The Delaware Court of Chancery has allowed breach of contract claims to proceed against the manager of a Delaware LLC accused of diverting the firm's assets to benefit himself and his friends.

Vice Chancellor Sam Glasscock III on Thursday said East Coast Miner investor MHS Capital had cleared initial hurdles to showing that Keith Goggin had violated the firm's operating agreement by secretly using the firm's bidding rights to lock up proceeds from a lucrative coal tract for himself and his “cronies” in a bankruptcy sale.

Glasscock, however, trimmed 11 other counts from the case—including claims against Goggin's friend's, Michael Goodwin and John Collins—as either duplicative or for failing to state a claim for relief.

The defendants had asked Glasscock in October to toss the entire suit, arguing that Goggin was protected from liability for money damages for breaching his duties to ECM under the company's operating agreement. Any equitable relief MHS sought, they said, would interfere with sale orders already entered by a Kentucky bankruptcy judge and were otherwise barred under the doctrine of judicial estoppel.

MHS had argued that it was not seeking to reverse or modify the sale orders. Instead the plaintiffs said they were seeking to disgorge the profits and set up a constructive trust over the proceeds from the transaction.

According to court documents, MHS said it is owed at least $35 million.

On Thursday, Glasscock rejected Goggin's argument that MHS was precluded from seeking equitable relief, and while he acknowledged concerns that the case could potentially undermine the bankruptcy court orders, a ruling on the availability of equitable relief was premature.

“Whether that is so depends in part on the scope of the relief—if any—I ultimately grant in this action,” he wrote in a 46-page memorandum opinion. “That is a fact-intensive question that cannot be resolved at the pleading stage.”

The Delaware complaint mirrors a similar case that worked its way through New York state and federal courts before it was dismissed last May based on an exclusive venue provision in ECM's operating agreement. In it, MHS said that it had given ECM $5 million to help the firm purchase a senior debt note in Kentucky-based coal mining company U.S. Coal Inc. for $21 million.

When ECM purchased the debt note, the company obtained a security interest in a division of U.S. Coal that allowed ECM to bid on coal assets using the note, instead of cash, the plaintiff said. Goggin, however, created an entirely new entity with Goodwin to exercise ECM's credit-bidding rights and dilute the interest that ECM had expected to receive.

In a separate series of transactions, MHS said, Goggin used another company to transfer ECM's assets to himself and Collins. Both sets of deals were approved by the U.S. Bankruptcy Court for the Eastern District of Kentucky.

Goggin's Katsky Korins attorneys argued that MHS' request for at least $35 million conflicted with earlier statements it had made in U.S. District Court for the Southern District of New York that it was not seeking money damages and that the relief it sought would not affect the U.S. Coal bankruptcy estate.

Glasscock said the request for equitable relief was not “clearly inconsistent” with the position MHS had taken in New York.

“MHS and ECM assured the district court that the relief they sought would not derogate the sale orders entered by the bankruptcy court,” he said. “MHS and ECM tried to support their position by pointing out that they sought monetary damages against Goggin, but that is not tantamount to a representation that MHS would never seek equitable relief against him or his purported co-conspirators.”

Glasscock, meanwhile, dismissed the remaining counts against Goodwin and Collins, citing deficiencies in the pleading. He also dismissed claims for fraud, unjust enrichment and misappropriation of trade secrets against Goggin, saying that they were either subsumed by the overarching contract complaint or had failed to state a claim under Chancery Court rules.

MHS is represented by Stanley S. Arkin, Robert C. Angelillo and Alex Reisen of Arkin Solbakken in New York and Philip Trainer Jr. and Marie M. Degnan of Ashby & Geddes in Wilmington.

Goggin and Goodwin are represented by David L. Katsky, Adrienne B. Koch and Joseph Weiner of  Katsky Korins in New York and Gregory V. Varallo and Susan M. Hannigan of Richards, Layton & Finger in Wilmington.

Collins was represented by Michael Busenkell of Gellert Scali Busenkell & Brown in Wilmington and Michael T. Leigh of Kaplan Johnson Abate & Bird in Louisville, Kentucky.

The case is captioned MHS Capital v. Goggin.