Evolve Growth Initiatives, LLC v. Equilibrium Health Solutions LLC

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
Evolve Growth Initiatives, LLC; Evolve )
Holdco, Inc.; and Evolve Intermediate )
Holding LLC, )
)
Plaintiffs and Counterclaim Defendants )
)
v. ) C.A. No. 2022-1113-SG
)
Equilibrium Health Solutions LLC; )
M&A Healthcare LLC; Ducat HC LLC; )
and Daryl Hagler, )
)
Defendants and Counterclaim Plaintiffs. )
MEMORANDUM OPINION
Date Submitted: June 16, 2023
Date Decided: July 26, 2023
Kenneth J. Nachbar and Alexandra M. Cumings of MORRIS, NICHOLS, ARSHT &
TUNNELL LLP, Wilmington, Delaware; OF COUNSEL: Andrew Z. Schwartz,
Euripides Dalmanieras, and Christian A. Garcia of FOLEY HOAG LLP, Boston,
Massachusetts, Attorneys for Evolve Growth Initiatives, LLC, Evolve Holdco, Inc.,
and Evolve Intermediate Holding LLC.
Rudolf Koch, Travis S. Hunter, and Sara M. Metzler of RICHARDS, LAYTON &
FINGER, P.A., Wilmington, Delaware; OF COUNSEL: Motty Shulman of
CENTRICITY LAW PLLC, New York, New York; Robin A. Henry of FRIED,
FRANK, HARRIS, SHRIVER & JACOBSON LLP, New York, New York,
Attorneys for Equilibrium Health Solutions LLC, M&A Healthcare LLC, Ducat HC
LLC, and Daryl Hagler.
GLASSCOCK, Vice Chancellor
Judges have—should have—as their goal, doing justice. Judges are inclined,
or perhaps I should say “conditioned” in the Skinnerian sense, to achieve that goal
from consideration of the record, whether on the pleadings (at the motion to dismiss
stage) or up through a trial on the merits. It is that conditioning to evidentiary-based
decision making that makes the decision explained below difficult, for this judge at
least.
That decision regards an action to enforce an arbitration award. The
arbitration proceeding and the resulting award are flawed, in the sense that one might
use that term in a review of their substance. Briefly, the arbitration chiefly addressed
the contractual rights arising from breach of representations and warranties in an
agreement to purchase an LLC. The complaint in arbitration also stated claims based
on fraud or negligent misrepresentation. The latter claims were only tangentially
referenced in the arbitral litigation, and not relied on, explicitly, at least, by the
arbitral panel (the “Panel”). This causes a problem for the reasons that follow.
First, in the interest of clarity, a note about nomenclature. The buyers in the
transaction at issue are the parties who were the claimants in the arbitration, and who
have filed this petition for confirmation of the arbitration award. The sellers (and
seller representative) were parties respondent in the arbitration, as well as in this
litigation. In the instant litigation, the parties have styled the buyers as “Plaintiffs”
and the sellers and seller representative as the “Defendants.” I employ that usage
1
here. For the sake of clarity, I also employ it in describing the same parties in
arbitration, so the party claimants in arbitration I refer to as the Plaintiffs there, and
the party respondents in arbitration I refer to as the Defendants. When quoting the
proceedings in arbitration, I have placed “Plaintiffs” and “Defendants” in brackets,
connoting replacement of the several terms used in that proceeding.
In the arbitration, both Plaintiffs and Defendants generally referred to all
Defendants subject to arbitration before the Panel as the “[Defendants].” These
included the entities liable for indemnification for simple breaches of representations
and warranties under the contract. It also included an individual, Mr. Daryl Hagler,
the “Seller Representative.” Hagler was not liable for simple breaches of reps and
warranties under the contract, but could be liable for damages arising from his fraud
or intentional acts or gross negligence. Hagler was a substantial actor with respect
to the underlying transaction, and was a named defendant in the complaint in
arbitration.
The arbitral award the (“Award”) did not differentiate among the Defendants.
Instead, based upon breaches of the reps and warranties, the Panel found all
Defendants jointly and severally liable in damages for the claims in arbitration. The
parties liable included Hagler. The Panel found breaches of representations and
warranties that could, presumably, result from facts also supporting liability for
Hagler’s fraud or gross negligence, but the Award was silent in this regard. I do
2
note that the Award provided that the facts before it “strongly support” intentional
misrepresentation, but did not base liability on such.
On cross-motions for summary judgement, the Defendants object to
confirmation of the award, and seek vacatur, only as it pertains to Mr. Hagler. As
the facts below illustrate, the Panel focused on the contractual claims, not on fraud
or on intentional or negligent misrepresentation. According to the Defendants, this
renders the award against Hagler legally incoherent, and thus the award of the Panel
should be vacated.
It is true that the Panel did not focus on the different theories that could lead
to liability on behalf of Hagler, as opposed to the entity defendants. The Panel made
clear that its decision rested on violation of the reps and warranties. Perhaps this
was oversight, perhaps it was error, perhaps it occurred because all Parties’ counsel
failed adequately to alert the Panel to the difference among the Defendants. The
latter oversight itself could have been strategic, or merely sloppy. If I sat as an
appeals court to the Panel, I would not hesitate to send it back to resolve these issues.
But I do not.
I must resist my temptation to address the Panel’s decision on the merits, and
instead consider what is in front of me. Confirmation of an arbitration award is a
kind of specific performance of a contract to arbitrate. The parties have agreed, for
reasons of their own, to submit certain disputes to an arbitration, and to accept the
3
results of the arbitration, absent fraud on the part of the arbitrator or certain other
very limited exceptions. The value of such a submission lies in reduced cost to
resolve disputes subject to arbitration; that value would be lost if the decision were
subject to substantive review. To protect this value, the applicable law here—the
Federal Arbitration Act—limits review of arbitrations under its aegis to the most
narrow of considerations. These are composed of four grounds for vacatur: where
the award is the product of fraud; where the arbitrator was not impartial or is
otherwise corrupt; where the arbitrator engaged in egregious procedural misconduct;
or where the arbitrator so exceeded her power or applied it in a way such that the
award was not effectively made upon the subject matter submitted. The Defendants
here advance only the latter proposition, arguing that the award against Hagler was
unsupported in facts or law. Such a proposition requires a high showing; that the
record is entirely bare of all support justifying the award.1 “[A]s long as the
arbitrator is even arguably construing or applying the contract and acting within the
scope of his authority, that a court is convinced that he committed serious error does
not suffice to overturn his decision.”2
1
See Carl Zeiss Vision, Inc. v. Refac Holdings, Inc., 2017 WL 3635568, at *4 (Del. Ch. Aug. 24,
2017).
2
SPX Corp. v. Garda USA, Inc., 94 A.3d 745, 751 (Del. 2014) (quoting United Paperworkers Int’l
Union, AFL-CIO v. Misco, Inc., 484 U.S. 29, 38 (1987)).
4
Of course, as the previous quote demonstrates, preserving the value of arbitral
proceedings itself entails a potential cost to the contracting parties; the risk of
receiving an arbitral decision that is questionable under the law and facts, but that is
nonetheless—not coming within the narrow window of judicial oversight—not
reviewable. That is the bargain the parties have struck here. Because I find that a
theory of liability against Hagler was pled in arbitration, and minimally before to the
Panel, I cannot disturb the decision in arbitration presented for confirmation.
Accordingly, I confirm the decision imposing liability on all Defendants, and deny
vacatur.3 A fuller explanation follows the facts.
I. FACTS
This matter involves the arbitration Award,4 that Plaintiffs have requested I
confirm in full.5 This Award, which the Defendants argue is deficient and should be
vacated,6 grants the Plaintiffs monetary damages arising from a Membership Interest
Purchase Agreement (the “MIPA”)7 and the legal fees accrued in pursuit of those
3
As the Stoic philosopher Johnny Cash described it, “I don’t like it but I guess things happen that
way.” Johnny Cash, Guess Things Happen That Way (Sun Records 1958).
4
Verified Appl. Confirm and Enter J. Final Arbitration Award Ex. A (“Award”), Dkt. No. 3.
5
Verified Appl. Confirm and Enter J. Final Arbitration Award, Dkt. No. 1.
6
Equilibrium Health Solutions LLC, M&A Healthcare LLC, Ducat HC LLC and Daryl Hagler’s
Answer to the Verified Compl. and their Verified Countercls. (“Defendents’ Answer”), Dkt. No.
9.
7
Verified Appl. Confirm and Enter J. Final Arbitration Award Ex. B (“MIPA”), Dkt. No. 3.
5
damages.8 In doing so, the Award held Defendant Daryl Hagler personally liable
for both the damages and the Plaintiffs’ legal fees.9 Defendants argue that this
finding is unsupported, and that the three-person arbitration panel (the Panel)
manifestly disregarded the law because by the plain terms of the MIPA, Hagler is
not liable. Defendants contend that I should vacate the Award because the Panel
disregarded the law (Count I), because there is no record support for Hagler’s
personal liability (Count II), and because the Panel exceeded the scope of what it
was to decide (Count III).10
A. The Parties
Defendants Equilibrium Health Solutions LLC (“Equilibrium”), M&A
Healthcare LLC, and Ducat HC LLC (collectively the “Sellers”) sold Plaintiff
Evolve Growth Initiatives LLC (“Evolve”) to Evolve Acquisition LLC pursuant to
the MIPA.11 Defendant Daryl Hagler, an owner of Equilibrium, served as the MIPA
defined “Seller Representative” which granted him power of attorney for the
Sellers.12 Hagler, however, is not a Seller under the terms of the MIPA.13 Plaintiffs
8
Award 95–96.
9
Award 95–96.
10
Defendents’ Answer. The Defendents abandoned Count IV and I dismissed Counts V and VI
of Defendents’ counterclaims before confirming the amount of the award at oral argument. Tr.
5.16.2023 Cross-Mots. Summ. J., Dkt. No. 38.
11
MIPA 1, Annex I.
12
Defendents’ Answer ¶ 20; MIPA §§ 11.1–11.2.
13
MIPA 1, §§ 11.1–11.2, Annex I.
6
Evolve, Evolve Intermediate Holdings LLC, and Evolve Holdco Inc. are “Buyer
Indemnified Persons” as defined in the MIPA.14
B. The Transaction
The facts, as they relate to the transaction that underlies the dispute, arise
primarily from the MIPA.
In Section 3, Sellers, among other facts, represented and warrantied that:
The Financial Statements (including the notes thereto, if any) have been
prepared from, and are consistent with, the books and records of the
Company, and fairly present the financial condition of the Company
and, as applicable, the Business, as of the dates thereof, and the results
of operations and cash flows for the period then ended, and have been
prepared in accordance with GAAP (except that the interim Financial
Statements are subject to normal and recurring year-end adjustments,
none of which are, individually or in the aggregate, material in amount
or effect and do not include the footnotes).15
[Evolve] has established and adhered to a system of internal accounting
controls that are designed to provide reasonable assurance regarding the
reliability of financial reporting . . . [and that] . . . [t]here has never been
(i) any significant deficiency or material weakness in any system of
internal accounting control used by [Evolve.]16
....
Neither this Agreement nor any written statement, report or other
document furnished or to be furnished by the Sellers or the Company
pursuant to [the MIPA] or in connection with the transactions
contemplated hereby contains, or will contain, any untrue statement of
14
MIPA § 9.2(a)(i); Defendants’ Answer ¶¶ 14–16.
15
MIPA § 3.4(a).
16
MIPA § 3.4(b).
7
a material fact or omits, or will omit, to state a material fact necessary
to make the statements contained herein or therein not misleading.17
Section 9 of the MIPA deals with indemnification for a number of claims that
could arise and lays out the procedure for disposing of these claims.18
The Sellers, pursuant to Section 9.2, are responsible for “jointly and severally”
indemnifying Evolve Acquisition LLC and its affiliates “in respect of any Losses
which [Evolve Acquisition LLC and its affiliates] may suffer as a result of, in
connection with or relating to any of” fourteen delineated types of claims.19 These
claims include those arising from breaches of or inaccuracies in the representations
and warranties and claims arising from the calculation of the purchase price.20
The MIPA’s arbitration provision, located in Section 9.6, includes the
following:
(a) Any dispute or controversy arising between the parties to this
Agreement in connection with the amount of any indemnity owed
pursuant to Section 9.2 or Section 9.3 shall be determined and settled
by arbitration in New York, New York, by a panel of three members
who shall be selected, and such arbitration shall be conducted, in
accordance with the commercial arbitration rules of the American
Arbitration Association, as then in effect . . . .
(b) Notwithstanding anything to the contrary in this Agreement, each
party retains the right to bring a proceeding before a court (or seek
judicial assistance) to compel arbitration in accordance with Section
17
MIPA § 3.30.
18
MIPA § 9.
19
MIPA § 9.2(a)(i).
20
MIPA § 9.2(a)(i).
8
9.6(a), enforce an arbitration award granted pursuant to the procedure
set forth in Section 9.6(a) or to obtain injunctive relief hereunder.21
In conjunction with the $83 million base purchase price, which was based on
a purported EBITDA of $7.96 million,22 the MIPA provided for a $10 million
indemnification escrow.23 The transaction closed on December 20, 2019.24
C. Hagler
Hagler, as noted, was not a “Seller” under the MIPA.25 He was “Seller
Representative.”26
Section 11 of the MIPA defines the role and authority of the “Seller
Representative.”27 Specifically, “Seller Representative” is the Sellers’ “true and
lawful attorney-in-fact and exclusive agent” with the power to bind the Sellers.28 So
long as the Seller Representative was acting within that capacity and in good faith,
“[e]xcept in cases of fraud, intentional misconduct or gross negligence, Seller
Representative will have no liability to Buyer” and also has the right to
indemnification and reimbursement from Sellers.29
21
MIPA § 9.6.
22
Award ¶¶ 6 n.2–4, 195–98.
23
Defendants’ Answer ¶ 27; MIPA Exhibit A.
24
Defendants’ Answer ¶ 4.
25
Defendants Answer ¶ 2; MIPA 1, Annex I.
26
Defendants Answer ¶ 2; MIPA §§ 11.1–11.2.
27
MIPA § 11.
28
MIPA § 11.2(a).
29
MIPA § 11.2(e).
9
I note that Hagler was not picked from obscurity to serve as the Sellers’
mouthpiece. Hagler, as alleged in the arbitration demands,30 “owns all or part of
Equilibrium[,]” one of the Sellers.31 Equilibrium owned 61% of Evolve’s
membership interests.32 Testimony during arbitration established that in negotiating
the sale “[t]he actual owners of the Seller,” not Evolve’s CEO, “were calling the
shots in the background[.]”33 Hagler was thought of as Evolve’s “primary”34 or
“majority owner.”35
During the deal’s diligence period, Hagler was privy to conversations
surrounding improper billing that had occurred.36 Evolve’s owners discussed the
30
Transmittal Aff. Sara M. Metzler Supp. Defs.’ Combined Answering Br. Opp’n Pls.’ Mot.
Summ. J. and Opening Br. Supp. Defs.’ Cross-Mot. Summ. J. Vacate Award Ex. 3 (“Original
Arbitration Demand”), Ex. 4 (“Amended Arbitration Demand”), Dkt. No. 19.
31
Original Arbitration Demand ¶ 11; Amended Arbitration Demand ¶ 12.
32
Original Arbitration Demand ¶ 15; Amended Arbitration Demand ¶ 16; MIPA Annex I.
33
Award ¶ 176.
34
Transmittal Aff. Sara M. Metzler Supp. Defs.’ Combined Answering Br. Opp’n Pls.’ Mot.
Summ. J. and Opening Br. Supp. Defs.’ Cross-Mot. Summ. J. Vacate Award Ex. 7–11
(“Evidentiary Hearing”) 403 (testimony of post-closing Evolve CEO), 1117 (testimony of pre-
closing Evolve CEO), Dkt. No. 19.
35
Evidentiary Hearing 1130 (testimony of pre-closing Evolve CEO).
36
Evidentiary Hearing 110–112 (testimony of an affiliate of purchaser) (“Q: Now, at some point
around the same time as these cumulative financial implications of diligence findings were
compiled in late September of 2019, did you participate in any discussion with any representatives
of the sellers regarding this improper billing of the psychiatric and urinalysis services?
A. Yes, we did, most specifically with Aron Gittleson, the CEO.
Q. Did the seller representative, as he is known, Daryl Hagler, participate in any of those
discussions?
A. These were telephonic. So to my recollection, he participated on one or two calls, but I am not
specific as to a particular call that you are referring to.
Q. Was there any discussion in the 24 September time frame concerning whether old Evolve should
be self-reporting these overcharges to the insurance companies?
A. Well, there were two -- there were two discussions that I recall. One was related to the improper
billing that is referred to here in this exhibit, and that relates to psychiatric and urinalysis. Without
10
overbilling and instructed Evolve not to self-report the issues to insurers.37 Hagler
specifically opposed self-reporting on the grounds that it was up to the insurers to
figure out that there was a problem and to pursue Evolve for payment.38
going into too much detail, unless the arbitrators would like me to, without having -- this is also a
violation of contracts and corporate practice of medicine laws in California. So, without forming
a separate what is called a PC or professional corporation, some of these bills would be improper.
And in addition to that, there was a similar issue with gross receipts tax that was never paid, so it
was just never even filed. That was something else that was brought to their attention. In the
course of these discussions we became concerned that the reputation of Evolve might be harmed
with the insurance community, which ultimately were the payors and clients on behalf of 3 the
patients of Evolve. And so there was discussion about going back to the payors, for example the
insurance companies, Anthem, and self-reporting, that Evolve should self-report these errors.
There was a subsequent finding which we haven’t discussed yet which we became aware of much
later, and a similar discussion was had about that as well.
Q. Did any representative of old Evolve or its owners take any position on whether old Evolve
should self-report these issues that your due diligence had exposed?
A. Yes. They had a very strong reaction to that suggestion and essentially we were, Galen was
told that they would not agree to self-report any errors to insurance companies and that that was
not their practice”).
37
Evidentiary Hearing 112.
38
Evidentiary Hearing 424–426 (testimony of post-closing Evolve CEO) (“Q: Mr. Wood, we heard
a little about the Anthem demand of $3.4 million. How did you learn about that demand?
A. Aron Gittleson, president and CEO of Evolve, old Evolve, sent me a copy of it shortly after it
was received.
Q. Do you recall participating in a call with members of the Galen team and members of the old
Evolve team to discuss that demand?
A. Yes.
Q. Did you speak during that call?
A. Yes, I did.
Q. Do you recall what you said?
A. Yes. We were discussing the fact that it appeared there was a pattern of billing for the drug
tests and a pattern of billing for the psychiatric services that went beyond just Anthem and wanted
to explore, should we have a settlement process with all other payors pre-closing so that we would
not have some overhang set of liabilities post-closing yet to be determined.
Q. Did those comments elicit any responses from members of the Centers business team?
A. Yes. There was a response from Daryl Hagler who indicated he objected to the idea of directly
reaching out to payors. He felt that it was inappropriate to voluntarily settle these, that it's up to
the payors to figure out there was a problem and to pursue Evolve in that case.
Q. What, if anything, did you think of that statement by Mr. Hagler?
11
D. Procedural History
Plaintiffs commenced arbitration on March 18, 2021 by filing a demand with
the American Arbitration Association (the “Original Arbitration Demand”).39 The
Original Arbitration Demand brought four causes of action against Defendants;
breach of contract (fictitious accounts receivable), breach of contract (additional
losses), misrepresentation, and breach of contract (declaratory relief).40 No
distinction was made between Hagler and the other Defendants in the Original
Arbitration Demand’s counts.41
In Count I, the Plaintiffs alleged that Defendants made representations and
warranties to the Plaintiffs that were untrue and caused Plaintiffs to overpay no less
than $25 million.42 In Count II, the Plaintiffs alleged that the Defendants made other
representations and warranties, which Defendants also breached but that the
damages needed to be determined in a hearing.43 In Count III, Plaintiffs alleged on
information and belief that “[Defendants] intentionally and/or negligently breached
each and every of the aforementioned representations and warranties” and that these
A. Well, I was troubled by it. This was clearly billing that was outside of the limits of both contract
and practice. It was beyond the legal authority of the provider. I felt strongly that the settlement
should be pursued.”).
39
Original Arbitration Demand; Defendants’ Answer ¶ 30.
40
Original Arbitration Demand ¶¶ 38–67.
41
Original Arbitration Demand 1, ¶¶ 38–67. There, Defendents were referred to as “Respondents.”
42
Original Arbitration Demand ¶¶ 38–44.
43
Original Arbitration Demand ¶¶ 45–56.
12
misrepresentations caused an overpayment.44 In Count IV, Plaintiffs sought a
declaratory judgment seeking indemnification for non-liquidated damages.45
On May 14, 2021, Hagler filed an action in this Court bringing claims for
declaratory judgment regarding the financial figures that were the subject of the
representations and warranties claims in Plaintiffs’ arbitration action, breach of
contract, and breach of the covenant of good faith and fair dealing.46 He contended
that his claims were not arbitrable under the MIPA, and thus, that jurisdiction was
proper in this Court.
On June 4, 2021, Plaintiffs submitted an amended arbitration demand (the
“Amended Arbitration Demand”) naming the same four Defendants47 and re-
asserting the causes of action.48 The Amended Arbitration Demand added facts and
increased Plaintiffs’ liquidated damages.49 On July 2, 2021, Defendants filed their
Answering Statement, arguing that the liquidated damages claims were not subject
to arbitration and were being litigated in this Court.50
44
Original Arbitration Demand ¶¶ 57–62.
45
Original Arbitration Demand ¶¶ 63–67.
46
Daryl Hagler v. Evolve Acquisition LLC, et al., 2021 WL 6123549, at *4 (Del. Ch. Dec. 28,
2021).
47
Amended Arbitratoin Demand 1. There, again, Defendents were denominated “Respondents”.
48
Amended Arbitration Demand ¶¶ 44–73.
49
Compare Original Arbitration Demand with Amended Arbitration Demand.
50
Award ¶ 31; Transmittal Aff. Alexandra M. Cumings Supp. Opening Br. Supp. Pls.’ Mot. Summ.
J. on (A) the Single Count in Pls.’ Verified Appl. Confirm and Enter J. Final Arbitration Award
and (B) All Six Counts in Defs.’ Verified Countercls. Ex. C ¶ 2, Dkt. No. 14.
13
Despite Hagler’s action in Chancery, a pending motion to dismiss that action,
and the belief that the liquidated damages claims were not arbitrable, Defendants
agreed to proceed with discovery in the arbitration action.51 On December 28, 2021,
I issued an opinion in Hagler’s action in this Court; holding that the arbitrability of
Hagler’s claims was a question for the arbitrators.52 This ended the question of
arbitrability, and Defendants—including Hagler—expressly consented to the
arbitration panel’s jurisdiction.53
Arbitration ensued. Pre-hearing briefs were submitted in January 2022.54
Defendants, among other arguments in their Pre-Hearing Brief, laid out the elements
of intentional misrepresentation55 and argued that the Plaintiffs could not
demonstrate liability.56 In their own words, Plaintiffs “have made no allegations that
could support a claim of intentional misrepresentation and the evidence does not
support one.”57 Plaintiffs’ disagreed in their Pre-Hearing Brief.58 They argued that
51
Award ¶ 31.
52
Hagler v. Evolve, 2021 WL 6123549, at *2.
53
Transmittal Aff. Sara M. Metzler Supp. Defs.’ Combined Answering Brief Opp’n Pls.’ Mot.
Summ. J. and Opening Br. Supp. Defs.’ Cross-Mot. Summ. J. Vacate Award Ex. 5 at 17 n.50
(“Defendents’ Pre-Hearing Brief”), Dkt. No. 19; Award ¶ 33.
54
Transmittal Aff. Sara M. Metzler Supp. Defs.’ Combined Answering Brief Opp’n Pls.’ Mot.
Summ. J. and Opening Br. Supp. Defs.’ Cross-Mot. Summ. J. Vacate Award Ex. 6 (“Plaintiffs’
Pre-Hearing Brief”), Dkt. No. 19.
55
“(i) deliberate, active concealment of a material fact, or silence in the face of a duty to speak;
(ii) scienter; (iii) an intent to induce reliance via the misstatement or concealment; (iv) causation;
and (v) damages.” Defendents’ Pre-Hearing Brief 22 (citing Nicolet Inc. v. Nutt, 525 A.2d 146,
149 (Del. 1986)).
56
Defendents’ Pre-Hearing Brief 22–23.
57
Defendents’ Pre-Hearing Brief 22–23.
58
Plaintiffs’ Pre-Hearing Memorandum.
14
Defendants “were at least reckless . . . in supplying false financial misinformation
and making the representations in” the MIPA.59
The Panel held an evidentiary hearing across the course of five days in January
2022.60 The Parties submitted post-hearing briefs to the Panel on April 15, 2022,
and the Panel held post-hearing oral argument on June 15, 2022.61
At post hearing oral argument, the Panel asked Plaintiffs directly if they were
alleging fraud and Plaintiffs replied in the affirmative.62
Question: Are you making allegation of fraud in this case?
Answer: Arbitrator Gluck, we believe that there is sufficient evidence
for the panel to find that there was fraud, given the nature of this
accounting chicanery. We’re not focused on the fraud issue because
we don’t want to undertake a larger burden than we have to as claimants
to prove our case. Breach of warranty, indemnification claim, does not
require fraud. So, you know, like I said, we don’t want to assume a
higher burden. And fraud needs to be proven by a higher quantum of
evidence than contract, breach of contract, so we’re focused on the
contract issues. But in light of the nature of some of these accounting
tricks, I think there’s ample evidence here that the panel could find
fraud. . . . You asked me are we affirmatively alleging there was fraud?
I’ll just say this. It hasn’t been the centerpiece of our case. As I started
off with the first slide, we view this as a breach of contract case. But
there’s ample evidence, we think, that the panel can infer there was
fraud, given the nature of the accounting issues here and the
deterioration during 2019 from prior years with respect to how much
they were booking as revenue and how much they actually collected.63
59
Plaintiffs’ Pre-Hearing Memorandum 22–24.
60
Evidentiary Hearing; Award ¶ 37.
61
Award ¶ 43; Transmittal Aff. Sara M. Metzler Supp. Equilibrium Health Solutions LLC, M&A
Healthcare LLC, Ducat HC LLC, and Daryl Hagler Reply Br. Supp. Their Cross-Summ. J. Mot.
Vacate Award Ex. 1 (“Post-Hearing Oral Argument”), Dkt. No. 27.
62
Post-Hearing Oral Argument 51–53.
63
Post-Hearing Oral Argument 51–53.
15
I have been unable to find any rebuttal by Hagler’s counsel in the post-trial argument,
pointing out the Hagler was in fact subject to a fraud/gross negligence standard of
liability.
Briefing concerning shifting of costs followed post-hearing oral arguments.64
In addition to reimbursement for fees expended in arbitration, Plaintiffs sought
recovery of their expenses in Hagler’s Chancery action.65 Defendants argued that
while collateral litigation to compel arbitration was contemplated by the MIPA, fees
for such collateral litigation were not.66
Though the Parties originally requested a “reasoned award,”—that is, a full
written decision specifying the grounds for any liability—they later requested the
Panel issue a “reasoned award lite.”67 I assume the “lightly reasoned” award was an
abbreviated version of the “reasoned” award. The Panel issued its reasoned award
lite, the Award, on October 14, 2022.68 The Panel, however, was not unanimous,
and one arbitrator dissented.69
64
Award ¶ 43.
65
See Transmittal Aff. Alexandra M. Cumings Supp. Opening Br. Supp. Pls.’ Mot. Summ. J. on
(A) the Single Count in Pls.’ Verified Appl. Confirm and Enter J. Final Arbitration Award and (B)
All Six Counts in Defs.’ Verified Countercls. Ex. H at 2 (“Defendants’ Fee Application”), Dkt.
No. 14; Award ¶ 301.
66
Defendants’ Fee Application 2.
67
Award ¶ 45.
68
Award; Defendants Answer ¶ 12.
69
Award ¶ 45, n.1; Aff. Sara M. Metzler Supp. Defs.’ Combined Answering Br. Opp’n Pls.’ Mot.
Summ. J. and Opening Br. Supp. Defs.’ Cross-Mot. Summ. J. to Vacate Award Ex. 14, Dkt. No.
22.
16
Ultimately, in the judgment of the Panel, the financial information represented
and warrantied was not accurate and resulted in losses; Defendants materially
overstated revenue and EBITDA and their revenue recognition practices “were not
accurate or reliable.”70 The Panel determined that,
Because we find the Buyer’s breach of contract claims meritorious in
the ways described herein and grant the Buyer the relief to which it
would, in any event, be entitled on its claims asserting the Seller’s
intentional or negligent misrepresentation as a tort, we need not reach
such claims in this Final Award.
We note in this regard that the Buyer told the Panel in the course of
closing arguments that, while it is asserting the Seller’s fraud, it is
proceeding primarily on its breach of contract claims rather than take
on the heavier burden of establishing fraud, if that is not necessary. We
also note that the Parties requested a reasoned award lite.
In these circumstances, we understand the Parties are not seeking a
ruling as to the Buyer’s claims in the alternative rendered redundant by
our above determinations in the case.71
Accordingly, the 97-page Award granted full relief to Plaintiffs, ordering;
1. [Defendants] Equilibrium Health Solutions LLC, M&A Healthcare
LLC, Ducat HC LLC, and Daryl Hagler . . . to pay [Plaintiffs] Evolve
Growth Initiatives, LLC, Evolve Holdco, Inc., and Evolve Intermediate
Holding LLC . . . damages in the amount $28,258,000, along with pre-
award interest in the amount of $5,271,370.92, for a total amount of
$33,529,370.92 that [Defendants], jointly and severally, are directed to
pay . . . .
2. . . . that all Escrow Funds be immediately released to [Plaintiffs] . . .
70
Award ¶ 130.
71
Award ¶¶ 293–95.
17
3. [Defendants], jointly and severally, . . . to pay [Plaintiffs] damages
in the additional amount [of] $241,582, along with additional pre-award
interest in the amount of $44,405.29, for a total amount of $285,987.29
that [Defendants], jointly and severally, are directed to pay . . .
5. [Defendants], jointly and severally, . . . to pay [Plaintiffs]
$2,597,022.18. in attorneys’ fees and costs.
6. [Defendants], jointly and severally, [to] bear the fees of the AAA in
this Arbitration totaling $31,750 and the compensation of the
Arbitrators in this Arbitration totaling $576,365.72
The Award specified timeframes for these payments to take place, designated several
set offs, and required Defendants to indemnify Plaintiffs for certain unliquidated
damages.73 Further, the Award noted,
7. This Final Award is in final settlement of all claims, affirmative
defenses, and set-offs submitted in this Arbitration. All claims,
affirmative defenses, affirmative defenses, and set-offs not expressly
granted herein are hereby denied.74
The Panel followed “the convention of the Parties” in collectively referring to
Defendants as the “Seller” and, in accordance with an agreement of the Parties, did
not “differentiate among the various entities or persons constituting [Plaintiffs] and
[Defendants] respectively.”75 Thus, in the Award, Hagler was a “Seller” despite not
being defined as such within the MIPA.
72
Award 95–96.
73
Award 95–96.
74
Award 96.
75
Award ¶ 1.
18
Hagler, and Defendants generally, disagreed with the Panel’s assignment of
joint and several liability to Hagler under the Award. On October 28, 2022,
Defendants filed a motion pursuant to AAA Rule 50 requesting “correction of a
ministerial error[,]” namely Hagler’s liability.76 Briefing and negotiation followed.
By letter, Plaintiffs stated that, if the Defendants agreed to other conditions:
Because Hagler is ostensibly not a Seller under the Agreement, but
rather the Seller Representative, [Plaintiffs] do not oppose
[Defendants]’ request to the extent, but only to the extent, that
[Defendants] ask that the Final Award be modified so that there is no
determination that Hagler is presently personally liable to contractually
indemnify [Plaintiffs] under the Agreement for damages and interest
thereon arising from the Sellers’ breaches of representations and
warranties.77
Again, this concession was conditional,78 and the Parties found no accord.79 On
November 30, 2022, the Panel concluded that the proposed changes “go beyond
those permitted under Rule 50.”80
76
Transmittal Aff. Sara M. Metzler Supp. Defs.’ Combined Answering Brief Opp’n Pls.’ Mot.
Summ. J. and Opening Br. Supp. Defs.’ Cross-Mot. Summ. J. Vacate Award Ex. 15 (“Rule 50
Motion”), Dkt. No. 19; Defendants Answer ¶ 48.
77
Transmittal Aff. Sara M. Metzler Supp. Defs.’ Combined Answering Brief Opp’n Pls.’ Mot.
Summ. J. and Opening Br. Supp. Defs.’ Cross-Mot. Summ. J. Vacate Award Ex. 16 at 2 (“Rule
50 Response”), Dkt. No. 19.
78
See Rule 50 Response.
79
See Transmittal Aff. Sara M. Metzler Supp. Defs.’ Combined Answering Brief Opp’n Pls.’ Mot.
Summ. J. and Opening Br. Supp. Defs.’ Cross-Mot. Summ. J. Vacate Award Ex. 17 (“Rule 50
Denial”), Dkt. No. 19.
80
Rule 50 Denial 2; Defendants’ Answer ¶ 48.
19
In what remains of this action, Plaintiffs seek confirmation of the Award and
Defendants dispute Hagler’s liability.81 Plaintiffs filed their one count complaint for
confirmation on December 2, 2022, and Defendants filed their answer and six count
counterclaim on January 10, 2023.82 Five of Defendants’ counts sought vacation of
the Award, while the sixth—Count IV—sought modification.83
As is regularly the case when parties dispute the confirmation of an arbitration
award, the Parties here have filed cross motions for summary judgment.84 Briefing
on the cross motions began on February 6, 2023, and concluded on May 2, 2023.85
At oral argument on May 16, 2023, the Defendants acknowledged
abandonment of Count IV and I dismissed Count V and VI.86 I then confirmed the
amount of the award.87 I reserved judgment on the question of Hagler’s joint and
several liability, but I ordered the Parties to meet, confer, and post a letter to the
docket on the question of settlement before I would consider the matter fully
81
Tr. 5.16.2023 Cross-Mots. Summ. J.
82
See Verified Appl. Confirm and Enter J. Final Arbitration Award; Defendants’ Answer.
83
Defendants’ Answer ¶¶ 51–93.
84
See Polychain Cap. LP v. Pantera Venture Fund II LP, 2022 WL 2467778, at *3 (Del. Ch. July
6, 2022).
85
See Opening Br. Supp. Pls.’ Mot. Summ. J. on (A) the Single Count in Pls.’ Verified Appl.
Confirm and Enter J. on Final Arbitration Award and (B) All Six Counts in Defs.’ Verified
Countercls., Dkt. No. 13; Equilibrium Health Solutions LLC, M&A Healthcare LLC, Ducat HC
LLC, and Daryl Hagler Reply Br. Supp. Their Cross-Summ. J. Mot. Vacate Award, Dkt. No. 27.
86
Tr. Cross-Mots. Summ. J. 43:10–43:23, 69:22–24. Count IV sought modification of the Award
under FAA § 11 to correct the “evident mistake” of Hagler’s liability. Counts V and VI sought
vacation of the Award for manifest disregard of the law and lack of record support. Both Counts
V and VI arose out of a whether certain information was represented and warrantied and cited to
the dissenting panelist’s opinion. Defendants’ Answer ¶¶ 69–93.
87
Tr. Cross-Mots. Summ. J. 71:7–9.
20
submitted.88 The Parties complied, but were unable to settle the matter, and I
formally took the matter under consideration on June 16, 2023.89
II. ANALYSIS
“A summary judgment motion ‘provides an appropriate judicial mechanism
for reviewing an arbitration award, because the complete record is before the court
and no de novo hearing is permitted.’”90 “Under Court of Chancery Rule 56,
summary judgment may be granted if ‘there is no genuine issue as to any material
fact and . . . the moving party is entitled to judgment as a matter of law.’”91 Cross
motions for summary judgment do not change the Rule 56 standard; the Court must
simply examine each motion on its own and determine if summary judgment is
warranted.92
“Arbitral awards are nearly impervious to judicial oversight.”93 Judicial
review of an arbitration award is among the narrowest standards of review in the
law.94 “Section 10 of the FAA . . . allows vacatur of an arbitration award only in the
88
Tr. Cross-Mots. Summ. J. 71:7–24.
89
See Judicial Action Form, Dkt. No. 42.
90
MHP Mgmt., LLC v. DTR MHP Mgmt., LLC, 2022 WL 2208900, at *2 (Del. Ch. June 21, 2022)
(quoting Wier v. Manerchia, 1997 20 WL 74651, at *7 (Del. Ch. Jan. 28, 1997)).
91
Roma Landmark Theaters, LLC v. Cohen Exhibition Co., 2021 WL 2182828, at *6 (Del. Ch.
May 28, 2021) (quoting Ct. Ch. R. 56(c)).
92
Bernstein v. TractManager, Inc., 953 A.2d 1003, 1007 (Del. Ch. 2007).
93
Teamsters Local Union No. 42 v. Supervalu, Inc., 212 F.3d 59, 61 (1st Cir. 2000).
94
SPX, 94 A.3d at 750.
21
case of arbitral misconduct: ‘corruption,’ ‘fraud,’ ‘evident partiality,’ ‘misconduct,’
‘misbehavior,’ and ‘exceed[ing] . . . powers.’”95 Thus, the limited grounds to vacate
an award exist:
(1) where the award was procured by corruption, fraud, or undue
means;
(2) where there was evident partiality or corruption in the arbitrators, or
either of them;
(3) where the arbitrators were guilty of misconduct in refusing to
postpone the hearing, upon sufficient cause shown, or in refusing to
hear evidence pertinent and material to the controversy; or of any other
misbehavior by which the rights of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so imperfectly
executed them that a mutual, final, and definite award upon the subject
matter submitted was not made.96
“The statute contains no express ground upon which an award can be
overturned because it rests on garden-variety factual or legal bevues.”97 As such,
courts “do not sit to hear claims of factual or legal error by an arbitrator as an
appellate court does in reviewing decisions of lower courts.”98 “‘[Q]uestionable
legal support or a misreading of the law alone are insufficient to vacate an arbitration
95
Auto Equity Loans of Delaware, LLC v. Baird, 232 A.3d 1293, *3 (Del. 2020) (quoting Hall St.
Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576, 586 (2008)).
96
TD Ameritrade, Inc. v. McLaughlin, Piven, Vogel Sec., Inc., 953 A.2d 726, 731 (Del. Ch. 2008)
(quoting 9 U.S.C. § 10(a)).
97
Advest, Inc. v. McCarthy, 914 F.2d 6, 8 (1st Cir. 1990). “Garden-variety bevue,” I admit I only
learned from reading the Advest opinion, appears to be a Francophilic way of saying “ordinary
oversight” or “common mistake.”
98
United Paperworkers Int’l Union v. Misco, Inc., 484 U.S. 29, 38 (1987).
22
award.’”99 “Indeed, to overturn an award, the court must be satisfied that ‘there [is]
absolutely no support at all in the record justifying the arbitrator’s
determinations.’”100
An arbitrator exceeds her authority when she decides an issue “outside of
those contained in the submission or if [her] actions are in direct contradiction to the
express terms of the agreement of the parties.”101 Arbitral authority flows from two
sources: “1) the underlying agreement between the parties in which they agree to
submit their disputes to arbitration and 2) the document containing the submission
to the Arbitrator of the issues to be decided.”102 If the arbitrator decides an issue
beyond these two wellsprings of authority, she has exceeded her authority.103
However, “[e]ven if the arbitrator did not state the grounds for a grant or denial of
relief, the grant or denial of relief will be deemed to be within the scope of the
arbitrator’s authority ‘[i]f grounds for the award can be inferred from the facts of the
case.’”104
99
Agspring, LLC v. NGP X US Holdings, L.P., 2022 WL 170068, at *3 (Del. Ch. Jan. 19, 2022),
aff’d, 288 A.3d 690 (Del. 2022) (quoting Auto Equity Loans of Delaware, 232 A.3d at
*3).
100
Carl Zeiss Vision, 2017 WL 3635568, at *4 (quoting United Transp. Union Local 1589 v.
Suburban Transit Corp., 51 F.3d 376, 379 (3d Cir. 1995)).
101
World-Win Mktg., Inc. v. Ganley Mgmt. Co., 2009 WL 2534874, at *2 (Del. Ch. Aug. 18, 2009)
(citing Malekzadeh v. Wyshock, 611 A.2d 18, 21 (Del. Ch. 1992)).
102
Malekzadeh v. Wyshock, 611 A.2d 18, 21 (Del. Ch. 1992) (citing Fagnani v. Integrity Fin.
Corp., 167 A.2d 67, 70 (Del. Super. Ct. 1960)).
103
Id. (citing federal case law).
104
World-Win Mktg., 2009 WL 2534874, at *2.
23
Here, the Defendants have assailed the award on a theory of manifest
disregard for the law. This ground for vacatur is an “outgrowth of the statutory
vacatur grounds for cases in which the arbitrator exceeds his powers.”105
[T]he test for ‘manifest disregard for the law’ is not whether the
arbitrator misconstrued the contract-even if the contract language is
clear and unambiguous. To vacate an arbitration award based on
‘manifest disregard of the law,’ a court must find that the arbitrator
consciously chose to ignore a legal principle, or contract term, that is
so clear that it is not subject to reasonable debate.106
“[T]he evidence must establish ‘that the arbitrator (1) knew of the relevant legal
principle, (2) appreciated that this principle controlled the outcome of the disputed
issue, and (3) nonetheless willfully flouted the governing law by refusing to apply
it.’”107 This is a “steep hill to climb.”108
Knowledge of the relevant legal principle requires “‘an error that is so obvious
that it would be instantly perceived as such by the average person qualified to serve
as an arbitrator.’”109 “[A]s long as the arbitrator is even arguably construing or
applying the contract and acting within the scope of his authority, that a court is
convinced that he committed serious error does not suffice to overturn his
decision.”110
105
Travelers Ins. Co. v. Nationwide Mut. Ins. Co., 886 A.2d 46, 48 (Del. Ch. 2005).
106
SPX, 94 A.3d at 747.
107
Id. at 750 (quoting Paul Green School of Rock Music Franchising, LLC. v. Smith, 389 Fed.
Appx. 172, 177 (3d Cir. 2010)).
108
Auto Equity Loans of Delaware, 232 A.3d at 1293.
109
SPX, 94 A.3d at 751.
110
Id.24
The Defendants argue that in holding Hagler personally liable, the Panel
exceeded its scope by manifestly disregarding the law, providing no factual basis for
its decision, and by lacking jurisdiction over Hagler. Defendants’ primary argument
is simply that the Panel misread the MIPA and lumped Hagler in with those defined
as “Sellers” disregarding his status as “Seller Representative” who “‘will have no
liability to the buyer’ except in cases of fraud, intentional misconduct or gross
negligence.”111 This mistake, Defendants argue, is a clear disregard for the
contract’s limited liability provisions, which the Panel read,112 and is akin to finding
for the liability of a non-party.113
Defendants rely most directly on Travelers Insurance v. Nationwide Mutual
Insurance.114 Travelers stands for the principle that an award must be vacated where
it holds liable a party for whom there is no conceivable liability.115 In Travelers, this
Court vacated an arbitration award for “manifest disregard of the law.”116 A driver
insured by Nationwide caused an accident injuring a driver insured by Travelers.117
Travelers paid its insured no-fault benefits, and sought to subrogate this payment
111
Defs.’ Combined Answering Br. Opp’n Pls.’ Mot. Summ. J. and Opening Br. Supp. Defs.’
Cross-Mot. Summ. J. to Vacate Award 23–25, Dkt. No. 19 (quoting MIPA § 11.2(e)).
112
Defs.’ Combined Answering Br. Opp’n Pls.’ Mot. Summ. J. and Opening Br. Supp. Defs.’
Cross-Mot. Summ. J. to Vacate Award 24–25.
113
Defs.’ Combined Answering Br. Opp’n Pls.’ Mot. Summ. J. and Opening Br. Supp. Defs.’
Cross-Mot. Summ. J. to Vacate Award 27.
114
886 A.2d 46 (Del. Ch. 2005).
115
Id. at *50–51.
116
Id.117
Id. at *47.
25
from Nationwide.118 These claims were submitted to arbitration as required by an
agreement entered by Nationwide and Travelers.119 Traveler’s insured then settled
her claims against Nationwide’s insured for the at-fault driver’s policy limits, which,
by statute, superseded the subrogation claim, and Travelers as well as the arbitrators
were made aware of the settlement.120 Nonetheless, Travelers continued with the
arbitration proceeding, and the arbitrators made a subrogation award to Travelers.121
This Court noted that in light of the fact that the panel was aware of the payment
which voided the subrogation claim, the award was in manifest disregard of the law.
The Court vacated the decision, noting that “the final judgment was made in manifest
disregard of the law on a record that reflected the operative facts.”122
Here, by contrast, Hagler was a defendant to all counts of the Original and
Amended Arbitration Demands.123 He failed to raise as a defense lack of contractual
liability for simple rep and warranty breaches at any point during the arbitration
proceedings, despite the incentive and opportunity to do so.124 He knew, or should
have known, that the matters before the Panel included fraud and misrepresentation
118
Id.
119
Id.
120
Id.
121
Id. at *48.
122
Id. at *50–51.
123
Original Arbitration Demand 1, ¶¶ 38–67; Amended Arbitration Demand 1, ¶¶ 44–73.
124
Opening Br. Supp. Pls.’ Mot. Summ. J. on (A) the Single Count in Pls.’ Verified Appl. Confirm
and Enter J. on Final Arbitration Award and (B) all Six Counts in Defs.’ Verified Countercls. 2;
Defs.’ Combined Answering Br. Opp’n Pls.’ Mot. Summ. J. and Opening Br. Supp. Defs.’ Cross-
Mot. Summ. J. to Vacate Award 28.
26
which could support his liability. The Panel appeared to limit its decision to simple
contractual liability, for which Hagler was not liable; nonetheless, the Award
imposed joint and several liability against Hagler.
The Supreme Court’s decision in SPX v. Guarda USA is instructive.125 In
SPX, the Delaware Supreme Court overturned a Court of Chancery decision finding
manifest disregard for the law because, despite finding the contract unambiguous
and unapplied by the arbitrators, this Court did not consider whether the arbitrator’s
decision “rationally can be derived from either the agreement of the parties or the
parties’ submissions to the arbitrator.”126 Because there was a basis for the award in
the contractual language as argued by the parties, the award could not be vacated.127
Thus, so long as there is a basis for liability discernable from the arbitration
record, the arbitration must be confirmed. That is the case here.
Under the terms of the MIPA, Hagler, as Seller Representative, was liable to
Evolve Acquisition LLC and Evolve, including their successors or assigns, for
“fraud, intentional misconduct, or gross negligence” but not for actions otherwise
“taken in good faith.”128 In the Award, the Panel noted:
“When one steps back and looks at the consistent, ongoing, and
continuing overstatement of Old Evolve’s revenues, as discovered by
the Buyer both during the Due Diligence period and after the Closing,
125
94 A.3d 745 (Del. 2014).
126
Id. at 751 (quotation omitted).
127
Id.128
MIPA 11.2(e).
27
the situation compellingly presents a picture of such financial
overstatements as to strongly support the inference that they were
intentional on the part of the Seller. At a minimum, the evidence shows
that the approaches, particularly the percentages, the Seller used for Old
Evolve’s revenue recognition and for bad debt, were not accurate or
true––that the Seller knew its revenue recognition approaches and
systems, the bases for its revenue recognition, were not accurate or
reliable.”129
A “compelling picture” of intentionality supports a finding of “fraud, intentional
misconduct or gross negligence.”
Similarly, Hagler contests the scope of the arbitration, arguing that his liability
was not among the issues for which the contract compelled arbitration. But based
on the procedural history of this matter, and the complaint in arbitration, this
argument must fail.
Hagler points to the MIPA, and argues that he was not thereby bound to
arbitrate and his liability accordingly was not within of the Panel’s ambit.130
However, where there is an adequate basis for the arbitration decision, the arbitrators
have not exceeded their scope. In Malekzadeh v. Wyshock, a managing general
partner of a partnership sought to vacate an arbitration award removing him as
general partner and adjusting the ownership percentages of the partners. 131 The
129
Award ¶ 130.
130
Defs.’ Combined Answering Br. Opp’n Pls.’ Mot. Summ. J. and Opening Br. Supp. Defs.’
Cross-Mot. Summ. J. to Vacate Award 27 (citing Rapid Settlements, Ltd. v. Green, 294 S.W.3d
701, 707 (Tex. App. 2009)).
131
611 A.2d 18, 20 (Del. Ch. 1992).
28
limited partner petitioners originally brought a claim in this Court with a request for
a preliminary injunction, but injunctive relief was denied and the action stayed in
favor of arbitration.132 Though the arbitration clause in the partnership agreement
was broad, the request for arbitration—via a pre-trial stipulation—included only a
narrow list of issues, specifically whether the general partner “had violated either
Delaware partnership law or the Partnership Agreement, and whether he had
breached the fiduciary duty he owed to the limited partners.”133 The arbitration panel
found that the general partner had not mismanaged the partnership in several ways,
but nonetheless imposed an independent manager upon the partnership and reduced
the general partner’s ownership percentage without providing a basis for the
decision.134 This Court upheld the award, nonetheless, because the pre-trial
stipulation noted that the previously filed complaint in this Court would serve as the
agreed “foundation of the Limited Partners’ claims.”135 The Malekzadeh court found
that “[b]ecause there were claims made by the limited partners that were not
expressly addressed in the Award, it can be inferred that those claims served as the
basis for the granting of the limited partners’ request.”136
132
Id. at 19–20.
133
Id. at 20.
134
Id. at 20–21.
135
Id. at 21.
136
Id. at 22. In dicta, this Court said that if the denied claims were the only claims leveled against
the general partner, the panel would have exceeded its scope.
29
Here, Hagler was a named party defendant, and his liability was alleged in
each of the Arbitration Demands’ counts. This provided Hagler with notice of his
potential liability and a basis for the Panel to make its decision. Because Hagler was
a named defendant and included in each of the Arbitration Demands’ counts,
Hagler’s liability was within the Panel’s scope.
Further, and perhaps more fundamentally, Hagler could have raised the issue
of arbitrability of claims against him with the Panel. He failed to do so.137 As I
found in Hagler’s original action on this very point, that issue would have been
properly before the Panel.138 Ultimately, the failure to argue to the Panel that Hagler
was outside the scope of arbitration binds Hagler. As this Court has noted,139 a
party’s “failure to make arguments to the arbitrator is not grounds for vacating the
arbitrator’s decision[;] . . . [the party’s] failure to brief and argue the issue before the
arbitrator may have been a conscious decision,” or mere oversight.140 Ultimately,
“[w]hether plaintiff’s failure to make certain arguments to the arbitrator was
intentional or not, such failure does not provide this Court a reason to vacate the
award of the arbitrator.”141
137
Opening Br. Supp. Pls.’ Mot. Summ. J. on (A) the Single Count in Pls.’ Verified Appl. Confirm
and Enter J. on Final Arbitration Award and (B) All Six Counts in Defs.’ Verified Countercls. 2;
Defs.’ Combined Answering Br. Opp’n Pls.’ Mot. Summ. J. and Opening Br. Supp. Defs.’ Cross-
Mot. Summ. J. to Vacate Award 28.
138
Hagler v. Evolve, 2021 WL 6123549, at *5.
139
World-Win Mktg. v. Ganley Mgmt., 2009 WL 2534874, at *3.
140
Id.141
Id.30
The Defendants make a final argument. They argue that Plaintiffs should be
estopped from confirming the Award because the Plaintiffs acknowledged the
Award’s deficiency in regard to Hagler’s liability.142 The Defendants first raised the
issue of Hagler’s joint and several liability via a request to the Panel under AAA
Rule 50, shortly after the Award issued. In their response to the Defendants’ request
to correct the “clerical mistake” or “ministerial error” regarding Hagler’s personal
liability, Plaintiffs agreed that
[b]ecause Hagler is ostensibly not a Seller under the Agreement, but
rather the Seller Representative, [Plaintiffs] do not oppose
[Defendants’] request to the extent, but only to the extent, that
[Defendants] ask that the Final Award be modified so that there is no
determination that Hagler is presently personally liable to contractually
indemnify [Plaintiffs] under the Agreement for damages and interest
thereon arising from the Sellers’ breaches of representations and
warranties.143
I find, however, that this “concession” was conditional and contingent on
several further modifications to the award. Plaintiffs sought to “expressly reserve
all of their rights to assert any claims of any nature for damages or any other form
of relief against Hagler as an individual or in any other capacity in any form of action
or proceeding.”144 Further, the Plaintiffs wrote,
“[f]or the avoidance of doubt, to the extent the Panel is disposed to
modify the Final Award so there is no determination that Hagler is
142
Defs.’ Combined Answering Br. Opp’n Pls.’ Mot. Summ. J. and Opening Br. Supp. Defs.’
Cross-Mot. Summ. J. to Vacate Award 31–33.
143
Rule 50 Response 2 (emphasis added).
144
Rule 50 Response 4.
31
presently personally liable to contractually indemnify [Plaintiffs] under
the Agreement for damages and interest arising from Seller
[Defendants’] breaches of representations and warranties, Plaintiffs
request that the Panel add a paragraph . . . that confirms that the
modification is without prejudice to [Plaintiffs’] rights to assert claims
against Hagler.”145
The Panel denied the Defendants’ request as incompatible with relief available under
Rule 50, and did not modify the Award.146
It is not entirely clear under what theory Hagler proceeds here. There was
never an unconditional promise by Plaintiffs to waive liability. Estoppel requires a
change in position on the part of the non-declarant that is absent here.147 The Panel
declined to consider the issue and did not rely on the Plaintiffs’ statement; thus, no
judicial estoppel arises.148
As there are no adequate bases on which to vacate the Award, to I must
confirm it.
145
Rule 50 Response 4.
146
Rule 50 Denial 2.
147
Bantum v. New Castle Cnty. Vo-Tech Educ. Ass’n, 21 A.3d 44, 51 (Del. 2011) (“To establish
estoppel, the party claiming estoppel must show the following three elements: (1) she lacked
knowledge or the means of obtaining knowledge of the truth of the facts in question, (2) she relied
on the conduct of the party against whom estoppel is claimed, and (3) she suffered a prejudicial
change of position as a result of her reliance.”) (citation and quotation omitted).
148
“‘[J]udicial estoppel operates only where the litigant’s [present position] contradicts another
position that the litigant previously took and that the Court was successfully induced to adopt in a
judicial ruling.’” Motorola Inc. v. Amkor Tech., Inc., 958 A.2d 852, 859–60 (Del. 2008) (emphasis
in original) (quoting Siegman v. Palomar Med. Techs., Inc., 1998 WL 409352, at *3 (Del. Ch. July
13, 1998)).
32
III. CONCLUSION
For the foregoing reasons, the Award is confirmed in full. The Plaintiffs’
Motion for Summary Judgment is granted, and the Defendants’ denied. The Parties
should provide a form of order.
33