James A. Zachman v. Real Time Cloud Services, LLC ( 2020 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
JAMES A. ZACHMAN, )
)
Plaintiff, )
)
v. ) C.A. No. 9729-VCG
)
REAL TIME CLOUD SERVICES, LLC, )
SANGEETA CHHABRA, and CBS )
ACCOUNTING PRIVATE, LIMITED, )
)
Defendants, )
)
and )
)
REAL TIME DATA SERVICES, LLC, )
)
Intervenor-Defendant. )
MEMORANDUM OPINION
Date Submitted: December 20, 2019
Date Decided: March 31, 2020
James A. Zachman, Pro Se.
Edward McNally and Kathleen Murphy, of MORRIS JAMES LLP, Wilmington,
Delaware, Attorneys for Defendants and Intervenor-Defendant.
GLASSCOCK, Vice Chancellor
This elderly action results from the inability of the principals of a Delaware
LLC to work together. Eventually, the Plaintiff here, James Zachman, was forced
out of the LLC at an unfair price following an unfair process. Claims and counter-
claims resulted; the LLC is run from India, which made discovery difficult and slow;
the Plaintiff proceeded pro se, further complicating the litigation; in sum, progress
has been testudinal.1 I will not recount here the several prior rulings of this Court,
which interested readers, if any, may themselves peruse.2 The remaining issues are
the fair value of the Plaintiff’s interest, as well as any set-off appropriate under the
Intervenor-Defendant’s counterclaims. The Defendants and Intervenor-Defendant
bear the burden on both these issues. This post-trial Memorandum Opinion resolves
these issues.
Using standard valuation techniques, I find that the fair value of the Plaintiff’s
interest is $173,000, and that the Intervenor-Defendant has not proved its
counterclaims for damages. My analysis is below.
1
I have sworn off the adjective “glacial,” which once aptly invoked progress so slow as to be
imperceptible; in light of the current climate, it better implies rapid retreat.
2
Transcript Ruling of the Court on Defs.’ Mot. for Summ. J. - July 28, 2016, Docket Item (“D.I.”)
128 (“July 28, 2016 Ruling”); Transcript of the 2-26-18 Oral Argument and Ruling of the Court,
D.I. 202 (“February 26, 2018 Ruling”); 3-5-2019 Oral Argument, D.I. 240 (“March 5, 2019
Ruling”).
I. BACKGROUND3
A. The Parties
Plaintiff James A. Zachman co-founded Intervenor-Defendant Real Time
Data Services, LLC (“Real Time Data” or the “Company”) in 2006.4
Intervenor-Defendant Real Time Data is a Delaware limited liability company
that provides QuickBooks hosting services.5
Defendant CBS Accounting Private, Limited (“CBS Accounting”) is an
Indian company that provides bookkeeping services.6 CBS Accounting co-founded
Real Time Data with Zachman.7
Defendant Sangeeta Chhabra founded CBS Accounting.8 She also co-
managed Real Time Data with Zachman.9 Later, she founded non-party Real Time
Data Services Private Limited (“Real Time Data SPL”) to provide support for Real
3
The parties submitted separate trial exhibits. Citations to the Plaintiff’s Trial Exhibits are
expressed as PX __, at __. Citations to the Defendants’ Trial Exhibits are expressed as DX __, at
__. Citations in the form “Trial Tr.” refer to the trial transcript. Pagination in some trial exhibits
is non-existent or handwritten, and I note this where appropriate.
4
DX 3, Real Time Data Services, LLC Operating Agreement (“Operating Agreement”); Trial Tr.
9:7–12 (Chhabra).
5
Operating Agreement; Trial Tr. 9:1–12 (Chhabra).
6
Trial Tr. 7:17–24 (Chhabra).
7
Operating Agreement, Ex. A, “Members.”
8
Trial Tr. 9:7–12 (Chhabra); see also Operating Agreement, Ex. A, “Members” (Identifying
Zachman and Chhabra on behalf of CBS Accounting as LLC signatories).
9
Operating Agreement, Ex. C, “Officers.”
2
Time Data.10 In 2012, Chhabra, through Real Time Data SPL, founded Defendant
Real Time Cloud Services, LLC (“Real Time Cloud”).11
Zachman founded non-party Cloudvara.com (“Cloudvara”) after his departure
from Real Time Data.12
B. Factual Background
1. Zachman and CBS Accounting Co-Found Real Time Data
Originally, starting in 2004, CBS Accounting, owned by Chhabra and based
in India, provided bookkeeping services to customers in the United States.13 Over
the next few years, it evolved its business toward providing “QuickBooks hosting.”14
Under this business model, CBS Accounting provided computer servers used to
facilitate the operation of QuickBooks software on customers’ computers.15 CBS
Accounting did not actually supply the software; it supplied the remote servers to
run the software.16
10
Trial Tr. 67:5–17 (Chhabra).
11
DX 17, at -556 (Zachman email from November 2012 discussing Chhabra’s creation of Real
Time Cloud); Trial Tr. 54:17–55:4 (Chhabra) (testifying she founded Real Time Cloud in June
2012); PX Q, Declaration in Superior Court of California, County of Riverside, ¶ 17 (Chhabra
declaring that Real Time Data SPL founded Real Time Cloud).
12
DX 15 (emails from Zachman describing founding of Cloudvara).
13
Trial Tr. 7:12–24 (Chhabra).
14
Id.
15
Id.
16
Id. at 8:2–16 (Chhabra).
3
Toward the end of 2004, Chhabra met the Plaintiff, Zachman, who operated
an accounting firm in the United States.17 On March 12, 2006, Chhabra and
Zachman joined forces and formed a limited liability company, Real Time Data.18
Like CBS Accounting, Real Time Data focused on QuickBooks hosting.19 Real
Time Data had two members: Zachman and CBS Accounting.20 Zachman and
Chhabra served as Real Time Data’s managers.21 Zachman, who was based in the
United States and had marketing experience, ran the marketing arm of the business,
first through direct marketing, then through digital campaigns.22 The digital
campaigns, particularly search engine optimization through Google, proved
effective, and after a slow start, the company began to grow.23
Meanwhile, in India, CBS Accounting provided hosting, tech, and billing
support to Real Time Data.24 As Real Time Data grew, it hired more employees in
addition to Zachman.25 Chhabra started another company, Real Time Data SPL, to
17
Id. at 8:17–9:6 (Chhabra).
18
Operating Agreement; Trial Tr. 9:7–12 (Chhabra).
19
Trial Tr. 8:21–9:12 (Chhabra).
20
Operating Agreement, Ex. A, “Members.”
21
Operating Agreement, Ex. C, “Officers.”
22
Trial Tr. 10:9–21 (Chhabra).
23
Id. at 11:2–13 (Chhabra). After three years of business, in 2009, Real Time Data’s net income
was around $45,000. See DX 23, Ex. 1 (calculating 2009 adjusted net income of $43,864); Trial
Tr. 40:18–41:2 (Chhabra) (testifying that 2009 unadjusted net income was $47,816).
24
Trial Tr. 25:1–12 (Chhabra).
25
Id. at 25:13–26:1 (Chhabra).
4
allow the Real Time Data business to add employees while circumventing regulatory
strictures in India on companies with more than twenty employees.26 Zachman
testified he was unaware Chhabra had started an additional company to provide
services to Real Time Data, but contemporaneous emails show that Zachman
corresponded with employees from Real Time Data SPL.27 Because Real Time Data
was a startup and initial revenue was small, neither Zachman nor Chhabra drew a
salary; instead, they agreed to equally split Real Time Data’s net income.28
2. Real Time Data’s Accounting Practices and Management Disputes
Zachman received accounting reports and reviewed the Company’s finances
on annual trips to India.29 In addition, he communicated with Real Time Data’s
accountants, who answered his inquiries and provided him with viewing access to
the company’s accounting records.30 Some sensitive accounting information,
26
Id. at 25:20–26:12 (Chhabra).
27
Id. at 196:24–198:17 (Zachman) (testifying that despite corresponding with Real Time Data SPL
employees regarding Real Time Data business and numerous payments to Real Time Data SPL
from Real Time Data’s PayPal, Zachman was unaware whether the business was providing
services to Real Time Data); DX 31 (emails showing Zachman corresponded with Real Time Data
SPL employees regarding Real Time Data business).
28
Trial Tr. 39:5–8 (Chhabra).
29
Id. at 27:5–21 (Chhabra).
30
DX 7 (emails documenting Zachman’s correspondence with Real Time Data employees
regarding accounting and accounting records from 2007 to 2012); Trial Tr. 28:13–32:3 (Chhabra).
5
however, remained inaccessible to Zachman, although it was accessible to his wife,
who helped with Real Time Data’s accounting.31
To facilitate customer payments, Real Time Data used several banking
services during its early years, including Bank of America until 2008, then Wachovia
Bank (which was taken over by Wells Fargo) and PayPal (a non-bank merchant
service) in 2009.32 Because the vast majority of Real Time Data’s customers were
in the United States, most paid for the Company’s services with checks and credit
card payments deposited in Real Time Data’s United States bank accounts.33
Zachman, as the United States liaison for the business, had access to these accounts
and was able to make withdrawals to pay the Company’s bills and draw his
membership share.34
31
See PX O, at 1 (screenshot indicating Zachman’s lack of access to “Sensitive Accounting
Activities”); Trial Tr. 65:3–67:2 (Chhabra) (testifying that Zachman’s wife had access to
“Sensitive Accounting Activities” on the Company’s QuickBooks); DX 7, at 31 (email from
accountant Shikha Bajaj responding to Zachman’s request for “Admin” access to QuickBooks that
he “can have the access to that file using [Zachman’s Wife’s] User id.”).
32
Trial Tr. 12:17–13:1 (Chhabra). Contemporaneous emails between Zachman and Chhabra show
that Zachman was aware of the PayPal account opened in 2009. DX 6 (emails dated October 23–
24, 2009, December 2, 2009, and January 26, 2010 discussing usernames and setting up and
accessing PayPal account); see also Trial Tr. 22:22–24:24 (Chhabra) (testifying she communicated
with Zachman regarding the PayPal account). Despite this evidence, Zachman contends he did
not know of the PayPal account. I do not credit his testimony in this regard. For further discussion,
see footnote 176, infra.
33
Trial Tr. 11:23–15:4 (Chhabra); DX 4 (Defendants’ graphic representation of bank accounts and
access).
34
E.g. DX 25, at 60 (Wells Fargo bank statement showing Zachman’s draws on account); Trial
Tr. 16:19–18:2 (Chhabra) (testifying regarding Zachman’s access). The page numbers in DX 25
are handwritten.
6
For the first several years of operations, Real Time Data’s accounting
practices were inconsistent.35 They began to improve once the Company’s revenues
grew and it hired an accountant, Shikha Bajaj, in 2010.36 However, both Zachman
and Chhabra had grievances related to the other’s behavior regarding accounting and
taxes. In 2010, it came to light that Zachman, although named “Tax Matters
Member” under the Real Time Data Services, LLC Operating Agreement (the
“Operating Agreement”), had never filed taxes for Real Time Data.37 For his part,
Zachman was concerned over the accounting practices and the unorganized system
of drawing on Company funds, and he suggested hiring a certified public accountant
to reconcile the past several years of accounting.38 In 2010, Zachman filed for
personal bankruptcy, but, as I found in a previous ruling, Chhabra was unaware of
his bankruptcy when it occurred.39
35
Trial Tr. 32:4–23, 71:7–18 (Chhabra).
36
Id.
37
Operating Agreement, § 5.4 (naming Zachman “Tax Matters Member”); DX 10 (emails dated
December 24–25, 2011 discussing tax returns); Trial Tr. 42:7–43:2 (Chhabra). After Zachman left
the Company, Real Time Data failed to file taxes in 2012 because, as Chhabra testified, she was
afraid the failure to file in the past would come to light. Trial Tr. 90:13–24 (Chhabra).
38
Trial Tr. 98:2–22 (Chhabra).
39
See id. at 59:10–13, 94:20–24, 101:12–21 (Chhabra) (testifying that Zachman’s bankruptcy
occurred in 2010 and that she did not know about it). Zachman testified that Chhabra was aware
of his personal bankruptcy. Id. at 179:15–22 (Zachman). I ruled on this issue in a summary
judgment bench ruling, finding the record did not support knowledge on Chhabra’s part. July 28,
2016 Ruling, at 6:15–18 (“The record does not support the plaintiff’s allegation that the defendants
knew of the plaintiff’s bankruptcy in 2010, although they were well aware of his financial
difficulties.”).
7
By the time the Company reached its sixth year of operations in 2012,
Zachman and Chhabra each believed the other was manipulating the Company’s
accounts for personal benefit. Chhabra suspected Zachman was making illegitimate
draws from the Company’s United States bank accounts, using his control of those
accounts to draw more than his fifty-percent share of net income.40 Further
investigation led her to conclude that he had overdrawn the accounts in the amount
of $48,720 during his time with the Company.41 Zachman, in turn, suspected that
Chhabra was inappropriately transferring money to the companies in India, where
she could exercise control over the funds.42
In March 2012, Zachman visited India, and the disputes between the business
partners came to a head.43 In late March, shortly after his return, Zachman
unilaterally opened a new bank account for Real Time Data at U.S. Bank and began
to deposit revenues in this account.44 Zachman’s practice was to deposit revenues
in the U.S. Bank account, then transfer a portion of those revenues to the Company’s
40
Trial Tr. 39:20–42:5, 88:16–89:1 (Chhabra), 217:21–218:7 (Zachman).
41
DX 9, at 1 (Defendants’ summary of alleged excess draws by Zachman).
42
E.g. Trial Tr. 164:22–165:3 (Zachman testifying he was angry with Chhabra in late 2009 because
she would “take money to India” when the Company needed it to pay vendors in the United States),
165:22–166:5 (Zachman testifying that money would be in the PayPal account, then he would find
“they had already withdrawn the funds and they were off to India.”).
43
Id. at 83:1–84:2 (Chhabra); DX 16 (Defendants’ timeline of events noting March 23, 2012
meeting leading to disputes).
44
Trial Tr. 44:5–22 (Chhabra); DX 12 (transaction records for U.S. Bank account).
8
Wells Fargo bank account.45 He acknowledged he kept money back in the U.S. Bank
account and spent it on personal expenses (including a lawsuit against Chhabra in
California), but he testified that he counted these funds as part of his membership
draw or that he intended to pay them back.46 Although Zachman had indicated to
Chhabra in emails that he wanted to streamline the Company’s revenue deposits to
eliminate the use of multiple accounts, he did not inform Chhabra when he opened
the U.S. Bank account.47 He testified that while he did not tell Chhabra about his
numerous personal draws on the account, it did not matter because she learned about
them through the bank statements.48 There is no evidence, however, that Zachman
provided the bank statements for the U.S. Bank account to Real Time Data.49
Chhabra discovered the new bank account in May 2012.50 Chhabra calculated the
total funds she believed he wrongfully retained in the U.S. Bank account to be
$63,213.20.51
45
Trial Tr. 44:23–46:17 (Chhabra).
46
Id. at 218:2–219:15 (Zachman); DX 13 (Zachman’s interrogatory response summarizing U.S.
Bank draws).
47
Trial Tr. 44:5–22 (Chhabra), 167:19–168:18 (Zachman) (testifying he informed Chhabra he was
contemplating streamlining revenue deposits by starting a new bank account).
48
Id. at 223:18–224:15 (Zachman).
49
Id. at 224:16–20, 227:6–19 (Zachman).
50
Id. 44:15–18 (Chhabra).
51
DX 9, at 2; Trial Tr. at 44:23–47:9 (Chhabra).
9
Around this time, Zachman began to take steps to form a competing company,
Cloudvara, including, on May 9, 2012, purchasing a website for his new company.52
3. Chhabra Terminates Zachman’s Employment with Real Time Data
In May 2012, Zachman traveled to India again, in part to attempt to amicably
resolve differences with Chhabra over the business, but the two did not end up
meeting.53 On May 16, 2012, after Zachman’s return to the United States, Chhabra
removed Zachman as manager of Real Time Data due to his 2010 personal
bankruptcy.54 Chhabra sent a Company-wide email regarding the termination that
stated it was due to mismanagement of Company funds, failure to file the Company’s
taxes, as well as Zachman’s personal bankruptcy filing in 2010.55 In addition,
Chhabra wrote to several Real Time Data clients, stating that Zachman had been
terminated due to “financial misappropriation of funds.”56 Though he was
52
See DX 16 (Defendants’ timeline of events noting purchase of website); DX 15 (Zachman’s
solicitation email date May 19, 2012 describing Cloudvara as “an improved application hosting
experience.”).
53
Trial Tr. 84:3–85:4 (Chhabra). Chhabra testified she waited for Zachman at a hotel in New
Delhi, and he failed to show. Trial Tr. 92:22–93:7 (Chhabra). Zachman testified that he invited
her to discuss the partition of the Company in Delaware, but she declined the invitation. Trial Tr.
179:8–13 (Zachman).
54
Id. at 179:16–17 (Zachman testifying “I’ve been removed as a manager because of my
bankruptcy filing. . .”); see also DX 15 (Zachman emailing Real Time Data customers noting his
date of departure as May 16, 2012); Trial Tr. 48:4–10 (Chhabra) (testifying Zachman was
terminated in May 2012).
55
Trial Tr. 87:9–89:1 (Chhabra).
56
PX D (email dated May 23, 2012); Trial Tr. 99:8–100:8 (Chhabra).
10
terminated as a managing member, under Delaware law Zachman retained his
economic interest in Real Time Data.57
In June 2012, following Zachman’s departure, Chhabra, through Real Time
Data SPL, started a new business, Real Time Cloud.58
4. Zachman Competes through Cloudvara, and Chhabra Eliminates
His Interest in Real Time Data
Following his termination, Zachman took actions aimed at prohibiting Real
Time Data’s ability to operate in the United States. He ceased making payments to
Real Time Data vendors, and he contacted Real Time Data’s service provider
seeking to restrict access for the Company.59 Through his son, Zachman contacted
a Chicago attorney who was helping Real Time Data open a bank account and
threatened to get him disbarred.60 He filed a complaint with PayPal, alleging that
Chhabra stole his identity.61 In that complaint, Zachman claimed he was the “sole
57
See Trial Tr. 93:8–24 (Chhabra). I ruled previously on this issue. July 28, 2016 Ruling, at 7:5–
8 (“Therefore, while Mr. Zachman did not retain, post-bankruptcy, the same managerial rights that
flowed from his membership, he retained certain economic rights.”).
58
Trial Tr. 54:17–55:4, 67:5–17 (Chhabra); PX Q, Declaration in Superior Court of California,
County of Riverside, ¶ 17.
59
DX 16-A (Zachman informing Chhabra on May 18, 2012 that he will not make vendor payments
until he is given access to Real Time Data platforms); DX 16-B (Zachman emailing service
provider requesting emergency administrative privileges and suspension of access by others at
Real Time Data); see also Trial Tr. 48:24–50:12 (Chhabra).
60
DX 16-D (Zachman’s son writing about attorney who assisted Real Time Data that he “will lose
his ability to practice law for the rest of his life”); Trial Tr. 51:1–52:3 (Chhabra). Zachman filed
a lawsuit in Illinois against this Chicago lawyer. Trial Tr. 52:2–3 (Chhabra).
61
See DX 16-C.
11
manager” of Real Time Data.62 He sent letters to a company, USA2Me, to prevent
Real Time Data from acquiring a United States address.63 He filed complaints with
the police and the United States Postal Service regarding another individual
attempting to assist Real Time Data to open a new bank account in the United
States.64 Finally, having closed Real Time Data’s bank account at Wells Fargo—
thus making PayPal the Company’s sole means to receive payments—Zachman
attempted several times after his termination to block Real Time Data’s access to its
PayPal account.65
Also following his removal as manager, Zachman began to contact Real Time
Data’s customers to recruit them to join his new company, Cloudvara.66 At least one
of Zachman’s solicitations included a warning against continuing to do business with
Real Time Data: “My primary concern with my former clients is that [Real Time
Data] is now controlled by an India operation which provides you no recourse should
62
DX 16-C; Trial Tr. 50:13–24 (Chhabra).
63
DX 16-H; Trial Tr. 54:5–16 (Chhabra).
64
DX 16-E; Trial Tr. 52:4–22 (Chhabra).
65
See DX 16-G (response from PayPal regarding Zachman’s complaints); Trial Tr. 52:23–54:4
(Chhabra).
66
DX 15; Trial Tr. 57:2–58:8 (Chhabra).
12
there be any issues. I would suggest that you consider an alternative.”67 Real Time
Data began to experience high rates of customer attrition.68
In October 2012, Chhabra decided to eliminate Zachman’s interest in Real
Time Data through a merger (the “Merger”).69 In determining a value, Chhabra
chose the number that Zachman assigned to his interest in his 2010 bankruptcy
petition: $3,487.50.70 Contending that Zachman’s post-termination actions had
“caused financial harm” to Real Time Data, Chhabra applied the value of Zachman’s
interest against what she alleged he owed the Company and paid him nothing.71 At
trial, Chhabra acknowledged that these choices did not comport with the fair value
owed to Zachman under Delaware law for his interest in the company.72
Although Chhabra’s other business, Real Time Cloud, existed from June
2012, it conducted no substantial business until October 2012.73 With Real Time
67
DX 15 (June 27, 2012 email); Trial Tr. 57:23–58:8 (Chhabra). DX 15 does not include page
numbers.
68
Trial Tr. 58:9–20 (Chhabra).
69
Id. at 58:21–59:3 (Chhabra). The Amended Complaint states the date of the Merger was October
29, 2012. First Am. Compl., D.I. 77 (“Am. Compl.”), ¶ 4. The Defendants’ valuation expert
identified the Merger date as October 28, 2012. Trial Tr. 118:6–10 (Seitz).
70
Am. Compl., Ex. G (“November 25, 2012 Letter”). Zachman included the November 25, 2012
Letter as an exhibit with his Amended Complaint, but he did not include it in his trial exhibits.
The Defendants have not disputed the amount they originally assigned to his interest.
71
See id.
72
Trial Tr. 59:14–17 (Chhabra) (testifying that “on flashback, I very deeply apologize, we should
have gone by the Delaware rules. I was actually not so much aware of it. And we should have
determined the fair value.”).
73
Id. at 55:2–56:6 (Chhabra).
13
Data beginning to lose money, and in coordination with the Merger, Chhabra
migrated Real Time Data’s customers to Real Time Cloud.74 Chhabra testified that
the customers switched voluntarily, but there were no written communications
asking customers for consent to move their business.75 Instead, it appears that
Chhabra notified the customers that they would receive invoices from Real Time
Cloud rather than Real Time Data, and she considered the business voluntarily
moved when the customers paid the invoices.76
5. The Experts’ Valuations of Zachman’s Economic Interest in Real
Time Data
At trial, each side offered a valuation expert to opine on the fair value of
Zachman’s fifty-percent economic interest in Real Time Data.
a. The Defendants’ Expert, Paul Seitz
The Defendants’ valuation expert, Paul Seitz, offered his report (the “Seitz
Report”) based on financial information from the QuickBooks provided by Real
Time Data.77 He selected October 31, 2012 as the relevant valuation date because it
74
Id. at 59:18–60:17 (Chhabra); PX Q, Declaration in Superior Court of California, County of
Riverside, ¶ 17.
75
Trial Tr. 67:18–68:18 (Chhabra); PX Q, Declaration in Superior Court of California, County of
Riverside, ¶ 17.
76
Trial Tr. 67:18–68:18 (Chhabra); PX Q, Declaration in Superior Court of California, County of
Riverside, ¶ 17.
77
DX 23 (“Seitz Report”), at 1–2; Trial Tr. 136:23–139:1 (Seitz).
14
was the closest month-end to the date of the Merger.78 He considered three potential
approaches to valuation: the asset based approach, the market approach, and the
income approach (which includes the discounted cash flow (DCF) approach and the
income capitalization approach).79 Ultimately, he selected the income capitalization
approach.80
Seitz applied two key adjustments to Real Time Data’s income prior to
applying his discount rate. First, he excluded lost revenues for the clients who left
between Zachman’s termination as manager and the elimination of his economic
interest through the Merger.81 In other words, Seitz assumed that the Company’s
loss of customers was permanent, and that it would grow at a steady rate from its
reduced client base as of October 2012.82 Next, Seitz adjusted the income as he
deemed appropriate to account for taxes, litigation expenses, and the fact that neither
78
Seitz Report, at 1; Trial Tr. 118:6–10 (Seitz). Because this date did not match up with the
Company’s fiscal year, Seitz employed a trailing 12-month period to create annualized numbers.
Trial Tr. 120:3–8 (Seitz).
79
Seitz Report, at 9; Trial Tr. 118:11–119:14 (Seitz).
80
Seitz Report, at 10; Trial Tr. 118:11–119:14 (Seitz). As a service business, the assets on Real
Time Data’s balance sheet would not reflect its true value; similarly, insufficient market data made
using a market approach undesirable. Seitz Report, at 9. The Company’s fluctuating income and
lack of financial forecasts made a DCF model difficult in Seitz’ opinion, thus making the income
capitalization the optimal approach in his view. Seitz Report, at 9–10.
81
Seitz Report, at 12; Trial Tr. 120:9–121:3 (Seitz).
82
Seitz testified that he did not take the cause of these departures into account; only the financial
results for Real Time Data’s income. Trial Tr. 141:11–142:5 (Seitz).
15
Zachman nor Chhabra took a salary.83 Excluding the lost revenue from the departed
customers, Seitz concluded that Real Time Data showed an annualized income of
$41,165.84
To arrive at his discount rate, Seitz added equity risk, industry risk, size risk,
and specific company risk premiums to the risk free rate.85 He based his company-
specific risk premium on the volatility caused by Real Time Data’s management
disputes and Zachman’s competition at Cloudvara.86 Seitz also concluded that Real
Time Data essentially had no growth potential, and thus its growth rate should match
the inflation rate at 2%.87 Seitz’ final capitalization rate was 14.25%, which, applied
to his annualized income created a value for Real Time Data of $265,000.88
Therefore, under Seitz’ analysis, Zachman’s fifty-percent interest was worth
$132,500.
83
Seitz Report, at 12–13; Trial Tr. 121:4–122:17 (Seitz).
84
Seitz Report, Ex. 3, at 1; Trial Tr. 122:18–123:10 (Seitz). With the lost revenue added back,
Seitz calculated annual income at $97,273. Seitz Report, Ex. 3, at 1.
85
Seitz Report, Ex. 2, at 1; Trial Tr. 123:21–128:7 (Seitz).
86
Seitz Report, Ex. 2, at 1; Trial Tr. 123:21–128:7 (Seitz).
87
Seitz Report, Ex. 2, at 1; Trial Tr. 123:21–128:7 (Seitz).
88
Seitz Report, Ex. 3, at 1; Trial Tr. 128:24–129:8 (Seitz).
16
b. The Plaintiff’s Expert, Derek Thomas
Zachman’s expert, Thomas, did not base his valuation report (the “Thomas
Report”) on the QuickBooks provided by Real Time Data.89 Instead, Zachman
recreated the Company’s financials from scratch “based on source documents,” gave
these numbers to an accounting firm to create new QuickBooks files, and the
accounting firm provided this information to Thomas for his valuation.90 In
conducting his valuation, Thomas did not review the QuickBooks files provided by
Real Time Data or attempt to reconcile the numbers.91 He communicated with the
accounting firm and confirmed with them that they based the numbers on bank and
PayPal statements provided by Zachman.92 Thomas testified he did not use the
numbers the Company provided due to Zachman’s doubts about their accuracy.93
Also differing from Seitz, Thomas used the date of Zachman’s termination as
manager in May 2012 for his valuation, rather than the date of the Merger in October
2012.94
89
PX R (“Thomas Report”), at 2; Trial Tr. 238:6–239:8 (Thomas).
90
Thomas Report, at 2; Trial Tr. 238:6–239:8, 255:24–257:12 (Thomas).
91
Trial Tr. 254:17–255:2, 255:24–257:12 (Thomas).
92
Id. at 256:24–257:12 (Thomas).
93
Id. at 249:8–250:4 (Thomas).
94
Thomas Report, at 1.
17
Like Seitz, Thomas employed an income-based approach, but he used a DCF
model for his valuation.95 He decided on this model because he believed it was the
best fit for an early stage growth company.96 Because the company did not make
financial projections, Thomas created his own projections, forecasting a 30% growth
rate for five years, followed by a terminal growth rate of 5%.97 He made this
determination based on Real Time Data’s 50% year-to-year growth leading up to the
Merger.98
In determining Real Time Data’s income, Thomas added back in the loss of
business the Company experienced due to management disputes and Zachman’s
solicitations from Cloudvara, contending that the Company would heal from this
temporary disruption and return to normal levels of growth.99 In determining
expenses, Thomas used Zachman’s estimates of operational expenses in India.100
Thomas then adjusted for expenses he imagined the Company might require in the
future as it grew, such as the addition of another United States employee, rent,
telephone service, and salaries for Zachman and his wife.101
95
Id. at 12; Trial Tr. 240:17–19, 243:19–244:14 (Thomas).
96
Trial Tr. 240:17–19, 243:19–244:14 (Thomas).
97
Id.
98
Thomas Report, at 3.
99
Trial Tr. 242:16–243:10 (Thomas).
100
Id. at 245:3–18 (Thomas).
101
Thomas Report, at 4; Trial Tr. 245:19–248:8 (Thomas).
18
Having made these adjustments to income, Thomas’ DCF model produced an
equity value for Real Time Data at the time of Zachman’s termination of $3,364,554,
of which Zachman’s half was worth (rounded) $1,682,000.102
C. Procedural History
Each phase of this litigation was lengthened by discovery disputes, which I
refrain from recounting in full except where pertinent. Motion practice was also
complicated by the Plaintiff filing “Notices,” which were essentially supplements to
his operative complaint with ongoing allegations of wrongdoing as he uncovered
facts during discovery, as well as arguments regarding what he felt the evidence
proved.103
The Plaintiff filed his original complaint on June 3, 2014 (the “Original
Complaint”).104 The Original Complaint brought four counts against the
Defendants: (I) breach of contract, (II) fraud, (III) breach of fiduciary duty, and (IV)
a demand for access to accounting records.105 Motion practice followed. The
102
Thomas Report, at 11–12; Trial Tr. 255:24–257:12 (Thomas).
103
See Notice to Court, D.I. 120; Notice to Court, D.I. 103; Notice to Court, D.I. 101; Notice to
Court, D.I. 100; Notice to Court, D.I. 96; Notice to Court, D.I. 92; Notice to Court, D.I. 86.
104
Compl. for Damages, Debt or Breach of Contract, D.I. 1 (“Original Compl.”).
105
Id. at 3–13. The Original Complaint also contained claims for libel and identity theft, but the
text of these claims was in strikethrough script, with a notation that they had been “Dismissed in
Superior Court.” Id. at 10–12.
19
Defendants moved to dismiss.106 The Plaintiff attempted to freeze the Defendants’
assets through emergency injunctive relief.107 Both parties filed discovery
motions.108 In November 2014, the Defendants renewed their motion to dismiss.109
In March 2015, the Plaintiff renewed his request for emergency injunctive relief.110
The Defendants answered the Plaintiff’s Original Complaint on May 13,
2015.111 At the same time, Real Time Data moved to intervene as Defendant to file
counterclaims.112 On June 12, 2015, the Plaintiff moved to amend his Original
Complaint.113 I granted the Motion to Intervene from Real Time Data as well as the
Plaintiff’s Motion to Amend on August 5, 2015.114 The Plaintiff’s amended
complaint (the “Amended Complaint”) contained five counts: (I) breach of contract,
106
Defs. Real Time Cloud Services, LLC, Sangeeta Chhabra and CBS Accounting Pvt. Ltd.’s Mot.
to Dismiss the Compl., D.I. 12.
107
Motion for Expedited Proceedings, D.I. 14; Mots. Request Escrow and Custodianship by Court
of All Funds or Assets of Def. Real Time Cloud Services Including Prelim. Inj., Asset Freeze &
Other Emergency Relief, D.I. 13.
108
Defs. Mot. to Stay Disc., D.I. 17; Mot. to Compel Disc., D.I. 28.
109
Defs.’ Renewed Mot. to Dismiss, D.I. 48.
110
Mot. for Immediate Prelim. Inj., D.I. 57.
Def. Real Time Cloud Services, LLC’s Answer, D.I. 68; Defs. Sangeeta Chhabra and CBS
111
Accounting Services Pvt. Ltd.’s Answer, D.I. 70.
112
Non-Party Real Time Data Services, LLC’s Mot. to Intervene, D.I. 71.
113
Mot. to Amend Compl., D.I. 76.
114
See D.I. 87.
20
(II) unjust enrichment, (III) breach of fiduciary duty, (IV) civil conspiracy, and (V)
a request for books and records.115
On December 15, 2015, the Defendants moved for partial summary
judgment.116 Resolution of this motion was complicated by ongoing discovery
disputes and various motions from the Plaintiff.117 In a July 28, 2016 bench ruling
(the “July 28, 2016 Ruling”), I granted the Defendants’ Motion for Partial Summary
Judgment on Counts I, II, IV, and V of the Amended Complaint.118 At that bench
ruling, I determined that the Plaintiff had been terminated by operation of law under
6 Del. C. § 18-304 due to his personal bankruptcy in 2010.119 This ruling left Count
III, the breach of fiduciary duty, as the sole remaining claim.120 I specified at that
115
Am. Compl.
Defs. Real Time Cloud Services LLC, Sangeeta Chhabra, and CBS Accounting Pvt. LTD’s
116
Mot. for Partial Summ. J., D.I. 104.
117
See Tr. of 2.9.16 Telephonic Scheduling Conference, D.I. 114. The Plaintiff filed a request to
defer the Motion for Partial Summary Judgment (D.I. 107), a Motion in Support of Evidence (D.I.
111), and a Motion for Books and Records (D.I. 113). At my direction, the Plaintiff synthesized
these filings into an answer to the Motion for Partial Summary Judgment. Pl.’s Opp’n to Mot. of
Partial Summ. J. and Reply, D.I. 117. However, after briefing completed, the Plaintiff then
supplemented his response with a “Notice to Court” regarding evidence from discovery. Notice
to Court, D.I. 120. I rejected the Notice to Court as an inappropriate sur-reply and considered the
matter submitted for decision. Ltr. to Litigants, D.I. 121. The Defendants then filed a Motion for
Injunctive Relief seeking to enjoin the Plaintiff from litigating identical claims in federal court in
the Western District of Pennsylvania. Defs.’ Mot. for Inj. Relief, D.I. 122. I denied this motion
as moot on July 28, 2016. See July 28, 2016 Ruling.
118
July 28, 2016 Ruling, at 7:11–9:13.
119
Id. at 5:18–7:10.
120
Id. at 9:12–13.
21
time that I viewed the remedy for the breach of fiduciary duty as essentially a
valuation exercise of the fair value of the Plaintiff’s interest in Real Time Data.121
The Plaintiff proceeded with his claim for breach of fiduciary duty. This
commenced a contentious and motion-heavy year-and-a-half-long discovery
practice.122 During this time, the Plaintiff also requested leave to file a counterclaim
against Intervenor-Defendant Real Time Data and moved to amend his complaint a
second time.123 On February 26, 2018, I held a hearing on all outstanding motions.124
I noted at the hearing that the Plaintiff’s requested second amended complaint was
“a completely new complaint.”125 The Plaintiff agreed, but felt that “so many things
have materially changed that [he] kind of thought a redo was in order.”126 I denied
the Plaintiff’s motion to amend the complaint.127 At that same hearing, I directed the
121
Id. at 11:15–16 (“[W]hat remains in this case is the value of [Plaintiff’s] interest at the time of
the merger.”).
122
I will not recount the discovery motions in full, which are legion. See generally D.I. 127–97.
123
Pl.’s Request for Mot. for Leave to File a Sec. Am. Compl., D.I. 147; Countercl. Against
Intervenor Def. Real Time Data Services, LLC, D.I. 156 (“Pl.’s Counterclaim”). The counterclaim
against Real Time Data contained seven counts: (1) Breach of Contract; (2) Breach of Implied
Covenant of Good Faith and Fair Dealing; (3) Defamation; (4) Fraud; (5) Constructive Trust; (6)
Promissory Estoppel; and (7) Accounting from Data Services. Pl.’s Counterclaim. The Plaintiff
also filed a “Petition for Post-Merger Appraisal” requesting the Court order a third-party fairness
opinion. Petition for Post-Merger Appraisal, D.I. 167.
124
Feb. 26, 2018 Ruling.
125
Id. at 5:8–13.
126
Id. at 5:14–16.
127
Id. at 26:5–27:7.
22
parties to engage valuation experts so that the remaining claim could proceed to
trial.128
By the fall of 2018, the parties were proceeding toward trial. The filing of
expert reports led to further contentious and motion-heavy discovery disputes.129
Eventually, the Defendants filed a Motion for Summary Judgment on May 15,
2019.130 I informed the parties that I would resolve the Defendants’ Motion for
Summary Judgment post-trial, after establishing an evidentiary record.131 I held a
one-day trial on June 26, 2019. After post-trial briefing completed—with some
delays due to the Plaintiff’s request to reopen the discovery phase of the litigation—
I considered this matter submitted on December 20, 2019.132
My decision follows.
II. ANALYSIS
This case concerns the Plaintiff’s claim for a breach of fiduciary duty against
the Defendants for the loss of his economic interest in Real Time Data, a claim for
which the Defendants concede wrongdoing.133 Therefore, this case entails two
128
Id. at 23:16–25:18.
129
See generally D.I. 206–37.
130
Defs.’ Mot. for Summ. J. and to Strike Pl.’s Proposed Expert Report, D.I. 244.
131
Ltr. to Litigants, D.I. 252.
132
Ltr. to Counsel and Mr. Zachman, D.I. 273.
133
See Trial Tr. 59:14–17 (Chhabra) (testifying that “on flashback, I very deeply apologize, we
should have gone by the Delaware rules. I was actually not so much aware of it. And we should
have determined the fair value.”); see also Defs. Real Time Cloud Services, LLC, Sangeeta
23
questions. The first is how much Real Time Data was worth when Chhabra merged
Zachman out, without fair compensation, in 2012.134 The second is whether that
value must be offset by Real Time Data’s counterclaims.
Before reaching these claims, however, I address two predicate matters. The
Defendants filed motions that I preserved ruling on until after trial: (1) a motion in
limine to exclude the Plaintiff’s valuation report, and (2) a motion for sanctions
related to the Plaintiff’s discovery practice.135 In the course of addressing these
issues, I also address concerns the Plaintiff raised post-trial, including arguments
about wrongful termination and his purported need for further discovery.
A. The Defendants’ Daubert Motion to Exclude the Plaintiff’s Expert
Valuation Report
The Defendants seek to exclude the Thomas Report.136 They argue that the
Thomas Report is inadmissible under Delaware Rule of Evidence 703.137 Under
Rule 703, an expert’s report must be based on “facts or data in the case that the expert
Chhabra, CBS Accounting Pvt. Ltd. & Real Time Data Services, LLC’s Opening Post-Trial Br.,
D.I. 259 (“Defs.’ Opening Post-Trial Br.”), at 19 (“[T]he Seitz Report . . . should be accepted as
stating fair value of [Real Time Data] on the merger date was $265,000.”).
134
See July 28, 2016 Ruling, at 11:15–16 (“[W]hat remains in this case is the value of [Zachman’s]
interest at the time of the merger.”).
135
The Defendants also moved for Summary Judgment on all claims and counterclaims. Defs.’
Mot. for Summ. J. and to Strike Pl.’s Proposed Expert Report, D.I. 244. Given the existence of a
full trial record, that motion is moot, except as it regards the Defendant’s evidentiary motion,
addressed below.
136
See Defs.’ Opening Br. in Support of Their Mot. for Summ. J. and Their Daubert Mot., D.I.
244, (“Defs.’ Opening Summ. J. Br.”), at 11–15.
137
D.R.E. 703.
24
has been made aware of.”138 Where “the expert’s opinion is not based upon an
understanding of the fundamental facts of the case,” it should be excluded.139
Excluding such evidence avoids a “two-layered reliability analysis” of both the
underlying facts and the results based on those facts.140
The Defendants argue that the Thomas Report is based on financial
information that is, in turn, based on Zachman’s subjective conclusions regarding
the Company’s expenses and income.141 In addition, the Thomas Report values the
Company as of May 2012, six months prior to the Merger.142 Therefore, the
Defendants conclude, its factual basis is speculative. However, I find that these
factual issues go to the credibility of the experts and should be evaluated in light of
their testimony and the evidence put forward at trial. In other words, rather than a
misunderstanding of the fundamental facts, the Thomas Report illustrates a
disagreement about the fundamental facts, one that requires resolution. As such,
excluding the evidence is improper in this context; instead, I evaluate each experts’
credibility considering the factual record developed at trial. Therefore, I deny the
Defendants’ Motion to Strike Plaintiff’s Expert Report.
138
Id.
139
Perry v. Berkley, 996 A.2d 1262, 1271 (Del. 2010).
140
Tumlinson v. Advanced Micro Devices, Inc., 81 A.3d 1264, 1270 (Del. 2013).
141
Defs.’ Opening Summ. J. Br., at 13–15.
142
Id. at 14.
25
B. Discovery Issues
As noted in the procedural history, a contentious discovery process lengthened
every segment of this nearly six-year-old case.143 On two separate occasions,
discussed below, I ordered Zachman to produce discovery, and he either refused or
his responses were inadequate. One of these occasions warranted a presumption that
the concealed evidence (his full tax returns) supported the Defendants’ position. For
his part, Zachman contends that he requires an extensive review of the bank records
of Real Time Data’s third-party service providers so that he can verify Real Time
Data’s financial records, a contention he takes up even after trial. I address both
issues below.
1. The Plaintiff’s Discovery Abuse
The Defendants filed a motion for sanctions against Zachman for his
discovery abuses.144 As relief, they request that I bar Zachman’s expert from
testifying.145
Part of the Defendants’ discovery requests included Zachman’s full income
tax returns, which would show how much income Zachman reported from Real Time
143
The case has seen eight motions to compel, four from each side. See D.I. 28, D.I. 127, D.I. 145,
D.I. 153 (Plaintiff’s motions to compel); D.I. 144, D.I. 162, D.I. 182, D.I. 209 (Defendants’
motions to compel).
144
Defs.’ Mot. in Limine to Bar Testimony Because of Pl.’s Disc. Abuse, D.I. 254 (“Defs.’ Mot.
in Limine”).
145
Id.
26
Data. Because Zachman had the right to half the Company’s net income, this
number would indicate the Company’s total net income. Zachman refused to
produce those in full because he did not believe they were “relevant.”146 On March
5, 2019, I ruled that Zachman’s failure to produce his full tax returns warranted a
presumption that they would support the Defendants’ position.147 In other words,
Zachman’s refusal to produce this discovery estops him from establishing that Real
Time Data’s income is higher than its financial statements show. As of trial,
Zachman had still not produced the portion of his tax returns showing the amount of
income he reported as coming from Real Time Data.148
The Defendants also requested that Zachman produce his communications
with Real Time Data customers from his new company, Cloudvara. Zachman
testified that Real Time Data customers in fact left the Company to come to
Cloudvara.149 But he refused to produce communications from Cloudvara other than
sixteen emails dated before June 1, 2012, explaining in his response that he was
146
March 5, 2019 Ruling, at 24:15–25:12.
147
Id. at 35:19–36:3; Lucas v. Chistiana Skating Center, Ltd., 722 A.2d 1247, 1248 (Del. Super.
1998) (“Courts in Delaware recognize the general rule that ‘where a litigant intentionally
suppresses or destroys pertinent evidence, an inference arises that such evidence would be
unfavorable to his case.’” (quoting Collins v. Throckmorton, 425 A.2d 146, 150 (Del. Super.
1980))).
148
Trial Tr. 202:3–205:3 (Zachman).
149
Id. at 228:4–9 (Zachman).
27
attaching “all contacts for Cloudvara that could possibly be relevant.”150 I found this
production inadequate.151 On March 5, 2019, I ordered Zachman to produce—
within ten days—all documents showing his communications with Real Time Data
customers on behalf of Cloudvara.152 He did not do so. At trial, never having sought
a protective order, he continued to maintain that communications after June 1, 2012
were irrelevant to Real Time Data’s counterclaims.153
Similar to my ruling on Zachman’s refusal to produce his full tax returns, his
refusal to produce communications after June 1, 2012 warrants a presumption in
favor of the Defendants and Intervenor-Defendant that these communications would
show that from June 1, 2012 through the Merger, Zachman continued to successfully
solicit Real Time Data customers to join him at his competing company,
Cloudvara.154
150
Id. at 229:24–230:7 (Zachman).
151
March 5, 2019 Ruling, at 35:15–18.
152
Id. (“It’s clear to me that you control the Cloudvara documents. You need to respond to those
[discovery requests].”).
153
Trial Tr. 228:10–231:6 (Zachman).
154
See Lucas v. Chistiana Skating Center, Ltd., 722 A.2d 1247, 1248 (Del. Super. 1998) (“Courts
in Delaware recognize the general rule that ‘where a litigant intentionally suppresses or destroys
pertinent evidence, an inference arises that such evidence would be unfavorable to his case.’”
(quoting Collins v. Throckmorton, 425 A.2d 146, 150 (Del. Super. 1980))).
28
I find these factual presumptions sufficiently resolve the issues of the
Plaintiff’s failure to produce discovery, and I therefore deny the Defendants’ Motion
in Limine to Bar Testimony Because of Plaintiff’s Discovery Abuse.
2. The Plaintiff’s Discovery Demands
In contrast to Zachman’s obstinacy in refusing to produce discovery, his
demands for it are far-ranging. Even after trial, rather than filing his answering post-
trial brief, he filed a “Motion to Reconsider,” purportedly under Chancery Court
Rule 60, requesting that the Court reopen discovery and grant his motions to
compel.155 I denied this motion and ordered the Plaintiff to complete post-trial
briefing.156 Because the Plaintiff continues to address the issue in his post-trial
briefing, and because it is relevant to the experts’ credibility, I address it here.
To facilitate a valuation, Real Time Data produced its financial records to
Zachman in the form of QuickBooks files. Zachman, however, believes Real Time
Data is inflating its expenses, and he therefore sought to compel the bank records of
the Indian companies that provide services to Real Time Data so that he can conduct
his own reconciliation of the Company’s expenses. In other words, he wishes to
conduct a detailed financial audit of Real Time Data as a part of the litigation. At a
hearing on February 26, 2018, I recognized that satisfaction of Zachman’s discovery
155
Mot. to Reconsider and to Postpone Final Post-Trial Replies by Pl. until the Matter is Resolved,
D.I. 261.
156
Order dated October 10, 2019, D.I. 266.
29
requests—full review of six years of third-party bank records—would be “incredibly
burdensome.”157 Nonetheless, I ordered Zachman to secure an expert and have the
expert inform me whether the records were necessary to conduct a valuation.158
Three months later, Brian Mendez, CPA, submitted an affidavit stating that the
discrepancies between the numbers that Zachman provided to him and the numbers
the Company provided required third-party bank records to reconcile.159 In other
words, Mendez certified that he would need the third-party records to verify whether
Zachman’s suspicions were correct, or whether it was Zachman himself who was
providing inaccurate financials.
In an attempt to compromise, the Defendants produced a sample month—
December 2011—of all third-party bank records, reconciling in detail Real Time
Data’s expenses against these bank records.160 At argument on March 5, 2019, I
addressed this discovery dispute.161 I informed Zachman that I considered the
Defendants’ production sufficient for his purposes but that I would order further
records if his expert filed a rebuttal report explaining why the absence of such
157
February 26, 2018 Ruling, at 27:17–28:6.
158
Id. at 27:17–28:6.
159
Aff. Valuation Request of Brian Mendez, CPA, D.I. 206.
See Unsworn Foreign Declaration of Sangeeta Chhabra Supplementing Defs.’ Answer to Pl.’s
160
Mot. to Compel Disc., D.I. 227–28.
161
March 5, 2019 Ruling.
30
records supported a presumption of unreliability.162 Zachman’s expert, Thomas,
filed his rebuttal report on March 27, 2019.163 In his rebuttal, Thomas stated
essentially the same thing as Mendez: to determine if Zachman’s numbers were
correct, he needed third-party bank records.164 Neither Mendez nor Thomas,
however, offered any reason to support the contention that the Company’s financial
statements were inaccurate.
Zachman has continued to argue post-trial, however, that he needs the third-
party records. In reviewing the sample month of third-party bank records, he claims
to have found “several fraudulent entries.”165 However, he only offers “one such
example.”166 He notes that Real Time Data entered “Rent paid for Office” as a
30,000 rupee ($595.71) expense, and lists a single check number.167 The third-party,
Real Time Data SPL, deposited a check bearing the same number for 15,000 rupees
($297.86).168 From this entry, Zachman infers that Chhabra was orchestrating a
162
Id. at 40:5–13.
Letter from Pl., Ex. A, Expert Evaluation Rebuttal Reply of Derek Thomas, D.I. 242 (“Thomas
163
Rebuttal”).
164
Id. at 2.
165
Pl.’s Argument in Opp’n to Defs.’ Summ. J. and Daubert Mot., D.I. 255 (“Pl.’s Opp’n to Summ.
J.”), at 8.
166
Id. at 8.
167
Id. at 8, Ex. M.
168
Id.
31
100% markup to hide income.169 However, the expenses Real Time Data provided
list “Rent paid for Office” as comprising two deposits on the associated bank
statement from Real Time Data SPL.170 Correspondingly, Real Time Data SPL’s
bank statement shows two 15,000 rupee checks deposited.171 In other words,
Zachman claimed to have found a single inaccurate entry of less than $300, but when
bringing it to the Court, he failed to include the pages of the record that show the
entry is not, in fact, inaccurate.
In short, while Zachman is convinced Chhabra is falsifying the financial
records to hide income, he has not offered a credible basis to support this belief. A
detailed six-year audit of the Company’s financial records is not warranted by his
suspicions. I found Chhabra’s testimony regarding Real Time Data’s expenses to
be credible. By contrast, Zachman’s testimony was largely conclusory.172 The
evidence shows that he had access to Real Time Data’s financial records during the
169
Id. at 8.
170
DX 8, Ex. C, at 1.
171
DX 8, Ex. C, Annexure 1, at 4, 6. The first check has a different check number than the number
listed on the expense sheet. The expense sheet, however, identifies total rent paid for the month
and also identifies the two deposits that make up this total amount. See DX 8, Ex. C, at 1.
172
E.g. Trial Tr. 154:1–4 (Zachman) (testifying “I don’t know specifically what the answer is
[regarding “sensitive accounting activities” in the Company’s QuickBooks], but it must be
something that they want to hide; that they want other people not to see. Thus, it becomes
sensitive.”); 180:7–182:8 (Zachman) (comparing Chhabra’s business practices to Hitler’s decision
to engage the Eastern Front in World War II).
32
relevant years.173 He corresponded with the accounting personnel at the Company
regarding his inquiries.174 He corresponded with Real Time Data SPL employees
and knew about that company’s existence.175 Despite Zachman’s testimony, it
appears that he was aware of all of Real Time Data’s PayPal accounts and he was
aware of the funds moving between those accounts.176 Again, I note that Thomas,
173
See DX 7 (emails from 2007 through 2012 between Zachman and accounting personnel at Real
Time Data); Trial Tr. 27:5–21 (Chhabra).
174
DX 7, at 23, 31, 64; Trial Tr. 28:13–32:3 (Chhabra). The page numbers for DX 7 are
handwritten.
175
Trial Tr. 196:24–198:17 (Zachman); DX 31 (emails between Zachman and Real Time Data
SPL employees).
176
Zachman remains fixated on the Company’s PayPal accounts and appears to consider this issue
part of his breach of fiduciary duty claim. In his post-trial briefing, he writes, “[a]t the heart of
this dispute, is Chhabra’s PayPal merchant account.” Post-Trial Br., D.I. 271 (“Pl.’s Post-Trial
Br.”), at 24. Zachman mentioned PayPal in the factual allegations in his Amended Complaint.
Am. Compl., ¶¶ 16–18. However, he did not include issues with PayPal in his Breach of Fiduciary
Duty Count, which only addresses the Merger. See Am. Compl., ¶¶ 48–55. Even had he included
PayPal issues in his breach of fiduciary duty claim, Zachman’s evidence and testimony on this
subject is inscrutable and often contradictory. It is clear that at least two PayPal accounts existed,
and that one was in Zachman’s name, while the other was in Chhabra’s name. See DX 6, at 1
(PayPal account in Zachman’s name); PX F, at 1 (PayPal account in Chhabra’s name). Chhabra’s
account appears to have been used to move funds to India so that she could pay business expenses
and take her draws. See Trial Tr. 89:5–10 (Chhabra). Zachman testified that he did not know that
Chhabra’s PayPal account existed until February 2012, and that this was the first time he knew
any money was going to India. Trial Tr. 150:18–151:1 (Zachman). He also testified that he was
involved in disputes with Chhabra over PayPal funds going to India as early at 2009, when she
testified her PayPal account was created. Trial Tr. 161:8–167:5 (Zachman). Zachman testified
that as of late 2009, he was angry with Chhabra because she would “take money to India” when
the Company needed it to pay vendors. Trial Tr. 164:22–165:3 (Zachman). Similarly, he stated
that money would be in his PayPal account, then he would find “they had already withdrawn the
funds and they were off to India.” Trial Tr. 165:22–166:5 (Zachman). In his post-trial briefing,
Zachman continued to provide contradictory dates. He wrote that a PayPal 1099 form—which he
testified alerted him to Chhabra’s PayPal account—“came in in February 2012 . . . and the full
PayPal records were not discovered until [I] received them in January 2014 from PayPal. Prior to
January 2014, the only PayPal records [I] had access to were provided to [me] by Defendants in
May 201[1].” Pl.’s Post-Trial Br., at 35. The exhibit referenced—Zachman submitted further
exhibits with his post-trial brief—shows these PayPal records are from May 2011. Pl.’s Post-Trial
33
Zachman’s expert, has failed to substantiate Zachman’s allegations of false Real
Time Data financials.
Considering the above, my pre-and-post-trial rulings stand denying
Zachman’s motions to compel additional discovery from the third-party Indian
companies that would allow him to conduct a financial audit of Real Time Data.
Zachman has not put forward evidence that creates doubt about the Company’s
financial records sufficient to warrant reopening the record. Moreover, as discussed
above, Zachman’s failure to produce his tax returns in full warranted an evidentiary
presumption in favor of the accuracy of Real Time Data’s QuickBooks.177
C. The Plaintiff’s Claim for Breach of Fiduciary Duty
Delaware’s common law fiduciary duties apply to mangers and managing
members of Delaware LLCs.178 An LLC may eliminate those common law duties
Br., Ex. D. The Defendants’ counsel examined Zachman at trial regarding emails showing that he
helped Chhabra set up a PayPal account in 2009, and that he in fact received security cards for this
account. Trial Tr. 208:2–210:22 (Zachman). First, Zachman testified that the “PayPal virtual
terminal” he helped set up was not a bank account and so these emails did not relate to Chhabra’s
account, though he did not produce evidence to support this. Trial Tr. 209:10–210:9 (Zachman).
He then testified regarding the account, “I knew it was a PayPal account, but they weren’t using it
to pay expenses . . . they were taking all the money out on the first of the month to PayPal, there
was no money left to pay [vendors].” Trial Tr. 210:15–22 (Zachman). Given this collection of
contradictory testimony and lack of evidence, it is impossible for me to credit Zachman’s
allegation that Chhabra stole his identity to create a secret PayPal account that she used to siphon
off money from the Company. See Am. Compl., ¶¶ 16–18; Pl.’s Post-Trial Br., at 24–25.
177
March 5, 2019 Argument, at 35:19–36:3 (“With respect to the tax records, they should have
been produced . . . I think the easiest thing to do with those is just to assume that they would
support [the Defendants’] proposition, which is that Mr. Zachman certified the Real Time
accounting through his verification to the federal government as to the sums he’s received.”).
178
Feeley v. NHAOCG, LLC, 62 A.3d 649, 661 (Del. Ch. 2012) (citing 6 Del. C. § 18-1104; 6 Del.
C. § 18-1101(c)). I note that Defendant Real Time Cloud was a separate entity unrelated to Real
34
in its operating agreement, provided that it does so clearly.179 By contrast, LLCs
“may not eliminate the contractual covenant of good faith and fair dealing.”180 Real
Time Data’s Operating Agreement does not eliminate fiduciary duties, and so by
default, the Defendants owed fiduciary duties and obligations of good faith and fair
dealing to Zachman.181 Zachman, although he continues to argue a wide array of
wrongs, essentially claims the Defendants breached that fiduciary duty when they
eliminated his economic interest through the Merger in 2012.182
Time Data, and the Plaintiff has not raised any convincing argument that Real Time Cloud would
owe fiduciary duties. The Defendants, however, do not attempt to distinguish Real Time Cloud
regarding liability for the breach of fiduciary duty claim.
179
6 Del. C. § 18–1101(e); Bay Ctr. Apartments Owner, LLC v. Emery Bay PKI, LLC, 2009 WL
1124451, at *9 (Del. Ch. Apr. 20, 2009) (requiring elimination of common law fiduciary duties by
an LLC to be “plain and unambiguous”).
180
6 Del. C. § 18-1101.
181
See Operating Agreement.
182
This Court may exercise discretionary leniency toward pro se litigants to ensure their claims
do not fail on technicalities. See Aziz v. Tsappas, 2019 WL 6724426, at *1 (Del. Ch. Nov. 1,
2019); Durham v. Grapetree LLC, 2014 WL 1980335, at *5 (Del. Ch. May 16, 2014). Zachman
spends the majority of his post-trial briefing arguing that 10 Del. C. § 18-304 is void under the
Takings clause of the U.S. Constitution and that Chhabra’s attempt to use his personal bankruptcy
as grounds to terminate his employment at Real Time Data was anathema to our nation’s founding
document. Pl.’s Post-Trial Br., at 1–24. Zachman also argues his termination was illegal under
federal statute. Pl.’s Post-Trial Br., at 30–31. I ruled on the issue of Zachman’s termination at
summary judgment several years ago, holding that it occurred as a valid operation of law and that
the Defendants did not consent to maintaining Zachman as an LLC member. See July 28, 2016
Ruling, at 5:18–7:10. Despite the leniency granted to pro se litigants, this issue has been ruled on;
it is the law of this case. Having ruled on the validity of his termination, I will not reconsider that
issue here.
35
1. Liability
Under 6 Del. C. § 18-304, “[a] person ceases to be a member of a limited
liability company,” if that person “[f]iles a voluntary petition in bankruptcy.”183
Accordingly, in May 2012, Chhabra expressed that Zachman’s membership in Real
Time Data, and his manager status, had ended by operation of Delaware law due to
his personal bankruptcy in 2010.184 At that point, under Milford Power Co., LLC v.
PDC Milford Power, LLC,185 Zachman became an “assignee” with economic rights
but no membership rights.186 Acting on the managerial control this termination gave
her, on October 29, 2012, Chhabra merged Real Time Data with RTDS LLC,
converting Zachman’s interests as an assignee into cash value.187 To assign a value,
she chose the number Zachman assigned to his interest in his 2010 bankruptcy
petition: $3,487.50.188 Alleging that Zachman’s post-termination actions had
“caused financial harm” to Real Time Data, Chhabra applied the value of Zachman’s
interest against what she alleged he owed the Company and paid him $0.189
183
6 Del. C. § 18-304.
184
See November 25, 2012 Letter.
185
866 A.2d 738 (Del. Ch. 2004).
186
Id. at 762 (“[6 Del. C.] § 18-304 means that a member who files for bankruptcy still ceases to
be a member, but becomes an assignee with the economic rights specified in [6 Del. C.] § 18–
702(b).”).
187
See November 25, 2012 Letter.
188
Id.
189
Id.
36
The Defendants do not dispute this narrative. At trial, Chhabra testified that
“during that time period [i.e. the Merger] . . . we had used the value which [Zachman]
had put for the company in Bankruptcy filed in 2010. But today, of course, we have
requested Mr. Paul Seitz to do the fair value of the company.”190 Chhabra also
expressly conceded wrongdoing, testifying, “we should have gone by the Delaware
rules . . . we should have determined the fair value.”191
I agree with Chhabra’s concession. As a manager of the LLC and controller
of the LLC’s other member, CBS Accounting, Chhabra owed fiduciary duties as
well as the obligation of good faith and fair dealing to Zachman. Her selection of
the Merger value was a pretextual opportunity to avoid paying Zachman anything
for his interest in the Company he had co-founded. The proper way to remedy this
breach, I find, is to determine the fair value of Zachman’s interest, and award him
damages.
2. Damages
The parties submitted expert reports, and both experts testified at trial as to
the fair value of Zachman’s interest. To reach their numbers, the experts valued
Zachman’s interest at different dates, based the Company’s income on different
190
Trial Tr. 94:20–24 (Chhabra).
191
Id. at 59:14–17 (Chhabra).
37
financial records, and employed different valuation approaches.192 The Defendants’
expert, Paul Seitz, valued Zachman’s interest in Real Time Data at $132,500, while
the Plaintiff’s expert, Thomas, valued Zachman’s interest at over twelve times this
amount, $1,682,000.193
a. The Relevant Date for the Valuation of Zachman’s Interest is
the Merger in October 2012
Real Time Data terminated Zachman as manager in May 2012.194 Chhabra
eliminated his economic interest in the Company through the Merger in October
2012.195 Zachman argues that the valuation date ought to be his termination date in
May, and his expert, Thomas, uses this earlier date in calculating the value of the
Company.196 I find the proper date of the valuation is October 2012 for two reasons.
First, October 2012 is when Chhabra eliminated Zachman’s interest without
proper compensation, and thus Zachman’s claim arose at that time. Zachman’s
argument that his interest should be valued as of May 2012 is based on the contention
that his termination was wrongful.197 I have already found, however, that Zachman’s
192
See Seitz Report; Thomas Report.
193
Seitz Report, at 15; Thomas Report, at 1.
194
DX 15 (Zachman emailing Real Time Data customers noting his date of departure as May 16,
2012); Trial Tr. 48:8–11 (Chhabra).
195
As noted, the Amended Complaint states the date of the Merger was October 29, 2012. Am.
Compl., ¶ 4. Seitz identified the Merger date as October 28, 2012. Trial Tr. 118:6–10 (Seitz).
196
Pl.’s Post-Trial Br., at 36–37; Thomas Report, at 1.
197
See Pl. Post-Trial Br., at 30–31 (arguing that his termination as manager was unlawful under
11 U.S.C. § 525).
38
termination was merely the Defendants’ acknowledgement of his removal by
operation of law under 6 Del. C. § 18-304 at the time of his 2010 bankruptcy.198 The
interest held by Zachman thereafter was eliminated in October of 2012; its value at
that time is the measure of his damages.199
b. The Value of Zachman’s Interest in Real Time Data as of
October 2012 is $173,000
When evaluating parties’ expert opinions, “[t]he Court may evaluate the
valuation opinions submitted by the parties, select the most representative analysis,
and then make appropriate adjustments to the resulting valuation.”200 I find the Seitz
Report, along with Seitz’ trial testimony, more reliable, and so I utilize it, with
adjustments, to determine the value of Zachman’s interest. Two factors lead me to
this conclusion.
198
July 28, 2016 Ruling, at 6:9–14.
199
I note that it would be inequitable to value Zachman’s shares at the earlier date. After his
termination in May 2012, Zachman engaged in a campaign to prevent Real Time Data from
operating in the United States. See DX 16-A through H. He also started a competing company
and, by his own admission, successfully solicited Real Time Data’s customers. Trial Tr. 228:4–9
(Zachman). Having eroded the value of Real Time Data for six months leading up to the Merger,
he cannot argue that this Court of equity should ignore the downturn in its financial performance.
200
In re Appraisal of Dell Inc., 2016 WL 3186538, at *20 (Del. Ch. May 31, 2016), aff’d in part,
rev’d in part sub nom. Dell, Inc. v. Magnetar Glob. Event Driven Master Fund Ltd., 177 A.3d 1(Del. 2017).
39
First, the Plaintiff’s expert, Thomas, valued Zachman’s interest as of May
2012.201 Seitz, by contrast, used the Merger date in October 2012, which I have
found above to be the appropriate date.202
Second, the experts based their valuations on different financial records. Seitz
used financial information from the QuickBooks supplied by Real Time Data.203
Thomas used financial information from the QuickBooks he received from an
accounting firm that Zachman engaged to “recreate” Real Time Data’s financial
statements “from scratch” based on “source documents” that were provided by
Zachman.204 Thomas testified that he discussed the source documents with the
accounting firm, but that he did not reconcile the numbers to the Company’s
financial information.205
Zachman simply had no credible basis for the financial figures he supplied to
Thomas, and Thomas’ use of those figures led to two problems highlighted in Seitz’
rebuttal and at trial. Zachman, due to his unwillingness to use the Company’s
QuickBooks, simply guessed at the expenses related to Real Time Data’s operations
201
Thomas Report, at 1.
202
Seitz Report, at 1.
203
Id. at 4–5.
204
Thomas Report, at 2.
205
Trial Tr. 256:24–257:12 (Thomas).
40
in India.206 Based on Chhabra’s and Seitz’ credible trial testimony and Real Time
Data’s financials, Zachman severely underestimated these expenses. For example,
Zachman would not agree how many people Real Time Data employed. To “prove”
his estimates of personnel expenses in India, he offered a photograph he had
apparently taken on a trip to the Company showing a room with six people in it and
two empty chairs.207 Given that the Company operated in two shifts, he argued this
photo demonstrated the Company employed at most fifteen to eighteen people.208
Seitz testified that based on the Company’s records—which trial testimony and a
review of the evidence gave no reason to suspect—Thomas underestimated expenses
from 2007 to 2011 by approximately $682,000.209
The second problem with Thomas’ reliance on Zachman’s numbers is that
Zachman inflated Real Time Data’s income figures. On cross-examination,
Zachman could not explain the fact that the income he alleged Real Time Data
206
Id. at 238:6–239:4 (Thomas). I have already discussed at length why I found Zachman’s
suspicions unfounded and denied him the opportunity to conduct what amounted to a financial
audit through discovery.
207
Zachman included this photograph with his trial exhibits; it appears from a hand-written
annotation in the corner to be PX Z.
208
Trial Tr. 184:9–185:7 (Zachman) (testifying “[t]he reason I know [the number of employees is]
a fictitious number is because I’ve been to India. And that’s a picture of the office. That office is
approximately 12 feet wide by about 20 feet, 25 feet deep. Holds about six to seven engineers . .
. [s]o at any given time, there was maybe six people or seven people in that room and rotating
through there was at most 15 to 18 at any -- on the payroll at any given time. So [Defendants’]
number is false.”).
209
Id. at 112:16–115:19 (Seitz).
41
generated was significantly higher than the income he reported on his personal tax
returns.210 For example, based on the numbers that Zachman provided to the
accounting firm, Thomas found that Real Time Data had a net income of
$312,436.13 in 2010 and $422,171.98 in 2011.211 In 2010, Zachman reported a joint
income, together with his wife, of $53,000.212 He stated the discrepancy was due to
income he had earned but had not yet moved to his personal bank accounts, though
he offered no evidence to support this statement.213 Moreover, I found that
Zachman’s refusal of this Court’s order to produce his complete personal tax returns
during discovery created a presumption in favor of Real Time Data’s income
figures.214 He cannot now establish that the Company’s income was three to four
times what he reported to the federal government.
I found both Chhabra’s and Seitz’ testimony regarding Real Time Data’s
finances credible, and I therefore find the numbers in the Seitz Report to be the most
reliable indication of the Company’s value. However, I found Seitz’ estimates
210
Id. at 206:6–207:7 (Zachman). As I noted above, although Zachman produced portions of his
tax returns, he refused to produce the exhibits that showed how much income he reported from
Real Time Data. See supra, Section II.B.1; see also March 5, 2019 Ruling, at 24:15–25:12.
211
Thomas Report, at Schedule 7.
212
Trial Tr. 202:3–204:12 (Zachman). As noted earlier, Zachman never produced his full tax
returns, and so the Defendants were unable to identify the amount he reported to the government
as income from Real Time Data.
213
Id. at 206:20–207:7 (Zachman).
214
March 5, 2019 Ruling, at 35:19–36:3.
42
regarding Real Time Data’s growth, given its early year-over-year expansion,
unduly conservative. Therefore, to find fair value, I utilize the numbers and income
capitalization model provided in the Seitz Report, but I adjust the long-term
company growth rate from Seitz’ prediction of 2% to Thomas’ higher prediction of
5%, to account for the Company’s early-years hyper-growth. Applying a 5% long-
term growth rate to Seitz’ model produces an equity value for Real Time Data at the
date of the Merger of $346,000. Zachman’s fifty-percent economic interest is worth
$173,000.
D. Real Time Data’s Counterclaims215
Real Time Data, as Intervenor-Defendant, filed counterclaims against
Zachman for conversion, violation of the Deceptive Trade Secret Act, and tortious
interference with contract.216 The Defendants seek to have any award from Real
Time Data’s counterclaims offset their liability owed for the fair value of Zachman’s
interest resulting from the breach of fiduciary duty claim.217 I find, however, that
215
Real Time Data filed its counterclaims on September 8, 2015. Countercl. by Intervenor-Def.
Real Time Data Services, LLC, D.I. 93. On October 19, 2016, Zachman requested leave to file a
“Supplemental Answer & Counterclaim Against Intervener Defendant Real Time Data Services,
Inc.” D.I. 142. Zachman sought to bring seven counts against Real Time Data: (1) Breach of
Contract, (2) Breach of Implied Covenant of Good Faith and Fair Dealing, (3) Defamation; (4)
Fraud; (5) Constructive Trust, (6) Promissory Estoppel, and (7) Accounting from Data Services.
Id. I consider Zachman’s request for leave to file this counterclaim denied under my ruling of
February 26, 2018, where I denied his request for leave to file a second amended complaint, for
the same reasons stated in that ruling. See February 26, 2018 Ruling, at 25:19–27:7.
216
Countercl. by Intervenor-Def. Real Time Data Services, LLC, D.I. 93.
217
The Defendants, in their briefing, often fail to distinguish between the Defendants and the
Intervenor-Defendant, Real Time Data. E.g. Def. Real Time Cloud Services, LLC, Sangeeta
43
the Intervenor-Defendant has failed to establish an entitlement to damages or an
offset.
1. Conversion
Conversion is “any distinct act of dominion wrongfully exerted over the
property of another, in denial of [the plaintiff’s] right, or inconsistent with it.”218
Real Time Data argues that Zachman is liable for conversion because he overdrew
on the Company’s bank accounts over several years and because he withheld
revenue deposits in his secret U.S. Bank account, using the funds to pay for personal
items.
For this counterclaim, the burden is on the Intervenor-Defendant to prove that
Zachman’s draws and withholding of funds amounted to conversion. As proof of
the overdraws, the Intervenor-Defendant submitted a one-page chart into evidence
showing a summary of how much it calculates Zachman overdrew the Company’s
bank accounts from fiscal years 2005 through 2013.219 Chhabra testified she created
this chart from bank statements with the help of an accountant.220 The number is
Chhabra, CBS Accounting Pvt. Ltd. and Real Time Data Services, LLC’s Reply Post-Trial Br.,
D.I. 272, at 1 (naming Real Time Data simply as a “Defendant”), 5 (stating that “Zachman has
failed to rebut the prima facie showing that supports Defendants’ claim against him.”). I have
attempted to distinguish the Defendants from the Intervenor-Defendant throughout this Opinion
for the sake of clarity, although in some situations the distinction is immaterial.
218
Kuroda v. SPJS Holdings, L.L.C., 971 A.2d 872, 889 (Del. Ch. 2009) (citing Drug, Inc. v. Hunt,
168 A. 87, 93 (Del. 1933)).
219
DX 9, at 1.
220
Trial Tr. 39:17–41:20 (Chhabra).
44
$48,720.221 Regarding the U.S. Bank account Zachman opened, Chhabra followed
the same approach, compiling expenditures and withdrawals into a one-page chart
with the aid of bank statements and an accountant and reaching a final number
labeled “Unexplained Withdrawal” of $63,213.20.222
These summary charts do not cite to or provide the bank statements or
financial records from which the data is compiled.223 The charts add together the
categories “Summary of Money excessively withdrawn” and “Unexplained
Withdrawal” to create “Total Money recoverable from Mr. Zachman.”224 This falls
short of Real Time Data’s burden of proof on this claim. The evidence offered does
not permit the Court to weigh whether these withdrawals and withholdings were
tortious; instead, Real Time Data essentially asks me to assume wrongdoing and rely
on its calculations, for which it provides only cumulative summaries. Zachman, too,
has explanations regarding the amounts of his withdrawals and withholdings.225
221
DX 9, at 1.
222
DX 9, at 2; Trial Tr. 44:23–46:1 (Chhabra).
223
The Defendants provided some of the bank statements for the U.S. Bank account in DX 12,
sample bank statements from Wells Fargo and Wachovia in DX 2, and a sample month of account
activity in the Wells Fargo account in DX 25. These sample bank statements were included to
demonstrate Zachman’s access to the accounts and to show the flow of money within the
Company. Trial Tr. 15:5–19:4 (Chhabra). The Defendants argue these sample bank statements
support Chhabra’s testimony at trial that she was able to trace funds and make calculations as to
the amount tortuously converted, as summarized in DX 9. Defs.’ Opening Post-Trial Br., at 8–9.
The summary charts in DX 9, as noted, do not reference any underlying bank statements or
financial records.
224
DX 9, at 1–2.
225
Trial Tr. 218:2–219:15 (Zachman).
45
Given the summary nature of Real Time Data’s evidence, I have no way to evaluate
credibility or compare the validity of the competing allegations, and so I cannot find
that it is more likely than not that Zachman’s withdrawals or retention of funds
constituted conversion.
2. Tortious Interference with Contract226
Tortious interference with contract requires showing “(1) a valid contract, (2)
about which the defendants have knowledge, (3) an intentional act by defendants
that is a significant factor in causing the breach of the [contract], (4) done without
justification, and (5) which causes injury,” that is, cognizable damages.227 The
Intervenor-Defendant argues that I should award damages because Zachman
tortuously interfered with its contracts following his termination from the Company.
The Intervenor-Defendant argues as follows, based on the evidence at trial:
Real Time Data had valid contractual relationships with its customers; Zachman
knew about those contracts because he helped obtain them through his marketing
role at the Company; after his termination, he intentionally emailed Real Time Data
customers and asked them to end their contractual relationship with Real Time Data
226
As noted, Real Time Data also filed a counterclaim for violation of the Deceptive Trade Secret
Act. Because the Intervenor-Defendant did not address this counterclaim in post-trial briefing, I
consider it waived.
227
Great Am. Opportunities, Inc. v. Cherrydale Fundraising, LLC, 2010 WL 338219, at *9 (Del.
Ch. Jan. 29, 2010).
46
and move to Cloudvara.228 Further, Real Time Data argues Zachman’s interference
was without justification: he used its customer list—which it claims is a trade secret;
he attempted to win the customers, at least in part, by disparaging the Company,
insinuating that conducting business with an India-based company was unduly risky;
and he otherwise engaged in wrongful behavior to stymie its business.229 Finally,
Real Time Data argues it was damaged, witnessing a spike in customer loss that, due
to Zachman’s discovery abuse, I should presume resulted from Zachman’s efforts at
Cloudvara.230
I note that the Intervenor-Defendant failed to allege that Zachman caused a
breach of any particular Real Time Data contract. The counterclaim appears to be a
mispled claim for tortious interference with business relationships.231 In any event,
I find that the Intervenor-Defendant’s claim founders on the shoal of justification.
Real Time Data argues that it was damaged because Zachman poached its customers.
Once Zachman was terminated, he was free to compete; the parties could have, but
did not, have a non-compete contract. Telling consumers that Real Time Data no
228
Defs.’ Opening Post-Trial Br., at 22–25.
229
Id. at 26–27; DX 15 (June 27, 2012 email suggesting Real Time Data had unsafe business
risks); Trial Tr. 57:23–58:8 (Chhabra). DX 15 does not include page numbers.
230
Defs.’ Opening Post-Trial Br., at 27–29.
231
For tortious interference with contract, Delaware law requires “an intentional act by defendants
that is a significant factor in causing the breach of the [contract].” Great Am. Opportunities, 2010
WL 338219, at *9. In their post-trial brief, the Defendants re-style this element as “Mr. Zachman’s
Intentional Act Caused The Contracts To Be Terminated”; interference with contract requires the
defendant contribute to a breach, not merely a termination. Defs.’ Opening Post-Trial Br., at 22.
47
longer had an American presence, a true fact, and insinuating that dealing with such
an entity is riskier than dealing with an American entity, is not, per se, unjustified
competition.232 Zachman, at the time he took the acts complained of, was not a
fiduciary for Real Time Data, nor has the Intervenor-Defendant pled a cause of
action sounding in breach of fiduciary duty. Some of Zachman’s behavior, post-
termination, such as directing his son to interfere with the relationship between the
Company and its outside counsel, is not admirable, but again, the Intervenor-
Defendant has not pled unfair competition, only interference with its contractual
relationship with customers.
The Intervenor-Defendant, in post-trial briefing, makes a half-hearted effort
to suggest that Zachman’s use of Real Time Data’s customer list to contact and
poach clients is the unjustified act leading to liability for intentional interference
with contract.233 The counterclaim, I note, stated a cause of action for improper use
of trade secrets concerning the customer list, but the Defendants did not brief the
issue post-trial, and I deem the claim waived. Can the same claim support the
interference tort? I make no determination whether the Delaware Trade Secret Act234
232
DX 15 (June 27, 2012 email) (“My primary concern with my former clients is that [Real Time
Data] is now controlled by an India operation which provides you no recourse should there be any
issues. I would suggest that you consider an alternative.”). DX 15 does not include page numbers.
233
Defs.’ Opening Post-Trial Br., at 26.
234
6 Del. C. §§ 2001–2009.
48
has preempted this common law tort where premised on misuse of trade secrets,
because the trial record is bereft of evidence that Real Time Data’s customer lists
were maintained as trade secrets.235 The Intervenor-Defendant has failed to
demonstrate that Zachman’s efforts to poach customers were unjustified, rather than
permitted, competition; therefore, I find that this counterclaim cannot support an
offset against the amounts owed Zachman.
III. CONCLUSION
The Defendants’ Daubert Motion and Motion in Limine to Bar Testimony
Because of Plaintiff’s Discovery Abuse are denied. The Defendants’ Summary
Judgement motion is moot. I deny the Intervenor-Defendant’s counterclaims for
conversion and tortious interference with contract. The Defendants are liable for
breach of fiduciary duty and must pay the Plaintiff the value of his interest in Real
Time Data as of the date of the Merger in October 2012. I find the value of
Zachman’s interest is $173,000, plus interest at the legal rate.236 The parties should
confer and submit an appropriate form of order.
235
In their mooted Motion for Summary Judgement, the Defendants attached a statement from
Chhabra asserting, in conclusory fashion, that customer lists were treated as trade secrets, but that
statement was not made a part of the trial record. See Defs.’ Opening Summ. J. Br., App’x, at
115–16 (unsworn foreign declaration from Chhabra stating, “[t]he list of [Real Time Data] clients
contained information that was not available as a compilation from public records and was kept
confidential by [Real Time Data] before it was used by James Zachman to contact [Real Time
Data] clients.”).
236
Citrin v. Int’l Airport Centers LLC, 922 A.2d 1164, 1167 (Del. Ch. 2006) (“A central purpose
of pre-judgment interest is to ensure that a plaintiff to whom payment was owed does not suffer
injury by the defendant’s unjustified delay. By requiring the defendant to pay a fair rate of interest
49
during the period of unjustifiable delay, pre-judgment interest helps make the plaintiff more whole,
while depriving the defendant of a windfall.”).