COURT OF CHANCERY OF THE STATE OF DELAWARE M ORGAN T

. Z URN V ICE C HANCELLOR L EONARD L. W ILLIAMS J USTICE C ENTER 500 N. K ING S TREET , S UITE 11400 W ILMINGTON , D ELAWARE 19801

- 3734 January 27, 2023 Thomas A. Uebler, Esquire McCollom , D’Emilio, Smith, Uebler LLC 2751 Centerville Road, Suite 401 Wilmington, DE 19808 Kurt M. Heyman, Esquire Heyma n, Enerio, Gattuso & Hirzel L LP 300 Delaware Avenue, Suite 200 Wilmington, DE 19801
Loren R. Barron, Esquire Margolis Edelstein 300 Delawar e Avenue, Suite 800 Wilmington, DE 19801 Stephen B. Brauerman, Esquire Bayard, P.A. 600 North King Street, Suite 400 Wilmington, DE 19801

RE : Patrick Daugherty v. James Dondero, et al. , Civil Action No. 2019

- 0956

- MTZ

Dear Counsel :

O n May 1 5, 20 20 , plaintiff Patrick Dau gherty filed his amended complaint

in this action (the “Amended Complaint ”)

. 1 In March of 2021, t his matter was
stayed in view of a related bankruptcy. But today I write to res olve three motions,

which I collective ly refer t o a s the “ Motions to Dismiss ” : (1) the Motion t o
Dismiss the Amended Verified Complaint filed by d efendant Mi chael Hurst ; 2

(2) the Motion to Di smiss or, in the Al ternative, Stay Plaintiff ’s Verified Am ended
Complaint filed by d efendants James Dondero, Hig h land Employee Retention

Asse ts LLC ( “HERA ”)
, H ig hland ERA Management LLC ( “ HERA

1 Docket Item ( “ D.I

. ” ) 2 8 [he r einaf ter Am. Compl.].Pa trick Daugherty v. James D ondero, et al.
,

Civil Ac ti on No. 20 19

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Management ” ) , Sc ott El l ington
, Thomas S urg e nt , and Issac Leventon (collectively

the “ H ighland Defendants ” ) ; 3 and (3) the Moti o n to Dismiss Plaintiff ’s Verified

A m ended Complai n t fil ed by d efendant s Marc Katz and Hunton A n dre ws Kurth

LLP ’s ( “ A ndrews Kurth ” and collectively the “ Andrews Kurth Defen d ants ” and
together with Hurst and the Highland Defendants, “ Defendants ” )

. 4 I conclude that

D augherty has imp er missibly s plit his clai m s

. Defenda nts ’ Motions to Dismiss are
granted

.
I. BACKGROU ND 5

Dau gherty wa s a partne r and senior executive o f nonparty Highland Capita l

Manage ment L.P. ( “Highland Capital ” )

. In 2009, Highland Capital formed HERA
,
a Delaware limi ted liability comp any

. High land Capital granted Dau gherty and

ot her em ployees “ equity

- li ke awards in certain funds, and then distribut [ed] t he

2 D.I

. 31.

3 D.I. 32.

4 D.I. 3 4.

5 A ll facts are drawn fr om th e Amended Complaint
, the documents integral to it , and those that are incorporated b y reference

. See Wal

- Mart Stores, Inc. v. AIG Life Ins. Co.
, 860 A.2d 312, 320 ( Del. 2004 ).Pa trick Daugherty v. James D ondero, et al.
,

Civil Ac ti on No. 20 19

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proceeds of those interests to the employees in their capacity as unit holders of

HERA. ” 6 Daugherty was also a director of HERA.

Dau gherty has h ad a difficult rel atio n ship wi th Highland Capita l and its
principals for over a decade. He resigned from H i ghland Capital on September 28
,
2011
, tho ugh he continued to hold an intere st in HERA

. He co ntends that i n
February 2 012, his adversar ies bega n a m ulti

- step plan desig ned to deprive him of

that HERA interest.

In 2012, Hi ghlan d Capital sued Da u gherty in a Texas court , and Dau gherty

respo nded by filing counterclaims against Highland Capit al and third

- party c laims
against HERA and o th ers

. Du ring t hose proce edings
, ce rtain D efendants created

an escrow to hold Daugh e r t y ’ s HERA interest pending the resolution of th e
litigation , which they represented would be transferred to him if he prevailed

. Bu t

D a ugh erty contends th e escr ow w as created to allow t hose D efendants to represent

to the T exas judge and jury th at they had not deprived Daugherty of his intere st :
according to Daugherty, those D efendants n ever intended to transfer Daugh erty ’ s

interes t to him , even if he won

.

6 A m . Com pl. ¶ 20.Pa trick Daugherty v. James D ondero, et al.
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Civil Ac ti on No. 20 19

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Daughe rty did wi n on at lea st o ne of his claims

. 7 T he Texas jury found in

his favor a nd award ed him dama ges of $2.6 million plus intere s t again st HERA

(the “ Texas Jud gment ” )

. Th e verdict was appeal ed
, an d t he Texas Court of
Appea ls a ffirmed the tria l court ’ s dec ision o n D ecember 1, 20 16
, m aking the Texas
Judgment colle ctable

. Shortly the reafter, the escrow agent resigned and the

escrowed assets were transfer red to Highland Capital, not back to HERA

. Moreover, Daugherty alle ges that b efor e the Tex as Judg ment b ec a m e final, certain

Defe ndant s caus ed a di sproportionate amount of legal fees from those proceed ings

to be allocated to HERA

. With the assets trans ferred to Highland from t he escrow,

and in light of the fee allocations, HERA no long er held a ny a ssets and so could

no t satisfy the Texa s Judgment

. D a ugherty alleges he has be en unable t o collect

th e T e xas Judgment

.
O n July 6, 20 17
, Dau gherty sued Highland Capital and the H i ghland

Defendants in this Court (the “ Firs t Delaware Actio n ” ). 8 His claims gene rally fall

i nto th ree categorie s : ( 1) the transfer of HERA ’ s ass e ts out of escrow ; (2)

am endments t o HERA ’ s LLC agree ment introduced by certain D efendants ; and (3 )

7 The Tex as jury a lso awarded H i ghland Cap ital attorn eys ’ fees of $ 2.8 million

. 8 Da ugherty v. Highland Cap

. M gmt. , L.P.
, 2017

- 0488

- MTZ ( Del. Ch. ) [hereinafter First Del

. Act

. ], D.I. 1.Pa trick Daugherty v. James D ondero, et al.
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Civil Ac ti on No. 20 19

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indemni fication and f

ees on fees relati ng to the Texas l itigation. 9 Over the next

two yea rs , the Cou r t issu e d two writte n dec isions resolving motio ns to dismiss
, 10

the parties engaged in var ious other motion p racti c e, 11 Daugherty filed two

amended co mplaints, 12 and the parties comp leted di s covery

. On July 11 , 201 8
,
Dondero was dismissed from the case , leavi ng Hig h land Capital , HER A, and
HERA Management as the only defendants. 13 T he case proce e ded to trial on

O ct ob er 14 , 2019.

9 Id. ¶¶ 73

– 11 9

. 10 First Del

. Act

. , D.I. 36 ; Daugherty v. Highland Cap. Mgmt.
, 2018 WL 4172 70 (D el. C h. Jan

. 16, 2018) ; Fi rst D e l

. Act

. , D.I. 66; Daugherty v. Highland Cap. Mgmt., L.P.
, 2018 WL 3217738 (Del. Ch. June 29, 2018)

. 11 See, e.g

. , First Del

. Act

. , D.I. 61 (motion for a protective order) ; First Del

. Act

. , D. I

. 106 (motion to compel escrow agent ’ s d o cum ents pursuant t o cri me

- fraud exceptio n ) ; First Del

. Act

. , D.I. 1 33 ( motion for parti al summary judgment ); Firs t Del

. Act

. , D.I . 152 (motion for status quo order ) ; First Del

. Act

. , D.I. 207 (motion f or ru le to show caus e why d efendants should not be h eld in contem pt); Fir st De l

. Act

. , D.I. 2 1 0 (m otion to compel disc overy relating to es crow); First Del

. Act

. , D.I. 2 11 (motion for reargument concerning motion to compel ); First Del

. Act

. , D.I. 220 (motion t o stay pending in terlocutor y appeal ) ; First Del

. Act

. , D.I. 229 (moti o n for partial s ummary judgment ); First Del

. Act

. , D.I. 259 ( motio n for protective ord er); First Del

. Act

. , D.I. 269 (motion to

com pel and s ubmit to a continued d eposition ); First Del

. Act

. , D.I. 270 (mot ion to com pel testimo ny ); First Del

. A ct

. , D.I. 29 8 ( mo tio n in limine); First Del

. Act

. , D.I. 299 (motio n in limine ); First Del

. Act

. at D.I. 32 9 (motion for co ntinuance ) ; First Del

. Act

. , D.I. 355 (motion to continue confident ial treatment of certain jo int exhib its).

12 First Del

. Act

. , D.I. 7 7 ; First Del

. A ct

. , D.I. 127

. 13 First Del

. Act

. , D.I. 68.Pa trick Daugherty v. James D ondero, et al.
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Civil Ac ti on No. 20 19

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On the morning of October 1 6
, 2 0 1 9

— the third day of trial

—

the d e fendants

info rmed the Court that Hi ghland Ca p i tal filed fo r bank ruptcy

. 14 A l l proceedings
agai nst H i ghland Capital w ere automaticall y sta yed , and t he parties agreed that the

res t of the First D elaware Action shou ld also be stayed

. 15 Tho se proceedings
remained stayed , and the trial record remains open.

Plaintiff i nitiated t hi s acti on on Decembe r 1, 2019
, an d filed the Am ended
Complai nt on May 1 5, 20 2 0

. 16 The Ame nded Complaint asse rts claims against all

defendants in the First Delaware Act i on (including Dondero) other than Highland
Capital. It added as new defenda nts Highland Capita l ’ s outside c ounse l ( Andrews

K urth , Katz, and Hurst ) and thr ee of Highland Capital ’ s in

- house counsel

( Ellington
, Levento n , and S u rgent )

. T h e new allegations i n th e Amended
Complaint center on these new D efendants ’ participation in transferring HERA ’ s

ass et s out of es crow and otherwise assisting in devaluing o r appropriating
Daugherty ’ s HERA interest

. Th e Amended Complaint arise s out of the same

14 First Del

. Act

. , D.I. 362

. 15 Id. ; First Del

. Act

. , D.I. 358.

16 D.I. 1; Am. Compl.Pa trick Daugherty v. James D ondero, et al.
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Civil Ac ti on No. 20 19

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series of actions at issue in the First Delawa re Actio n

— a point Daugherty r eadily

adm it s. 17

On July 15, 20 2 0, De fe ndants file d the Motions to D ismiss pursuant to Cou rt
of Chancery Rule 12(b)(6)

. 18 The Highland Defendants also moved in the

alternat ive to stay this actio n

. 19 Daugherty asserted claims relating to the Texas
Judgment and other dama ges soug ht in th e Delaware actions a s a c reditor in
Highland Capital ’ s bankruptcy, so I grant ed the st ay pending the resolution of
Highland Capital ’ s bankruptcy proceedings

. 20 The ban kruptcy proceedings remain
ongoing , but Daugherty has reached a settlement o f his claim s again st Highland
Cap it al. 21

On a May 5 , 2022
, status conference, I requested tha t the parties pro vide
supplement al br iefing on the issues of claim splitting and the T ex as attorney

17 D.I. 46 at 26 [hereinaft er Ans. Br. ] ( “ There is no real dispute between Daugherty and the Defen dants that the cl aims i n this ac tion are par t of the same c ommon nucleu s of fa ct

. ” ).

18 D.I. 3 1 ; D.I. 3 2 ; D.I. 3 4

. 19 D.I. 32.

20 D.I. 61; D.I. 62 at 59

– 64

. 21 D.I. 66; D.I. 6 9 at 2

– 3; D.I. 92 at 6

– 7 [ hereinafter Supp. Ans. Br.]

.Pa trick Daugherty v. James D ondero, et al.
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Civil Ac ti on No. 20 19

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immunity doctrine 22 for purposes of determ ining whether some or all of the c la ims

s et forth in the Amen ded Complaint could be resolved on the pleadings and
without intruding on the bankruptcy proceedings

. 23 Th e parties filed their
supplemental b ri efs 24 and I heard argument on October 6, 2022. 25

II. ANALYSIS

The st anda rd governing Def end an ts ’ Motion s to Di smi ss is as follows:

( i) [A]ll well

- pleaded factual all egations are accepted as true; (ii) even vague allegations a r e “well

- pleaded” if they give the opposing party notice of the claim; (iii) the Court must draw all rea sonable infe ren ces i n favor of the no n

- m oving party; and [( iv)] dismissal is inappropriate

u nless the “plaintiff wou ld not be entitled to recover under a ny reasonably conceivable set of c ircumstances susceptible of proof. ” 26

Defen dants move d to d ismiss the Ame nded C o mp laint on the basis of clai m
split ting

. The c lai m splitti ng do ctrine requires th at a plaintiff raise all l eg al

22 Under t he Texas a ttorney i mmunity doctr in e , “ an attorney is immun e from li ability to

n onclients for conduct within the scope of his rep resentation of his clien ts

. ” You ngkin v. Hines , 546 S.W.3d 675, 681 (Tex. 2018)

. The parties dispute both the availabili ty and applicabil ity of t his protectio n in t hi s case. This lett er r esolv es D efendant s ’ Motion s to Dismi ss under the doctrine of claim splitting , so I do not reach whether the Te xas immunity doctrin e applies.

23 D. I. 86 at 22

– 30

. 24 D.I. 87; D.I. 88; D.I. 90; Supp. Ans. Br. ; D .I. 98; D.I. 100 ; D .I. 1 0 1

. 25 D.I

. 103; D.I. 104. I also dra w on the p art ies ’ earlier briefing on the se same i ssues. D.I. 31; D.I. 3 3; D.I. 35; Ans. Br. ; D.I. 53 ; D.I. 54; D.I. 55.

26 Savo r, Inc. v. FMR Corp. , 812 A.2d 894, 896

– 97 (Del. 2002) ( foot notes o mitted) (quoting Ko

fron v . Amoco Chems. C orp. , 441 A.2d 226, 227 ( D el. 1982) )

.Pa trick Daugherty v. James D ondero, et al.
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Civil Ac ti on No. 20 19

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theories arising from a co m mon nuc leus of operat i v e fact in one action so long as

she has had a full and free opportunity to do s o

. 27 A final ju dgment i n the first

filed ac tion is not a necess ary element of the doctrine. 28 C la im splitting may b ar a

second cause of action even where ther e is not complete overlap betwee n the

nam ed defend ants

. 29 The burden is on the plaintiff to sho w that she could n o t hav e

raised her n ew claim s in the first proceeding. 30 Two principles drive th e claim

27 J.L. v. Barnes , 33 A.3d 90 2, 918 (Del. Super. 2011) ; see also Goureau v. Lemonis
, 20 21 WL 1197531, at *9 (Del. Ch. Mar. 30, 2021) (re as oning the claim spl itting doctrine

can a pply to a series of relat ed t ra nsac tions )

. C laim sp l itting will n o t b e applied where a plaintiff “ could no t for jurisd ictional reasons have presen ted his claim in its entirety in a prior or parallel adjudication. ” Barnes , 33 A.3d at 9 20 ( internal quotati on marks omitted) ( quotin g Maldonado v. Flynn , 417 A.2d 378, 383 ( Del. Ch. 1980 ) ).

28 See Ba lin v. Amerim ar Realty Co ., 1995 WL 170421, at *4 (Del. Ch. Apr. 10, 1995) ( ex plain ing that t he “ bas ic difference ” between res judicata and claim splitting “ is that res judicata preclu d es th e relitigation o f fa ctual and legal issue s previously decided in a n earlier law suit, while the rule a gainst claim splitting eliminates the cont e mporaneous litiga ti on of the same factual or legal issues in differ ent courts ” ) ; Hawkins v. Daniel
, 2021 W L 3732 539, at *12

– 14 (Del

. Ch. Aug. 24, 2021) ( considerin g simultaneou sly pending actions); Goureau
, 2021 WL 1197531, at *8 ( same ) ; Barnes , 33 A.3d at 917

– 18 ( same ) ; Win ner A c ceptance Corp. v. R e turn on Cap

. C orp. , 2008 WL 5352063, at *18 (Del. Ch. Dec. 23
, 2 008) ( no ting the p o licy of claim split tin g is intended to avoid both “ o verlapping [and] repet itive actions in different courts or at different times ” ( internal quotation marks omitted) ( q uoting Balin , 199 5 WL 170421, at *4 ) ) ; s ee also 18 Charles A. Wrig ht & Arthur R. Miller
, Fed eral Practice & Pro cedure § 4406 (4 t h ed.) ( “ In dealing with simultan eous actions on r el ated theories, courts at times express pr inciple s of ‘ claim splitting ’ that are similar to claim preclusi on, but that do not require a prior j udgm ent. ” )

. 29 Barnes
, 33 A .3d at 918

– 19 ( cons idering that substantial fact ual overlap between t he two pending ac ti on s made it like ly that the defendants would be subjected to c laim s or third

- party clai m s for contribution in each case )

. 30 Maldonado , 417 A. 2d at 3 83

– 84

.Pa trick Daugherty v. James D ondero, et al.
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Civil Ac ti on No. 20 19

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splitting doctri ne: (1) “ that no person sho uld be unnecessarily harassed with a
multip licity of suits ” ; and (2) a litigant should be prohibi ted “ from getting ‘ two

bite s at t he apple. ’ ” 31

Daughert y ’ s F irst Delaware Action assert ed claims arising ou t of , a mong

other thin gs , the trans fer of HERA asset s from the escrow

. Th ose proceedings

were stayed by the aut omat ic bankru ptcy stay and by consent

. Daughert y then

f iled this second action
, asserting claim s that he concedes arise from th e same

common nucleus of operative fact
, 32 which he describes as only “ nominally

new , ” 33 aga ins t ove rlapping and additional defendants. These simultaneous ly
pending, overlapping ca ses u ndoub tedly ris k subje cting Defendan ts to multiple
jud gments and potentia lly risk giving Daugh er t y two chances at prevail i ng on

claims arising from the same series of t ransactions (in addition to his third
opportunity as a creditor in Highland Capit al ’ s b an kruptcy)

. Inde ed, Daugherty

31 Barne s , 33 A.3d at 918 ( internal quotati on marks omi tted) (quoting Jo se ph E. Edwards, LL.B, Annotation
, Waiver of, by F ailing to P romptly R aise, O bjection to S plitting C ause of A ction , 40 A.L.R.3d 108 (1971)
, and then Balin
, 1995 WL 170421, at *1 ).

32 Ans. Br. a t 26

. 33 Supp. Ans. Br. at 2

– 3

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does n ot di spute that he has engaged in claim splitti ng ; he argues he should be

e xcused fro m the con sequen ces of doing so

. 34

Daugherty urges this Court to apply an except ion to the claim splitt i ng

doctrine that , in ot her ju ri sdictions, forecloses dismissal whe re a plaintiff could not

have discovered a cause of a ction du e to the defendant ’ s fraud or co ncealmen t. 35

He con tends he did not assert hi s claims against the additional defendants earlie r

because , accord ing to Da ughert y, D ondero stated for the first time at tr ial that
Highland Capital was relying on the ad vice of counsel in carrying out the

unde rlying acts

. 36

34 See D.I. 104 at 43 ( “ I agr ee with one thin g [D efendan ts ] said. The claims we re split, but where I t ake issue is that the claim splitting was improper here. ” ) ; Supp. Ans. Br. at 7

– 10

. 35 Supp. Ans. Br. a t 7

– 10 ( citing Haverc ombe v. Dep ’ t of Educ. of th e Commonwea lth of P.R.
, 25 0 F.3d 1, 8 n.9 (1st Cir. 2001) ).

36 Ans. Br. at 29.Pa trick Daugherty v. James D ondero, et al.
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Civil Ac ti on No. 20 19

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If I were to implement this except ion to im proper claim split ting, thi s case

would n ot satisfy it. Daugherty has failed to p ersua de me th at t he defe ndant s in the

First Del aware A c tio n concealed either the attorney defendan ts ’ involvement in t he
underlying even ts or the princ ipals ’ intention to rely on advice of counsel to defeat
the claims against them

. T he d efendants in the First Delaware Actio n ind icate d
they would argue that th ey did not act with t he mental state require d for
Daugher ty ’ s claims because they relied on the advice of counse l, but it appears
Daugherty did not pursue d ocuments or testimony under the at

- issue exceptio n
until his obje ctio n to Donder o ’ s trial test imony.

The defendants in the First Dela ware Action c onsistently pled a n affirmative

defense that they “ did not act with the necessary kno wledge, intent, or scienter, and

instead acted in good faith and with d ue care at all times

. ” 37 O n Jan uary 9, 20 19,

the y re sponded to Daugherty ’ s interrogatory reque sting t he basis f or that defense

b y st a ti ng , in relev ant part, that “ [t]he Amended Complaint alleges no specific

facts establishing that the transfer of the Depo sit Assets was made w i th t he a ct ual

intent to hinder, delay , or def raud
, ” and that “ Defendants ’ Couns el
, ” among others,

37 First Del. Act. , D.I. 81 at Af f irmative Defense ¶ 8 ; First Del. Act.
, D.I. 23 8 at Affirmative Defense ¶ 8 ( s ame ).Pa trick Daugherty v. James D ondero, et al.
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Civil Ac ti on No. 20 19

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have knowledg e c oncerning thi s defense. 38 D augherty did not move to comp el a

more expansive r esponse

. On March 22
, 2019
, Daugherty noti ced serv ice of a
subp o ena d u ces t ecum on Andrews Kurt h LLP requ esti ng documents relating to

the escro w

. 39 It is not clear to me w he ther D augherty ever received those

documents, but he nev er filed a motion to compel relating to that sub poena.
Daughe rty als o moved for the commi s si on of a subpoena ad tes t ifica ndum to be

serve d on Kat z. 40 Th at moti o n w as den ied withou t prejudice , and the Court
expressly permitted Daugherty to renew that m o tio n after obtaining other

d iscovery i f he could de monstrate that there we re “ gaps in the rec ord h e needs t o

fill. ” 41 He neve r did so. L ikewise, in a May 24, 2019 motion to compel
, Daugh erty express ed concerns wi th t h e d efendants ’ A p ril 2019 privilege log, but

he did not seek relief on any entry on th e basis of the at issu e e xception

. 42 When

38 First Del. Act. at J oint E xhibit 582 at r es

. 6 4.

39 First Del. Act.
, D.I. 1 39

. 40 First Del. Act.
, D .I. 140.

41 First Del. Act.
, D.I. 21 8 at 16

– 18

. That other discovery incl uded certa in documents fr om H igh land Capital ’ s Del aware counsel for its actions relating to the es crow, pursuant to t he cr ime

- fraud excepti on. Id. at 14

– 1 5

. 42 First Del. Act.
, D.I. 210 at 4, 6

– 9

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Dond ero w as deposed on August 6, 201 9 , it appears that he conveyed that he relied

on the advice of counsel sever al times as to several diff erent matters

. 43

In pretrial br iefing, t he Fir st Delaware Action d efendan ts ’ brief inclu ded
multip l e references to the a dvice of counsel defense
, and e xpressly argued that the

defendants relied on their Delaware counsel ’ s advice as a defen se to several of the
claims relating to the escr ow

. 44

And so, leading up to trial, i t appea rs Daugherty was on not ice that the First

De lawar e A c tion defendants might a rg ue that their reliance on the advice of

counsel foreclosed a finding that they held t he requisite intent in taking the

43 First Del. Act.
, D.I. 34 9
, Ex . G at 4 8 ( “ [ Q

. ] So is it yo ur position that HERA was receiving $9.5 million worth of services from Highland at the time? A

. Yeah. I believe it woul d have been an appropriate transfer. That ’ s why it was done. Q. And what makes it appropria te, in y our view? A. It was strategized, reviewed, and vetted by counsel as appropriate, given facts and circumstances, expenses and own ership. Q. Okay. Ap art f rom the belief of Highland ’ s in

- house or outside counsel about the appropriateness, do y ou ha ve

-- is anything e ls e in forming your po sition that the transfer was appropriate? A. I rely on their expertise. ” ); id. at 52 ( “ Q. Do yo u remember communicat ing w ith anybody in or around December 2013 regarding the escrow? A. No . It wouldn ’ t

-- it wouldn ’ t h ave been my idea, but it would ’ ve be en the advice of counsel

. ” ; id. at 5 4 ( “ Q. You said it would

-- when you were referring to the es crow, you said it wou ld ’ ve been the advice of counsel. Which cou nsel are you referring to? A. I don ’ t kn ow. Q. Highla nd counsel? A. No. It would ’ ve

-- yeah, it would ’ ve been external counsel, but I don ’ t know which one. Q. Okay. So outside counsel? A. Yes. Q. To Highland ? A. I don ’ t know. Q. Was it Andrews Kurth? A. I don ’ t know. Q. Who, apart from A ndrews Kurth, was Highlands [ sic] outside counsel rela ted to the Texas case? A. I don ’ t know. Q. And as far as you can recall, you never communicated with Abrams & Baylis s abo ut the escrow? A. Correct. ” ).Pa trick Daugherty v. James D ondero, et al.
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Civil Ac ti on No. 20 19

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complain e d

- of actions

. He als o was on notice that he did n ot know what that

ad vic e was. H e investigat ed th e defe ndants ’ affirmative defense and conducted

disc overy to his apparent s atisfaction in the First Delaware A c tion.
In opposing the Motions to Dismiss, Daugherty argu es Defendants raise d the

advice of counsel defense for the f ir st time at trial

. His b riefing cit e s a number of

pages o f trial testimony
, without exp lain ing how any of that testimony support s his
position

. 45 I n the hearing, he focused on the following tes timo ny , which he arg u ed

constituted new inf

ormation : 46

Q. Did Highland have outsid e cou nsel advising with respect to the purchase of the units?
A. Yes. I believe the whole situation was the most lawyered thing

we ’ ve ever done. I mean, there was counsel for each of the board

m embers, there was counsel for Highland, t here was counsel for HERA, there was Delaware counse l. Everything was or chestrated, dictated by counsel. Q. Did Highland have

-- did that counsel that Highland used als o advise counsel on the doc uments, the transact ion documents, relating to those purchase s?
A. Yes. All the fu nctio nal documents and major mo ves at various turni ng points were all at the request

-- or decided by counsel. 47

44 First Del. Act.
, D.I. 323 at 26
, 35

– 36 , 42

– 43

. 45 Ans. Br. at 29 (citing First Del . A c t. , D.I. 361 at 284

– 85 , 288, 293, 298

– 99 , 300, 308

– 13 , 325

– 27
, 3 42).

46 D.I. 104 at 45

– 48

. 47 First Del. Act.
, D .I

. 361 at 284.Pa trick Daugherty v. James D ondero, et al.
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. . . Q. Did you have any communica tion

-- are you familiar w ith Abrams & Bayliss, with what Abrams & Bayliss is?
A. I know they ’ re a Delaware l aw fi rm. But beyond that, no. Q. Did you ever have any communications with Abrams & Bayliss about them resigning as escrow agent? A. No. Highland and myself, I know, were pu rposely kept separat e from this whole thing. And it was drive n by

-- i t was driven by

c ounsel. 48

. . . Q. My ques tion is a little bi t more specific because it relates to the escrow assets a nd Mr. Daugherty. If you had been told by counsel that Mr. Daughe rty was entitled to t he escrow assets, you would have given hi m the escrow assets; right ?

A. Yes. We would have do ne whatever couns el told us. We tried very hard to compartmentalize this mess. We have a business to run. And this is

-- a half dozen lawsuits , haranguing everybod y in public, it was all intended to disru pt our business as mu ch as possible. So we tried to delegate it and c o mpartmentalize it to the lawyers as much as p ossible. 49

. . .

48 Id. a t 288

. 49 Id. at 325

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Q. Let ’ s talk about which lawyers you ’ re referring to. So I ’ l l start with the in

- h ouse lawyers again. Which in

- house lawyer s of Highland are you rely ing on with respe ct to the transfer of the e scrow assets?
A. It would have been the same three internal lawyers working with external counse l. Q. Mr. Ellington, Mr. Lev enton, and Mr. Surgen t; is that right?
A. I believe so. I beli eve they were the one s at that time and pla ce. Q. Wh ich outside counse l are you relying on?
A. I don ’ t know if Andrews and Kurth had merged with Piper. I don ’ t know w ho else was involved besides the Abrams guys. But it would have been, more likely than not , those two counsels with whatever other co unsel was representing some of the people who were sued individually. 50
Additionally
, Daugherty ’ s counsel clarified with Dondero that he had test ified he

had relied on counsel in connection with b uying out other HE RA u nit holders

. 51

T hen
, a nd only then, did Daugher ty objec t. He did not object to any of the

abo ve testimony as introducing a new , unexpected, or potentially waived defense

.
R ather
, D augherty took issue with the fact that the defendants asserted attorn ey

client privilege o ver t heir counsel ’ s advice
, arg uin g privi lege was waived under the

50 Id. at 32 6

. 51 Id. at 292

– 2 9 3

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at

- iss ue exce ption and that he “ reserve[d] the right to pursue the at

- issue waiver in

the eve nt that anyone else at Highland might recall the advice that was received

. ” 52

But as explaine d, Da ugherty was aware of the d efense before that testimony,

and had an opportunity to pursue any legal advice put at issue before Do n dero ’ s
trial testimony. Daug herty can not avoid the consequences of his claim splitt ing on

the asser t ion t hat he was surpr ised at trial in the First Delaware Action. 53

52 Id. at 300; id. at 293 ( “ MR. UEBLER: You r Honor, the defen dants are using the attorney

- client privil ege as a sword and a shie ld. The pur pos e s [sic] of the testi m ony is to estab lish, a t least as far a s I und erstand it, if this buyout process was proper. And Mr. Dondero has t estified today that i t was done at the advice of counsel. If they ’ re going to rely on th at advice to support any positions t hat they ’ re taking in this case, we ’ re en titled to kn ow w h at tha t advice was. THE COURT:

. . . You ’ re assertin g the at

- issue exception? MR. UEBLER: Y es. ” )

. 53 Daugherty also suggests that he ha d to file a sep arate acti on becau se the autom atic bank r uptcy stay prec luded a m ending hi s comp l aint in the First De lawar e A ction

. Supp. An s. Br. at 2

– 3 ( “ Daugherty filed the nominally new action against the defendants Dondero implicated as the root bad actors becau se Daugherty could not take action in the original case due to the automatic stay. ” ) ; id. at 7 ( “ Because the e v idence was withheld, Daugherty did not have the evidence to assert all of his claims in the first action. Then he was stymied by the automatic s tay

. ” ). H e has failed to demon st rate that Dondero ’ s trial testimony would have jus t ified a late and prej udici al amended pleading i n the F irst Delaware Action ( if it had n ot been stayed )

. A su rprise defen se at trial is not typically resolved by the plainti ff filing an amended complaint . Rather, where a d e fendant raises

an arg ument or in voke s for the first t ime a d efense in the middle of a trial
, the most sensible outcome is a fin d ing that th e party waived i ts argument or defense. See Barra v. Adams
, 1994 WL 369532, at *6 (Del. Ch. Jul y 1, 1994) ( “ As a procedural matter, the

e stoppel def

ense comes too late, as it was never plea ded or even referred to in the pretrial order ” and ins t ead raised the for the first time at trial); Carberry v. Redd
, 1977 WL 9561, at *1

– 2 (Del. C h. Jan. 1 9, 1977) ( h o lding statute of l imitations defense w as waived where i t wa s include d in an answer filed after trial p reparation had alread y begun) ; see also K n utkowski v. Cross
, 2011 WL 6820335, at *2 n. 10 (Del. Ch. Dec. 22, 2011) ( “ AlthoughPa trick Daugherty v. James D ondero, et al.
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Daugherty also argues that the poli c y concerns drivin g the claim splitting

doct rine are not imp l icated here because t hey can be addresse d by consolidating

this action with the First Delawa re Actio n. I reject thi s argument as w ell

. “ The
Court has ample discretion in considering how to reme d y claim splitting

. ” 54 And

u nder Court of Chance ry Rule 4 2
, the Court may consolid a te actions pending

before the Court whenever they “ involve [ ] a co mmon question of law or f a c t

. ” 55

Clai m split ting is not implicated unless the claims share a c ommon nucle us o f
operative fact. 56 To accept Daugherty ’ s solution would me an that the doctrine o f
claim splitting
, which as explained can app ly to contemp or an eously pe nding

actions, could n ever bar a second claim pending before this Court.

In addition, Court of Chancery R u le 1 states that the Cou rt ’ s rules “ shall be

con str ued
, admin ister ed, and employe d b y the Court . . . to secure the just, speedy

it is indisputably the general ru l e that a party ’ s f ailure to raise an a ffir mative defe ns e in t he appr opriate pleading results in waiver, . . . there is ample authorit y in this C ircuit for the proposition that absent unfair surprise or prejudice to the plaintiff, a defendant ’ s affirmative defense is not wa ived when it is firs t rai sed in a p re

- trial di sposi tive motion. .

. . This view is in accord with the vast majorit y of o ur si ster circuits. ” (alterations in original) (internal quota tion marks omitted) (quoting Brinkley v. Ha rbour Recre a tion Club
, 180 F.3 d 598, 612 (4t h Cir. 1999 ) ) )

. Such an amendme nt wo uld not have been proper i f th e case had procee ded; that it was stayed does not make the amendment proper

. 54 Gou re au , 2021 WL 1197531, at *12

. 55 Ct. Ch. R. 42(a).

56 See, e.g. , Winner Acceptanc e Cor p

. , 2008 WL 5352063, at *18

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and inexpensive det ermination of every p rocee d ing. ” 57 It is dif ficult to see how
any of Rule 1 ’ s purposes would be served by impl e menting Rule 42 a s Daugherty

suggests . After mor e than t wo ye a rs of hard

- fought litigation in vol vi ng extensive
motion practice, Daugherty is eff ectively requesting t hat I permit him to amend his
complaint on the third day of t rial to add , among other thi n gs, five new defe ndants

to the case , based on a l egal the ory and discovery posit ion he was on noti c e of

d uring discovery. To allow consolidation h ere would only make an a lready
procedurally complicated situat ion even more co m plicated just as it is approa c hing

its resoluti on . I deny Daug herty ’ s requ est for consolidation

.
Defendant s ’ Motions to Dismiss are GRANTE D

. The dismiss al of the

Amended Co mplaint is without pr e j udi ce.

IT IS SO ORDERED

.
Since r ely,

/s/ Morgan T. Z

urn

Vice Ch an cellor

MT Z /m s

cc : All Cou n sel of Record, v ia Fi l e & S e rve Xpress

57 Ct . Ch. R. 1.