Ari Rostowsky v. Laura M. Hirsch and Lisa M. True, and Aither Health, LLC
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Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
ARI ROSTOWSKY ) ) Plaintiff, ) ) v. ) C.A. No. 2022-0004-SG ) LAURA M. HIRSCH and ) LISA M. TRUE, ) ) Defendants, ) ) -and- ) ) AITHER HEALTH, LLC, ) ) Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: May 8, 2024 Date Decided: October 15, 2024
Daniel C. Herr, LAW OFFICE OF DANIEL C. HERR LLC, Wilmington, Delaware; OF COUNSEL: Barry F. Fagel, LINDHORST & DREIDAME CO., L.P.A., Cincinnati, Ohio, Attorneys for Plaintiff Ari Rostowsky.
David B. Anthony, BERGER MCDERMOTT LLP, Wilmington, Delaware; Brian Gottesman, GABELL BEAVER LLC, Wilmington, Delaware, Attorneys for Defendants Laura M. Hirsch and Lisa M. True.
Alisa E. Moen, MOEN LAW LLC, Wilmington, Delaware, Attorney for Nominal Defendant Aither Health LLC.
GLASSCOCK, Vice Chancellor This post-trial opinion addresses the ownership interest held by Plaintiff, Ari
Rostowsky, in a business he formed with Individual Defendants, Laura Hirsch and
Lisa True. The business is formally structured as a Delaware LLC, Aither Health.
It is a service business related to administration of health insurance claims. Plaintiff
avers that he is a member of the LLC. However, there is a written LLC operating
agreement that states that there are only two members of the LLC, Hirsch and True.
Plaintiff advances another claim, however; that he is entitled to a share of the
business under the rubric of promissory estoppel. The record at trial demonstrates
that Plaintiff is entitled to a 15% share of the business (or damages) under that
theory, based on the following facts. The parties, including Plaintiff, created the
company. The parties also made clear in their business plan that Plaintiff was a
“Founder” of the company. They did not disclose to him that they had executed an
LLC operating agreement that excluded him, and Plaintiff expected and attempted
to facilitate an LLC operating agreement that would acknowledge his interest.
Defendants relied on these assertions and omissions to benefit themselves and the
LLC at Plaintiff’s expense, most notably by 1) causing Plaintiff to work for more
than a year without pay based on his understanding that the waxing value of his
equity would eventually compensate him, and 2) relying on Plaintiff to secure a start-
up loan to the business from a company in which his father was a principal. The
million-dollar loan was made without collateral, was not convertible to equity, and
1 was guaranteed only personally by Defendants. This loan was based on a business
plan that referred to Hirsh, True, and Plaintiff as “the Founders,” and Plaintiff’s
father testified that he would not have approved the loan absent the parties holding
Plaintiff out as a co-owner.
Finally, in an email to Plaintiff by True, copied to Hirsch, True stated that
Plaintiff owned 15% of Aither’s business. Hirsch did not dissent. I find by clear
and convincing evidence that Hirsch and True are estopped from asserting that
Plaintiff is not a 15% owner of Aither’s business, although not a member of the LLC
under the LLC operating agreement.
Plaintiff eventually left his work for Aither. Subsequently, the parties
disagreed about Plaintiff’s stake in Aither, which Plaintiff argued should be 1/3, and
which Defendants insisted was inchoate and unvested. 1
This Memorandum Opinion leaves other matters unresolved, including how
equity should vindicate Plaintiff’s rights. I address here only the issue described
above.
1 Defendants argue, without the support of written evidence, that Plaintiff agreed to five year’s labor as a condition precedent for receiving a share of Aither, a term of service he failed to complete. One wonders whether, upon completion of the term, like Jacob (Genesis 29:20–35), Plaintiff would have received less attractive equity.
2 I. BACKGROUND 2
1. The Parties
Plaintiff Ari Rostowsky (“Ari” or “Plaintiff”) is the former Senior Vice
President of Business Development 3 of Aither Health, LLC (“Aither” or the
“Company”). 4
Defendant Laura Hirsch (“Hirsch”) is co-CEO of Aither and is a managing
member of Aither.5
Defendant Lisa True (“True” and collectively with Hirsch, the “Defendants”)
is co-CEO of Aither and is a managing member of Aither. 6 Together, Hirsch and
True control Aither. 7
Defendant Aither is a Delaware limited liability company involved in the
business of third-party administration of health insurance claims (“TPA”). 8
2 This Memorandum Opinion only contains facts necessary to my analysis. Citations to the parties’ joint trial exhibits are referred to by the numbers provided by the parties and cited as “JX __”. See Ex. A to Joint Pre-Trial Stipulation and [Proposed] Ord., Dkt. No. 46; Ex. 97, Dkt. No. 65. Citations to the parties’ stipulated pre-trial order are cited as “PTO ¶ __”. Joint Pre-Trial Stipulation and [Proposed] Ord., Dkt. No. 46. References to the trial transcripts are cited as “Tr. __:__”. 09-07-2023 Tr. of Evid. Hr’g, Dkt. No. 49. 3 Tr. (A. Rostowsky) 30:10–12. 4 PTO ¶ 11. 5 JX71; Tr. (True) 249:7–12. 6 JX71; Tr. (True) 249:7–12. 7 JX71. 8 JX24; JX97 at 4.
3 Non-party Richard Rostowsky (“Richard”) is Ari’s father and a former owner
of a TPA named S&S Healthcare. 9
2. The Parties Prior Involvement with TPAs
Prior to joining Aither, Plaintiff worked in sales for his father’s TPA, S&S
Healthcare, from September 2011 to April 2019. 10 Hirsch and True met Plaintiff at
their place of employment, Nova Healthcare, another TPA company. 11 S&S
Healthcare provided services to Nova Healthcare. 12 In August 2018, Richard and
his business partner sold S&S Healthcare to a private equity company.13 At the time
of the sale, Plaintiff signed an employee agreement that contained a non-compete
and non-solicitation clause.14 After the sale, S&S Healthcare terminated Plaintiff’s
employment in April 2019. 15
In April 2019, Plaintiff, Hirsch, and True began discussions about going into
business together by purchasing Significa Benefits, an existing TPA. 16 Hirsch and
True learned of Significa Benefits through Plaintiff. 17 Plaintiff introduced Significa
Benefits personnel to Hirsch and True, and the pair expressed an interested in buying
9 PTO ¶¶ 1–4. I refer to the Rostowskys by first name in the interest of clarity; no familiarity or disrespect is intended. 10 Id. ¶¶ 1–2. 11 Tr. (True) 190:8–191:13; Tr. (A. Rostowsky) 81:8–82:8. 12 Tr. (True) 190:8–191:13; Tr. (A. Rostowsky) 81:19–82:8; PTO ¶ 5. 13 PTO ¶ 3. 14 Tr. (A. Rostowsky) 8:17–9:9; JX68. 15 PTO ¶ 4. 16 Tr. (A. Rostowsky) 14:11–15:18; Tr. (True) 230:6–231:11. 17 Tr. (A. Rostowsky) 14:11–15:4.
4 the company.18 After two meetings with Significa Benefits, Hirsch and True
prepared a business plan which outlined the following ownership structure: Hirsch
and True would each own 30%, Plaintiff would own 15%, and two other individuals
would own 20% and 5%.19 Plaintiff did not agree to the ownership breakdown.20
Ultimately, and in any event, Plaintiff, Hirsch, and True decided that purchasing
Significa Benefits was not an ideal business decision and settled on forming their
own TPA.21
3. The Formation of Aither Health LLC
In summer 2019, the parties took steps toward forming Aither. On July 2,
2019, Hirsch and True executed a certificate of formation,22 initial resolutions,23 and
an operating agreement for Aither. 24 The operating agreement listed and currently
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
ARI ROSTOWSKY ) ) Plaintiff, ) ) v. ) C.A. No. 2022-0004-SG ) LAURA M. HIRSCH and ) LISA M. TRUE, ) ) Defendants, ) ) -and- ) ) AITHER HEALTH, LLC, ) ) Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: May 8, 2024 Date Decided: October 15, 2024
Daniel C. Herr, LAW OFFICE OF DANIEL C. HERR LLC, Wilmington, Delaware; OF COUNSEL: Barry F. Fagel, LINDHORST & DREIDAME CO., L.P.A., Cincinnati, Ohio, Attorneys for Plaintiff Ari Rostowsky.
David B. Anthony, BERGER MCDERMOTT LLP, Wilmington, Delaware; Brian Gottesman, GABELL BEAVER LLC, Wilmington, Delaware, Attorneys for Defendants Laura M. Hirsch and Lisa M. True.
Alisa E. Moen, MOEN LAW LLC, Wilmington, Delaware, Attorney for Nominal Defendant Aither Health LLC.
GLASSCOCK, Vice Chancellor This post-trial opinion addresses the ownership interest held by Plaintiff, Ari
Rostowsky, in a business he formed with Individual Defendants, Laura Hirsch and
Lisa True. The business is formally structured as a Delaware LLC, Aither Health.
It is a service business related to administration of health insurance claims. Plaintiff
avers that he is a member of the LLC. However, there is a written LLC operating
agreement that states that there are only two members of the LLC, Hirsch and True.
Plaintiff advances another claim, however; that he is entitled to a share of the
business under the rubric of promissory estoppel. The record at trial demonstrates
that Plaintiff is entitled to a 15% share of the business (or damages) under that
theory, based on the following facts. The parties, including Plaintiff, created the
company. The parties also made clear in their business plan that Plaintiff was a
“Founder” of the company. They did not disclose to him that they had executed an
LLC operating agreement that excluded him, and Plaintiff expected and attempted
to facilitate an LLC operating agreement that would acknowledge his interest.
Defendants relied on these assertions and omissions to benefit themselves and the
LLC at Plaintiff’s expense, most notably by 1) causing Plaintiff to work for more
than a year without pay based on his understanding that the waxing value of his
equity would eventually compensate him, and 2) relying on Plaintiff to secure a start-
up loan to the business from a company in which his father was a principal. The
million-dollar loan was made without collateral, was not convertible to equity, and
1 was guaranteed only personally by Defendants. This loan was based on a business
plan that referred to Hirsh, True, and Plaintiff as “the Founders,” and Plaintiff’s
father testified that he would not have approved the loan absent the parties holding
Plaintiff out as a co-owner.
Finally, in an email to Plaintiff by True, copied to Hirsch, True stated that
Plaintiff owned 15% of Aither’s business. Hirsch did not dissent. I find by clear
and convincing evidence that Hirsch and True are estopped from asserting that
Plaintiff is not a 15% owner of Aither’s business, although not a member of the LLC
under the LLC operating agreement.
Plaintiff eventually left his work for Aither. Subsequently, the parties
disagreed about Plaintiff’s stake in Aither, which Plaintiff argued should be 1/3, and
which Defendants insisted was inchoate and unvested. 1
This Memorandum Opinion leaves other matters unresolved, including how
equity should vindicate Plaintiff’s rights. I address here only the issue described
above.
1 Defendants argue, without the support of written evidence, that Plaintiff agreed to five year’s labor as a condition precedent for receiving a share of Aither, a term of service he failed to complete. One wonders whether, upon completion of the term, like Jacob (Genesis 29:20–35), Plaintiff would have received less attractive equity.
2 I. BACKGROUND 2
1. The Parties
Plaintiff Ari Rostowsky (“Ari” or “Plaintiff”) is the former Senior Vice
President of Business Development 3 of Aither Health, LLC (“Aither” or the
“Company”). 4
Defendant Laura Hirsch (“Hirsch”) is co-CEO of Aither and is a managing
member of Aither.5
Defendant Lisa True (“True” and collectively with Hirsch, the “Defendants”)
is co-CEO of Aither and is a managing member of Aither. 6 Together, Hirsch and
True control Aither. 7
Defendant Aither is a Delaware limited liability company involved in the
business of third-party administration of health insurance claims (“TPA”). 8
2 This Memorandum Opinion only contains facts necessary to my analysis. Citations to the parties’ joint trial exhibits are referred to by the numbers provided by the parties and cited as “JX __”. See Ex. A to Joint Pre-Trial Stipulation and [Proposed] Ord., Dkt. No. 46; Ex. 97, Dkt. No. 65. Citations to the parties’ stipulated pre-trial order are cited as “PTO ¶ __”. Joint Pre-Trial Stipulation and [Proposed] Ord., Dkt. No. 46. References to the trial transcripts are cited as “Tr. __:__”. 09-07-2023 Tr. of Evid. Hr’g, Dkt. No. 49. 3 Tr. (A. Rostowsky) 30:10–12. 4 PTO ¶ 11. 5 JX71; Tr. (True) 249:7–12. 6 JX71; Tr. (True) 249:7–12. 7 JX71. 8 JX24; JX97 at 4.
3 Non-party Richard Rostowsky (“Richard”) is Ari’s father and a former owner
of a TPA named S&S Healthcare. 9
2. The Parties Prior Involvement with TPAs
Prior to joining Aither, Plaintiff worked in sales for his father’s TPA, S&S
Healthcare, from September 2011 to April 2019. 10 Hirsch and True met Plaintiff at
their place of employment, Nova Healthcare, another TPA company. 11 S&S
Healthcare provided services to Nova Healthcare. 12 In August 2018, Richard and
his business partner sold S&S Healthcare to a private equity company.13 At the time
of the sale, Plaintiff signed an employee agreement that contained a non-compete
and non-solicitation clause.14 After the sale, S&S Healthcare terminated Plaintiff’s
employment in April 2019. 15
In April 2019, Plaintiff, Hirsch, and True began discussions about going into
business together by purchasing Significa Benefits, an existing TPA. 16 Hirsch and
True learned of Significa Benefits through Plaintiff. 17 Plaintiff introduced Significa
Benefits personnel to Hirsch and True, and the pair expressed an interested in buying
9 PTO ¶¶ 1–4. I refer to the Rostowskys by first name in the interest of clarity; no familiarity or disrespect is intended. 10 Id. ¶¶ 1–2. 11 Tr. (True) 190:8–191:13; Tr. (A. Rostowsky) 81:8–82:8. 12 Tr. (True) 190:8–191:13; Tr. (A. Rostowsky) 81:19–82:8; PTO ¶ 5. 13 PTO ¶ 3. 14 Tr. (A. Rostowsky) 8:17–9:9; JX68. 15 PTO ¶ 4. 16 Tr. (A. Rostowsky) 14:11–15:18; Tr. (True) 230:6–231:11. 17 Tr. (A. Rostowsky) 14:11–15:4.
4 the company.18 After two meetings with Significa Benefits, Hirsch and True
prepared a business plan which outlined the following ownership structure: Hirsch
and True would each own 30%, Plaintiff would own 15%, and two other individuals
would own 20% and 5%.19 Plaintiff did not agree to the ownership breakdown.20
Ultimately, and in any event, Plaintiff, Hirsch, and True decided that purchasing
Significa Benefits was not an ideal business decision and settled on forming their
own TPA.21
3. The Formation of Aither Health LLC
In summer 2019, the parties took steps toward forming Aither. On July 2,
2019, Hirsch and True executed a certificate of formation,22 initial resolutions,23 and
an operating agreement for Aither. 24 The operating agreement listed and currently
lists only Hirsch and True as members of the Company.25 For the admittance of new
members, Section 1.8 of Aither’s operating agreement requires unanimous written
consent of all members. 26 Plaintiff asserts he was not aware of the execution of the
operating agreement and believed Aither did not have an executed written operating
18 Id.; Tr. (True) 230:6–24, 232:14–233:11. 19 Tr. (True) 195:21–196:2, 232:14–233:11; JX3. 20 Tr. (A. Rostowsky) 16:20–17:9. 21 Id. at 18:20–20:6; Tr. (True) 235:11–236:20; JX7. 22 JX71. 23 JX83. 24 JX10. 25 Id. at 12. 26 Id. at 2.
5 agreement.27 Defendants assert that Plaintiff is not an owner of the Company, but
instead, Plaintiff agreed to earn a 15% non-voting ownership interest in the
Company after five years of work 28 and agreed not to be compensated for any work
until Aither could afford to do so.29 Defendants contend that, in exchange, Plaintiff
did not have to guarantee the Company’s debt or make capital contributions.30
After Hirsch and True executed the operating agreement, the parties evaluated
options for funding the venture.31 The parties prepared an updated business plan on
July 27, 2019 that listed Plaintiff, Hirsch, and True as “Founders.” 32
The business plan attributed various company functions to the “Founders,”
such as “Expansion Plan,” “Investor Equity,” and “Exit Strategy.” 33 In addition, the
business plan refers to the parties’ ownership of the Company using the possessive
form “their.”34 For instance, the business plan’s “Management Team” section lists
each party (including Plaintiff) as a part of the Company’s management team.35 The
“Management Team” section details each parties’ respective background in the
industry and states that “[the parties’] combined expertise and industry network, will
27 Tr. (A. Rostowsky) 46:2–23. See also First Am. Verified Member Compl. Asserting Deriv. and Direct Claims ¶ 4, Dkt. No. 11 (“First Am. Compl.”). 28 Tr. (True) 207:12–17, 246:19–23, 264:1–18. 29 Id. at 200:17–201:7. 30 Id. at 200:17–19, 211:21–212:4. 31 Tr. (A. Rostowsky) 22:2–22. 32 JX97 at 4. 33 Id. at 5–6. 34 See JX97. 35 Id. at 5.
6 bring the operations of their business to profitability within its first two years.”36 In
addition, the business plan states “[t]he Founders intend to grow the Company for at
least 10–15 years. Eventually, the Company will hire a qualified business broker to
sell the business [on] their behalf.”37 Further, the “Organizational Budget” section
of the business plan listed three owners of the Company. 38 This section of the
business plan did not specify who those owners were. 39
Hirsch also prepared a five-year forecast for Aither. 40 For an employee
projection for 2019 to 2024, Hirsch put “Co CEO, Co CEO, SVP Business
Development” under the “Owners” section of the table.41 At trial, True testified that
“SVP of business development” referenced Plaintiff.42
Plaintiff proposed that the parties borrow startup money from his father in
order to fund the venture.43 Hirsch and True emailed Richard and his business
partners the updated version of Aither’s business plan 44 as well as a July 27, 2019
version of the five-year financial forecast. 45 Richard testified that his understanding
36 Id. (emphasis added). 37 Id. at 6 (emphasis added). 38 Id. at 21. 39 Id. 40 Tr. (A. Rostowsky) 28:24–32:14; Tr. (True) 248:11–249:15; JX17a. 41 JX17a at 32. 42 Tr. (True) 248:11–249:15. 43 Tr. (A. Rostowsky) 22:2–11; Tr. (True) 238:6–8. 44 JX13; JX97. 45 JX17; JX17a. In my factual findings and analysis, I rely on the employee projection table in the financial forecast. I note that the parties submitted the September 5, 2019 version of the five-year forecast as Joint Exhibit 17a rather than the version of the forecast that was attached to the July 27, 2019 updated business plan given to Buffalo Enterprises. JX13; JX17; JX17a. However, at
7 of the business plan was that Plaintiff would be a part owner of Aither.46 Richard
further testified that based on his understanding of the ownership structure of Aither,
he decided with his partners to agree to loan the money to Aither. 47 Specifically,
Richard testified that he would not have provided the loan to Aither if Plaintiff was
not an owner of Aither.48 In addition, Richard stated that he discussed with Hirsch
Plaintiff’s desire to not disclose his involvement with Aither due to the non-compete
and non-solicitation clauses with S&S Healthcare, which restricted, or may have
restricted, Plaintiff’s participation in Aither. 49
Aither entered into a promissory note with Buffalo Enterprises, LLC, an entity
owned in part by Richard, 50 on October 1, 2019, wherein Aither agreed to repay
$1,000,000.51 Hirsch and True personally guaranteed the loan, but provided no
collateral, with the creditor agreeing to rely solely on their personal guarantees.52
According to Richard, Plaintiff did not guarantee the loan because Richard would
trial, True testified that the employee projection table in Joint Exhibit 17a was included in the five- year forecast attached to the July 27, 2019 updated business plan. Tr. (True) 248:11–249:15. In other words, for the purposes of my findings and analysis, the difference in the forecast versions submitted to the Court and to Buffalo Enterprises is not material, as I rely on the employee projection table that appears in both versions. 46 Tr. (R. Rostowsky) 165:1–24, 166:1–14, 166:23–167:7, 167:8–23. 47 Id. at 168:13–169:3. 48 Id. at 169:21–170:12. 49 Id. at 171:6–23. At this time, Plaintiff was involved in a lawsuit with S&S Healthcare relating to his employment agreement. Tr. (A. Rostowsky) 32:23–33:8. 50 Tr. (R. Rostowsky) 171:24–172:3. 51 JX20. In addition to the loan that Hirsch and True received, the pair contributed their personal funds to Aither. Tr. (True) 267:12–22. 52 JX20; Tr. (R. Rostowsky) 170:13–15, 182:16–23; Tr. (True) 211:13–212:4, 251:13–252:19.
8 assume responsibility for any potential liability that his son incurred.53 The terms of
the loan provided that repayment of the loan would commence with interest-based
payments on September 1, 2020 and repayment of the principal on January 1, 2022
for a five year period.54
Prior to the execution of the promissory note, Jeffrey Steinberg, a member of
Buffalo Enterprises, requested via email Aither’s articles of organization and a
“Corp resolution stating intent to borrow money from Buffalo Enterprises” to send
to an attorney. 55 Richard did not request a copy of Aither’s operating agreement.56
On October 2, 2019, True emailed Steinberg a copy of Aither’s Certificate of
Formation along with minutes of a special meeting of Aither.57 An excerpt from the
meeting minutes reads: “The following members and/or managers were present at
this special meeting: Lisa M. True Laura M. Hirsch being all the members of the
Limited Liability Company.”58
4. Plaintiff’s Involvement with Aither
During the Company’s startup period, Plaintiff contributed to its marketing by
recruiting a friend of his to create Aither’s logo and color scheme.59 Plaintiff
53 Tr. (R. Rostowsky) 170:16–171:1. 54 JX20. 55 JX24; Tr. (R. Rostowsky) 163:9–13, 176:3–7; Tr. (True) 206:1–3. 56 Tr. (R. Rostowsky) 173:18–174:12. 57 JX24. 58 Id. 59 Tr. (A. Rostowsky) 35:20–36:9.
9 disseminated marketing materials to prospective customers which identified Hirsch
and True as the only members of Aither.60 In addition, Plaintiff was aware of license
filing applications in different states that identified Hirsch and True as the sole
members of Aither.61 Plaintiff did not object or assert that Aither was making
inaccurate statements in its filings.62
While ramping up Aither’s business, Plaintiff, Hirsch, and True agreed to
forgo compensation until Aither became profitable.63 Plaintiff did not receive
compensation for eighteen months but provided services to the company 80 to 90
hours per week during that time period. 64 Utilizing an email address owned by
True’s other business, Plaintiff worked behind the scenes until Plaintiff was released
from his non-compete agreement with S&S Healthcare in October 2019.65
Afterwards, True created an official Aither email address for Plaintiff. 66 However,
Plaintiff did not revise the marketing materials to reflect his alleged ownership.67
According to Plaintiff, he was content with the materials not reflecting his alleged
60 Id. at 153:24–154:13. 61 Id. at 152:7–153:8, 153:13–17, 156:4–11; JX85; JX87; JX90. 62 See Tr. (A. Rostowsky) 152:7–153:8, 153:13–17, 156:4–11; JX85; JX87; JX90. 63 Tr. (A. Rostowsky) 36:13–38:3; Tr. (True) 200:17–201:7, 215:7–216:4. 64 Tr. (A. Rostowsky) 36:17–38:6, 48:1–2; Tr. (True) 201:2–11, 254:11–255:2, 265:2–6. 65 Tr. (A. Rostowsky) 39:15–41:13; JX95. 66 Joint Post-Trial Stipulation of Facts ¶ 5, Dkt. No. 52. 67 Tr. (A. Rostowsky) 153:24–155:17.
10 ownership since he did not want to confuse the public’s view of Aither and disrupt
the Company’s reputation, potentially stunting its growth.68
In 2020, Plaintiff brought in Aither’s first client. 69 Throughout 2020, Hirsch,
True, and Plaintiff discussed the Company’s strategy, employee hiring, and the
Company’s financial status on a high-level basis.70 In addition, Plaintiff recruited
employees for the Company.71 The Company grew quickly 72 and at the start of the
new year of 2021, in a text message to Plaintiff with True copied, Hirsch wrote
“Thank you for putting up with us and for being our partner!!! Here’s to another
awesome year!!!”73 In April 2021, Aither began to make a profit, and the parties
began to draw base salaries.74 Plaintiff’s pay was based on an annual payment
structure of $125,000. 75
5. Communications Regarding Plaintiff’s Ownership Interest in Aither
After S&S Healthcare released Plaintiff from his employment agreement,
Plaintiff had discussions with Defendants about signing a written operating
agreement.76 In October 2019, Plaintiff visited Hirsch’s house in Buffalo, New York
68 See id. at 154:14–155:17. 69 Id. at 44:5–9. 70 Id. at 49:20–50:5. 71 Id. at 50:1–5. 72 Id. at 47:18–24. 73 JX44. 74 Tr. (A. Rostowsky) 64:6–65:6. 75 Id. at 145:3–5. 76 Id. at 41:14–23.
11 with the expectation of executing a written operating agreement.77 According to
Plaintiff, however, when he arrived there was not an operating agreement available
for him to sign.78 Later in December that same year, Plaintiff travelled to Buffalo
again to execute an operating agreement, but (according to Plaintiff) Defendants said
that they could not sign because True was too distracted, having learned that her
father was diagnosed with a severe illness.79 In February 2020, Plaintiff travelled to
Dallas, Texas for a conference and with the goal to execute an operating
agreement.80 Once again, Hirsch and True told Plaintiff the agreement was not ready
to be signed.81 On August 15, 2020, True replied to an email from Plaintiff, wherein
Plaintiff attached a draft NDA that he signed, stating “technically as a minority you
don’t have authority to bind Aither.”82 Plaintiff did not refute this characterization
of his ownership.83
6. Plaintiff’s Resignation from Aither
Finally, in 2021, Plaintiff’s frustration with Hirsch and True came to head.
On February 9, 2021, Plaintiff and True had a phone call about creating an operating
77 Id. at 41:20–43:1. 78 Id. at 42:19–43:1. 79 See Tr. (A. Rostowsky) 43:2–44:4. During this time, Plaintiff also visited a potential client in Syracuse, New York. Id. at 44:2–4. 80 Id. at 44:21–45:22. 81 Id. at 45:4–8. 82 JX79. 83 Tr. (A. Rostowsky) 116:16–117:1.
12 agreement to memorialize his ownership interest.84 That night, True sent a follow-
up email after the phone call, to Plaintiff and copied to Hirsch, stating that Plaintiff
had a 15% ownership interest in Aither. 85 True testified that her statement in the
email was incorrect, and intended to avoid further discussion because True was tired
and frustrated.86 Plaintiff did not refute True’s characterization of his ownership
interest as limited to 15%, as he contends he was relieved that Hirsch and True
finally recognized his ownership status, at all.87 In a similar vein, Hirsch did not
object to True’s email confirming Plaintiff’s ownership status. 88
In June 2021, Plaintiff asked Hirsch via text to provide him with K-1 tax
documents for the 2020 year.89 This request implied that he was an owner of Aither,
who would be entitled to a K-1. Hirsch responded: “We haven’t done the taxes. It’s
going to take awhile for me to catch everything up.” 90 Defendants did not refute
Plaintiff’s entitlement to the K-1 tax documents.91
Ultimately, because he had to “pull[] teeth” to get paid by Defendants and
was stressed from working for the Company, Plaintiff resigned from Aither on June
84 Id. at 59:13–61:7. 85 JX49. 86 Tr. (True) 217:9–219:1, 261:1–262:5. 87 Tr. (A. Rostowsky) 63:8–64:5. 88 Tr. (True) 262:6–18. 89 JX53. 90 Id. at 2. 91 Id.; Tr. (A. Rostowsky) 68:4–16.
13 21, 2021. 92 Upon Plaintiff’s resignation, Hirsch and True asserted that Plaintiff was
not an owner of Aither. 93 Specifically, Hirsch and True claimed that Plaintiff’s 15%
ownership interest was inchoate, and would vest only after Plaintiff worked at Aither
for five years. 94 In addition, Defendants claim that Plaintiff agreed to accept (once
his interest vested) a non-voting ownership. 95
B. Procedural History
Plaintiff filed his initial Complaint on January 3, 2022,96 and later filed an
Amended Complaint on April 19, 2022.97 The Amended Complaint asserts the
following causes of actions: Count I (Declaratory Judgment Recognizing Plaintiff’s
Ownership of Aither), Count II (Breach of Contract Against All Defendants), Count
III (Breach of Fiduciary Duty Against Hirsch and True), Count IV–VI (Unjust
Enrichment, Quantum Meruit, and Promissory Estoppel Against All Defendants),
Count VII (Fraud Against Hirsch and True), Count VIII (Violation of the Fair Labor
Standards Act, 29 U.S.C. § 201, et. seq. Against Aither).98
92 Tr. (A. Rostowsky) 69:3–70:4; PTO ¶ 11. 93 Tr. (A. Rostowsky) 71:15–23. 94 Tr. (True) 200:17–201:23, 246:19–23, 262:1–265:6. 95 Id. at 264:12–14. 96 Verified Member Deriv. Compl., Dkt. No. 1. 97 First Am. Compl. 98 Id. ¶¶ 58–96.
14 Defendants filed a Motion to Partially Dismiss the Amended Complaint on
May 23, 202299 and the parties fully briefed the Motion on July 15, 2022.100 I held
oral argument on the Motion to Dismiss on January 24, 2023, and held the Motion
in abeyance. 101 I ordered an evidentiary hearing concerning solely whether Plaintiff
is an owner of Aither. 102 I held trial in this matter on September 7, 2023.103 The
parties filed their respective post-trial briefs, 104 and I heard post-trial oral argument
on April 9, 2024. 105 I requested parties to meet and confer on possible settlement
and give a status update to the Court on April 30, 2024.106 On May 1, 2024, the
parties informed the Court that they were unable to reach a settlement. 107 On May
8, 2024, I wrote a letter to counsel informing the parties that I consider the matter
submitted as of that date.108
99 Defs.' Mot. to Partially Dismiss Pl.’s First Am. Verified Deriv. Member Compl., Dkt. No. 13. 100 Defs.' Opening Br. in Supp. of Their Mot. to Dismiss Pls.' Am. Verified Member Deriv. Compl., Dkt. No. 14; Pl.’s Answering Br. In Opp’n To Defs.’ Mot. For Partial Dismissal Of Pl.’s First Am. Compl., Dkt. No. 16; Defs.' Reply Br. in Further Supp. of Their Mot. to Partially Dismiss Pls.' Am. Verified Member Deriv. Compl., Dkt No. 17. 101 Mot. to Dismiss before Vice Chancellor Sam Glasscock dated 1.24.23 re: Arg. Deferred; Counsel to meet and confer and contact Chambers re an Evid. Hr’g date, Dkt. No. 21. 102 Id. 103 Evid. Hr’g before Vice Chancellor Sam Glasscock dated 9.7.23, Dkt. No. 47. 104 Defs.' Joint Post Trial Opening Br., Dkt. No. 53 (“Defs. PT OB”); Pl.'s Post-Trial Br., Dkt. No. 54 (“Pl. PT OB”); Defs.' Joint Post Trial Answering Br., Dkt. No. 58 (“Defs. PT AB”); Pl.’s Post Trial Answering Br., Dkt. No. 59 (“Pl. PT AB”). 105 Post Trial Oral Arg. before Vice Chancellor Sam Glasscock dated 4.9.24, Dkt. No. 62. 106 Tr. of Post Trial Oral Arg. dated 4.9.24 (“Post-Trial Tr.”) 75:5–76:7. 107 Letter to the Ct. from Pl.’s Counsel: Status Update re Settlement, Dkt. No. 63. 108 Letter to Counsel, Dkt. No. 64.
15 This Memorandum Opinion addresses only Plaintiff’s ownership status in
Aither and his ownership percentage.109
II. ANALYSIS
The question before me is whether Plaintiff is an owner of Aither Health LLC,
and if so, what percentage Plaintiff owns in the Company. I find that pursuant to the
Delaware Limited Liability Act (the “LLC Act”), Plaintiff has not established that
he is a member of Aither since he was not admitted as a member at the time of
Aither’s formation or at a later time pursuant to Aither’s operating agreement.110
The record, however, demonstrates that Plaintiff is entitled to relief pursuant to
promissory estoppel.111 My analysis follows.
109 I note that there is a pending Motion in Limine before me. Defs.’ Joint Mot. In Limine, Dkt. No. 39. First, Defendants seek to exclude as evidence Richard Rostowsky’s deposition testimony and trial testimony because Richard did not answer questions relating to S&S Healthcare during his deposition. Defs.’ Joint Pre-Trial Opening Br. 39–41, Dkt. No. 40. Second, Defendants seek to exclude as evidence emails pertaining to settlement negotiations and testimony from a witness who allegedly was not deposed nor identified by Plaintiff as a trial witness. Id. at 42–45. Lastly, Defendants seek an adverse inference against Plaintiff because, as Defendants argue, Plaintiff self- collected evidence and spoliated data from a cell phone during the pendency of this litigation. Id. at 35–39. Richard Rostowsky’s involvement with S&S Healthcare, the emails pertaining to settlement negotiations, and testimony from a witness who allegedly was not deposed nor identified as a trial witness, were not necessary to my analysis, and I decline to rule on that portion of the Motion. In regard to evidence Plaintiff self-collected, I find that an adverse finding against Plaintiff is not warranted. I find that Defendants’ spoilation argument fails to satisfy Defendants’ burden to demonstrate Plaintiff acted recklessly or intentionally. See DG BF, LLC v. Ray, 2021 WL 5436868, at *5 (Del. Ch. Nov. 19, 2021) (quoting TR Invs., LLC v. Genger, 2009 WL 4696062, at *17 (Del. Ch. Dec. 9, 2009)). Accordingly, I deny the request for an adverse inference against Plaintiff. 110 Robinson v. Darbeau, 2021 WL 776226, at *8 (Del. Ch. Mar. 1, 2021) (“A member may be admitted at the time of formation or at a later time.”); 6 Del. C. § 18-301(a)–(b). 111 Defendants argue that Plaintiff did not raise the claim of a membership interest in Aither based on a theory of promissory estoppel, in his Complaint, Amended Complaint, pre-trial briefs, or pre-
16 A. Plaintiff was not Admitted as a Member in Aither at the Time of Aither’s Formation or Pursuant to the Method Required by its Operating Agreement
I begin my analysis by determining whether Plaintiff was admitted into
membership of Aither, an LLC. Under the LLC Act, a “member” is “a person who
is admitted to a limited liability company as a member as provided in § 18-301.”112
trial stipulation, thus waiving the argument. Defs. PT OB 45–46. Defendants further argue that it is prejudicial to allow Plaintiffs to seek an award of membership interest through promissory estoppel post-trial because Defendants could not have known to develop evidence to defeat this claim. Id. First, Plaintiff did raise the theory of promissory estoppel in his Amended Complaint (although Defendants assert it was only an alternative theory for monetary damages to compensate Plaintiff for his services at Aither rather than for an award of membership interest). First Am. Compl. ¶¶ 52, 75–84; Defs. PT OB 45–46. Defendants are free to argue that the proper remedy for the promissory estoppel theory is monetary damages rather than equity, in the next phase of this litigation. However, because Plaintiff did raise the theory of promissory estoppel in his Amended Complaint, Defendants were on notice of this argument both during discovery and at trial. As such, Plaintiff’s argument for a membership interest under promissory estoppel is not prejudicial to Defendants and the discovery and trial they conducted. Cf. In re PNB Hldg. Co. S’holder Litig., 2006 WL 2403999, at *22 n.117 (Del. Ch. Aug. 18, 2006) (barring defendants from relying on an exculpation clause where defendants raised the defense, which is “in the nature of an affirmative defense,” after discovery was closed and after plaintiffs had shaped their trial plans, making it prejudicial to the plaintiffs (quoting Emerald P’rs v. Berlin, 726 A.2d 1215, 1223 (Del. 1999))); Zaman v. Amedeo Hldgs., Inc., 2008 WL 2168397, at *15 (Del. Ch. May 23, 2008) (holding that defendants waive their affirmative defense because they did not give fair notice by raising it for the first time on the second day of trial when it was not included in their answer, pre-trial briefs, or pre-trial order). Further, both parties were able to address the promissory estoppel argument in their post- trial briefs and during the post-trial oral argument. Defs. PT OB 46–53; Defs. PT AB 31–34; Pl. PT OB 28–33; Pl. PT AB 24–31; Post-Trial Tr. 59:7–61:11, 67:3–68:1. Therefore, I find that Defendants have suffered no prejudice where promissory estoppel was raised in post-trial briefing prior to the post-trial oral argument. Cf. In re IBP, Inc. S’holder Litig., 789 A.2d 14, 62 (Del. Ch. 2001) (finding that a party waived any arguments that were not raised in their opening post-trial brief); Emerald P’rs v. Berlin, 2003 WL 21003437, at *43 (Del. Ch. Apr. 28, 2003) (denying plaintiff’s motion for leave to file a post-argument brief, after a post-trial oral argument, advancing an argument that has never been advanced in any briefing filed by the plaintiff in the action), aff’d, 840 A.2d 641 (Del. 2003); In re Morrow Park Hldg. LLC, 2020 WL 3415649, at *20 (Del. Ch. June 22, 2020) (holding that parties’ second basis for promissory estoppel is waived because it was raised for the first time at oral argument for a motion for summary judgment and not in the complaint or brief in opposition to summary judgment). 112 6 Del. C. § 18-101(13).
17 6 Del. C. § 18-301 establishes different courses of action to admit a member into an
LLC both in connection with the formation of an LLC and after the formation of an
LLC. 113
At the time of formation of an LLC, 6 Del. C. § 18-301(a) “permits a person
to be admitted as a member ‘when the person’s admission is reflected in the records
of the limited liability company.’”114
After the formation of an LLC, a person is admitted as a member of the LCC:
“In the case of a person who is not an assignee of a limited liability company interest, including a person acquiring a limited liability company interest directly from the limited liability company and a person to be admitted as a member of the limited liability company without acquiring a limited liability company interest in the limited liability company at the time provided in and upon compliance with the limited liability company agreement or, if the limited liability company agreement does not so provide, upon the consent of all members or as otherwise provided in the limited liability company agreement;” 115
In summary, among other courses of action, a person can be admitted as a
member of an LLC in connection with its formation if the person is identified as a
member in the LLC’s records at the time of formation, and after its formation
pursuant to the requirements of the LLC’s operating agreement. Accordingly, my
113 Id. § 18-301(a)–(b). 114 Robinson, 2021 WL 776226, at *8 (quoting 6 Del. C. § 18-301(a)(2)). “The records of a limited liability company at the time of formation include, at a minimum, the certificate of formation, and the LLC Act provides that members may be identified at the time of formation in the certificate of formation itself.” Id. at *8 (emphasis added). 115 6 Del. C. § 18-301(b)(1).
18 analysis relies on Aither’s records at the time of formation and Aither’s written
operating agreement.116
I turn first to whether Plaintiff was admitted as a member of Aither in
connection with its formation. Plaintiff is not identified as a member of Aither in
Aither’s records at the time of formation, which include its certificate of formation,
initial resolutions, and written operating agreement.117 Thus, Plaintiff was not
admitted as a member of Aither in connection with its formation.
Next, I turn to whether Plaintiff was admitted as a member of Aither after its
formation pursuant to the requirements of Aither’s written operating agreement. I
116 Plaintiff argues that the written operating agreement has no legal effect, as in his view the parties came to an implied or oral operating agreement for Aither, which predated Aither’s “secret” written operating agreement, recognized Plaintiff as a member, and could not be overridden by the “secret” written operating agreement without Plaintiff. Pl. PT OB 20–22. I disagree. “[T]he fact that an LLC agreement may be oral or implied does not change the fact that [LLC] had a written agreement. . . That agreement governs.” See Riverside Risk Advisors LLC v. Chao, 2022 WL 14672745, at *20 (Del. Ch. Oct. 26, 2022, revised Oct. 28, 2022), judgment entered, 2023 WL 35348 (Del. Ch. Jan. 3, 2023), and rearg. denied, 2023 WL 5046760 (Del. Ch. Jan. 3, 2023), aff'd, 303 A.3d 51 (Del. 2023) (citing A&J Cap., Inc. v. L. Off. of Krug, 2018 WL 3471562, at *5 (Del. Ch. July 18, 2018)). Aither has a written operating agreement; I find that the written operating agreement governs. Plaintiff argues that Riverside facts are materially different because the Riverside plaintiff began as an employee of the LLC after its formation, and she was never a member under the LLC’s operating agreement that only lists other parties; therefore, the Riverside plaintiff was not able to block the execution of a later operating agreement. Pl. PT AB 6. I read Riverside differently. The Riverside plaintiff makes a similar argument to that of Plaintiff in this action—that she was kept in the dark of the existence of the LLC’s written agreement for three and a half years, during which she was a member the entire time because LLC agreements can be oral or implied. Defs. Answer to Frosts Post Trial Br. at 10, Riverside Risk Advisors LLC v. Grace I Ching Chao, 2019-0789- KSJM, (Del. Ch. May 3, 2022). The Court in Riverside found that the LLC’s written agreement governs. Riverside, 2022 WL 14672745, at *20. Similarly, I find that Aither’s written operating agreement governs. 117 See JX10 at 12; JX71; JX83.
19 find that he was not. Pursuant to Section 1.8 of Aither’s written operating agreement,
additional members could be admitted to the Company only by unanimous written
consent of its members. 118 Plaintiff did not receive unanimous written consent from
Hirsch and True. Although True sent an email to Plaintiff on February 9, 2021
stating that his ownership interest was 15%, 119 Hirsch did not respond to that email
or otherwise provide written consent.
Plaintiff was not admitted as a member of Aither pursuant to its operating
agreement.
B. The Record Demonstrates that Plaintiff is Entitled to a Remedy Pursuant to Promissory Estoppel
I now turn to whether the record demonstrates Plaintiff is entitled to relief
pursuant to promissory estoppel. I find that he is. To prevail on a promissory
estoppel claim, a plaintiff must establish that by clear and convincing evidence:
(i) a promise was made; (ii) it was the reasonable expectation of the promisor to induce action or forbearance on the part of the promisee; (iii) the promisee reasonably relied on the promise and took action to his detriment; and (iv) such promise is binding because injustice can be avoided only by enforcement of the promise. 120
118 JX10 at 2. 119 JX49. 120 Harmon v. State, Del. Harness Racing Comm'n, 62 A.3d 1198, 1201 (Del. 2013) (quoting Lord v. Souder, 748 A.2d 393, 399 (Del. 2000)).
20 The predominant question in Delaware promissory estoppel cases is “whether
injustice could be avoided only by enforcement of the promise.” 121
1. The Record Demonstrates that Hirsch and True Made a Promise to Plaintiff that He Would be an Owner of Aither with a 15% Interest
a. Hirsch and True Promised that Plaintiff Would be an Owner of Aither
Unless noted otherwise, the findings of fact below are made pursuant to the
clear and convincing evidence standard.
Plaintiff testified that he was promised an ownership interest by
Defendants, 122 and I find that the record, in addition to this testimony, demonstrates
that he was promised an ownership interest by Defendants. The parties’
communications amongst themselves and to third parties demonstrate that Hirsch
and True made a promise that Plaintiff would be an owner of Aither. True referred
to the existence of Plaintiff’s ownership interest in various emails. For example, in
one email to Plaintiff, True stated that Plaintiff owned a 15% interest in Aither.123 In
another email to Plaintiff, True categorized Plaintiff as “a minority” of Aither.124
The record does not demonstrate that either Defendant recanted or objected to the
existence of an ownership interest held by Plaintiff after these emails were
121 Grunstein v. Silva, 2011 WL 378782, at *11 (Del. Ch. Jan. 31, 2011) (quoting Grunstein v. Silva, 2009 WL 4698541, at *7 (Del. Ch. Dec. 8, 2009)). 122 Ex. A – Ari Rostowsky July 18, 2023 Tr. 91:1–93:22, Dkt. No. 41. 123 JX49. 124 JX79.
21 exchanged.125 In addition, Plaintiff requested K-1 tax documents from Hirsch, and
Hirsch’s reply indicated that the K-1 would be forthcoming.126 Plaintiff’s request
implied that he was an owner of Aither, who would be entitled to a K-1, and
Defendants did not refute Plaintiff’s entitlement to the K-1.
Further, the parties sent an updated business plan and five-year forecast to
Buffalo Enterprises to secure an investment after the execution of Aither’s operating
agreement.127 The business plan listed Plaintiff, Hirsch, and True as “the
Founders.” 128 The business plan refers to the parties’ ownership of the Company
using the possessive form “their.”129 For instance, the “Management Team” section
details each parties’ (including Plaintiffs’) respective background in the industry and
states that “[the parties’] combined expertise and industry network, will bring the
operations of their business to profitability within its first two years.” 130
In addition, the five-year forecast, as included with the updated business plan,
had a table that indicated the projected owners of Aither were two Co-CEOs and the
SVP of Business Development for 2019 to 2024. 131 True testified that “SVP of
business development” referred to Plaintiff. 132 These facts regarding the parties’
125 See Tr. (True) 262:1–5, 262:9–18. 126 JX53. 127 JX10; JX13; JX17; JX17a; JX97. 128 JX97 at 4. 129 See JX97. 130 Id. at 5 (emphasis added). 131 JX17a at 32; Tr. (True) 248:11–249:15. 132 Tr. (True) 248:11–249:15.
22 communications amongst themselves in combination with the updated business plan
and five-year forecast clearly and convincingly support a finding that Hirsch and
True promised Plaintiff an ownership interest in Aither, and acted in such a way as
to acknowledge the promise.
Defendants make several arguments to negate these communications, but
none is persuasive. Defendants argue that True was tired and frustrated when she
sent the email that stated Plaintiff owned an interest in Aither.133 Whatever the truth
of this statement, I do not find this testimony persuasive as to either Defendants’ or
Plaintiff’s understanding of Aither’s ownership; True made no effort to refute the
statement after she became calm and clear-minded.134 Defendants further assert that
True only stated that Plaintiff was a minority and had no authority to bind Aither
because True was using it as a “coaching opportunity” to explain to Plaintiff that at
no point in time would he be able to bind Aither, even if he became an owner years
hence.135 I also do not find this testimony credible, as a reasonable person would not
refer to an individual as a “minority” owner if they in fact had no present interest in
the company, and only an inchoate and conditional expectation of an interest in the
future. These communications, to my mind, clearly acknowledge a present interest.
133 Id. at 217:13–218:1, 260:9–261:24. 134 Id. at 262:1–18. 135 Id. at 219:4–220:11, 255:22–257:19.
23 Defendants also contend that Plaintiff being listed in the updated business plan
as one of three “Founders” simply indicates that the parties developed the business
concept together and does not indicate each of the Founders had an ownership
interest in the Company itself.136 I do not find this argument persuasive. The record
indicates that Plaintiff took extensive efforts to develop Aither (the actual company
and not just the concept), alongside True and Hirsch by assisting in finding its start-
up investment, 137 securing the Company’s first client, 138 and working without pay
for eighteen months,139 which I will discuss further below. These are consistent with
the business plan’s implication of a current interest. Defendants also contend that
the five-year forecast, which indicates that there are three owners of the business,140
was based on a “template” to forecast expenses, and not intended to specify who the
members of Aither were or what percentage membership interest they held.141 I find
this not to be a credible interpretation. The five-year forecast specifically includes
the “SVP [of] Business Development” under the “Owners” section of a table.142
136 Defs. PT OB 24. 137 See Tr. (A. Rostowsky) 22:2–11; Tr. (True) 238:6–239:20; JX7 (demonstrating that Hirsch was relying on Plaintiff’s connections to secure a start-up loan). 138 Tr. (A. Rostowsky) 44:5–9. 139 Id. at 36:17–38:9; Tr. (True) 201:2–11, 254:11–255:2, 265:2–6. 140 JX17a at 32. 141 Defs. PT OB 24–25. 142 JX17a at 32.
24 Further, True herself testified at trial that “SVP of business development” refers to
Plaintiff. 143
Finally, Defendants argue Plaintiff did not prove a promise was made because
certain communications to third parties did not include him as a member of Aither.
For instance, Defendants state that even after Plaintiff was released from his non-
compete, he allowed Aither to submit license applications that excluded him as a
member 144 and he failed to change marketing materials sent to prospective customers
to include himself as a member.145 I find this insufficient to rebut the clear evidence
of the documentary record, taken as a whole. First, Plaintiff adequately explained
that he was loathe to announce to potential customers a different ownership
structure, lest confusion in the marketplace result.146 Second, even if certain
communications to third parties did not state that Plaintiff is a member, Defendants
represented Plaintiff as a “Founder” in the updated business plan.147 But, more
importantly, Defendants also represented to Plaintiff himself that he had an
ownership interest in Aither in several communications. Accordingly, I find, by clear
and convincing evidence, that Plaintiff was promised an ownership interest in the
Aither business by Defendants.
143 Tr. (True) 249:13–15. 144 Defs. PT OB 49. 145 Id. at 29, 48–49. 146 See Tr. (A. Rostowsky) 53:2–55:16, 154:14–155:17. 147 JX97.
25 b. Hirsch and True Promised a 15% Ownership Interest in Aither
Turning to the amount of Plaintiff’s ownership interest in the LLC, I find that
the record supports a finding that Plaintiff was promised a 15% ownership interest.
Plaintiff asserts that he is entitled to a one-third interest, 148 as Hirsch and True orally
or impliedly agreed to this ownership structure. 149 The record, to my mind, does not
support such a finding. Upon receiving the email from True that confirmed that he
held a 15% interest, Plaintiff did not object to such statement.150 In addition, after
the email exchange wherein True stated that Plaintiff was a “minority” interest
holder, Plaintiff did not protest that he held a share equal to Hirsch and True. 151 This
finding is consistent with the anticipated ownership structure of Significa Benefits,
the company that the parties almost acquired and created an ownership structure
for.152 This latter fact is not dispositive, but is indicative of the Defendants’ intention
towards Plaintiff. I find that the parties understood that Plaintiff was promised a
15% ownership interest in Aither.
148 Pl. PT OB 33. Plaintiff did not initially assert he held a one-third interest but did later in litigation. See Verified Member Deriv. Compl., Dkt. No. 1. 149 Pl. PT OB 17–22. 150 Tr. (A. Rostowsky) 63:8–14. 151 See id. at 116:16–117:1; JX79. 152 Tr. (True) 195:10–196:2; JX3.
26 2. The Record Demonstrates that Hirsch and True Reasonably Expected to Induce Action or Forbearance on Part of Plaintiff
Plaintiff’s services provided to Aither without compensation 153 and the loan
provided to Aither by Buffalo Enterprises 154 demonstrate that Hirsch and True
reasonably expected to induce action or forbearance on part of Plaintiff. “The
standard for testing expectation is an objective one.”155
Plaintiff’s conduct—uncompensated labor156—mirrored the conduct of an
individual who expected to share in profits and losses. Hirsch and True also worked
for this period of time without pay.157 Only an unreasonable person in Hirsch’s and
True’s position would expect a non-equity-holder to work for a long-extended
period, at will and facing the possibility of termination before any interest vested,
without payment. In contrast, a reasonable person would expect inducement of that
conduct where there is an incentive, such as expecting to share in profits and losses
through an ownership interest. In addition, upon reading Aither’s business plan,158
a reasonable person would infer that Plaintiff had an interest in the profitability of
Aither and acted in accordance. Accordingly, I find by clear and convincing
153 Tr. (A. Rostowsky) 36:13–37:2; Tr. (True) 200:17–201:11, 215:7–16, 254:11–255:2, 265:2–6. 154 JX20. 155 Ramone v. Lang, 2006 WL 905347, at *15 (Del. Ch. Apr. 3, 2006). 156 Tr. (A. Rostowsky) 36:13–37:2; Tr. (True) 200:17–201:11, 215:7–16, 254:11–255:2, 265:2–6. 157 Tr. (A. Rostowsky) 36:13–23, 38:1–3; Tr. (True) 201:2–5, 215:7–16. 158 JX97.
27 evidence that Hirsch and True expected to induce action—uncompensated labor—
on part of Plaintiff, from the promise of an ownership interest in Aither.
The loan provided to Aither by Buffalo Enterprises also supports a finding
that Hirsch and True expected that Plaintiff would be induced to act based on their
promise. Buffalo Enterprises is partly owned by Plaintiff’s father, Richard.159
Defendants expected Plaintiff to use his influence with his father,160 an action
incentivized by the promise of Plaintiff’s ownership interest in Aither. In fact, True
even texted Hirsch that Plaintiff’s expected contribution to Aither was to “bring in
the money and prospects – leave the rest to [them].161
The record demonstrates that Plaintiff did use his influence with his father.
First, the loan was not a normal business loan—it was made without collateral.162
Second, Richard testified that he only loaned the money because he expected
Plaintiff to be a co-owner of Aither based on conversations with Defendants.163 I
159 Tr. (R. Rostowsky) 171:24–172:3. 160 See JX7; Tr. (True) 238:6–239:4; Tr. (A. Rostowsky) 22:2–23:2. 161 JX11. 162 JX20; Tr. (R. Rostowsky) 182:16–19; Tr. (True) 251:19–21. 163 Tr. (R. Rostowsky) 165:17–24, 166:12–14, 167:16–23, 168:13–169:3, 169:21–170:12. Defendants assert that any probative value of Richard’s testimony is negated by Defendants’ disclosure that Hirsch and True are the only members of the Company in the meeting minutes given to Steinberg on October 2, 2019 and Richard’s failure to request the operating agreement from Defendants. Defs. PT OB 50. I find this argument to be unpersuasive. Given that the record does not indicate that Richard was aware of either the operating agreement or meeting minutes, these facts do not negate that Richard expected Plaintiff to be a co-owner of Aither. Tr. (R. Rostowsky) 171:2–5, 173:18–175:14. This is further supported by the fact that Richard knew Hirsch was aware of Plaintiff’s desire to keep his involvement with Aither a secret, as discussed below. Id. at 171:6–23. Accordingly, I find that regardless of what the documents stated, Richard
28 find his testimony credible, in light of the terms of the loan. Given Plaintiff’s
relationship with the creditor (father–son), the favorable nature of the start-up loan,
and Richard’s testimony of his understanding of Plaintiff’s interest in Aither based
on conversations with Defendants, Defendants had reason to know that Plaintiff did
rely on the promise of his ownership interest in Aither and “acted” by influencing
his father. I find by clear and convincing evidence that Hirsch and True reasonably
expected to induce action on part of Plaintiff (influencing his father to give Aither a
loan from Buffalo Enterprises) in light of their promise to give him an ownership
interest in Aither.
Defendants point out that they, and not Plaintiff, personally guaranteed the
Buffalo Enterprises loan. 164 The argument is that there was no action or forbearance
on part of Plaintiff because he did not make the loan or personally guarantee the
loan—it was Buffalo Enterprises that “acted” by giving the loan. 165 I do not find
this argument persuasive. Plaintiff did not need to have personally guaranteed the
loan because the record, as discussed above, already shows action on part of Plaintiff
that Defendants reasonably expected to induce—uncompensated labor and
expected Plaintiff to be a co-owner of Aither and was thus influenced by Plaintiff to offer this favorable loan to Aither at the request of Plaintiff. 164 Defs. PT OB 50. 165 Id. (“Plaintiff’s contention that Buffalo Enterprises would not have given Aither the Loan but for his alleged ownership in the Company does not cure this fundamental deficiency – as it may have been Buffalo Enterprise’s reliance but not Plaintiff’s. Plaintiff did not make the Loan, and did not take on any risk for this financing; Defendants bore all of the risk alone. There is no legal basis for a claim of third-party reliance or reliance by proxy.”).
29 influencing his father for the start-up loan. In addition, the record demonstrates that
Plaintiff’s personal guaranty was not necessary as Plaintiff’s father, Richard,
expected to be responsible for Plaintiff’s portion of any liability. 166
Defendants also assert that they could not reasonably expect that Plaintiff
would be induced to act by a promise of an immediate ownership interest in Aither
because their understanding of the agreement was that Plaintiff’s ownership interest
would vest after five years.167 As I understand Defendants’ argument, it is that if
Plaintiff was induced to act, it must be based on this alleged agreement that
Plaintiff’s ownership interest would vest after five years. They assert that the parties’
agreement was both conditional—on his remaining an at-will employee for the full
term—and oral.168
I find this untenable. The record demonstrates that Hirsch and True asserted
this version of the agreement of ownership interest only after this litigation began.169
Further, it is not plausible that an employee would be induced to act, i.e., work
without compensation for an extended period of time, solely with the expectation of
an incentive—unvested—that could come to fruition five years in the future. Such
an agreement, I note, would be difficult to enforce due to the statute of frauds,
166 Tr. (R. Rostowsky) 170:16–171:1. 167 Defs. PT OB 50–51. 168 Id.; Tr. (True) 262:9–15, 263:10–265:6. 169 See Tr. (A. Rostowsky) 70:5–24, 71:15–23.
30 making it even less plausible that an employee would be induced to act by such an
agreement.170 In short, Defendants’ arguments are not credible, and I find that
Plaintiff has proved, under the clear and convincing standard, that Defendants
reasonably expected to induce action on part of Plaintiff based on their promise of
his ownership interest in Aither.
3. The Record Demonstrates that Plaintiff Reasonably Relied on Hirsch’s and True’s Promise and That He Took Actions to his Detriment
Plaintiff reasonably relied on Defendants’ promise for his ownership interest
in Aither and acted to his detriment because of the promise. Plaintiff worked for
Aither for eighteen months without compensation, 171 secured—through his
connection with his father—the Company’s start-up loan,172 secured the Company’s
first client,173 and contributed other services to the Company.174 Plaintiff testified
that he would not have worked without pay unless he was an owner of Aither.175 I
believe this testimony. Plaintiff also demonstrated his belief that he was an owner,
as he testified that he discussed with Defendants the Company’s strategy, employee
hiring, and finances at a high-level.176 I find his testimony credible.
170 6 Del C. § 2714(a). 171 Tr. (A. Rostowsky) 36:13–37:2; Tr. (True) 200:17–201:11, 215:7–16, 254:11–255:2, 265:2–6. 172 Tr. (A. Rostowsky) 22:2–23:2; Tr. (True) 238:6–239:20; JX20. 173 Tr. (A. Rostowsky) 44:5–9. 174 See id. at 36:5–12, 49:23–50:5. 175 Id. at 37:7–9. 176 Id. at 49:23–50:5.
31 The record demonstrates that Hirsch and True were well aware of the
extensive services that Plaintiff provided to Aither at the beginning stages of its
formation, during its startup period, and when it became profitable. In addition,
Plaintiff communicated his understanding of his ownership interest, over an
extended period of time, to Defendants. 177 Defendants at no point in time during
Plaintiff’s eighteen-month tenure with Aither refuted his ownership interest nor
explicitly made clear that he was simply an employee.178 Thus, I find it was
reasonable for Plaintiff to rely on Hirsch’s and True’s promise, and that he did so to
his detriment.
Defendants point to marketing materials, filings, and minutes that stated
Hirsch and True were the only owners of Aither. 179 Defendants argue that Plaintiff
and Buffalo Enterprises were aware of these materials and did not refute them, which
demonstrates that Plaintiff could not have reasonably relied on their promise. 180 I
find this argument unpersuasive since the record demonstrates Plaintiff, Buffalo
Enterprises, and Defendants had an incentive to keep Plaintiff’s involvement in the
Company a secret in light of Plaintiff’s non-compete with S&S Healthcare, a fact
177 See id. at 41:14–42:11, 42:19–43:1, 43:2–44:1, 44:21–45:22, 60:3–61:10; JX49. 178 Ramone, 2006 WL 905347, at *16 (finding reasonable and detrimental reliance where promisor was aware of promisee’s reliance and took no action to correct promisee’s conduct based on the purported promise). 179 Defs. PT OB 29–30, 52. 180 Id.
32 that Hirsch and True were well aware of. 181 I find that Plaintiff reasonably relied on
Defendants’ promise and took actions, including uncompensated labor, to his
detriment.
4. The Promise is Binding Because Injustice Can be Avoided Only By Enforcement of the Promise
I find that an injustice can be avoided only by enforcing Hirsch’s and True’s
promise to Plaintiff. Plaintiff introduced the connection to secure Aither’s start-up
loan.182 In turn, the record demonstrates that Hirsch and True used their association
with Plaintiff to receive the loan.183 Plaintiff also contributed extensive services to
Aither for eighteen months without pay.184 In addition, Plaintiff had continuous back
and forth communications regarding the status of his ownership with Hirsch and
True while being led on.185 The Company relied on and benefitted materially from
the assistance and contributions that Plaintiff provided. Therefore, I find that it
would be manifestly unjust to allow Hirsch and True reap the benefits of Plaintiff’s
contributions without fulfilling their promise to Plaintiff.
181 See Tr. (R. Rostowsky) 171:6–23; Tr. (A. Rostowsky) 12:11–14:8; Tr. (True) 227:20–229:21, 253:7–23; JX2. 182 Tr. (A. Rostowsky) 22:2–23:2; Tr. (True) 238:6–239:2. 183 JX7 (demonstrating that Hirsch was relying on Plaintiff’s connections to secure a start-up loan); Tr. (R. Rostowsky) 168:13–169:3. 184 Tr. (A. Rostowsky) 36:13–37:2; Tr. (True) 200:17–201:11, 215:7–16, 254:11–255:2, 265:2–6. 185 See Tr. (A. Rostowsky) 41:14–43:1, 43:2–44:1, 44:21–45:22, 60:3–17; JX49.
33 III. CONCLUSION
For the foregoing reasons, I find that Plaintiff pursuant to promissory estoppel
has a 15% ownership interest in Aither. How equity should act to vindicate this
interest remains for further consideration. The parties should submit a form of order
consistent with this Memorandum Opinion.
Related
Cite This Page — Counsel Stack
Ari Rostowsky v. Laura M. Hirsch and Lisa M. True, and Aither Health, LLC, Counsel Stack Legal Research, https://law.counselstack.com/opinion/ari-rostowsky-v-laura-m-hirsch-and-lisa-m-true-and-aither-health-llc-delch-2024.