Blue Valley, LLC v. Klein

• Court: Superior Court of Delaware
• Decided: July 31, 2023
• Docket: S20C-03-300 SKR CCLD
• Status: Published

Opinion

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE

BLUE VALLEY, LLC, ) a Texas company, ) ) Plaintiff, ) ) v. ) C.A. No. N20C-03-300 SKR CCLD ) JOHN KLEIN, ) LENORA KLEIN and ) CAMBRIDGE THERAPEUTIC ) TECHNOLOGIES, LLC, a ) Delaware company, ) ) Defendants. )

Submitted: May 17, 2023 Decided: July 31, 2023

Upon Consideration of Plaintiff’s Motion for Partial Summary Judgment: GRANTED.

John Harris, Esquire, and Harry Shenton IV, Esquire, of BERGER HARRIS LLP, Wilmington, Delaware, for Plaintiff Blue Valley, LLC.

John Klein, Pro Se, Tampa, Florida.

RENNIE, J. INTRODUCTION Variations of this breach of contract action have persisted in this Court

and federal court for years. In broad terms, Plaintiff Blue Valley, LLC (“Blue

Valley”) seeks to recover millions of dollars that it invested in Defendant John

Klein’s pharmaceutical drug packaging company, Cambridge Therapeutic

Technologies (“CTT”).

Depending on who you ask, this matter is either complicated – or

benefitted – by the federal litigation that preceded it. Before Blue Valley filed

this suit in Superior Court, seven other CTT investors, not including but

similarly situated to Blue Valley, sued Mr. Klein in his personal capacity in

the United States District Court for the District of Delaware (the “Federal

Action”) for statutory and common law fraud and material misrepresentation.

The Federal Action proceeded to a three-day bench trial and culminated in a

memorandum opinion (the “Federal Opinion”) which found Mr. Klein liable

on all counts.1 The United States Court of Appeals for the Third Circuit

affirmed the final judgment against Mr. Klein on May 25, 2022.2

Blue Valley has now moved for partial summary judgment on Counts II

and III of its Amended Complaint filed in this Court. Those Counts allege

1 Adams v. Klein, 2021 WL 4439658 (D. Del. Sept. 28, 2021). 2 Adams v. Klein, 2022 WL 1658700, at *3 (3d. Cir. May 25, 2022). 2 that Mr. Klein signed a two-party Unit Purchase Agreement (the “UPA”), by

which Blue Valley invested $7 million in CTT, in spite of Mr. Klein’s

knowledge that several of CTT’s representations regarding its “Intellectual

Property Rights” were materially false.3 To that end, Blue Valley says it

invested in CTT because of Mr. Klein’s personal guarantee of indemnification

under the UPA.4 Even though he presented CTT as a sound investment choice,

Mr. Klein allegedly never intended to make distributions or return Blue

Valley’s capital investment equal to the UPA purchase price.5 Instead, Blue

Valley alleges that Mr. Klein used its investment as “a personal slush fund.”6

Throughout its motion, Blue Valley argues that offensive collateral estoppel

stemming from the Federal Action prevents Mr. Klein from relitigating the

issue of his alleged material misrepresentations.

By his pro se filing in response, Mr. Klein concedes almost nothing and

recasts what happened in the Federal Action. As best the Court can discern,

his opposition centers around four arguments. First, he argues that the

findings of the Federal Action were against CTT’s predecessor entity (“CTT-

3 See Plf.’s Op. Br. In Supp. Of its Mot. For Partial Summ. J. (“Plf.’s Mot.”) at 1 (D.I. 103). 4 Id. at 6. 5 Id. at 7. 6 Id. at 8. 3 NJ”) and, therefore, have no preclusive effect in this litigation.7 Second, he

offers an assortment of newly-raised “evidence” that attacks the District

Court’s findings.8 Third, he relies on extrinsic evidence to show that CTT’s

intellectual property was outside of the Blue Valley Investment.9 Fourth and

finally, he contends that his material misrepresentations as to CTT’s

intellectual property rights are excused by Blue Valley’s nine months of due

diligence.10

The Court has carefully considered the parties’ arguments and, for the

reasons that follow, finds that Blue Valley’s motion for partial summary

judgment must be GRANTED.

FACTUAL OVERVIEW As mentioned, this matter concerns Blue Valley’s interactions with Mr.

Klein, who was the founder and CEO of CTT.11 Prior to mid-2016, CTT’s

operating entity was a New Jersey LLC. CTT became a Delaware LLC in

June 2016.12

7 See Def.’s Resp. Op. Br. In Opp. Of Partial Summ. J. (“Def.’s Resp.”) at 5-6, 10, 14 (D.I. 105). 8 Id. at 6-10. 9 See id., Ex. B. 10 Id. at 5, 11, 13-14. 11 Pl.’s Am. Compl., Ex. D (“Indemnification Agreement”) at 1 (D.I. 76). 12 See generally Pl.’s Compl., Ex. C (“Operating Agreement”) (D.I. 76). 4 Mr. Klein served as CTT’s CEO from 2011 until his termination in

December 2017.13 In his capacity as CEO, he represented to numerous

investors that CTT was in the business of distributing two or more generic

prescription drugs combined in a single package (“Compliance PACs”).14 Mr.

Klein stated that these Compliance PACs would primarily be distributed from

doctors’ offices, which was a novel feature of his business.15 He also claimed

that CTT had fully developed its first Compliance PAC, and that CTT owned

one New Drug Application (“NDA”), NDA 50-824, which was a

gastroenterology product that treated peptic ulcers.16 In addition to this NDA,

Mr. Klein represented that CTT owned four valuable Investigational New

Drugs (“INDs”) that were approved and ready for commercialization.17

After merging CTT into a Delaware LLC, Mr. Klein began negotiating an

investment with the originating members of Blue Valley in 2016. 18 The

parties executed the UPA in September of that year, whereby Blue Valley

purchased 9,111 Class A Units of CTT stock for $7 million.19 Additionally,

13 Pl.’s Am. Compl., Ex. L (“Klein Dep. Tr.”) at 256:6-14 (D.I. 77). 14 Pl.’s Am. Compl., Ex. CC (“CTT Investment Presentation Slides”) at 9, 12-14 (D.I. 81). 15 Id. at 15 (“CTT has just created a new revenue stream that wasn’t previously available to [health-care] providers.”). 16 Pl.’s Am. Compl., Ex. B (“Disclosure Schedule”) at 3 (D.I. 76). 17 Id. 18 Klein Dep. Tr. at 256:6-14. 19 Pl.’s Am. Compl., Ex. A (“UPA”) at 4 (D.I. 76). 5 Blue Valley and Mr. Klein entered into an Indemnification Agreement,

whereby Mr. Klein promised that “[a]s an inducement to [Blue Valley] to

purchase the Class A Units, and as a condition to such purchase, [Mr. Klein

would personally] indemnify Blue Valley immediately for any and all

liabilities . . . arising directly or indirectly out of, or relating to, any breach of,

or misrepresentation, in the representations and warranties contained in

Section 3.9 of the UPA.”20

Section 3.9 incorporated Schedule 3.9 of the UPA, which was “a

comprehensive list of all assets that CTT possesse[d] that are necessary to

conduct its business,” including CTT’s intellectual property rights.21

Schedule 3.9 explicitly stated that CTT “possesse[d] the full ownership

interest in, and there [were] no liens on” five intellectual properties consisting

of NDA 50-824 and four INDs.22

As it turns out, none of that was true. NDA-50-824 was actually owned

by Gastro-Entero Logic LLC,23 in which Mr. Klein owned a personal interest

that paid him roughly $1 million in royalties over five years.24 The other four

20 Indemnification Agreement at 1. 21 UPA at 7. 22 Disclosure Schedule at 3. 23 Pl.’s Am. Compl., Ex. U (“Federal Plaintiffs’ Interrog. Resp.”) at 12 (D.I. 78); see also Official Transcript (“Oral Arg. Tr.”) at 44:10-14; 47:9-18. 24 See Pl.’s Am. Compl., Ex. Y (“Klein GEL Partnership Schedule K-1 from 2012- 2016”) (D.I. 78). 6 IND assets were owned by DAVA Pharmaceuticals (“DAVA”), another

company for which Mr. Klein previously worked.25 Mr. Klein now admits that

the INDs were DAVA intellectual property all along.26

But even if the INDs had been given to CTT, they were of no value

anyway. DAVA never developed the INDs into NDAs after filing initial

letters with the FDA and did not invest any money into the process.27 In fact,

as Mr. Klein’s partner at DAVA acknowledged, the INDs “were worthless.”28

And, last but not least, Mr. Klein did not use the investment funds for CTT

business. He used them to fund summer rentals in the Hamptons, pay off

property taxes on his mansion, and wire money to previously-undisclosed

CTT investors.29

Now controlled by a “disposition” officer, CTT is mired in litigation and

investigations, rendering Blue Valley’s investment worthless.

PROCEDURAL HISTORY Blue Valley initiated this action in March 2020, seeking recovery of its

original $7 million investment through the Indemnification Agreement. Three

25 Klein Dep. Tr. at 72:3-20; 85:10-25. 26 Id. 27 Pl.’s Am. Compl., Ex. G (“Moezina Dep. Tr.”) at 108:5-25 (D.I. 76). 28 Id. 29 See Pl.’s Am. Compl., Exs. W (“Klein 2016 Bank Reconciliation Email”) (D.I. 78), JJ (“Summary of Klein Personal Expenses”) (D.I. 82), KK (“Request for Mr. Klein’s Bank Reconciliation”) (D.I. 82). 7 years later, it filed this motion for partial summary judgment on Counts II and

III of its Amended Complaint.

Count II asserted a breach of contract claim against CTT for breaching the

express warranties in Section 3.9 of the UPA. In May 2023, however, CTT

conceded liability on Count II and the Court entered a Stipulated Consent

Order and Final Judgment jointly filed by the parties.30 The matter that

remains for disposition, set forth in Count III, is a breach of contract claim

against Mr. Klein, in his personal capacity, for breaching the Indemnification

Agreement.

STANDARD OF REVIEW Summary judgment is appropriate when “the pleadings, depositions,

answers to interrogatories, and admissions on file, together with the affidavits,

if any, show that there is no genuine issue as to any material fact and that the

moving party is entitled to summary judgment as a matter of law.”31 Blue

Valley bears the initial burden to show that no genuine issue of material fact

remains for trial.32 If met, the burden shifts to Mr. Klein.33 The Court “will

30 See D.I. 112. 31 Super. Ct. Civ. R. 56(c). 32 Moore v. Sizemore, 405 A.2d 679, 680 (Del. 1979). 33 See id. 8 accept as established all undisputed factual assertions, made by either party,

and accept the non-movant’s version of any disputed facts.”34

ANALYSIS As discussed above, Blue Valley alleges that Mr. Klein breached the

Indemnification Agreement contained within the UPA. The crux of Blue

Valley’s motion is a request that the Court apply offensive collateral estoppel

to bar relitigation of CTT’s purported ownership of NDA 50-824. Offensive

collateral estoppel is, indeed, a rare remedy that the Court applies with

caution; it goes without citation that excusing a plaintiff of its burden of proof

is no small task. Here, however, the Court need not employ an offensive

collateral estoppel analysis because Blue Valley has carried its summary

judgment burden of proof on the merits.

A. The UPA Is Unambiguous, and Mr. Klein’s Offering of Extrinsic Evidence is Barred by the Parol Evidence Rule.

Preliminarily, the Court will address Mr. Klein’s use of extrinsic evidence,

through which he seeks to demonstrate that the NDA and INDs were outside

of Blue Valley’s investment. For example, Mr. Klein now asks the Court to

consider:

[A]n email [which] shows that NDA 50-824 was not included in [CTT] and attached to the email is the assignment of rights dated January 30, 2014 assigning to

34 Merrill v. Crothall-American, Inc., 606 A.2d 96, 99-100 (Del. 1992). 9 Klein from DAVA pharmaceuticals the rights of [the] four NDAs. . . . The email and assignment [sic] was blocked by [Blue Valley’s] attorney in the [federal] case because they claim [sic] they didn’t review in discovery, the judge granted their request, however, [sic] IN DEFENSE OF THIS ALLEGATION IT WILL BE SUBMITTED HERE THUS PROVING THEIR RELIANCE ON THE [federal] CASE CAN BE DISPUTED AND THE ALLEGATION PROVEN FALSE [sic].35

This email is dated May 25, 2016, nearly four months before the UPA was

executed.

Delaware honors the parol evidence rule,36 which provides that “[w]hen

two parties have made a contract and have expressed it in a writing to which

they have both assented as to the complete and accurate integration of that

contract, evidence . . . of antecedent understandings and negotiations will not

be admitted for the purpose of varying or contradicting the writing.”37

In contract disputes, ambiguity is often a threshold challenge for summary

judgment motions.38 Delaware follows the “objective” theory of contracts,

meaning a contract is construed as understood by a reasonable third party.39

35 Def.’s Resp. at 7 (emphasis in original). 36 Rhone-Poulenc Basic Chem. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del. 1992). 37 Doe v. Cedars Academy, LLC, 2010 WL 5825343, at *5 (Del. Super. Oct. 27, 2010). 38 Massachusetts Mutual Life Ins. Co. v. Certain Underwriters at Lloyd’s of London, 2014 WL 3707989, at *4 (Del. Super. June 6, 2014). 39 Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del. 2010). 10 To ensure compliance with the parol evidence rule, Delaware courts give

priority to the parties’ intentions as reflected within the four corners of the

agreement when interpreting a contract.40 So, as directed by the rule, the

Court must first look to the Indemnification Agreement itself (the text within

the “four corners”) to determine if it unambiguously reflects the parties’ intent

with respect to indemnity. The Court will read the agreement as a whole,

giving each provision effect so as not to render any part of the contract

meaningless, illusory, or superfluous.41

When the contract is unambiguous, the Court enforces the plain meaning

of its terms and provisions.42 If the agreement is clear, by definition it speaks

for itself, so there is no reason to look for the parties’ subjective

expectations.43 If, however, there is more than one reasonable interpretation,

a provision is ambiguous.44 But, a provision is not ambiguous just because

the parties disagree on its proper construction; nor are unreasonable

interpretations considered.45

40 Comrie v. Enterasys Networks, Inc., 837 A.2d 1, 13 (Del. Ch. 2003) (internal citations omitted). 41 Osborn, 991 A.2d at 1160. 42 Id. 43 Massachusetts Mutual Life Ins. Co., 2014 WL 3707989, at *5. 44 AT&T Corp. v. Lillis, 953 A.2d 241, 252 (Del. 2008). 45 Id. 11 Here, the Indemnification Agreement unequivocally states that Mr. Klein

would personally indemnify Blue Valley “for any and all liabilities . . . arising

directly or indirectly out of, or relating to, any breach of, or misrepresentation,

in the representations and warranties contained in Section 3.9 of the UPA.”46

The UPA makes no mention of the “true fact,” as Mr. Klein puts it, that Blue

Valley knew CTT did not own the intellectual property. Instead, Section 3.9

of the UPA incorporates Schedule 3.9, whereby Mr. Klein represented that

CTT owned NDA 50-824 and four INDs. That is as unambiguous as it gets.

Accordingly, Mr. Klein’s extrinsic evidence is barred by the parol evidence

rule.

B. Mr. Klein Breached the UPA. Generally, the elements of a breach of contract claim are: (i) a contractual

obligation between two parties, (ii) a breach, and (iii) damages.47 Insofar as

the breach of contract claim is concerned here, Mr. Klein agrees with Blue

Valley on two points: first, that he and Blue Valley entered into a valid

contract when they signed the UPA,48 and second, that Blue Valley performed

46 Indemnification Agreement at 1. 47 Vituli v. Carrols Corp., 2015 WL 5157215, at *3 (Del. Super. May 1, 2015). 48 See Def.’s Resp. at 15 (“[Blue Valley] argues that the UPA is a valid and enforceable agreement, and it is.”). 12 under the UPA when it invested $7 million into CTT.49 Unsurprisingly, that

is where the congruity ends. Mr. Klein contends that he did not breach the

UPA, because Blue Valley allegedly invested with the understanding that

CTT did not own NDA 50-824 and the INDs.50

The problem with this position is that it is belied by the unambiguous

language of the UPA. In simple terms, the UPA says “if X, then Y”: if CTT

did not own NDA 50-824, then Mr. Klein must indemnify Blue Valley for its

investment. And, as Mr. Klein admitted during the opening seconds of oral

argument, CTT never owned NDA 50-824:

[MR. KLEIN]: Your Honor, all of the facts here, but one, are disputed. Number one, the fact that’s not disputed is that [CTT] did not own [NDA] 50-824. . . . [THE COURT]: Wait. You’re saying – you’re acknowledging, you’re conceding – that CTT did not own [NDA] 50-824? [MR. KLEIN]: Yes, Your Honor, you are correct. ... [THE COURT]: Let me make sure I understand what you’re saying, so we don’t go down a rabbit hole. You’ve initially conceded that [NDA] 50-824 was not owned – is not owned – by CTT, right? [Mr. KLEIN]: That is absolutely correct, Your Honor.51

49 Id. at 9 (“The case does center around [Blue Valley]’s $7 million investment into [CTT].”). 50 Id. at 10. 51 Oral Arg. Tr. 24:12-16; 25:1-5, 22-23; 26:1-7. 13 This, alone, ends the inquiry. Even if Mr. Klein’s claim that he did not “read

[Section] 3.9 specifically”52 before signing the Indemnification Agreement

were true, it does not excuse his continued failure to indemnify Blue Valley

after he clearly breached the UPA.

Sophisticated parties represented by counsel during contract negotiations,

like Mr. Klein, can and should make their own judgments about the risk they

bear in an agreement. When parties have ordered their affairs voluntarily

through a binding contract, Delaware law is strongly inclined to respect their

agreement, and “will only interfere upon a strong showing that dishonoring

the contract is required to vindicate a public policy interest even stronger than

freedom of contract.”53

Mr. Klein has made no such showing. He breached the UPA, so his

obligation under the Indemnification Agreement is triggered.54 The Court

must enforce it here.

52 Oral Arg. Tr. 40:14. 53 Libeau v. Fox, 880 A.2d 1049, 1056-57 (Del. Ch. 2005), aff’d in part, rev’d in part on other grounds, 892 A.2d 1068 (Del. 2006). 54 Because the finding that Mr. Klein breached the UPA ends the analysis, the Court will not address Mr. Klein’s arguments regarding Blue Valley’s due diligence. 14 CONCLUSION For the reasons discussed above, Blue Valley’s motion for partial summary

judgment is GRANTED. Counsel for Blue Valley shall submit a proposed

order to this effect by August 11, 2023.

IT IS SO ORDERED.

______________________________ Sheldon K. Rennie, Judge