Court Opinion

ID: 6343103
Source: CourtListenerOpinion
Date Created: 2022-05-23 19:02:34.334629+00
Date Added: 2024-06-11T14:21:40.068305
License: Public Domain

COURT OF CHANCERY
                                   OF THE
                             STATE OF DELAWARE
MORGAN T. ZURN                                                 LEONARD L. WILLIAMS JUSTICE CENTER
VICE CHANCELLOR                                                    500 N. KING STREET, SUITE 11400
                                                                  WILMINGTON, DELAWARE 19801-3734

                                     May 23, 2022

    Andrew H. Sauder, Esquire                 Sean A. Meluney, Esquire
    Dailey LLP                                Benesch, Friedlander, Coplan & Aronoff LLP
    1201 North Orange Street, Suite 7300      222 Delaware Avenue, Suite 801
    Wilmington, Delaware 19808                Wilmington, Delaware 19801

                                              David B. Anthony, Esquire
                                              Berger Harris LLP
                                              1105 North Market Street, Suite 1100
                                              Wilmington, Delaware 19801

         RE: DG BF, LLC, et al. v. Michael Ray, et al.,
             Civil Action No. 2020-0459-MTZ

Dear Counsel,

         I write to address the Defendants’ pending Application for Attorneys’ Fees

and Costs (the “Application”).1 The Application seeks fees over and above those

that were already shifted for discovery misconduct, citing the bad faith exception to

the American Rule and a new fee-shifting provision in the governing operating

1
  Docket Item (“D.I.”) 250. Citations in the form “App. —” refer to the Application. The
Application attached several exhibits, which are cited in the form “App. Ex. —.” The
Application was also supported by two affidavits and a declaration submitted by
Defendants’ counsel; these are cited as “Meluney Aff. —,” “Perry Aff. —,” and “Anthony
Decl. —,” respectively. Citations in the form “AB —” refer to Plaintiffs’ Answering Brief
in Opposition to Defendants’ Application for Attorneys’ Fees and Costs, available at
D.I. 265. And citations in the form “RB —” refer to Defendants’ Reply Brief in Support
of Its Application for Attorneys’ Fees and Costs.
DG BF, LLC v. Michael Ray, et al.,
Civil Action No. 2020-0459-MTZ
May 23, 2022
Page 2 of 15

agreement. Plaintiffs argue that the additional fees sought are unreasonable, and that

they did not bring or litigate this matter in bad faith. Plaintiffs’ litigation misconduct

already resulted in dismissal of their claims, as I detailed in an order dated

November 19, 2021 (the “Order”).2 This letter presumes familiarity with the Order’s

series of unfortunate events and its defined terms. For the additional reasons I will

explain, Defendants’ Application is granted.

         I.        Plaintiffs Litigated In Bad Faith.

         My analysis begins where the Order left off. That Order explained that while

other sanctions had been levied against Plaintiffs for their misconduct, they had

failed to remedy and stop Plaintiffs’ contempt, so no sanction other than dismissal

would suffice.3 It is difficult for me to discern any space between litigation so

contumacious that only the ultimate sanction of dismissal will have any effect, and

bad faith litigation. If there is any such space, this case does not fall within it. I

conclude Plaintiffs litigated in bad faith.

2
    DG BF, LLC v. Ray (Order), 2021 WL 5436868 (Del. Ch. Nov. 19, 2021); D.I. 253.
3
    Id. at *5–7.
DG BF, LLC v. Michael Ray, et al.,
Civil Action No. 2020-0459-MTZ
May 23, 2022
Page 3 of 15

         Under the American Rule, litigants are expected to bear their own costs
         of litigation absent some special circumstances that warrant a shifting
         of attorneys’ fees, which, in equity, may be awarded at the discretion
         of the court. The bad faith exception to the American Rule applies in
         cases where the court finds litigation to have been brought in bad faith
         or finds that a party conducted the litigation process itself in bad faith,
         thereby unjustifiably increasing the costs of litigation. There is no
         single standard of bad faith that warrants an award of attorneys’ fees in
         such situations; rather, bad faith is assessed on the basis of the facts
         presented in the case. Courts have found bad faith conduct where
         parties have unnecessarily prolonged or delayed litigation, falsified
         records, or knowingly asserted frivolous claims. Specific behavior that
         has been found to constitute bad faith in litigation includes misleading
         the court, altering testimony, or changing position on an issue. The
         bad faith exception is not lightly invoked. The party seeking a fee
         award bears the stringent evidentiary burden of producing “clear
         evidence” of bad-faith conduct.4

Defendants have produced such evidence. First, Plaintiffs “unnecessarily prolonged

[and] delayed litigation.”5 By way of example:

4
 Beck v. Atl. Coast PLC, 868 A.2d 840, 850–51 (Del. Ch. 2005) (footnotes omitted) (citing
Barrows v. Bowen, 1994 WL 514868, at *1 (Del. Ch. Sept. 7, 1994), and Arbitrium
(Cayman Is.) Handels v. Johnston, 705 A.2d 225, 231 (Del. Ch. 1997), aff’d 720 A.2d 542
(Del. 1998), and Jacobson v. Dryson Acceptance Corp., 2002 WL 31521109, at *16 (Del.
Ch. Nov. 1, 2002), and Shapiro v. Healthcare Acq., Inc., 2004 WL 878018, at *1 (Del. Ch.
Apr. 20, 2004)).
5
    Id. at 851.
DG BF, LLC v. Michael Ray, et al.,
Civil Action No. 2020-0459-MTZ
May 23, 2022
Page 4 of 15

          • “Rather than focusing on discovery, Plaintiffs engaged in motion practice,
            filing a motion to appoint a receiver over AGR (which Plaintiffs withdrew
            after Defendants moved to strike it) and two motions to extend the
            scheduling order (which Defendants briefed and which were denied for
            failure to establish excusable neglect). Plaintiffs also took time to amend
            their nearly identical complaint in a parallel action pending before the
            Supreme Court of the State of New York.”6
          • Plaintiffs opposed a motion to compel “without offering any substantive
            grounds for their opposition.”7
          • “Plaintiffs’ forwarding counsel was extremely obstructive at the Court of
            Chancery Rule 30(b)(6) deposition of Menashe as DG BF’s representative
            on document retention. Defendants were again forced to resort to motion
            practice, and were awarded a second deposition on August 17.”8
          • After the Court ordered Plaintiffs to image and search Demeter’s server,
            Demeter (which Menashe controls) filed a motion to quash production of
            the server image.9 “And again, rather than attending to their own
            obligations, Plaintiffs took countermeasures, demanding on August 24 that
            Plaintiffs image AGR’s server ‘for all financial records going back to when
            [Menashe] invested in the company.’”10
          • Plaintiffs’ utter failure to properly collect, produce, and log discovery, in
            knowing and brash contempt of orders as detailed in the Order, also
            contributed substantially to the well-over thirty motions or letter
            applications filed in this case over eighteen months.11

6
 Order, 2021 WL 5436868, at *2 (footnotes omitted) (citing D.I. 147, D.I. 152, D.I. 158,
D.I. 166, D.I. 182, D.I. 184, D.I. 195, D.I. 202, and D.I. 212).
7
    Id. at *3 (citing D.I. 172).
8
    Id. at *4 (footnotes omitted) (citing D.I. 180, D.I. 196, D.I. 197, and D.I. 204).
9
    Id. (citing D.I. 234).
10
     Id. (citing D.I. 231, Ex. 9).
11
  See, e.g., D.I. 146; D.I. 158; D.I. 180; D.I. 182; D.I. 212; D.I. 225; D.I. 231; D.I. 236;
D.I. 238; D.I. 250; see also D.I. 272 at 6–7.
DG BF, LLC v. Michael Ray, et al.,
Civil Action No. 2020-0459-MTZ
May 23, 2022
Page 5 of 15

             Second, Menashe made false statements on the record.

         • “Menashe used text messaging to conduct AGR business, but continued
           his practice of actively deleting his text messages through the pendency of
           this litigation. Menashe testified that he did not text about business
           matters, but that testimony was undermined by texts Defendants produced;
           when confronted, Menashe then testified he deleted all such messages.”12
         • Menashe also represented in briefing, attempting to defend his litigation
           misconduct, that he had never been involved in litigation before.13 This
           was demonstrably false.14

         Finally, Plaintiffs “knowingly asserted frivolous claims,” most significantly a

claim that Defendants fraudulently induced Plaintiffs into investing in AGR by

presenting false financials that were later revised downward.15 Plaintiffs’ litigation

conduct regarding their anchoring fraud claim betrays that they knew that claim was

frivolous all along.16

12
     Order, 2021 WL 5436868, at *2 (footnotes omitted) (citing D.I. 146, and D.I. 225).
13
     D.I. 237 at 2.
14
     See D.I. 242, Ex. 31; D.I. 242, Ex. 32.
15
     See Beck, 868 A.2d at 851.
16
   See Sam Reisman, Chancery Preserves Investor’s Fraud Claim Against Pot Co.,
LAW360 (March 2, 2021, 8:40 PM), https://www.law360.com/articles/1360493 (reporting
that Plaintiffs’ counsel described the fraud claim as “the crux of the dispute”).
DG BF, LLC v. Michael Ray, et al.,
Civil Action No. 2020-0459-MTZ
May 23, 2022
Page 6 of 15

          •       Plaintiffs “refused to answer several core questions, including to
                  identify the due diligence they performed relating to DG BF’s
                  investment in AGR, and to identify the material omissions
                  Plaintiffs contend were concealed and the financial statements or
                  projections that Plaintiffs believed included misrepresentations.”17
          •       “Plaintiffs’ failure to answer written discovery substantially
                  weakened that [fraud] claim, as they declined to identify any
                  omissions or misrepresentations in written discovery and so were
                  precluded from offering any at trial.”18
          •       “Plaintiffs have filed a claim for fraudulent inducement in New
                  York State based on these same facts, telling that court that New
                  York state and federal courts have exclusive jurisdiction over any
                  disputes arising out of, or relating to the Purchase Agreement,
                  including, without limitation, Plaintiff’s claims that Defendants
                  fraudulently induced it to enter into the Purchase Agreement by
                  which it invested in AGR. Plaintiffs withdrew all claims relating
                  to that Purchase Agreement from this case.”19

And after the Court ordered Plaintiffs’ repositories to be turned over to Defendants

for review by Defendants’ counsel, Defendants’ counsel discovered a June 2020

email that revealed Menashe was never concerned that the financials he saw

fraudulently induced his investment.20 Menashe forwarded an email he sent his

17
     Order, 2021 WL 5436868, at *2 (citing D.I. 183).
18
     Id. at *7.
19
     Id. (alterations and internal quotation marks omitted) (quoting D.I. 212, Ex. 9 ¶ 7).
20
     App. Ex. 2. Plaintiffs should have produced this email in discovery.
DG BF, LLC v. Michael Ray, et al.,
Civil Action No. 2020-0459-MTZ
May 23, 2022
Page 7 of 15

counsel to a friend; in the underlying email, Menashe gave his counsel his thoughts

on a draft complaint:

         • The issue is NOT that financials were revised downward – so avoid
           mentioning $s and %s – the issue is they were not transparent, did
           not disclose Roach issue, and extended Series E to a closing date of
           Oct 31 when they knew company was insolvent (per BOD mtg 34
           days later)
         • Need to focus on the key issues (mis-management, potential fraud,
           covering up actions, no governance etc,
         • Lastly, there is no mention of my demands I have presenting since
           mid February including now repricing Series D and getting Vlad
           completely out of company including Board, and Cary on Board,
           indemnification to me for financials, etc… my list. Instead it says I
           want my $5m back which is fine, but think we should list demands
           instead21

Menashe’s focus on corporate governance over fraudulent inducement is consistent

with Menashe’s goal in May 2020, as related by his friend who introduced Menashe

to his counsel:

         As I see it the Company has not done what it should have done to
         protect his investment and, if appropriate, could use the Fox review and
         potential “shot over the bow” to ensure his ownership and rights are
         protected………. and begin serious discussions.22

21
     Id. (formatting in original).
22
     App. Ex. 1 (formatting in original).
DG BF, LLC v. Michael Ray, et al.,
Civil Action No. 2020-0459-MTZ
May 23, 2022
Page 8 of 15

Defendants’ counsel also discovered a text message, which Menashe had deleted, in

which he proposed leading the next round of financing—after the projections were

revised.23 Menashe’s “shot across the bow” comprised a fraud claim that he knew

was a blank. I conclude Menashe knowingly and in bad faith pressed litigation based

on a frivolous claim.

         I conclude that fee-shifting is warranted under the bad faith exception.24 I do

not reach whether the fee-shifting provision in the Company’s operating agreement,

introduced after this litigation began, can compel fee-shifting in this case.

         II.    The Fees Defendants Seek Are Reasonable.

         Defendants’ Application, supported by the necessary Court of Chancery

Rule 88 affidavits, requests over two million dollars in fees and expenses incurred

by counsel for the individual defendants and separate counsel for the nominal

defendant.25 Of that amount, $608,666.88 is tied to previous fee awards and fees on

fees for the Application;26 the remainder is requested under today’s bad faith award.

23
     See D.I. 242, Ex. 24.
24
  This includes the attorneys’ fees incurred in connection with the temporary restraining
order and the Series E financing. See AB at 19–20.
25
     See Meluney Aff. ¶¶ 2–5; Woodward Aff. ¶¶ 3–6; Anthony Decl. ¶¶ 3–5.
26
     App. at 14–15.
DG BF, LLC v. Michael Ray, et al.,
Civil Action No. 2020-0459-MTZ
May 23, 2022
Page 9 of 15

         “Delaware law dictates that, in fee shifting cases, a judge determine[s]

whether the fees requested are reasonable.”27 The Court “has broad discretion in

determining the amount of fees and expenses to award.”28 The Court reviews a fee

application pursuant to the factors set forth in Rule 1.5(a) of the Delaware Lawyers’

Rules of Professional Conduct:

         (1)    the time and labor required, the novelty and difficulty of the
                questions involved, and the skill requisite to perform the legal
                service properly;
         (2)    the likelihood, if apparent to the client, that the acceptance of the
                particular employment will preclude other employment by the
                lawyer;
          (3)   the fee customarily charged in the locality for similar legal
                services;
         (4)    the amount involved and the results obtained;
         (5)    the time limitations imposed by the client or by the
                circumstances;
         (6)    the nature and length of the professional relationship with the
                client;
         (7)    the experience, reputation, and ability of the lawyer or lawyers
                performing the services; and
         (8)    whether the fee is fixed or contingent.29

27
  Mahani v. Edix Media Gp., Inc., 935 A.2d 242, 245 (Del. 2007) (citing Del. Lawyers’
R. Prof’l Conduct 1.5(a)(1)(a)); see also Aveta v. Bengoa, 2010 WL 3221823, at *4 (Del.
Ch. Aug. 13, 2010) (noting that the Court assesses fee awards for reasonableness).
28
   Black v. Staffieri, 2014 WL 814122, at *4 (Del. Feb. 27, 2014) (TABLE) (citing Kaung
v. Cole Nat’l Corp., 884 A.2d 500, 506 (Del. 2005)).
29
     Mahani, 935 A.2d at 246 (citing Del. Lawyers’ Rules of Prof’l Conduct R. 1.5(a)(1)).
DG BF, LLC v. Michael Ray, et al.,
Civil Action No. 2020-0459-MTZ
May 23, 2022
Page 10 of 15

       “Determining reasonableness does not require that this Court examine

individually each time entry and disbursement.”30 Nor does it “require the Court to

assess independently whether counsel appropriately pursued and charged for a

particular motion, line of argument, area of discovery, or other litigation tactic.”31

“A party’s expenses are reasonable if they were actually paid or incurred, were

thought prudent and appropriate in the good faith professional judgment of

competent counsel, and were charged at rates, or on a basis, charged to others for the

same or comparable services under comparable circumstances.”32 “For a Court to

second-guess, on a hindsight basis, an attorney’s judgment” as to whether work was

necessary or appropriate “is hazardous and should whenever possible be avoided.”33

30
   Aveta, 2010 WL 3221823, at *6 (citing, among other cases, M & G Polymers USA, LLC
v. Carestream Health, Inc., 2010 WL 1611042, at *76 (Del. Super. Apr. 21, 2010) (finding
no authority that “requires this Court to engage in a line-by-line analysis of the components
of an attorneys’ fee application when an award of fees is based upon the bad faith exception
to the American Rule”)).
31
   Weil v. VEREIT Operating P’ship, L.P., 2018 WL 834428, at *12 (Del. Ch.
Feb. 13, 2018) (internal quotation marks omitted) (quoting Danenberg v. Fitracks, Inc., 58
A.3d 991, 997 (Del. Ch. 2012)).
32
  Id. (alterations and internal quotation marks omitted) (quoting Delphi Easter P’rs Ltd.
P’ship v. Spectacular P’rs, Inc., 1993 WL 328079, at *9 (Del. Ch. Aug. 6, 1993)).
33
  Arbitrium, 1998 WL 155550, at *4; accord Sparton Corp. v. O’Neil, 2018 WL 3025470,
at *6 (Del. Ch. June 18, 2018) (noting that “the hourly rates charged by Defendants’
counsel are not excessive, and the staffing of attorneys appears appropriate” and should
not be second-guessed); Weil, 2018 WL 834428, at *12 (stating that “whether counsel
appropriately pursued and charged for a particular . . . litigation tactic” should not be
second-guessed (internal quotation marks omitted) (quoting Fitracks, 58 A.3d at 997));
DG BF, LLC v. Michael Ray, et al.,
Civil Action No. 2020-0459-MTZ
May 23, 2022
Page 11 of 15

         In addition, “[w]hen awarding expenses as a contempt sanction or for bad faith

litigation tactics, this Court takes into account the remedial nature of the award.”34

In those cases, the fee award “is designed to make whole the party who was injured

by the other side’s contumely. The remedial nature [of] the award commends putting

primary emphasis on reimbursing the injured party. The results achieved are of

secondary importance.”35 And when assessing the aggregate fees requested in

situations involving contempt or bad faith, this Court considers whether they “are

within the range of what a party reasonably could incur over the course of . . .

pursuing an adversary engaged in a mix of open defiance, evasion and

obstruction.”36

Aveta, 2010 WL 3221823, at *8 (expanding the rationale and noting where “staffing
appears appropriate” it “need not be second-guessed”). Still, the Court may consider
“whether the number of hours devoted to litigation was excessive, redundant, duplicative
or otherwise unnecessary,” and may decrease an award where the applicant’s “own
litigation efforts have in some ways been less than ideal in terms of timeliness or prudent
focus.” Fitracks, 58 A.3d at 996 (internal quotation marks omitted) (quoting Mahani, 935
A.2d at 247–48); Auriga Cap. Corp. v. Gatz Props., 40 A.3d 839, 882 (Del. Ch. 2012),
aff’d, 59 A.3d 1206 (Del. 2012).
34
   Aveta, 2010 WL 3221823, at *6 (citing In re SS &C Techs., Inc. S’holders Litig.,
2008 WL 3271242, at *3 n.14 (Del. Ch. Aug. 8, 2008), and Arbitrium, 1998 WL 155550,
at *3).
35
     Id. (citation omitted).
36
     Id. (internal quotation marks omitted).
DG BF, LLC v. Michael Ray, et al.,
Civil Action No. 2020-0459-MTZ
May 23, 2022
Page 12 of 15

          Against this standard, Plaintiffs dispute Defendants’ requested fees, pointing

to tepid “[i]ndicators [s]uggesting the [c]laimed [f]ees are [q]uestionable.”37 First,

Plaintiffs object to the time Defendants’ counsel spent on preparing their reply brief

and for oral argument on their motion to dismiss. But Plaintiffs’ amended complaint

“span[ned] one hundred forty-three pages and offer[ed] twenty-four counts, taking

readers on a comprehensive tour of the realms of fiduciary duty, contract, and tort.”38

In this regard, Plaintiffs’ “shot across the bow” resembled buckshot: the work to

clean the wounds was onerous, by design. Plaintiffs also sought and obtained an

expedited schedule.39 Plaintiffs’ complaint that Defendants’ counsel had to work

many hours to quickly seek dismissal of those many counts fails to paint those hours

as unreasonable. This is particularly so because the litigation was expedited,40 the

37
     AB at 18.
38
     DG BF, LLC v. Ray, 2021 WL 776742, at *1 (Del. Ch. Mar. 1, 2021).
39
     See D.I. 2; D.I. 6; D.I. 28; D.I. 36.
40
  See, e.g., Brandt v. CNS Response, Inc., 2009 WL 2425757, at *1 (Del. Ch. Aug. 3, 2009)
(recognizing the risk of “unnecessary confusion and expenditure of time and attorneys’
fees in an expedited matter”); In re First Interstate Bancorp Consol. S’holder Litig.,
756 A.2d 353, 364 n.6 (Del. Ch. 1999) (considering, on a fee application, whether fees
were incurred “in litigation conducted on a non-expedited schedule”), aff’d sub nom. First
Interstate Bancorp v. Williamson, 755 A.2d 388 (Del. 2000).
DG BF, LLC v. Michael Ray, et al.,
Civil Action No. 2020-0459-MTZ
May 23, 2022
Page 13 of 15

fees were incurred while Defendants were expecting to pay them, 41 and today’s fee

award is intended to be remedial.42

          Second, Plaintiffs complain that Defendants’ counsel billed for reviewing the

nearly identical lawsuit Plaintiffs filed in New York. These fees, particularly as

modified in Defendant’s reply brief, are reasonable; it was necessary for Defendant’s

counsel to be informed about Plaintiffs’ second “shot across the bow.”43 Third,

Plaintiffs object to Defendants’ work responding to Plaintiffs’ bungling of the expert

identification deadline.44 Defendants explain that they interviewed potential rebuttal

experts in the event Plaintiffs achieved an extension and disclosed experts. This was

prudent. Fourth, Plaintiffs object that Defendants made travel arrangements to

depose Menashe in his home state of Montana as he requested, and to attend the

looming trial.45 These costs were reasonably incurred; I do not see how Defendants

41
   See, e.g., Aveta, 2010 WL 3221823, at *6 (noting that one “indication” of reasonableness
is the “reality” that when the fee-seeking party litigated the matter and “paid the expenses
it now seeks to recover, [it] did not know that it would be able to shift those expenses to”
the other party).
42
     See supra notes 34–36.
43
     RB at 9 n.7.
44
     AB at 21–22.
45
     Id. at 22.
DG BF, LLC v. Michael Ray, et al.,
Civil Action No. 2020-0459-MTZ
May 23, 2022
Page 14 of 15

could have been prepared to take Menashe’s deposition or attend the trial without

them.

           Fifth, Plaintiffs contend the documentation of the fees shifted under previous

awards is “patchy.”46 In assessing the reasonableness of Defendants’ requested fees,

“[t]he Court of Chancery has discretion in determining the level of submission

required.”47 I conclude Defendants’ Affidavits are adequate to give Plaintiffs notice

of the fees.

           Finally, Plaintiffs lodge a conclusory objection to the time spent pursuing fees

on fees.48 But the path of this case has been extraordinarily contentious and time-

consuming, with zigs and zags that take time to document. Plaintiffs themselves

sought an enlarged word count and extensive briefing schedule to respond to the

Application.49 I conclude Defendants’ fees on fees are reasonable.

           Defendants shall submit a proposed order reflecting the modification to the

amount sought set forth in their reply brief. With that, I believe the only issue

remaining before me is Defendants’ motion for damages from the temporary

46
     Id.
47
     Aveta, 2010 WL 3221823, at *3 (citing Cohen v. Cohen, 269 A.2d 205, 207 (Del. 1970)).
48
     AB at 22.
49
     See D.I. 263.
DG BF, LLC v. Michael Ray, et al.,
Civil Action No. 2020-0459-MTZ
May 23, 2022
Page 15 of 15

restraining order.   I ask Defendants to advise if any further submissions are

requested, or to advise that the motion is ready to be considered on the papers. Those

submissions are due within twenty days.

                                              Sincerely,

                                              /s/ Morgan T. Zurn

                                              Vice Chancellor

MTZ/ms

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