Hawkins v. Daniel

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
SHARON HAWKINS, individually and )
derivatively on behalf of MEDAPPROACH, L.P., )
)
Plaintiff, )
)
v. ) C.A. No. 2021-0453-JTL
)
W. BRADLEY DANIEL, an individual, and )
MEDAPPROACH HOLDINGS, INC., a )
Delaware corporation, )
)
Defendants, )
)
and )
)
MEDAPPROACH, L.P., a Delaware limited )
partnership, )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: August 10, 2021
Date Decided: August 24, 2021
Richard I. G. Jones, Jr., John G. Harris, BERGER HARRIS LLP, Wilmington, Delaware;
Attorneys for Plaintiff.
David J. Teklits, Sara Toscano, MORRIS, NICHOLS, ARSHT & TUNNELL LLP,
Wilmington, Delaware; Jeffrey Alan Simes, GOODWIN PROCTER LLP, New York, New
York; Attorneys for Defendants.
LASTER, V.C.
MedApproach, L.P. (the “Partnership”) is a Delaware limited partnership that
dissolved on February 28, 2021. As its principal asset, the Partnership owns shares
representing 75% of the issued and outstanding equity of N.D. Management, Inc. (the
“Majority Shares”).
Defendant W. Bradley Daniel is the sole owner of defendant MedApproach
Holdings, Inc. (“Holdings”), which serves as the general partner of the Partnership. Under
the limited partnership agreement governing the Partnership, Holdings has the obligation
to wind up the affairs of the Partnership, which includes maximizing the value of its assets.
Over two decades ago, the Partnership’s predecessor executed an irrevocable proxy
that granted three individuals the authority to vote the Majority Shares (the “Irrevocable
Proxy”). One of the proxyholders has died. Daniel is one of the two remaining
proxyholders.
Plaintiff Sharon Hawkins owns 88% of the limited partner interests in the
Partnership. She seeks a declaratory judgment that the Partnership can sell the Majority
Shares free and clear of the delegation of voting authority conferred by the Irrevocable
Proxy. She also seeks equitable relief to ensure that Daniel and Holdings do not favor
Daniel’s interests by insisting on selling the Majority Shares subject to the Irrevocable
Proxy.
This action thus presents two narrow issues. The first requires applying the language
of the Irrevocable Proxy to a sale of the Majority Shares during the winding up process.
The second requires evaluating the fiduciary duties that Daniel and Holdings owe during
the winding up process. Both questions arose recently as a result of the Partnership
dissolving.
The defendants have moved to dismiss the complaint under Rule 12(b)(3). They
maintain that the court should dismiss this case in favor of a lawsuit that the plaintiff filed
eight years ago—in 2013—and which remains pending in the United States District Court
for the Southern District of New York (respectively, the “New York Action” and the “New
York Court”).
Over the years, the New York Court has issued a string of decisions and has disposed
of a series of claims relating to the Partnership. The sole remaining claim before the New
York Court concerns compensation that Daniel paid himself in 2016 and 2017. That claim
appears to be headed to trial.
In their effort to obtain dismissal, the defendants invoke both the doctrine of forum
non conveniens and the concept of claim splitting. Neither warrants the court declining to
proceed with the case. The narrow claims that Hawkins has filed here are distinct from the
issues that the New York Court has addressed and from the compensation issues that the
New York Court will adjudicate. Moreover, it would result in considerable inefficiency for
Hawkins to present her current claims in the New York Action, which would force that
long-running case to return to the pleading stage. This decision therefore denies the
defendants’ motion.
I. FACTUAL BACKGROUND
The facts are drawn from the complaint, the documents that it incorporates by
reference, and the materials submitted in connection with the Rule 12(b)(3) motion. When
2
considering a motion under Rule 12(b)(3), the trial court can consider sources of
information extrinsic to the complaint. Focus Fin. P’rs, LLC v. Holsopple, 250 A.3d 939,
952 (Del. Ch. 2020).
A. The Sublicense
The distant origins of the current dispute lie in the awarding of a sublicense to
manufacture, market, and distribute RU-486, an oral abortifacient (the “Sublicense”). A
French pharmaceutical company granted a license to manufacture, market, and distribute
RU-486 in the United States to Population Council, Inc. (“Popco”), an international not-
for-profit corporation focused on family planning. Compl. ¶¶ 13–14. Popco granted the
Sublicense to Joseph D. Pike. Id. ¶ 15.
As the operating entity to own the Sublicense and pursue the commercialization of
RU-486, Pike formed Danco Laboratories, Inc. That entity started its existence as a
company formed under the law of the Cayman Islands. It subsequently became a Delaware
limited liability company called Danco Laboratories, LLC. See Dkt. 16, Ex. C ¶ 17. This
decision refers to it as “Danco Labs.”
Pike created Neogen Investors LP (“Neogen LP”), a California limited partnership,
as a holding company that owned all of the equity in Danco Labs. Neogen LP’s successor
is a California limited partnership called Danco Investor Group L.P. Id. ¶ 18. Pike raised
capital from investors by selling limited partner interests. For simplicity this decision refers
to the limited partnership as “Danco LP.”
Pike formed N.D. Management, Inc. as the general partner of Danco LP. Because
of its role, this decision refers to N.D. Management as “Danco GP.” That entity also started
3
its existence as a company formed under the law of the Cayman Islands. Danco GP
subsequently became a Delaware corporation. Danco GP remains the sole general partner
of Danco LP. Compl. ¶¶ 16, 37.
Pike originally owned 100% of the stock in Danco GP. Through Danco GP, he
controlled Danco LP. Through Danco LP, he controlled Danco Labs. See id. ¶ 16.
B. Mr. And Mrs. Hawkins Become Involved.
In 1995, non-party Gregory Hawkins met Pike through a mutual friend. Id. ¶ 17.
Gregory Hawkins is the husband of the plaintiff, Sharon Hawkins.1
When the meeting took place, Pike was soliciting investments in Danco LP. The
mutual friend who introduced Mr. Hawkins to Pike suggested that Mr. Hawkins invest
through a fund managed by his cousin. The cousin was Daniel. Id.
1
My usual practice is to refer to individuals using their last names without
honorifics, or alternatively to use first names. This decision departs from that practice and
refers to Gregory and Sharon Hawkins, respectively, as “Mr. Hawkins” and “Mrs.
Hawkins.” It does so because the investment that Mr. and Mrs. Hawkins made has given
rise to many judicial decisions, and those appellations track how other courts have referred
to Mr. and Mrs. Hawkins.
This decision adopts a series of other designations, including short-hand labels for
entities and provisions in the relevant agreements. During future proceedings in this case,
the court asks the parties to use the terms from this decision. The court has attempted to
frame them neutrally, and the court finds them helpful for thinking about the dispute. It
will be inefficient for each side to persist with its own set of defined terms, then for the
court to have to translate those alternative usages. That might seem to go without saying,
but parties too often ignore the court’s terms and continue using their own divergent
nomenclatures.
4
Daniel formed MedApproach L.P. (“Old MedApproach”), a Tennessee limited
partnership, as a special purpose vehicle to invest in Danco LP. Id. ¶ 18. The general partner
of Old MedApproach was Bio-Pharm Investments, Inc., a Tennessee corporation. Daniel
owned all of its shares. See Dkt. 16, Ex. C ¶ 25.
Mr. Hawkins purchased limited partner interests in Old MedApproach. Compl. ¶¶
19–20. Old MedApproach purchased limited partner interests in what became Danco LP.
C. The Settlement Agreement, The Irrevocable Proxy, And The Addendum
In 1996, Popco learned that Pike had a prior criminal conviction. Popco sued Pike
to cancel the Sublicense. Compl. ¶ 23.
Mr. Hawkins worked with Daniel and other investors to broker a solution. In 1997,
their efforts resulted in an agreement to eliminate Pike’s control over Danco GP (the
“Settlement Agreement”). Danco GP had (and continues to have) only 100 shares that were
issued and outstanding. Under the terms of the Settlement Agreement, Pike committed to
sell 75 shares, representing 75% of the equity in Danco GP, to Old MedApproach. Those
75 shares comprise what this decision calls the “Majority Shares.” Pike would retain the
other 25 shares, but he agreed that they would become non-voting shares (the “Pike
Shares”). It appears that the transfer of the Majority Shares would not be complete until
Old MedApproach had paid the full purchase price to Pike, which would happen over time.2
2
See Compl. ¶¶ 28–29; Hawkins v. MedApproach Hldgs., Inc. (Second SDNY
Dismissal), 2015 WL 8480076, at *1 (S.D.N.Y. Nov. 30, 2015) (summarizing allegations
in Mrs. Hawkins’ amended complaint the New York Action); Hawkins v. MedApproach
Hldgs., Inc. (First SDNY Dismissal), 2014 WL 3926811, at *2 (S.D.N.Y. Aug. 11, 2014)
(summarizing allegations in Mrs. Hawkins’ complaint the New York Action); see also Pike
5
To ensure that Daniel gave up control immediately over all of the voting rights
associated with the shares of Danco GP, the Settlement Agreement called for Pike to
execute the Irrevocable Proxy. Dated February 5, 1997, the Irrevocable Proxy
memorialized that fact by stating that it was issued in connection with the Settlement
Agreement, which the Irrevocable Proxy described as “that certain Agreement Regarding
Neogen Project . . . , dated as of January 21, 1997.” Dkt. 16 Ex. A at 1.
1. The Terms Of The Irrevocable Proxy
Through the Irrevocable Proxy, Pike appointed three individuals as his proxies with
authority to vote all 100 shares in Danco GP. The operative paragraph stated:
The Stockholder hereby constitutes and appoints each Holder, during the
term of this Irrevocable Proxy, as the Stockholder’s true and lawful proxy
and attorney-in-fact, with full power of substitution, to vote all of the Shares
plus any additional Shares which Stockholder may own or hold as of the date
of any such vote (and any all [sic] securities issued or issuable in respect
thereof) which Stockholder is entitled to vote (collectively, the “Proxy
Shares”), for and in the name, place and stead of the Stockholder, at any
annual, special or other meeting of the stockholders of the Company, and at
any adjournment or postponement thereof, or pursuant to any consent in lieu
of a meeting or otherwise.
Id. § 1 (the “Appointment Provision”). The Irrevocable Proxy defined the Stockholder as
“Joseph D. Pike,” and when he executed the Irrevocable Proxy, Pike owned all 100 shares
in Danco GP. Technically, therefore, the Irrevocable Proxy covered both the 75 Majority
v. Freeman, 266 F.3d 78, 81 (2d Cir. 2001) (addressing appeal from entry of arbitral award
resolving dispute over Pike’s performance of obligations under Settlement Agreement and
his right to payments; noting that “[i]n return for the sale [of the Majority Shares] and for
fulfilling other obligations, Pike was to receive certain payments”); id. at 82 (summarizing
Pike’s allegations regarding payments to which he was entitled).
6
Shares and the 25 Pike Shares. It also technically encompassed any other, as-yet unissued
shares in Danco GP that Pike might come to own. The Irrevocable Proxy defined that
universe of shares collectively as the “Proxy Shares.” For purposes of this case, the shares
that matter are the Majority Shares.
Through the Appointment Provision, Pike granted voting authority over the Proxy
Shares to the “Holders,” defined as Brian M. Freeman, Jeffrey L. Rush, and Daniel. Id. Ex.
A. The Irrevocable Proxy required the Holders to vote the Proxy Shares as they determined
by majority vote. Id. § 7. Freeman died in 2001, leaving Rush and Daniel as the only
remaining Holders. See SDNY SJ Decision, 2020 WL 4349813, at *4.
The Irrevocable Proxy recited that it was coupled with an interest and was
irrevocable. The relevant language stated:
All power and authority hereby conferred is coupled with an interest and is
irrevocable. In the event any applicable law imposes a mandatory limit on
the period of time for which a proxy or other rights as referenced herein may
be granted, it is the intention of the parties that this Irrevocable Proxy and the
related rights granted herein shall expire on the latest date permissible under
such applicable law, and the parties hereto hereby waive any such time
limitation to the fullest extent waivable and hereby extend and/or agree to
extend such time limit (by amendment, renewal or otherwise) to the fullest
extent extendable under such law.
Dkt. 16 Ex. A § 1 (the “Irrevocability Provision”).
Reinforcing the Irrevocability Provision, Section 5 of the Irrevocable Proxy
contained the following additional commitment:
The Stockholder agrees that such Irrevocable Proxy is coupled with an
interest sufficient in law to support an irrevocable power and shall not be
terminated by any act of the Stockholder (other than in connection with the
termination provisions of Section 4 hereof), by death or disability of the
7
Stockholder, by lack of appropriate power or authority or by the occurrence
of any other event or events other than as provided in Section 4 hereof.
Id. § 5 (the “Survival Provision”).
But while the Irrevocable Proxy stated that it was irrevocable, it did not contemplate
a permanent existence. The Irrevocability Provision itself acknowledged the possibility of
a mandatory time limit under applicable law. Another provision provided for the
Irrevocable Proxy to terminate in connection with a further reorganization contemplated
by the Settlement Agreement. The same provision empowered the Holders to terminate the
Irrevocable Proxy. The operative language stated:
This Irrevocable Proxy shall terminate immediately upon the occurrence of
any of the following:
(i) the merger or other reorganization of the Company in connection with
the formation of “Newco” as contemplated in the Agreement, but only
if and to the extent the terms and conditions of the documentation
pursuant to which such merger or other reorganization is effected
expressly refer to this Irrevocable Proxy and expressly provide that
this Irrevocable Proxy shall terminate pursuant to such documents; or
(ii) upon notice of termination given by the Holders to the Stockholder.
Id. § 4 (the “Termination Provision”) (formatting added).
2. The Terms Of The Addendum
Through the Irrevocable Proxy, Pike granted the authority conferred by the
Appointment Provision to the Holders. Under the Settlement Agreement, however, Old
MedApproach was purchasing the Majority Shares. A mechanism was needed for Old
MedApproach to sign on to the Irrevocable Proxy once it acquired the Majority Shares.
8
The result was an addendum to the Irrevocable Proxy. Its language consists of a
single dense paragraph. In its entirety, the paragraph states:
At any time that [Old MedApproach], or its affiliates, owners, designees or
nominees (or their respective successors or assigns) (each a “MedApproach
Person”) is a beneficial or record holder of any of the Shares or any of the
Proxy Shares, [Old MedApproach] hereby agrees (and agrees to cause each
other MedApproach Person to agree) that references in this Irrevocable
Proxy to “Stockholder” shall mean and include [Old MedApproach] (or such
MedApproach Person) with references to “the date hereof” in Section 2(a)
being instead a reference to the date of closing under the Agreement), and
that [Old MedApproach] is bound (and [Old MedApproach] agrees not to
transfer any such shares to any other MedApproach Person unless such
transferee agrees in writing satisfactory to the Proxy Holders (other than W.
Bradley Daniel) to be bound) by this Irrevocable Proxy as the Stockholder;
provided; however, no MedApproach Person shall be deemed the
Stockholder for purposes of Section 2 hereof. [Old MedApproach] agrees to
duly authorize, execute and deliver a restated Irrevocable Proxy reflecting
the foregoing promptly after the closing under the Agreement and such other
agreements or documents as are reasonably necessary or appropriate to carry
out the intent of the foregoing.
Id., Addendum (the “Addendum”).
The Addendum has multiple parts. First, it defines the term “MedApproach Person”
to consist of Old MedApproach and “its affiliates, owners, designees or nominees (or their
respective successors or assigns).” Id. (the “Affiliate Definition”).
Second, the Addendum provides that if Old MedApproach or any other
MedApproach Person became a beneficial or record owner of any shares of Danco GP,
then
[Old MedApproach] hereby agrees (and agrees to cause each other
MedApproach Person to agree) that references in this Irrevocable Proxy to
“Stockholder” shall mean and include [Old MedApproach] (or such
MedApproach Person) with references to “the date hereof” in Section 2(a)
being instead a reference to the date of closing under the Agreement).
9
Id. (the “Expanded Stockholder Definition”).
Third, the Addendum states:
[Old MedApproach] is bound (and [Old MedApproach] agrees not to transfer
any such shares to any other MedApproach Person unless such transferee
agrees in writing satisfactory to the Proxy Holders (other than W. Bradley
Daniel) to be bound) by this Irrevocable Proxy as the Stockholder . . . .
Id. (the “Transfer Provision”).
The Addendum thus contains overlapping provisions and redundancies. Both the
Transfer Provision and Old MedApproach’s promise that it “is bound” by the Irrevocable
Proxy stand in tension with the Expanded Stockholder Definition, because if the language
of the Expanded Stockholder Definition means what it says, then Old MedApproach
already was bound by the Irrevocable Proxy. In light of the Expanded Stockholder
Definition, Old MedApproach should not have needed to bind itself to the Irrevocable
Proxy, nor should Old MedApproach have needed to commit itself to bind any other
MedApproach Person to the Irrevocable Proxy.
D. The Restructurings
After the execution of the Settlement Agreement, two restructurings took place that
resulted in the parties to the case occupying their current positions relative to each other.
One restructuring involved Mr. and Mrs. Hawkins. The other restructuring involved Old
MedApproach.
10
The restructuring on the Hawkins side was simple. Effective July 2, 1998, Mr.
Hawkins assigned all of his interests in Old MedApproach to Mrs. Hawkins.3 The New
York Court has held that despite transferring his interests to his wife, Mr. Hawkins
continued to manage the investment. Hawkins v. MedApproach Hldgs., Inc. (SDNY SJ
Decision), 2020 WL 4349813, at *1, 8 (S.D.N.Y. July 29, 2020).
The restructuring of Old MedApproach was more complex and took place in 1999.
The nature of the restructuring suggests an effort to separate income streams that could
qualify for treatment as capital gains from other income streams that would be taxed as
income.
As part of the restructuring, Daniel formed three new Delaware limited partnerships
(the “Three Partnerships”). The Partnership was one of them. Daniel also formed Holdings,
which became the general partner of each of the Three Partnerships. Holdings has no assets
other than its general partner interests in the Three Partnerships. Compl. ¶¶ 35–37.
3
Of passing interest, Daniel has alleged in other litigation that Mr. Hawkins suffered
personal financial difficulties in 1998 as a result of the collapse of Long-Term Capital
Management L.P., where he was a principal. See MedApproach Hldgs., Inc. v. Mrs.
Hawkins (First Tennessee Dismissal), 2012 WL 6569268, at *2 (M.D. Tenn. Dec. 17,
2012). The demise of that excessively leveraged hedge fund threatened to bring down the
global financial markets, necessitating a then-unprecedented intervention by a consortium
of Wall Street firms assembled hastily by the Federal Reserve Bank of New York. The
transfer of his interests to his wife would have corresponded to a time when his personal
assets were under threat. See id.11
In the transaction at the heart of the restructuring, Old MedApproach dissolved. As
part of the winding up process, Old MedApproach made non-pro rata distributions of its
assets to the Three Partnerships. The Partnership received the Majority Shares.
The parties agree that the following diagram accurately depicts the organizational
structure of the relevant entities after the restructuring. It refers to Holdings as “Med
Approach Holdings.” It refers to the Partnership by its formal name, MedApproach LP.
And it refers to Danco GP as “N.D. Management.” Except for the fact that the Partnership
has dissolved and entered the winding up phase, the diagram reflects the organizational
structure of the relevant entities as it continues to exist today.
Dkt. 16 at 7.
12
As shown in the diagram, Danco Labs owns the Sublicense. Danco LP owns 100%
of the equity in Danco Labs. A number of investors own limited partner interests in Danco
LP, with Mrs. Hawkins beneficially owning the largest stake through her interests in the
Three Partnerships. Danco GP controls Danco LP as its general partner. Through the
Irrevocable Proxy, the Holders control Danco GP by virtue of their ability to exercise the
voting power carried by the Majority Shares. But for the Irrevocable Proxy, the Partnership
would control Danco GP through the Majority Shares. See SDNY SJ Decision, 2020 WL
4349813, at *1.
E. The Many Disputes Between The Parties
By 2001, all of the financial obligations to Pike had been satisfied, so there was no
possibility that he could reassert control over Danco GP. At that point, Mr. Hawkins asked
Daniel to terminate the Irrevocable Proxy. Daniel initially demurred, then asserted that the
Irrevocable Proxy was irrevocable and could not be relinquished. Compl. ¶¶ 38–39.
In 2011, Daniel caused Holdings to sue Mr. and Mrs. Hawkins in the United States
District Court for the Middle District of Tennessee. Daniel alleged that Holdings was
entitled to hedge-fund-style fees, including a 1% annual management fee, a carried interest
in 10% of the distributions made by two of the Three Partnerships, and a carried interest in
20% of the distributions made by the third of the Three Partnerships. See First Tennessee
Dismissal, 2012 WL 6569268, at *3. The complaint asserted that to avoid their obligation
to pay those fees, Mr. and Mrs. Hawkins fraudulently induced Holdings to permit them to
transfer interests in the Three Partnerships to entities that they claimed not to control. In
reality, Mr. and Mrs. Hawkins controlled the transferee entities. After initially dismissing
13
the complaint with leave to replead, the Tennessee court permitted a claim for fraud and a
claim for civil conspiracy to proceed past the pleading stage. See MedApproach Hldgs.,
Inc. v. Mrs. Hawkins, 2013 WL 3789515, at *14 (M.D. Tenn. July 18, 2013). After three
more years of litigation, the parties settled and dismissed the Tennessee action with
prejudice. See MedApproach Hldgs., Inc. v. Mrs. Hawkins, Civ. No 3:11-cv-01199, ECF
No. 125 (M.D. Tenn. Oct. 11, 2016).
In 2013, while the Tennessee action was pending, Mrs. Hawkins filed the New York
Action. She asserted claims falling into three categories. See First SDNY Dismissal, 2014
WL 3926811, at *1 (summarizing claims).
First, Mrs. Hawkins asserted claims associated with the origins of the Irrevocable
Proxy. In one claim, she sought a declaratory judgment invalidating the Irrevocable Proxy,
contending that it was intended to be a temporary measure and that the Holders were
obligated to replace it with an ordinary corporate governance structure once the transfer of
the Majority Shares was complete. The defendants moved to dismiss that claim as
untimely. The New York Court agreed that the claim was presumptively untimely, but
granted Mrs. Hawkins leave to replead. Id. at *6. In a related claim, Mrs. Hawkins
contended that Daniel had breached his fiduciary duties by accepting the fees contemplated
by the Irrevocable Proxy. The New York Court dismissed this claim as untimely, finding
that Mrs. Hawkins knew of the fees—and hence was on notice of the facts giving rise to
her claim—when the Irrevocable Proxy was executed. The New York Court did not give
Mrs. Hawkins leave to replead that claim. Id. at *5.
14
Second, Mrs. Hawkins challenged Daniel and Holdings’ refusal to convert Danco
GP into an S corporation. She maintained that Daniel and Holdings had admitted that the
conversion would generate tax benefits for Danco GP’s stockholders and were acting
disloyally by failing to pursue it. The New York Court declined to dismiss that claim. See
id. at *7–10.
Third, Mrs. Hawkins claimed that Daniel and Holdings had breached their fiduciary
duties and violated contractual obligations by withholding distributions that the Three
Partnerships were obligated to make. Id. at *10. The New York Court declined to dismiss
that claim. See id. at *11.
Mrs. Hawkins subsequently filed an amended complaint in which she reasserted her
claim that the Irrevocable Proxy was intended to be a short-term measure that the Holders
were obligated to replace. To avoid the defendants’ statute-of-limitations defense, she
sought to provide a factual basis for her invocation of tolling doctrines. The defendants
again moved to dismiss the claims as untimely, and the New York Court again granted
their motion. The court explained that Mrs. Hawkins was on notice since 2001 that Daniel
contended that the Irrevocable Proxy was not a temporary measure, yet she had not sued
until 2013. See Second SDNY Dismissal, 2015 WL 8480076, at *3–4.
In 2020, the defendants moved for summary judgment on Mrs. Hawkins’ remaining
claims. The New York Court started by addressing Mrs. Hawkins’ theory that Daniel and
Holdings had breached their fiduciary duties by failing to reorganize Danco GP as an S
corporation. The conversion would have required a distribution of the Majority Shares to
their beneficial owners, resulting in Mrs. Hawkins owning 88% of the Majority Shares.
15
Mr. Hawkins had pushed for the Holders to terminate the Irrevocable Proxy in connection
with the conversion, and Daniel had refused. The New York Court dismissed this claim,
holding that Mrs. Hawkins was not a proper representative plaintiff to pursue it
derivatively. Citing extensive evidence which showed that Mr. and Mrs. Hawkins sought
to link the conversion to the termination of the Irrevocable Proxy, the New York Court
found that Mrs. Hawkins had an ulterior motive for seeking the conversion. SDNY SJ
Decision, 2020 WL 4349813, at *8–9. The court concluded that “Mrs. Hawkins is an
inadequate representative not because she advances her claims alone, but because she
purports to advance a claim on behalf of the corporation for tax restructuring, but in deed
and word has sought to advance her interest as to the proxy.” Id. at *9.
Next, the New York Court considered a claim that in 2010, the Holders had caused
Danco LP to issue a 10% limited partner interest to themselves personally. See id. at *3–4.
The New York Court granted summary judgment for the defendants on this claim, finding
that it was time-barred. Id. at *10. The New York Court declined to apply any tolling
doctrines, finding that (i) Daniel had advised Mr. Hawkins about the anticipated issuance
in 2008 and 2009 and (ii) Mrs. Hawkins received distributions after 2010 that reflected the
issuance. Id. at *10–11.
After that, the New York Court considered Mrs. Hawkins’ claim that Daniel caused
Holdings to withhold distributions from the Three Partnerships. Id. at *4–5. The New York
Court granted summary judgment for the defendants, holding that any claim on that topic
was a compulsory counterclaim that had to be asserted in the Tennessee action. The
dismissal of the Tennessee action therefore foreclosed the claim. See id. at *12.
16
Finally, the New York Court considered Mrs. Hawkins’ claim that Daniel breached
his fiduciary duties in 2016 and 2017 by causing Holdings to make excessive and improper
payments to himself and the Chief Financial Officer of Danco Labs. Id. at *5–7. The New
York Court granted summary judgment for the defendants as to the payments to the CFO,
finding that there was no basis to rebut the presumptions of the business judgment rule. Id.
at *13–14. The New York Court denied the motion for summary judgment as to the
payments that Daniel made to himself, finding that the defendants would have to prove that
the payments were entirely fair. Id. at *15.
As a result of these rulings, the only live claim remaining in the New York Action
is Mrs. Hawkins’ challenge to Daniel’s compensation in 2016 and 2017.
F. The Partnership Dissolves.
The internal affairs of the Partnership are governed by an Agreement of Limited
Partnership dated as of January 1, 1999. Dkt. 1 Ex. A (the “Partnership Agreement” or
“PA”). Section 2.7 of the Partnership Agreement provided that the term of the Partnership
would expire on December 31, 2020. Id. § 2.7. Section 9.1 of the Partnership Agreement
provided that “[t]he Partnership shall terminate upon the expiration of its term.” Id. § 9.1.
As the end of the Partnership term approached, Daniel and Holdings asked the
limited partners to extend its existence. As the holder of 88% of the limited partner
interests, Mrs. Hawkins controlled the vote of the limited partners. She agreed to extend
the term of the Partnership until February 28, 2021, but not beyond. Compl. ¶ 42.
On February 28, 2021, the Partnership dissolved. Section 9.1 of the Partnership
Agreement provides that after the Partnership dissolves, “no further business shall be done
17
in the Partnership name except the completion of any incomplete transactions and the
taking of such action as shall be necessary for the winding up of the affairs of the
Partnership and the distribution of its assets.” PA § 9.1.
Section 9.2 of the Partnership Agreement empowers Holdings as general partner to
wind up the Partnership’s affairs. As part of that process, Holdings is obligated to “convert
to cash such of the non-cash assets of the Partnership as [Holdings] deems necessary or
advisable” and “determine the closing capital accounts of the Partners.” Id. § 9.2.
Mrs. Hawkins asserts that as part of the winding up process, Daniel and Holdings
intend to market and sell the Majority Shares. Mrs. Hawkins alleges that the value of the
Majority Shares will be maximized by selling them free and clear of the Irrevocable Proxy.
She claims that Daniel and Holdings have indicated that they only will sell the Majority
Shares subject to the Irrevocable Proxy. See Compl. ¶¶ 50–60.
G. This Litigation
On May 24, 2021, Mrs. Hawkins filed this litigation and moved for expedited
treatment. The complaint asserts two counts.
In Count I, Mrs. Hawkins seeks a declaratory judgment that the defendants “are
required to market and sell the Partnership’s 75% stake in ND Management free and clear
from, and not subject to, the continued application of the Proxy.” Id. ¶ 72. In Count II, Mrs.
Hawkins seeks an injunction prohibiting the defendants “from marketing and/or selling the
Partnership’s ND Management stock subject to the continued application of the Proxy.”
Id. ¶ 74. Count II obviously describes a remedy and not a cause of action.
18
Mrs. Hawkins moved for expedited proceedings. The defendants opposed Mrs.
Hawkins’ motion and argued that the court should dismiss this case in deference to the
New York Action. Dkt. 6; Dkt. 7. At a hearing on June 10, 2021, the court granted
expedition and permitted the defendants to move for dismissal under the doctrine of forum
non conveniens while the case otherwise moved forward. Dkt. 20.
II. LEGAL ANALYSIS
A motion to dismiss pursuant to forum non conveniens proceeds under Court of
Chancery Rule 12(b)(3) as it “seeks dismissal on grounds of improper venue.” Holsopple,
250 A.3d at 952. Whether to dismiss a case on the basis of forum non conveniens is an
issue “addressed to the trial court’s sound discretion.” Martinez v. E.I. DuPont de Nemours
& Co., Inc., 86 A.3d 1102, 1104 (Del. 2014).
When exercising its discretion, the court considers the so-called “Cryo-Maid
factors,” named after General Foods Corp. v. Cryo-Maid, Inc., 198 A.2d 681 (Del. 1964).
The factors are (1) the pendency or non-pendency of a substantially similar action in
another jurisdiction; (2) the controversy’s dependency on Delaware law; (3) the availability
of compulsory process for witnesses; (4) the relative ease of access to proof; and (5) all
other practical problems that would make the trial easy, expeditious, and inexpensive. Id.Traditionally, the court also considered the possibility of a view of the premises. That factor
often is omitted in commercial cases such as this one where it has no relevance. See Aranda
v. Philip Morris USA Inc., 183 A.3d 1245, 1251 (Del. 2018).
The first Cryo-Maid factor asks whether there is (i) an earlier-filed action, (ii)
between the same or substantially similar parties, (iii) addressing the same or substantially
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similar subject matter, (iv) pending in a court capable of addressing the matter and
providing justice (a “Prior Action”). Whether this factor is satisfied affects the approach
the court takes to the balancing of the Cryo-Maid factors. See Gramercy Emerging Mkts.
Fund v. Allied Irish Banks, P.L.C., 173 A.3d 1033, 1036–38 (Del. 2017).
If a Prior Action exists and remains pending, then a Delaware court approaches the
Cryo-Maid factors with the analysis tilted in favor of the defendant. Under an approach
known as the “McWane doctrine,” the court will dismiss or stay the Delaware action in
deference to the Prior Action unless the Cryo-Maid factors weigh heavily in favor of
allowing the Delaware action to proceed. Id. at 1037; see McWane Cast Iron Pipe Corp. v.
McDowell-Wellman Eng’g Co., 263 A.2d 281 (Del. 1970). Generally speaking, the
calculus only will favor denying the motion and permitting the Delaware action to move
forward, notwithstanding the existence of the Prior Action, if the Delaware plaintiff has
invoked a specialized statutory proceeding designed to address a particular issue or if
Delaware otherwise has a particularly strong interest in the dispute. See Holsopple, 250
A.3d at 953–954, 956.
If a Prior Action once existed but no longer is pending, then the Delaware court
conducts a straightforward assessment of the Cryo-Maid factors to determine where it
makes the most sense for the action to proceed. The resulting analysis “is not tilted in favor
of the plaintiff or the defendant.” Gramercy, 173 A.3d at 1044.
If the Delaware case is the first-filed action, then the court will approach the Cryo-
Maid factors with the analysis tilted in favor of the plaintiff. The court generally will allow
the Delaware action to proceed unless the defendant shows that it would face
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overwhelming hardship or inconvenience from litigating in Delaware. Id. Although
linguistically extreme, the overwhelming hardship standard is not impossible to meet. To
satisfy it, the defendant must show that the Cryo-Maid factors “weigh heavily and
decisively in favor of dismissal.” Holsopple, 250 A.3d at 953 (internal quotation marks
omitted). The defendant need not show that every factor supports dismissal, nor even that
a majority of the factors support dismissal. Rather, “the trial court must consider the weight
of those factors in the particular case and determine whether any or all of them truly cause
both inconvenience and hardship.” Martinez, 86 A.3d at 1104.
The defendants’ argument for dismissal starts and ends with their contention that
the New York Action qualifies as a Prior Action. They never go further than that. And
despite purporting to ground their motion to dismiss in the doctrine of forum non
conveniens, they devoted most of their briefs and their presentation during the hearing to
an argument about claim splitting and an assertion that Mrs. Hawkins’ claims conflict with
the plain language of the Irrevocable Proxy.
A. The McWane Doctrine Does Not Apply.
In the only argument they advance in support of the motion they claimed to file, the
defendants maintain that the McWane doctrine requires dismissal of this action in deference
to the New York Action. It does not. The New York Action is not a Prior Action for
purposes of the McWane doctrine. Although the New York Action involves the same
parties, it does not involve the same or substantially similar issues.
This case presents two focused questions, neither of which is now or ever has been
at issue in the New York Action. The first question is whether, under the terms of the
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Irrevocable Proxy, the Partnership can sell the Majority Shares free and clear of the voting
authority that the Irrevocable Proxy conferred. That question did not arise until recently,
after the term of the Partnership ended and when Daniel and Holdings took the position
that the Partnership only could sell the Majority Shares subject to the Irrevocable Proxy.
That issue has never been raised in New York.
The second question concerns the scope of the fiduciary duties that Daniel and
Holdings owe during the winding up process. Those duties affect their ability to make
decisions about whether and how to sell the Majority Shares. Daniel owes fiduciary duties
both as a Holder under the Irrevocable Proxy and as the controller of Holdings, which also
owes fiduciary duties as the general partner of the Partnership. The fiduciary duties of the
holder of a proxy run to the owner of the shares. See Zohar II 2005–1, Ltd. v. FSAR Hldgs.,
Inc., 2017 WL 5956877, at *20 (Del. Ch. Nov. 30, 2017). The fiduciary duties that
Holdings and Daniel owe as the general partner of the Partnership and its controller run to
the Partnership. The fiduciary principle generally requires that a fiduciary act loyally and
in good faith to maximize the value of an asset held in a fiduciary capacity for the benefit
of the cestui que trust. See Frederick Hsu Living Tr. v. ODN Hldg. Corp., 2017 WL
1437308, at *20 (Del. Ch. Apr. 14, 2017). Viewed in the abstract, the fiduciary principle
therefore would seem to call for Daniel and Holdings to maximize the value of the Majority
Shares by selling them free and clear of the voting authority conferred by the Irrevocable
Proxy, if they have the ability to do so.
The New York Court has considered claims for breach of fiduciary duty, but no one
has ever asked the New York Court to consider the operation of the fiduciary principle in
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this setting. As with the application of the Irrevocable Proxy’s language to a sale of the
Majority Shares, the dispute over the implications of the fiduciary principle arose only
recently, after the Partnership dissolved and after Daniel and Holdings took the position
that the Partnership only could sell the Majority Shares subject to the Irrevocable Proxy.
Over the years that the New York Action has been pending, Mrs. Hawkins has
advanced a number of claims in that proceeding, but none are the same or substantially
similar to the focused issues presented by this case. At the outset of the New York Action,
Mrs. Hawkins challenged the validity of the Irrevocable Proxy on the theory that it was an
interim measure that would be replaced promptly with a more traditional governance
regime. Mrs. Hawkins thus advanced a theory based on events that took place before the
turn of the current millennium. When Mrs. Hawkins asserted that claim in 2013, the New
York Court had little difficulty holding that it was time-barred. See Second SDNY
Dismissal, 2015 WL 8480076, at *4; First SDNY Dismissal, 2014 WL 3926811, at *6–7.
The New York Court did not rule how on the Irrevocable Proxy would apply during the
winding up process to a sale of the Majority Shares. Nor did the New York Court address
the fiduciary duties that Daniel or Holdings owe in that context.
In the New York Action, Mrs. Hawkins also challenged allegedly self-dealing
transactions that the Holders engaged in before the turn of the current millennium, and she
challenged an issuance of limited partner interests in Danco LP that took place in 2010.
The New York Court held that those claims also were time-barred. See SDNY SJ Decision,
2020 WL 4349813, at *10–11. There is no overlap between this case and those claims.
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In the New York Action, Mrs. Hawkins also challenged the failure to restructure
Danco GP as an S corporation. The New York Court held that Mrs. Hawkins was an
improper derivative plaintiff for purposes of that claim. See id. at *8. The claims in this
case do not implicate the disputed restructuring.
In the New York Action, Mrs. Hawkins sought to relitigate the withholding of
distributions that had been the subject of the Tennessee action. The New York Court held
that Mrs. Hawkins could not do that. See id. at *12. The claims in this case do not relate to
those issues or any aspect of the Tennessee action.
In the New York Action, Mrs. Hawkins also challenged the payments that Daniel
made in 2016 and 2017 to himself and the CFO of Danco Labs. The New York Court
granted summary judgment in favor of the defendants on the payments to the CFO but
denied the motion as to the payments to Daniel. See id. at *13–14. The propriety of those
payments is the only remaining issue in the New York Action. The claims in this case have
nothing to do with payments that Daniel received in 2016 and 2017.
In an effort to connect the current case to the New York Action, the defendants have
taken allegations from the complaint in this action and compared them to allegations in the
New York Action. Dkt. 16 Ex. 1. Those allegations describe the origins of the Sublicense,
the Settlement Agreement, and the terms of the Irrevocable Proxy. The complaint in this
action provides those facts as background, and they are necessary to understand and frame
the dispute. The overlapping descriptions do not mean that this action and the New York
Action involve the same or substantially similar issues.
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The New York Action is not a Prior Acton for purposes of McWane. The narrow
claims that Mrs. Hawkins has asserted in this action differ fundamentally from the matters
that the New York Court has addressed.
Other than arguing that the New York Action is a Prior Action, the defendants have
not attempted to show why any other Cryo-Maid factor supports dismissal. The motion to
dismiss the current action on the basis of forum non conveniens therefore is denied.
B. Mrs. Hawkins Has Not Engaged In Improper Claim Splitting.
In their briefs, the defendants devoted much of their firepower to arguing that Mrs.
Hawkins has engaged in improper claim splitting. Their invocation of claim splitting fares
no better than their reliance on McWane.
The rule against claim splitting is an “aspect of the doctrine of res judicata.”
Maldonado v. Flynn, 417 A.2d 378, 382 (Del. Ch. 1980). It seeks to “eliminate[] the
contemporaneous litigation of the same factual or legal issues in different courts.” Balin v.
Amerimar Realty Co., 1995 WL 170421, at *4 (Del. Ch. Apr. 10, 1995). The basic intuition
is that “it is fairer to require a plaintiff to present in one action all of his theories of recovery
relating to a transaction, and all of the evidence relating to those theories, than to permit
him to prosecute overlapping or repetitive actions in different courts or at different times.”
Maldonado, 417 A.2d at 382. “Two basic principles animate the rule. First, the rule is
founded upon the principle that no person should be unnecessarily harassed with a
multiplicity of suits. Second, the rule is designed to prevent a litigant from getting two bites
at the apple.” J.L. v. Barnes, 33 A.3d 902, 918 (Del. Super. Ct. 2011) (cleaned up)
(collecting authorities).
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Delaware takes a modern, transactional view of claim splitting. Goureau v. Lemonis,
2021 WL 1197531, at *8 (Del. Ch. Mar. 30, 2021). For the doctrine to apply, the claims
must arise out of the same transaction or from a common nucleus of operative fact. Id. The
Delaware Supreme Court has adopted the approach taken in Section 24 of the Restatement
(Second) of Judgments, which calls for a pragmatic assessment by the trial court. See
LaPoint v. AmerisourceBergen Corp., 970 A.2d 185, 193 (Del. 2009). A comment to
Section 24 states:
The expression “transaction, or series of connected transactions,” is not
capable of a mathematically precise definition; it invokes a pragmatic
standard to be applied with attention to the facts of the cases. And underlying
the standard is the need to strike a delicate balance between, on the one hand,
the interests of the defendant and of the courts in bringing litigation to a close
and, on the other, the interest of the plaintiff in the vindication of a just claim.
...
In general, the expression connotes a natural grouping or common nucleus
of operative facts. Among the factors relevant to a determination whether the
facts are so woven together as to constitute a single claim are their relatedness
in time, space, origin, or motivation, and whether, taken together, they form
a convenient unit for trial purposes. Though no single factor is determinative,
the relevance of trial convenience makes it appropriate to ask how far the
witnesses or proofs in the second action would tend to overlap the witnesses
or proofs relevant to the first. If there is a substantial overlap, the second
action should ordinarily be held precluded. But the opposite does not hold
true; even when there is not a substantial overlap, even when there is not a
substantial overlap, the second action may be precluded if it stems from the
same transaction or series.
Restatement (Second) of Judgments § 24 cmt. b (1982).
Litigation involving a series of transactions calls for a similarly pragmatic
assessment that turns on the same factors. Goureau, 2021 WL 1197531, at *9.
When a defendant is accused of successive but nearly simultaneous acts, or
acts which though occurring over a period of time were substantially of the
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same sort and similarly motivated, fairness to the defendant as well as the
public convenience may require that they be dealt with in the same action.
Restatement, supra, § 24 cmt. d. At the same time, “the rule against claim-splitting is not
meant to ‘preclude litigation of events arising after the filing of the complaint that formed
the basis of the first lawsuit.’” Leonard v. Stemtech Int’l, Inc., 2012 WL 3655512, at *9
(D. Del. Aug. 24, 2012) (quoting Curtis v. Citibank, N.A., 226 F.3d 133, 139 (2d Cir.
2000)). Moreover, “[m]aterial operative facts occurring after the decision of an action with
respect to the same subject matter may in themselves, or taken in conjunction with the
antecedent facts, comprise a transaction which may be made the basis of a second action
not precluded by the first.” Restatement, supra, § 24 cmt. f.
For the reasons already discussed, Mrs. Hawkins is not attempting to relitigate the
same factual or legal issues that she presented to the New York Court. The narrow
questions that this case presents do not arise out of the same transactions that gave rise to
the claims in New York.
There is, of course, a superficial similarity between the two cases, because both
litigations (as well as the Tennessee action) trace their origins to the awarding of the
Sublicense. There is also high-level overlap because both cases involve the Irrevocable
Proxy, and both cases touch on Daniel’s obligations as a fiduciary. But that is about it. The
factual context is substantially different. The claims are substantially different.
It also is true that from Daniel’s standpoint, the bottom-line outcome of losing in
this litigation could be the same as if Mrs. Hawkins had prevailed on her original challenge
to the Irrevocable Proxy. In both cases, Daniel could lose his ability to exercise the
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Irrevocable Proxy going forward. But the nature of the claims, the facts giving rise to them,
and their broader implications are fundamentally different. Had it been litigated, and had
Mrs. Hawkins prevailed, then her claim about the temporary nature of the Irrevocable
Proxy would have led to a judicial determination that some form of wrong occurred around
the turn of the millennium, along with whatever attendant consequences such a ruling
would have had for Daniel’s subsequent actions. By contrast, if Mrs. Hawkins were to
obtain the declaratory judgment or injunctive relief that she seeks in this action, they would
apply only to the winding up process that started in February 2021. They would have no
effect on any earlier actions that Daniel might have taken.
The defendants also are incorrect in contending that the earlier decisions in the New
York Action have a preclusive effect on the current litigation. The New York Action has
not yet become final. The two dismissal rulings and the summary judgment decision are
both interlocutory rulings that do not have collateral estoppel or res judicata effect. That
said, in the interest of judicial efficiency, this court will not revisit the New York Court’s
rulings, nor will the court permit Mrs. Hawkins to litigate claims that the New York Court
has rejected.
Both here and in its ruling on the doctrine of forum non conveniens, the court is not
suggesting that the New York Court is not capable of addressing the claims in this action.
Such an assertion would be preposterous. The New York Court plainly could resolve the
claims in this case, just as it could resolve virtually any dispute that the parties might have.
But that is not the issue. The question is rather whether Mrs. Hawkins was obligated to
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assert her claims through an amended complaint in the New York Action because she has
been litigating there over other disputes involving the Partnership.
The substantial distinctions between this case and the New York Action mean that
Mrs. Hawkins was not obligated to assert her current claims through an amended complaint
in the New York Action. For her to do so would have been inefficient, because the New
York Action currently is proceeding to trial on the fairness of the compensation that Daniel
received in 2016 and 2017. It would make little sense for the New York Action to return
to the pleading stage. The New York Court has ruled on two pleading-stage dismissal
motions and a motion for summary judgment. Along the way, the court ruled on a motion
to compel. See Hawkins v. MedApproach Hldgs., Inc., 326 F.R.D. 391 (S.D.N.Y. 2018).
The doctrine of claim splitting does not require that the New York Action return to the
starting line.
Mrs. Hawkins is not engaging in claim splitting. Mrs. Hawkins has acted properly
by filing her complaint in this court.
C. The Implicit Rule 12(b)(6) Motion
In addition to arguing about claim splitting, the defendants used their Rule 12(b)(3)
motion to advance an argument about the plain language of the Irrevocable Proxy. In
substance, the defendants sought to show that Mrs. Hawkins has not stated a claim on
which relief can be granted. The defendants’ Rule 12(b)(3) motion was not an appropriate
vehicle to advance an argument under Rule 12(b)(6), and the court declines to consider it.
The defendants’ plain language argument also does not reach Mrs. Hawkins’
arguments about Daniel’s and Holdings’ fiduciary obligations. Mrs. Hawkins maintains
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that even if the plain language of the Irrevocable Proxy were to call for a sale subject to the
Irrevocable Proxy, then Daniel still would have a fiduciary obligation to seek to sell the
shares free and clear of the Irrevocable Proxy, for example by invoking the Termination
Provision. The defendants’ plain language argument does not address that theory.
To blunt the potential implications of the fiduciary principle, the defendants argue
that Daniel also holds the Irrevocable Proxy “for the benefit of the broader [RU-486]
Project and its many investors who were induced to invest based upon the governance
structure set forth in the [Irrevocable] Proxy.” Dkt. 16 at 2. In essence, the defendants argue
that other investors, such as other limited partners in Danco LP, are intended third-party
beneficiaries of the Irrevocable Proxy and that Daniel is legally obligated to protect their
interests. That is an interesting argument, and it is possible that a conflict may exist between
the fiduciary principle and a contractual obligation.
The parties have not engaged in meaningful briefing on these issues. As with the
defendants’ plain language argument, the defendants’ Rule 12(b)(3) motion is not the
appropriate vehicle to address that aspect of the dispute.
III. CONCLUSION
The defendants’ motion to dismiss the complaint in favor of the New York Action
is denied.
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