August 18, 2026|Publications
By the time Vice Chancellor Lori Will of the Delaware Court of Chancery dismissed the derivative claims against B. Riley Financial Inc.’s directors on March 30 in Marchner v. B. Riley, the facts underlying the case had already produced a remarkable litigation inventory.
The U.S. Securities and Exchange Commission had served two rounds of subpoenas on the company and its founder. The counterparty at the center of the story, Brian Kahn, pled guilty in the U.S. District Court for the District of New Jersey in December 2025 to conspiring to commit securities fraud. And two days after that plea, a U.S. District Court for the Central District of California judge largely denied dismissal of a securities class action in Coan v. B. Riley, sustaining fraud claims against the company and its founder.
Then, the Delaware Court of Chancery looked at the same story and dismissed the fiduciary case.[1]
The same facts produced three different outcomes in three courthouses. Anyone surprised by that sequence is thinking about governance litigation the way most people did five years ago: as an echo of enforcement, filed on the same theory, and rising or falling with the government’s case.
Marchner is the cleanest demonstration in years of why that model fails, and why boards facing a government investigation so often prepare for the wrong lawsuit.
How B. Riley Got Here
In May 2023, B. Riley agreed to help take Franchise Group Inc. private in a $2.6 billion transactionin which B. Riley, together with private equity company Irradiant Partners LP, would join Franchise Group’s management in acquiring 64% of the company’s stock at $30 per share.[2]Kahn, Franchise Group’s CEO, was a longtime B. Riley client and a friend of founder Bryant Riley.
The deal closed in August 2023, with B. Riley committing $216.5 million in equity and rolling its preexisting loans to Kahn and his affiliates into a single note of about $201 million.
Months after the deal closed, Kahn was publicly implicated in the 2020 collapse of Prophecy Asset Management LP, a hedge fund whose co-founder pled guilty in November 2023 to hiding $294 million in losses. The SEC sued Kahn in September 2025, alleging that most of the funds’ capital had been routed to him and that losses exceeded $350 million.
Franchise Group filed for bankruptcy in November 2024, and B. Riley took approximately $490 million in write-downs.
The government’s interest widened as it went. The SEC’s first subpoenas sought the company’s dealings with Kahn, the second round reached Franchise Group and Bryant Riley’s personal loan secured by a pledge of company stock, and in June 2026, the SEC subpoenaed current and former employees for testimony.
The company and Riley are cooperating, and no determination of any violation has been made. Kahn pled guilty in December 2025, and his sentencing is pending.
The derivative plaintiff’s theory in the Court of Chancery was straightforward: B. Riley’s directors breached their oversight duties by approving and maintaining the Franchise Group exposure despite red flags about Kahn. That is a Caremark claim — derived from the Court of Chancery’s seminal 1996 ruling in In re: Caremark International Inc. Derivative Litigation — filed in the standard modern posture without a presuit demand and tested under Rule 23.1 of the Federal Rules of Civil Procedure’s demand futility standard.
Why the Court of Chancery Dismissed
Vice Chancellor Will’s opinion is a systematic tour of what Caremark is not. Its first line does the framing: “This case presents a hindsight critique of a business decision gone awry.”
According to the decision, Prong 1 of Caremark failed because the machinery existed.
The first avenue requires pleading that the directors “utterly failed” to implement a reporting or monitoring system. Here, the complaint acknowledged functioning oversight: an active audit committee, external auditors and outside counsel reporting to the committee. Allegations that a compliance system was flawed or ineffective do not support an inference that directors utterly failed to monitor.
Prong 2 also failed because the red flags were flags of risk, not illegality, per the decision.
The second avenue requires directors to have consciously disregarded red flags of noncompliance with positive law. The plaintiff’s red flags were Franchise Group’s declining projections, debt downgrades and the collateralization of Kahn’s loans. Those, in the court’s words, are “quintessential business risks,” not signs of unlawful behavior.
The Marchner ruling states the distinction as directly as any decision yet: “Imperfect diligence on an investment that later sours is a matter of business risk, not bad faith.” The court also rejected the plaintiff’s reliance on what the board “should have” known, which pleads constructive knowledge rather than the actual knowledge and conscious inaction that bad faith requires.
Further, the court declined the invitation to extend oversight duties outward.
The oversight doctrine addresses failures to monitor internal corporate compliance with positive law, and, per the decision, “B. Riley’s Board members had no duty to monitor the internal compliance of a separate company.”
A board’s oversight duty is inward-facing. The fraud here, as the court saw it, happened at someone else’s company, and the claim was “essentially one for negligent due diligence,” which exculpation forecloses.
With no substantial likelihood of liability, a majority of the board could impartially consider a demand under the Delaware Supreme Court’s 2021 decision in United Food and Commercial Workers Union v. Zuckerberg, and the complaint was dismissed. The plaintiff has appealed to the Delaware Supreme Court, so the boundary drawn below is now squarely before the justices.
Why The Courthouses Diverge
Practitioners — and more dangerously, boards — routinely treat the SEC investigation, the criminal case and the fiduciary suit as one legal event with three procedural expressions. They are better understood as three different questions.
The criminal case asks what an individual did. Kahn’s guilty plea concerns his own conduct at Prophecy, a fraud on that fund’s investors. It required proof of his intent and says nothing about what B. Riley’s outside directors knew or consciously disregarded.
The securities case asks what the company told its investors. The class action that survived dismissal in the Central District of California turns on whether B. Riley’s public statements were materially misleading and whether the speakers acted with scienter. Disclosure fraud is an outward-facing claim about corporate speech. It can succeed against a company whose board oversight was impeccable and fail against a company whose board was asleep. That case is in discovery, with trial set for January 2028.
The fiduciary case asks what the board did in the boardroom. Caremark is an inward-facing claim about governance conduct: systems, reporting, response to internal legality flags. It is famously “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment,” according to the original Caremark decision itself — and deliberately so, because it polices bad faith rather than bad outcomes.
The Court of Chancery opinion makes the same point in its most useful paragraph for anyone advising a board. The plaintiff argued at the hearing that the alleged misstatements were “encompassed within Caremark.”
Vice Chancellor Will answered that Delaware recognizes no separate “duty of disclosure,” and that the complaint “relies instead on impermissible group pleading, lifting vague facts from the securities class action complaint — an action brought against the Company and certain executives, not the outside directors.” Borrowing the securities theory is what marked the claim as belonging in a different courthouse.
The three claims also run on different evidentiary engines.
A securities complaint is built from public statements, stock drops and confidential witnesses, while a criminal case is built from cooperators and grand jury subpoenas.
A Caremark complaint has to be built from the company’s own books and records, obtained through a Section 220 of the Delaware General Corporation Law demand — and that engine just got harder to run, as the 2025 amendments narrowed the categories of available records and raised the showing required to get anything more.
The Marchner plaintiff ran that playbook and sued only after taking a Section 220 production. It cut against him: The minutes and committee materials he obtained, incorporated by reference into his complaint, supplied the record of functioning oversight that defeated his claims. The Court of Chancery plaintiffs in In re: The Boeing Co. Derivative Litigation lost the same way on Aug. 13.
No court erred. Each was answering a different question.
The Playbook for Boards Under Investigation
The pattern in the Marchner case is one easily seen as from both sides of the table, and it yields concrete guidance.
The record that wins the Rule 23.1 motion is built before the subpoena arrives.
B. Riley’s directors prevailed because the oversight apparatus existed, was documented and was visibly operated when the crisis hit. The audit committee acted swiftly to commission an investigation by company counsel, then a second by a separate firm after the auditor requested an independent review
The court held that retaining two separate law firms to investigate “negates any reasonable inference of bad faith.” By the time the government arrives, the machinery can only be operated, not built. Boards should treat committee minutes as the future exhibits they are.
Distinguish legality flags from risk flags in real time, and paper the distinction.
The Marchner decision protects boards that oversaw a risky decision. It does not protect boards that ignored signs of illegality inside the company.
When concerning information arrives about a counterparty, a customer or an executive’s outside dealings, the minutes should reflect what the information was understood to be, the business risk to be weighed or the legality question to be investigated, and what the board did about it. That contemporaneous characterization will be read back years later by a vice chancellor.
Expect the derivative suit on a government timetable, not a plaintiff’s.
The Section 220 demand now arrives within days of the Form 8-K disclosing a subpoena, and the derivative complaint follows the securities complaint. Assume that every disclosure about an investigation is being read by three different plaintiffs bars at once, and coordinate disclosure and defense from day one.
Do not overread the protection.
The Marchner decision polices Caremark’s boundary without shrinking its core. Where the misconduct is internal and the flags are legality-facing, oversight claims survive and settle for nine figures: food safety in the Court of Chancery’s 2019 decision in Marchand v. Barnhill and harassment by a senior officer in its 2023 ruling in In re: McDonald’s Corp.
The Boeing decision shows both sides. Vice Chancellor Morgan Zurn sustained oversight claims against Boeing in 2021 arising from the 737 Max crashes from 2018, and last week dismissed claims from the 2024 door-plug blowout, holding that “Delaware law does not hold corporate fiduciaries liable merely because a general risk materialized.”[3] Same company, same judge, opposite results. The line is inward versus outward, legality versus risk.
And in the Marchner case, the line itself is on appeal. A board that treats the decision as a settled shield is preparing for the wrong case in the other direction.
Three Questions, Three Records
Prosecutors build cases on what individuals knew and when. Securities plaintiffs work from what the company said. The Court of Chancery asks a narrower question: what the board actually did, in the room, with the information in front of it.
Counsel who treat the three regimes as one tend to overreact to the loudest and underprepare for the quietest, and the quietest is the one whose record is being written right now, in this quarter’s committee minutes, by people who are not thinking about the Court of Chancery at all.
To view the full article as published by Law360, click here.
Ashwin J. Ram is a partner and co-chair of the white collar and investigations practice at Buchalter LLP. He previously served as an assistant U.S. attorney in the Major Frauds Section of the U.S. Attorney’s Office for the Central District of California.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
