Court Opinion

ID: 4237384
Source: CourtListenerOpinion
Date Created: 2018-01-18 15:09:05.829735+00
Date Added: 2024-06-11T13:26:54.061894
License: Public Domain

COURT OF CHANCERY
                                  OF THE
 SAM GLASSCOCK III          STATE OF DELAWARE                  COURT OF CHANCERY COURTHOUSE
   VICE CHANCELLOR                                                      34 THE CIRCLE
                                                                 GEORGETOWN, DELAWARE 19947

                        Date Submitted: December 14, 2017
                         Date Decided: January 16, 2018

 Thomas A. Uebler, Esquire                     Michael F. Bonkowski, Esquire
 Kerry M. Porter, Esquire                      Nicholas J. Brannick, Esquire
 Cooch and Taylor, P.A.                        Cole Schotz P.C.
 3711 Kennett Pike, Suite 100                  500 Delaware Avenue, Suite 1410
 Greenville, DE 19807                          Wilmington, DE 19801

               Re: Daugherty v. Highland Capital Management, Civil Action No.
               2017-0488-SG

Dear Counsel:

       This matter involves purported breaches of fiduciary duty and, via Count I of

the Complaint, alleges a fraudulent transfer of funds to escape a Texas court

judgment. Before me is a Motion to Dismiss those allegations. This Letter Opinion

addresses only the Motion to Dismiss the fraudulent transfer claim in Count I. I have

asked for supplemental briefing regarding the claims raised in the other counts of

the Complaint, and will address the Motion to Dismiss those claims later, in the light

of that briefing.

       Briefly, according to Count I of the Complaint, the Plaintiff brought an action

against various Defendants in Texas, alleging that they had purloined his interest in

an entity, Defendant HERA. Thereafter, the Defendants caused another entity

Defendant to deposit, perhaps as a “litigation reserve,” an amount in escrow
sufficient to make the Plaintiff whole, should he prevail. HERA then represented to

the Texas Court that the funds in escrow belonged to it, conditioned on a final

judgment against HERA; should the Plaintiff obtain a verdict, the amount in escrow

would, through HERA, then be available to the Plaintiff. Subsequently, the Plaintiff

obtained a final judgment against HERA, but immediately thereafter, the Defendants

caused the escrow agent to resign and return the funds to the other Defendants,

leaving the Plaintiff unable to collect the judgment. Again, Count I alleges that the

transfer of these funds from escrow, without value to HERA, was a fraudulent

transfer. The Motion to Dismiss that claim is denied in part. My reasoning follows.

       The Defendants have moved to dismiss the Complaint under Court of

Chancery Rule 12(b)(6). When reviewing such a motion,

       (i) all well-pleaded factual allegations are accepted as true; (ii) even
       vague allegations are well-pleaded if they give the opposing party
       notice of the claim; (iii) the Court must draw all reasonable inferences
       in favor of the non-moving party; and (iv) dismissal is inappropriate
       unless the plaintiff would not be entitled to recover under any
       reasonably conceivable set of circumstances susceptible of proof.1

I need not, however, “accept conclusory allegations unsupported by specific facts or

. . . draw unreasonable inferences in favor of the non-moving party.”2

1
  Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (footnotes and internal quotation
marks omitted).
2
  Price v. E.I. DuPont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011).
                                              2
       This litigation, and the precedent Texas litigation, are complicated; what

follow are only those facts alleged as necessary to understand my decision on the

instant motion. Plaintiff Patrick Daugherty filed the Complaint on July 5, 2017.

Defendants Highland Capital Management, L.P. (“Highland”), Highland Employee

Retention Assets LLC (“HERA”), Highland ERA Management LLC (“HERA

Management”), and James Dondero (collectively the “Defendants”) moved to

dismiss the Complaint on August 23, 2017. Daugherty was a partner and senior

executive of Highland from 1998 until 2011, after which the parties engaged in

litigation.3 Highland is a registered investment advisor with nearly $15 billion of

assets under management.4 As part of his employment, Daugherty was an equity

holder in HERA.5

       According to the Plaintiff, a jury in Texas awarded him $2.6 million from

HERA, with pre- and post-judgment interest, “as compensation for the diminution

of value of Daugherty’s units as a result of [HERA’s] breach of the implied covenant

of good faith and fair dealing.”6 The Texas court also struck language from the

proposed judgment that would have extinguished the Plaintiff’s interest in HERA.7

HERA has not paid its judgment.8 The Plaintiff alleges that Dondero, Highland, and

3
  Verified Compl. (“Compl.”) ¶ 10.
4
  Id. ¶ 11.
5
  Id. ¶¶ 18–19.
6
  Id. ¶¶ 1–3.
7
  Id. ¶ 4.
8
  Id. ¶¶ 47–48.
                                         3
HERA Management caused HERA to “fraudulently or otherwise wrongfully transfer

its assets [through an escrow] to [Highland], which purportedly left [HERA]

insolvent.”9 The Plaintiff seeks to have the Defendants return the transferred assets

to HERA and satisfy his Texas judgment.10

       Under HERA’s operating agreement (the “Agreement”), any distribution from

HERA to a member litigating against HERA or Highland may be “suspended and

held in escrow by [HERA] until the final, non-appealable resolution of the

Dispute.”11 The Plaintiff alleges that Highland placed Daugherty’s HERA interests

of approximately $3.1 million into escrow with Abrams & Bayliss LLP

(“Abrams”).12 The Plaintiff alleges that, under both the Agreement and according

to Dondero’s testimony, the escrow should have been transferred to Daugherty in

satisfaction of any final judgment in favor of Daugherty in Texas.13 On December

1, 2016, an appellate court in Texas affirmed the trial court judgment.14 On

December 2, 2016, the Plaintiff contends that Abrams resigned as escrow agent and

transferred $3.1 million in Escrow assets to Highland.15 The Complaint incorporates

a letter from Abrams to the Plaintiff explaining that Highland, which had placed the

9
  Id. ¶¶ 4–5, 24, 41–48.
10
   Id. ¶ 6.
11
   Id. ¶ 24.
12
   Id. ¶¶ 41–43.
13
   Id.
14
   Id. ¶ 49.
15
   Id. ¶¶ 51–52.
                                         4
funds in escrow and for which Abrams acted as agent, had directed Abrams to return

the funds to Highland, which it did.16 The Complaint alleges in conclusory fashion

that all Defendants “caused” the funds to be returned to Highland, but the facts

indicate that only Highland effected the transfer.17 Subsequent to the transfer,

HERA filed an affidavit with the Texas court averring that it is insolvent.18

       The Defendants first argue that Count I is barred by analogy to the four-year

statute of limitations in 6 Del. C. § 1309, because this claim arose when the assets

in question were transferred from HERA to Highland on April 30, 2013.19 The claim

in Count 1, however, accrued at the time of the transfer of funds from escrow in

2016, and laches by analogy to the statute is no bar. The Defendants also contend

that Count I is “barred by the doctrines of collateral estoppel and/or res judicata” due

to the Texas rulings.20 I have reserved consideration of the issue preclusion defenses

pending supplemental briefing. I now turn to the Defendants’ argument that the

Plaintiff failed to properly plead a fraudulent transfer claim,21 and Dondero’s

16
   Id. ¶ 52.
17
   Id. ¶¶ 74–80.
18
   Id. ¶ 48.
19
   Mot. to Dismiss 2; Opening Br. in Supp. of Mot. to Dismiss 30; Reply Br. in Supp. of Mot. to
Dismiss 3.
20
   Mot. to Dismiss 2; Opening Br. in Supp. of Mot. to Dismiss 18.
21
   Reply Br. in Supp. of Mot. to Dismiss 5–7.
                                               5
assertion that Count I fails as to him because the Plaintiff “has not sufficiently pled

allegations supporting a finding of alter ego as required.”22

       I find that there is a factual issue about whether HERA had a cognizable

interest in the amount in escrow. At this stage, drawing all reasonable inferences in

favor of the Plaintiff, I find that it is reasonably conceivable that HERA owned the

amount in escrow once the Plaintiff’s judgment against HERA became final; and

that Highland caused HERA’s escrowed asset to be transferred to Highland without

value, leaving HERA insolvent, to defeat the Plaintiff as a creditor of HERA. This

states a claim of fraudulent transfer.23 The Motion to Dismiss Count I for failure to

state a claim is denied.

       Separately, Dondero seeks to be dismissed with regard to Count I, noting that

all non-conclusory allegations indicate that the transfer of the escrow was

accomplished by a corporate entity, Highland. The Plaintiff argues that, based on

the facts pled, Highland ERA Management was a sham entity created or maintained

to further a fraud, and that Dondero acted as Highland ERA Management’s alter ago.

The problem with this assertion is that nothing in Count I alleges that Higland ERA

Management took any act with respect to removing the escrowed amount from

HERA. The facts only reflect that Highland placed the funds in escrow, and that

22
   Mot. to Dismiss 2; Opening Br. in Supp. of Mot. to Dismiss 35; Reply Br. in Supp. of Mot. to
Dismiss 8–9.
23
   6 Del. C. §§ 1304–05.
                                               6
Highland directed Abrams to return them.               Assuming that the Plaintiff has

sufficiently alleged that Highland ERA Management is the alter ego of Dondero, it

nonetheless has failed to allege facts indicating liability on the part of that entity for

fraudulent transfer. Accordingly, Dondero’s Motion to be dismissed from Count I

is granted.

         At this pleading stage, I assume for purposes of this motion that HERA had a

cognizable interest in the amount in escrow, that the interest was subject to a claim

by Mr. Daugherty, and that once that claim was reduced to a judgment, the amount

was transferred to insiders without value, leaving HERA insolvent, in a way that

implicates the statute on fraudulent transfers.24          Of course, these are factual

allegations subject to proof in this litigation.

         For those reasons, the Motion to Dismiss is denied as to Count I, but granted

as to Dondero. To the extent the foregoing requires an Order to take effect, IT IS

SO ORDERED.

                                                   Sincerely,

                                                   /s/ Sam Glasscock III

                                                   Sam Glasscock III

24
     Id. §§ 1304–05, 1309.
                                            7