Delaware Court of Chancery Vice Chancellor Sam Glasscock III.

A Delaware Court of Chancery judge has removed a hurdle for two former executives of Louis Dreyfus Highbridge Energy to pursue potentially millions of dollars in damages stemming from the firm's $1.9 billion sale of its energy storage and processing plants in 2011.

Vice Chancellor Sam Glasscock III on Wednesday granted a request by Kevin Capone and Steven Scheinman to cancel the dissolution of two Delaware limited liability companies used to effectuate the deal, clearing the way for the plaintiffs to argue in New York state court that they are owed at least $11 million in bonuses.

Capone, former head trader for LDH Energy, and Scheinman, who served as the firm's general counsel, had sued in Delaware after a year of legal wrangling over an incentive plan, which entitled high-level employees to redeem their shares after being terminated without cause from the company.

According to court documents, Capone's stake was worth 1.5 percent of LDH Energy's value, and Scheinman was entitled to a 0.7 percent stake when the two were fired in late 2010. However, LDH redeemed their shares using a market value of $1.74 billion, a valuation that Capone and Scheinman argued undervalued the firm by at least $500 million.

In their complaint, the pair said LDH Energy knew at the time that Capone and Scheinman had a valid case for breach of contract against the company, but failed to meet a requirement under Delaware law requiring dissolving LLCs to set aside funds to satisfy known claims.

Capone and Scheinman reached their valuation based on the $1.94 billion sale of LDH Energy's midstream assets to a joint venture between Energy Transfer Partners and Regency Energy Partners in March 2011. LDH Energy was later acquired by third-party investors and renamed Castleton Commodities International in 2012.

In their lawsuit, Capone and Scheinman questioned how LDH Energy could arrive at a valuation of $1.74 billion in late 2010, when only one part of the business sold for more than $1.9 billion just months later. They said the firm and its directors had acted in bad faith by ignoring market evidence that indicated LDH Energy's value was actually much higher.

LDH Energy has said that its actions complied with Delaware law, and the company was barred from considering events after Dec. 31, 2010, in determining fair value.

The allegations also formed the basis of a breach of contract suit Capone and Scheinman filed against Castleton in New York Supreme Court in 2015. That case had been stayed, pending a ruling from Glasscock on whether LDH Energy had violated Delaware's Limited Liability Company Act by dissolving two firms without establishing a reserve of funds to cover the claims.

Capone and Scheinman asked Glasscock to nullify the LLC cancellations, so that they could proceed with their claims in New York.

On Wednesday, the judge ruled that the plaintiffs' claims “easily” had a basis in law, and LDH Energy had acted unreasonably in not establishing a reserve.

“Because the defendants were aware at the time of dissolution of the plaintiffs' nonfrivolous claims against the LLCs for breach of contract, the LLC Act required creation of a reserve to cover the plaintiffs' claims. It is undisputed that the defendants failed to do that,” Glasscock wrote in a 39-page memorandum opinion. “Accordingly, the LLCs were dissolved in violation of [the LLC Act], and the certificates of cancellation shall be nullified.”

Attorneys for the LDH Energy and Castleton did not return calls Wednesday seeking comment on the ruling. A Castleton spokesman did not respond to a request for comment.

Plaintiffs counsel were not available to comment on Wednesday.

Capone and Scheinman were represented by Brendan V. Sullivan Jr., Stephen L. Urbanczyk, Paul Mogin, Steven M. Cady and Matthew H. Blumenstein of Williams & Connolly in Washington, D.C., and Daniel A. Dreisbach and Ryan P. Durkin of Richards, Layton & Finger in Wilmington.

LDH Energy and Castleton were represented by Andrew Ditchfield, David B. Toscano, Edward Fu and Sagar D. Thakur of Davis Polk & Wardwell in New York and Donald J. Wolfe Jr., T. Brad Davey and Seth R. Tangman of Potter Anderson & Corroon in Wilmington.

The Delaware case is captioned Capone v. LDH Management Holdings.