Avande, Inc. v. Shawn Evans

• Court: Court of Chancery of Delaware
• Decided: August 13, 2019
• Docket: C.A. No. 2018-0203-AGB
• Status: Published

Opinion

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

AVANDE, INC., a Delaware corporation ) ) Plaintiff, ) ) v. ) C.A. No. 2018-0203-AGB ) SHAWN EVANS and DC RISK ) SOLUTIONS, INC., ) ) Defendants. )

MEMORANDUM OPINION

Date Submitted: May 21, 2019 Date Decided: August 13, 2019

Thad J. Bracegirdle and Julie M. O’Dell, WILKS, LUKOFF & BRACEGIRDLE, LLC, Wilmington, Delaware; Jerome R. Bowen, BOWEN LAW OFFICES, Las Vegas, Nevada; Attorneys for Plaintiff Avande, Inc..

Sean J. Bellew, BELLEW, LLC, Wilmington, Delaware; Attorney for Defendants Shawn Evans and DC Risk Solutions, Inc.

BOUCHARD, C. This post-trial decision resolves various claims that Avande, Inc., a privately

held medical claims management company, brought against its former CEO and

director Shawn Evans and a company he owns, DC Risk Solutions, Inc. Avande

contends that Evans breached his duty of loyalty by engaging in self-interested

transactions, authorizing improper expenditures of company funds, and failing to

maintain appropriate documentation of company expenditures. For this, Avande

seeks over $5.3 million of damages, which equals approximately 45% of all the

expenses Avande incurred to operate its business from its inception in 2013 until

Evans was terminated as CEO in February 2018.

As explained below, the court concludes that Avande is entitled to damages,

but only in the amount of $21,817.70, and to an accounting of payments that Avande

made to DC Risk Solutions, Inc., which it quantifies to be $235,845.83 Defendants

are entitled to judgment in their favor on all other claims.

I. BACKGROUND

The facts recited in this opinion are my findings following a three-day trial

held in February 2019. The record includes live testimony from five witnesses,

approximately 450 exhibits, stipulations of fact in the Pre-Trial Stipulation and

Order (“PTO”), and twelve depositions.1

1 Two of the trial witnesses have the same last name: defendant Shawn Evans and an outside accountant Avande hired named Rick Evans. This decision refers to Shawn Evans as “Evans” and to Rick Evans by his full name. 1 A. The Players

Avande, Inc is a privately held Delaware corporation that was formed on

February 23, 2016, before which time its business was pursued through Avande,

LLC, a Delaware limited liability company that was formed in April 2013. 2 For

simplicity, unless otherwise noted, the court refers to both entities together as

“Avande” or the “Company.” Avande’s principal place of business is in North

Augusta, South Carolina.3

Defendant Shawn Evans is a resident of San Francisco, California who served

as a director and the Chief Executive Officer of Avande, Inc. from February 23, 2016

until February 15, 2018.4 Evans previously served as the Managing Member and

Chief Executive Officer of Avande, LLC.5 Evans is the owner of defendant DC Risk

Solutions, Inc. (“DC Risk”), an insurance brokerage and consulting firm based in

San Francisco, California, where it is incorporated.6

Two other individuals prominent in this action are Dr. Norman Kato and

Mehmet Ergun, who both served as managers of Avande LLC and then as directors

2 PTO ¶¶ 1, 3; JX 14. 3 PTO ¶ 1. 4 PTO ¶¶ 7-8. 5 PTO ¶ 9. 6 PTO ¶ 10; Tr. 5 (Evans). 2 of Avande, Inc.7 Kato served as Avande, Inc.’s Chief Medical Officer from its

inception through February 15, 2018, and is currently Chief Executive Officer and a

director.8 Ergun was the Chief Technology Officer from Avande’s inception until

his death on August 31, 2017.9

B. Avande’s Formation, Management, and Capital Structure

Before Avande was formed, Kato had developed an independent consulting

practice to review hospital bills for insurance companies and to perform “prior

authorization” services.10 “Prior authorization is a process where physicians and

hospitals submit their requests for services” to an insurer so that the insurer may

determine if the services requested are medically necessary.11 Toward the end of

2012, seeing a business opportunity, Kato decided to start a company to provide

these types of services and recruited Ergun and Evans to join him.12

In April 2013, Kato formed Avande, LLC as a new medical management

business to perform prior authorization and hospital billing review services for

insurers.13 Ansera Cloud Services, LLC was formed simultaneously to develop,

7 PTO ¶ 14; JX 14 at AVANDE0023353. 8 PTO ¶ 15; Tr. 401 (Kato). 9 PTO ¶¶ 16, 19. 10 Tr. 402-03 (Kato). 11 Tr. 403-04 (Kato). 12 Tr. 404-07 (Kato) 13 JX 14; Tr. 405-06 (Kato). 3 operate, and manage the internet “cloud application” and related technology that

Avande LLC would use to serve its clients.14

Kato, Evans, and Ergun divided up their responsibilities into three areas.

Kato, as the Chief Medical Officer, “was the medical guy” who had the client

relationships and performed the “medical reviews” for clients.15 Ergun, as the Chief

Technology Officer, was responsible for information technology, including

“building out systems” for the Company.16 Evans, as the CEO, described his

responsibilities as extending to anything that Kato and Ergun did not do, which

included administrative and financial matters.17 For a time, Evans oversaw financial

matters as the Chief Financial Officer, but beginning in 2015, Evans engaged an

outside CFO service called NowCFO and used a CPA (Ronald J. Ruttenberg) to

produce its year-end financial reports.18

In February 2016, Kato, Evans, and Ergun decided to restructure Avande LLC

and convert it into a Delaware corporation.19 On February 23, 2016, pursuant to the

terms of a Stock Purchase Agreement, all the membership interests in Avande LLC

14 Tr. 408-09 (Kato); Tr. 152 (Evans). 15 Tr. 14 (Evans); Tr. 408 (Kato). 16 Tr. 14 (Evans); Tr. 408 (Kato). 17 Tr. 14 (Evans): Tr. 408 (Kato). 18 Tr. 271-72, 384-85 (Evans) 19 Tr. 412-13 (Kato). 4 and Ansera Cloud Services, LLC were exchanged for shares of Avande, Inc. stock.20

Avande, LLC and Ansera Cloud Services LLC initially operated as wholly-owned

subsidiaries of Avande, Inc. but later were merged into Avande, Inc.21 On December

13, 2016, a certificate of cancellation for Avande, LLC was filed with the Delaware

Secretary of State and Avande, Inc. assumed all of its rights and obligations.22

After forming Avande, Inc., Kato, Evans, and Ergun served as its directors.23

Five people owned Avande’s common stock at the time, apportioned as follows:

Kato owned 43.0108%, Evans owned 30.466%, Ergun owned 23.2975%, and two

others, Donna Gentile and Peter Dumich, owned 1.7921% and 1.4337%,

respectively.24 The Company’s three officers each resided and worked in a different

location: Kato in Los Angeles, Evans in San Francisco, and Ergun circulated

between Turkey, Mexico and two locations in California—San Diego and Irvine.25

C. Other Businesses Owned and Operated by Avande’s Principals

Avande, LLC’s operating agreement permitted managers to engage in outside

business ventures.26 This practice continued after the formation of Avande, Inc.

20 PTO ¶¶ 3-4; JX 131 at AVANDE0009345; Tr. 412 (Kato). 21 PTO ¶ 4; Tr. 152-53 (Evans). 22 PTO ¶¶ 5-6. 23 PTO ¶ 14. 24 PTO ¶ 13. 25 Tr. 377 (Evans); Tr. 425 (Kato). 26 JX 14 § 6.7(a). 5 While working for Avande, Ergun owned and operated Avandel, Inc.

(“Avandel”), which provided all of Avande’s IT services, including the development

of add-on software solutions to the Salesforce platform on which the Company

operated.27 Avandel employed many programmers, who worked mostly in Turkey.28

As Kato was aware, Evans owned and operated DC Risk while working for

Avande.29 As Avande’s CEO, Evans arranged for Avande to purchase insurance

policies that were brokered by DC Risk.30 Avande also utilized a DC Risk employee,

Susan Omran, for bookkeeping services.31 According to Evans, all three directors

made the decision to use Omran as an employee of DC Risk, where she was eligible

for benefits.32

While working for Avande, Evans also owned part of two other companies,

Scooter Ricambi and Euro Classix Cars, which Kato was not aware of.33 In 2017,

while he was still CEO of Avande, Evans purchased Podiatry Plan, which is a

27 Tr. 14 (Evans); Tr. 638 (Taciroglu); Evans Dep. 85. 28 Tr. 173, 377 (Evans). 29 Tr. 447 (Kato). 30 PTO ¶¶ 42-43. 31 Tr. 24 (Evans). 32 Tr. 71 (Evans). 33 Tr. 72 (Evans); Tr. 447 (Kato). 6 “network of podiatrists” that provides services similar to those provided by Avande,

but only in the field of podiatry.34

D. Avande Experiences Financial Troubles

Over time, tensions developed between Evans and Kato due, in part, to

financial difficulties that Avande experienced during Evans’ tenure as CEO.35 In

October 2016, Medical Benefits Mutual Life Insurance Co. (“MedBen”), one of

Avande’s largest clients, was requesting that Avande repay it $426,219.36 Given the

nature of Avande’s business, having to refund payments received from clients is a

business risk. As Kato testified:

Avande makes its money through savings on hospital bills. . . . So if a bill comes in, let’s say at $100,000, and we can save 50,000, so the ultimate payout is only $50,000, then we get 35 percent. 5 percent goes back to the third-party administrator for administrative fees. We keep the other 30 percent.37

If a hospital refuses to accept the discount that a client applies based on Avande’s

recommendation, however, Avande could be required to repay the client for funds

remitted to Avande upfront in expectation of realizing the savings.38

34 Tr. 40, 68 (Evans); PTO ¶ 45; Tr. 476-80 (Kato). 35 Tr. 638 (Taciroglu); Tr. 427 (Kato); JX 195. 36 JX 186. 37 Tr. 429 (Kato). 38 Tr. 430 (Kato). 7 With respect to MedBen, there was a contractual relationship between the

hospital and an employer group that did not allow for any repricing, so Avande had

to return to MedBen what it had already received for all cases involving that

employer group.39 This proved to be difficult for Avande, because, as Evans put it

“[w]e’re a $3 million company being asked to pay back $400,000 in cash and an

additional almost $200,000 in accounts receivable write-offs.”40 Kato placed the

blame for the MedBen problem on Evans, contending that he should have reserved

more of the money the Company received upfront from MedBen given the risk of

having to pay it back.41

On the heels of the problems with MedBen and the financial strain it put on

the Company, Kato and Ergun expressed concerns about Evans’ spending habits,

including his traveling first class and staying at high-end hotels.42 On December 13,

2016, in an advance of a board meeting scheduled that day, Ergun proposed a series

of resolutions to enact a formal travel policy and restrict the ability of all officers to

authorize material expenditures of Company funds, hire employees, or modify their

compensation.43 The board ultimately approved a resolution requiring prior board

39 Tr. 431 (Kato). 40 Tr. 26-27 (Evans). 41 Tr. 514 (Kato). 42 Tr. 443 (Kato); JX 151; JX 170. 43 JX 199; Tr. 441-43 (Kato). 8 approval (i) to hire or terminate employees and to set or modify their compensation

terms and (ii) “for any expenditure by the Company exceeding $10,000.”44 The

board also decided to adopt a formal corporate travel policy at a later meeting and

determined “that in the interim, all corporate travel would be conducted at coach

fare.”45

E. Ergun’s Death and Subsequent Corporate Changes

On August 31, 2017, Ergun died unexpectedly.46 This tragic event created a

vacancy on Avande’s board and led to a deadlock between Evans and Kato. Before

his death, Ergun had served as a “go-between” who maintained the “balance” when

Kato and Evans disagreed.47 Ergun’s death eliminated that balance and, because he

died intestate, Ergun’s Avande shares could not be voted in an election of directors

until a representative for his estate was appointed.48

Around the time of Ergun’s death, Kato was communicating with William

Witenberg, a financial consultant for Avande, to discuss options for terminating

Evans’ role in the Company.49 Those discussions touched on a disagreement

44 JX 198; PTO ¶17. 45 JX 198. 46 PTO ¶ 19. 47 Tr. 15 (Evans); Tr. 456 (Kato). 48 PTO ¶ 19; Tr. 458 (Kato). 49 Tr. 535-36, 554-56 (Kato); JX 267; JX 291. 9 between Kato and Evans concerning how to best calculate the cost of conducting a

medical review to determine what contracts were profitable for Avande. At some

point, Kato had Ali Taciroglu, Avande’s Chief Operating Officer at the time,

calculate the “true cost per authorization.”50 In an August 30, 2017 email, Kato

indicated to Witenberg that he was not planning to provide this information to Evans,

stating he “did not want [Evans] trying to figure out the correct numbers” in order

to “leave him in the dark and let him hang himself as he signs the new essentially

worthless contracts since [his] new clients are not sending in any new cases.”51 Kato

did not tell Taciroglu to keep his cost calculations secret from Evans, and Taciroglu

ultimately shared them with Evans.52

In the wake of Ergun’s death, Kato made multiple requests for Evans to

participate in a stockholders’ meeting to elect directors and eventually scheduled one

to be held in San Jose.53 Evans refused to attend, which prevented a quorum because

in addition to the absence of his shares, no one had been appointed as a representative

with the authority to vote Ergun’s shares, which together accounted for

approximately 53.8% of the Company’s outstanding shares.54

50 Tr. 538 (Kato); Tr. 647 (Taciroglu). 51 JX 267. 52 Tr. 647 (Taciroglu). 53 Tr. 458 (Kato); PTO ¶ 21. 54 Tr. 458 (Kato). 10 On January 8, 2018, Kato filed an action under 8 Del. C. § 211 to compel an

annual meeting of the Company’s stockholders, which had not been held for more

than thirteen months.55 On February 5, 2018, this court entered a judgment in Kato’s

favor and ordered Avande to hold an annual meeting of stockholders on February

15, 2018.56 At this meeting, Kato, Witenberg, and Peter Dumich were validly

elected as directors of Avande, and Evans was not reelected.57 After the meeting,

the new board validly terminated Evans from his position as CEO and appointed

Kato as the new CEO.58

F. Evans’ Actions after his Termination

On February 15, 2018, immediately after his termination as CEO, Evans sent

Avande a written demand for repayment of loans with an outstanding principal

amount at the time of approximately $169,000 that he and his wife had made to

Avande the previous September to help stabilize the Company.59 On February 20,

2018, Avande’s counsel responded, stating that Evans’ “demand for immediate

payment is premature at best under the circumstances” as “the new leadership will

need time to obtain and review all relevant documentation, financial and otherwise,

55 PTO ¶ 23; Kato v. Avande, Inc., C.A. No. 2018-0008-AGB. 56 PTO ¶ 24. 57 PTO ¶¶ 25-26. 58 PTO ¶¶ 27, 30. 59 PTO ¶ 32; JX 271; JX 416. 11 to make any reasonable determination as to the real financial condition of the

company as well as any alleged outstanding obligations.”60

On March 1, 2018, Evans and his wife filed suit against Avande in California

state court seeking to compel the Company to repay their loans.61 On June 7, 2018,

the California Superior Court stayed that case pending adjudication of this action.62

Evans admits taking certain actions after his termination that had the potential

to harm Avande. During this period, Evans contacted creditors of Avande to

encourage them to take legal action against Avande in an effort to cause an

involuntary bankruptcy of the Company.63 Evans also contacted Luke Burchard, a

medical director at Avande, and invited him to leave Avande in order to join Evans

in a new venture.64

G. Internal Audit and Investigation after Evans’ Termination

After Evans was terminated, Kato and other Avande employees began to

assess the financial situation of Avande.65 Both Kato and Avande’s counsel

requested that Evans turn over all Avande documents in his possession, but Evans

60 JX 344. 61 PTO ¶ 37. 62 JX 390. 63 PTO ¶¶ 35-36. 64 PTO ¶ 31; Tr. 658-59, 665-67 (Burchard); JX 352. 65 Tr. 461-62 (Kato). 12 did not do so.66 Kato, together with Avande’s bookkeeper Stephanie Taylor,

undertook an audit, and Kato for the first time learned of various suspect

transactions, such as the purchase of a scooter for Ergun from a company in which

Evans had an ownership interest, and payments to a private school and ballet studio

attended by the children of a consultant who periodically provided services to the

Company.67 It also was discovered that Evans had not paid invoices to Avande

clients and vendors; for example, Avande had not paid twenty-four invoices, totaling

$45,613.72 to MedBen that were over 605 days past due.68

In March 2018, Avande engaged Rick Evans and his accounting firm Serotta

Maddocks Evans & Co., CPAs (“Serotta”) to assist in preparing Avande’s financial

statements and tax returns for 2017.69 Later in March, Avande learned that the IRS

would be conducting a field audit on its 2016 tax return, and Serotta’s engagement

was expanded to include the audit.70 An IRS agent informed Rick Evans that this

was a random audit.71

66 JX 459; JX 344; Tr. 108 (Evans). 67 Tr. 467 (Kato). 68 JX 385 (MedBen); Tr. 475-76 (Kato). 69 JX 448; Tr. 589 (R. Evans). 70 Tr. 592 (R. Evans). 71 JX 369A; Tr. 596, 617 (R. Evans). 13 Serotta attempted to secure the records sought by the IRS, but discovered that

some of these documents, including Form 1099s, credit card statements, bank

records, receipts, and invoices, could not be located.72 In September 2018, Avande’s

counsel requested that Evans provide any and all documentation concerning Avande

in his possession to the Company to assist its response to the IRS’s audit requests.73

Evans did not respond to Avande, but provided the documents to his counsel, who

produced copies during discovery in this case.74 As of the time of trial, the IRS audit

was still ongoing.75

II. PROCEDURAL HISTORY

On March 22, 2018, the Company filed its original complaint in this action,

which it amended on May 30, 2018 (the “Amended Complaint”).76 The Amended

Complaint contains six claims. Count I asserts a claim for declaratory judgment

pertaining to Evans’ termination as Avande’s CEO. Count II asserts that Evans

breached his fiduciary duties. Count III asserts a claim for tortious interference with

contract and business relations. Count IV asserts a claim for defamation and/or trade

72 Tr. 595 (R. Evans) 73 JX 402. 74 Tr. 109-10 (Evans). 75 Tr. 616 (R. Evans). 76 Dkts. 1, 12. 14 libel. Count V asserts a claim for conversion. Count VI asserts that Avandel and

DC Risk aided and abetted Evans in breaching his fiduciary duties.

On June 13, 2018, Evans filed an answer and counterclaims against Avande

and its current board, consisting of Kato, Dumich, and Witenberg.77 Evans also

moved for expedited proceedings, which the court denied on June 22, 2018.78

On September 28, 2018, the parties filed a stipulation in which (i) Evans

voluntarily dismissed without prejudice his counterclaims, as amended, (ii) DC Risk

withdrew a motion to dismiss for lack of personal jurisdiction that it had filed, and

(iii) the parties requested a compact schedule to adjudicate Avande’s claims, with

trial scheduled to begin on February 20, 2019.79

On December 28, 2018, the deadline to exchange expert reports, Avande

produced a three-page letter from Rick Evans of Serotta. The letter advised that

Avande’s financial statements could not be audited due to a lack of corroborating

documentation and listed certain categories of unavailable documents, but it did not

explain what opinions Rick Evans intended to offer at trial and did not contain any

opinion about the amount of damages Avande was seeking in this action.80

77 Dkt. 16. 78 Dkts. 17, 31. 79 Dkts. 60, 61. 80 JX 412. 15 On February 7, 2019, Avande served on defendants a 41-page “supplemental

expert report” consisting of an engagement letter, various spreadsheets quantifying

alleged damages to Avande, and backup documentation.81 Later that day, defendants

moved to strike the supplemental expert report.82 The court granted this motion at

the pretrial conference held on February 14, 2019, explaining that the production of

what was a “new report from a previously designated expert” forty days after the

agreed-upon deadline for expert reports, about fifteen hours before the expert was

scheduled to be deposed, and less than ten days before trial was inexcusable and

prejudicial to defendants.83 The court further explained that it was not precluding

Rick Evans from testifying as a fact witness.84

On February 19, 2018, the day before trial began, defendants filed a motion

seeking to exclude Rick Evans as a witness at trial in any capacity, arguing that it

was improper to call him as a fact witness and that his initial expert report contained

no opinions that would justify calling him as an expert.85 The court denied the

81 JX 425. 82 Dkt. 123. 83 Pre-Trial Tr. 53-54 (Feb. 14, 2019) (Dkt. 170). 84 Pre-Trial Tr. 58. 85 Dkt. 164. 16 motion, reiterating that Rick Evans could “testify in his capacity as a fact witness”

and as an expert as to his three-page letter that was served on December 28.86

A three-day trial was held in February 2019. During post-trial briefing, the

Company did not brief and thus waived its claims for declaratory relief, tortious

interference with contract and/or business relations, defamation and/or trade libel,

and conversion.87 Accordingly, judgment will be entered in defendants favor on

Counts I, III, IV, and V of the Amended Complaint. As to Count IV, Avande

previously filed a voluntary notice of dismissal of its aiding and abetting claim

against Avandel.88 Thus, what remains for decision in the discussion that follows is

Avande’s claim against Evans for breach of fiduciary duty (Count II) and against

DC Risk for aiding and abetting (Count VI).

86 Tr. 343. In clarifying the line between fact and expert witness, Avande’s attorney agreed that Rick Evans “would not be . . . giving an independent opinion now, as opposed to repeating what he advised the company in the past as an advisor to the company, about whether certain things are legitimate business expenses or not.” Id. 203-04. Rick Evans, who was not proffered as an expert at trial, conceded that his December 28, 2018 letter did not contain any opinions, and was precluded from offering other opinions. Id. 613-15 (R. Evans), 631-32 (sustaining objections). Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (“Issues not briefed are deemed 87

waived.”). 88 Dkt. 113. 17 III. ANALYSIS

During post-trial argument, Avande explained that it is seeking entry of a

judgment against Evans for breach of fiduciary duty relating to three categories of

alleged damages totaling $5,372,758.33. Each of these categories covers the period

from the Company’s inception in 2013 to January 2018, shortly before Evans was

terminated as Avande’s CEO. The three categories are as follows:

 $4,691,097 of expenses that Avande contends the IRS could

disallow as deductible business expenses.

 $235,845.83 of payments Avande made to DC Risk.

 $445,815.50 equal to 50% of the Evans’ compensation as CEO.89

The court’s analysis of Avande’s claims against Evans and DC Risk with respect to

each category is set forth in Sections B-E below. Before turning to that analysis, the

court will address Evans’ affirmative defense under the unclean hands doctrine.

A. Evans Has Failed to Prove an Unclean Hands Defense

Evans asserts that Avande should be barred from obtaining any relief in this

action under the doctrine of unclean hands on the theory that, “[a]s early as August

2017, Kato began conspiring with William Wittenberg [sic] to undermine Evans in

an effort ultimately calculated to secure his removal from the Company.” 90 For

89 Post- Trial Tr. 24-25, 36-37 (May 7, 2018) (Dkt. 188). 90 Defs.’ Answering Br. 27. 18 support, Evans relies primarily on an email Kato sent to Witenberg on August 30,

2017, where Kato stated that he did not want to alert Evans to certain cost figures

that Taciroglu had calculated because he wanted to let Evans “hang himself” by

continuing to use incorrect cost figures when negotiating contracts with clients.91

The doctrine of unclean hands is an affirmative defense that allows this court

to deny relief to a party who acts in bad faith:

When one files a bill of complaint seeking to set the judicial machinery in operation and to obtain some remedy has violated conscience or good faith or other equitable principles in his conduct, then the doors of the Court of Equity should be shut against him. The Court should refuse to interfere on his behalf to acknowledge his right or to award him a remedy.92

In order to establish unclean hands, “the plaintiff’s conduct [must be] so offensive

to the integrity of the court that his claims should be denied, regardless of their

merit.”93 And “the inequitable conduct must have an ‘immediate and necessary’

relation to the claims under which relief is sought. To operate otherwise would invite

courts to act in a constabulary rather than judicial capacity.”94

Defendants have not established that Avande acted with unclean hands. To

start, the cited conduct of Kato was not exceptionally offensive. Defendants object

91 JX 267. 92 Bodley v. Jones, 59 A.2d 463, 469 (Del. 1947). 93 Gallagher v. Holcomb & Salter, 1991 WL 158969, at *4 (Del. Ch. Aug. 16, 1991). 94 Nakahara v. NS 1991 Am. Tr., 718 A.2d 518, 523 (Del. Ch. 1998) (internal footnotes omitted). 19 to Kato seeking to remove Evans from the Company, but he was within his rights to

do so. The record shows that the relationship between Kato and Evans had

deteriorated significantly by December 2016, when Avande experienced financial

troubles because of the need to repay MedBen.95 In Kato’s view, Evans was

responsible for this problem because he failed to reserve sufficient funds for this

contingency.96 After Ergun’s death in 2017, the relationship between Kato and

Evans eroded further, ultimately leading to his removal as a director of the Company

at a court-ordered meeting of stockholders and as an officer by the Company’s newly

elected board in February 2018. Both of these actions were concededly valid.97

With respect to the August 2017 email exchange with Witenberg, Kato

credibly explained his frustration that Evans had signed up “money-losing” contracts

and would not heed his concerns about making sure that contracts with clients were

negotiated on terms that would cover the Company’s costs.98 Kato telling Witenberg

that he wanted Evans to fail because of his own incompetence was an act of bad

management on his part, but that action does not come close to being so offensive

as to warrant barring Avande’s claims for relief.

95 JX 195; Tr. 426-28 (Kato). 96 Tr. 514 (Kato). 97 PTO ¶¶ 26-27. 98 Tr. 538-39 (Kato). 20 Further, the nexus between Evans’ alleged breaches of fiduciary duty and

Kato’s interactions with Witenberg is highly attenuated.99 The vast majority of the

expenditures for which Avande seeks recourse against Evans, which date back to

2013, predated the Kato-Witenberg August 2017 email exchange and their later

discussions about removing Evans from the Company. The “immediate and

necessary” relationship between the alleged “inequitable conduct” and “the claims

under which relief is sought” thus has not been established to support an unclean

hands defense.100

B. The Legal Framework

The gravamen of Avande’s single claim against Evans is that he breached his

duty of loyalty to Avande as a director and as its CEO by engaging in self-dealing

transactions, acting in bad faith, and committing waste.101 Importantly, what is not

at issue in this case is whether Evans breached his duty of care. This is because

Evans is exculpated from liability for breaches of the duty of care in his capacity as

a director of Avande under its certificate of incorporation,102 and because Avande

99 Nakahara, 718 A.2d at 523. 100 Id. 101 Although some of the events in this case date back to the predecessor of Avande, Inc. (Avande, LLC), the parties analyzed the legal issues in this case solely based on the law applicable to a fiduciary of a corporation governed by the Delaware General Corporation law and accordingly the court uses the same framework. 102 JX 132 at Art. VIII. 21 did not fairly raise a claim against Evans for breach of the duty of care in his capacity

as an officer of Avande.103

“The duty of loyalty requires that a corporate fiduciary act with undivided and

unselfish loyalty to the corporation and that there shall be no conflict between duty

and self-interest.”104 “If corporate fiduciaries stand on both sides of a challenged

transaction, an instance where the directors’ loyalty has been called into question,

the burden shifts to the fiduciaries to demonstrate the ‘entire fairness’ of the

transaction.”105 “[I]n a typical self-dealing transaction, the fiduciary is the recipient

of an allegedly improper personal benefit, which usually comes in the form of

obtaining something of value or eliminating a liability.”106

103 In its reply brief, Avande asserted that “Evans cannot be exculpated from liability for any acts that he undertook unilaterally under his authority as Avande’s CEO.” Pl.’s Reply Br. 25. Avande, however, did not fairly raise in its opening brief that it was seeking to recover damages from Evans in his capacity as an officer under a due care theory. See Pl.’s Opening Br. 26-39 (asserting that Avande had proven a non-exculpated claim for breach of Evans’ fiduciary duty of loyalty and not advancing a claim for breach of the duty of care); Post-Trial Tr. 18-20 (conceding that Avande did not advance a duty of care argument against Evans in its opening brief). Avande thus waived its right to assert a duty of care claim. See Zutrau v. Jansing, 2013 WL 1092817, at *6 (Del. Ch. Mar. 18, 2013) (noting that “[u]nder the briefing rules, a party is obliged in its motion and opening brief to set forth all of the grounds, authorities and arguments supporting its motion” and that “courts routinely have refused to consider arguments made in reply briefs that go beyond responding to arguments raised in a preceding answering brief”). 104 Oliver v. Boston Univ., 2006 WL 1064169, at *18 (Del. Ch. Apr. 14, 2006) (internal quotation marks omitted). 105 Id. 106 Personal Touch Hldg. Corp. v. Glaubach, 2019 WL 937180, at *19 (Del. Ch. Feb. 25, 2019). 22 Once entire fairness applies, “the defendants must establish to the court’s

satisfaction that the transaction was the product of both fair dealing and fair price.”107

“[T]he test for fairness is not a bifurcated one as between fair dealing and price. All

aspects of the issue must be examined as a whole since the question is one of entire

fairness.”108

“The duty of loyalty includes a requirement to act in good faith.” 109 “To act

in good faith, a director must act at all times with an honesty of purpose and in the

best interests and welfare of the corporation.”110 “A failure to act in good faith may

be shown, for instance, where the fiduciary intentionally acts with a purpose other

than that of advancing the best interests of the corporation, where the fiduciary acts

with the intent to violate applicable positive law, or where the fiduciary intentionally

fails to act in the face of a known duty to act, demonstrating a conscious disregard

for his duties.”111

“Corporate waste occurs when a corporation is caused to effect a transaction

on terms that no person of ordinary, sound business judgment could conclude

In re Trados Inc. S’holder Litig., 73 A.3d 17, 44 (Del. Ch. 2013) (internal quotation 107

marks omitted). 108 Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983). 109 In re Orchard Enters., Inc. S’holder Litig., 88 A.3d 1, 32 (Del. Ch. 2014). 110 In re Walt Disney Co. Deriv. Litig., 907 A.2d 693, 755 (Del. Ch. 2005), aff’d, 906 A.2d 27 (Del. 2006). 111 In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 67 (Del. 2006). 23 represent a fair exchange.”112 Waste is “a residual protection for stockholders that

polices the outer boundaries of the broad field of discretion afforded directors by the

business judgment rule” and may be best conceptualized as allowing a plaintiff to

state a claim “even when the motivations for a transaction are unclear by pointing to

economic terms so one-sided as to create an inference that no person acting in a good

faith pursuit of the corporation’s interests could have approved the terms.” 113 Waste

has been viewed as being covered by an exculpation provision,114 but this court has

noted that it “also can be understood as a means of proving bad faith conduct” and

“could fall outside the exculpatory provision.”115

Unless otherwise indicated below, Avande “ha[s] the burden of proving each

element, including damages, of each” cause of action “by a preponderance of the

evidence.”116 “[P]roof by a preponderance of the evidence means that something is

more likely than not.”117

112 Steiner v. Meyerson, 1995 WL 441999, at * 1 (Del. Ch. July 19, 1995) (Allen, C.). 113 Sample v. Morgan, 914 A.2d 647, 669-70 (Del. Ch. 2007) (Strine, VC). 114 Green v. Phillips, 1996 WL 342093, at *6-7 (Del. Ch. June 19, 1996). 115 Amalgamated Bank v. Yahoo! Inc., 132 A.3d 756, 786 (Del. Ch. 2016), abrogated on other grounds, Tiger v. Boast Apparel, Inc., --A.3d--, 2019 WL 3683525 (Del. Aug. 7, 2019) (citing Sample, 914 A.2d at 670). 116 Physiotherapy Corp. v. Moncure, 2018 WL 1256492, at *3 (Del. Ch. Mar. 12, 2018) (internal quotation marks omitted). 117 Id. (internal quotation marks omitted). 24 C. Transactions Purportedly Lacking Proper Documentation

Avande’s first category of alleged damages consists of $4,691,097 of

expenses the deductibility of which the IRS purportedly could disallow for lack of

supporting documentation. Rick Evans of the Serotta firm calculated this figure. He

began by identifying the amount of expenses recorded in the Company’s ledgers

from the Company’s inception in 2013 through January 2018, from which he

subtracted four items:118

Total Expenses $11,765,503 1. Salaries & Wages, Payroll Taxes, Benefits 6,103,267 2. Depreciation, Amortization 92,718 3. Specialty Health 762,109 4. Other Expenses Exhibiting Evidence of Proper 116,312 Authorization or Expense Receipts Exhibiting Evidence of Business Purpose Expenses Subject to Disallowance by IRS $4,691,097

The $4,691,097 result of this calculation is referred to hereafter, at times, as the

“Challenged Amount.”

Of the Challenged Amount, the Company specifically has questioned only six

expenditures that account for less than 1% (or approximately $30,500) of the

expenses at issue. Instead of attempting to isolate any other specific items or

118 Tr. 605-06 (R. Evans); JX 425 at 5. 25 categories of expenses within the Challenged Amount that it believes are

problematic, Avande argues that Evans should bear the burden to prove the fairness

of each and every expense making up the Challenged Amount based on a line of

cases emanating from this court’s decision in Technicorp Int’l II, Inc. v. Johnston.119

The court turns to this issue next and then will address the four specifically

challenged items.

1. Avande Has Failed to Make the Prima Facie Showing Necessary to Shift to Evans the Burden of Proving the Fairness of Expenditures Within the Challenged Amount

In Technicorp, this court found after trial that two individuals (Johnston and

Spillane) had “systematically looted” over a twelve-year period two companies:

Technicorp International II, Inc. (TCI II) and its subsidiary Statek, Inc.120 The fact

that Johnston and Spillane “exclusively managed and controlled TCI II and Statek,

including all access to their cash and corporate records” during this period, “while

keeping the corporate books and records in such a way as to minimize, if not

altogether avoid, the risk of being held accountable,” complicated the corporations’

efforts to recover their losses after control of TCI II and Statek had changed hands.121

119 2000 WL 713750, at *2 (Del. Ch. May 31, 2000). 120 Id. at *1. 121 Id. 26 After retaining an expert “to perform six months of painstaking, highly

intricate forensic accounting work,” TCI II and Statek asserted that Johnston and

Spillane had “wrongfully diverted to themselves at least $28.5 million of those

corporations’ assets in several different ways,” consisting of approximately $11.5

million from TCI II and $17 million from Statek.122 Two aspects of the court’s

analysis of these claims are relevant here.

First, based on the testimony of plaintiffs’ expert and other evidence, the court

found that “plaintiffs have established, prima facie” that all of the TCI II funds at

issue (approximately $11.5 million) “were paid to Johnston, Spillane, and the

Johnston entities, all of whom Spillane confirmed were the recipients of those

funds.”123 Given this prima facie showing that the claims involving use of TCI II’s

funds were entirely self-interested, the court shifted to the defendants the burden “to

account for their disposition of those funds:”

And where, as here, the fiduciaries cause those funds to be used for self- interested purposes, i.e., to be paid to themselves or to others for the fiduciaries’ benefit, they have the burden of establishing entire fairness, sufficient to pass the test of careful scrutiny by the court.124

Second, the court engaged in a similar analysis with respect to approximately

$1.1 million of charges on Statek credit cards issued to Johnston and Spillane:

122 Id. at *2, 14-15. 123 Id. at *16. 124 Id. (internal quotation marks and alterations omitted). 27 Because the defendants charged the challenged expenses to their Statek American Express credit cards, and also determined that Statek would pay those charged expenses, the defendants have the burden of showing that these charges represented legitimate business expenses of Statek.125

Once again, plaintiffs made a prima facie showing to warrant this burden allocation.

In particular, after reviewing the “corporations’ financial records that were available,

including the Statek American Express credit card charge records,” plaintiffs’ expert

prepared a summary of challenged charges and underlying statements that “were

supplied to defendants almost two years before the trial,” after which the defendants

were deposed about the charges.126 Discovery revealed that the challenged charges

admittedly were made without following any sort of policy and included many

charges that appeared on their face to be personal in nature, including for “stuffed

animals, chocolate, flowers, cases of fine wine, fine china, videotapes, picture

frames, Waterford and Baccarat crystal, furniture, Christmas decorations, and dry

cleaning.”127

The parties have identified four cases where this court applied Technicorp,

with mixed results, in deciding whether to order an accounting or to allocate to a

125 Id. at *25. Avande does not rely on the Technicorp court’s disposition of the remaining claims involving Statek (for approximately $16 million), which the court sorted into over ten categories and sub-categories that it analyzed separately. See id. at *20-22, 27-50. 126 Id. at *23. 127 Id. 28 fiduciary the burden of demonstrating the fairness of a series or group of

transactions. These cases are reviewed next in the order they were decided.

In Carlson v. Hallinan, a stockholder of CR Services Corp. (CR) alleged that

CR’s two other stockholders (Hallinan and Gordon) “caused CR to bear the expenses

of other Hallinan entities.”128 In a post-trial decision, the court found that “Hallinan

and Gordon exercise exclusive control over CR’s funds,” that they used that control

to have CR pay for websites that benefitted other entities that Hallinan controlled,

and that they “never documented expenses incurred by CR” on behalf of the Hallinan

controlled entities.129 Citing Technicorp with favor, the court concluded, based in

significant part on “Plaintiffs’ showing of definite instances where Defendants did

not properly allocate expenses among Hallinan owned or controlled entities,” that

an accounting would be necessary “to determine the extent of the misallocation of

expenses and the damages resulting therefrom.”130

In Sutherland v. Sutherland, a stockholder demanded that certain directors and

officers of a corporation and its subsidiary be required to “undertake a

comprehensive accounting . . . to demonstrate affirmatively that the Companies’

funds have not been used to finance any of [their] personal expenses.”131 In

128 925 A.2d 506, 536-37 (Del. Ch. 2006). 129 Id. at 537. 130 Id. 131 2010 WL 1838968, *4 (Del. Ch. May 3, 2010). 29 analyzing the issue, the court emphasized that in Technicorp, plaintiffs had “made a

prima facie showing” that defendants “had diverted almost $12 million” before the

court placed the burden on them to account for the funds; and that in Carlson,

plaintiffs had demonstrated “definite instances” of “unaccounted-for dispositions”

before the court ordered an accounting.132 Finding that the stockholder had failed to

make any such prima facie showing, the court rejected the request for an accounting

and granted summary judgment in defendants’ favor.

In Zutrau v. Jansing, the plaintiff challenged as improper approximately

$51,000 out of over $1 million in expenses that the defendant had charged to his

company credit card over a six-year span.133 The defendant admitted that certain

expenses were personal and the court found others to be business expenses, leaving

approximately $28,000 of charges in dispute.134 In a post-trial decision, the court

found that “neither side has submitted convincing evidence as to the nature of these

expenses,” which meant that whether a breach of fiduciary duties occurred “will

depend upon who bears the burden of proof.”135 The court refused to shift the burden

under Technicorp or Carlson, reasoning that the plaintiff “has not made a prima

facie showing that any of the remaining Amex charges were incurred improperly;

132 Id. at *16 (internal quotation marks omitted). 133 2014 WL 3772859, at *27-28 (Del. Ch. July 31, 2014). 134 Id. 135 Id. at *28. 30 rather, her challenges to those charges are based on speculation and are not supported

by substantial evidence.”136 Citing Sutherland, the court further explained that

although the “lack of formal expense reporting is far less than ideal, . . . the relatively

minimal nature of the personal expenses that Jansing has been shown to have

charged to the Company over a span of six years is not sufficient to warrant shifting

the burden of proof to him.”137

In CanCan Development, LLC v. Manno, the court allocated to a defendant

fiduciary (Manno) the “burden of accounting for compensation and expenses” that

were self-interested transactions.138 After adjudicating these transactions, the court

separately considered challenges to “Manno’s excessive spending on limousines,

hotels, meals, and flights.”139 The court noted that “[o]rdinarily, these expenses

would be subject to the business judgment rule,” but found, citing Technicorp, that

“Manno bore the burden at trial to establish the purpose, amount, and propriety of

the disbursements” because “many of the expenses related to the interested

transactions” it had adjudicated.140 Although Manno never made that effort, the

136 Id. 137 Id. 138 2015 WL 3400789, at *16 (Del. Ch. May 27, 2015). 139 Id. at *19. 140 Id. at *19-20 (internal quotation marks omitted). 31 court was able to determine damages by using an analysis of the expenses that the

corporation’s expert had prepared.141

In sum, the cases discussed above show that this court may place on a

fiduciary the burden to demonstrate the fairness of a series or group of expenditures,

or may order an accounting of such expenditures, where—as in Technicorp, Carlson,

and CanCan—a plaintiff has made a prima facie showing based on substantial

evidence that the expenditures in question are self-interested transactions. The

fiduciary’s exercise of control over the corporation’s funds and records is a factor to

be considered in the analysis. Where, by contrast, a plaintiff has failed to make such

a prima facie showing—as in Sutherland and Zutrau—the court has refused to shift

the burden of proof to the fiduciary or to order an accounting. In that event,

potentially problematic transactions should be examined individually.

Turning to the facts of this case, Avande has failed to make the prima facie

showing required to shift to Evans the burden of demonstrating the fairness of each

of the expenses making up the Challenged Amount or to require an accounting of

those expenses. More specifically, Avande has not provided substantial evidence

that the transactions making up the Challenged Amount, which likely consist of

thousands of individual expenditures incurred over a span of more than five years,

141 Id. at *20. In another section of the opinion devoted to the corporation’s waste claims, the corporation had the burden to overcome the business judgment rule. See id. at *20-21. 32 constitute self-interested transactions involving Evans. To the contrary, except for

one de minimis transaction involving a scooter valued at approximately $3,500,

Avande did not identify any transactions out of the approximately $4.7 million of

expenses in question that appear to have personally benefited Evans.

As discussed below, the other five expenditures that Avande specifically

challenges were not self-interested transactions but instead involved questionable

payments to third parties. Even if, arguendo, the six specifically challenged

transactions all were deemed to be acts of self-dealing, their total value—

approximately $30,500—still would be so minimal relative to the total amount in

question that shifting the burden of proof to Evans or ordering an accounting would

be unwarranted. And, significantly, it was not for a lack of trying that Avande was

only able to identify six problematic transactions. To the contrary, the Company’s

Chief Operating Officer spent an average of three hours a day over a ten-month

period culling through Evans’ emails to help build Avande’s case against Evans.142

Several additional considerations support the court’s decision not to shift the

burden of proof or to order an accounting with respect to the Challenged Amount of

expenditures. First, Evans did not have the sole authority to expend funds on behalf

of Avande. The record shows, for example, that his fellow directors and officers

142 Tr. 649-52 (Taciroglu). 33 (Kato and Ergun) and at least six other employees (Mine Ozbek, Ali Taciroglu,

Donna Gentile, Carolyn A. Hammons, Luke Burchard, and Matthew Kelley) were

authorized to and did use corporate credit cards.143 Expenditures using these credit

cards accounted for approximately $700,000 of the Challenged Amount.144 Unlike

in Technicorp and CanCan, moreover, Avande made no effort to isolate the charges

attributable to Evans, or to determine from the face of the credit card statements

whether the charges appeared to be business-related or personal in nature.145

Second, Evans did not exercise sole control over Avande’s finances. He

regularly forwarded to the board financial reports, budgets, and projections that

delineated by category the amount of expenses the Company was incurring.146 Any

director thus was to free to inquire and take action if he had a concern about the

Company’s level of spending. Indeed, emails in the record reflect that when Kato

requested back-up documentation for certain expenses, the information was

143 Tr. 37-39 (Evans); see, e.g., JX 18; JX 24; JX 25; JX 30; JX 47; JX 80; JX 105; JX 129; JX 183; JX 257; JX 308; JX 350; see also Tr. 627-28 (R. Evans) (acknowledging that the Challenged Amount would have included Kato’s expenses related to Avande). 144 Pl.’s Opening Br. 30 (quantifying charges on American Express and Chase Card Services credit cards at $419,552.21 and $281,410.61, respectively); Post-Trial Tr. 30-31 (representing that credit card charges are included within the Challenged Amount). 145 See Technicorp, 2000 WL 713750, at *22-23; CanCan, 2015 WL 3400789, at *19-20. 146 See, e.g., JX 215; JX 259; JX 264; JX 277; JX 279A; JX 289; JX 302; JX 330. 34 provided to him.147 And, when the board became concerned about the Company’s

level of expenditures in December 2016, it implemented spending limitations.148

Third, common sense suggests that many of the expenses within the

Challenged Amount would have had a legitimate business purpose. As explained

above, Rick Evans computed the Challenged Amount by deducting four items from

the total amount of expenses Avande incurred from 2013 to January 2018, three of

which were cash items: (1) payroll expenses, (2) payments to Specialty Health, and

(3) $116,312 of other expenses that exhibited “evidence of proper authorization” or

of “business purpose.”149 But it is inconceivable that the $116,312 in “other”

expenses would capture anything close to the actual cost of operating the Company

for five years after backing out payroll expenses and payments to Specialty Health.

Indeed, the financial reports and budgets that Evans regularly forwarded to

Kato delineate numerous additional categories of expenses that logically would be

necessary to operate Avande’s business, such as: IT (computer, internet and

programming expenses), rent, telephone, utilities, insurance, professional fees

(legal, accounting), travel and entertainment, non-payroll taxes, business licenses,

147 JX 200; JX 213; JX 307. 148 JX 198; Tr. 364-65 (Evans); Tr. 445-46 (Kato). 149 JX 425 at 5. 35 bank fees, office supplies, and interest.150 To use one example, the Company paid

approximately $626,000 for programmers in 2016—more than five times the

$116,312 of “other” expenses in Rick Evan’s calculation.151 These individuals

would have been working under the direction of Ergun, who was responsible for

building out and maintaining the Company’s platform to conduct medical reviews.152

Yet, according to Avande, Evans should be required to pay damages to reimburse

the Company for its programming expenses (and innumerable other expenditures)

even though such expenses facially had a business purpose and the record is devoid

of evidence that Evans stood to benefit personally from them. There is no logic or

equity to this position.

Finally, it bears mention that the expert case Avande planned to present at trial

would not have been useful to make the prima facie showing of self-dealing

necessary to warrant a burden shift or an accounting under Technicorp and its

progeny. According to Avande, Rick Evans intended to opine that there was “no

evidence proving, under the standards set by the IRS, that the funds [making up the

Challenged Amount] were spent on legitimate Avande business.”153 In other words,

150 See, e.g., JX 214; JX 215; JX 259; JX 264; JX 277; JX 289; JX 302; JX 330 (native spreadsheets). 151 JX 214 (native spreadsheet). 152 Tr. 14 (Evans); Tr. 408 (Kato). 153 Pl.’s Opening Br. 31. 36 Rick Evans intended to opine about expenses that the Company had deducted on its

tax returns that the IRS might disallow based on the IRS’s documentation

standards.154 Application of the IRS’s standards to identify insufficiently

documented expenses, however, does not mean that the expenses themselves

benefitted Evans in a self-interested manner. It just means there is a risk that some

of the Company’s past deductions might be disallowed for lack of supporting

documentation.155

*****

For the reasons explained above, because Avande failed to make a prima facie

showing based on substantial evidence that the expenditures within the Challenged

Amount constitute self-interested transactions involving Evans, it would be

inappropriate to shift to Evans the burden of demonstrating the fairness of each of

those expenditures or to order an accounting of them. Accordingly, except for the

six expenditures that Avande has specifically challenged, which are discussed next,

Evans is entitled to judgment in his favor because the expenditures within the

154 Tr. 607-08 (R. Evans). 155 Avande apparently hoped to use Rick Evans’ analysis to make the case that Evans “actions and omissions” exposed the Company to additional taxes and penalties if the deductibility of the allegedly insufficiently documented expenses were disallowed. See Pl.’s Pre-Trial Br. 27. Such a claim might have been advanced as a non-exculpated breach of the duty of care that Evans owed as an officer of Avande but, as noted above, the Company failed to fairly present such a claim. See supra. n. 103. 37 Challenged Amount are subject to the business judgment rule and the Company has

not proven that any of them constitute waste.156

2. Specific Expenditures Avande Has Challenged

The Company specifically has challenged six expenditures within the

Challenged Amount. In total, these expenditures add up to approximately $30,500.

They are addressed next in three categories.

a. Payments for Dr. Danhaive

Avande specifically challenges three payments totaling $18,280.20 that Evans

authorized Avande to make for the benefit of Dr. Olivier Danhaive, a neonatologist

who performed medical reviews for Avande.157 Two of the three payments were

made to the Lycee Francais de San Francisco to pay for tuition at a foreign language

school that Danhaive’s children attended: $7,605.20 on December 17, 2014, and

$5,635 on February 9, 2017.158 The third payment was made to a ballet school for

Danhaive’s children (the Academy of Ballet): $5,040 on October 4, 2017.159

156 In its opening brief, Avande called out $218,529.79 of alleged reimbursements Evans received from Avande, which the court understands to fall within the Challenged Amount. Pl.’s Opening Br. 30. Defendants appended to their answering brief a chart identifying documentary support for each of these expenditures, Defs.’ Answering Br. Ex. B, and defendants did not focus on this group of expenditures thereafter at post-trial argument. 157 Tr. 45 (Evans). 158 JX 62; JX 368; JX 224. 159 JX 285. 38 Each of these three payments, in reality, was made to compensate Danhaive

for consulting services he performed for Avande.160 But instead of having the

Company pay Danhaive directly, Evans directed that Company funds be used to pay

Danhaive’s personal bills. As part of this scheme, Evans explicitly instructed

Omran, the DC Risk employee who served as Avande’s bookkeeper, not to issue a

Form 1099 to Dainhaive for the first payment, which was characterized falsely on

Avande’s books as a charitable “donation.”161 No Form 1099s are in the record for

the other two payments as well.

Evans’ initial testimony about these payments was not credible and shifted

when he was pressed by the court, but the upshot is that he authorized the Company

to make these payments in his capacity as Chief Executive Officer while knowing

he was causing the Company to violate the law in doing so. Evans considers himself

an “expert” in business management and is familiar with the legal obligation that a

corporation owes to report income paid to a non-employee on a Form 1099.162 Yet

instead of having Avande pay Danhaive directly and issue Form 1099s to document

his compensation from the Company, Evans intentionally engaged in subterfuge in

plain disregard of the law. In short, insofar as the Danhaive payments are concerned,

160 Tr. 156-57, 370-71 (Evans). 161 Tr. 154-57 (Evans); 469-70 (Kato); JX 62; JX 368. 162 Tr. 6, 109, 111-12 (Evans). 39 Evans acted in bad faith in breach of the duty of loyalty he owed as a fiduciary of

the Company.163

“Delaware law dictates that the scope of recovery for a breach of the duty of

loyalty is not to be determined narrowly.”164 Damages flowing from duty of loyalty

breaches “serve the dual purposes of compensating for injury and deterring future

breaches of the duty of loyalty”165 and as such “are to be liberally calculated.”166

“Furthermore, once a breach of duty is established, uncertainties in awarding

damages are generally resolved against the wrongdoer.”167

Although it is difficult to determine precisely the level of harm to which the

Company has been exposed as a result Evans’ breach of duty, the record reflects that

Avande currently is the subject of an IRS audit, that the IRS has requested

documentation it has been unable to provide—including Form 1099s, and that a

spotlight is now focused on Avande’s compliance with IRS requirements.168 Under

these circumstances, and given the egregiousness of Evans’ conduct, it is just to

163 Disney, 906 A.2d at 67 (explaining that bad faith is shown “where the fiduciary acts with the intent to violate applicable positive law”). 164 Thorpe v. CERBCO, Inc., 676 A.2d 436, 445 (Del. 1996). 165 OptimisCorp v. Waite, 2015 WL 5147038, at *82 (Del. Ch. Aug. 26, 2015), aff’d, 137 A.3d 970 (Del. 2016). 166 Thorpe, 676 A.2d at 444. 167 Thorpe v. CERBCO, Inc., 1993 WL 443406, at *12 (Del. Ch. Oct. 29, 1993). 168 Tr. 592-95 (R. Evans). 40 award Avande damages in the amount of $18,280.20 for the three Danhaive

payments at issue.

b. The Scooter for Ergun

The next specific expenditure Avande challenges involves the Company

paying Scooter Ricambi, a company in which Evans had an ownership interest,

$3,537.50 in November 2015 as an “office expense” for a motor scooter that was

provided to Ergun.169 According to Evans, who authorized this payment without

Kato’s knowledge, Ergun had asked for a vehicle from the Company and Evans

suggested getting him a scooter instead.170

Because Evans stood on both sides of this transaction as a fiduciary of the

buyer (Avande) and an owner of the seller (Scooter Ricambi), it is his burden to

prove the entire fairness of the transaction.171 He has not done so.

With respect to the fairness of the price, Evans testified that Scooter Ricambi

bought the scooter “wholesale for a very good price”172 but Evans did not say what

that price was, he provided no written evidence of what Scooter Ricambi actually

169 JX 111; JX 113; JX 365; Tr. 468 (Kato); Tr. 44-45 (Evans). 170 PTO ¶ 44; Tr. 44-45 (Evans); Tr. 468 (Kato). 171 See Oliver, 2006 WL 1064169, at *18 (stating that when a fiduciary stands “on both sides of a challenged transaction” the fiduciary has the burden to prove entire fairness). 172 Tr. 266 (Evans). 41 paid for the scooter, and he submitted no evidence of its fair market value at the time

it was given to Ergun.

With respect to fair dealing, Evans’ contention that “Evans and Ergun,

together constituting a majority of Avande LLC’s [board] de facto approved the

purchase” of the scooter, misses the point—by a lot.173 Like Evans, Ergun also had

a personal interest in the transaction as the recipient of a scooter paid for by the

Company. The relevant point is that the use of Company funds to purchase the

scooter was concealed from the only disinterested member of the board—Kato.174

“In cases where the defendant breaches the duty of loyalty, the infringing

party must disgorge all profits and equity from the usurpation.”175 This is because

“the imposition of damages should eliminate the possibility of profit flowing to

defendants from the breach of the fiduciary relationship.”176 Given his failure to

prove that the use of Company funds to purchase the scooter was entirely fair, Evans

is liable for damages equal to what Avande paid for the scooter: $3,537.50.

173 Defs.’ Answering Br. 36. 174 Tr. 468 (Kato). 175 In re Mobilactive Media, LLC, 2013 WL 297950, at *24 (Del. Ch. Jan. 25, 2013). 176 Int’l Telecharge, Inc. v. Bomarko, Inc., 766 A.2d 437, 441 (Del. 2000). 42 c. Payments to Law Firms

The final two expenditures that Avande specifically challenges involved

payments of Company funds that Evans authorized to be made to two different law

firms. The two payments total $8,650.

The first payment was made in March 2015 to The Oxford Law Firm, a firm

with trust law expertise that had been representing Ergun, in the amount of $5,000.

The purpose of the expenditure was to pay a retainer for Ergun, who was going

through a divorce and who was “broke” at the time, to retain a trust attorney.177

According to an email that Ergun sent Evans, he needed counsel to “help structure

[his] voting shares [in Avande LLC] such that they are protected in the future after

[his] divorce stipulation.”178

The second payment was made in April 2016 to Fragomen Del Rey Bernsen,

a law firm specializing in immigration, in the amount of $3,650.179 The Fragomen

firm represented Ali Ozden, an employee of Avandel—Ergun’s company—who was

going through the immigration process in connection with relocating from Turkey

to the United States to do programming work for Avande.180

177 Tr. 225-26 (Evans); JX 75. 178 JX 75 at AVANDE0000784. 179 JX 140; JX 366; JX 377. 180 Tr. 49 (Evans). 43 Because Evans had no personal interest in either of these transactions, they

are presumptively governed by the business judgment rule. 181 Avande, however,

has not proven that either transaction was an act of bad faith or waste. To the

contrary, although reasonable minds could disagree about whether these

expenditures were the best use of corporate funds, neither expenditure was irrational

and neither was “caused to effect a transaction on terms that no person of ordinary,

sound business judgment could conclude represent a fair exchange.”182

With respect to the Oxford firm payment, the retention agreement identifies

Avande, LLC as the client and Evans credibly testified that the Company benefited

from receiving advice to ensure that Ergun’s divorce would not disrupt the Avande,

LLC’s ownership structure, and that Ergun paid the firm separately for services it

provided to him personally.183 With respect to the payment to the Fragomen firm,

the Company benefited by ensuring that “one of [its] senior programmers . . . who

was critical” to completing a software project for Avande could come to the United

States to do so.184

181 See Trados, 73 A.3d at 36 (the business judgment rule applies when the decision makers “were disinterested and independent”). 182 Steiner, 1995 WL 441999, at *1. 183 JX 74; Tr. 163-67 (Evans). 184 Tr. 49 (Evans). 44 For the reasons explained above, Avande has failed to prove that Evans

breached his fiduciary duties with respect to either of the two law firm expenditures.

D. Self-Interested Transactions Involving DC Risk

Avande’s second category of alleged damages consists of $235,845.83 of

payments that Avande made to DC Risk, which is wholly-owned by Evans.185

According to Avande, this amount falls outside of the Challenged Amount186 and

includes expenses for “Bookkeeping, Travel reimbursement, Microsoft office &

adobe reimbursement.”187

Evans does not contest that Avande paid $235,845.83 to DC Risk, and both

parties focus on two types of expenditures when discussing the payments Avande

made to D.C. Risk: charges for (i) bookkeeping services that DC Risk employee

Susan Omran performed for Avande and (ii) brokerage commissions for insurance

policies DC Risk placed for Avande.188 DC Risk billed Omran’s services to Avande

on an hourly basis at $35 or $40 per hour, which Evans claims was below the market

185 Tr. 5 (Evans). 186 Post-Trial Tr. 23. It is unclear to the court why this amount fell outside of the Challenged Amount but defendants did not dispute this contention and, even if the payments to DC Rick were within the Challenged Amount, the court would resolve the dispute concerning them in the manner set forth herein. 187 JX 396. 188 Pl.’s Opening Br. 33-35; Defs.’ Answering Br. 46-49. 45 rate in the San Francisco.189 According to invoices in the record, DC Risk charged

Avande a total of $89,947.50 for bookkeeping services provided from December

2013 to February 2018, although some invoices appear to be missing.190 The record

also contains DC Risk invoices for insurance policies ($28,587.11)191 and travel

reimbursement ($1,510.34).192 Kato knew that DC Risk purchased insurance

policies for Avande, but claims he was unaware that DC Risk was earning brokerage

commissions for doing so.193 The total amount of DC Risk invoices in the record

appears to be approximately $120,000.

Although the court does not have a complete picture of the expenses that make

up the entire $235,845.83 at issue, two things are clear. First, Evans stood on both

sides of these transactions. He was a fiduciary of Avande who authorized the

payments on one side, and the sole owner of DC Risk that received the funds on the

other side. Thus, all of the transactions at issue are self-interested. Second, as to

Omran’s bookkeeping services, which comprise a significant chunk of the amount

in dispute and which was the focus of the trial insofar as expenditures involving DC

189 Tr. 25 (Evans). 190 See JX 33; JX 40; JX 50; JX 63; JX 69; JX 72; JX 77; JX 82; JX 95; JX 100; JX 107; JX 117; JX 122; JX 128; JX 137; JX 143; JX 149; JX 155; JX 164; JX 171; JX 177; JX 185; JX 193; JX 212; JX 223; JX 229; JX 235; JX 245; JX 255; JX 258; JX 261; JX 268; JX 283; JX 294; JX 300; JX 309; JX 334. 191 JX 101 ($14,055.11); JX 181 ($14,532). 192 JX 268 ($1,510.34). 193 Tr. 448-49 (Kato). 46 Risk are concerned, the evidence presented at trial raised more questions than it

answered.

Omran was the sole person who performed bookkeeping for Avande.194 She

would generate an invoice for her time, draft a check from Avande to DC Risk based

on that invoice, and Evans would approve it.195 Significantly, Omran simultaneously

performed bookkeeping services for several other entities that Evans had an

ownership interest in and/or operated.196 In that regard, Omran acknowledged that

the time she billed to Avande was “just [a] ball park figure” because she “always

bounced back and forth” and “was always interrupted with things to do for different

companies.”197 Just as concerning, a number of the invoices appear suspicious on

their face. For example, according to the invoices, Omran billed Avande precisely

four hours per day every day in October and November 2014, and the exact same

number of hours per day during several other long stretches.198

194 Omran Dep. 162. 195 Omran Dep. 163-66. 196 The number of entities fluctuated during the relevant period. In 2016, Omran split her time among five entities. JX 458. Evans later acquired Podiatry Plan, for which Omran also performed work. Omran Dep 130. 197 Omran Dep. 129. 198 JX 63 (billing 4.0 hours per day in October and November 2014); JX 69 (billing 5.5 hours per day for 21 days in January 2015); JX 72 (billing 5.0 hours per day for 20 days in February 2015); JX 95 (billing 5.0 hours per day for 21 days in August 2015). 47 Also significant, Omran testified during her deposition that she kept a

spreadsheet reflecting the allocation of her time among Evans’ various entities, but

no such spreadsheet was produced during discovery.199 Defendants, who elected not

to call Omran to testify at trial, produced one spreadsheet (for 2016) during trial and

never produced spreadsheets for any other years.200

For the reasons explained above, the court finds that Avande made a prima

facie showing at trial based on substantial evidence that the bookkeeping charges it

paid to DC Risk were self-interested transactions and that the billing records appear

suspicious. For their part, defendants did not prove the fairness of those charges and

their production of a single spreadsheet during trial is problematic, because it was

both untimely and incomplete. Given these findings concerning a substantial portion

of the amount at issue, and given the lack of visibility that exists concerning the

balance, the court will order an accounting.201

The accounting will examine each of the Company’s payments to DC Risk

before Evans’ termination as CEO and determine to what extent, if any, they were

unfair under the standards of Delaware law for self-interested transactions. The

199 Omran Dep. 127-30. 200 JX 458. Avande was given a chance to re-depose Omran, but declined to do so. 201 Carlson, 925 A.2d at 537 (ordering an accounting where defendants exercised “exclusive control” over expenses, plaintiffs showed definite instances where Defendants did not properly allocate those expenses, and there was inadequate documentation of the expenses). 48 parties shall meet and confer to select a qualified person to conduct the accounting

and defendants shall bear the entire expense of the accounting.202 DC Risk shall be

jointly liable with Evans as an aider and abettor for any damages that are assessed

as a result of the accounting, as DC Risk’s knowing participation can be inferred

from the actions of Evans, its sole owner and operator.203

E. Disgorgement of Evans’ Compensation

Finally, Avande asks that Evans pay damages in the amount of $445,815.50,

which equals 50% of the compensation he received from the Company before his

termination as CEO. The argument goes as follows: Based on Evans’ estimate that

he spent approximately 10-20 hours per week doing work for DC Risk while also

working for Avande, and “[a]ssuming a 40-hour work week,” he should disgorge

“time working on his personal businesses.”204 The argument is meritless.

The purpose of disgorgement is to deter “acts of conscious wrongdoing and

breaches of a fiduciary’s duty of loyalty . . . by requiring the wrongdoer to disgorge

202 See Carlson v. Hallinan, 2006 WL 1510759, at *2 (Del. Ch. May 22, 2006) (defendants ordered to “bear the expense of the entire accounting,” because “they failed to satisfy [their] burden and were found to have breached their fiduciary duties” by entering into self- interested transactions that were not entirely fair). 203 Carlson, 925 A.2d at 542 (concluding that “Hallinan’s knowledge as a director and officer of both Main Street and TC is imputed to them” for purposes of satisfying the knowing participation element of an aiding and abetting claim against them) (internal footnotes omitted). 204 Pl.’s Opening Br. 43-44. 49 any profit made as a result of such wrongful conduct.”205 In order to disgorge Evans’

salary, Avande must establish that Evans’ “misconduct somehow unfairly increased

his compensation, such as could occur if an investment manager falsely recorded

gains on his positions and pumped up his resulting performance-based bonus.”206

There is no evidence that any of Evans’ misconduct increased his salary. Nor

is there any ground to reduce his salary to account for the estimated 10-20 hours

Evans spent on DC Risk each week at a particular point in time.207 As noted above,

Avande, LLC’s operating agreement expressly permitted its managers to engage in

other business ventures, this practice was permitted to continue after the formation

of Avande, Inc., and, indeed, Kato was aware throughout that Evans was working

for DC Risk while serving as Avande’s CEO.208 Avande’s 40-hour work week

assumption, furthermore, is speculative and belied by Evans’ uncontroverted

testimony that at the time he was spending 10-20 hours per week on DC Risk, he

also was working “[o]n average, 40 hours a week” or between a minimum of 30

205 Pike v. Commodore Motel Corp., 1986 WL 13007, at *3 (Del. Ch. Nov. 14, 1986). 206 Seibold v. Camulos P’rs LP, 2012 WL 4076182, at *25 (Del. Ch. Sept. 17, 2012). 207 Evans Dep. 167 (stating that in February of 2016 he worked “anywhere between 10 and 20 hours a week” on DC Risk). 208 See supra I.C.; Tr. 447 (Kato). 50 hours and a maximum of 60 hours per week for Avande.209 In short, no factual or

legal basis exists on which to order disgorgement of any of Evans’ compensation.

IV. CONCLUSION

For the reasons explained above, Avande is entitled to damages from Evans

in the amount of $21,817.70, as well as pre- and post-judgment interest, both at the

Delaware legal rate.210 Avande also is entitled to an accounting with respect to all

payments that Avande made to DC Risk as described above. Defendants are entitled

to judgment in their favor on all other claims. The parties are directed to confer and

to submit a form of order to implement this decision within ten business days. Each

party will bear its own costs.

IT IS SO ORDERED.

209 Evans Dep. 167-68 (stating his hours as of February 2016). 210 See Valeant Pharmaceuticals Int’l v. Jerney, 921 A.2d 732, 755 (“[A] successful plaintiff is entitled to interest on money damages as a matter of right from the date liability accrues.”). 51