Court Opinion

ID: 9931122
Source: CourtListenerOpinion
Date Created: 2024-02-08 16:04:26.421009+00
Date Added: 2024-06-11T12:16:54.929145
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

JOSE MELLADO, D.M.D.,                        )
                                             )
                 Plaintiff,                  )
                                             )
      v.                                     ) C.A. No. 2023-0791-BWD
                                             )
ACPDO PARENT INC.,                           )
                                             )
                Defendant.                   )

       ORDER DENYING CROSS-MOTIONS FOR AN AWARD OF
               ATTORNEYS’ FEES AND EXPENSES

WHEREAS:

      A.    On July 21, 2023, plaintiff Jose Mellado, D.M.D. (“Plaintiff”), served

a demand on defendant ACPDO Parent Inc. (the “Company”) seeking to inspect

books and records pursuant to Section 6.2 of the Company’s bylaws and 8 Del. C.

§ 220(d) (the “Demand”).

      B.    On August 2, 2023, Plaintiff filed a Verified Complaint for Inspection

of Books and Records, seeking an order compelling the Company to produce the

books and records sought in the Demand. Dkt. 1.

      C.    Eleven days before trial, on November 3, 2023, the Company filed a

Motion for Inferences, to Show Cause, And/Or Compel Wrongfully Withheld

Discovery (the “Motion for Inferences”). Dkt. 60. In the Motion for Inferences, the

Company argued that Plaintiff had improperly withheld documents and refused to

answer questions at his deposition concerning his communications with the Florida
Agency for Healthcare Administration (“AHCA”) as part of an ongoing

investigation into fraudulent Medicaid billing practices at the Company, on the basis

that AHCA had instructed Plaintiff not to disclose details about its investigation. Id.

¶ 60. At a November 8, 2023 pre-trial conference, the Court took the Company’s

request for adverse inferences under advisement. Dkt. 69.

      D.     On November 14, 2023, the Court held a one-day trial to resolve

Plaintiff’s entitlement to the Company’s books and records in response to the

Demand. Dkt. 83.

      E.     Following post-trial briefing, on November 21, 2023, the Court issued

a Post-Trial Final Report, setting forth detailed factual findings and legal analyses

that are incorporated by reference herein. Dkt. 89. 1 The Post-Trial Final Report

resolved the Motion for Inferences, first explaining:

      “When a party objects to providing discovery, ‘[t]he burden . . . is on
      the objecting party to show why and in what way the information
      requested is privileged or otherwise improperly requested.’” Van de
      Walle v. Unimation, Inc., 1984 WL 8270, at *2 (Del. Ch. Oct. 15, 1984).
      To be clear, Plaintiff has not invoked privilege or identified any
      particular immunity, defense, or other legal doctrine to justify his
      refusal to produce discovery relevant to the Company’s defenses.
      Rather, Plaintiff simply claims that he has been instructed not to
      disclose information concerning AHCA’s ongoing investigation and
      that he believes he may suffer adverse consequences if he does not
      comply. Notably, Plaintiff has refused to identify who provided that
      instruction to him, when the instruction was made, or the precise
      parameters of the instruction. If AHCA’s instruction was made in
1
  See Mellado v. ACPDO Parent Inc., 2023 WL 8086840 (Del. Ch. Nov. 21, 2023)
[hereinafter, “Post-Trial Final Report”].
                                          2
       writing, Plaintiff has not produced it—the only evidence of such an
       instruction is Plaintiff’s self-serving testimony. Likewise, assuming the
       instruction is real, there is no evidence that Plaintiff ever sought
       permission or clarification from AHCA to confirm what he might be
       permitted to disclose in this litigation.

Post-Trial Final Report at *9. Under those facts, the Post-Trial Final Report

concluded that the Company’s request for “adverse inferences”—effectively a

default judgment—was “too extreme[,]” but that “some remedy [wa]s needed to

address Plaintiff’s refusal to provide relevant discovery concerning AHCA.” Id. at

*10. As a result, the Post-Trial Final Report explained that “a more moderate

remedy by shifting the burden of proof to Plaintiff is the fairest way to address the

Company’s inability to seek full discovery into Plaintiff’s communications with

AHCA” and, accordingly, “the burden should shift to Plaintiff to prove by a

preponderance of the evidence that his primary purpose for making the Demand is

not improper.” Id. After shifting the burden, the Post-Trial Final Report concluded

that judgment should be entered for Plaintiff. Id. at *19. 2

       F.     On January 8, 2024, the Company filed a Motion to Shift Certain Fees

(“the Company’s Motion”). Def.’s Mot. to Shift Certain Fees [hereinafter, “Def.’s

Mot.”], Dkt. 97. On January 22, 2024, Plaintiff filed a Cross-Motion to Shift Fees

2
  In response to the parties’ competing requests for an award of attorneys’ fees and costs,
the Post-Trial Final Report advised that “[n]either party is precluded from filing a motion
for fees within thirty days of this final report becoming an order of the Court.” Post-Trial
Final Report at *14.
                                             3
and Opposition to Defendant’s Motion to Shift Certain Fees (“Plaintiff’s Motion,”

and together with the Company’s Motion, the “Motions”). Pl.’s Cross-Mot. to Shift

Fees and Opp’n to Def.’s Mot. to Shift Certain Fees [hereinafter, “Pl.’s Mot.”], Dkt.

103. On February 2, 2024, the Company filed an Opposition to Plaintiff’s Cross-

Motion to Shift Fees and Reply in Further Support of its Motion to Shift Certain

Fees. Def.’s Opp’n to Pl.’s Cross-Mot. to Shift Fees and Reply in Further Supp. of

its Mot. to Shift Certain Fees, Dkt. 107.

      NOW, THEREFORE, IT IS HEREBY ORDERED, this 8th day of February,

2024, as follows:

      1.     “Delaware courts follow the American Rule that ‘each party is

generally expected to pay its own attorneys’ fees regardless of the outcome of the

litigation.’” Pettry v. Gilead Scis., Inc., 2020 WL 6870461, at *29 (Del. Ch. Nov.

24, 2020 (quoting Shawe v. Elting, 157 A.3d 142, 149 (Del. 2017)). An exception

exists in equity, however, when a party litigates in bad faith. Rice v. Herrigan-Ferro,

2004 WL 1587563, at *1 (Del. Ch. July 12, 2004). This Court has recognized that

in “extraordinary circumstances,” “overly aggressive litigation strategies” employed

to improperly resist a books and records demand may warrant fee-shifting. Pettry,

2020 WL 6870461, at *29-30 (citation and internal quotation marks omitted). A

party seeking to shift fees must satisfy “the stringent evidentiary burden of producing

‘clear evidence’ of bad faith . . . .” Dearing v. Mixmax, Inc., 2023 WL 2632476, at

                                            4
*5 (Del. Ch. Mar. 23, 2023) (ORDER) (quoting Beck v. Atl. Coast PLC, 868 A.2d

840, 851 (Del. Ch. 2005)). To warrant fees, a litigant’s conduct must be “glaring[ly]

egregious.” Seidman v. Blue Foundry Bancorp, 2023 WL 4503948, at *6 (Del. Ch.

July 7, 2023).

      2.     “Abuse of the discovery process provides another basis to shift fees.”

Bay Cap. Fin., L.L.C. v. Barnes & Noble Educ., Inc., 2020 WL 1527784, at *11 (Del.

Ch. Mar. 30, 2020), aff’d, 249 A.3d 800 (Del. 2021). “Rule 37 gives the Court broad

discretion to impose sanctions and shift costs for discovery violations.” Pharmerica

Long Term Care Inc. v. New Castle RX, LLC, 2010 WL 5130746, at *3 (Del. Ch.

Dec. 8, 2010).

      3.     Plaintiff argues that his fees should be shifted onto the Company

because he “was required to start this lawsuit and press all the way to trial because

Defendant refused to give Plaintiff documents to which he was entitled as a director

of ACPDO Parent[,]” and “Defendant unnecessarily ran-up Plaintiff’s costs” with

an “approach to discovery [that] was patently unreasonable and excessive in its

scope.” Pl.’s Mot. ¶¶ 1-2. At the same time, the Company contends that Plaintiff’s

“knowing and intentional discovery misconduct” at issue in the Motion for

Inferences warrants fee-shifting. Def.’s Mot. at 1. According to the Company,

Plaintiff’s conduct “drove up the expense of this dispute[,]” such that he should be

ordered to pay most of the fees and expenses incurred in the litigation. Id. ¶ 11.

                                          5
         4.     Neither party has met the high bar to demonstrate clear evidence of bad

faith warranting fee-shifting.

         5.     Plaintiff has not shown that the Company acted in bad faith by

improperly withholding books and records to which Plaintiff had “‘a clearly defined

and established right[.]’” Pettry v. Gilead Scis., Inc., 2021 WL 3087027, at *1 (Del.

Ch. July 22, 2021) (quoting McGowan v. Empress Ent., Inc., 791 A.2d 1, 4 (Del. Ch.

2000)). To the contrary, although the Court found Plaintiff was entitled to inspect

certain categories of books and records, it also found merit in the Company’s

position that Plaintiff sought books and records for secondary purposes that included

“assisting AHCA in its ongoing investigation, and, to a lesser degree, advancing

Plaintiff’s other litigations.” See Post-Trial Final Report at *14.

         6.     As for the Company’s Motion, the Post-Trial Final Report did conclude

that Plaintiff failed to meet his burden to show that he properly withheld information

on AHCA’s instruction.3 But Plaintiff’s litigation positions still do not, in my view,

reflect an “abuse of process that is manifestly incompatible with justice” or “an

attempt to game the system” in bad faith. Donnelly v. Keryx Biopharmaceuticals,

Inc., 2019 WL 5446015, at *6 (Del. Ch. Oct. 24, 2019). Moreover, the Post-Trial

3
    Post-Trial Final Report at *9.
                                            6
Final Report already remedied any unfairness that Plaintiff’s position caused, 4 and

both sides share responsibility for the additional expense they incurred in presenting

these issues to the Court,5 which further militates against fee-shifting.

       7.     The Company’s Motion also cites cases in which this Court has shifted

fees for extreme discovery misconduct that is not comparable to the position Plaintiff

took here. See, e.g., Bay Cap., 2020 WL 1527784, at *1 (partially shifting fees where

“[t]he plaintiff’s primary case was . . . a bold-faced lie”); Beck v. Atl. Cost PLC, 868

A.2d 840, 854 (Del. Ch. 2005) (partially shifting fees where plaintiff’s counsel

“confessed that he made a conscious decision not to produce certain portions” of

documents that “clearly bore on the fitness of [the plaintiff] to serve as a class

representative as well as on the viability of [the plaintiff’s] own personal claims

against” the defendant). I also note that, although the Post-Trial Final Report found

4
  See Post-Trial Final Report at *10 (“[I]mposing a more moderate remedy by shifting the
burden of proof to Plaintiff is the fairest way to address the Company’s inability to seek
full discovery into Plaintiff’s communications with AHCA.”).
5
  The Company points out that “Plaintiff refused to answer 107 questions at his deposition
based on the purported AHCA investigation.” Def.’s Mot. ¶ 20. But that is because the
Company repeatedly asked Plaintiff variations of the same question. The Company also
spent hours of trial time focused on this issue, rebuffing Plaintiff’s attempts to streamline
the proceedings by stipulating to identify questions Plaintiff refused to answer at his
deposition. See, e.g., Mellado v. ACPDO Parent Inc., C.A. No. 2023-0791-BWD, at 197:6-
14 (Del. Ch. Nov. 14, 2023) (TRANSCRIPT) (“[PLAINTIFF’S COUNSEL]: To speed this
along, I invite [counsel], if he wants to submit to the Court a piece of paper that says these
are the questions and the designations, I’m happy with that. I have no issue with that. The
record says what it says. [DEFENSE COUNSEL]: I’m happy to present my case as I
choose, sir.”).
                                              7
certain of Plaintiff’s representations were “disproven at trial,” it further observed

that “[t]he Company’s failure to produce the AHCA Letter from its own files by the

discovery deadline [wa]s likewise concerning . . . .” Post-Trial Final Report at *9;

id. at *9 n.7.

       8.        Under the circumstances, I recommend that the Court exercise its

discretion to deny both parties’ requests for fee-shifting, whether framed under the

bad-faith exception to the American Rule or as discovery sanctions.

       9.        Accordingly, both Motions are DENIED.

       10.       This is a final report. Exceptions may be taken within three business

days pursuant to Court of Chancery Rule 144(d)(2).6

                                                /s/ Bonnie W. David

                                                Bonnie W. David
                                                Magistrate in Chancery

6
 See Ct. Ch. R. 144(d)(2) (“In actions that are summary in nature or in which the Court
has ordered expedited proceedings, any party taking exception shall file a notice of
exceptions within three days of the date of the report.”).
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