Martin v. Med-Dev Corporation and Finley ( 2015 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
MICHAEL G. MARTIN, :
:
Plaintiff, :
:
v. : C.A. No. 10525-VCP
:
MED-DEV CORPORATION and :
THOMAS J. FINLEY, :
:
Defendants. :
MEMORANDUM OPINION
Date Submitted: July 28, 2015
Date Decided: October 27, 2015
James S. Yoder, Esq., WHITE AND WILLIAMS, LLP, Wilmington, Delaware; Kevin F.
Berry, Esq., Kimberly A. Havener, Esq., WHITE AND WILLIAMS, LLP, Philadelphia,
Pennsylvania; Attorneys for Plaintiff Michael G. Martin.
Michael P. Kelly, Esq., Andrew S. Dupre, Esq., Benjamin A. Smyth, Esq., McCARTER
& ENGLISH, LLP, Wilmington, Delaware; Attorneys for Defendants Med-Dev
Corporation and Thomas J. Finley.
PARSONS, Vice Chancellor.
This case involves a dispute over the management of a medical device company.
Members of the company‟s board of directors accused the Chairman and CEO—the
plaintiff in this action—of misappropriating company funds, leading to his eventual
resignation. Although the plaintiff believed his resignation was contingent on the
appointment of two investors to the company‟s board of directors, the other directors—
one of whom, along with the company, is a defendant in this action—took the resignation
as unconditional.
The plaintiff brought this action under Section 225 of the Delaware General
Corporation Law (“DGCL”)1 to contest the validity of his resignation from the
company‟s board of directors and to invalidate the appointment of the director who
replaced him as the Chairman. Both parties also seek an award of attorneys‟ fees and
expenses against the other under the bad faith exception to the American Rule.
The trial was conducted on June 10 and 11, 2015. After post-trial briefing, I heard
oral argument on July 28. For the reasons that follow, I conclude that the plaintiff should
be reinstated as the company‟s Chairman, but that the director who replaced him as the
Chairman should remain on the board. The defendants are entitled to partial attorneys‟
fees and expenses against the plaintiff based on a frivolous claim the plaintiff brought
against them and pursued until he abandoned it just before trial. I deny the plaintiff‟s
request for attorneys‟ fees and expenses from the defendants.
1
8 Del. C. § 225.
1
I. BACKGROUND2
A. Parties
Plaintiff, Michael G. Martin, is the sole incorporator of Med-Dev Corporation
(“Med-Dev” or the “Company”). Martin3 initially served as the Chief Executive Officer
(“CEO”) and Chairman of Med-Dev‟s board of directors (the “Board”). He purportedly
resigned from those posts on April 19, 2014. The effect of that resignation and Martin‟s
claim for reinstatement as the Chairman of the Board are at issue in this action.
The defendants are Med-Dev and Thomas J. Finley (collectively, “Defendants”).
Med-Dev, a Delaware corporation based in Scranton, Pennsylvania, is a medical device
company that was founded in 2012. Finley4 has at all times since the Company‟s
inception served as a member of the Board and Med-Dev‟s President. Finley replaced
Martin as the CEO upon his purported resignation.
Relevant non-parties to this action include William Peters, M.D., and Michael
Moore, M.D., Ph.D., who were the other two initial members of the Board, and George
Albanese, a Company stockholder who was appointed to the Board on January 16, 2014
2
Citations to testimony presented at trial are in the form “Tr. # (X),” with “X”
representing the surname of the speaker, if not clear from the text. Exhibits will
be cited as “JX #,” and facts drawn from the parties‟ pretrial Joint Stipulation are
cited as “JS ¶ #.”
3
All references to “Martin” throughout this Memorandum Opinion should be
understood to mean Michael G. Martin. Any reference to Mick Martin, another of
the Company‟s original stockholders, will include his first and last name.
4
All references to “Finley” throughout this Memorandum Opinion should be
understood to mean Thomas J. Finley. Any reference to Finley‟s brother, Kevin
Finley, will include his first and last name.
2
and later replaced Martin as the Chairman after his purported resignation. Like Martin,
Albanese‟s current status as a director and the Chairman of the Board is at issue in this
action. In conjunction with his resignation from the Board, Martin attempted to cause the
addition to the Board of Gregory Rainey and Edward Lipes—stockholders of Med-Dev
with experience working in the medical device industry. Joseph Tomasek was the
Company‟s corporate counsel from 2012 until December 2014.
B. Facts
1. Background of the Company
Med-Dev was formed in June 2012 to distribute a novel intra-nasal medical device
(the “Clip”) that was intended to serve as a non-antibiotic treatment for nasal methicillin-
resistant Staphylococcus aureus infections. The Clip was developed by Moore and was
to be handmade using a silver impregnated fabric material for placement on the nasal
septum. In addition to Moore (1,252,500 shares), the Company‟s founders and original
stockholders included Martin (1,252,500 shares), Finley (1,252,500 shares), Peters
(1,252,500 shares), Albanese (1,252,500 shares), Frank LaForgia (710,000 shares), and
Mick Martin (525,000 shares). Finley was the Company‟s original President, and Martin
was its original Chairman and CEO.
Although the Clip was the only product Med-Dev had when it was founded, in
mid-2013, the Company identified an opportunity to obtain the exclusive rights to market
two other, market-ready “Infection Control” medical supply products. The Company
hoped these two new products could be sold through the same distribution channel that
initially was to be used to sell the Clip. Martin believed that to market effectively the two
3
Infection Control products, Med-Dev needed to hire a Chief Operating Officer (“COO”)
with relevant experience. He, therefore, reached out to Eric Suchecki, a recent Company
investor, in or around November 2013, to discuss the possibility of Suchecki serving as
Med-Dev‟s COO. According to Martin, Finley reacted negatively to this suggestion and
stated that he would “not report[] to anybody.”5
2. Albanese’s election to the Board
On January 16, 2014, the Board held a meeting at which Martin presided as
Chairman. At that meeting, a motion was made to expand the Board from four to five
directors and to appoint Albanese as the fifth director. Martin objected, contending that
the nomination and proposed election of Albanese were defective under the Company‟s
bylaws (the “Bylaws”). Martin based his objection on his understanding that the Bylaws
required notice to stockholders before the appointment of a new Board member.
Ultimately, Martin agreed to vote in favor of expanding the Board and Albanese‟s
appointment to the Board, but said that he was “going to get a legal opinion on [the
appointment process‟s compliance with the Bylaws] after the meeting.”6 Hence, the
Board voted unanimously on January 16, 2014 to expand to five members and appoint
Albanese to fill the new seat.
After the January 16 Board meeting, Martin contacted Tomasek and requested a
copy of the Bylaws, which Tomasek forwarded to both Martin and Finley. Martin also
5
Tr. 248.
6
Tr. 156 (Martin).
4
emailed Albanese regarding his initial opposition to Albanese‟s appointment to the
Board, stating, “Somehow, I am being cast as your enemy. Not so, but if you believe it,
so be it. Both you and I can be successful on our own, but somehow I thought we worked
better together.”7 The evidence is unclear as to whether Martin formally pressed his
objection to Albanese‟s appointment after the January 16 meeting.8 In that regard,
Martin alleges that Albanese resigned at some point between January 16 and April 19,
2014, but he failed to adduce any probative and persuasive evidence of such a
resignation.9 Defendants, on the other hand, point to several emails regarding Board
7
JX 27.
8
Compare Tr. 126 (Finley) (“Mr. Albanese told me that he had been contacted by
Mr. Martin and that Mr. Martin had engaged a Delaware law firm that had
provided an opinion that George was illegally elected to the board in January of
2014.”), with Tomasek Dep. 121-22, 124 (stating that he did not recall if Martin
had complained to him about Albanese‟s election and that he would have
investigated the circumstances of Albanese‟s appointment, but did not do so, had
an objection been raised), and Tr. 86, 111 (Finley) (stating that Martin did not
continue to object to Albanese‟s appointment after the January 16 meeting).
9
Martin cites to Tomasek‟s deposition for the proposition that Albanese resigned
from the Board after the January 16, 2014 meeting. In the relevant part of his
testimony, Tomasek stated that, in March 2014, the Board had splintered into two
competing camps: Finley and Moore versus Martin and Peters. Tomasek Dep. 38-
39. Plaintiff argues that, by negative implication, because Tomasek only
mentioned four directors and did not include Albanese, that Albanese must have
resigned from the Board. Plaintiff also points to Tomasek‟s testimony that
“Albanese stat[ed] to [Tomasek] that [Albanese] didn‟t know if he was on the
[Board] or not.” Tomasek Dep. 23-24. In addition, Martin notes that in the
Written Consent that Tomasek drafted to effectuate Martin‟s resignation, only
Martin, Finley, Peters, and Moore are recognized as Board members and the
number of authorized director positions is listed as “four.” JX 70. I attribute these
inconsistencies to Tomasek‟s forgetfulness and carelessness, however, rather than
as reliable indicia of Albanese‟s resignation. None of this evidence directly states
5
business during the relevant time period that Martin sent to Med-Dev‟s other directors,
including Albanese, as support for their position that Albanese never resigned from the
Board after his January 16 appointment.10 In addition, on April 11, 2014, Rainey
communicated to Martin his understanding that the Board consisted of Martin, Finley,
Moore, Peters, and Albanese, and there is no evidence Martin corrected him.11
3. Finley’s investigation into Martin’s Company expenses
On January 23, 2014, Martin learned that Finley had caused Med-Dev to close,
without notice to Martin, the joint account held at Wells Fargo Bank that had been used
for Med-Dev‟s business. When Martin asked Finley about the account closure, Finley
responded that he had moved the account because he thought Martin was
misappropriating Company funds. Specifically, Finley had been monitoring Med-Dev‟s
finances since its inception in 2012 and, in late 2013, noticed that some of Martin‟s
reimbursements from the Company appeared to be for non-Med-Dev purposes. Upon
further investigation, Finley identified approximately twenty instances in which Martin
allegedly misused Company funds. Martin ultimately admitted that at least two of those
instances did involve expenses that should not have been charged to Med-Dev.
or describes the circumstances surrounding Albanese‟s purported resignation.
Further, it is undisputed that at the January 16, 2014 meeting, the size of the Board
was expanded from four members to five. JS ¶ 17. Based on the absence of any
evidence that the Board‟s size was reduced to four members, I consider the
statement in the Written Consent as to the Board‟s size to be simply an error on
Tomasek‟s part.
10
JX 32, 40, 47, 55, 56, 58, 62, 63.
11
JX 58.
6
Finley discovered, for example, that Martin used his Med-Dev debit card on
February 14, 2012 to pay $2,500 to the law firm Mauro, Savo, Camerino, Grant & Schalk
(“Mauro Savo”).12 Tomasek shared office space with Maura Savo and occasionally
would “farm out” litigation matters to that firm because he was not a litigation attorney.
When questioned about the $2,500 charge, Martin first claimed that it was for legal work
related to Med-Dev‟s founding that Tomasek had referred to Mauro Savo. After
Tomasek denied farming out any Med-Dev-related work to Mauro Savo, Martin stated, in
a March 25, 2014 email to Tomasek, that he had made a mistake and that the $2,500
payment, in fact, pertained to a different entity that was not affiliated with Med-Dev.
Martin also used his Med-Dev debit card to pay $23,267 to Baltusrol Country
Club in New Jersey.13 Martin and other Med-Dev employees, including Finley, used
Baltusrol “to entertain prospective investors, sales management, possible mergers,
potential employees, distributors, doctors, analysts, [investment banks], and customers.”14
Of that $23,267, Martin admitted, in a March 31, 2014 email to Tomasek, that $8,783
was paid for non-Med-Dev expenses.15
12
JS ¶ 25.
13
JS ¶ 32.
14
JX 32.
15
JX 56.
7
4. Martin’s resignation from the Board
As the controversy regarding Martin‟s Company expenses was coming to a head,
the other members of the Board considered whether to remove Martin as a director. On
April 15, 2014, Tomasek circulated a memorandum to the Board members, with the
exception of Martin, regarding whether the Bylaws permitted the Board unilaterally to
remove him.16 Tomasek concluded the answer was no and that removing Martin from
the Board would require stockholder approval. By then the conflict had grown to the
point that “corporate activity seemed to have frozen.”17 Although Peters supported
Martin, the other directors no longer were speaking to Martin, and the Board became
“deadlocked.”18 Eventually, Martin suggested to Tomasek that it might be necessary for
him to resign to move the Company forward and indicated that he would be willing to do
so, on the condition that Lipes and Rainey be elected to the Board. Tomasek then
conveyed the proposed terms of Martin‟s resignation to Finley, who said it was a “good
idea.”19
To effectuate this plan, Tomasek drafted a resignation letter and a Unanimous
Written Consent of Directors of Med-Dev (the “Written Consent”), pursuant to which
Martin‟s resignation was contingent on the appointment of Lipes and Rainey to the
16
JX 68.
17
Tomasek Dep. 39.
18
Id.
19
Id. at 40.
8
Board.20 Tomasek sent those two documents to Martin on April 18, 2014 and separately
forwarded the documents to the rest of the Board members for their review. In his
transmittal email to Martin, Tomasek stated, “I have also attached the Board Consent,
appointing [Lipes] and [Rainey] to serve as Board members. [Lipes] and [Rainey] shall
be appointed once the D&O insurance is bound, scheduled for early next week.”21
Martin admits that he did not read the draft resignation letter Tomasek sent him on April
18. He focused, instead, on the Written Consent, which he found acceptable.
The Board, sans Martin, held a conference call on April 18, 2014, and requested
that Tomasek remove the contingency in the resignation letter as to the appointment of
20
JS ¶ 35. The draft resignation letter stated:
Please accept this, my resignation as an officer and director of
Med-Dev Corporation, effective upon the appointment of
Messrs. Ned Lipes and Greg Rainey to serve as members of
the Board of Directors of Med-Dev Corporation. If, in fact,
the appointment of Messrs. Lipes and Rainey to the Board of
Directors does not take place on or before 5:00 PM, Eastern
Time, April 25, 2014, then this Resignation shall be
automatically rescinded at such time.
JS ¶ 37. Similarly, the Written Consent stated:
[T]he Board has received the Resignation of Michael G.
Martin from the Board of Directors and as an officer of Med-
Dev and now desires to appoint Edward Lipes and Gregory
Rainey to serve as members of the Board of Directors.
JS ¶ 38.
21
JX 70.
9
Lipes and Rainey so that the Board could vet their qualifications first.22 Tomasek
modified the letter as requested and emailed Martin the revised resignation letter, which
simply stated “Please accept this, my resignation as Chief Executive Officer and as
Chairman of the Board and director of Med-Dev Corporation, effective 5:00 PM, Eastern
Time, April 19, 2014.”23
In his email, Tomasek did not mention that he had changed the resignation letter
or that the Board wanted to vet Lipes and Rainey prior to appointing them. Although
Tomasek testified that he did discuss, at some point, both of those issues with Martin,24
Martin‟s April 21 email to Rainey, Lipes, Tomasek, and Peters indicates that Martin was
under the impression that once his resignation was submitted and the directors and
officers (“D&O”) insurance policies were effective, Lipes and Rainey would be
22
Tomasek Dep. 118-19.
23
JS ¶ 41.
24
Tomasek Dep. 52 (“I obviously did [discuss the change in the language of the
resignation letters with Martin]. I would have.”); Id. at 118-19 (“I had mentioned
to [Martin] . . . that [Lipes and Rainey] were going to the Board of Directors . . .
the Board had not told me when they told me to change the resignation getting rid
of the contingency language that they were not going to appoint or consider
appointing the two gentlemen Rainey and Lipes to the Board. The whole point
was that they needed to vet their qualifications and that‟s what I‟m sure I
explained to [Martin] as the reason that he should sign the unconditional
resignation. I said they‟re going to interview these guys, I‟m sure that these guys
are going to be qualified, you need to sign this resignation so that . . . the company
can move on and get things done.”).
10
appointed to the Board.25 Martin executed the updated resignation letter and emailed it to
Tomasek on April 19, copying Peters on that email. Tomasek then sent the signed
resignation letter to the rest of the Board on April 20. As Martin admits, because he
concededly did not read the initial resignation letter containing the conditional language,
he was unaware that any changes had been made to the resignation letter when he signed
it.26 Martin did read the Written Consent that accompanied the first resignation letter.
Tomasek did not include a Written Consent with the second resignation letter, but he also
did not indicate to Martin that there would be any changes to the original Written
Consent.27 Thus, Martin testified credibly that he believed, at all times, that his
resignation was conditioned on the appointment of Lipes and Rainey to the Board.28
And, Tomasek acknowledged that he understood that Martin viewed his resignation as
contingent on Lipes and Rainey‟s appointment to the Board, even after Martin signed the
unconditional resignation letter.29
25
JX 78 (“I am asking Joe Tomasek to schedule a BOD teleconference for Thursday
morning [presumably April 24, 2014] at 8 AM. By that time Finley should have
the D&O Insurance and the resignation and new BOD acceptances should
seamlessly occur.”).
26
Tr. 267.
27
Tr. 266-69 (Martin).
28
Tr. 169-72, 260-61 (Martin).
29
Tomasek Dep. 52-53.
11
5. The Board’s actions after Martin’s resignation
On April 21, 2014, Martin emailed Lipes, Rainey, Tomasek, and Peters requesting
a Board meeting to allow his resignation and the appointments of Lipes and Rainey to
occur “seamlessly.”30 On April 25, 2014, Finley issued a memorandum to the Board
stating that Martin had resigned and that he was calling a special emergency meeting of
the Board on April 29 to: (1) accept Martin‟s resignation; (2) retroactively terminate
Martin‟s consulting agreement; and (3) appoint Albanese to fill Martin‟s vacancy.31 At
that meeting, the Board appointed Albanese to fill the Chairman position vacated by
Martin.32 There is no indication that the Board discussed the possibility of appointing
Lipes or Rainey as directors at the April 29 meeting. Although Finley‟s memorandum
purportedly was sent to the full Board,33 Peters did not receive notice of, or participate in,
30
JX 78. Martin apparently held the mistaken belief that the Board had to accept his
resignation before it became effective. As discussed in Section II.B.2 infra, that is
incorrect.
31
JX 1 at LACK_000337-41.
32
JX 72. Martin claims that JX 72—Finley‟s notes from the April 29 Board
meeting—indicates that Albanese resigned from his Board position sometime after
his January 16 appointment. Plaintiff relies on the statement in Finley‟s notes that
a motion was made “to add G. Albanese as a BOD to fill [Martin‟s] vacancy
[previously] added to BOD 1/16/14.” Id. Because the notes indicate that
Albanese previously was added to the Board on January 16, the date of his original
appointment, and do not mention that Albanese ever resigned, I find unpersuasive
Martin‟s contention that the notes provide conclusive evidence that he resigned at
some point after his original appointment. Instead, I find it more likely, based on
the absence of any direct evidence that Albanese resigned from the Board, that
Finley‟s notes mean that, at the April 29 meeting, the Board selected Albanese, as
a current Board member, to fill Martin‟s vacant Chairman position.
33
See JX 1 at LACK_00337.
12
the April 29 meeting. After the meeting, Peters promptly emailed Finley to voice his
frustration:
I disagree completely with conducting board related business
in my absence. I was not notified of the election of people to
the board. If I was notified of such actions I would have
requested that the board meeting be arranged to permit my
attendance. No proper notification was provided that such
action was to be taken.34
On April 29, Rainey emailed Finley, copying Albanese, Peters, Moore, Tomasek,
and Lipes, stating, “It has been over a week since [Martin‟s] resignation from the
[Board]. It was my understanding that [Lipes] and I would be joining the board.” 35
Finley responded by notifying Rainey that the Board had accepted Martin‟s resignation
34
JX 137. Defendants object to the admission of this email chain as evidence.
Martin obtained the email chain from Peters just before trial and forwarded it to
Defendants when it was received. See Tr. 59-63 (Finley). Defendants object to
this evidence on the grounds of untimeliness and unfair surprise. As Martin points
out, however, Finley was copied on all of these emails and responded to some of
them. See JX 137. In addition, although Defendants argue that Martin could have
sought discovery from Peters earlier because he was a friendly witness,
Defendants, likewise, could have sought discovery from Peters and obtained the
evidence earlier. In fact, given Peters‟ role as one of the four initial Board
members, he appears to have been an obvious potential source of relevant
evidence. Trial courts must balance their duty “to admit into evidence all relevant
and material facts” with their “correlative duty of enforcing standards of fairness
and compliance with the Rules [of Evidence].” Hoey v. Hawkins, 332 A.2d 403,
407 (Del. 1975). Because Defendants presumably knew of this evidence‟s
existence and could have obtained it earlier from Peters, and because Defendants
have not shown that Martin delayed providing it to them once he received it, I do
not consider the emails to be untimely or to constitute an unfair surprise.
Accordingly, I overrule Defendants‟ objection and admit JX 137.
35
JX 137.
13
and elected Albanese to fill his vacancy.36 Finley further indicated that the Board would
make a motion at the next meeting to nominate Rainey as an independent Board member
and that the Board needed to review Lipes‟s resume before considering his appointment.
Lipes sent his resume and biographical information to Finley that same day. On May 2,
2014, Lipes emailed Finley that he was “anxious to see Med-Dev moving towards
product launches as soon as possible” and asking when he and Rainey could join the
Board.37 On the same day, Rainey emailed Finley again and echoed Lipes‟s sentiments,
asking “wasn‟t [Martin‟s] resignation contingent upon [Lipes] and I being installed onto
the board within a specific time frame?”38 Rainey further stated that they “certainly want
to stay within that time frame or we will be faced with the situation of [Martin] rejoining
the board and then leaving it again.”39 In another email, Peters expressed his agreement
with Rainey.
On May 1, 2014, Martin wrote to Tomasek asking whether “there [was] any
update on [Rainey] and [Lipes] being added to the [Board]?”40 Later that day, Peters
forwarded Martin an email from Finley announcing to third parties that Martin had
resigned from the Board. Martin forwarded that email to Tomasek saying that “[Martin]
36
Id.37
Id.38
Id.39
Id.40
JX 85.
14
thought [his] resignation was effective only after [Lipes] and [Rainey] were added to the
[Board].”41 Martin then wrote to Tomasek on May 2, 2014 and purported to rescind his
resignation because Lipes and Rainey had not been appointed as directors.42 According
to Martin, Tomasek responded that the Board had “backed out of the deal.”43 Finley
testified that the Board ultimately decided not to appoint Lipes and Rainey because: (1)
they felt that Lipes and Rainey did not share their concern regarding Martin‟s Company
expenses; and (2) they were troubled by the fact that Lipes and Rainey had assigned their
proxies to Martin.44
On May 7, 2014, Peters also submitted his resignation from the Board. On August
20, 2014, Finley distributed a newsletter to Med-Dev investors announcing both that he
was succeeding Martin as the CEO and that his brother, Kevin Finley, and Deanne Dulik
Garver, Ph.D., had been appointed to the Board.45 On September 2, Rainey emailed
Finley, copying Lipes, Albanese, and Moore, to express his irritation with the Board‟s
actions since Martin‟s resignation:
In April, Ned Lipes and I presented our CV‟s to you and your
board of directors. To date? Nothing. Yet you have the time
to appoint two new directors, one your brother and the other
an individual whom you describe as having significant
41
JX 86.
42
JX 87.
43
Tr. 173.
44
Tr. 120-22.
45
JX 104 at P_000510-11.
15
industry experience. Great. You take the cumulative 75+
years of experience between Ned and myself and totally
ignore that in favor of a family member and someone no one
knows. . . . The unprofessionalism that you have exhibited in
this and other matters regarding me and other investors whom
I have introduced to Med Dev is repugnant.46
6. The Lackawanna County criminal investigation of Martin
In or around March 2014, while the Board was investigating Martin‟s expenses,
Finley engaged a Scranton attorney and former prosecutor, Amil Minora, Esq., to
represent Med-Dev.47 According to Defendants, Minora was hired because Tomasek had
represented Martin in various personal and business matters for over twenty years. 48
Martin, on the other hand, alleges that Minora was hired primarily because of his contacts
at the Lackawanna County District Attorney‟s Office (the “LCDA”).49 On May 6, 2014,
after Martin‟s April 19 resignation from the Board, Minora complained to the LCDA on
Med-Dev‟s behalf regarding Martin‟s Company expenses and alleged they constituted
theft.50 Lackawanna County Detective Lisa Bauer handled the criminal investigation.
In connection with its complaint, the Company disclosed the $2,500 payment that
Martin caused the Company to make to Mauro Savo. Med-Dev also claimed that Martin
46
JX 105.
47
Minora evidently still worked part-time as a Lackawanna County Assistant
District Attorney. See JX 131.
48
JX 55.
49
JX 131.
50
JX 1 at LACKA_000003.
16
improperly paid $70,000 of Company funds to Scotland Yarns, LLC, a company he
owned, and that Martin had loaned Tomasek $10,000 from Med-Dev‟s funds. Minora
also requested that Bauer look into theft claims that had been made against Martin in
connection with his 2009 arrest in Bergen County, New Jersey.
In 2009, Martin was arrested in Bergen County on charges of theft by deception
for allegedly falsifying information on financial documents (the “2009 Arrest”). Martin
eventually entered a pretrial intervention program, under the terms of which Martin said
the charges against him would be dismissed and expunged in exchange for his
cooperation with prosecutors. The charges against Martin were dropped, but the 2009
Arrest was never expunged. Finley and Tomasek apparently knew of the 2009 Arrest
before Med-Dev‟s founding, but they were under the impression that it had been
expunged from Martin‟s record. In May 2014, however, Tomasek learned that the arrest
never had been expunged. On May 20, Tomasek emailed the Board claiming that Martin
had “deceived” him into believing the 2009 Arrest had been expunged and advising them
that a potential issue might exist regarding Med-Dev‟s duty to amend prior stockholder
filings to disclose the 2009 Arrest.51
Based on the information Finley provided, Bauer obtained two search warrants.
The first was to obtain Martin‟s bank records; the second sought Med-Dev‟s bank records
in order to verify what Finley and Minora had reported. After the search warrants were
issued, Martin retained counsel to defend him against Med-Dev‟s criminal accusations.
51
JX 96.
17
On July 25, 2014, Minora sent Martin‟s counsel a proposed settlement agreement that,
according to Minora, Martin‟s counsel had invited and asked him to draft.52 In addition,
Bauer agreed to a request from Martin‟s attorneys to put the investigation on hold so the
parties could attempt to settle the matter. Minora‟s proposed settlement agreement stated
that “[the LCDA] believes probable cause exists to charge Martin with criminal conduct”
and called for Martin to relinquish all interests in Med-Dev in exchange for the
termination of the Lackawanna County criminal investigation.53 Minora then sent
52
Minora Dep. 37-38.
53
JX 101. Defendants object to the admission of this evidence regarding their
settlement negotiations under Delaware Rule of Evidence (“D.R.E.”) 408. Under
Rule 408:
Evidence of (1) furnishing or offering or promising to furnish,
or (2) accepting or offering or promising to accept, a valuable
consideration in compromising or attempting to compromise
a claim which was disputed as to either validity or amount is
not admissible to prove liability for or invalidity of the claim
or its amount. Evidence of conduct or statements made in
compromise negotiations is likewise not admissible. This rule
does not require the exclusion of any evidence otherwise
discoverable merely because it is presented in the course of
compromise negotiations. This rule also does not require
exclusion when the evidence is offered for another purpose,
such as proving bias or prejudice of a witness, negativing a
contention of undue delay or proving an effort to obstruct a
criminal investigation or prosecution.
D.R.E. 408. Insofar as Martin is utilizing this evidence to justify the
reasonableness of his delay in bringing this action—i.e., for purposes of refuting
Defendants‟ laches affirmative defense—I hold the evidence is admissible, as it is
offered to “negativ[e] a contention of undue delay.” Id.Plaintiff also is using this evidence to support his claim for attorneys‟ fees under
the bad faith exception to the American Rule, claiming that it is admissible under
18
Martin‟s attorney an email that threatened to seek criminal charges if Martin did not
agree to Med-Dev‟s proposed settlement.54 Thereafter, Martin retained different defense
counsel and declined to settle with the Company. The investigation then resumed.
On August 28, 2014, Martin‟s new defense counsel, Henry Hockheimer, Esq., sent
a letter to Minora notifying him that he believed Minora‟s threat of criminal action was
made to gain an advantage in a civil matter and could be unlawful and in violation of the
Pennsylvania Rules of Professional Conduct.55 Minora responded to Hockheimer on
August 29 by withdrawing Med-Dev‟s settlement offer.56 On September 2 and 4,
this Court‟s decision in Paige Capital Management, LLC v. Lerner Master Fund,
LLC, which held that “Rule 408 does not exclude the introduction of settlement-
related evidence if the evidence is being introduced to prove a claim arising out of
a wrong committed during settlement negotiations.” 22 A.3d 710, 726 (Del. Ch.
2011). As Defendants point out, Martin is attempting to use settlement evidence
to prove their liability for his attorneys‟ fees for allegedly acting in bad faith. In
particular, Martin claims that Defendants acted in bad faith by making a baseless
criminal charge against him and then attempting to extort a settlement from him
by offering to halt the criminal investigation in exchange for his relinquishment of
all interests in the Company. Defendants contend this is explicitly forbidden by
Rule 408, as it constitutes using “[e]vidence of . . . offering . . . valuable
consideration . . . to prove liability for . . . [a] claim.” Rule 408, however, only
forbids using evidence of a settlement offer to prove or disprove liability for the
claim being settled. In this case, Martin is using evidence of Defendants‟ offer to
drop the criminal charges in Lackawanna County to prove that they committed a
wrong during the settlement negotiations that supports his fee-shifting claim.
Martin does not seek to use the disputed evidence to prove or disprove his liability
as to the underlying criminal charges. This falls within the exception to Rule 408
articulated in Paige Capital Management, LLC; thus, the evidence is admissible.
54
JX 1 at LACKA_000041.
55
Id. at LACKA_000033.
56
JX 132.
19
Hockheimer sent letters to Bauer, expressing concern that Med-Dev might be using the
assistance of law enforcement to gain an advantage over Martin in a civil dispute and
explaining the circumstances surrounding Martin‟s allegedly improper Company
expenses.57
To evaluate Hockheimer‟s explanations regarding Martin‟s expenses, Bauer
interviewed Tomasek. In the interview, Tomasek told Bauer that:
[T]here [was] something personal going on with Mr. Finley
and Mr. Martin because it seems like Mr. Finley came after
Mr. Martin with a vengeance demanding a criminal
investigation instead of coming to Attorney Tomasek and
asking him to look into the matter and try to work it out. He
added that things with Mr. Martin and Mr. Finley seemed to
be going great, and then Mr. Martin told Mr. Finley that Med-
Dev needed someone else with experience to come in, and . . .
Mr. Finley thought that Mr. Martin was trying to get rid of
him, and maybe that‟s why he is taking this situation to the
extreme.58
Tomasek also informed Bauer that the 2009 Arrest stemmed from a disgruntled investor
and that the charges ultimately were dismissed.59 Despite Finley‟s continued urging that
Bauer revisit the 2009 Arrest, she concluded that it had no bearing on her investigation,
and she never reached out to Bergen County.60
57
JX 133-34.
58
Id. at LACKA_000008.
59
JX 1 at LACKA_000007-08.
60
Bauer Dep. 69-72.
20
Bauer interviewed Martin on September 22, 2014 and, shortly thereafter,
concluded that the dispute between Martin and Med-Dev was civil in nature and there
was insufficient evidence to pursue criminal charges.61 Bauer also requested that District
Attorney Anthony Jarbola review the evidence and provide his opinion. Upon review of
Bauer‟s report, Jarbola concurred with her conclusion.62 Finley then reached out to
another Lackawanna County Assistant District Attorney, Eugene Talerico, to try and
convince him to keep the criminal case against Martin open. After reviewing Bauer‟s
report, however, Talerico agreed with Bauer and Jarbola that insufficient evidence
existed to pursue criminal charges.63 The LCDA‟s criminal investigation ultimately
closed on October 1, 2014 without Martin being arrested or charged.
C. Procedural History
Martin filed his original complaint on January 7, 2015. Defendants filed a motion
to dismiss on February 2, in response to which Plaintiff filed an amended complaint on
March 9. Defendants then withdrew their motion to dismiss and filed an answer. After
the parties engaged in discovery and, in conjunction with the pretrial briefing, Martin
moved to amend his complaint again—this time to comport with evidence obtained
during discovery.
61
Id. at LACKA_000009-13.
62
Id.63
Bauer Dep. 89-93.
21
In his motion, Plaintiff proposed to make three categories of amendments: (1) the
removal of the originally pled Count II, which argued that Albanese‟s appointment to the
Board was invalid because his appointment allegedly violated the Bylaws (the “Old
Albanese Claim”); (2) the assertion of a new Count II and related allegations that
Albanese must be removed as Chairman of the Board and a director because Martin‟s
resignation was ineffective, void, or voidable (the “New Albanese Claim”); and (3) other
miscellaneous allegations unrelated to categories (1) and (2). Defendants opposed
Plaintiff‟s motion as to the Old Albanese Claim on the grounds that they needlessly had
incurred attorneys‟ fees and otherwise been forced to expend time and resources
defending against a claim that they always contended was frivolous, but was being
withdrawn only belatedly. Further, Defendants opposed Martin‟s motion as to the New
Albanese claim on the grounds that they may be prejudiced because the claim was not
brought in a timely manner. On June 11, 2015, I granted Plaintiff‟s motion as to all three
of his requested categories of amendments and allowed him to file his second amended
complaint (the “Complaint”). I did so, however, without prejudice to Defendants‟ ability
to seek fees and expenses relating to the Old Albanese Claim and to argue that the
admission of evidence relating to the New Albanese Claim had prejudiced Defendants‟
ability to defend this litigation on the merits.
I presided over a trial of this summary proceeding pursuant to 8 Del. C. § 225 on
June 10 and June 11, 2015. I ordered the parties to submit simultaneous post-trial briefs
on July 10 and to treat those briefs as answering briefs to the arguments made in their
adversary‟s respective pretrial briefs. Post-trial oral argument was held on July 28. This
22
Memorandum Opinion reflects my post-trial findings of fact and conclusions of law in
this matter.
D. Parties’ Contentions
Plaintiff, Martin, contends that his resignation was invalid and, therefore, that he
should be reinstated to the Board, on three bases. First, Martin claims that his oral
resignation—which was made conditional on the appointment of Lipes and Rainey to the
Board—rather than his written, unconditional resignation letter has legal effect. Second,
Plaintiff argues that the unconditional, written resignation letter is unenforceable under
general contract principles because: (a) he lacked intent to be bound; (b) the resignation
letter lacked sufficiently definite terms; and (c) Defendants failed to provide sufficient
consideration. Finally, Martin argues that his resignation was obtained improperly under
false pretenses and as a result of Defendants‟ and Tomasek‟s misrepresentations and
knowing silence.
Martin also claims that Albanese‟s position on the Board should be invalidated
because Albanese replaced Martin as the Chairman after Martin‟s resignation and,
according to Plaintiff, that purported resignation was ineffective. Consequently, because
Martin‟s resignation should have no legal effect, neither should the Board‟s appointment
of Albanese to replace him as Chairman.
Regarding Martin‟s argument as to the validity of his resignation, Defendants
respond that Martin‟s oral resignation was superseded by his unconditional, written
resignation letter. Defendants also maintain that Martin‟s contract-based arguments are
misplaced because director resignations are statutory, rather than contractual, documents.
23
And, to the extent that Plaintiff claims that his resignation was the result of Defendants‟
fraudulent inducement, Defendants insist that the facts do not support such a finding.
Martin also contends that Albanese‟s position on the Board depends on whether
Martin resigned on April 19, 2014, as Defendants contend, because Martin alleges that
Albanese resigned from his position as the purported fifth director before April 19.
Defendants assert that Plaintiff never proved that Albanese resigned after his original
appointment to the Board. As a result, if Albanese was a Board member at the time of
Martin‟s resignation, then the validity of Martin‟s resignation would affect whether
Albanese is the Chairman, but would have no bearing on the validity of Albanese‟s
position as a director.
Defendants also assert equitable defenses of laches, waiver, acquiescence, and
estoppel, and claim that both Counts I—regarding Martin‟s resignation—and II—
regarding Albanese‟s appointment—of the Complaint are barred by Martin‟s delay in
bringing this action. Martin counters by asserting that Defendants‟ unclean hands
prevent them from utilizing equitable defenses. He bases that argument on Defendants‟
alleged bad faith conduct in this action and their attempted prosecution of Martin in
Lackawanna County.
Finally, both parties seek an award of attorneys‟ fees from the other under the bad
faith exception to the American Rule. As described above, Martin maintains that he is
entitled to attorneys‟ fees from Defendants because of their alleged bad faith conduct in
this action and their attempted prosecution of him in Lackawanna County. Defendants,
on the other hand, seek to recover attorneys‟ fees from Plaintiff because of his bad faith
24
in bringing and litigating this action, particularly as it relates to the multiple iterations of
his claims regarding the validity of Albanese‟s position on the Board.
II. ANALYSIS
A. Legal Standard
“Plaintiffs have the burden of proving each element, including damages, of each of
their causes of action against each Defendant by a preponderance of the evidence.”64
“Proof by a preponderance of the evidence means proof that something is more likely
than not. It means that certain evidence, when compared to the evidence opposed to it,
has the more convincing force and makes you believe that something is more likely true
than not.”65 “By implication, the preponderance of the evidence standard also means that
if the evidence is in equipoise, Plaintiffs lose.”66
B. The Validity of Martin’s Resignation from the Board
Martin brought this action to invalidate his resignation from the Board and to
obtain a declaration reinstating him as Chairman under Section 225(a) of the DGCL,
which grants this Court authority to determine “the validity of any election, appointment,
removal or resignation of any director or officer of any corporation, and the right of any
64
OptimisCorp v. Waite, 2015 WL 5147038, at *55 (Del. Ch. Aug. 26, 2015).
65
Agilent Techs., Inc. v. Kirkland, 2010 WL 610725, at *13 (Del. Ch. Feb. 18,
2010) (quoting Del. Express Shuttle, Inc. v. Older, 2002 WL 31458243, at *17
(Del. Ch. Oct. 23, 2002)).
66
OptimisCorp, 2015 WL 5147038, at *55.
25
person to hold or continue to hold such office.”67 Section 141(b) of the DGCL states that
“[a]ny director may resign at any time upon notice given in writing or by electronic
transmission to the corporation. A resignation is effective when the resignation is
delivered unless the resignation specifies a later effective date or an effective date
determined upon the happening of an event or events.”68 “Determining whether a
director or officer has resigned is a question of fact determined by the circumstances of
each case.”69 “In general, a director may resign verbally through a sufficiently clear
manifestation of his or her intent to resign. Although the magic words „I resign‟ may not
be necessary, there must nonetheless be some objective manifestation of words or actions
to that effect.”70 “In a related context it has been held that „loose and ambiguous
language will not be regarded as sufficient to prove the resignation of a corporate officer,
at least where the subsequent acts and declarations of the officer are inconsistent with any
such contention.‟”71
67
8 Del. C. § 225(a).
68
8 Del. C. § 141(b).
69
Dionisi v. DeCampli, 1995 WL 398536, at *8 (Del. Ch. June 28, 1995) (citing
Bachmann v. Ontell, C.A. No. 7805, at 6 (Del. Ch. Nov. 16, 1984); Lasher v.
Inter-Continental Biologics, Inc., 1984 WL 137716, at *8 (Del. Ch. June 14,
1984)).
70
Oracle P’rs, L.P. v. Biolase, Inc., 2014 WL 2120348, at *16 (Del. Ch. May 21,
2014), aff'd, 97 A.3d 1029 (Del. 2014).
71
EDWARD P. WELCH ET AL., FOLK ON THE DELAWARE GENERAL CORPORATION
LAW § 141.05 at 4-316 (6th ed. 2015) (quoting Lasher, 1984 WL 137716, at *8).
26
With these principles in mind, I turn to Plaintiff‟s three arguments, stated above,
as to why his April 19, 2014 unconditional, written resignation from the Board was
ineffective. I address each of those arguments in turn.
1. Did Martin orally resign and, if so, was that resignation effective?
Martin argues that, at all times, he intended his resignation to be conditional on the
appointment of Lipes and Rainey to the Board. Plaintiff communicated this intent to
Tomasek, who was acting on behalf of the Company. Tomasek acknowledged that
Martin always intended his resignation to be conditional and testified that he
communicated this intention to Finley who agreed that Martin‟s conditional resignation
was a “good idea.”72 Plaintiff, therefore, contends that any subsequent writing
confirming his resignation was unnecessary and ineffective because his initial oral,
conditional resignation was communicated to Med-Dev via Tomasek and represented an
objective manifestation of Martin‟s intent to resign.73
I find as a matter of fact, however, that Martin‟s verbal communications with
Tomasek were not sufficiently definite to constitute an objective manifestation of
Martin‟s intent to resign. Rather, Martin‟s communications with Tomasek represented
preliminary discussions regarding Martin‟s willingness to resign conditionally, if that was
agreed to by the Board. Both Martin and Tomasek testified that “Martin suggested” that
he should resign when they were discussing how to resolve the conflict on the Board, so
72
Tomasek Dep. 40, 52-53.
73
See Oracle P’rs, L.P., 2014 WL 2120348, at *16-17.
27
that the Company could move forward.74 It does not appear, based on the evidence in the
record, that either Tomasek or Martin took those suggestions to be controlling. Rather,
Tomasek proceeded to draft formal documents regarding the resignation and sent them to
Martin. Although oral resignations generally are permissible under Delaware law,75
Martin‟s communications with Tomasek and, through him, to the Board were not
sufficiently clear manifestations that he had a present intention to resign. Thus, I
conclude that Martin‟s purported oral, conditional resignation is legally ineffective.
2. Is Martin’s written resignation unenforceable under general contract
principles?
Martin argues that “[t]his Court has consistently applied basic contract principles
when determining whether or not to enforce a director‟s resignation.”76 Defendants, on
the other hand, assert that “[d]irectorship resignations pursuant to 8 Del. C. §141(b) are
74
Tomasek Dep. 40; Tr. 169 (Martin).
75
See, e.g., Oracle P’rs, L.P., 2014 WL 2120348, at *16-17 (finding that a director‟s
oral resignation was effective because the resigning director and the other
directors who heard his oral statement understood that he was resigning
immediately); Boris v. Schaheen, 2013 WL 6331287, at *17-18 (Del. Ch. Dec. 2,
2013) (“[A] director may resign orally. Subsequent actions consistent with an oral
resignation can support finding a resignation without written notice.”); Dionisi,
1995 WL 398536, at *8 (finding a director‟s oral resignation effective because he
made it clear that he was resigning immediately from all of his positions with the
company) (quoting Bachmann v. Ontell, 1984 WL 8245, at *2 (Del. Ch. Nov. 27,
1984) (“I can conceive of circumstances where a completely illogical result would
follow from the refusal of the law to recognize an oral resignation clearly
given.”)).
76
Pl.‟s Post-Trial Br. 42.
28
creatures of statute, not contract.”77 Resolution of this dispute as a threshold matter is
important because a number of Martin‟s contentions regarding the invalidity of his
unconditional resignation letter are couched in terms of contract law. On that premise,
Plaintiff contends that his written resignation is unenforceable for want of essential
elements of a contract, including the intent to be bound, definite terms, and consideration.
Based on the plain language of Section 141(b), I conclude that Defendants‟
characterization of director resignations as statutory, rather than contractual, instruments
is accurate. Although Delaware courts have applied contract law principles to interpret
documents relevant to Section 225 claims,78 the only requirement in Section 141(b) for a
director‟s resignation to be effective is that it be communicated to the corporation. 79 The
history of Section 141(b) supports this conclusion. Under the prior common law rule, a
board had to accept a director‟s resignation in order for the resignation to be effective, but
that requirement was removed by the 1968 amendment to that section.80 I see no reason
to read additional elements for an effective resignation into Section 141(b) beyond what
the statute itself requires. Thus, I reject, as a matter of law, Plaintiff‟s claim that his
written resignation is unenforceable under general contract terms because I find it without
merit.
77
Defs.‟ Post-Trial Br. 21.
78
See Mariucci v. DeSantis, 1997 WL 61125, at *4 (Del. Ch. Oct. 14, 1997).
79
8 Del. C. § 141(b).
80
EDWARD P. WELCH ET AL., supra note 71, § 141.05 at 4-317.
29
3. Was Martin’s unconditional resignation obtained under false pretenses?
Martin argues that his “resignation is ineffective, invalid and voidable because it
was improperly obtained under false pretenses and as a result of Defendants‟ and
[Tomasek‟s] misrepresentations and knowing silence.”81 Because Plaintiff frames this
argument in terms of contract principles, Defendants contend that my conclusion that
Martin‟s resignation letter is not a contract preempts this argument. Although I
determined above that Martin‟s written resignation constituted a statutory, rather than
contractual, instrument, this Court has held that “a resignation will be deemed invalid if
obtained through trickery or misrepresentation.”82 As a result, Martin‟s claim that his
resignation was invalidly obtained via Defendants‟ misrepresentations does not depend
on a finding that his resignation letter was a contractual document.83
81
Pl.‟s Post-Trial Br. 45-46.
82
Hockessin Cmty. Ctr., Inc. v. Swift, 59 A.3d 437, 458 (Del. Ch. 2012).
83
Id. (comparing ineffective resignations obtained by trickery or misrepresentation
to other non-contractual board actions invalidated by such conduct (citing Fogel v.
U.S. Energy Sys., Inc., 2007 WL 4438978, at *3 (Del. Ch. Dec. 13, 2007) (“Where
a director is tricked or deceived about the true purpose of a [special] board
meeting, and where that director subsequently does not participate in that meeting,
any action purportedly taken there is invalid and void.”); Schroder v. Scotten,
Dillon Co., 299 A.2d 431, 436 (Del. Ch. 1972) (“A quorum obtained by trickery is
invalid and the reasoning which forbids trickery in securing a quorum applies
equally well to securing the absence of opposing directors from a meeting by
representing that such a meeting will not be held.”))).
30
a. Legal standard
Transactions entered into in reliance on material misrepresentations are voidable.84
For a transaction to be voidable, a plaintiff must show: “(1) that there was a
misrepresentation; (2) that the misrepresentation was either fraudulent or material; (3)
that the misrepresentation induced the recipient to enter into the contract; and (4) that the
recipient‟s reliance on the misrepresentation was reasonable.”85 A misrepresentation is
an assertion that is not in accordance with the facts and is material if it would induce a
reasonable person to manifest his assent.86 In addition, “fraud does not consist merely of
overt misrepresentations, but „may also occur through deliberate concealment of material
facts, or by silence in the face of a duty to speak.‟”87
b. Application
Martin asserts that Defendants‟ misrepresentations induced his unconditional
resignation from the Board. Martin highlights Tomasek‟s communications with him and
argues that Tomasek acted on behalf of the Board in those interactions. Specifically,
Plaintiff claims that Tomasek misrepresented the legal effect of the second resignation
84
See Naughty Monkey LLC v. MarineMax Ne. LLC, 2011 WL 4091851, at *3 (Del.
Ch. Aug. 31, 2011) (“[A] party may escape a contract which it was induced to
enter by the other party‟s fraudulent or material misrepresentation . . . .” (citing
Berdel, Inc. v. Berman Real Estate Mgmt., Inc., 1997 WL 793088, at *8 (Del. Ch.
Dec. 15, 1997))).
85
Alabi v. DLH Airways, Inc., 583 A.2d 1358, 1361-62 (Del. Super. 1990) (citing
RESTATEMENT (SECOND) OF CONTRACTS §§ 159, 164 (1981)).
86
Id.
87
Gaffin v. Teledyne, Inc., 611 A.2d 467, 472 (Del. 1992).
31
letter by failing to inform Martin that: (1) the Board had decided to vet Lipes and Rainey
before appointing them as directors; and (2) Tomasek had removed the condition that was
present in the first resignation letter at the Board‟s request. As to the first point, the
evidence is unclear regarding whether Tomasek communicated to Martin that the Board
wanted to vet Lipes and Rainey before appointing them as directors. If I credit
Tomasek‟s testimony that he did communicate the Board‟s intentions to Martin, I find it
more likely than not that Tomasek also gave Martin the impression that the vetting
merely was a formality.88 For example, Tomasek testified that he told Martin that
“they‟re going to interview these guys, I‟m sure that these guys are going to be qualified
. . . .”89 Tomasek acknowledged, however, that he was aware that Martin, at all times,
intended for his resignation to be contingent on the appointment of Lipes and Rainey to
the Board.90 Yet, the only contingency regarding the appointment of Lipes and Rainey
that Tomasek unquestionably did mention to Martin was the need for the Company‟s
D&O insurance policies to be effective. There is no evidence that anyone expected that
issue to be problematic, and ultimately it was not.
88
Tr. 270 (Martin) (“The board resolution [appointing Lipes and Rainey to the
Board] was a fait accompli as far as I was concerned.”).
89
Tomasek Dep. 119.
90
Tomasek Dep. 52-53.
32
Regarding the second alleged misrepresentation, Tomasek testified that he did
discuss the change to the resignation letter with Martin.91 But, the documentary evidence
provides no support for that allegation.92 Having considered the evidence of record, I
find it more likely than not that Martin still believed that his resignation was conditioned
on Lipes and Rainey‟s appointment to the Board when he signed the unconditional
resignation and that Tomasek knew that and did nothing to dissuade Martin from that
notion.
Because Tomasek, as the Board‟s agent, remained silent as to the unconditionality
of Martin‟s resignation despite knowing Martin would not have tendered his resignation
had he understood it to be unconditional, the Board obtained Martin‟s unconditional
resignation via Tomasek‟s material misrepresentations. In addition, under Delaware law,
a corporation generally is “liable for the acts and knowledge of its agents—even when the
agent acts fraudulently or causes injury to third persons through illegal conduct.”93
Tomasek was the Company‟s corporate counsel from 2012 until December 2014, 94 and
Defendants concede that he was acting as the Board‟s agent in his interactions with
91
Id. at 52.
92
JX 73 (email from Tomasek to Martin with the second, unconditional resignation
letter attached containing no discussion of the removal of the condition from the
first, conditional resignation letter).
93
Stewart v. Wilm. Tr. SP Servs., Inc., 112 A.3d 271, 302 (Del. Ch. 2015); see also
In re Am. Int’l Gp., Inc., 965 A.2d 763, 806 (Del. Ch. 2009) (citing E.I. du Pont de
Nemours & Co. v. Admiral Ins. Co., 1996 WL 111133, at *2 (Del. Super. Feb. 22,
1996)).
94
Tr. 23 (Finley).
33
Martin regarding his resignation.95 Thus, Tomasek‟s inducement of Martin to execute the
unconditional resignation letter under false pretenses is imputed to Med-Dev.
Defendants argue that had Martin simply read both the first and second versions of
the resignation letter, he likely would have recognized that the second letter, which he
executed, was unconditional. According to Defendants, Martin‟s failure to notice the
plain unconditionality of the second resignation letter renders his reliance on any
misrepresentation by Tomasek unjustifiable.96 The reasonableness of Martin‟s reliance
on Tomasek‟s alleged misrepresentations, however, must be considered in the context of
the surrounding circumstances including his prior communications with Tomasek.
Tomasek sent Martin the Written Consent along with the first resignation letter on
April 18, and the Written Consent reflected Martin‟s intent that his resignation be
conditional on the appointment of Lipes and Rainey to the Board. 97 Martin testified that
he believed the Written Consent was the crucial document in terms of effectuating his
95
Defs.‟ Post-Trial Br. 28 n.13 (noting that Tomasek was “acting as Med-Dev‟s
agent” when negotiating and drafting Martin‟s resignation).
96
Carrow v. Arnold, 2006 WL 3289582, at *11 (Del. Ch. Oct. 31, 2006) (“It is
unreasonable to rely on oral representations when they are expressly contradicted
by the parties‟ written agreement. „Fraudulent inducement is not available as a
defense when one had the opportunity to read the contract and by doing so could
have discovered the misrepresentation.‟ Because [the plaintiff] had such an
opportunity, any reliance he placed on prior, inconsistent, oral promises or
representations was unreasonable.” (footnotes omitted) (quoting 17A AM. JUR. 2D
CONTRACTS § 214 (2006))).
97
See supra note 20.
34
desire that Lipes and Rainey be appointed to the Board upon his resignation. 98 The
record also shows that Martin mistakenly believed that the Board had to accept his
resignation by way of a Board resolution—i.e., that the Written Consent was necessary to
effectuate his resignation. That belief may have resulted from Tomasek sending Martin
the Written Consent to Martin along with the first version of the resignation letter on
April 18, which suggests that those two documents should be read in conjunction with
one another. Because Tomasek did not send a second board resolution or written consent
with the second version of the resignation letter, it appears that Martin reasonably
assumed that the Written Consent had not changed.99 Further, in his April 18 email,
Tomasek affirmatively stated that “[Lipes and Rainey] shall only be appointed once the
D&O insurance is bound . . . ,”100 but mentioned no other contingency.
After Martin indicated to Tomasek his willingness to resign from the Board on the
condition that Lipes and Rainey be elected to the Board, Tomasek conveyed that idea to
Finley, who said it was a “good idea.”101 On April 18, Tomasek forwarded the first draft
resignation letter and the Written Consent to the Board for their review. In a conference
call that day that did not include Martin, the other Board members asked Tomasek to
remove the contingency in the resignation letter so that they could vet the qualifications
98
Tr. 266-70.
99
See id.
100
JX 70.
101
Tomasek Dep. 40.
35
of Lipes and Rainey first.102 As a result of that conversation, Tomasek sent Martin the
second, unconditional draft of the resignation letter. Thus, when Tomasek communicated
with Martin by email and orally on April 19, he knew that Finley and other Board
members were qualifying their willingness to appoint Lipes and Rainey as directors on
vetting them first. Nonetheless, I am not convinced that Tomasek communicated that
fact to Martin before Martin executed the purportedly unconditional resignation letter.
But, even if Tomasek did mention the Board‟s intention to vet Lipes and Rainey to
Martin, the evidence shows that he more than likely implied it was a mere formality and
that both of them would qualify as directors. Tomasek also did not inform Martin that he
had changed the resignation letter because Finley and the other directors instructed him to
make it unconditional. In these circumstances, I find that Tomasek, as Med-Dev‟s agent,
had a duty fully and fairly to disclose at least the vetting condition to Martin, which he
failed to do.103
102
Id. at 118-19.
103
Defendants seem to allege that they expected their vetting of Lipes and Rainey to
be more than a mere formality. Indeed, because neither Lipes nor Rainey ever was
nominated as a director, let alone appointed, it is questionable whether Finley or
the Board ever intended to consider them seriously. Even if they did, however, the
record proves that they never questioned their qualifications. Rather, Finley and
those aligned with him objected to Lipes and Rainey‟s apparent allegiance to
Martin. It is not clear whether Tomasek understood this on April 19, but it is
largely immaterial to my decision. If he did, he should have been more forthright
with Martin as to the vetting requirement. If he did not, I infer from the evidence
that the Med-Dev Board did not disclose that information to him.
36
Taking all of these factors into account, I find it reasonable: (1) that Martin
believed the Written Consent, rather than the resignation letter, was the controlling
document in terms of assuring that Lipes and Rainey would be appointed to the Board;
(2) that Martin believed, because Tomasek did not send him an updated board resolution,
that the original Written Consent still would be used; and (3) for Martin to have relied on
Tomasek‟s representation that Lipes and Rainey would be appointed once Martin
resigned and the D&O insurance policies were effective. Thus, despite Martin‟s careless
failure to compare the terms of the first resignation letter to the second resignation letter,
his reliance on Tomasek‟s material misrepresentation by silence in the face of a duty to
speak as to the conditionality of Martin‟s resignation was reasonable.
I conclude, therefore, that Martin‟s unconditional resignation letter was obtained
by Tomasek‟s misrepresentations as to whether his resignation was conditioned on the
appointment of Lipes and Rainey to the Board. Martin reasonably relied on those
misrepresentations, and they were material because they induced Martin‟s unconditional
resignation. As a result, absent a successful equitable defense by Defendants, equity
demands that Martin‟s unconditional resignation be invalidated.
c. Defendants’ equitable defenses
Defendants argue that even if this Court finds that Martin‟s resignation was
obtained through false pretenses, Martin‟s claim to invalidate that resignation should be
barred by various equitable defenses. Although they included waiver, acquiescence, and
estoppel among their asserted defenses in the Joint Stipulation and their Pre-trial Brief,
Defendants relied only on laches in their Post-Trial Brief. That may be because Martin
37
responded to all four of Defendants‟ equitable defenses by invoking the unclean hands
doctrine. Beyond that, Martin said little or nothing about the specific defenses of waiver,
acquiescence, or estoppel. Hence, I will focus my analysis on whether Plaintiff‟s claim
to invalidate his resignation under Section 225 of the DGCL is time-barred by laches.
i. Acquiescence, estoppel, and waiver
Before addressing laches, I pause briefly to discuss Defendants‟ other equitable
defenses. As to their acquiescence and estoppel defenses, Defendants assert that the
Board materially has changed its positions in reliance on Martin‟s unconditional
resignation and note that they would be prejudiced by “Martin‟s attempt to invalidate all
acts occurring after the date of his resignation” in his initial proposed second amended
complaint.104 Defendants contend that Martin, therefore, is barred by acquiescence and
estoppel from challenging the validity of his resignation.105 In the final second amended
complaint—i.e., the Complaint—filed just before trial, however, Martin, at my
instruction,106 removed the paragraphs in the initial proposed second amended complaint
that Defendants had cited as challenging all of the Board‟s actions taken after his
104
Defs.‟ Pretrial Br. 35 (citing Joint Pretrial Stipulation and Order, Docket Item
(“D.I.”) 61, Ex. A ¶¶ 104-108).
105
Id. (citing Nevins v. Bryan, 885 A.2d 233, 246-50 (Del. Ch. 2005) (Section 225
claim barred by acquiescence, estoppel, and laches in part because the defendants
continued to carry on business after the allegedly defective act)).
106
At the Pretrial Conference, I noted that the initial proposed second amended
complaint could be prejudicial to Defendants because it sought the removal of all
directors appointed to the Board after April 19, 2014. Martin‟s counsel then
agreed to consider modifying the proposed amended pleading to narrow that
request. See Pretrial Conference Tr. 6.
38
purported retirement.107 As a result, Defendants‟ acquiescence and estoppel arguments
(as distinguished from laches) effectively are mooted because Martin‟s claim has been
limited such that the only Board action he seeks to challenge as a result of his allegedly
invalid resignation is the appointment of Albanese to Martin‟s seat.
As to their waiver defense, Defendants argue that Martin violated his “duty to
speak because he believed the Board had violated his rights and had acted
impermissibly,” and yet did not object to the alleged violations.108 Defendants‟ assertion,
however, is contradicted by Martin‟s prompt attempt to retract of his resignation on May
2, 2014, upon learning from Tomasek that the Board had “backed out of the deal.” 109 To
the extent Defendants claim that Martin delayed unreasonably after May 2 in bringing
this action and thereby waived his claims, I reject that argument in the context of my
laches analysis below. Thus, Defendants‟ equitable defenses of acquiescence, estoppel,
and waiver do not entitle them to anything more than what is discussed elsewhere in this
Memorandum Opinion.
107
Compare Joint Pretrial Stipulation and Order, D.I. 61, Ex. A ¶¶ 104-108
(requesting that the Court declare that Martin is the rightful Chairman of the Board
and that Albanese and any other director appointed after April 19, 2014 shall cease
acting as a member of the Board), with Pl.‟s Motion to File Amended Compl., D.I.
70, Ex. D ¶¶ 104-108 (requesting only that the Court declare that Martin is the
rightful Chairman of the Board and that Albanese shall cease acting as a member
of the Board).
108
Defs.‟ Pretrial Br. 36 (citing Brittingham v. Bd. of Adjustment of Rehoboth Beach,
2005 WL 170690, at *5 (Del. Super. Jan. 14, 2005) (“When a duty to speak exists,
it is said that „silence gives consent.‟”)).
109
Tr. 173 (Martin).
39
ii. Laches
Because it is an affirmative defense, Defendants bear the burdens of proof and
persuasion on the issue of laches.110 “Laches is an unreasonable delay by a party, without
any specific reference to duration, in the enforcement of a right, and resulting in prejudice
to the adverse party.”111 “In the Section 225 context, a delay of even a month and a half
has been held sufficient to bar a claim under the doctrine of laches.”112
Martin discovered that the Board definitively had decided not to appoint Lipes and
Rainey as directors and purported to retract his resignation on May 2, 2014.113 Plaintiff
did not commence this action, however, until January 7, 2015. According to Defendants,
this “eight month delay in challenging the Board‟s composition is unreasonable.” 114 And,
in that eight-month time period, Defendants claim they materially changed their positions
in reliance on Martin‟s unconditional resignation by notifying investors and other third
parties of his resignation and by appointing Finley to succeed Martin as the CEO and
110
See Ct. Ch. R. 8(c); Penn Mart Supermkts., Inc. v. New Castle Shopping
LLC, 2005 WL 3502054, at *5 n.40 (Del. Ch. Dec. 15, 2005) (citing Warwick
Park Owners Ass’n, Inc. v. Sahutsky, 2005 WL 2335485, at *4 (Del. Ch. Sept. 20,
2005)).
111
Whittington v. Dragon Gp., L.L.C., 991 A.2d 1, 7 (Del. 2009) (citing Reid v.
Spazio, 970 A.2d 176, 183 (Del. 2009)).
112
Klaassen v. Allegro Dev. Corp., 2013 WL 5739680, at *20 (Del. Ch. Oct. 11,
2013) (citing Stengel v. Rotman, 2001 WL 221512 (Del. Ch. Feb. 26, 2011)).
113
See supra notes 40-43 and accompanying text; see also Martin Dep. 34 (stating
that he knew in early May 2014 that he was not going to be put back on the Board,
even after attempting to retract his resignation).
114
Defs.‟ Pre-Trial Br. 35.
40
Kevin Finley and Garver to the Board.115 Plaintiff‟s eight-month delay is even longer
than the month and a half and seven-month delays that gave rise to successful laches
defenses in the context of Section 225 claims in the Stengel and Klaassen cases,
respectively.116 The courts have held, however, that “[t]he length of the delay is less
important than the reasons for it.”117
In his briefs, Martin does not defend the reasonableness of his delay in bringing
this action other than by reference to the LCDA criminal investigation that provides the
basis for his unclean hands response. Martin testified, for example, that he “had to wait
until the gun to [his] head was away in Lackawanna County”—i.e., until the criminal
investigation over his Company expenses was completed—and that he “didn‟t sue
because of the lack of bandwidth due to the criminal . . . investigation.”118 Thus, Martin
essentially argues that it would be unreasonable to expect him to have defended himself
in the Lackawanna County criminal investigation and pursued his Section 225 claims
simultaneously.
Rather than contesting the merits of Defendants‟ laches defense, Plaintiff instead
asserts that Defendants‟ equitable defenses are precluded by their unclean hands. This
115
See Nevins, 885 A.2d at 246-50 (“By waiting a year to bring suit, [the plaintiff]
jeopardized all of the actions taken by the Board during that year.”).
116
Klaassen, 2013 WL 5739680, at *20; Stengel, 2001 WL 221512, at *6-7.
117
IAC/InterActiveCorp v. O’Brien, 26 A.3d 174, 177 (Del. 2011) (citing
Whittington, 991 A.2d at 8).
118
Tr. 289; Martin Dep. 34-35.
41
Court has “broad discretion when applying the unclean hands doctrine” and may
“refuse[] to consider requests for equitable relief in circumstances where the litigant‟s
own acts offend the very sense of equity to which he appeals.”119
Martin avers that “Defendants conduct before this litigation was fraudulent and
egregious thereby barring them from presenting equitable defenses under the unclean
hands doctrine . . . .”120 Specifically, Plaintiff refers to: (1) Defendants‟ inducement of
Martin‟s resignation under false pretenses; and (2) Defendants‟ pursuit of criminal
charges against Martin in Lackawanna County. Martin avoided, however, accusing
Tomasek of fraudulent behavior. Instead, Plaintiff based his claim that his unconditional
resignation was induced under false pretenses, which I found persuasive supra, on
Tomasek‟s material, rather than fraudulent, misrepresentations.121 Plaintiff concedes that
the record is “unclear” as to “[w]hether . . . Tomasek willfully misled Martin as to the
legal effect of his resignation.”122 Martin also testified explicitly that he was not aware of
any fraud committed against him by Tomasek and that he “would use Joe Tomasek in a
119
Metcap Sec. LLC v. Pearl Senior Care, Inc., 2009 WL 513756, at *6 (Del. Ch.
Feb. 27, 2009) (quoting Nakahara v. NS 1991 Am. Trust, 718 A.2d 518, 522 (Del.
Ch. 1998)) (citing SmithKline Beecham Pharm. Co. v. Merck & Co., 766 A.2d
442, 448 (Del. 2000)).
120
Pl.‟s Post-Trial Br. 68.
121
See supra note 85 and accompanying text (noting that a transaction is voidable if
induced by either a fraudulent or a material misrepresentation).
122
Pl.‟s Post-Trial Br. 18.
42
heartbeat in the future to do a start-up.”123 Martin‟s unclean hands argument, therefore,
rests entirely on Defendants‟ conduct in connection with the Lackawanna County
criminal investigation.
As to that criminal investigation, I conclude that, under the circumstances,
Martin‟s focus on defending himself in that process provided a reasonable basis for his
delay in bringing this action.124 Martin‟s participation included responding to detective
Bauer‟s search warrant, engaging in settlement negotiations, engaging two different
defense attorneys, and meeting with Bauer for an interview.125 It also is true, however, as
Defendants emphasize, that the criminal investigation ended over three months later on
October 1, 2014, and Martin did not commence this action until January 7, 2015. But,
Defendants have failed to point to any Board action taken during that time period that
would constitute a material change of position in reliance on Martin‟s delay in bringing
this action.126
123
Tr. 272-73.
124
See Stewart v. Wilm. Trust SP Servs., Inc., 112 A.3d 271, 296 (Del. Ch. 2011)
(finding that a plaintiff‟s delay in bringing an action was not unreasonable for
laches purposes when that delay was occasioned by a substantial amount of
litigation activity in a related action).
125
See supra Section I.B.6.
126
As noted previously, Martin will be precluded from challenging any action taken
by the Med-Dev Board between April 19, 2014 and the date of this Memorandum
Opinion based on the allegedly improper composition of the Board. See supra
notes 106-107 and accompanying text.
43
Regardless of whether Defendants‟ conduct was fraudulent and egregious, as
Plaintiff characterized it, their role in initiating and steadfastly encouraging the
prosecution of their criminal allegations—especially after Bauer concluded that
insufficient evidence of criminal behavior existed to warrant continuing the
investigation—precludes Defendants from using the delay occasioned by that conduct as
an equitable defense. Defendants argue that because the LCDA put its investigation on
hold during the parties‟ settlement discussions, Martin had an opportunity to bring his
Section 225 claims. Defendants ignore, however, the fact that those settlement
negotiations called for Martin either to relinquish his interest in the Company or risk
criminal prosecution.127 If Martin was considering accepting Defendants‟ settlement
agreement, he would have had no incentive to bring his Section 225 claims as he no
longer would have been a Med-Dev stockholder.
For all of these reasons, I find that Defendants have not carried their burden as to
their laches defense. Because Martin‟s resignation was obtained under false pretenses
and he did not delay unreasonably his initiation of this action or thereby cause prejudice
to Med-Dev such that it is time-barred by laches, I conclude that his unconditional
resignation should be invalidated. Martin never executed the first, conditional
127
JX 101.
44
resignation letter, so that letter also is ineffective. As a result, Martin should be returned
to his position as Chairman of the Board.128
C. The Validity of Albanese’s Position on the Board
In addition to disputing the effectiveness of his own resignation, Martin also
argues that Albanese‟s position on the Board is invalid. Plaintiff points to Finley‟s notes
from the Board‟s April 29, 2014 meeting as indicating that the Board appointed Albanese
to Martin‟s vacated position.129 Although it is undisputed that the Board unanimously
expanded the Board‟s size by one seat and selected Albanese for that seat on January 16,
2014,130 Martin contends that Finley‟s notes from the Board‟s April 29 meeting are
conclusive evidence that, at some point after his January 16 appointment, Albanese
resigned from the Board. As I found supra, however, the evidence does not support that
128
Although the parties focused their briefs on whether Martin should be reappointed
to the Board and his position as Chairman, his resignation applied to both his
position as Chairman of the Board and as the Company‟s CEO. Section 225 of the
DGCL applies to disputes over corporate directors and officers. 8 Del. C. § 225(a)
(“[T]he Court of Chancery may hear and determine the validity of any election,
appointment, removal or resignation of any director or officer of any corporation,
and the right of any person to hold or continue to hold such office.”). In the
Pretrial Stipulation and in Martin‟s Pre- and Post-Trial Briefs, however, he sought
only reinstatement as Chairman of Med-Dev‟s Board. Thus, I conclude that he
has waived any claim for reinstatement as CEO. See Emerald P’rs v. Berlin, 726
A.2d 1215, 1224 (Del. 1999) (“Issues not briefed are deemed waived.”). In
addition, Defendants‟ affirmative defense of laches would be stronger as to
Martin‟s position as CEO because such relief could cause greater uncertainty as to
the day-to-day actions taken by Med-Dev‟s CEO Finley between May 2, 2014 and
today.
129
JX 72.
130
JS ¶¶ 15-22.
45
conclusion.131 Rather, because Plaintiff has not presented any direct evidence of
Albanese‟s resignation from the Board before mid- to late-April 2014, I found it more
likely that Finley‟s notes simply reflect the Board‟s decision to assign Albanese, as a
current Board member, to the Chairman position that purportedly was vacated by
Martin‟s unconditional resignation ten days earlier.132
Because Albanese validly was appointed to the Board on January 16, 2014 and did
not resign afterwards, his status as a director is not affected by my conclusion that Martin
should be reinstated. As to Albanese‟s appointment to Martin‟s purportedly vacant
Chairman position, however, I conclude that that appointment was invalid. Because
Martin‟s resignation was ineffective when it was made, he never vacated the Chairman
position, and Albanese could not have been selected to replace him. The same reasoning
applies to the Board‟s selection of Kevin Finley to fill Albanese‟s purportedly vacant
seat.133 Thus, I conclude that: (1) Albanese should be removed from his position as
Chairman of the Board; (2) Albanese should remain a member of the Board; (3) Martin
should be reinstated as a director and Chairman of the Board; and (4) Kevin Finley
should be removed from the Board altogether.
131
See supra notes 9, 32.
132
See supra note 32.
133
JX 104 at P_000510 (stating that Kevin Finley was appointed to fill the seat on the
Board vacated by Albanese when Albanese took Martin‟s seat as Chairman).
46
D. The Parties’ Competing Requests for Attorneys’ Fees
Martin claims that he is entitled to the attorneys‟ fees and expenses he incurred
during the Lackawanna County criminal investigation due to Defendants‟ “fraudulent and
egregious” conduct in connection with that investigation.134 Besides denying Plaintiff‟s
claims, Defendants assert that they are entitled to their attorneys‟ fees and expenses
incurred in connection with Martin‟s “frivolous” Old Albanese Claim.135 After
describing the legal standard applicable to both parties‟ requests for attorneys‟ fees, I
address each of their claims seriatim.
134
Plaintiff also asserted, in his Pretrial Brief, that he is entitled to his attorneys‟ fees
incurred in this action based on Tomasek‟s “fraudulent misrepresentation[s].”
Pl.‟s Pretrial Br. 39. As I concluded supra, however, while Tomasek did make a
material misrepresentation, the evidence does not support a finding that he acted
fraudulently, and Martin conceded as much at trial and in his Post-Trial Brief. See
supra notes 121-123 and accompanying text. I reject, therefore, any attempt by
Plaintiff to rely on Tomasek‟s conduct as a basis for his request for attorneys‟ fees.
135
In their Post-Trial Brief, Defendants sought their attorneys‟ fees related to all
iterations of Martin‟s attempts to remove Albanese from the Board, including the
New Albanese Claim. Defs.‟ Post-Trial Br. 42. Based on Finley‟s notes from the
April 29, 2014 meeting and Tomasek‟s testimony—which indicated that the Board
only included Martin, Finley, Peters, and Moore—I conclude that Plaintiff had a
reasonable, albeit ultimately unpersuasive, basis for believing that Albanese had
resigned at some point after his January 16, 2014 appointment to the Board. See
supra notes 9, 32. Thus, the New Albanese Claim does not support an award of
attorneys‟ fees under the bad faith exception to the American Rule. As I indicated
in my June 11, 2015 order granting Plaintiff‟s motion to amend his complaint to
comport with evidence obtained during discovery, however, Defendants are
entitled to seek attorneys‟ fees in connection with the Old Albanese Claim. See
supra Section I.C. I therefore limit my analysis of Defendants‟ request for
attorneys‟ fees to the Old Albanese Claim.
47
1. Legal standard
Under the American Rule, each party must bear its own litigation expenses,
including attorneys‟ fees, absent an exception that warrants a shifting of such fees.136
Under one well-recognized exception to this rule, a court may award attorneys‟ fees in
cases where the court finds that a party brought the action in bad faith or that a party
acted in bad faith or vexatiously to increase the costs of litigation.137 “[T]his Court does
not lightly award attorneys‟ fees under this exception, and has limited its application to
situations in which a party acted vexatiously, wantonly, or for oppressive reasons.”138
“The party invoking the bad faith exception „bears the stringent evidentiary burden of
producing clear evidence of bad-faith conduct‟ by the opposing party.”139
“There is no single standard of bad faith that justifies an award of attorneys‟
fees—whether a party‟s conduct warrants fee shifting under the bad faith exception is a
fact-intensive inquiry.”140 The Delaware Supreme Court has held that a party engages in
bad faith conduct “sufficient for awarding attorneys fees to its opponent when it (i)
136
See, e.g., Israel Discount Bank of N.Y. v. First State Depository Co., 2013 WL
2326875, at *28 (Del. Ch. May 29, 2013); Nichols v. Chrysler Gp. LLC, 2010 WL
5549048, at *3 (Del. Ch. Dec. 29, 2010).
137
See, e.g., Israel Discount Bank, 2013 WL 2326875, at *28; Postorivo v. AG
Paintball Hldgs., Inc., 2008 WL 3876199, at *24 (Del. Ch. Aug. 20, 2008).
138
Postorivo, 2008 WL 3876199, at *24.
139
Marra v. Brandywine Sch. District, 2012 WL 4847083, at *4 (Del. Ch. Sept. 28,
2012) (quoting Beck v. Atl. Coast PLC, 868 A.2d 840, 850-51 (Del. Ch. 2005)).
140
Israel Discount Bank, 2013 WL 2326875, at *28 (citing Auriga Capital Corp. v.
Gatz Props., LLC, 40 A.3d 839, 880 (Del. Ch. 2012)).
48
defends the action despite knowledge there is no valid defense, (ii) delays the litigation
and assert[s] frivolous motions, (iii) falsifies evidence, and (iv) changes his or her
testimony to suit his or her needs.”141 “Ultimately, the bad faith exception is applied in
extraordinary circumstances primarily to deter abusive litigation and protect the integrity
of the judicial process.”142
2. Is Plaintiff entitled to attorneys’ fees from Defendants?
Considering the standard set forth above, I conclude that Martin is not entitled to
an award of his attorneys‟ fees against Defendants based on their actions during the
Lackawanna County criminal investigation. As an initial matter, the legal standard set
forth above largely relates to conduct taken during litigation rather than before it
commences.143 Even if the bad faith exception to the American Rule did permit fee-
141
P.J. Bale, Inc. v. Rapuano, 2005 WL 3091885, at *1 (Del. Nov. 17, 2005)
(TABLE) (citing Montgomery Cellular Hldg. Co., v. Dobler, 880 A.2d 206, 228
(Del. 2005)).
142
Nichols, 2010 WL 5549048, at *3.
143
In re Grupo Dos Chiles, LLC, 2006 WL 2507044, at *2 (Del. Ch. Aug. 17, 2006)
(“[A]n award of fees for bad faith conduct must derive from either the
commencement of an action in bad faith or bad faith conduct taken during
litigation, and not from conduct that gave rise to the underlying cause of action.”
(citing Johnston v. Arbitrium (Cayman Is.) Handels AG, 720 A.2d 542, 546 (Del.
1998))). Plaintiffs cite to Paron Capital Management, LLC v. Crombie for the
proposition that conduct giving rise to the underlying cause of action can support
an award of attorneys‟ fees. 2012 WL 2045857 (Del. Ch. May 22, 2012). As
Defendants point out, however, the attorneys‟ fee award in Paron Capital
constituted a portion of the tort damages resulting from the defendant‟s fraudulent
behavior. Id. at *15 (“Here, [the defendant] committed an extensive and
calculated fraud that resulted in severe damage to the reputations and livelihoods
of [the plaintiffs]. The prosecution of this action to clear Plaintiffs‟ names, among
49
shifting based on pre-litigation conduct, however, Defendants‟ complained-of actions
here do not rise to the level of bad faith sufficient to justify an award of attorneys‟ fees.
Given the fact that Defendants‟ allegations against Martin to the LCDA were
sufficient to persuade detective Bauer to initiate her investigation and provided probable
cause for the issuance of a search warrant of Martin‟s bank records, there appears to have
been a reasonable basis for making those complaints. Plaintiff also contends that
Defendants acted in bad faith by proposing a settlement under which they drop their
efforts to have criminal charges brought against Martin in exchange for his
relinquishment of his interests in the Company because such a proposal violates various
Pennsylvania and federal laws and rules of professional ethics.144 Based on the record
here, however, I conclude that those contentions do not justify an award of attorneys‟ fees
against Defendants. Martin has admitted that at least two of the challenged expenditures
he charged to Med-Dev were mistaken and, in fact, represented personal charges. Minora
sent Martin‟s counsel the disputed settlement proposal on July 25, 2014. But, Minora
other things, is a direct and foreseeable consequence of [the defendant‟s]
wrongdoing.”). Because Martin did not assert a similar tort claim against
Defendants in this case, I consider the fee award for pre-litigation conduct in
Paron Capital to be inapposite.
144
Pl.‟s Post-Trial Br. 68-69 (“Defendants‟ settlement agreement and the ultimatum
communicated by Attorney [Minora] violate state and federal law. The
Commonwealth of Pennsylvania prohibits „theft by extortion,‟ „blackmail,‟
„blackmail by injury to reputation or business,‟ and „blackmail by accusation of
heinous crime.‟ The Federal Travel Act also forbids the use of the U.S. mail, or
interstate or foreign travel, for the purpose of engaging in unlawful acts, including
extortion.” (footnotes omitted)).
50
made that proposal in response to a request by Martin for a stay of the investigation,
while the parties explored a settlement. Defendants acceded to that request. By August
28, 2014, Martin had retained new defense counsel, who objected to the propriety of the
proposed settlement offer on ethical grounds, among others. Defendants promptly
withdrew it. In addition, the LCDA closed its investigation on or about October 1, 2014.
In these circumstances, while the settlement terms proposed by Defendants‟
counsel may have been improper, the manner in which the proposal arose and the relative
alacrity with which the investigation was terminated convince me that this situation does
not involve such extraordinary circumstances that fee-shifting would be appropriate to
deter abusive litigation and protect the integrity of the judicial process. Martin, therefore,
has not demonstrated that he is entitled to fee-shifting under the bad faith exception to the
American Rule.
3. Are Defendants entitled to attorneys’ fees from Plaintiff?
Defendants are entitled to a partial award of their attorneys‟ fees against Plaintiff.
Defendants have shown that, although the Old Albanese Claim was so meritless that it
bordered on frivolous, Martin refused to abandon it until shortly before trial. I conclude,
therefore, that his persistent pursuit of the Old Albanese Claim until then constitutes bad
faith. As Defendants point out, the Board plainly was authorized under the DGCL, 145 the
145
8 Del. C. § 223(a)(1) (“Unless otherwise provided in the certificate of
incorporation or bylaws: (1) Vacancies and newly created directorships . . . may be
filled by a majority of the directors then in office . . . .”).
51
Bylaws,146 and Med-Dev‟s charter147 to expand its size and appoint a director to the
newly created vacancy.148 Moreover, even if Martin had a reasonable basis for
challenging the validity of Albanese‟s appointment, his claim likely would have been
barred by Defendants‟ equitable defenses because Plaintiff arguably: (1) acquiesced by
voting in favor of Albanese‟s appointment at the January 16, 2014 meeting; (2) waived
his objection by failing to challenge Albanese‟s appointment after that meeting; and (3)
was subject to laches because he did not bring a Section 225 claim during the three
146
JS ¶ 8 (“Bylaws Article III(11)(a) states, „[t]he number of directors constituting
the initial Board of Directors shall be fixed by the Incorporator. Thereafter, the
number of directors may be fixed, from time to time, by the affirmative vote of a
majority of the entire Board of Directors or by action of the stockholders of the
Corporation.‟”); JS ¶ 11 (“Bylaws Article III(11)(d) states, „[a]ny vacancy in the
Board of Directors, whether arising from death, resignation, removal (with or
without cause), an increase in the number of directors or any other cause, may be
filled by the vote of a majority of the directors then in office, though less than a
quorum, or by the sole remaining director or by the stockholders at the next annual
meeting thereof or at a special meeting thereof.‟”).
147
JS ¶ 5 (“Certificate of Incorporation VII.1 states, „the number of the Directors of
the Corporation shall be fixed from time to time exclusively pursuant to a
resolution adopted by a majority of the Whole Board (but shall not be less than
one).‟”); JS ¶ 6 (“Certificate of Incorporation VII.1 states, „[a]ny vacancy in the
membership of the Board of Directors may be filled by appointment pursuant to a
resolution adopted by a majority of the Whole Board.‟”); JS ¶ 7 (“Certificate of
Incorporation VII.3 states, „newly created directorships resulting from any
increase in the number of Directors and any vacancies on the Board of Directors
resulting from death, resignation, disqualification, removal or other cause shall be
filled by the affirmative vote of a majority of the remaining Directors then in
office, even though less than a quorum of the Board of Directors, and not by the
stockholders.‟”).
148
See Defs.‟ Pre-Trial Br. 38-40.
52
months between that meeting and his purported resignation on April 19, let alone the
period from that date until he filed this action on January 7, 2015.
While the standard for shifting fees pursuant to the bad faith exception to the
American Rule is a stringent one, Martin‟s dogged pursuit of the borderline frivolous or
near frivolous Old Albanese Claim meets that standard because it utterly lacked any legal
or factual bases. The only grounds Plaintiff submitted in support of the Old Albanese
Claim were the provisions in the bylaws relating to the nomination of directors for
elections at annual and special meetings of stockholders.149 These provisions have no
relevance to the circumstances in which Albanese was appointed to the Board. Martin‟s
prosecution of the Old Albanese Claim despite the plain language of the Bylaws
demonstrates a disconcerting lack of diligence and constitutes bad faith litigation. As a
result, I conclude that Defendants are entitled to reasonable attorneys‟ fees and expenses
relating to the Old Albanese Claim of up to the $67,546.09 that they attested to and
requested in their Post-Trial Brief, subject only to submission of appropriate
documentation indicating that Defendants spent at least that much on that claim.150
III. CONCLUSION
For the foregoing reasons, I grant Plaintiff‟s request for a declaratory judgment as
follows: (1) that Martin is entitled to reinstatement as a Med-Dev director and Chairman
of the Board and to the removal of Albanese as Chairman; and (2) that Kevin Finley must
149
Pl.‟s Verified Am. Compl., D.I. 15, ¶¶ 26-30, 81-86.
150
Defs.‟ Post-Trial Br. 44.
53
be removed from the Board. I deny Plaintiff‟s request for declaratory relief under
Section 225 of the DGCL as to Albanese‟s removal from the Board, as well as Plaintiff‟s
request for attorneys‟ fees. I grant Defendants‟ request for an award of their reasonable
attorneys‟ fees and expenses against Plaintiff of up to $67,546.09 relating to the Old
Albanese Claim, subject to submission of appropriate documentation.
An implementing order accompanies this Memorandum Opinion.
54