting claim because there were no allegations
indicating that Uphold had anything to do with the relationship between those third parties. In re
Cred Inc., 650 B.R. at 831 n.93 (“[G]iven that there are no allegations in the Complaint that suggest
Uphold was in any way involved with Hua or MoKredit’s relationship with Cred . . . it is reasonable
to conclude that this allegation does not form the basis for the Trust’s aiding and abetting claim”).
C.

Dismissal of the Complaint with Prejudice

“The Bankruptcy Court stated no reason for denying the Trust an opportunity to amend,”
the Trust argues, and its blanket refusal to grant leave to amend without any stated rationale was
an “abuse of discretion.” (D.I. 28 at 27-28). “The court should freely give leave [to amend] when
justice so requires,” the Trust asserts, and thus, should this Court construe any part of the
Complaint as deficient, the Trust “should be permitted to amend.” (D.I. 11 at 54 (quoting In re
Zohar III, 631 B.R. 133, 172 (Bankr. D. Del. 2021)).
Here, the Bankruptcy Court dismissed the Complaint with prejudice—i.e., without leave
to amend—but did not cite a specific basis for denying leave to amend. The standard of review
24

for denial of leave to amend is “plenary if the denial is based on a legal error, and otherwise is for
abuse of discretion.” In re KII Liquidating, Inc., 607 B.R. 398, 404-05 (D. Del. 2019). “A court
abuses its discretion only when it makes a clear error of judgment, exceeds the bounds of
permissible choice, or when its decision is arbitrary, capricious or whimsical, or results in a
manifestly unreasonable judgment.” In re LMI Legacy, 625 B.R. at 291. A decision denying leave
to amend “stands under that standard unless no reasonable person would adopt the lower court’s
view.” In re Mallinckrodt Plc, 2022 WL 3545583, at *5 (D. Del. Aug. 18, 2022).
The Supreme Court has instructed, that while “[t]he grant or denial of an opportunity to
amend is within the discretion of the [ ] Court,” an “outright refusal to grant the leave without any
justifying reason . . . is not an exercise of discretion; it is merely abuse of that discretion and
inconsistent with the spirit of the Federal Rules.” Foman v. Davis, 371 U.S. 178, 182 (1962). The
Third Circuit has instructed, “[i]t does not matter whether or not a plaintiff seeks leave to amend
. . . if a complaint is vulnerable to 12(b)(6) dismissal, a district court must permit a curative
amendment, unless an amendment would be inequitable or futile.” Phillips v. County of Allegheny,
515 F.3d 224, 236 (3d Cir. 2008).
Uphold argues that the Bankruptcy Court’s dismissal of Counts I and II with prejudice was
proper as any amendment to the Complaint would be futile. (See D.I. 26 at 50-52). According to
Uphold, “[t]he Trust brought this case after having conducted an extensive pre-litigation
investigation, including depositions of key witnesses and receipt of over 100,000 pages voluntarily
produced by Uphold (along with countless internal Cred documents, and documents from other
third parties).” (Id. at 50-51). “Despite the luxury of that extensive pre-litigation discovery,”
Uphold argues, the Bankruptcy Court concluded that “the Complaint suffer[ed] from profound
factual pleading deficiencies.” (Id. at 51).

25

Although there is no separate section setting forth the Bankruptcy Court’s reasoning for
dismissing the Complaint with prejudice, the Opinion contains several “justifying reason[s],”
Forman, 371 U.S. at 182, which indicate that amendment here would be “futile,” Phillips, 515
F.3d at 236. Indeed, prefacing its detailed analysis of the Complaint’s factual allegations, which
“achieve[d] a level of obscurity and incomprehensibility that is truly remarkable,” together with
its deficiencies, the Bankruptcy Court explained that:
Here, both my experience and common sense lead me to conclude
that the Trust does not state any claim for relief against Uphold that
is plausible. Even assuming the truth of all the properly pled factual
allegations, those that support the conclusion that Uphold acted
unlawfully are sparse and the Trust assigns far greater significance
to them than is reasonable. Put simply, the claims alleged are at best
only possible, not plausible, and the sheer possibility of liability is
not enough.
In re Cred Inc., 650 B.R. at 814. Moreover, the Trust has identified no new information or specific
facts, or provided any proposed amendments, that would cure the Complaint’s deficiencies. In re
NAHC, Inc. Sec. Litig., 306 F.3d 1314, 1332 (3d Cir. 2002) (no abuse of discretion in denying
leave to amend where plaintiffs made no representation concerning new information received since
filing the complaint and provided no proposed amendments or specific facts that would cure the
complaint’s pleading deficiencies). Based on the foregoing, the Bankruptcy Court was within its
discretion in determining that Counts I and II for aiding and abetting breach of fiduciary duty
would not be salvaged by further amendment and, therefore, should be dismissed with prejudice.
IV.

CONCLUSION
For the foregoing reasons, the Order shall be affirmed. A separate Order shall be entered.

26