Trascent Management Consulting, LLC v. George Bouri ( 2018 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
TRASCENT MANAGEMENT )
CONSULTING, LLC, )
)
Plaintiff/Counterclaim Defendant, )
)
v. ) C.A. No. 10915-VCMR
)
GEORGE BOURI, )
)
Defendant/Counterclaim Plaintiff. )
MEMORANDUM OPINION
Date Submitted: August 7, 2018
Date Decided: September 10, 2018.
Michael W. Arrington and Michael W. Teichman, PARKOWSKI, GUERKE &
SWAYZE, P.A., Wilmington, Delaware; Michael S. Gardner, Eric P. Haas, and
Jeremy R. Wilson, GARDNER HAAS PLLC, Dallas, Texas; Attorneys for
Plaintiff and Counterclaim Defendant.
Todd C. Schiltz and Ryan T. Costa, DRINKER BIDDLE & REATH LLP,
Wilmington, Delaware; Damian Christian Shammas and Kristen Jasket Piper,
LAW OFFICES OF DAMIAN CHRISTIAN, Morristown, New Jersey; Attorneys
for Defendant and Counterclaim Plaintiff.
MONTGOMERY-REEVES, Vice Chancellor.
In 2011, a real estate management consultant started looking for investors or
a partner for his consulting firm. He wanted to grow the business globally, but he
spent too much time working abroad to focus on the United States business. He
reached out to a business acquaintance to see if he was interested in investing or
becoming a partner. The business acquaintance, the defendant in this case, was not
interested in giving the consultant cash, but he persuaded the consultant to set up a
new entity, pour the consultant’s clients, reputation, and goodwill into that new
entity, and make the defendant a manager and equity owner of the new entity. The
defendant persuaded the consultant to take these steps by presenting himself as an
attractive partner with immense business success and personal wealth. Little did the
consultant know that the defendant’s representations were false. The defendant was
struggling financially and had been terminated from his previous job because his
superiors had lost confidence in his business judgment after complaints regarding
his management style and workplace behavior.
Truth is never far from the spotlight in legal proceedings, but this is a case
where questions about truth take a prominent role. The plaintiff alleges that the
defendant fraudulently induced the consultant to form a new limited liability
company and grant the defendant a significant portion of the equity in the new
company by representing that he had voluntarily resigned from his last position,
when he actually had been terminated, and that he was a man of significant means,
1
when he actually was struggling financially. The plaintiff also alleges that the
defendant’s employment agreement with it was a product of the same fraud. The
plaintiff seeks rescission of the employment agreement procured by fraud; a
declaration that the limited liability company agreement is unenforceable by the
defendant; and attorneys’ fees and costs incurred in this litigation. In the alternative,
the plaintiff requests a declaration that the defendant was terminated from the
company for cause and damages related to the defendant’s breaches of contract and
fiduciary duty. I find that the defendant not only fraudulently induced the formation
of the limited liability company and his employment agreement but also, unable to
let go of the fraud, made numerous false statements during this litigation. Thus, I
rescind the employment agreement, declare the limited liability company agreement
unenforceable by the defendant, and award some, but not all, attorneys’ fees and
costs as a sanction for bad faith litigation conduct.
I. BACKGROUND
Below are my findings of fact based on the parties’ stipulations, trial exhibits,
and the testimony of live witnesses during a five-day trial.1
1
Citations to testimony presented at trial are in the form “Tr. # (X)” with “X”
representing the surname of the speaker. Joint Trial Exhibits are cited as “JX #,”
and facts drawn from the parties’ Joint Pretrial Stipulation and Order are cited as
“PTO #.” Unless otherwise indicated, citations to the parties’ briefs are to post-trial
briefs. After being identified initially, individuals are referenced herein by their
surnames without honorifics or regard to formal titles such as “Doctor.” No
disrespect is intended.
2
A. Parties and Relevant Non-Parties
Trascent Management Consulting, LLC (“Trascent”) is a Delaware limited
liability company (“LLC”). 2 As of January 1, 2014, there were three members and
holders of Class A Units of Trascent: Rakesh Kishan, George Bouri, and Itay
Fastovsky. 3
Kishan manages the European affairs of Trascent and has served as a member
of the board of managers of Trascent (the “Board”) since 2014. 4 He was the sole
member of the Board from April 8, 2015, until he reinstated Fastovsky several days
later. 5 He owns a majority of Trascent’s Class A Units.6
Bouri was Managing Principle of the Americas and also in charge of finance,
human resources (“HR”), information technology (“IT”), and operations for
Trascent from January 1, 2014, to April 8, 2015. 7 He was also a member of the
2
JX 56, at 1.
3
Id. at Schedule I.
4
Tr. 43 (Kishan); PTO ¶ II.16.
5
PTO ¶ II.55; Tr. 1080 (Fastovsky).
6
PTO ¶ II.18.
7
Id. ¶¶ II.23, II.24, II.55, II.58.
3
Board during that time. 8 He owned forty-three percent of Trascent’s Class A Units
until his separation from Trascent.9
Fastovsky manages the Asian affairs of Trascent.10 He was also a member of
the Board from January 1, 2014, to April 8, 2015. 11 Several days after April 8, 2015,
Kishan reinstated Fastovsky to the Board.12 He owns eight percent of Trascent’s
Class A Units. 13
Neha Patel Kishan is Kishan’s wife.14 She served as Director of Finance for
UMS Advisory, Inc. (“UMS Advisory”), Trascent’s predecessor entity, 15 and
Director of Finance for Trascent until May 2014.16
8
Id. ¶¶ II.16, II.55, II.58.
9
Id. ¶¶ II.22; JX 56, at 3, 27.
10
Tr. 43 (Kishan).
11
PTO ¶¶ II.16, II.55.
12
Tr. 1080 (Fastovsky).
13
PTO ¶¶ II.17, II.20, II.21; Tr. 1080 (Fastovsky).
14
PTO ¶ II.10.
15
Id. ¶ II.33.
16
Id. ¶¶ II.10, II.13, II.33, II.34.
4
B. Facts
The astute reader may find the below facts confusing at times. I remind the
reader that this is a quintessential case of “he-said/he-said,” and the below recitation
of facts includes the misrepresentations made by one party to the other. I endeavor
to show the actual series of events as best the record will allow.
1. Kishan and UMS Advisory
In 2000, Kishan began working for a real estate consulting business that
ultimately became UMS Advisory. 17 Kishan managed UMS Advisory and, in 2006,
became the sole owner.18 UMS Advisory “provided management consulting
services to top Fortune 200 companies . . . around real estate, which is buying and
selling property, managing properties and portfolios of corporations, large global
corporations, as well as facilities management, which is the operations of those
portfolios.”19
UMS Advisory performed well financially. 20 It made a profit each year and
paid bonuses every year except for 2008.21 It also expanded globally with offices in
17
Id. ¶ II.1.
18
Id.
19
Tr. 7 (Kishan).
20
Id.
21
Tr. 7-8 (Kishan).
5
Singapore and Switzerland.22 Kishan moved to Switzerland at the end of 2010 to
run the office there and “lead a significant project with Novartis.”23 Kishan’s
“presence in Switzerland and residency in Switzerland, which was then sponsored
by Novartis, required [him] to spend significant attention in the European market
and [he] needed somebody [he] could trust to then manage the operations in the
[United States] and [he] started to entertain bringing in a partner.” 24 By mid-2011,
Kishan thought of Bouri, whom he had met when Bouri was an executive at Time
Warner, as a potential candidate to become his partner in the United States. 25
2. Bouri’s departure from Time Warner
Meanwhile, on May 2, 2011, Bouri returned from a vacation to his job as
Senior Vice President (“SVP”), Real Estate and Facilities Management at Time
Warner. 26 He was informed upon his return that people in his department had made
complaints against him and that Time Warner’s HR department had launched an
investigation.27 He was told he could not “be in the building or anywhere near the
22
Tr. 8 (Kishan).
23
Tr. 9 (Kishan).
24
Id.
25
Tr. 10-11 (Kishan).
26
Tr. 613-14 (Bouri).
27
Tr. 613-15 (Bouri).
6
employees so that there was no perception of . . . favoritism towards [him] the
executive.”28 That was the last time he “was at Time Warner as an employee.” 29
The investigation proceeded, and three days later Bouri spoke by telephone
with one of Time Warner’s attorneys regarding complaints about his management
style and behavior.30 The attorney had compiled a list of complaints about Bouri’s
management style, including that he was “unreasonable, blaming others for his
mistakes, aggressive, disrespectful, bullying, ‘act[ing with a] regal air [and]
entitlement,’ bad mouthing other [Time Warner] leaders and team members,
[displaying] erratic behaviors [and] mood swings, [and making] consistent
comments about his role/title: [like] ‘I’m a f[***]ing SVP.’” 31 The attorney also had
a list of complaints about sexual comments and conduct:
[T]alk about sex all the time, graphic detail, open marriage
[with] wife—girlfriends, try anything once, oral sex, the
box, look good have to fire you to date you, date your
sister, are you gay, going down on people, hand on thigh
with discussion about ‘keeping’ thai [sic] girlfriends, full
body bear hugs, hands on shoulder/thighs, hugs, kisses on
lips (closed mouth), kisses on lips open mouth, hugs—full
28
Tr. 613-14 (Bouri).
29
Tr. 614 (Bouri).
30
JX 306, at TW0050; Tr. 554-56 (Bouri).
31
JX 306, at TW0051.
7
body uncomfortable to watch, has seen kisses with
[redacted]. 32
The attorney took notes on Bouri’s responses to the allegations during their
meeting. She wrote the following statements:
Denied open relationship, talking about sex/initiating,
never asked about sex. [sic] orientation, never talked about
sex ever with anyone at work, doesn’t like to socialize, has
wife 3 kids wants to get home, doesn’t drink a lot only 1
drink, never mentioned about having girlfriends, denied
ever having taken anyone to the box, never kissed anyone
at work ever, never in a cab except previous [D]eloitte,
doesn’t lose his temper, is a Libra, so well-balanced.33
On May 6, 2011, Time Warner terminated Bouri without cause.34 Bouri met,
by telephone, with his manager and the CEO of Time Warner, John Martin, and a
HR representative, Mark Henderson, about his termination.35 There were talking
points prepared for this meeting.36 The talking points indicate that Martin reminded
Bouri that Time Warner had “received complaints from [Bouri’s] team . . . about
[Bouri’s] management and [his] behavior. A prompt and thorough review was
32
Id. at TW0051-52.
33
Id. at TW0052.
34
Id. at TW0010.
35
Id. at TW0001-03.
36
Id.
8
completed and [Martin was] briefed on the data gathered during the review.” 37 The
talking points also say that Bouri’s “previous manager, [Martin,] and other Time
Warner leaders . . . spent considerable time during the last year addressing areas of
[Bouri’s] performance that are not meeting the needs of [Time Warner],” and “[t]his
feedback has included multiple occasions where [Bouri’s supervisors] . . . addressed
[Bouri’s] failure to use sound business judgment on business matters as well as with
[his] team.” 38 Martin was to inform Bouri that he “no longer had confidence in
[Bouri’s] business judgment,” and “it is in the best interest of [Time Warner] to make
a change.”39 Henderson then reviewed the key points of the notice of termination,
termination agreement, and release with Bouri.40
Bouri received the notice of termination dated May 6, 2011, which explained
that he was being terminated without cause. 41 Bouri signed the termination
agreement as revised, which also stated that he was being terminated without cause,
on May 16, 2011.42 Under the termination agreement, Bouri would continue to
37
Id. at TW0002-03.
38
Id. at TW0002.
39
Id.
40
Id. at TW0003.
41
Id. at TW0010.
42
Id. at TW0011.
9
receive his current base salary of $481,000 and a pro rata share of his annual bonus
until the effective termination date of July 5, 2011. 43 The termination agreement
shows that Time Warner and Bouri agreed that the average annual bonus amount
was $360,825.07. 44 The termination agreement also shows that Bouri agreed to
“resign as an officer of Time Warner Inc.” as of May 6, 2011, and agreed “to sign
the enclosed officer resignation letter to effectuate [his] removal from [Time
Warner’s] books as an officer.”45 The termination agreement goes on to say, “The
officer resignation letter is not intended to alter the nature of your departure and, as
stated below, your termination will for all purposes be considered a termination
without cause.”46 Bouri signed the officer resignation letter on May 16, 2011.47 On
May 18, 2011, he signed a release stating that in exchange for the benefits he
43
Id.
44
Id. This agreed-to amount is seventy-five percent of Bouri’s base salary under the
Time Warner employment agreement, which is consistent with the seventy-five
percent target bonus also in that agreement. See id. at TW0020.
45
Id. (emphasis added). In an email on May 10, 2011, Bouri states that he is “not able
to sign the resignation letter in its present form. A ‘resignation’ is inconsistent with
a ‘termination without cause.’ I would not want someone to state that I resigned
from Time Warner.” Id. at TW0047-48.
46
Id. at TW0011.
47
Id. at TW0018.
10
received under his employment agreement, he released Time Warner from all claims
arising from his employment or termination. 48
3. Formation of Trascent
In the summer of 2011, Kishan learned that Bouri no longer worked at Time
Warner. On July 26, 2011, Kishan emailed Bouri, “I understand that you have
moved on from Time Warner. Just wanted to connect to see what you are up [to] –
perhaps there may be opportunities to collaborate.” 49 On August 5, Bouri responded,
“Thank you for reaching out. Yes, I have since resigned from Time Warner. I will
happily explain the reasons when we speak.” 50
During their initial conversations, Bouri explained that he had resigned from
Time Warner because he was being “micromanaged.” 51 He told Kishan that his
supervisor was annoyed that Bouri drove his Bentley into the office at 10:30 a.m.
because “it set a bad example to the other employees.”52 Bouri also told Kishan he
was making $2.5 million a year in total compensation at Time Warner as the head
48
Id. at TW0017.
49
JX 6.
50
Id.
51
Tr. 12 (Kishan).
52
Tr. 13 (Kishan).
11
of Global Shared Services and Senior Vice President.53 The two spoke again in
2012, and Bouri provided Kishan with a copy of his Time Warner employment
agreement.54 The employment agreement Bouri sent to Kishan said that Bouri was
“Senior Vice President, Global Shared Services & Real Estate and Facilities
Management” and that his base salary was $600,000 per year with a target annual
bonus of eighty-five percent of his base salary. 55
53
Tr. 13-14 (Kishan). The title head of Global Shared Services indicated “a much
broader role” than Senior Vice President for Real Estate and Facilities. Tr. 32
(Kishan). Compare Tr. 13-14 (Kishan) with JX 306, at TW0019.
54
Kishan testified that he did not follow the usual, formal practice for employees
where the company would verify employment and compensation because Bouri was
coming on as a partner. Tr. 18-19 (Kishan). Instead, Kishan believed the
representations Bouri made to him because he trusted him, which was “vital.” Tr.
19, 24 (Kishan).
55
JX 13. There are a series of discrepancies between the purported Time Warner
employment agreement Bouri sent to Kishan and the employment agreement Time
Warner produced in this litigation. The differences include Bouri’s base salary,
title, bonus percent, and amount of stock options. Compare JX 306 with JX 13.
When asked about these differences at trial, Bouri testified that he went back and
forth in negotiations with Time Warner and must have inadvertently sent Kishan
one of the draft agreements. Tr. 533 (Bouri). This testimony lacks credibility
because the documents are both signed by the same representative of Time Warner,
but with different signatures, and both versions are marked with the same version
control number, version three. Compare JX 306 with JX 13 and Tr. 534-35 (Bouri).
There are also numerous typographical errors in the version Bouri sent to Kishan.
JX 13; Tr. 538-41 (Bouri). Bouri testified that he did not edit the document he sent
to Kishan, and any discrepancies were a result of the editing process between him
and Time Warner. Tr. 536, 542 (Bouri). I excluded JX 13 for the purpose of
showing fraudulent inducement because Trascent failed to raise the exhibit in a
timely manner. Pretrial Conference Tr. 18. I allowed JX 13 to be introduced for
other reasons, such as impeachment or credibility. Id.
12
Kishan testified that during the conversations he had with Bouri between 2012
and 2013, Bouri “always represented himself as a man of substantial financial
means.”56 Kishan testified that Bouri “talked about his Aston Martins. He talked
about his home in Atherton, California, where the average price per home, he
informed me, was $5 million. He talked about growing up in the south of France.
He said his father was the largest cement trader in the world” and “that he grew up
in lavish homes all around the world.” 57 Bouri told Kishan that while Bouri “was at
Sun Microsystems he earned hundreds of millions of dollars and he gave a lot of that
money away.” 58 This wealth was important to Kishan because Kishan was looking
for a partner who would be able to invest capital in the business in exchange for
equity. 59
Bouri also informed Kishan that he wanted to join Kishan’s small company
because Bouri had been advised by “his recruiting agent or, you know, recruiting
firm, Heidrick & Struggles or Korn Ferry, one of those big placement agencies,” that
56
Tr. 22 (Kishan).
57
Id.
58
Tr. 22-23 (Kishan).
59
JX 21 (email from Kishan to Bouri explaining that Trascent will be valued “based
on cash contributions” and that “[e]quity is not granted, it is paid for,” and the buy-
in process is “you give cash and you [get] equity immediately”). Trascent’s ultimate
LLC Agreement also supports this. JX 56, at Art. III.
13
“given where he was in his career, he needed to show that he could be
entrepreneurial, that he can join a small firm . . . and develop it further, that would
be good for his career.” 60
The two continued to negotiate going into business together. 61 Bouri
“insisted” that he would only come on board as an equity partner. 62 Bouri testified
that Kishan first approached him with an offer to join UMS Advisory, but Bouri
responded, “‘Unless [Kishan] form[ed] a different corporate structure that [made
Bouri] an equity partner,’ [he] would not be interested in joining.” 63 In April 2013,
Kishan formed a limited liability company, UMS Advisory, LLC, which later
changed its name to Trascent, to help move the negotiations along.64 Bouri joined
UMS Advisory on a temporary basis in June 2013 as “managing director or
managing principle of the U.S. and [was] handed . . . the HR function and the finance
60
Tr. 23-24 (Kishan).
61
JX 7; JX 9; JX 10; JX 17; JX 20; JX 21.
62
Tr. 20 (Kishan).
63
Tr. 639 (Bouri).
64
Tr. 241 (Patel Kishan) (“Q: Was the original intent to do business under that name,
UMS Advisory, LLC? A: No. We just opened it using that name just to make sure
we can open the company and then a new name would be found and then later
adapted -- adopted.”); Tr. 119 (Kishan).
14
function and the IT function.”65 This interim arrangement was to be, and in fact was,
in effect only until Kishan and Bouri completed the LLC documents.66
As of January 1, 2014, Trascent would initiate operations, take over all of
UMS Advisory’s consulting projects, and hire all of UMS advisory’s employees.67
UMS Advisory, however, would retain its existing assets and liabilities.68
Trascent’s operating agreement (the “LLC Agreement”) was effective
January 1, 2014, and Bouri’s role in the newly formed Trascent was “head of the HR
function, the finance function, the IT function, and head of the U.S. consulting
business.” 69 The members of Trascent acquired their interests with promissory
notes. 70 Bouri “was averse to putting in cash. So he came up with the idea of a
65
Tr. 39 (Kishan). “UMS[ Advisory’s] hire of Bouri was understood by both parties
to be an interim arrangement. Kishan and Bouri agreed that Bouri would acquire a
minority stake in an entity to be co-owned by Kishan.” PTO ¶ II.9.
66
JX 27; Tr. 666-67 (Bouri).
67
Tr. 44 (Kishan). The original date was December 2, 2013, but in March 2014, the
members of Trascent decided to retroactively adjust the starting date to January 1,
2015. JX 66; Tr. 250 (Patel Kishan).
68
Id.
69
Tr. 39 (Kishan).
70
Tr. 24 (Kishan).
15
promissory note instead as a substitute for cash.” 71 In fact, “[h]e insisted on it.”72
The other members “agreed to it because [they] felt here’s a wealthy man who will
fulfill his obligation to meet the note, that he had the means of doing so. [They]
trusted him.” 73
4. Trouble at Trascent
Everything went well for the first several months of 2014. Bouri was bringing
in business, and Trascent was celebrating milestones.74 But behind the scenes,
known to some and unknown to others, Bouri was exacerbating cash flow issues at
Trascent, sowing seeds of dissent, and plotting to overthrow Kishan.
a. Trascent’s cash flow issues
Trascent was undercapitalized from the start. 75 Patel Kishan testified that the
startup date for Trascent was December 2, 2013, but the only cash available to
Trascent as of that date was $25,000 contributed by Fastovsky. 76 Neither Bouri nor
Kishan put any cash into Trascent, instead financing their equity purchases with
71
Tr. 24, 43 (Kishan).
72
Tr. 20 (Kishan).
73
Tr. 24-25 (Kishan).
74
JX 80; JX 195.
75
Tr. 255-57 (Patel Kishan).
76
Tr. 250, 253 (Patel Kishan).
16
promissory notes. 77 In order for Trascent to meet its financial obligations, Patel
Kishan started “throwing money from” UMS Advisory into Trascent as a courtesy
because so many people were “depending” on Trascent. 78 In January 2014, Patel
Kishan informed Bouri of the situation, but she testified that she got no guidance or
leadership from Bouri. 79 For the first four months of Trascent, UMS Advisory gave
Trascent “hundreds of thousands of dollars . . . to [ensure] Trascent made it.” 80
Trascent finally started bringing in revenue in 2014, but despite all the new
business, Trascent was not profitable that first year. 81 This was, in part, because
Bouri increased Trascent’s overhead costs substantially, putting a strain on
Trascent’s resources.82 In October 2014, Trascent’s director of finance, Janice
Shaffer, emailed the Board to let them know Trascent was “in a cash shortage
position and [the Board] need[ed] to make hard decisions regarding staffing and that
this cash shortage is due to the fixed employee costs in the company.” 83 After that
77
See Tr. 253 (Patel Kishan).
78
Tr. 259 (Patel Kishan).
79
Tr. 257-58 (Patel Kishan).
80
Tr. 263 (Patel Kishan).
81
Tr. 200 (Kishan).
82
In 2012, the net income of UMS Advisory was $915,000. In 2013, when Bouri
signed on, the net income was $78,000. Tr. 244 (Patel Kishan).
83
Tr. 52-53 (Kishan).
17
email, Fastovsky and Kishan started to pressure Bouri about cost reduction and
headcount reduction to match the lack of revenues in the U.S. “[Bouri] became
exceedingly erratic, hostile towards the board.”84
A few days later, Shaffer reached out to Bouri and Kishan because “there was
an [American Express] payment that was due [in October] and if [Trascent] did not
make that payment, the entire balance on the corporate credit card would be
immediately due to [American Express].” 85 Kishan testified, “[Shaffer] needed
[$]50,000 to cover that bill that was due and she asked me to put in [$]25,000 and
she asked Mr. Bouri to put in the remaining [$]25,000 to meet this company
obligation.”86 “She called me in a panic and said he is not willing to talk to her until
Monday, when it would be too late, and she asked me if I can put in the full amount.
So I did.” 87 Shaffer testified that Bouri actually told her, “You go tell Mr. Kishan
he can go f[**]k himself. I am not giving a dime,” and “when [she] had to call
84
Id.
85
Tr. 53 (Kishan).
86
Id.
87
Tr. 53-54 (Kishan).
18
[Kishan] and ask him for the money, [she] didn’t tell him what [Bouri] said.”88
Kishan “gave [her] the money right away.” 89
Despite Trascent’s cash flow situation, and Bouri’s refusal to contribute any
cash to help avert the credit card issue,90 Bouri requested advances on his paycheck
three times: November 2014, December 2014, and March 2015. 91 For the first two
requests for an advance, Bouri explained to Shaffer that his accountant had run afoul
of Regulation D. 92 The third time, he gave Shaffer a very long explanation involving
identity theft in two states, a diminished credit score from Trascent’s line of credit,
and the fact that he had taken a significant pay cut when he started at Trascent.93
Bouri asked Shaffer not to share his requests for these advancements, or his personal
financial matters, with the other members of Trascent.94
88
JX 331, at 81-83.
89
Id. at 83.
90
Id.
91
JX 117; JX 124; JX 353. Bouri also requested and received a $50,000 advance on
his bonus in December 2013. JX 77; Tr. 438 (Patel Kishan).
92
JX 117; JX 124.
93
JX 353. Bouri repaid each advance through deductions from his paycheck or by
cashing out his accrued vacation time. Tr. 868-69 (Bouri).
94
Tr. 868-69 (Bouri).
19
b. Bouri’s hidden fraud
The cash advances were not the only thing Bouri was hiding from the other
members of Trascent. On May 6, 2014, Bouri attended an annual fundraising event
hosted by Michael Herklots, the Vice President of Retail & Brand Development for
Nat Sherman International, Inc. (“Nat Sherman”), a New York cigar company. 95
Bouri purchased several lots, totaling $7,050.96 Bouri later submitted his
reimbursement to Trascent, claiming the purchased items as business expenses;
however, he did not list the items he actually purchased.97 Instead, unbeknownst to
anyone at Trascent, Bouri fabricated a letter on Nat Sherman letterhead purporting
to thank Bouri for Bouri’s purchase of alternative lots.98 Bouri then submitted that
letter to Trascent as part of his business expenses.
Bouri testified that he fabricated the letter because there were clients with him
at the fundraiser, and he did not want the actual purchases to reflect poorly on them. 99
Bouri explained this was because the clients’ companies had procurement policies
regulating what employees could receive from consultants, to avoid corruption and
95
JX 314, at 3.
96
Id. at Ex. A-2.
97
Tr. 465 (Bouri).
98
JX 314, at Ex. A-5; Tr. 449, 465-66 (Bouri).
99
Tr. 473-75 (Bouri).
20
undue influence, and receiving the actual lots purchased at the auction, as they had,
violated those policies. 100 If a company client audited Trascent’s records at some
point in the future, as Bouri testified was a relatively common occurrence, the
company client would not see that Trascent had violated the company’s procurement
policies because the forged documentation would deceive them. 101 Trascent did not
discover the forgery until after Bouri had left Trascent.102
100
Tr. 477-78 (Bouri).
101
Tr. 479-81 (Bouri).
102
Tr. 95-96 (Kishan). The other members of Trascent did not discover the rest of
Bouri’s other questionable expenses until after he had departed Trascent. Schaffer
emailed Kishan on April 20, 2015, with a compilation of Bouri’s expenses saying,
“[Bouri] certainly liked to spend extravagantly. . . . Constant use of limos,
entertaining clients, and expensive meals are more than I think is necessary for a
company of this size, but that is a business decision.” JX 331.15. She went on to
list the areas of “invalid or suspicious” charges she focused on. Id. She listed the
following charges:
1) Dinners and theater events without stating client
names or purpose 2) Personal cigar club membership
charged to Trascent 3) Coat checks equating to $1,145
without receipts ($20 each time, avg) . . . The Kings
supermarket $986 purchases were for wine that
supposedly went to clients, but Tina never sent anything
to anyone. . . . 6) **Recruiting meetings when we had
no jobs. In the USA, Tina would handle the resumes
and set up recruiting and had no copies of resumes. For
several, specifically “Athena”, this recruiting meeting
was so late it went into the next day and involved heavy
drinking. . . . 7) The last ship theatre event: he claims
he was with Sharon Lee, but in his calendar it states an
11am meeting in lieu of dinner. 8) **Wedding for Paul
Begin’s daughter: it appears he charged Trascent for
this personal event. And claimed he was at a TR
21
c. Internal investigations at Trascent
By October 2014, Bouri initiated an internal investigation into the financials
of Trascent (the “Internal Investigation”).103 Before Bouri’s arrival at Trascent, Patel
Kishan, Kishan’s wife, handled the finances in a relatively informal manner. 104 Patel
Kishan facilitated the fiscal transition from UMS Advisory to Trascent 105 and
admitted that she was overwhelmed with that role because of the way the handover
of business from UMS Advisory to Trascent took place.106 As a result, Trascent’s
books were rather disorderly. Thus, the Internal Investigation was not completely
baseless.
But, Bouri also had ulterior motives for the Internal Investigation. Bouri
wanted Kishan out and was going to use the Internal Investigation to do it. He told
leadership meeting. . . . 9) **Large expenditures for
fundraisers that are unrelated to Trascent.
Id.
103
JX 331, at 28.
104
Tr. 314-15 (Patel Kishan).
105
Tr. 260-62 (Patel Kishan).
106
Tr. 316-17 (Patel Kishan) (“It was crazy. All the way until, you know, a little --
maybe a month before [Shaffer] joined and even then so, so busy. I’m running three
entities across 12 time zones. I’m doing -- you know, I got to look at what’s coming
up for payables, predominantly payroll. I have to do all the invoicing. I have to fend
e-mails from all over the world. You know, I’m dealing with different time zones.
It was crazy. I was -- I was, you know, drinking water through a fire hose. I mean,
I could just barely keep up, but -- I was so, so busy.”).
22
the finance department, which he supervised, that Kishan was using Trascent as his
own personal “piggy bank”107 and that Kishan had “his hand in the cookie jar.”108
He also told them that Kishan was “financially irresponsible and irrational, and
dragging [Trascent] into a financial catastrophe each month with him.” 109
The Internal Investigation centered on Kishan’s promissory note with
Trascent (the “Note”). Initially, the Internal Investigation was about reconciling the
amounts UMS Advisory paid to or for Trascent during the first several months of
Trascent’s existence. Because the transition was so hectic, Bouri and Shaffer had
questions about whether the correct amounts were credited against the Note.110
As the Internal Investigation progressed, however, it became focused on
Kishan’s spending and reimbursements.111 Bouri also voiced concerns about the fact
that Kishan had two employment agreements that paid him a greater salary than what
had been agreed upon, charged Trascent for the preparation and filing of his personal
tax returns, and insisted on reimbursement for exorbitant cell phone bills for both
107
Tr. 924 (Ryan).
108
JX 331, at 176-77.
109
JX 184.
110
See JX 132; JX 147; JX 180.
111
See JX 157; JX 172.
23
himself and Patel Kishan. 112 Bouri made it clear to the finance team as they
continued to reconcile the Note that “the end goal result” of the Internal Investigation
was to find a way to force out Kishan.113 Eventually, Schaffer and Bouri hired an
external accounting firm, EisnerAmper LLP, to take over the Internal
Investigation. 114
On March 13, 2015, Bouri, Shaffer, and another Trascent employee, Kristine
McArdle, met with two EisnerAmper partners, Gerard Abbattista and Terry
Simonds. 115 During that meeting, the EisnerAmper partners determined that
EisnerAmper was not needed for a forensic investigation, but instead would “go
through the books and records, clean up the records based on [their] interpretations
of the [LLC Agreement] and the transactions that occurred in order to prepare an
112
JX 81; JX 116; JX 154; JX 205; JX 208; Tr. 111-12, 133-137 (Kishan); Tr. 737-38,
749-52, 789, 904-06 (Bouri). Plaintiff objects to JX 81, 116, 154, and 205 under
Delaware Rule of Evidence 802. These objections are overruled because these
exhibits are not being used to show the truth of the matter asserted in the statements
therein.
113
Tr. 929 (Ryan); see JX 144 (email in which Shaffer informs Bouri that she might
have found a $200,000 “bogus charge to [the N]ote,” and Bouri responds “I hope
so”); JX 188 (email in which Bouri tells Shaffer, “I can’t wait until you uncover the
smoking gun(s) we are all waiting for. Then a new chapter begins for Trascent.”);
JX 200 (email in which Bouri tells Shaffer, “Remember, we need a smoking
Bazooka!”).
114
JX 198.
115
JX 369; Tr. 830-33 (Abbattista).
24
accurate tax return.” 116 EisnerAmper concluded their work with Trascent in July
2015. 117 They did not find “any evidence of intentional wrongdoing” or perform “a
forensic investigation.” 118
5. Automated Data Processing investigation
The Internal Investigation was not the only investigation Bouri initiated due
to his ulterior motives. On January 20, 2015, Bouri filed a complaint with Trascent’s
outside HR company, Automated Data Processing (“ADP”), on behalf of some
female Trascent employees, including Schaffer, and a female Trascent client. 119 In
the complaint, Bouri alleged that the women complained to Bouri during the month
of January about Kishan’s “unprofessional and inappropriate behaviors.”120 ADP
initiated an investigation (the “HR Investigation”).121
Bouri told Fastovsky about the HR Investigation. Fastovsky testified that
Bouri “contacted [him] . . . sometime in early 2015 and informed [him] that a number
116
Tr. 834 (Abbattista).
117
Tr. 841 (Abbattista).
118
Tr. 844 (Abbattista).
119
JX 137; JX 279. Plaintiff objects to JX 137 under Delaware Rule of Evidence 802.
This objection is overruled because this exhibit is not being offered to show the truth
of the matter asserted in the statements therein.
120
JX 279.
121
Id.
25
of women had approached [Bouri] with concerns about being mistreated by Mr.
Kishan.” 122 Bouri “also informed [Fastovsky] that Jody Brown [who worked at one
of Trascent’s biggest clients] had witnessed a nude photograph at a dinner. And that
because of these incidents . . . an ADP investigation would have to be launched to
make sure and go after these incidents.” 123 Kishan did not know about the ADP
investigation until late March 2015.124
As the HR Investigation continued, Bouri encouraged the alleged
complainants to take part. His executive assistant, Tina Ryan, described her
interactions with Bouri regarding the HR Investigation.
[Bouri] wanted to know, you know, had the people called
and made their complaints. And then when he received
updates from Heather at ADP as to who had or hadn’t
called in, I would get the phone call from [Bouri] directing
me to contact those individuals that had not called in on
their own and ask them are they going to call in. When are
they going to call in? And then in a conversation in that
time frame with [Bouri], I had asked him -- you know, I
stated I wasn’t feeling very comfortable with it because it
could be collusive. We’re asking people to participate in
something they weren’t doing of their own accord. But
that was not met well.125
122
Tr. 1049 (Fastovsky).
123
Id.
124
See Tr. 59-60 (Kishan).
125
Tr. 926-27 (Ryan).
26
In response to this “encouragement,” several women made statements to
ADP. The ADP final report includes these statements, which allege that Kishan
created “a hostile work environment.” 126 There were four complainants. The first
stated that Kishan embarrassed her by criticizing her and saying “derogatory things”
in front of her project team. 127 The second complainant stated that Kishan told her
things were “going to get really ugly and you’re not going to like it” if she did not
approve his $40,000-$50,000 cell phone bill.128 The second complainant also stated
that she was “extremely uncomfortable” being in the middle of Bouri and Kishan
and that she saw a document that Kishan had put together alleging she was “trying
to rip off the company.” 129 The third complainant alleged that she got a “verbal
lashing” from Kishan when she was out sick and did not respond to one of his emails
and that Bouri told her Kishan had been bad mouthing her. 130 The fourth and final
complainant, Brown, alleged that “[i]n September 2014, the project team (25-30)
people went out to dinner at a restaurant in Singapore. At the dinner [Kishan] was
talking about his recent vacation and he showed pictures (on his cell phone), of his
126
JX 279.
127
Id.
128
Id.
129
Id.
130
Id.
27
nanny in a bikini,” which made her “uncomfortable” and was “inappropriate at a
business function.” 131
In March 2015, the Board had “a very difficult board meeting.”132 According
to Kishan, Bouri told him, “You have to leave the firm or I leave the firm or you
back down.”133 Kishan continued, “It was very hostile. It was a profanity-laced rant
by Mr. Bouri. It was a very difficult board meeting.”134 Kishan testified that he did
not understand what Bouri was saying at first. Kishan testified that Bouri “made
representations such as, you know, you’re a bully and they’re coming to me. I didn’t
know what that meant at that time. But he seemed to say back down and things like
that. It was a little perplexing as to what he was getting at.”135 But, Kishan testified,
“It was definitely a veiled threat of some sort.”136
Kishan finally understood the threat when he got a call from ADP on March
26, 2015, informing him that they were investigating allegations that he was creating
131
Id. When Bouri found out ADP had spoken to this complainant he responded,
“Hallelujah!!! Isn’t that all we were looking for, i.e. for her to corroborate as the
client and as a female executive who was offended by his behaviors? Please
confirm.” JX 232.
132
Tr. 58 (Kishan).
133
Id.
134
Id.
135
Tr. 58-59 (Kishan).
136
Tr. 59 (Kishan).
28
a hostile work environment. 137 During this phone call, Kishan concluded that Bouri
had fabricated the HR Investigation and involved a client in an internal HR matter,
which he determined constituted “cause” for termination under Bouri’s employment
agreement (the “Employment Agreement”). 138 On April 8, 2015, Kishan, as the
majority holder of Class A Units, removed Bouri and Fastovsky from the Board by
written consent. 139 Kishan, as the only remaining member of the Board, then
terminated Bouri’s employment for cause under the Employment Agreement.140
Several days later Kishan reinstated Fastovsky to the Board.141
Shaffer recanted her complaint before ADP issued its final report. A footnote
in the final ADP report states, “On April 15, 2015, after Mr. Bouri was terminated
from the company, Ms. Shaffer alleged she was coerced to participate in the
investigation. Ms. Shaffer further alleged that Mr. Bouri told her if she didn’t
participate in the investigation, she would be fired.”142 Shaffer testified that she felt
137
Tr. 60 (Kishan); JX 279.
138
Tr. 73, 80, 84-85 (Kishan).
139
PTO ¶ II.55.
140
PTO ¶¶ II.56, II.58.
141
Tr. 1080 (Fastovsky).
142
JX 279.
29
coerced by Bouri into making the complaint. 143 Later in her deposition, she testified
that Kishan encouraged her to recant her statement after Bouri’s termination.144
Ultimately, ADP concluded that “[t]he evidence does not establish that a violation
of the Harassment Prevention Policy has occurred, as alleged by [the Trascent
employees and client].” 145 After ADP completed its report, one of the complainants
filed a charge of discrimination with the Equal Employment Opportunity
Commission against Trascent.146 Additionally in this litigation, two of the other
complainants testified that Bouri encouraged or pressured them to submit their
statements.147
C. Credibility
The credibility of the two main actors, Kishan and Bouri, is central to the
outcome of this litigation. So much so that the parties included a separate credibility
section in each of the four post-trial briefs. 148 Judicial opinions typically exist in a
closed universe of only the record presented by the parties. My credibility
143
JX 331, at 99-100.
144
JX 331, at 333.
145
JX 279.
146
JX 438.
147
JX 339, at 17-18, 41-42; Tr. 999-1001 (Liu).
148
See Pl.’s Opening Br. 9; Def.’s Answering Br. 5; Pl.’s Reply Br. 2; Def.’s Sur-Reply
Br. 2.
30
determinations are based on the testimony and evidence submitted to make up that
record and the patterns of behavior reflected in the testimony and evidence. While
I discuss some examples point by point, my determination is holistic—made by
looking at the record in its entirety. My credibility determinations should not be
taken as a statement of universal truth as to a person’s character. Instead, they
provide the explanation for why certain evidence carries more weight.
I tend to give more weight to the contemporaneous evidence, as it is free from
the realities of litigation and closer in time to the events that transpired. But this
evidence does not always resolve all disputes. When I only have testimony, and the
testimony conflicts, I must determine whose testimony to credit. Within the limited
context of this litigation, for the reasons that follow, I find Kishan to be more credible
than Bouri and, thus, tend to place more weight on his testimony when it conflicts
with Bouri’s and there is an absence of contemporaneous evidence.
31
Neither Kishan nor Bouri has been portrayed in the best light during this
litigation, but the salient difference is that while Kishan may not make the best
decisions, 149 Bouri has repeatedly lied, before and during this litigation.150
Bouri repeatedly asserted under oath that he resigned from Time Warner until
eventually admitting he never resigned before he was terminated, which Time
Warner’s contemporaneous business records (the “Business Records”) confirm.151
Bouri also has repeatedly asserted that he did not and does not know of any basis for
his termination from Time Warner, but the Business Records show that Bouri was
warned that he was being terminated because his superiors lost confidence in his
business judgment. 152 Bouri also repeatedly asserted that he was never told of any
allegations against him, but again, the Business Records show he was told in detail
149
See JX 128 (spending extravagantly despite limited finances); JX 184 (requesting
$40,000 loan from Trascent’s line of credit to pay personal credit card bill); JX 273-
74 (directing Shaffer to pay his $2,000/month cell phone bill, which was
$1,700/month higher than approved under Trascent’s policy, immediately after
firing Bouri who would not approve payment of the bill); JX 361 (continuing to
spend extravagantly despite limited finances); Tr. 172-74 (Kishan) (removing both
Bouri and Fastovsky from the Board before firing Bouri for initiating an HR
investigation into Kishan that Kishan determined was fraudulent).
150
Tr. 448 (Bouri).
151
Compare JX 6, JX 304, JX 305 and Tr. 520, 521, 550, 612, 620 (Bouri) with JX 306
and Tr. 855 (Bouri).
152
Compare JX 304 and Tr. 550-51 (Bouri) with JX 306, at TW 0002-03.
32
about the allegations made against him. 153 Further, Bouri forged expense
documentation and presented the forgery for reimbursement purposes in order to
help his clients circumvent the monitoring policies of their employers intended to
prevent fraud and undue influence.154 Finally, Bouri presented to Kishan an altered
version of his Time Warner employment agreement that inflated his position, salary,
and bonus. 155 Bouri admits that he forged the Nat Sherman letter, 156 and the Time
Warner business documents show that he knew of at least some basis for his
termination and that he gave a false employment agreement to Kishan.157 In the face
of such a pattern, I do not find Bouri to be a credible witness regarding the events
leading to this litigation.
Conversely, Kishan’s actions, while evidencing questionable judgment, do
not give me reason to doubt the credibility of his testimony during the course of this
litigation. Bouri points to three examples of behavior that he argues undermine
153
Compare JX 304 and JX 305 with JX 306, at TW0052.
154
PTO ¶ II.50; Tr. 473-77 (Bouri).
155
Compare JX 13, at D192757-58 with JX 306, at TW0019-20. Bouri testified that
he “inadvertent[ly]” gave Kishan a preliminary version of his Time Warner
employment agreement and “did not purport that [it] was [his] final Time Warner
agreement.” Tr. 447 (Bouri). This statement is belied by the evidence. See supra
note 55.
156
Tr. 448 (Bouri).
157
JX 306, at TW0019-41, TW0052.
33
Kishan’s credibility. 158 First, Trascent was erroneously charged $20,000 for the
preparation of Kishan’s personal tax returns. The same accountant prepared
Trascent’s and Kishan’s tax returns and sent a single, unclear invoice that Patel
Kishan mistakenly paid.159 This error was discovered and corrected. 160 Second,
Bouri alleges that Kishan attempted “to offset Kishan’s $520,000 promissory note
with questionable credits, falsely claiming that the [N]ote had been fully satisfied
and that Trascent owed Kishan money on top of that.”161 As the discussion above
about the transition from UMS Advisory to Trascent makes clear, UMS Advisory
gave Trascent significant loans during the first few months of Trascent’s
158
Bouri also points to two facts he claims undermine Patel Kishan’s credibility. First,
he claims that Patel Kishan “submitted to Trascent thousands of dollars of expense
reimbursement requests on Kishan’s behalf without the required back-up
documentation.” Def.’s Sur-Reply Br. 3. Patel Kishan testified that she used the
American Express statement as backup for the expense reimbursement requests she
submitted because it provided extensive detail. Tr. 299-300 (Patel Kishan) (“It
provides the date, the name of the vendor, the amount. It provides additional
information. If it was an airfare, it would provide date of departure, the airline that
was used. If it was a hotel charge, it would provide date of arrival, date of departure.
If it was a meal, it would state the amount of the meal and then the tip that was
provided for.”). Second, Bouri claims that Patel Kishan “purposefully and
improperly kept herself on Trascent’s payroll to maintain certain US benefits while
simultaneously also remaining on the payroll of Trascent’s Swiss subsidiary.”
Def.’s Sur-Reply Br. 3. The only evidence Bouri points to as support for this
contention is his testimony. I do not find this sufficient evidence to show that Patel
Kishan did anything dishonest.
159
JX 331, at 600-01.
160
Id.
161
Def.’s Sur-Reply Br. 3.
34
operation.162 Patel Kishan kept a log of these loans in Trascent’s books as credits
against Kishan’s note because it was better for Trascent than having large payables
on its books. 163 The Note itself was never altered. 164 Nor did the Kishans try to
avoid a proper accounting and reconciliation of Trascent’s finances and Kishan’s
note.165 In fact, Kishan encouraged it.166 Both Shaffer and EisnerAmper
independently reconciled the Note.167 What Bouri tries to paint as “false claims”
were nothing more than statements based on incomplete data or hopes about what
the outcome might be. 168 Finally, Bouri points to the fact that Kishan had two
employment agreements, one with Trascent and one with the Swiss entity, that
resulted in him receiving higher compensation than Kishan and Bouri had agreed.169
While I do not condone Kishan’s two employment agreements, that one action does
not completely undermine Kishan’s credibility or overcome the evidence against
162
Tr. 288 (Patel Kishan).
163
Tr. 291 (Patel Kishan).
164
Tr. 289 (Patel Kishan).
165
JX 331, at 249.
166
Id. at 603.
167
Id. at 278-79; JX 331.18.
168
JX 109.
169
Def.’s Sur-Reply Br. 3.
35
Bouri’s veracity. Thus, when the testimony of Kishan and Bouri conflicts, I tend to
credit Kishan’s testimony over Bouri’s testimony.
II. ANALYSIS
“To succeed at trial, ‘Plaintiffs, as well as Counterclaim–Plaintiffs, have the
burden of proving each element . . . of each of their causes of action against each
Defendant or Counterclaim–Defendant, as the case may be, by a preponderance of
the evidence.’” 170 “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.” 171
A. Fraudulent Inducement
Trascent argues that Bouri fraudulently induced it to enter into the
Employment Agreement and the LLC Agreement. As a result, Trascent seeks to
rescind the Employment Agreement, and it seeks a declaration that Bouri may not
enforce the LLC Agreement. “The elements of fraudulent inducement are the same
170
S’holder Representative Servs. LLC v. Gilead Scis., Inc., 2017 WL 1015621, at *15
(Del. Ch. Mar. 15, 2017) (quoting inTEAM Assocs., LLC v. Heartland Payment Sys.,
Inc., 2016 WL 5660282, at *13 (Del. Ch. Sept. 30, 2016)), aff’d, 177 A.3d 610 (Del.
2017).
171
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)).
36
[as] those of common law fraud.”172 The Supreme Court of Delaware defines those
elements:
(1) a false representation, usually one of fact, made by the
defendant; (2) the defendant’s knowledge or belief that the
representation was false, or was made with reckless
indifference to the truth; (3) an intent to induce the
plaintiff to act or to refrain from acting; (4) the plaintiff’s
action or inaction taken in justifiable reliance upon the
representation; and (5) damage to the plaintiff as a result
of such reliance.173
As more fully explained below, Bouri made false representations about his departure
from Time Warner and his personal wealth that he knew were misleading to induce
Kishan to form Trascent and make Bouri a member and manager. Kishan and
Trascent relied upon these statements by forming Trascent and making Bouri a
member and manager, which resulted in damage to Trascent.
1. Trascent can rely on statements made before it existed
Bouri first argues that Trascent’s claim must fail because “[a]s a matter of
law, Trascent cannot base its claim upon alleged misrepresentations that predate its
existence,” and Trascent was not formed until after Bouri made the statements in
172
LVI Grp. Invs., LLC v. NCM Grp. Hldgs., LLC, 2018 WL 1559936, at *11 (Del. Ch.
Mar. 28, 2018) (alteration in original) (quoting Smith v. Mattia, 2010 WL 412030,
at *5 n.37 (Del. Ch. Feb. 1, 2010)).
173
E.I. DuPont de Nemours & Co. v. Fla. Evergreen Foliage, 744 A.2d 457, 461-62
(Del. 1999).
37
question. 174 In Nye Odorless Incinerator Corp. v. Felton, 175 the Delaware Superior
Court outlined a two-part test to determine whether an entity could assert a claim
based on fraudulent misrepresentations made before it was formed. An entity can
maintain a claim based on misstatements made before its formation when (1) the
fraudulent statements were made to an innocent individual to induce him/her to form
an entity and have that entity take certain actions, and (2) that individual forms the
entity and causes it to take said actions. 176
Nye concerned the acquisition of a Georgia company by a Delaware entity
formed solely for the acquisition. The question the Superior Court answered in Nye
is essentially the same question posed here: “[C]an a suit be maintained at law,
sounding in tort, at the instance and in the name of a corporation based upon alleged
fraudulent misrepresentations by a vendor to the promoter of the proposed
corporation, which was afterwards incorporated?” 177 The court summarized the
parties’ arguments:
The defendant contends that the suit cannot be maintained
by the corporation for any supposed misrepresentation
prior to the existence of the corporation. . . . The plaintiff
contends that where false and fraudulent
174
Def.’s Answering Br. 9-10.
175
162 A. 504 (Del. Super. 1931).
176
See id. at 508.
177
Id.
38
misrepresentations are made to individuals to induce them
to form a corporation for the purpose of purchasing
property, or rights, or entering into a contract, and the
corporation, when created by such individuals, who
become its stockholders and officers, acts upon such
representations to its injury, it may maintain an action.178
The court explained its analysis:
The plaintiff bases its contention on the general and
underlying proposition that where misrepresentations are
made to one person, with the intention that they be
communicated to another, and acted upon by such other,
and as a fact such representations are communicated and
acted upon to the prejudice of a stranger, an action of
deceit will lie. This general proposition is not disputed by
the defendant but only its application to the case of a
nonexistent corporation.179
The court then looked to Ehrich on Promoters:
If representations are made with the purpose of inducing
persons to organize a corporation, to take over certain
property or to enter upon particular engagements and the
persons deceived do, in reliance upon the representations
made, organize the corporation and cause it to take the
contemplated action, it may fairly be said that the
representations were made with intent to deceive the
corporation, that it was deceived thereby and acted thereon
to its damage. 180
178
Id. (citation omitted).
179
Id.
180
Id.
39
Ultimately, the court found that the corporation could bring the fraud claim relying
on statements made before it existed when the statements were made to induce the
creation of said corporation and to have the corporation take certain actions.
The events that transpired here are directly in line with the holding of Nye and
the two-part test established therein. In Nye, the vendor made statements to the
promoter that induced the promoter to form a corporation and cause that corporation
to purchase the assets of a Georgia corporation.181 Here, Bouri made statements to
Kishan, discussed below, that induced Kishan to form Trascent and caused Trascent
to enter into an employment agreement with Bouri. 182 Moreover, Bouri’s statements
to Kishan induced Trascent, once formed, to make Bouri not just an employee but a
unitholder and manager. In that way, this case is even more compelling than Nye.
To hold otherwise would be to ignore the harm suffered by Trascent in its very
conception, structure, and management.
Relying on Trenwick America Litigation Trust v. Ernst & Young, L.L.P., Bouri
contends that Trascent’s claims must fail as a matter of law.183 This Court described
181
Id. at 505.
182
Tr. 20 (Kishan); JX 15 (explaining that Bouri told Kishan the formation of an LLC
would “entice” him to join); JX 18 (“[W]e discussed in the past the concept of an
‘employment agreement’ so as to protect both of us. In that spirit, I sent you a copy
of my Time Warner Agreement.”).
183
906 A.2d 168 (Del. Ch. 2006), aff’d sub nom. Trenwick Am. Litig. Tr. v. Billett, 931
A.2d 438 (Del. 2007).
40
Trenwick as an “unusual” case. 184 “The primary defendants . . . were directors of a
publicly listed insurance holding company. All but one of the eleven directors [were
independent]. The other director was the chief executive officer of the holding
company.” 185 “The holding company and its top U.S. subsidiary filed for
bankruptcy. The cause of the failure was that the claims made by the insureds
against the holding company’s operating subsidiaries . . . exceeded estimates and
outstripped the holding company’s capacity to service the claims and its debt.”186
As part of the bankruptcy, a Litigation Trust was created. “That Trust was assigned
all the causes of action that the U.S. subsidiary owned.”187
The Litigation Trust then brought a case and supported its claim with the
following allegations:
[T]he majority independent board of the holding company
engaged in an imprudent business strategy by acquiring
other insurers who had underestimated their potential
claims exposure. As a result of that imprudent strategy,
the holding company and its top U.S. subsidiary were
eventually rendered insolvent, to the detriment of their
creditors. Not only that, because the top U.S. subsidiary
took on obligations to support its parent’s debt and
actually assumed some of that debt, the top U.S. subsidiary
184
Id. at 172.
185
Id.
186
Id.
187
Id.
41
and its creditors suffered even greater injury than the
holding company and its creditors.188
“At the tail end of its complaint, the Litigation Trust allege[d] that the
Trenwick and Trenwick America directors committed fraud, in concert with each
other and with outside advisors to Trenwick. The fraud alleged consists of non-
disclosures and material misstatements of fact.”189 “The complaint allege[d] that the
Trenwick and Trenwick America officers and directors had a duty to disclose
[certain] facts to [the] ‘Plaintiff.’” 190 This Court supposed that by “Plaintiff,” the
party bringing the suit, the Litigation Trust, meant “the entity whose claims it now
possesses, Trenwick America.” 191
“Allegedly, the Trenwick directors knew ‘these statements were false when
made.’ . . . ‘Plaintiff’—i.e., Trenwick America—supposedly relied detrimentally on
the statement.” 192 This Court went on to say, “Remember that the Litigation Trust
only has the ability to assert a claim that Trenwick America possesses.”193
188
Id.
189
Id. at 186.
190
Id. at 187.
191
Id.
192
Id.
193
Id. at 191.
42
The final claim made against the directors of both
Trenwick and Trenwick America is that they worked
together to commit fraud that injured Trenwick America.
This is an extremely odd claim to be advanced on behalf
of Trenwick America for an obvious reason: the claim
depends on the notion that Trenwick America’s
controlling stockholder, Trenwick, and Trenwick
America’s board, in particular, Billett, who was on the
parent board as well, knew facts about Trenwick America
that they concealed from Trenwick America. 194
This Court held that “the plain vanilla reason the fraud claim fails, . . . is that
the complaint does not satisfy the stringent pleading standard governing fraud
claims.” 195 In addition to this holding, this Court went on to say,
[T]he Litigation Trust fails to plead a fraud claim for
another important reason . . . . The Litigation Trust is only
entitled to bring claims possessed by Trenwick America.
By the Litigation Trust’s own admission, Trenwick
America’s board of directors knew the true facts about all
the issues said to have been misrepresented. As a result,
Trenwick America—as an entity—did not rely to its
detriment on any of the misstatements, despite the cursory
statement in the complaint that the “plaintiff” relied on the
false statements to its detriment. 196
This Court then stated,
To the extent that the Litigation Trust is referring to itself,
it could not have relied on the statements at issue as it did
not exist when those statements were made. To the extent
194
Id. at 207.
195
Id.
196
Id. at 211.
43
that the Litigation Trust is referring to Trenwick America,
its statement makes no sense because the complaint
alleges that those who controlled Trenwick America knew
the statements were inaccurate.
...
[T]he entity would not have been relying to its detriment
on the fraudulent statement because its controllers were
aware of the actual state of affairs. For this reason, our
law has treated claims by stockholders that corporate
disclosures in connection with a stockholder vote or tender
were materially misleading as direct claims belonging to
the stockholders who were asked to vote or tender.197
The line on which Bouri’s entire argument rests, “[t]o the extent that the
Litigation Trust is referring to itself, it could not have relied on the statements at
issue as it did not exist when those statements were made,” 198 is dicta, in a case with
completely different facts than the one here. More importantly, Trenwick does not
pass the first step of the Nye test as the supposedly fraudulent statements did not
induce the formation of the Litigation Trust. In fact, the Litigation Trust had no
relation to the alleged fraudulent statements whatsoever. The inducement to form a
new entity and the intent to have the new entity rely upon the statements makes this
case akin to Nye and distinguishable from Trenwick. Thus, Trascent could rely on
the statements made to Kishan.199
197
Id. at 211-12.
198
Id. at 211.
199
Bouri argues that Nye does not support Trascent’s position because in Nye “the
underlying transaction documents demonstrated that the individuals to whom the
44
2. Bouri made representations he knew were false with the
intent of inducing action by Trascent
To succeed on its fraud claim, Trascent must show that Bouri made
misrepresentations he knew were false with the intent to induce action by Trascent.
Trascent argues that Bouri made false and misleading statements about his departure
from Time Warner and his personal wealth. For the reasons that follow, I find that
Bouri knowingly made false and misleading statements about his personal wealth
and his reasons for leaving Time Warner to induce Trascent to enter into the LLC
Agreement and Employment Agreement.
a. The false statements about Bouri’s departure from
Time Warner and his personal wealth
“A misrepresentation is an assertion that is not in accord with the facts.”200
“[F]raud does not consist merely of overt misrepresentations,” but “[i]t may also
occur through deliberate concealment of material facts, or by silence in the face of a
duty to speak.” 201 One has a duty to speak to correct an omission “in order to prevent
statements were made should be viewed as ‘equitable stockholders, potential
stockholders, or . . . some other name which would indicate that they had rights in
the corporation . . . .’ at the time of the misrepresentation,” but here there are no
documents indicating Kishan or Fastovsky should be treated as owners of Trascent
in August 2011. Def.’s Sur-Reply Br. 5-6, 6 n.5. The court in Nye discusses
equitable stockholders because of a rule regarding promoters and assignment of
stock that is inapplicable here. See Ehrich on Promoters §§ 120-23.
200
Restatement (Second) of Contracts § 159 (Am. Law. Inst. 1981); accord Norton v.
Poplos, 443 A.2d 1, 5 (Del. 1982).
201
Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1074 (Del. 1983).
45
statements actually made from being misleading.”202 “[A]lthough a statement or
assertion may be facially true, it may constitute an actionable misrepresentation if it
causes a false impression as to the true state of affairs, and the actor fails to provide
qualifying information to cure the mistaken belief.”203
There are two sources of information about what happened with Bouri’s
departure from Time Warner: Bouri’s testimony and the Business Records. Bouri
challenges the Business Records with two arguments, neither of which I find
persuasive. First, Bouri argues that if the allegations in the Business Records had
been substantiated, then he would have been terminated for cause. This does not
necessarily follow. A company may choose not to terminate someone for cause for
any number of business reasons, including to avoid costly litigation related to the
termination. In fact, Bouri signed a release as part of his termination without cause.
Second, Bouri argues that the allegations in the Business Records cannot be true
because he had received a “glowing” evaluation in March 2011. Again, this
conclusion does not necessarily follow because the allegations all could have been
made between Bouri’s evaluation in March and the investigation in May.
202
Id.203
Norton, 443 A.2d at 5 (“For example a true statement that an event has recently
occurred may carry the false implication that the situation has not changed since its
occurrence. Such half-truths may be as misleading as an assertion that is wholly
false.”).
46
Regardless, whether the allegations were substantiated does not mean they were
unrelated to his termination from Time Warner. Further, neither argument discredits
the Business Records in their entirety or undercuts the fact that the Business Records
show that Bouri’s departure from Time Warner was completely different than the
story presented to Kishan.
Bouri told Kishan he voluntarily resigned from Time Warner because he was
being micromanaged. 204 He even gave examples of this “micromanagement,”
including that his boss wanted him to stop driving his Bentley into the office at
10:30 a.m. on workdays because “it set a bad example [for] the other employees.”205
In reality, he had been terminated without cause because Time Warner “had received
complaints from [Bouri’s] team . . . about [his] management and [his behavior,]” and
the CEO of Time Warner and other leaders “ha[d] spent considerable time during
the last year [of Bouri’s employment] addressing areas of [Bouri’s] performance that
[were] not meeting the needs of [Time Warner].” 206 This led the CEO to lose
confidence in Bouri’s business judgment.207 Further, shortly before Bouri’s
termination, Time Warner received and investigated serious allegations of
204
Tr. 12 (Kishan).
205
Tr. 13 (Kishan).
206
JX 306, at TW0002.
207
Id.47
mismanagement and sexual harassment, including that he was “unreasonable,
blaming others for his mistakes, aggressive, disrespectful, bullying” and that he
“talk[ed] about sex all the time [in] graphic detail [and] . . . [told employees: you]
look good [but I’d] have to fire you to date you.” 208 One of Time Warner’s attorneys
discussed these allegations in detail with Bouri, and Bouri responded in detail at the
same meeting.209 Shortly thereafter, the CEO of Time Warner and an HR
representative met with Bouri to inform him that he was being terminated. Finally,
Bouri admitted at trial that he had not resigned before he was terminated.210 Bouri’s
statement that he had resigned because he was being micromanaged was not in
accord with the facts, and he knew it was not in accord with the facts. What is more,
his statements gave “a false impression as to the true state of affairs,” and he failed
“to provide qualifying information to cure the mistaken belief.” 211
Bouri also made statements that gave the impression that he was a man of
considerable personal wealth.212 Kishan testified that Bouri “talked about his Aston
Martins. He talked about his home in Atherton, California, where the average price
208
Id. at TW0051-52.
209
Id. at TW0002, TW0052.
210
Tr. 557-59 (Bouri).
211
Norton, 443 A.2d at 5.
212
Tr. 22-24 (Kishan).
48
per home, he informed me, was $5 million. He talked about growing up in the south
of France. He said his father was the largest cement trader in the world” and “that
he grew up in lavish homes all around the world.” 213 Bouri told Kishan that while
Bouri “was at Sun Microsystems he earned hundreds of millions of dollars and he
gave a lot of that money away.” 214 In fact, before and around the time Bouri made
these statements to Kishan, Bouri knew he was struggling financially; he had
significant tax liens on his home in New Jersey, had sold his Atherton, California
home in a short sale, and had been forced to sell much of his stock. 215 Again, Bouri’s
statements gave a false impression of the true state of affairs, and Bouri never
corrected the mistaken impression.
b. Bouri made the false statements with the intent of
inducing action by Trascent
“A result is intended if the actor either acts with the desire to cause it or acts
believing that there is a substantial certainty that the result will follow from his
213
Tr. 22 (Kishan).
214
Tr. 22-23 (Kishan).
215
JX 117; JX 119; JX 124; JX 308; JX 353. Defendant objects to JX 308 under
Delaware Rule of Evidence 901. This objection is overruled because under
Delaware Rule of Evidence 901(b)(7) the exhibit is a public record filed in a public
office, and under Delaware Rule of Evidence 902(1) the exhibit is a domestic public
document under seal.
49
conduct.” 216 The discussions and emails between Kishan and Bouri were essentially
“an extended job interview” where Kishan vetted Bouri to become his partner and
take over certain portions of the business, including overseeing operations and
managing the U.S. consulting business.217 Bouri knew this. In overseeing
operations, Bouri would be, and in fact was, the only member with direct oversight
of Trascent’s HR, finances, and IT. As head of the U.S. consulting business, Bouri
was also the only member in North America; the other two members of Trascent,
the only people with the ability to check Bouri in any meaningful way, were on other
continents.
Bouri made statements related to his previous employment and wealth to
increase Bouri’s chances of inducing Kishan to form Trascent and give Bouri an
equity interest in Trascent. Bouri made these statements to strengthen his
negotiating position relative to Kishan. Without the misrepresentations about how
and why Bouri left Time Warner and the actual state of his personal finances, Bouri
would not have been able to induce Trascent to employ him as the sole manager of
the entire U.S. consulting business as well as the sole member in charge of global
operations, without any oversight by the other members.
216
Vichi v. Koninklijke Philips Elecs., N.V., 85 A.3d 725, 811 (Del. Ch. 2014) (quoting
In re Wayport, Inc. Litig., 76 A.3d 296, 325 (Del. Ch. 2013)).
217
Tr. 18, 20 (Kishan); Tr. 639 (Bouri).
50
Bouri’s misrepresentations had the intended impact on Trascent’s decision to
enter into business with him, on the terms of the business, and on his role at the
company. Thus, Trascent has proven the first three elements of its fraudulent
inducement claim by a preponderance of the evidence.
3. Trascent justifiably relied on Bouri’s false statements
To succeed on its fraud claim, Trascent must show that it justifiably relied on
Bouri’s misrepresentations. Under Delaware law, justifiable reliance is measured
objectively 218 and “requires that the representations relied upon involve matters
which a reasonable person would consider important in determining his course of
action in the transaction in question.”219 “A misrepresentation induces a party’s
manifestation of assent if it substantially contributes to his decision to manifest his
assent.”220 “It is not necessary that [the] reliance have been the sole . . . factor in
influencing his conduct. . . . It is, therefore, immaterial that he may also have been
influenced by other considerations.”221
Bouri made material misrepresentations regarding his departure from Time
Warner and his personal finances that a reasonable person would consider important
218
Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1074 (Del. 1983).
219
Craft v. Bariglio, 1984 WL 8207, at *8 (Del. Ch. Mar. 1, 1984).
220
Restatement (Second) of Contracts § 167 (Am. Law. Inst. 1981).
221
Id. at cmt. a.
51
in deciding whether to make him a member of Trascent and a manager of Trascent
with responsibility for the U.S. consulting business, finance, and HR. In Kronenberg
v. Katz, this Court found that “it is inconceivable that reasonable investors would
have proceeded to invest, knowing that Katz intended for Robins,” who had multiple
felony convictions, “to be the Chief Operating Officer of the company and to have
control over corporate funds” without “full and complete disclosure” of Robins’s
criminal record.222 Even then, this Court reasoned that Robins “would only be
permitted to play carefully constrained and supervised roles.”223
I likewise find it inconceivable that if Bouri had been truthful about why and
how he departed from Time Warner and the particulars of the allegations made
against him, Kishan would have made Bouri the head of HR, finance, or the U.S.
consulting business without any oversight. Bouri was terminated from Time Warner
in part because his supervisors had lost confidence in his business judgment. He
also was terminated after an investigation into allegations of inappropriate sexual
comments and behaviors in the workplace. Kishan was looking for a partner who
could handle the entire U.S. consulting business because Kishan was too focused on
the European market to give the U.S. market the attention it required. It is highly
222
872 A.2d 568, 587 (Del. Ch. 2004).
223
Id. at 586.
52
unlikely that Kishan would have handed over that entire section of his business to
Bouri if he had known that a sophisticated business like Time Warner had lost
confidence in Bouri’s business judgment.224 Furthermore, the nature of the
allegations made at Time Warner would have been material information for Kishan
and Trascent to have before consenting to Bouri’s role as the head of Trascent’s HR.
Nor is it conceivable that had Kishan known the truth about Bouri’s finances,
he would made him a member of Trascent. 225 Kishan was looking for someone to
invest in the company, and members had to be able to invest cash when necessary.226
Kishan testified that the only reason he accepted Bouri’s promissory note in
exchange for Bouri’s equity was that he believed Bouri was a wealthy man and
would be able to invest cash when Trascent needed. 227 Instead, Bouri refused to give
224
JX 306, at TW0002.
225
It is also questionable whether Kishan would have made Bouri the head of finance
if he knew the truth. Kishan made a presentation to the Board in which he pointed
out that Shaffer had “recently eloped” and been “involved in multiple housing sale
transactions.” JX 139. He further stated, “I had warned [Bouri] on several
occasions that in other smaller consulting firms I had been with, both CFO’s were
siphoning cash.” Id. If Kishan was this concerned about the CFO’s elopement and
multiple house sales, he likely would have been similarly concerned about putting
a man with significant financial woes at the head of finance for Trascent. This
inference is supported by emails from Kishan after Bouri’s departure where he
reiterates that he thought Bouri was “rich” and thanks Shaffer for keeping an eye on
the accounts that Bouri accessed. JX 353.
226
JX 56; JX 21.
227
Tr. 24-25 (Kishan).
53
Trascent needed cash infusions and took loans and advances from the cash-strapped
company. 228 The fact that Bouri did not have cash to infuse should Trascent need it,
as it in fact did, was material information for Kishan to consider.
Once Bouri embarked upon his explanation for his departure from Time
Warner, he had to give Kishan a “full and open disclosure” of the real circumstances
around that departure. 229 Once Bouri volunteered information to Kishan that gave a
certain impression about Bouri’s financial status, Bouri had to correct that
impression by telling Kishan about the true state of his financial affairs. While it is
hard to believe Kishan still would have formed Trascent, made Bouri a member, and
entrusted Bouri with the U.S. business and Trascent’s operations had he known the
truth of these matters, at the very least there would have been different constraints
on Bouri’s ownership and role at Trascent. Instead, Kishan offered Bouri “complete
independence, decision-making without political entanglements, . . . and the ability
to exert [his] vision and leadership and harness the power of a talented global team
to execute [his] vision.” 230 Thus, “it is clear that [Bouri] made material
228
Tr. 53 (Kishan); Tr. 437-38 (Patel Kishan); JX 77; JX 117; JX 124; JX 331, at 81-
84; JX 353.
229
Kronenberg, 872 A.2d at 586.
230
JX 23.
54
misrepresentations of facts that would have been important to a reasonable [person]
considering [this business venture].” 231
Bouri argues that Trascent did not justifiably rely on Bouri’s statements for
two reasons: (1) the negotiations to form Trascent took place over a long period of
time and (2) Kishan needed to “rejuvenate [UMS Advisory’s] struggling
business.” 232 Bouri never corrected the misrepresentations he made to Kishan,233
and nothing in the record suggests the information became stale over the course of
Trascent’s formation. The time between when Bouri made the statements and when
231
Kronenberg, 872 A.2d at 587.
232
Def.’s Answering Br. 14. Bouri also argues that his “employment history and
personal wealth were [not] important considerations” for Trascent because
“1) Kishan’s admitted desire to bring in someone like Bouri who had more
‘capacity, talent and capability’ than UMS ever had, who would be ‘instrumental’
in ‘transforming’ UMS into a global force, and whose ambition was ‘far greater’
than what UMS had for itself in the past; 2)” that Kishan failed to run a background
check on Bouri; “3) Kishan’s omission of personal wealth as a requirement for
partnership when Bouri questioned him about the prerequisites; and 4) Trascent’s
willingness to fund initial capital contributions for all three members through non-
recourse promissory notes.” Def.’s Sur-Reply Br. 8-9. The first, second, and fourth
arguments address reliance by Kishan that was in direct response to the lies Bouri
told him. Kishan’s reliance was justifiable based on the information that Bouri gave
him. He had no duty to gather independent information. See Restatement (Second)
of Contracts § 172 (Am. Law. Inst. 1981). As for the third argument, the list of
prerequisites in the cited email comes after extensive discussion of purchasing
equity for cash. JX 21. This fact actually cuts against Bouri’s argument and makes
clear that putting cash into the business was an essential prerequisite to becoming a
member.
233
In fact, he maintained that he had resigned from Time Warner until his third day of
testimony at trial. See infra Section C.
55
Trascent was ultimately formed therefore is irrelevant. And as to whether it was
UMS Advisory’s financial struggles that primarily motivated Kishan to bring on
Bouri, the evidence does not support this contention. Patel Kishan, UMS Advisory’s
Director of Finance, credibly testified that in 2012 UMS Advisory made a net profit
of over $915,000 in the U.S. alone. 234 Kishan testified that UMS Advisory paid
bonuses every year except 2008. 235 These facts undercut Bouri’s position that
Kishan was so desperate to bring on Bouri that Kishan would have ignored the
circumstances surrounding Bouri’s termination from Time Warner and that Bouri
was struggling with his personal finances. Moreover, even if UMS Advisory was
struggling, the reliance is still justified even if the statements were not the sole factor
influencing the reliance. 236 A reasonable person would have considered it important
to know that the person he was going to make a member in a new entity and to whom
he was handing the U.S. business and worldwide operations had been terminated
from his last job after an investigation into his management style and inappropriate
behavior and was struggling to make ends meet financially. Thus, Trascent has
proven the fourth element of its fraudulent inducement claim by a preponderance of
the evidence.
234
Tr. 235-36 (Patel Kishan).
235
Tr. 7-8 (Kishan).
236
Restatement (Second) of Contracts § 167 cmt. a (Am. Law. Inst. 1981).
56
4. Trascent was damaged as a result of its justifiable reliance
The final element of the fraudulent inducement claim is satisfied because
Trascent entered into the Employment Agreement and LLC Agreement when it
otherwise would not have.237 Thus, Trascent has proven each element of its
fraudulent inducement claim by a preponderance of the evidence and shown that
Bouri fraudulently induced Trascent to enter into the LLC Agreement and the
Employment Agreement.
B. Remedies
Trascent essentially seeks three remedies for its fraudulent inducement claim:
(1) rescission of the Employment Agreement; (2) a declaratory judgment that the
LLC Agreement is unenforceable by Bouri; and (3) attorneys’ fees and costs. 238
1. Rescission of the Employment Agreement
“By ordering rescission, whether at law or in equity, the court endeavors to
unwind the transaction and thereby restore both parties to the status quo.”239 Legal
237
Prairie Capital III, L.P. v. Double E Hldg. Corp., 132 A.3d 35, 62 (Del. Ch. 2015)
(“The plaintiff can claim causally related harm because it entered into an agreement
it otherwise would not have signed.”).
238
PTO § V.A. In the alternative, should the Court have found that the contracts were
not induced by fraud, Plaintiff requested a declaration that Defendant was
terminated for cause and related monetary relief. PTO § I. Because I held that the
contracts were induced by fraud, I do not consider the alternative arguments and
requests for relief.
239
Ravenswood Inv. Co. v. Estate of Winmill, 2018 WL 1410860, at *21 (Del. Ch. Mar.
21, 2018), as revised (Mar. 22, 2018).
57
rescission refers to the “judicial declaration that a contract is invalid and a judicial
award of money or property.” 240 Here, Trascent appears to request legal rescission
of the Employment Agreement.241 Bouri argues, relying on Ravenswood Investment
Co. v. Estate of Winmill,242 that rescission is not available in this case because it is
not possible to return the parties to the status quo ante for two reasons. 243 First,
“Bouri contributed greatly to Trascent’s business during his tenure, and removing
the Employment Agreement would permit Trascent to reap the benefits of his
contribution while Bouri loses all benefits and protections.”244 Second, Bouri argues
that he was limited in his post-termination employment opportunities because he
abided by the eighteen-month post-termination noncompete provision in the
Employment Agreement.245 Neither of these arguments convince me that I cannot
return the parties to the status quo ante.
While it may be true that Bouri contributed to the business of Trascent, it is
also true that Bouri cost Trascent a significant amount of money during his tenure.
240
Id.241
PTO ¶ V.A.1.
242
2018 WL 1410860, at *22 (Del. Ch. Mar. 21, 2018), as revised (Mar. 22, 2018).
243
Def.’s Answering Br. 20.
244
Id. at 20-21.
245
Id. at 21.
58
In the second half of 2013, Bouri increased the size of the firm from ten employees
to eighteen. 246 In 2012, the net income of UMS Advisory was $915,000, but in 2013,
after Bouri signed on, the net income was $78,000. 247 In 2014, Trascent did not
make a profit at all.248 The benefits bestowed by Bouri and the expenses incurred
by Trascent are comparable. No further compensation of the parties is required to
substantially return them to the pre-Employment Agreement status quo.
Bouri also argues that he was limited in his post-termination employment
opportunities because he abided by the eighteen-month post-termination
noncompete provision in the Employment Agreement. 249 The noncompete
provision in the Employment Agreement prevents certain actions “in the business of
providing consulting services in the real estate/facilities management market
anywhere within the United States and in such other jurisdictions as the Company is
then providing such services or has provided such services within the prior 24
months.”250 Bouri separated from Trascent in April 2015 and moved to Beirut,
Lebanon, in August 2015 “[f]or simply personal reasons,” including being closer to
246
Tr. 251 (Patel Kishan).
247
Tr. 244 (Patel Kishan).
248
Tr. 200 (Kishan).
249
Def.’s Answering Br. 21.
250
JX 55, at 8.
59
his aging mother.251 He has resided there since.252 In November 2015, Bouri was
diagnosed with certain medical conditions that make it dangerous for him to travel
to the U.S., Europe, Asia, or anywhere requiring plane travel.253 Neither party has
pointed to any evidence that Trascent provided any real estate/facilities management
consulting services in or around Lebanon during the twenty-four months before
Bouri’s departure in April 2015 such that the noncompete provision would prevent
Bouri from finding employment in Lebanon if he so wished. Therefore, I find that
Bouri chose not to work due to personal reasons. As such, I can place the parties in
substantially the same position they were in before the Employment Agreement by
rescinding the Employment Agreement, making rescission an appropriate remedy.
2. Declaratory judgment that the LLC Agreement is
unenforceable by Bouri
When “there is fraud in the inducement, the contract is enforceable against at
least one party,” and the “agreement is ‘voidable’ at the option of the innocent
party.” 254 Trascent requests a declaratory judgment that the LLC Agreement is
251
Tr. 802-03 (Bouri); Bouri Aff. ¶ 2 (Sept. 19, 2017).
252
Bouri Aff. ¶ 2 (Sept. 19, 2017).
253
Def.’s Mot. for Protective Order ¶¶ 2-11 (Sept. 19, 2017).
254
PHL Variable Ins. Co. v. Price Dawe 2006 Ins. Tr. ex rel. Christiana Bank & Tr.
Co., 28 A.3d 1059, 1067 (Del. 2011) (quoting Dougherty v. Mieczkowski, 661 F.
Supp. 267, 274 (D. Del. 1987)).
60
unenforceable by Bouri. Bouri’s only response is that the LLC Agreement was not
procured by fraud. 255 As discussed at length above, I find that the LLC Agreement
was procured by fraud, and therefore, I grant Trascent the declaratory judgment it
seeks. 256
3. Attorneys’ fees and costs
Trascent requests attorneys’ fees and costs in four different ways. Trascent
requests these fees as: (1) “restitution sufficient to return Trascent to the position
that it would have been had the [Employment Agreement] not been entered,
including recovery of its own attorneys’ fees and costs incurred in connection with
the [Employment Agreement] and recovery of all attorneys’ fees and costs advanced
to Bouri for indemnification in connection with this litigation and pre-judgment
interest on all amounts so recovered;” 257 (2) “restitution sufficient to return Trascent
255
Def.’s Answering Br. 21.
256
Bouri also seeks three forms of relief: (1) a declaration that Kishan terminated Bouri
without cause, that Bouri is entitled to advancement, and that Bouri is the rightful
owner of forty-three percent of the Class A units of Trascent; (2) an award of
damages and attorneys’ fees and costs; and (3) an injunction requiring Plaintiff to
turn over all of Bouri’s personal property remaining at its offices. PTO § V.B.
Bouri withdrew his request for advancement as moot in the pretrial stipulation. PTO
2 n.2. My above findings moot Bouri’s requests for a declaratory judgment or an
award of attorneys’ fees and costs. While Bouri made his request for return of his
personal property in his counterclaim and introduced evidence at trial relating to the
personal property, he omitted the request from the Pretrial Stipulation and did not
mention it in the post-trial briefing. All Bouri’s requests for relief therefore are
denied.
257
PTO ¶ V.A.1.
61
to the position that it would have been had the [LLC Agreement] not been entered,
including recovery of its own attorneys’ fees and costs incurred in connection with
the [LLC Agreement] and recovery of all attorneys’ fees and costs advanced to Bouri
for indemnification in connection with this litigation;” 258 (3) “[a]n award of
Trascent’s reasonable costs of investigation, litigation and appeal, including
reasonable attorneys’ fees, costs, and disbursements;”259 and (4) “[a]n award of
immediate reimbursement by Bouri of all sums advanced by Trascent to indemnify
him for his attorneys’ fees and costs incurred in this litigation.”260
As to the requests for the return of the attorneys’ fees and costs advanced to
Bouri, those claims are denied. The Court heard Bouri’s advancement case and
found that Bouri is entitled to advancement under both the Employment Agreement
and the LLC Agreement. Trascent appealed that decision to the Supreme Court of
Delaware, and the Supreme Court affirmed the Court’s decision. Bouri therefore is
entitled to advancement until a final, non-appealable order has been entered in this
plenary action. 261 Should this post-trial memorandum opinion be affirmed or should
258
Id. ¶ V.A.2.
259
Id. ¶ V.A.5.
260
Id. ¶ V.A.6.
261
8 Del. C. § 145(e) (“Expenses (including attorneys’ fees) incurred by an officer or
director of the corporation in defending any civil, criminal, administrative or
62
Bouri choose not to appeal this decision, Trascent may then be entitled to a return of
advanced attorneys’ fees and costs.262 To the extent that Trascent is arguing that
Bouri is not entitled to indemnification, those claims are not yet ripe as there is no
final, non-appealable judgment in this plenary action. 263 Thus, this relief is denied.
As for the return of Trascent’s own attorneys’ fees and costs, Trascent
requests those (1) as “[a]n award of Trascent’s reasonable costs of investigation,
litigation and appeal, including reasonable attorneys’ fees, costs, and
disbursements;”264 and (2) under a theory of restitution related to the fraudulent
inducement of both the Employment Agreement and the LLC Agreement. 265 As to
the first request, Trascent does not argue that an exception to the American Rule
applies, and thus, that request is denied. 266 As for the second request, Trascent
requests “restitution sufficient to return Trascent to the status quo before Bouri
joined Trascent; specifically, . . . recoupment of all attorneys’ fees and litigation
investigative action, suit or proceeding may be paid by the corporation in advance
of the final disposition of such action, suit or proceeding . . . .” (emphasis added)).
262
See Edward P. Welch, Robert S. Saunders & Jennifer C. Voss, Folk on the Delaware
General Corporate Law § 145.08 (6th ed. 2018).
263
See Scharf v. Edgcomb Corp., 864 A.2d 909, 919-20 (Del. 2004).
264
PTO ¶ V.A.5.
265
Id. ¶¶ V.A.1-2.
266
See Section II.C infra for a discussion of the American Rule. I address separately
Trascent’s Motion for Sanctions and the fees sought therein.
63
costs it has expended to litigate this matter.” 267 Trascent points to no authority that
supports this request. In the context of rescission, restitution is awarded as a way of
returning consideration that needs to be returned when the contract is “unmade.”268
The attorneys’ fees and costs Trascent has paid to bring its case were not part of that
consideration. Moreover, “[t]he cost[s] of litigation are not available in this Court
as damages . . .[except] under special circumstances not present here.” 269 Thus, this
relief is also denied.
C. Sanctions
“Candor and fair-dealing are, or should be, the hallmark of litigation and
required attributes of those who resort to the judicial process.”270 Trascent seeks
267
Pl.’s Opening Br. 27.
268
Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial Practice
in the Delaware Court of Chancery § 12.04 (2017).
269
Morabito v. Harris, 2003 WL 22290934, at *1 (Del. Ch. Sept. 29, 2003); E. I. Du
Pont de Nemours & Co. v. Admiral Ins. Co., 1994 WL 465547, at *7 (Del. Super.
Aug. 3, 1994) (“I cannot change the common law rule by disguising the claim for
attorney’s fees under the cloak of compensatory damages.”); cf. Arbitrium (Cayman
Islands) Handels AG v. Johnston, 705 A.2d 225, 231 (Del. Ch. 1997) (exceptions to
the American Rule include “cases where the underlying (pre-litigation) conduct of
the losing party was so egregious as to justify an award of attorneys’ fees as an
element of damages”), aff’d, 720 A.2d 542 (Del. 1998); Cantor Fitzgerald, L.P. v.
Cantor, 2001 WL 536911, at *3 (Del. Ch. May 11, 2001) (“[T]his Court, exercising
the discretion given it, determined that damages, as measured by attorneys’ fees and
expenses spent to address the defendants’ conduct, is an appropriate remedy for this
egregious breach of the duty of loyalty.”).
270
E.I. DuPont de Nemours & Co. v. Fla. Evergreen Foliage, 744 A.2d 457, 461 (Del.
1999).
64
sanctions against Bouri for repeatedly misrepresenting in discovery and before the
Court the true nature of his departure from Time Warner. It is understandable that
Bouri would be hesitant to share the true details of his departure from Time Warner,
but I find that his lack of candor in discovery and during trial endangered the
legitimacy of the litigation process and, thus, is deserving of sanctions.
“The American Rule applies in Delaware.” 271 “Under the American Rule,
litigants are expected to bear their own costs of litigation absent some special
circumstances that warrant a shifting of attorneys’ fees, which, in equity, may be
awarded at the discretion of the court.”272 “[Delaware] courts have, however,
recognized bad faith litigation conduct as a valid exception to that rule.” 273 “To
justify an award under the bad faith exception, ‘the Court must conclude that the
party against whom the fee award is sought has acted in subjective bad faith.’”274
271
Gatz Props., LLC v. Auriga Capital Corp., 59 A.3d 1206, 1221 (Del. 2012).
272
Beck v. Atl. Coast PLC, 868 A.2d 840, 850 (Del. Ch. 2005).
273
Gatz Props., 59 A.3d at 1222.
274
K & G Concord, LLC v. Charcap, LLC, 2018 WL 3199214, at *1 (Del. Ch. June 28,
2018) (quoting Reagan v. Randell, 2002 WL 1402233, at *3 (Del. Ch. June 21,
2002)).
65
“The party seeking a fee award bears the stringent evidentiary burden of producing
‘clear evidence’ of bad-faith conduct.” 275
The purpose of the bad faith exception “is not to award attorney’s fees to the
prevailing party as a matter of right, but rather to . . . [protect] the integrity of the
judicial process.’” 276 “Although there is no single definition of bad faith conduct,
courts have found bad faith where parties have unnecessarily prolonged or delayed
litigation, falsified records or knowingly asserted frivolous claims.” 277 Bad faith has
also included “misleading the court, altering testimony, . . . changing position on an
issue,” 278 and perjury. 279
Trascent points to at least three instances where, in bad faith, Bouri
misrepresented the nature of his departure from Time Warner during these
proceedings in sworn statements and while under oath. The first was in response to
275
Beck, 868 A.2d at 851 (citing Shapiro v. Healthcare Acq., Inc., 2004 WL 878018,
at *1 (Del. Ch. Apr. 20, 2004) and Arbitrium (Cayman Islands) Handels AG, 705
A.2d at 232).
276
In re Shawe & Elting LLC, 2016 WL 3951339, at *12 (Del. Ch. July 20, 2016)
(quoting Brice v. State Dept. of Corr., 704 A.2d 1176, 1179 (Del. 1998)), aff’d sub
nom. Shawe v. Elting, 157 A.3d 142 (Del. 2017).
277
Gatz Props., 59 A.3d at 1222 (quoting Johnston v. Arbitrium (Cayman Islands)
Handels AG, 720 A.2d 542, 546 (Del. 1998)).
278
Beck, 868 A.2d at 851.
279
Choupak v. Rivkin, 2015 WL 1589610, at *23 (Del. Ch. Apr. 6, 2015), aff’d, 129
A.3d 232 (Del. 2015).
66
interrogatories; the second was in response to requests for admissions; and the third
was while testifying at trial. I find that this constitutes bad faith litigation conduct
that warrants the shifting of attorneys’ fees and costs as sanctions.
The interrogatory asks, “Describe in detail the circumstances regarding your
termination from Time Warner, including identifying all persons with knowledge of
facts regarding the decision to terminate your employment.” 280 Bouri responds,
Defendant objects to this Interrogatory on the grounds that
it is vague, ambiguous, overbroad, unduly burdensome,
and harassing. Defendant also objects to this Interrogatory
to the extent it calls for disclosure of information or
communications protected by the attorney-client privilege
and/or attorney work product doctrine. Subject to and
without waiving these objections and the General
Objections,
Defendant became employed by Time Warner Inc.
(“TWX”) in April 2010. Initially, defendant reported to
the EVP/Chief Administrative Officer, Pat Fili-Krushel,
but she subsequently left TWX in November 2010.
Defendant and all other administrative functions began
reporting to the EVP/CFO, John Martin.
In May 2011, Defendant tendered his voluntary
resignation from TWX based on his frustrations with his
day-to-day professional working relationship with his
supervisor, Defendant’s overall professional unhappiness
at the company, and Defendant’s view that his business
philosophy did not fit with TWX’s risk
averse/conservative business philosophy. Upon further
discussions with TWX, John Martin, and Mark Henderson
(Director of Human Resources), TWX offered to
280
JX 305, at 5.
67
designate Defendant’s departure as a termination without
cause, which triggered the payout of certain benefits to
Defendant. Defendant agreed to this and the termination
without cause was made effective May 6, 2011. TWX
never informed or advised Defendant that any grounds
existed to discipline him or terminate him for cause. 281
The first request for admission asks, “Admit that you were terminated by your
former employer, Time Warner Inc. (“Time Warner”) for reasons concerning or
relating to allegations of sexual harassment or misconduct.” 282 Bouri responds,
Mr. Bouri objects to this Request on the grounds that it is
vague, ambiguous, and harassing. Mr. Bouri also objects
to this Request on the grounds that “misconduct” is not
defined. Subject to and without waiving these objections,
Mr. Bouri denies this Request. Mr. Bouri tendered his
voluntary resignation and, after further discussion with
Time Warner, the parties agreed to designate his
separation from the company as a termination without
cause. Time Warner never informed or advised Mr. Bouri
that allegations of sexual harassment or misconduct had
been made against him, or that his termination was due to
or related to any such allegations.283
The second request for admission asks, “Admit that an employee of Time Warner
made allegations against you of sexual harassment or misconduct during the time
you were employed at Time Warner.” 284 Bouri responds,
281
Id. at 5-6.
282
JX 304, at 1.
283
Id. at 1-2.
284
Id. at 2.
68
Mr. Bouri objects to this Request on the grounds that it is
vague, ambiguous, and harassing. Mr. Bouri also objects
to this Request on the grounds that “misconduct” is not
defined. Subject to and without waiving these objections,
Mr. Bouri denies this Request. Mr. Bouri was never made
aware that any allegations of sexual harassment or
misconduct had been made against him during his
employment at Time Warner. However, prior to his
termination from Time Warner, Mr. Bouri was
interviewed in connection with an internal investigation
into individuals who worked in his department and he was
asked questions about, among other things, alleged
comments of a sexual nature that had been attributed to
him. Time Warner never advised Mr. Bouri regarding the
findings or outcome of the investigation and he was never
disciplined for any alleged sexual harassment or
misconduct.285
The third request for admission asks, “Admit that you did not disclose to Plaintiff
that you were terminated by Time Warner for reasons concerning or relating to
allegations of sexual harassment or misconduct.” Bouri responds,
Mr. Bouri objects to this Request on the grounds that it is
vague, ambiguous, and harassing. Mr. Bouri also objects
to this Request on the grounds that “misconduct” is not
defined. Subject to and without waiving these objections,
Mr. Bouri admits this Request. Mr. Bouri further states
that Time Warner never informed or advised him that
allegations of sexual harassment or misconduct were made
against him, or that his termination was due to or related
to any such allegations. 286
285
Id.
286
Id.
69
At trial, Bouri repeatedly testified that he voluntarily resigned from Time Warner.287
The Business Records and Bouri’s own testimony both show that Bouri lied
under oath about the following:
• Bouri did not voluntarily resign from Time Warner but was terminated
without cause.288 This termination without cause was explicitly stated in the
notice of termination Time Warner gave to and reviewed with Bouri 289 and in
the termination agreement that Bouri signed. 290 Furthermore, the termination
agreement explicitly stated that the officer resignation letter Bouri signed did
not change the nature of his termination without cause. 291 Finally, Bouri
eventually admitted that he did not resign before he was terminated from Time
Warner. 292
287
Tr. 520 (Bouri) (“Q. Are those your words that you resigned from Time Warner? A.
I did, and, yes, those are my words. Q. You didn’t voluntarily resign from Time
Warner, did you, sir? A. Yes, I did.”); Tr. 521 (Bouri) (“I was not required to resign.
I offered my resignation and tendered it to Time Warner.”); Tr. 620 (Bouri) (“Q.
Okay. Now, Mr. Bouri, did you resign from Time Warner? A. I did.”).
288
JX 306, at TW0010-11; Tr. 620 (Bouri).
289
JX 306, at TW0010.
290
Id. at TW0011-15.
291
Id. at TW0011.
292
Tr. 855 (Bouri).
70
• Bouri did not depart from Time Warner due to “frustrations with his day-to-
day professional working relationship with his supervisor, Bouri’s overall
professional unhappiness at the company, and Bouri’s view that his business
philosophy did not fit with [Time Warner’s] risk averse/conservative business
philosophy;” 293 instead, he was terminated without cause because his
superiors “no longer had confidence in his business judgment.” 294 Further,
Bouri was terminated at the conclusion of an investigation into allegations of
inappropriate workplace behaviors, including mismanagement and sexual
harassment.295
• Bouri knew about the allegations of mismanagement and sexual misconduct
made against him. 296 He met with a Time Warner attorney who informed
Bouri of the allegations against him and recorded Bouri’s specific denials to
293
JX 305, at 5-6.
294
JX 306, at TW0002.
295
Id. at TW0002.
296
Id. at TW0052 (including notes on Bouri’s specific and detailed denials of the
allegations against him); id. at TW0045 (email from Bouri to Henderson stating “I
am surprised that you are allowing people that have levied these wrongful
accusations access to my affairs.”).
71
each allegation.297 Moreover, Bouri eventually admitted that he knew about
the specific allegations against him. 298
Bouri argues that his conduct is not sanctionable because he has the right to
present his explanation for why and how he separated from Time Warner and that
he has consistently maintained that he resigned and that the resignation was
structured as a termination without cause.299 I agree that every litigant has a right to
present his or her side of the story, but that does not allow for the submission of false
statements. Bouri’s consistent assertion that he voluntarily resigned is not consistent
with the independent facts. 300 Moreover, his side of the story is not consistent with
his eventual testimony that he did not resign. 301
Bouri also argues that his behavior was not sanctionable because it is merely
inconsistent. This argument relates to Bouri’s sworn statements about the internal
investigation at Time Warner. Bouri does not deny that he lied in at least three of
his responses. Instead, Bouri argues that his answer to Request for Admission No.
71 makes his answers internally inconsistent. First, this is not true. Bouri’s answer
297
JX 306, at TW0052.
298
Tr. 557 (Bouri).
299
Def.’s Opp. to Pl.’s Mot. for Sanctions 1-2, 7.
300
JX 306, at TW0001-03, TW0010-21.
301
Tr. 855 (Bouri).
72
to Request for Admission No. 71 says, in relevant part, “Mr. Bouri was interviewed
in connection with an internal investigation into individuals who worked in his
department and he was asked questions about, among other things, alleged
comments of a sexual nature that had been attributed to him.” 302 This answer is
consistent with his other answers because it strongly suggests that he was questioned
only ancillary to an investigation into other people in his department and implies that
comments were mistakenly attributed to him. Second, even if this answer was
actually inconsistent, it does nothing to change the fact that Bouri lied in his other
responses. Contrary to Bouri’s argument, this alleged inconsistency did not
somehow shift the burden to Trascent to ask Bouri to “clarify or reconcile” his
discovery responses. Bouri knew all along that people at Time Warner made
allegations against him. 303 And if he had somehow forgotten, then the Time Warner
documents would have refreshed his recollection. Bouri had a duty to tell the truth
in his discovery responses and before this Court. He failed in that duty. 304 Trascent
has carried its burden of showing by clear evidence that Bouri took part in bad faith
302
JX 304, at 2 (emphasis added).
303
JX 306, at TW0052 (including notes on Bouri’s specific and detailed denials of the
allegations against him); id. at TW0045.
304
See Tr. 550-51 (Bouri) (trial testimony affirming that his discovery answers that he
was never informed of any allegations made against him at Time Warner were true).
73
litigation tactics by misleading Trascent and the Court in sworn statements about the
events surrounding his departure from Time Warner.
The only question then is the appropriate measure of sanctions. “The Court
of Chancery has broad discretion in fixing the amount of attorney fees to be
awarded.”305 “The Court evaluates the totality of a party’s misconduct to determine
whether the party litigated in bad faith and to determine the amount of fees to
award.”306 “In exercising its discretion to determine an appropriate sanction for bad
faith and vexatious litigation conduct, this Court has shifted a portion of, and on
occasion the entirety of, the opposing side’s attorneys’ fees.” 307 Because Bouri’s
false statements go to the heart of two of the five counts brought by Trascent, I award
Trascent its reasonable attorneys’ fees and costs incurred in bringing the Motion for
Sanctions and two-fifths of its reasonable attorneys’ fees and costs incurred in this
litigation.
III. CONCLUSION
For the foregoing reasons, the Employment Agreement is rescinded; I grant a
declaratory judgment that the LLC Agreement is unenforceable by Bouri; and I
305
Johnston v. Arbitrium (Cayman Islands) Handels AG, 720 A.2d 542, 547 (Del.
1998).
306
In re Shawe, 2016 WL 3951339, at *19.
307
Id.74
award Trascent all of its reasonable attorneys’ fees and costs incurred in bringing
the Motion for Sanctions and two-fifths of its reasonable attorneys’ fees and costs
incurred in this litigation. All other relief is DENIED. Trascent shall prepare and
file with the Court within ten business days an implementing order stating the
amount of the reasonable attorneys’ fees and costs it incurred in bringing the Motion
for Sanctions and two-fifths of the litigation, along with an affidavit documenting
the same. The implementing order shall provide for the sanctions to be paid within
ten business days of entry of that order.
IT IS SO ORDERED.
75