Catalyst Advisors Investors Global Inc. v. Catalyst Advisors, L.P.
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Opinion
IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
CATALYST ADVISORS ) INVESTORS GLOBAL INC. and ) CHRISTOS RICHARDS, ) ) Plaintiffs, ) ) v. ) C.A. No. N20C-06-080 AML CCLD ) CATALYST ADVISORS, L.P., ) ) Defendant. )
Submitted: December 7, 2023 Decided: March 28, 2024
POST-TRIAL MEMORANDUM OPINION
Neil R. Lapinski, Esquire, Phillip A. Giordano, Esquire, Madeline R. Silverman, Esquire, GORDON, FOURNARIS & MAMMARELLA, P.A., Wilmington, Delaware, Attorneys for Plaintiffs Catalyst Advisors Investors Global Inc. and Christos Richards.
Lisa Zwally Brown, Esquire, Samuel L. Moultrie, Esquire, GREENBERG TRAURIG, LLP, Wilmington, Delaware, Richard Angowski, Jr., Esquire, Sean Rose, Esquire, OLENDER FELDMAN LLP, Summit, New Jersey, Attorneys for Defendant Catalyst Advisors, L.P.
LEGROW, Justice1
1 Sitting as a Judge of the Superior Court of the State of Delaware by special designation of the Chief Justice of the Supreme Court of Delaware pursuant to Del. Const. Art. IV § 13(2). Two former partners in a limited partnership that operates as a boutique
recruiting firm challenge the partnership’s calculation of their share of the profits in
the year that they left the partnership and the price they are entitled to receive for
their partnership units. Both calculations are based on bespoke contractual language
contained in the limited partnership agreement and the partners’ profit-sharing
policy.
There are two primary issues in this case. First, do certain changes to the
profit-sharing policy adopted in the weeks leading up to the plaintiffs’ dissociation
from the partnership apply to the plaintiffs, who argue they left the partnership
before the changes were fully implemented? As to this issue, the plaintiffs’ attempt
to avoid the policy modifications would require the Court to eschew the partnership
agreement’s unambiguous language in favor of extrinsic evidence. That result
contradicts fundamental, uncontroverted legal principles, and the plaintiffs therefore
failed to carry their burden regarding this aspect of their breach of contract claim.
The second primary issue requires the Court to determine the partnership’s
Enterprise Valuation, a contractually defined term used to calculate the buyout price
for partnership units. The partnership had commissioned just such a valuation seven
months before the plaintiffs’ exit, and all the partners accepted and relied on that
valuation to determine a new partner’s buy-in. A reasonable course might have been
for the parties to rely on that valuation to determine the plaintiffs’ buyout price. But—perhaps predictably given the level of animosity between the parties—that is
not the course that either side selected. Instead, each side obtained a valuation that
failed to follow the contractual definition of Enterprise Valuation, resulting in
unreliable figures that artificially inflated or depressed the partnership’s value.
Because neither litigation valuation follows the contractually agreed methodology,
the Court instead adopts the valuation the parties obtained before the plaintiffs’
departure.
For the reasons that follow, the Court finds that the partnership properly
calculated the plaintiffs’ share of the 2019 profits but erred in calculating the
plaintiffs’ buyout price.
I. FACTUAL BACKGROUND2
The Court conducted a five-day bench trial. During trial, the Court heard from
and considered the testimony of the following witnesses: Simon Bartholomew,
Christos Richards, John Archer, Francis P. Egan, Randall Martin Paulikens, Alyson
Archer, and Tom Theurkauf. The parties also submitted 100 joint trial exhibits.3
2 This post-trial decision cites: C.A. No. N20C-06-080 AML CCLD docket entries (by “D.I.” number); trial exhibits (by “JX” number); the trial transcript (“Trial Tr.” by day “I–V”); deposition transcripts lodged by the parties (by witness last name); stipulated facts set forth in the parties’ Joint Pre-Trial Order (“PTO”), D.I. No. 88; and the parties’ Post-Trial Opening Briefs (“Opening Br.”) and Post-Trial Answering Briefs (“Answering Br.”). 3 To the extent the parties raised objections in the joint exhibit list that were not raised at trial or in post-trial briefing, those objections are deemed waived.
2 These are the facts as the Court finds them after weighing the testimony and exhibits
admitted during trial.4
A. The Parties and Relevant Non-Parties
Defendant Catalyst Advisors, L.P. (“Catalyst” or the “Company”) is a
Delaware limited partnership with its principal place of business in New York, NY.5
Plaintiff Catalyst Advisors Investors Global, Inc. (“CAIG”) is a Delaware
corporation.6 Plaintiff Christos Richards (“Richards” and collectively with CAIG,
“Plaintiffs”) is an individual and a resident of California.7 Richards was a limited
partner of Catalyst from 2014 to October 4, 2019.8
CAIG’s sole shareholder is a United Kingdom company, Bartholomew
Advisors Ltd. (“Bartholomew Advisors”).9 Simon Bartholomew, who resides in
4 In reaching its verdict, the Court has examined all exhibits submitted and has considered the testimony of all witnesses, both direct and cross, live and by deposition. The Court has also considered the applicable Delaware case law that has defined the legal precepts applicable to the claims and defenses the parties have raised. The Court has applied the Delaware Rules of Evidence to the testimony and exhibits and only relied on evidence that would be allowed under those rules—consistent with the Court’s knowledge of those rules and the specific rulings that may have been made and articulated both pre-trial and during the trial proceedings. And, of course, the Court has considered each party’s respective arguments on the weight to be accorded the testimony and evidence. 5 PTO § II(A)(1). 6 PTO § II(A)(4). 7 PTO § II(A)(2). 8 PTO § II(A)(3). 9 PTO § II(A)(5).
3 London, England, is the majority shareholder of Bartholomew Advisors and holds
100% of its voting rights.10
B. Catalyst’s formation and growth
Catalyst is an executive recruiting and assessment firm specializing in
recruiting senior executives and board members to companies in the
biopharmaceutical and medical technology industries.11 John Archer founded the
business as Catalyst Advisors, LLC in 2008, and the company employed three
people at its inception.12 In 2014, Catalyst Advisors, LLC converted to Catalyst (the
limited partnership).13 Catalyst’s limited partners included John Archer, Alyson
Archer (John Archer’s spouse), Stephen Williams, Richards, and CAIG (represented
by Bartholomew).14 A substantial portion of the partners’ compensation came from
the annual distribution of the company’s profits. The company’s End-of-Year Bonus
Policy defined how that compensation was calculated and apportioned among the
partners.
10 PTO § II(A)(6). 11 Trial Tr. II at 181. 12 Id. at 182–84. 13 Id. at 188. 14 Trial Tr. I at 20, 165–66; Trial Tr. II at 188.
4 C. Catalyst’s Limited Partners Execute the LPA in 2018
In 2018, Catalyst added two limited partners: Arnaldo De Lisio and Sara
Hager.15 Upon their admission, a new limited partnership agreement (the “LPA”)
was executed with a January 1, 2018 effective date.16 The LPA governed the
relationship between the limited partners and Catalyst and is the operative document
in this litigation.17
Before the partners signed the LPA, Alyson Archer created and circulated a
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IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
CATALYST ADVISORS ) INVESTORS GLOBAL INC. and ) CHRISTOS RICHARDS, ) ) Plaintiffs, ) ) v. ) C.A. No. N20C-06-080 AML CCLD ) CATALYST ADVISORS, L.P., ) ) Defendant. )
Submitted: December 7, 2023 Decided: March 28, 2024
POST-TRIAL MEMORANDUM OPINION
Neil R. Lapinski, Esquire, Phillip A. Giordano, Esquire, Madeline R. Silverman, Esquire, GORDON, FOURNARIS & MAMMARELLA, P.A., Wilmington, Delaware, Attorneys for Plaintiffs Catalyst Advisors Investors Global Inc. and Christos Richards.
Lisa Zwally Brown, Esquire, Samuel L. Moultrie, Esquire, GREENBERG TRAURIG, LLP, Wilmington, Delaware, Richard Angowski, Jr., Esquire, Sean Rose, Esquire, OLENDER FELDMAN LLP, Summit, New Jersey, Attorneys for Defendant Catalyst Advisors, L.P.
LEGROW, Justice1
1 Sitting as a Judge of the Superior Court of the State of Delaware by special designation of the Chief Justice of the Supreme Court of Delaware pursuant to Del. Const. Art. IV § 13(2). Two former partners in a limited partnership that operates as a boutique
recruiting firm challenge the partnership’s calculation of their share of the profits in
the year that they left the partnership and the price they are entitled to receive for
their partnership units. Both calculations are based on bespoke contractual language
contained in the limited partnership agreement and the partners’ profit-sharing
policy.
There are two primary issues in this case. First, do certain changes to the
profit-sharing policy adopted in the weeks leading up to the plaintiffs’ dissociation
from the partnership apply to the plaintiffs, who argue they left the partnership
before the changes were fully implemented? As to this issue, the plaintiffs’ attempt
to avoid the policy modifications would require the Court to eschew the partnership
agreement’s unambiguous language in favor of extrinsic evidence. That result
contradicts fundamental, uncontroverted legal principles, and the plaintiffs therefore
failed to carry their burden regarding this aspect of their breach of contract claim.
The second primary issue requires the Court to determine the partnership’s
Enterprise Valuation, a contractually defined term used to calculate the buyout price
for partnership units. The partnership had commissioned just such a valuation seven
months before the plaintiffs’ exit, and all the partners accepted and relied on that
valuation to determine a new partner’s buy-in. A reasonable course might have been
for the parties to rely on that valuation to determine the plaintiffs’ buyout price. But—perhaps predictably given the level of animosity between the parties—that is
not the course that either side selected. Instead, each side obtained a valuation that
failed to follow the contractual definition of Enterprise Valuation, resulting in
unreliable figures that artificially inflated or depressed the partnership’s value.
Because neither litigation valuation follows the contractually agreed methodology,
the Court instead adopts the valuation the parties obtained before the plaintiffs’
departure.
For the reasons that follow, the Court finds that the partnership properly
calculated the plaintiffs’ share of the 2019 profits but erred in calculating the
plaintiffs’ buyout price.
I. FACTUAL BACKGROUND2
The Court conducted a five-day bench trial. During trial, the Court heard from
and considered the testimony of the following witnesses: Simon Bartholomew,
Christos Richards, John Archer, Francis P. Egan, Randall Martin Paulikens, Alyson
Archer, and Tom Theurkauf. The parties also submitted 100 joint trial exhibits.3
2 This post-trial decision cites: C.A. No. N20C-06-080 AML CCLD docket entries (by “D.I.” number); trial exhibits (by “JX” number); the trial transcript (“Trial Tr.” by day “I–V”); deposition transcripts lodged by the parties (by witness last name); stipulated facts set forth in the parties’ Joint Pre-Trial Order (“PTO”), D.I. No. 88; and the parties’ Post-Trial Opening Briefs (“Opening Br.”) and Post-Trial Answering Briefs (“Answering Br.”). 3 To the extent the parties raised objections in the joint exhibit list that were not raised at trial or in post-trial briefing, those objections are deemed waived.
2 These are the facts as the Court finds them after weighing the testimony and exhibits
admitted during trial.4
A. The Parties and Relevant Non-Parties
Defendant Catalyst Advisors, L.P. (“Catalyst” or the “Company”) is a
Delaware limited partnership with its principal place of business in New York, NY.5
Plaintiff Catalyst Advisors Investors Global, Inc. (“CAIG”) is a Delaware
corporation.6 Plaintiff Christos Richards (“Richards” and collectively with CAIG,
“Plaintiffs”) is an individual and a resident of California.7 Richards was a limited
partner of Catalyst from 2014 to October 4, 2019.8
CAIG’s sole shareholder is a United Kingdom company, Bartholomew
Advisors Ltd. (“Bartholomew Advisors”).9 Simon Bartholomew, who resides in
4 In reaching its verdict, the Court has examined all exhibits submitted and has considered the testimony of all witnesses, both direct and cross, live and by deposition. The Court has also considered the applicable Delaware case law that has defined the legal precepts applicable to the claims and defenses the parties have raised. The Court has applied the Delaware Rules of Evidence to the testimony and exhibits and only relied on evidence that would be allowed under those rules—consistent with the Court’s knowledge of those rules and the specific rulings that may have been made and articulated both pre-trial and during the trial proceedings. And, of course, the Court has considered each party’s respective arguments on the weight to be accorded the testimony and evidence. 5 PTO § II(A)(1). 6 PTO § II(A)(4). 7 PTO § II(A)(2). 8 PTO § II(A)(3). 9 PTO § II(A)(5).
3 London, England, is the majority shareholder of Bartholomew Advisors and holds
100% of its voting rights.10
B. Catalyst’s formation and growth
Catalyst is an executive recruiting and assessment firm specializing in
recruiting senior executives and board members to companies in the
biopharmaceutical and medical technology industries.11 John Archer founded the
business as Catalyst Advisors, LLC in 2008, and the company employed three
people at its inception.12 In 2014, Catalyst Advisors, LLC converted to Catalyst (the
limited partnership).13 Catalyst’s limited partners included John Archer, Alyson
Archer (John Archer’s spouse), Stephen Williams, Richards, and CAIG (represented
by Bartholomew).14 A substantial portion of the partners’ compensation came from
the annual distribution of the company’s profits. The company’s End-of-Year Bonus
Policy defined how that compensation was calculated and apportioned among the
partners.
10 PTO § II(A)(6). 11 Trial Tr. II at 181. 12 Id. at 182–84. 13 Id. at 188. 14 Trial Tr. I at 20, 165–66; Trial Tr. II at 188.
4 C. Catalyst’s Limited Partners Execute the LPA in 2018
In 2018, Catalyst added two limited partners: Arnaldo De Lisio and Sara
Hager.15 Upon their admission, a new limited partnership agreement (the “LPA”)
was executed with a January 1, 2018 effective date.16 The LPA governed the
relationship between the limited partners and Catalyst and is the operative document
in this litigation.17
Before the partners signed the LPA, Alyson Archer created and circulated a
PowerPoint presentation that purported to explain the agreement’s key terms (the
“LPA Slide Deck”).18 At trial and in post-trial briefing, Plaintiffs relied on a bullet
point on one slide, which referred to a resigning partner being “grandfathered” into
the End-of-Year Bonus Policy that was in place at the time of the partner’s departure.
The parties dispute the relevance of this slide deck, which was admitted into
evidence at trial.19
D. Gilbert Forest Joins Catalyst in 2019
In 2019, Gilbert Forest joined Catalyst, buying in as a limited partner.20
Contemporaneously with Forest’s admission into the partnership, Alyson Archer
15 Trial Tr. I at 21, 166. 16 Id. at 21–22, 167; JX 1. 17 JX 1 § 3.1. 18 JX 46; Trial Tr. I at 23–24, 169–70. 19 See JX 46. 20 Trial Tr. I at 35, 50, 166.
5 presented a slide deck entitled “Overview for Gilbert Forest,” which outlined
founding equity partner compensation.21 The slide deck made no mention of
“grandfathering.”22
E. Valuation Reports
Before the partners executed the LPA, Sun Business Valuations, LLC (“Sun”)
conducted multiple valuation analyses for Catalyst.23 In January and February 2018,
after the LPA went into effect, Sun prepared another series of valuation analyses.24
These reports were created to value the Company at the time it was formed and to
account for the investment capital contributions of two partners, Sarah Hagar and
Arnaldo De Lisio.25 In May 2019, the summer before CAIG and Richards’
dissociations, Sun prepared a further valuation analysis which had an effective date
of December 31, 2018.26 The May 2019 Sun Reports were prepared to update the
Company’s value in connection with Gilbert Forest’s buy-in.27 After CAIG and
Richards dissociated, Sun prepared another series of valuations in August and
21 The slide deck is dated February 12, 2018, but facts suggest it was presented in 2019 based on when Gilbert joined the partnership. JX 68; Trial Tr. I at 50–51. 22 JX 68. 23 JX 11; JX 12. 24 JX 16; JX 17; JX 19. 25 See Trial Tr. I at 34–35; Trial Tr. III at 14–15, 24, 268. 26 The Report dated May 16, 2019, was a draft. JX 21. The Report dated May 25, 2019, was the final version. JX 22. 27 See Trial Tr. I at 35; Trial Tr. III at 14–15, 198, 206, 269–71; Trial Tr. IV at 176.
6 September 2020.28 These valuations purported to value Catalyst as of the date of
Plaintiffs’ respective dissociations.
In addition to those valuations, Wipfli LLP, under the direction of Plaintiffs’
expert, Francis Egan, conducted a fair market value business valuation of Catalyst
after CAIG and Richards dissociated (the “Egan Report”).29 The Egan Report is
dated September 1, 2021, but purported to establish Catalyst’s Enterprise Valuation
using the Adjusted Book Value Method as of October 31, 2019.30
F. Key Provisions in the LPA
The LPA contains several provisions relevant to the current litigation. The
LPA established an Operating Committee (“Committee”) that managed Catalyst
alongside its Managing Partner, John Archer.31 The only members of the Committee
28 See JX 26 (calculating the buyout price for Richards on October 4, 2019 at $1,480,798.47 and the buyout price for Bartholomew on October 21, 2019 at $776,613.91); JX 27 (calculating the buyout price for Richards on October 4, 2019 at $1,607,068 and the buyout price for Bartholomew on October 21, 2019 at $925,946). The September 10, 2020 Sun Report calculated the Enterprise Value of Catalyst as of October 4, 2019 at $871,016 and a Buyout Price of $1,745,170 for Richards and as of October 21, 2019 an Enterprise Value of $817,811 and a Buyout Price of $833,767 for Bartholomew. JX 28. The September 11, 2020 Sun Report calculated the same Enterprise Value and Buyout Prices as the September 10 Report. JX 29. The September 15, 2020 Sun Report calculated the same Enterprise Value of Catalyst as the two prior reports but had a Buyout Price of $1,745,151 for Richards and $833,779 for Bartholomew. JX 30. At trial, Theurkauf did not coherently explain the differences between these valuations, stating instead that the valuations resulted from an “iterative process” by which he would work with an attorney and an accountant when completing the report. Trial Tr. IV at 188–89. See also Trial Tr. III at 271 (explaining which reports reflect the “final report”). 29 JX 61. 30 Id. 31 JX 1 § 4.2(a).
7 were Catalyst’s limited partners, and, as such, there was no distinction between a
“partner meeting” and a “Committee meeting.”32
The LPA defines when a partner dissociates and establishes the formula to
determine a partner’s buyout price following dissociation.33 Section 8.1 “embodies
the [] intentions” when a partner dissociates.34 Section 8.2 describes the ways that a
partner may dissociate, stating:
A Partner shall cease to be a Partner upon the earliest of any of the following events (each, a “Dissociation”, with the Partner that is the subject of the Dissociation begin referred to as the “Dissociating Partner”): (1) Disability, (2) death, (3) resignation/retirement, (4) termination for Cause, (5) termination for Other Cause; or (6) termination without Cause. . . .35
Once a partner dissociates, a buyout of the partner’s units is not automatic.
Section 8.4 explains the purchase of partnership units following a partner’s
dissociation.36 Section 8.4 states: “[t]he Company shall have the ongoing right to
purchase the Dissociated Partner’s Units as set forth in this Section 8.4.” 37 In the
instance of dissociation upon resignation, as occurred in the instant case, Section
32 See JX 1 § 4.2(a)(1); Trial Tr. II at 237. 33 See JX 1 § 8 et seq. 34 JX 1 § 8.1. 35 JX 1 § 8.2. 36 JX 1 § 8.4. 37 Id.
8 8.4(a) allows, but does not require, Catalyst or its remaining partners to purchase the
dissociated partner’s units at the “Buyout Price.”38
Section 8.4(e) specifies the process by which a buyout is initiated:
The Company, or the Partners, as applicable, shall exercise its right to purchase the Dissociating Partner’s Units by written notice to the Dissociating Partner specifying: (i) the Buyout Price, and any adjustments thereto; (ii) the date of closing on the purchase; and (iii) any other conditions applicable to such purchase as are permitted herein. Upon receipt of such notice the Dissociating Partner shall have the absolute obligation to sell such Units of the Company, or the Partners, as applicable.39
Section 8.4(f) goes on to describe the “Notice of Exercise” and states that:
The Company shall have the first right to exercise the right to purchase the Dissociating Partner’s Units, which shall be triggered by any Partner making written demand upon the Company to do so. If the Company fails to provide written notice of its exercise of such right within thirty (30) days of the written demand by a Partner, then the Partners shall have the right to exercise the right to purchase the Dissociating Partner’s Units on a pro-rata basis.40
The LPA also establishes a formula for the buyout price of a partner’s units.
Section 8.2 states that “[t]he purchase price for a Partner’s equity following a
Dissociation will be determined in accordance with Section 8.5.”41 Section 8.5(a)
states that “[t]he Buyout Price shall be calculated in accordance with Exhibit C,
38 JX 1 § 8.4(a). 39 JX 1 § 8.4(e). 40 JX 1 § 8.4(f). 41 JX 1 § 8.2.
9 subject to adjustment as set forth in Section 8.4 and this Section 8.5.” 42 Exhibit C
contains the following Buyout Price Formula:
The Buyout Price of a Partner’s Units shall be calculated by multiplying the Enterprise Valuation by the Partner’s Participation Percentage.
* “Enterprise Valuation” is determined as set forth in the Agreement.
* “Partner’s Participation Percentage” is calculated by taking the average of the Partner’s Profit Distribution Percentage over the immediately prior 5 years (or such shorter time if the dissociating Partner has dissociated prior to the 5th anniversary of becoming a Partner at the Company) from the date of dissociation.
* “Profit Distribution Percentage” means the percentage of Partner Distributable Income (as set forth in the Policy) that is distributed to a Partner pursuant to the End of Year Bonus Policy (“Policy”).43
The LPA defines “End-of-Year Bonus Policy” as “the policy adopted by the
Company that determines the allocation and distribution of Profit to the Partners.”44
The End-of-Year Bonus Policy is used to calculate each limited partner’s Partner
Distributable Income (“PDI”), which is part of the Profit Distribution Percentage
that is used to calculate the Partner’s Participation Percentage (“PPP”).45
42 JX 1 § 8.5(a). 43 JX 1, Ex. C. 44 JX 1 § 2.29. 45 PTO § II(B)(15).
10 The other part of the buyout equation, Catalyst’s Enterprise Valuation, also is
defined in the LPA. The LPA states that “Enterprise Valuation”:
means the appraised value of the Company, as illustrated by and in accordance with the methodology set forth in the Sun Valuation report on file with the Company, as may be updated from time to time, or as may be superseded by an appraisal report following the same methodology issued by another appraisal Company. 46
G. The August 2019 Committee Meeting
In 2019, as certain partners left the partnership and new partners joined, the
partnership began discussing changes to its compensation structure. According to
Catalyst’s position in this litigation, the changes were at least partially driven by a
concern that certain partners, including Plaintiffs, were operating in a manner that
maximized their individual compensation at the expense of Catalyst’s profitability.
On August 8, 2019, Catalyst’s limited partners47 and its counsel, Kurt Olender
of OlenderFeldman LLP, attended a Committee/Partner meeting.48 At the meeting,
the partners received and discussed a PowerPoint presentation addressing certain
compensation issues.49 It was Alyson Archer’s practice to edit a PowerPoint during
partner meetings to capture discussions that took place; these edits were highlighted
46 JX 1 § 2.30. 47 Catalyst’s limited partners and the Committee consisted of: Christos Richards, CAIG (Bartholomew), John Archer, Alyson Archer, Stephen Williams, Gilbert Forest, and Arnaldo De Lisio. PTO § II(B)(14). 48 PTO § II(C)(31); Trial Tr. I at 87, 94, 201. 49 JX 34; Trial Tr. I at 85–86, 201–02; Trial Tr. IV at 77.
11 in green and circulated to the partners after the meeting.50 Guided by the
PowerPoint, the partners discussed a series of changes to the End-of-Year Bonus
Policy. Relevant to the current dispute, the partners discussed three changes to the
End-of-Year Bonus Policy that were intended to address: (1) long-in-the-tooth
(“LIT”) searches, (2) difficult searches, and (3) unpaid invoices. According to the
LPA, changes to the End-of-Year Bonus Policy required approval from a majority
of the Committee including the Managing Partner.51
1. The LIT Modification
The proposed LIT Modification would take a deduction from a recruiting
partner’s origination credit (an input for the PDI calculation) for LIT searches.52 LIT
search projects were search projects open past the guaranteed limit in Catalyst’s
proposal letter with its clients, and the deduction would apply to all searches open
as of August 8, 2019, as well as any new searches started after that date.53 The
50 See e.g., JX 34; Trial Tr. I at 85–87, 203–04; Trial Tr. IV at 5, 83–84. 51 JX 1 § 4.3(f) (“Decisions Requiring Approval of a Majority of the Committee including the Managing Partner. The Company shall not take any of the following actions without the majority approval of the Committee which shall include the approval of the Managing Partner: . . . (f) Changing the End-of-Year Bonus Policy.”). 52 See JX 34 at CATALYST003308; Defendant’s Opening Br. at 14. 53 JX 34 at CATALYST003308; Trial Tr. I at 90–95, 203–06; Trial Tr. II at 227.
12 Committee passed the LIT Modification by a 4-3 vote.54 Richards and Bartholomew
voted against the LIT modification.55
The partners agreed to a two-step implementation process for the
modification.56 In step one, a subcommittee—excluding the originating partner—
would identify searches that would be considered LIT.57 In step two, a final decision
would be reached regarding how that LIT search should be addressed (e.g.,
cancelled, charge-back to the originating partner, or permitted to continue).58
2. Difficult Searches
“Difficult Searches” were defined as: “broken searches” (a search that did not
succeed previously with a different recruiting firm); a search project with a retainer
or final fee under Catalyst’s minimum requirements; a search project open for more
than a year; or a search project with a company that had particular issues that would
make the search challenging.59 The proposed Difficult Search Modification would
re-allocate a portion of the recruiting partner’s profit share (their total PDI) from the
54 JX 34 at CATALYST003308 (“No= Simon, Christos, Arnaldo. Yes= Steve, Gilbert, John, Alyson.”). 55 Id. 56 Id. 57 Id.; Trial Tr. I at 90–95, 203–11; Trial Tr. II at 227; Trial Tr. IV at 5–15, 153–55, 164–66. 58 JX 34 at CATALYST003308; Trial Tr. I at 90–95, 203–11; Trial Tr. II at 227; Trial Tr. IV at 5–15, 153–55, 164–66. 59 JX 34 at CATALYST003314; Trial Tr. I at 97–99, 210; Trial Tr. II at 45–46, 242–44; Trial Tr. IV at 98–101.
13 originating partner to non-partners who were assigned to work on “Difficult
Searches.”60 The Committee passed the Difficult Search Modification by a 7-0
vote.61
3. Unpaid Invoice Deduction
The proposed Unpaid Invoice Deduction effectively required Partners to
guarantee payment of their client’s invoices.62 The proposal called for a deduction
from the originating partner’s PDI for unpaid invoices.63 The Committee passed the
Unpaid Invoice Deduction by a 7-0 vote.64
H. September Meetings
The Partners convened another meeting on September 3, 2019, to discuss:
“YTD Overview of Firm Performance, Review of Decisions from [August] Meeting,
[and] Searches to Be Reviewed.”65 A subcommittee was formed and met on
September 6, 2019, to review changes to the Operating Agreement, discuss
60 JX 34 at CATALYST003315; Trial Tr. I at 97–99, 210; Trial Tr. II at 45–46, 242–44; Trial Tr. IV at 98–101. 61 JX 34 at CATALYST003314–15. 62 JX 34 at CATALYST003310. 63 Id. 64 Id.; Trial Tr. II at 232–35. 65 JX 35 at CATALYST000151; Trial Tr. II at 249–52; Trial Tr. IV at 103–07.
14 proposals, and review searches.66 The Committee met again on September 16, 2019,
and reviewed the subcommittee’s work.67
I. The Plaintiffs’ dissociations and the October 2019 Committee Meeting
The parties stipulated before trial that Richards dissociated from Catalyst on
October 4, 2019.68
The Committee held another meeting on October 21, 2019.69 At this meeting,
the Committee discussed implementing a policy requiring recruiting partners to
achieve a certain minimum origination credit in order to participate in the Partner
Compensation Plan.70 The Committee discussed a proposal that would measure a
partner’s origination metrics over a three-year period. If a recruiting partner failed
to meet the minimum origination criteria, he or she only would be compensated
based on their individual performance (the “Minimum Origination Requirement”).71
The parties dispute what occurred during the vote on this revision to the End-of-Year
Bonus Policy. Having received testimony and reviewed the evidence, the Court
concludes that Bartholomew—who was participating remotely—disconnected from
66 JX 36 at CATALYST000110; Trial Tr. II at 256–58; Trial Tr. IV at 108–11. 67 JX 37 at CATALYST000139–43; Trial Tr. I at 102–04; 223Trial Tr. II at 258–59; Trial Tr. IV at 114–15. 68 PTO § II(A)(3); Trial Tr. I at 174, 193; JX 79. 69 JX 43. 70 Id. at CATALYST000972. 71 Id. at CATALYST000976.
15 the meeting in the middle of the vote.72 The record does not show by a
preponderance of the evidence that Bartholomew announced that CAIG was
dissociating from the partnership “effective immediately.” Even if he made such a
pronouncement, however, it was not an effective means of dissociating before the
policy modification was approved, as explained in the analysis section below.
On October 28, 2019, Bartholomew, on behalf of CAIG, sent the Partners a
letter requesting that Catalyst purchase CAIG’s partnership units.73 The letter stated
that CAIG resigned on October 21, 2019.74 Bartholomew sought a buyout under
Section 8.5 of the LPA.
Three days later, on October 31, 2019, Richards sent a letter requesting that
the partners or Catalyst purchase his units under Section 8.5 of the LPA.75 The letter
noted that this “formal request” followed his October 4, 2019 resignation.76
In two letters dated April 30, 2020, Catalyst provided proposals to Richards77
and Bartholomew (on behalf of CAIG)78 to buy out their ownership units in Catalyst
and pay 2019 PDI due under the LPA. Plaintiffs rejected Catalyst’s buyout because
72 Trial Tr. I at 113; Trial Tr. II at 263, 270. 73 Trial Tr. I at 28; JX 78. 74 JX 78. 75 Trial Tr. I at 174; JX 79. 76 JX 79. 77 JX 33. 78 JX 42.
16 they disagreed with the price calculations.79 In May 2020, Catalyst responded to
both Richards80 and Bartholomew81 with another letter. Each letter outlined the
recipient’s respective PDI for fiscal year 2019 according to Catalyst.82 Following
receipt of these letters and amidst ongoing disagreements as to the buyout price, the
Plaintiffs initiated this action.
J. CAIG and Richards File This Action
CAIG and Richards filed their complaint on June 5, 2020, asserting one count
for breach of contract.83 On September 22, 2020, Plaintiffs filed for an Entry of
Default Judgment against Catalyst under to Superior Court Rule 55(b)(1).84 On
October 1, 2020 Plaintiffs dismissed all claims against Catalyst Advisors, LLC under
Superior Court Rule 41(a)(1)(I) because the complaint incorrectly identified that
entity as the general partner of Catalyst Advisors, L.P.85
On October 6, 2020 Catalyst moved to vacate the default judgment under
Superior Court Civil Rule 60(b).86 Plaintiffs responded to Catalyst’s motion on
79 Trial Tr. I at 29, 175. 80 JX 69. 81 JX 70. 82 JX 69; JX 70; Trial Tr. I at 28–31. 83 D.I. No. 1. 84 D.I. No.7. 85 D.I. No. 8. 86 D.I. No. 10.
17 October 23, 2020.87 On October 29, 2020, the Court heard argument,88 granted the
motion with amendments, and issued an order vacating the default judgment.89
Catalyst filed a Motion for Partial Summary Judgment on October 29, 2021,
which the Court denied on February 10, 2022.90 The Court held a five-day virtual
bench trial from December 12, 2022 through December 15, 2022, with a final day
of trial on January 27, 2023.91 Plaintiffs and Defendant filed their respective Post-
Trial Opening Briefs on June 27, 2023,92 and their respective Post-Trial Answering
Briefs on August 1, 2023.93 The Court heard post-trial oral argument on December
7, 2023.94
II. PARTIES’ CONTENTIONS
The parties dispute what amounts are owed to Richards and CAIG as a result
of their respective dissociations, including the 2019 compensation and the Buyout
Price. Those disputes generally fall into two categories: (1) the proper calculation
of Partner Distributable Income (“PDI”) and Partner’s Participation Percentage
87 D.I. No. 13. 88 D.I. No. 18. 89 D.I. No. 19. 90 PTO § XI(13); D.I. Nos. 63, 78. 91 D.I. Nos. 115–18. 92 D.I. No. 106, 107. 93 D.I. Nos. 111, 112. 94 D.I. No. 121.
18 (“PPP”), and (2) the meaning and calculation of Enterprise Valuation. The parties
also dispute whether CAIG had a positive capital account balance and whether
Plaintiffs are entitled to an award of attorneys’ fees.
A. The Parties’ Contentions Regarding PDI and PPP
Plaintiffs raise three issues related to calculating PDI and PPP. First, Plaintiffs
argue that there is no evidence that the policy changes adopted during the August 8,
2019 or October 21, 2019 Committee meetings were finalized and implemented,
and, as such, they should not be included in the End-of-Year Bonus Policy.95
Second, and relatedly, Plaintiffs argue that they are “grandfathered” into the End-of-
Year Bonus Policy that existed before any modifications, such that any changes
approved but not fully implemented at the time of Plaintiffs’ dissociation did not
apply to them.96 Third, Plaintiffs contend that in calculating PPP, the phrase
“immediately prior 5 years” does not include the year the partner dissociated.97
Plaintiffs therefore argue that their PPP should be calculated based on their
respective Partner Profit Distribution Percentage in 2014-2018.98
Catalyst responds that the policy changes considered during the August 8,
2019 and October 21, 2019 Committee meetings were approved in accordance with
95 Plaintiffs’ Opening Br. at 56–57. 96 Id. at 50–51. 97 PTO § II (B)(25)(a). 98 Id.
19 the LPA.99 Catalyst asserts that the LPA does not require any additional steps to
modify the Policy, and those changes therefore should be reflected in the End-of-
Year Bonus Policy and PDI calculations even if the policy modifications were not
fully “implemented” at the time the Plaintiffs dissociated. In response to Plaintiffs’
“grandfathering” argument, Catalyst argues that the term “grandfather” is not
located in the LPA and only appears on one slide in the LPA Slide Deck,100 which
was circulated before the LPA’s execution and was not integrated into the LPA.101
Finally, Catalyst states that the phrase “immediately prior 5 years” is inclusive of the
year when the Partner dissociates, and Plaintiffs’ PPP therefore should be calculated
based on the years 2015 through 2019.102
B. The Parties’ Contentions Regarding Enterprise Valuation
As to Enterprise Valuation, the parties vigorously dispute the meaning of
Enterprise Valuation within the LPA and which of the proffered valuation reports
fits that definition. Unfortunately, neither party’s position on this issue engages with
the contractual language or the factual record in a satisfactory way. The parties
disagree as to which experts the Court should rely on, which report should be used
99 Defendant’s Answering Br. at 10–11, 15, 18–19. 100 JX 68 at CATALYST000031. 101 Defendant’s Answering Br. at 13–14. 102 PTO § II (B)(25)(b).
20 when calculating Enterprise Valuation, and what report was “on file” with the
Company for purposes of Plaintiffs’ claim.
Plaintiffs contend that under the LPA’s definition of Enterprise Value, the
report “on file” at the time of their dissociation is the May 16, 2019 Sun Valuation
Report.103 Catalyst argues that the report “on file” is the September 15, 2020 Sun
Valuation Report (the “2020 Report”).104
Plaintiffs further argue that the Court should rely on the Egan Report when
calculating Enterprise Valuation for purposes of the breach of contract claim.105
Catalyst counters that Plaintiffs fail to identify support in the evidentiary record or
under the LPA for their proposed Enterprise Valuation and reiterate that Enterprise
Valuation should be calculated using the 2020 Report that Catalyst offered at trial.106
Plaintiffs argue that the Court should not consider Randall Paulikens’ expert
report and testimony with respect to any calculation of Enterprise Valuation because
he was a rebuttal expert.107 Catalyst argues that Paulikens offered admissible
evidence that opined on the issues to which Plaintiffs’ expert (Egan) testified.
103 Plaintiffs’ Opening Br. at 18, 27. 104 Defendant’s Answering Br. at 20. 105 Plaintiffs’ Opening Br. at 26. 106 Defendant’s Answering Br. at 20; JX 30. 107 Plaintiffs’ Opening Br. at 41–47; PTO § XI(19).
21 Catalyst contends that Paulikens did not seek to provide any expert opinion as to
Catalyst’s Enterprise Valuation.108
C. The Parties’ Contentions Regarding Positive Capital Account Balance
Plaintiffs argue that Catalyst failed to credit CAIG with the balance in his
capital account, arguing the account contained $79,181 based on a statement to that
effect in the 2020 Report.109 Catalyst, on the other hand, asserts that CAIG’s 2019
Schedule K-1 confirms that CAIG did not possess a positive balance in its capital
account upon its dissociation and that tax documents are the most reliable indicator
of CAIG’s account balance.110 Further, Catalyst argues that Plaintiffs fail to meet
their burden to establish that CAIG possessed a positive balance in his capital
account.111
D. The Parties’ Contentions Regarding Fee Shifting
Finally, Plaintiffs contend that Catalyst engaged in bad faith litigation that
warrants fee shifting.112 In Plaintiffs’ view, the logic that permits fee shifting when
a party “knowingly assert[s] frivolous claims” should extend to the assertion of
frivolous defenses, which is how Plaintiffs categorize Catalyst’s defense of the
108 Defendant’s Answering Br. at 28–31; PTO § XI(20). 109 Plaintiffs’ Opening Br. at 19–20; Plaintiffs’ Answering Br. at 2; JX 30 at 18. 110 Defendant’s Answering Br. at 32–33. 111 Id. 112 Plaintiffs’ Opening Br. at 37–40.
22 claims in this case.113 Catalyst disputes that it engaged in bad faith litigation, arguing
that normal litigation strategy and opposing Plaintiffs’ claim does not amount to
conduct that rises to the level of bad faith.114
III. ANALYSIS
The parties’ dispute focuses on the 2019 compensation and Buyout Price to
which CAIG and Richards are entitled. Their disputes challenge—and the Court’s
analysis addresses—the correct inputs for the Buyout Price Formula established in
Exhibit C to the LPA. A visual graphic of this formula provides that:
𝐵𝑢𝑦𝑜𝑢𝑡 𝑃𝑟𝑖𝑐𝑒 = 𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑉𝑎𝑙𝑢𝑎𝑡𝑖𝑜𝑛 𝑥 𝑃𝑎𝑟𝑡𝑛𝑒𝑟 𝑃𝑎𝑟𝑡𝑖𝑐𝑖𝑝𝑎𝑡𝑖𝑜𝑛 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒
𝑠𝑢𝑚 𝑜𝑓 𝑃𝑃𝐷𝑃115 𝑓𝑟𝑜𝑚 𝑙𝑎𝑠𝑡 5 𝑦𝑒𝑎𝑟𝑠 𝑃𝑎𝑟𝑡𝑛𝑒𝑟 𝑃𝑎𝑟𝑡𝑖𝑐𝑖𝑝𝑎𝑡𝑖𝑜𝑛 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 = 5
𝑃𝑃𝐷𝑃 = % 𝑜𝑓 𝑃𝐷𝐼116 𝑑𝑖𝑠𝑡𝑟𝑖𝑏𝑢𝑡𝑒𝑑 𝑝𝑢𝑟𝑠𝑢𝑎𝑛𝑡 𝑡𝑜 𝑡ℎ𝑒 𝐸𝑛𝑑 − 𝑜𝑓 − 𝑌𝑒𝑎𝑟 𝐵𝑜𝑛𝑢𝑠 𝑃𝑜𝑙𝑖𝑐𝑦
A. Partner’s Profit Distribution Percentage over the immediately prior 5 years
The parties disagree about the share of Catalyst’s 2019 profits to which CAIG
and Richards are entitled as well as the proper method for calculating PPP.117 To
reiterate, PPP is an input to the Buyout Price Formula and “is calculated by taking
113 Johnston v. Arbitrium (Cayman Is.) Handels AG, 720 A.2d 542, 546 (Del. 1998). 114 Defendant’s Opening Br. at 38. 115 Partner’s Profit Distribution Percentage. 116 Partner Distributable Income. 117 PTO §II(B)(9).
23 the average of the Partner’s Profit Distribution Percentage over the immediately
prior 5 years (or such shorter time if the dissociating Partner has dissociated prior to
the 5th anniversary of becoming a Partner at the Company) from the date of
dissociation.”118 The “‘Profit Distribution Percentage’ means the percentage of PDI
(as set forth in the Policy) that is distributed to a Partner pursuant to the End-of-Year
Bonus Policy (‘Policy’).”119
For purposes of this formula, the parties disagree as to the calculation of
Plaintiffs’ 2019 PDI and the meaning of the phrase “the immediately prior 5 years”
in the definition of PPP. Although Catalyst alternatively argues that it “is entitled to
a directed verdict on the calculations of 2019 PDI because Plaintiffs failed to provide
competent testimony establishing the amount they claim entitlement to[,]” the Court
does not reach that issue because, as explained below, the Court does not agree with
Plaintiffs that Catalyst erred in calculating 2019 PDI.120
1. Catalyst properly calculated Plaintiffs’ 2019 PDI with the changes to the Policy adopted at the August 9, 2019 and October 21, 2019 Committee meetings.
CAIG and Richards assert claims for their “share of Profits in the year of
Dissociation as of the date of Dissociation,” and they contend that the calculation of
118 JX 1, Ex. C. 119 Id. 120 Defendant’s Opening Br. at 30.
24 those profits, i.e., PDI, should not reflect the Policy modifications the partners
adopted in August and October 2019.121 Plaintiffs make this argument without any
apparent regard for the contractual confines of their partnership agreement. The
LPA places very few limits on how Catalyst’s partners may adopt and amend the
Policy. Specifically, the LPA provides that “‘End-of-Year Bonus Policy’ means
the policy adopted by the Company that determines the allocation and distribution
of Profit to the Partners.”122 The End-of-Year Bonus Policy can be changed by a
vote of a simple majority of the Committee, provided that the Managing Partner is
within the majority.123 The LPA provides: “Decisions Requiring Approval of a
Majority of the Committee including the Managing Partner. The Company shall
not take any of the following actions without the majority approval of the Committee
which shall include the approval of the Managing Partner: . . . (f) Changing the End-
of-Year Bonus Policy.”124
With respect to the End-of-Year Bonus Policy, Plaintiffs argue that there is no
evidence that the policy changes voted on during the August 8, 2019 or October 21,
2019 Committee meetings were finalized and implemented before their respective
121 JX 1 §8.5(a). 122 JX 1 § 2.29. 123 JX 1 § 4.3(f). 124 Id.
25 dissociations.125 Catalyst contends that there is sufficient evidence to demonstrate
that the policy changes were adopted upon voting, which is all that the LPA
requires.126 In addition, Catalyst argues that the record shows that the partners
implemented the modifications in accordance with their agreed-upon procedure.127
a. The LIT and Difficult Search Modifications.128
Both the LIT and Difficult Search Modifications adopted by the Committee
in August 2019 had the potential to reduce a partner’s distributable income if the
partner consistently relied on less-profitable searches. The LIT Modification
reduced a recruiting partner’s origination credit (an input for the PDI calculation)
for LIT searches.129 The Difficult Search Modification reallocated to non-partners a
125 Plaintiffs’ Opening Br. at 56–57. 126 Defendant’s Opening Br. at 38–40. 127 Defendant’s Answering Br. at 12–13 (citing JX 34; JX 35; JX 36; JX 37; Trial Tr. II at 250, 256; Trial Tr. IV at 103–04, 108, 110, 114, 116, 121–26). 128 It is Plaintiffs’ burden to prove that the LIT and Difficult Search Modifications were not applicable. See Plaintiffs’ Opening Br. at 54 (citing Tanyous v. Happy Child World, Inc., 2008 WL 2780357, at *1, *8 (Del. Ch. July 17, 2008) (“Because there is no signed writing detailing exactly what was agreed to, the Court must ascertain the shared intent of the parties to determine what, if any, changes were made to the End-of-Year Bonus Policy.”). Catalyst notes that Plaintiffs’ reliance on Tanyous is misplaced because the facts are distinguishable from the present case. Catalyst asserts that “[h]ere, the Court has the benefit of the one plaintiff and two defendants’ testimony and Catalyst PowerPoints which confirm there were votes taken to modify the Policy[,]” and as such there is no burden shifting. Defendant’s Answering Br. at 10 n.3. There is no factual dispute as to the occurrence of the vote and the Court therefore holds that it is the Plaintiffs’ burden to prove their claim. 129 See JX 34 at CATALYST003308; Defendant’s Opening Br. at 14.
26 portion of a recruiting partner’s profit share (their total PDI) for searches categorized
as “difficult.”130
Catalyst argues that the LIT Modification was an effort by Catalyst “to
incentivize more equitable conduct” and encourage partners to seek out projects that
would benefit all in the partnership.131 Catalyst notes that the LIT and Difficult
Search Modifications “resulted in multiple partners, not just Richards, receiving
deductions consistent with the modifications for search projects that met the
criteria.”132
Plaintiffs assert that the LIT Modification was a policy “meant to penalize Mr.
Richards.”133 Plaintiffs further contend that “the policy was never implemented
prior to Mr. Richard’s dissociation” because the “two-step process” was not
completed before he dissociated. Plaintiffs therefore argue that the LIT Modification
cannot be considered when calculating Richards’ and CAIG’s 2019 PDI.134
Similarly, Plaintiffs argue that “a subcommittee was never formed” as called for in
the notes added to the PowerPoint slide regarding the Difficult Search Modification.
130 JX 34 at CATALYST003315; Trial Tr. I at 97–99, 210; Trial Tr. II at 45–46, 242–44; Trial Tr. IV at 98–101. 131 Defendant’s Answering Br. at 15. 132 Id. 133 Plaintiffs’ Opening Br. at 7. 134 Id. at 8 (“[A] subcommittee was never formed nor was a meeting held by September 7, 2019. And prior to Richards’ dissociation, there was never a discussion among the partners as to what percentage charge-back to allocate against the originator on LIT searches.”).
27 Accordingly, Plaintiffs maintain that the Difficult Search Modification was never
implemented and cannot be considered when calculating their PDI.135
Catalyst responds that the Committee passed both modifications at the August
8, 2019 Committee meeting in accordance with the LPA.136 Catalyst asserts that the
facts presented at trial demonstrate that “Catalyst (a) took a vote to modify the Policy
to implement the Difficult Search Modification and LIT Modification, (b)
implemented those Modifications immediately by forming a subcommittee which
met on September 6th and identified qualifying search projects which were discussed
over the next several Committee meetings.”137 Given these facts, Catalyst argues
that the LIT Modification and Difficult Search Modification were adopted on August
8, 2019, before Plaintiffs dissociated, and those modifications appropriately were
reflected in Catalyst’s calculation of Plaintiffs’ 2019 PDI.
The Court finds that both the LIT Modification and the Difficult Search
Modification were properly included in Plaintiffs’ 2019 PDI calculation. According
to the LPA, changes to the End-of-Year Bonus Policy required approval from a
majority of the Committee, including the Managing Partner.138 At the August 8,
135 Id. at 9. 136 Defendant’s Answering Br. at 11. 137 Id. at 12. 138 JX 1 § 4.3(f) (“Decisions Requiring Approval of a Majority of the Committee including the Managing Partner. The Company shall not take any of the following actions without the 28 2019 Committee meeting, the Committee passed the LIT Modification by a 4-3 vote
and the Difficult Search Modification by a 7-0 vote.139 The Managing Partner voted
in favor of both modifications.140 No further steps were required under the LPA to
modify the Policy.
The fact that the policy changes could not be “implemented” immediately
does not preclude their application to Plaintiffs because the operative vote occurred
before they dissociated from the partnership. The LPA does not require
“implementation” for a change to the End-of-Year Bonus Policy to take effect, and
any such limitation would not be logical in the context of Catalyst’s business. The
record shows that Catalyst finalizes annual partner compensation under the Policy
after the calendar year closes.141 In that sense, Catalyst could never “implement” a
Policy modification before the end of the year. Nothing in the LPA, the Policy, or
the parties’ testimony suggests that a partner could avoid the effect of Policy
modifications by resigning at any time before the annual compensation was
finalized.
majority approval of the Committee which shall include the approval of the Managing Partner: . . . (f) Changing the End-of-Year Bonus Policy.”). 139 JX 34 at CATALYST003308, CATALYST003314–15. 140 Id. 141 Trial Tr. IV at 135–36; JX 38.
29 To the extent Plaintiffs rely on the implementation process agreed upon at the
August 2019 meeting as a prerequisite to the modifications becoming effective, the
record similarly does not support that position. At the August 2019 meeting, the
parties agreed to a method to identify LIT or difficult searches.142 There is nothing
in the record to suggest approval or effectiveness was contingent on that process or
that the partners could not later change the process by agreement. If the partners
deviated from that process, there is no record that Plaintiffs objected to that deviation
at the time. And, to the extent any purported deviation occurred after their
dissociation, Plaintiffs forfeited the opportunity to challenge the implementation by
dissociating before the process was complete. In any event, the record shows by a
preponderance of the evidence that the Committee took the agreed-upon steps
toward implementation.143
b. Unpaid Invoice Deduction.
The Unpaid Invoice Deduction ensured that partners guaranteed payment by
their clients.144 The policy introduced the following two changes:
[1] If a client fails to pay a retainer or final fee after one year, the payment will be deducted from a Partner’s PDI (and credited once client payment is received) 142 JX 34 at CATALYST003308, CATALYST003314–15; Trial Tr. I at 90–95, 203–11; Trial Tr. II at 227; Trial Tr. IV at 5–15, 153–55, 164–66. 143 JX 34; JX 35 at CATALYST000176–79; JX 36 at CATALYST000126–29; JX 37 at CATALYST 000139–43; Trial Tr. I at 94–102, 152–53, 204–05; Trial Tr. II at 92, 227–29, 256, 259–61, 291; Trial Tr. IV at 7–8, 14, 16–23, 61, 103–04, 108, 110, 114–117, 121–26. 144 JX 34 at CATALYST003310.
30 [2] If a client fails to pay an expense for 6 months, the expense will be allocated to a Partner’s [business development] account (and credited once client payment is received).145
The Committee passed the Unpaid Invoice Deduction by a 7-0 vote.146
Plaintiffs nevertheless assert that the “partners discussed guaranteeing client
payments on a going-forward basis[]” and the policy had not been implemented
when Plaintiffs dissociated.147 Catalyst counters that all that was needed to pass the
Unpaid Invoice Deduction was a majority vote that included the Managing Partner,
and that voting requirement indisputably was met.148 As such, Catalyst contends
that the Unpaid Invoice Deduction was in effect upon Richards’ dissociation and a
$467,996.42 deduction therefore properly was taken from his PDI.149
Like his argument regarding the LIT and Difficult Search Modifications,
Richards’ interpretation of the record and the LPA is not persuasive. The LPA does
not require implementation for the policy modification to be in effect. There is no
dispute that the modification was approved by a vote consistent with the LPA.150
Richards’ trial testimony regarding prospective application finds no support in the
145 Id. 146 Id.; Trial Tr. II at 232–35. 147 Plaintiffs’ Opening Br. at 10. 148 Defendant’s Answering Br. at 15. 149 Id. at 16; JX 38; JX 40. 150 JX 34 at CATALYST003310; Trial Tr. II at 232–35.
31 record and was unconvincing. Richards’ contention that he could have paid the
unpaid invoices himself to avoid at least a portion of this penalty misses the point;
Richards voluntarily dissociated and in so doing surrendered the opportunity to blunt
the modifications’ effect.151 The Court finds that the Unpaid Invoice Deduction was
in effect when Richards and CAIG dissociated, and Catalyst properly included those
deductions in calculating Plaintiffs’ 2019 PDI.
c. Minimum Origination Requirement
At the October 21, 2019 Committee meeting, the Committee approved the
adoption of a minimum origination requirement for recruiting partners to participate
in the Partner Compensation Plan.152 The Minimum Origination Requirement set
certain metrics to measure origination over a three-year period.153 If a recruiting
partner failed to meet the minimum origination criteria, they would be compensated
based only on their individual performance.154
Plaintiffs argue that the “proposed changes to the End-of-Year Bonus Policy
discussed at the October 21, 2019 meeting related to underperforming partners
[were] never actually implemented. . . and [were] contrived to force CAIG to
151 Richards also testified that some of the invoices in question were actually paid or not pursued in good faith by Catalyst. This convoluted testimony was neither convincing nor adequately supported by Catalyst’s contemporaneous records. 152 JX 43 at CATALYST000972. 153 JX 43. 154 Id.
32 resign.”155 Plaintiffs contend that this is evidenced by the fact that Catalyst did not
apply the modification to Alyson Archer.156
Catalyst argues that CAIG’s reliance on Alyson Archer’s compensation is
unavailing because—as the firm’s sole non-recruiting partner—she always was
compensated differently under the Policy.157 Further, Catalyst asserts that the
Plaintiffs fail to “identify a cognizable basis under the LPA or in the evidentiary
record to show that the Minimum Origination Requirement is invalid or inapplicable
. . . and the Court must conclude that CAIG’s 2019 PDI is $430,332.”158
To resolve this aspect of the parties’ dispute, the Court must determine
whether CAIG’s mid-meeting verbal dissociation exempts it from the Minimum
Origination Requirement’s application. Neither party’s argument is compelling on
this issue, leaving the Court to consider the LPA without the benefit of the parties’
considered input.
The LPA’s plain language does not expressly state how a partner dissociates
or, relatedly, when such dissociation becomes effective. In the absence of specific
language creating a dissociation procedure, the Court considers Delaware’s Limited
Partnership Act and the LPA’s more general provisions. To begin, Delaware law
155 Plaintiffs’ Opening Br. at 55; Plaintiffs’ Answering Br. at 18–19. 156 Plaintiffs’ Opening Br. at 54–55; Plaintiffs’ Answering Br. at 18–19. 157 Defendant’s Opening Br. at 38–40; Defendant’s Answering Br. at 17–18. 158 Defendant’s Opening Br. at 38–40; Defendant’s Answering Br. at 19.
33 prohibits a limited partner from withdrawing from the partnership before dissolution
and winding up, except as provided in the partnership agreement.159 The LPA
plainly contemplates that Catalyst’s partners may dissociate, but it does not specify
how a partner may do so.160 The LPA does, however, require that all notices and
communications required or provided for by the LPA be in writing.161
Although the LPA does not expressly say so, a partner necessarily would need
to communicate his or her dissociation to the partnership. But under the LPA,
verbally announcing dissociation, as CAIG claims it did on the October 21, 2019
call, would not be a sufficient method of communication.162 CAIG’s dissociation
was not effective until it sent written notice, which occurred after the meeting and
the vote adopting the policy change.163 As such, the Minimum Origination
159 See also 8 Del. C. § 17-603 (“A limited partner may withdraw from a limited partnership only at the time or upon the happening of events specified in the partnership agreement and in accordance with the partnership agreement. Notwithstanding anything to the contrary under applicable law, unless a partnership agreement provides otherwise, a limited partner may not withdraw from a limited partnership prior to the dissolution and winding up of the limited partnership. Notwithstanding anything to the contrary under applicable law, a partnership agreement may provide that a partnership interest may not be assigned prior to the dissolution and winding up of the limited partnership.”). 160 See JX 1 §§ 8.1, 8.2, 8.4, 5.3. 161 See JX 1 § 11.1 (“Notices. All notices, demands, and communications (each, a “Notice”) required or provided for in this Agreement must be in writing.”). 162 Although CAIG did not prove by a preponderance of the evidence that it announced its dissociation before terminating the call, the Court assumes this occurred for purposes of this analysis. 163 JX 78.
34 Requirements were in effect before CAIG’s dissociation, and Catalyst properly
applied the requirement to CAIG’s 2019 PDI.
Finally, the Court finds unavailing Plaintiffs argument that the Minimum
Origination Requirement is invalid because Catalyst did not apply it to Alyson
Archer. Alyson Archer never originated or executed search projects for Catalyst
because that was not part of her job responsibilities. She served Catalyst in a
management capacity and was not eligible to receive performance-based
compensation as its other partners were.164 It logically follows that policy changes
related to search projects would not affect her compensation, and the absence of
application of those changes to her compensation is not evidence that the Minimum
Origination Requirement never took effect.
d. The LPA does not contemplate a partner being “grandfathered” into any policies.
In an argument that is more or less derivative and duplicative of the arguments
addressed above, Plaintiffs further contend that they are “grandfathered” into the
End-of-Year Bonus Policy that was in effect before adoption of the LIT
Modification, the Difficult Search Modification, the Unpaid Invoice Deduction, and
the Minimum Origination Policy. 165 Plaintiffs seem to contend that the LPA is
ambiguous and that it reasonably can be read to provide that any changes to the
164 JX 38; JX 68; Trial Tr. II at 270. 165 Plaintiffs’ Opening Br. at 50–51.
35 Policy that were not fully implemented at the time of Plaintiffs’ dissociation did not
apply to them.166 In support of this theory, Plaintiffs point to extrinsic evidence in
the LPA Slide Deck.167 The slide Plaintiffs identify states that a majority of the
Committee is required to “[c]hang[e] the End-of-Year Bonus Policy (When a partner
leaves, they are grandfathered in to the plan that was in place as of the date of
dissociation)[.]”168 Further, Plaintiffs argue that “[b]ecause there is no signed
writing detailing exactly what was agreed to, the Court must ascertain the shared
intent of the parties to determine what, if any, changes were made to the End-of-
Year Bonus Policy.”169
Catalyst points out that the term “grandfather” is not located in the LPA and
only appears in the LPA Slide Deck.170 Catalyst contends that because the
PowerPoint “was circulated prior to the execution of a full[y] integrated document,
the LPA, the PowerPoint is irrelevant to Plaintiffs’ claims.”171
For all the reasons previously discussed, the Court disagrees with Plaintiffs’
interpretation of the record and the LPA. The Court can discern no ambiguity in the
relevant contractual language, and the Court may not look to extrinsic evidence to
166 Id. 167 Id. at 57 (citing JX 46). 168 JX 46 at CATALYST000031. 169 Plaintiffs’ Opening Br. at 54. 170 Defendant’s Answering Br. at 13. 171 Id. at 14.
36 find an ambiguity. The LPA expressly requires a Committee vote to approve
changes to the End-of-Year Bonus Policy.172 The LPA does not contain any other
requirements for those changes to become effective. As previously discussed,
because PDI could not be calculated until after the close of Catalyst’s fiscal year, no
policy change ever could be fully “implemented” until such time. If the partners
intended Policy changes to be effective only upon full implementation, they would
have expressly provided for that in the LPA. In the absence of such language, Policy
modifications became effective upon approval and properly applied to partners who
dissociated after approval.
The Court cannot revise contract terms after the fact, especially when the
parties are sophisticated and willingly negotiated and accepted the terms of the
LPA.173 Further, “[t]he parol evidence rule bars the admission of evidence extrinsic
172 JX 1 § 4.3(f) (“Decisions Requiring Approval of a Majority of the Committee including the Managing Partner. The Company shall not take any of the following actions without the majority approval of the Committee which shall include the approval of the Managing Partner: . . . (f) Changing the End-of-Year Bonus Policy.”). 173 E.g., W. Willow-Bay Ct., LLC v. Robino-Bay Ct. Plaza, LLC, 2007 WL 3317551, at *9 (Del. Ch. Nov. 2, 2007) (“The presumption that the parties are bound by the language of the agreement they negotiated applies with even greater force when the parties are sophisticated entities that have engaged in arms-length negotiations.”) (emphasis added), aff'd, 2009 WL 4154356, 985 A.2d 391 (Del. Nov. 24, 2009); NAMA Holdings, LLC v. World Mkt. Ctr. Venture, LLC, 948 A.2d 411, 419 (Del. Ch. 2007) (“Contractual interpretation operates under the assumption that the parties never include superfluous verbiage in their agreement, and that each word should be given meaning and effect by the court.”), aff'd, 2008 WL 571543, 945 A.2d 594 (Del. Mar. 4, 2008); DeLucca v. KKAT Mgmt., L.L.C., 2006 WL 224058, at *2 (Del. Ch. Jan. 23, 2006) (“[I]t is not the job of a court to relieve sophisticated parties of the burdens of contracts they wish they had drafted differently but in fact did not.”) (emphasis added); see also Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 740 (Del. 2006) (“A court must accept and apply the plain 37 to an unambiguous, integrated written contract for the purpose of varying or
contradicting the terms of that contract.”174 Nothing in Delaware law or the record
permits this Court to conclude that the “grandfathering” mentioned on the slide
overrides the LPA’s unambiguous language. Accordingly, the Court finds that the
End-of-Year Bonus Policy changes approved at the August 8, 2019 and October 21,
2019 meetings were effective upon approval by the Committee in compliance with
the requirements of the LPA.
2. For purposes of Plaintiffs’ PPP, “immediately prior 5 years” comprises 2015-2019.
The parties’ final dispute regarding the PPP/PDI portion of the Buyout
Formula relates to the proper time frame used to set a partner’s PPP. Under the LPA,
the PPP “is calculated by taking the average of the Partner’s Profit Distribution
Percentage over the immediately prior 5 years (or such shorter time if the
dissociating Partner has dissociated prior to the 5th anniversary of becoming a Partner
meaning of an unambiguous term . . . in the contract language . . ., insofar as the parties would have agreed ex ante.”). 174 Phillips v. Wilks, Lukoff & Bracegirdle, LLC, 2014 WL 4930693, at *3 (Del. Oct. 1, 2014), as corrected (Oct. 7, 2014) (quoting Galantino v. Baffone, 46 A.3d 1076, 1081 (Del. 2012)); see also Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228, 1232 (Del. 1997) (“If a contract is unambiguous, extrinsic evidence may not be used to interpret the intent of the parties, to vary the terms of the contract or to create an ambiguity.”); Restatement of Contracts (Second), § 213, cmt. (a) (“[The parol evidence rule] renders inoperative prior written agreements as well as prior oral agreements.”).
38 at the Company) from the date of dissociation.”175 The parties disagree as to the
meaning of “the immediately prior 5 years.”
Plaintiffs contend that their PPP should be the average of their Partner’s Profit
Distribution Percentage for the years 2014 through 2018 and should not include the
year the partner dissociated because the year of dissociation typically would not
reflect a full year of a partner’s profit share. That calculation results in the following
values:176
CAIG 2014 12.27% 2015 5.94% 2016 10.57% 2017 8.74% 2018 5.87% Average 8.68%
Richards 2014 35.39% 2015 40.99% 2016 33.05% 2017 33.44% 2018 33.38% Average 35.25%
175 JX 1, Ex. C (emphasis added). 176 PTO § II (B)(25)(a).
39 Catalyst, in contrast, argues that Plaintiffs’ PPP should be the average of their
Partner’s Profit Distribution Percentage for the years 2015 through 2019, including
the year the partner dissociated, resulting in the following values:177
CAIG 2015 5.94% 2016 10.57% 2017 8.74% 2018 5.87% 2019 3.83% Average 6.99%
Richards 2015 40.99% 2016 33.05% 2017 33.44% 2018 33.38% 2019 10.90% Average 30.35%
This Court finds that the plain meaning of “the immediately prior 5 years” is
the most recent five years of a partner’s Profit Distribution Percentage, which in this
case means 2015-2019. Limited partnership agreements are a type of contract that
courts construe “in accordance with their terms to give effect to the parties’ intent.
We give words their plain meaning unless it appears that the parties intended a
177 PTO § II (B)(25)(b).
40 special meaning.”178 Nothing in the text or structure of the LPA suggests that the
parties intended the phrase “the immediately prior 5 years” to have any special
meaning.
“Under well-settled case law, Delaware courts look to dictionaries for
assistance in determining the plain meaning of terms which are not defined in a
contract.”179 “Immediately” is given its usual meaning of “without interval of
time.”180 By its plain meaning, “immediately” encompasses the year that a partner
dissociates. To exclude the year of dissociation would permit an “interval of time”
inconsistent with the meaning of the adverb “immediately.”
Moreover, that interpretation is consistent with the Delaware courts’
preference to adopt “an interpretation that harmonizes the provisions in a contract as
opposed to one that creates an inconsistency or surplusage.”181 The LPA expressly
178 Norton v. K-Sea Transp. Partners L.P., 67 A.3d 354, 360 (Del. 2013) (citing In re Nantucket Is. Assocs. Ltd. P'ship Unitholders Litig., 810 A.2d 351, 361 (Del. Ch. 2002); AT&T Corp. v. Lillis, 953 A.2d 241, 252 (Del. 2008)). 179 Lorillard Tobacco, 903 A.2d at 738 (citing Northwestern National Ins. Co. v. Esmark, Inc., 672 A.2d 41, 44 (Del. 1996) (using AMERICAN HERITAGE DICTIONARY (1969) to define “under” as “within the group or classification of” without further comment); Hibbert v. Hollywood Park, Inc., 457 A.2d 339, 343 n.3 (Del. 1983) (using Webster's New International Dictionary (2d ed. unabr.1951) to define “party” without further comment); The Cove on Herring Creek Homeowners' Ass'n v. Riggs, 2005 WL 1252399, at *2 (Del. Ch. May 19, 2005) (applying definition from WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY (1993) to unambiguous, but disputed, language in a contract)). 180 Immediately, Merriam-Webster (2024) https://www.merriam- webster.com/dictionary/immediately (Feb. 2, 2024). 181 GRT Inc. v. Marathon GTF Tech., Ltd., 2012 WL 2356489, at *4 (Del. Ch. June 12, 2012) (citing Eagle Indus., Inc., 702 A.2d at 1232).
41 permits PPP to be calculated based on a shorter time period if a partner dissociates
before the “5th anniversary of becoming a Partner.” 182 Although the parties included
this clarification, they did not specify that the shortened time period would include
only the years in which the dissociated partner served a complete year. In the
absence of any indication otherwise, the Court assumes that the parties intended to
give the word “immediately” its ordinary meaning.
Plaintiffs complain that this result unfairly reduces a partner’s historical profit
share if the partner dissociates before the end of Catalyst’s fiscal year.183 A few brief
responses suffice. First, the Court is charged with interpreting the contract’s plain
meaning, not with assessing the comparative fairness of the proffered interpretations.
Second, the unfairness about which Plaintiffs complain is less than apparent to the
Court. Under the LPA, a partner could choose when in the fiscal year to dissociate
and could weigh within that analysis the benefits of dissociating mid-year against
the downside of an incremental reduction to PPP. In contrast, Catalyst could not
prevent a partner from dissociating and likely would need to adjust its business and
compensation to accommodate that partner’s exit. Therefore, it is reasonable to
conclude that, in adopting the LPA, the partners intended to include within the
182 JX 1, Ex. C. 183 Plaintiffs’ Answering Br. at 32.
42 calculation of PPP the lower Partner’s Profit Distribution Percentage associated with
a partial year’s profit.
B. Enterprise Valuation
In addition to the parties’ disagreements about calculating PDI and PPP, the
parties also dispute the Buyout Formula’s other input: Enterprise Valuation. The
parties disagree as to the meaning of Enterprise Valuation and which of their experts’
calculations was proper under the LPA.
1. Neither party’s expert provided a reliable valuation.
Plaintiffs argue that Catalyst breached the LPA by improperly calculating
Plaintiffs’ buyout price based on a purported Enterprise Valuation that Plaintiffs
argue is inconsistent with the LPA.184 Plaintiffs assert that the Enterprise Valuation
for both Richards and CAIG should be $6,400,000 as set forth in the Egan Report.185
Catalyst argues that Plaintiffs fail to identify support in the evidentiary record
or under the LPA for their proposed Enterprise Valuation.186 Catalyst contends that
calculations for Enterprise Valuation should be based on the 2020 Report, which
184 Plaintiffs’ Opening Br. at 26. 185 JX 61. 186 Defendant’s Answering Br. at 20.
43 valued Catalyst at $871,016 as of the date Richards dissociated and $817,811 as of
the date CAIG dissociated.187
Although neither party focused on the issue, it would be reasonable to
conclude that Plaintiffs bear the burden of proof with respect to Enterprise
Valuation. Plaintiffs advanced this claim as a breach of contract claim, and a
plaintiff generally bears the burden of proving all elements of a breach of contract
claim, including damages.188 On the other hand, the contract itself contemplates that
Catalyst will participate in setting the Buyout Price.189 Plaintiffs therefore could
have argued that the parties shared the burden with respect to Enterprise Valuation,
as in an appraisal case conducted under 8 Del. C. § 262.190 But the question largely
JX 30. The 2020 Report states that Richards’ date of dissociation was October 4, 2019 and 187
CAIG’s date of dissociation was October 21, 2019. Id. 188 In re Cellular Tel. P'ship Litig., 2021 WL 4438046, at *41 (Del. Ch. Sept. 28, 2021) (“The plaintiffs bore the burden of proving each element of the claim by a preponderance of the evidence.”); First State Constr., Inc. v. Thoro-Good's Concrete Co., 2010 WL 1782410, at *3 (Del. Super. May 3, 2010) (“In any breach of contract action, a plaintiff must prove each element by a preponderance of the evidence.”). 189 JX 1 § 8.4(e). 190 Highfields Capital, Ltd. v. AXA Fin., Inc., 939 A.2d 34, 42 (Del. Ch. 2007) (quoting M.G. Bancorp., Inc. v. Le Beau, 737 A.2d 513, 520 (Del. 1999)). See also Merion Cap. L.P. v. Lender Processing Servs., Inc., 2016 WL 7324170, at *12 (Del. Ch. Dec. 16, 2016) (“Each party also bears the burden of proving the constituent elements of its valuation position by a preponderance of the evidence, including the propriety of a particular method, modification, discount, or premium. If both parties fail to meet the preponderance standard on the ultimate question of fair value, the Court is required under the statute to make its own determination.”) (quoting Jesse A. Finkelstein & John D. Hendershot, Appraisal Rights in Mergers & Consolidations, 38–5th C.P.S. §§ IV(H)(3), at A–89 to A–90 (BNA)).
44 is academic because, as explained below, neither side provided a persuasive expert
valuation.
a. The May 25, 2019 Sun Report is the report “on file” for purposes of Section 2.30, and an Enterprise Valuation must follow the methodologies in that report.
Before addressing the specifics of each side’s proffered appraisal report, I first
address the meaning of Enterprise Valuation under the LPA. Recall that a
dissociated partner’s buyout price is calculated by multiplying Catalyst’s Enterprise
Valuation and the partner’s PPP. Enterprise Valuation means:
. . . the appraised value of the Company, as illustrated by and in accordance with the methodology set forth in the Sun Valuation report on file with the Company, as may be updated from time to time, or as may be superseded by an appraisal report following the same methodology issued by another appraisal Company. 191
Given this definition, it is necessary to identify what valuation report was “on file
with the Company” for purposes of this case.192
Catalyst essentially argues the 2020 Report was “on file” because it is the
most recent report prepared by Sun. Catalyst further contends that under the LPA,
Sun was not required to follow its past methodologies when it “updated” its report.193
This interpretation is not a reasonable one. Specifically, it is unreasonable to think
191 JX 1 § 2.30. 192 Id. 193 Defendant’s Opening Br. at 41–43; Defendant’s Answering Br. at 20.
45 that the partners would have agreed to allow Catalyst to obtain a new report after a
partner’s dissociation and use that as the report “on file,” thereby permitting Catalyst
to change valuation methodologies without restraint as long as Sun prepared the new
report.194
The 2020 Sun Report is not the report “on file” because Section 2.30 and
Exhibit C of the LPA, read in conjunction, require the report to be “on file” at the
time of a partner’s dissociation.195 The LPA’s plain language supports this
conclusion, and it is the only reasonable interpretation of the parties’ agreement,
which the Court must read as a whole.196 In Exhibit C, PPP is calculated as 5 years
immediately before the “date of dissociation.”197 This is the only date mentioned in
the Buyout Formula, and it is sensible and consistent to apply the same date to all
elements in the buyout calculation. This is not to say that either side could not obtain
a new valuation for purposes of calculating a buyout. But that new valuation—
whether prepared by Sun or another appraisal company—must follow the same
methodology as the report on file at the date of dissociation.
194 See e.g., Defendant’s Opening Br. at 41–42. 195 JX 1 § 2.30, Ex. C. 196 Norton, 67 A.3d at 360; In re Nantucket Is. Assocs. Ltd. P'ship Unitholders Litig., 810 A.2d at 361; Lillis, 953 A.2d at 252. 197 JX 1, Ex. C.
46 Perhaps even more unreasonably, Plaintiffs argue that an appraisal report
prepared by any appraisal company other than Sun need not follow with the same
degree of precision the methodology employed in the Sun Report “on file.”
Plaintiffs arrive at this interpretation by distinguishing between the LPA’s use of “by
and in accordance with” as compared to its use of “following the same
methodology.” Plaintiffs failed to coherently explain in their briefs and at oral
argument the actual difference they ask this Court to distill from that language.198
Perhaps realizing the hollowness of the proposed distinction, Plaintiffs go on to
contend that the Egan Report nevertheless was prepared in accordance with Sun’s
May 2019 report.199
Accordingly, the report “on file” for purposes of Section 2.30 was the May
25, 2019 Report, which was the most recent Sun valuation prepared before Plaintiffs’
dissociation. Plaintiffs argue that the report “on file” should be the May 16, 2019
draft report, but all the partners agreed to the May 25, 2019 Report and that valuation
was used to calculate partner buy-in at the time. Given these facts, Sun’s May 25,
2019 Report was the report “on file” at the time of dissociation and established the
methodology to be applied to Catalyst’s Enterprise Valuation for purposes of
Plaintiffs’ buyout.
198 Plaintiffs’ Opening Br. at 29–33. 199 Id. at 33–34. Plaintiffs contend that the report on file at the time of dissociation is the draft May 16, 2019 Sun Valuation Report. Id. at 18, 27.
47 b. The 2020 Report is not reliable.
Catalyst urges the Court to adopt as Catalyst’s Enterprise Valuation the 2020
Report prepared by Sun and supported by the testimony of Thomas Theurkauf,
Catalyst’s expert at trial.200 Catalyst asserts that the 2020 Report is the appropriate
valuation for purposes of Plaintiffs’ buyout for four primary reasons.201 First,
Catalyst contends that the 2020 Report was issued by Sun, and the LPA allows the
report “on file” with Catalyst to be updated from “time to time.”202 Second, Catalyst
asserts that the 2020 Report “appraises Catalyst consistent with the methodology of
previous reports Sun issued because all the Sun reports valued Catalyst utilizing the
Adjusted Book Value Method.”203 Third, Catalyst argues that only the 2020 Report
“accounts for Plaintiffs’ respective dissociations and the buyout and profit
distribution related to the dissociations and bonuses owed to the remaining limited
partners.”204 Finally, and with no small degree of ipse dixit, Catalyst argues that the
2020 Report is “on file” because Archer, the Managing Partner, says it is.205
200 Defendant’s Opening Br. at 41–42. 201 Id. 202 Id. at 41 (citing JX1; JX 30). 203 Id. (citing JX 19; JX 22; JX 30). Catalyst argues the 2020 Report follows Sun’s past methodologies while also arguing that the LPA does not require Sun to adhere to its past methodologies, even if it prepares an Enterprise Valuation report after a partner dissociates. As discussed above, that is not a reasonable reading of the LPA. 204 Id. at 41–42 (citing JX 30). 205 Id. at 42 (citing Trial Tr. III at 267–68).
48 The Court finds that the 2020 Report is not reliable for purposes of
determining Catalyst’s Enterprise Valuation for Plaintiffs’ buyout.206 The 2020
Report is litigation-driven. Plaintiffs filed their Complaint on June 5, 2020,207 and
the 2020 Report was prepared well after it was clear that the parties’ business
separation would not be an amicable one. The deductions and manipulations to
Sun’s valuation reflect this reality and ultimately render the report unreliable. Those
deviations are not consistent with the partners’ past practices for valuing Catalyst.
Three primary examples illustrate the point that the 2020 Report is not
consistent with Sun’s past methodology or the LPA. First, the 2020 Report reduces
Catalyst’s projected revenue to account for Plaintiffs’ dissociation, which was not
done in past valuations relied upon by the partners over the course of their
association.208 Theurkauf’s and Catalyst’s attempt to explain this change is
unconvincing, and, more importantly, the deduction is inconsistent with the LPA’s
requirement that Enterprise Valuation follow the methodology of the report “on
file.” Second, the 2020 Report compounds this error by failing to account for
goodwill and Catalyst’s ability to bring in new partners to make up for revenue
206 See JX 30. 207 D.I. No. 1. 208 Plaintiffs’ Opening Br. at 36–37; Trial Tr. IV at 189–99. Compare JX 17 and JX 19 (February 2018 Sun Reports, which did not contemplate any discount for a downward effect due to a partner’s dissociation), with JX 30 (the 2020 Report, which adjusts Enterprise Valuation downward for lost revenue attributable to the dissociating partners).
49 attributable to a dissociating partner.209 The record supports the conclusion that there
was a million dollars in goodwill on Catalyst’s books that the 2020 Report did not
consider when concluding that the brand had no intangible value.210 Instead, the
2020 Report entirely discounts the likelihood that when a partner dissociates, new
partners will join. Third, the 2020 Report treats Plaintiffs’ buyout price as an
accrued liability of the partnership, but that treatment is inconsistent with the LPA.
Under the LPA’s terms, Catalyst had no obligation to buy Plaintiffs’ units.211 Its
choice to do so does not mean it can treat the buyout as a company liability that
reduces the price of Plaintiffs’ units.
c. The Egan Report also is not reliable.
Egan’s report (the “Egan Report”)—which Plaintiffs ask the Court to rely on
in calculating Enterprise Valuation—likewise is not a reliable valuation for several
distinct reasons.212
First, Plaintiffs’ position regarding Catalyst’s Enterprise Valuation has shifted
dramatically over the course of this litigation. Although perhaps not unusual, the
209 Plaintiffs’ Opening Br. at 37–38 (citing Trial Tr. III at 235–40; JX 43; JX 63). 210 Trial Tr. III at 233–235. 211 Plaintiffs’ Opening Br. at 39–40 (citing Trial Tr. IV at 174–76, Trial Tr. III at 213–24, 229–32, Trial Tr. V at 189–90, 200); Plaintiffs’ Answering Br. at 26–27. See JX 69 at CATALYST003997 and JX 70 at CATALYST004015 (emails dated April 30, 2020 to Richards and Bartholomew, respectively, expressing for the first time Catalyst’s intent/agreement to buy back Plaintiffs’ units). See also JX 1 § 8.4(a) (LPA which states that “[i]n the event of the . . . resignation[] of a Partner, the Company is entitled to, but not required, purchase the Partner’s equity at the Buyout Price.”). 212 See JX 61.
50 shift—particularly the doubling of Plaintiffs’ valuation, undermines confidence in
the reliability of Plaintiffs’ expert’s methodology and conclusion. Plaintiffs’
original complaint relied on the May 25, 2019 Sun Report for Enterprise
Valuation.213 At trial, however, Plaintiffs relied on Egan’s valuation, which
concludes Catalyst’s Enterprise Value at the time of Plaintiffs’ dissociation was
$6,400,000, more than double Plaintiffs’ original allegations.214
Moreover, the Egan Report does not, as it must under Section 2.30, follow the
May 25, 2019 Sun Report’s methodology.215 The term “methodology” does not
require a valuation company to ascribe the same weight to the different valuation
approaches as Sun did in its reports. But Section 2.30’s plain terms require the
valuation company to consider the same valuation approaches and to adopt a
consistent approach for deductions and projections. As with the 2020 Report, Egan
fails to follow this requirement of the LPA.
For example, Egan failed to treat the partners’ 2019 PDI as a liability that
Catalyst owed to its partners. Accounting for liabilities that Catalyst owed to the
partners was an element used by Sun in the past when determining Catalyst’s
213 D.I. 1 at ¶ 26 (“According to the Sun Valuation, Enterprise Valuation is $3,000,000.”); JX 22. 214 JX 61. In post-trial briefing and argument, Plaintiffs obliquely offered the May 16, 2019 Sun valuation as an alternative figure. See, e.g., Plaintiffs’ Opening Br. at 27. 215 See JX 1 § 2.30 (“the appraised value of the Company, as illustrated by and in accordance with the methodology set forth in the Sun Valuation report on file with the Company. . .”).
51 Enterprise Valuation.216 But because Plaintiffs contend that a report conducted by
another appraisal company is not required to strictly follow Sun’s past methodology,
Plaintiffs excuse Egan’s omission of this deduction without any principled
explanation as to its appropriateness. The Court finds that the Egan Report violates
the LPA by failing to deduct 2019 PDI as a liability even though past reports had
done so.217
Egan also included within his valuation a “reasonable compensation
adjustment” that he failed to reliably justify in the context of Catalyst’s business or
Sun’s past appraisal methodologies. “The reasonable compensation adjustment
seeks to adjust owner compensation (the limited partners) to a hypothetical amount
intended to represent what the company would pay to a non-owner performing the
same task with the same background.”218 The Egan Report used a lower reasonable
compensation number than that which Sun used in the past, which had the effect of
inflating Catalyst’s appraised value.219 Catalyst is “a small boutique firm,” but the
Egan Report’s reasonable compensation adjustment relied on five publicly traded
216 Defendant’s Opening Br. at 45; JX 19; JX 22. This is distinct from treating a partner’s buyout as a liability which, as previously explained, was not consistent with the LPA. 217 See JX 19; JX 22. 218 Defendant’s Opening Br. at 52 (citing JX 63 at 9) (“Generally, the lower the reasonable compensation number, the higher the value of the company as the EBITDA multiple is conversely related to the valuation analysis’s adjustment for reasonable compensation.”). 219 Id. at 53 (citing JX 61 at 17).
52 companies that were 8 to 290 times Catalyst’s size.220 The Egan Report’s reasonable
compensation adjustment artificially inflates Catalyst’s Enterprise Valuation and, as
such, contributes to the Report’s lack of reliability.
d. The May 25, 2019 appraisal was accepted by all partners and represents Catalyst’s “market” valuation.
Having concluded that neither party provided persuasive expert testimony
supporting their proposed Enterprise Valuation, the Court is left to determine how
to reliably calculate Catalyst’s Enterprise Valuation for purposes of Plaintiffs’
buyout price. The most reliable figure is Sun’s May 25, 2019 valuation because: (i)
all Catalyst’s partners accepted it and relied upon it for purposes of determining a
new partner’s buy-in, (ii) it was obtained close in time to Plaintiffs’ dissociations,
and (iii) it was not manipulated by the parties’ unreasonable litigation-driven
positions.
Reliance on this market-tested valuation is consistent with Delaware
precedent. The Delaware Supreme Court provides guidance “and regularly rests its
appraisal analysis on the premise that when a transaction price represents an
unhindered, informed and competitive market valuation, that price ‘is at least first
among equals of valuation methodologies in deciding fair value.’”221 Although this
220 JX 61 at 17; Defendant’s Opening Br. at 52. 221 In re Appraisal of Jarden Corp., 2019 WL 3244085, at *23 (Del. Ch. July 19, 2019), on reargument in part sub nom. In re Jarden Corp., 2019 WL 4464636 (Del. Ch. Sept. 16, 2019), and aff'd sub nom. Fir Tree Value Master Fund, LP v. Jarden Corp., 236 A.3d 313 (Del. 2020) (quoting 53 is not an appraisal case, the principle holds; a recent valuation on which the parties
relied to make business decisions before the litigation arose is representative of a
“competitive market valuation” existing at the time Plaintiffs dissociated. Neither
party has offered a more reliable calculation of Catalyst’s Enterprise Valuation.
Reliance on this report also is in harmony with the LPA, which defines
Enterprise Valuation as the Company’s appraised value as “illustrated by” the
“report on file with the Company, as may be updated from time to time, or as may
be superseded by” another company’s report “following the same methodology.” 222
For the reasons explained above, the 2020 Report did not properly update the report
on file, and Egan’s Report did not supersede the report on file. Therefore, under the
LPA’s plain terms, Enterprise Valuation for purposes of Plaintiffs’ buyout is the
figure in the May 25, 2019 Report.
2. The Court does not need to resolve Plaintiffs’ objection to Paulikens’ report and testimony.
Plaintiffs objected before and during trial to the report and testimony of
Catalyst’s rebuttal expert, Randall Paulikens, “to the extent he offer[ed] a calculation
of Enterprise Valuation or attempt[ed] to analyze the [2020 Report] because he [was]
and citing In re Appraisal of AOL Inc., 2018 WL 1037450, at *1 (Del. Ch. Feb. 23, 2018); In re Appraisal of PetSmart, Inc., 2017 WL 2303599, at *27 (Del. Ch. May 26, 2017) (collecting cases)). 222 JX 1 § 2.30.
54 a rebuttal expert who offered no opinion by the applicable deadline in the CMO.”223
Catalyst responded that Paulikens’ report and testimony should be considered in full
because his testimony was offered to rebut Egan’s valuation and testimony.224
Further, Catalyst contended that Paulikens did not provide any expert opinion as to
Catalyst’s Enterprise Valuation.225 The Court reserved decision and allowed
Paulikens to testify. Now, this issue is moot because the Court does not rely on
either of the parties’ experts or on any separate valuation Paulikens purported to
offer.
3. CAIG’s Capital Account Balance
In addition to buyout price, CAIG contends it had a positive capital account
balance at the time it dissociated and that Catalyst is required to pay that amount
under Section 8.5(a)(1)(ii) of the LPA. Because the parties do not dispute the
balance in Richards’ capital account when he dissociated,226 only CAIG’s account
balance is at issue. Unlike the determination of buyout price, this dispute requires a
straightforward determination of whether CAIG’s capital account balance was
greater than zero when it dissociated from Catalyst.227 Like the other forms of
223 Plaintiffs’ Opening Br. at 41–47; PTO § XI(19). 224 Defendant’s Answering Br. at 28–31; PTO § XI(20). 225 Defendant’s Answering Br. at 28–31. 226 PTO § II(B)(30). 227 JX 1 § 8.5(a)(1)(ii) (“Determination of Buyout Price. The Buyout Price shall be calculated in accordance with Exhibit C, subject to adjustment as set forth in Section 8.4 and this Section 8.5: 55 recovery sought in this action, CAIG must prove by a preponderance of evidence
that it is entitled to the positive balance that it demands.
The parties disagree as to what evidence the Court should rely on to determine
whether CAIG possessed a positive balance in its capital account at the time of its
dissociation. CAIG encourages this Court to adopt the account balance reflected in
the 2020 Sun Report—$79,181.228 According to CAIG, because Sun attributed a
positive balance to CAIG’s capital account, and because Catalyst relies on the 2020
Sun Report in other respects, Catalyst effectively admitted that CAIG possessed a
positive capital account balance upon dissociation.229 Catalyst, on the other hand,
points to CAIG’s 2019 Schedule K-1, which reflects a capital account balance of
$0.230
Delaware courts previously have relied on a company’s tax returns to resolve
similar questions. In re Dissolution of Jeffco Management, LLC231 is instructive.
There, the Court of Chancery held that a company’s Schedule K-1 was a “reliable
indicator” as to whether a partner possessed a capital account balance.232 That is so
(1) With respect to an Initial Partner . . . (ii) the Initial Partner’s positive capital account balance (excluding the Original Capital Contribution) as of the date of Dissociation[.]”). 228 JX 30 at 18. 229 Plaintiffs’ Answering Br. at 2. 230 Defendant’s Opening Br. at 27; JX 90 at 1. 231 In re Dissolution of Jeffco Mgmt., LLC, 2021 WL 3611788, at *6 (Del. Ch. Aug. 16, 2021). 232 Id.
56 because tax returns are signed and submitted under penalty of perjury.233 Moreover,
although the partnership itself may be responsible for preparing Schedule K-1s,
unless a partner can show that it was denied access to the tax documents, any failure
to dispute the information within the document signals a partner’s acknowledgment
that the information is accurate.234 CAIG offers no caselaw to the contrary.
The facts here are analogous to those in Jeffco. CAIG’s 2019 Schedule K-1
confirms that CAIG did not possess a positive capital account balance upon its
dissociation in 2019.235 Testimony at trial also established that CAIG never: (i)
disputed the contents of the 2019 K-1, (ii) sought to amend the 2019 K-1, or (iii)
notified Catalyst’s accountants that it believed the 2019 K-1 was incorrect.236
Although Bartholomew testified that he relied on Catalyst to prepare CAIG’s K-
1s,237 this position is unconvincing because, as explained above, if CAIG believed
the K-1 reflected incorrect information, it should have requested changes to the
information.
CAIG also contends that because Catalyst relies on the 2020 Sun Report for
its Enterprise Valuation argument, it should not be able to distance itself from the
233 Id. 234 Id. 235 JX 90 at 1; Trial Tr. IV at 142–143. 236 Trial Tr. I at 118. 237 JX 90; see also Trial Tr. I at 116–118.
57 same document’s account balance information.238 But this argument misses the
mark for two reasons. First, this Court already has declined to rely on the 2020
Report. Second, CAIG argues that the positive capital account balance listed in the
2020 Sun Report is an admission by a party opponent and therefore sufficient to
satisfy CAIG’s burden of proof.239 A party opponent’s admission may make a piece
of evidence admissible under the hearsay rules, but it does not address how relevant,
probative, or ultimately convincing a piece of evidence is in meeting the burden of
proof.240
Accordingly, this Court follows the Court of Chancery’s sound reasoning in
Jeffco.241 CAIG’s failure to amend or request an amendment to the 2019 K-1 belies
CAIG’s argument that the K-1 is inaccurate. Because CAIG’s 2019 K-1 confirms
that CAIG did not possess a positive balance upon its dissociation from Catalyst,
and CAIG fails to convincingly identify other evidence that could serve to refute the
K-1, this Court adopts the 2019 K-1 as the most reliable evidence of whether CAIG
possessed a positive balance upon dissociation. Accordingly, CAIG has failed to
prove that it is entitled to any additional funds relating to this claim.
238 Plaintiffs’ Answering Br. at 2. 239 Id. 240 D.R.E. 801(d)(2)(A). 241 Cede & Co. v. Technicolor, Inc., 1990 WL 161084, at *25 (Del. Ch. Oct. 19, 1990).
58 4. Fee Shifting
Finally, Plaintiffs advance several reasons to support their argument that
Catalyst engaged in bad faith litigation that warrants fee shifting.242 First, Plaintiffs
argue that because Catalyst’s buyout letters failed to provide an Enterprise Valuation
and buyout calculation, Catalyst acted in bad faith.243 Catalyst avers that the “bad
faith” exception cannot apply because it sent Plaintiffs the buyout letters nearly two
months before litigation commenced.244 Second, Plaintiffs contend that Catalyst
acted in bad faith because it obtained and relied upon the 2020 Sun Report.245 In
response, Catalyst asserts that its reliance on the 2020 Sun Report merely reflects
the two sides’ disagreement regarding the merits of this suit.246 Third, Plaintiffs
argue that Catalyst deliberately created the LIT and Difficult Search Modifications
in bad faith to target Richards.247 Catalyst contends that this argument is
“disingenuous” because Plaintiffs participated in all relevant meetings and votes.248
Further, Catalyst asserts that its implementation of modifications permitted by the
242 Plaintiffs’ Opening Br. at 37–40. 243 Id. 244 Defendant’s Opening Br. at 36. 245 Plaintiffs’ Opening Br. at 48. 246 Defendant’s Opening Br. at 37. 247 Plaintiffs’ Opening Br. at 48–49. 248 Defendant’s Opening Br. at 37–38.
59 LPA cannot result in a finding of bad faith.249 Finally, Plaintiffs assert that John and
Alyson Archer testified insincerely, pointing to differences between Richards’ and
John Archer’s testimony regarding the “Genocea” search status report.250
None of Plaintiffs’ arguments offers a convincing basis for fee shifting.
Delaware follows the American Rule, under which litigants generally are
responsible for paying their own litigation costs.251 Courts recognize “limited
equitable exceptions” to the American Rule, including one for a party’s “bad faith”
conduct throughout litigation.252 Although there exists no all-encompassing
definition of “bad faith” conduct, Delaware courts have awarded attorneys’ fees
where a party has “unnecessarily prolonged or delayed litigation, falsified records,
or knowingly asserted frivolous claims.”253 In Delaware, the “bad faith” exception
applies only in “extraordinary cases.”254 Its purpose is “to deter abusive litigation
and protect the integrity of the judicial process.”255 To prevent the exception from
249 Id. at 38. 250 Plaintiffs’ Opening Br. at 49. 251 Mahani v. Edix Media Group, Inc., 935 A.2d 242, 245 (Del. 2007). 252 Montgomery Cellular Holding Co., Inc. v. Dobler, 880 A.2d 206, 227 (Del. 2005). 253 Johnston, 720 A.2d at 546. 254 Brice v. State Dept. of Correction, 704 A.2d 1176, 1179 (Del. 1998). 255 Montgomery, 880 A.2d at 227.
60 swallowing the rule, Delaware courts require a moving party to prove bad faith with
“clear evidence.”256
Plaintiffs have failed to present clear evidence that Catalyst’s conduct rose to
the level of bad-faith litigation tactics. Plaintiffs and Catalyst each prevailed in
different portions of this litigation. Plaintiffs’ arguments reflect nothing more than
each party taking opposing positions throughout litigation and do not bring this case
within the scope of “extraordinary cases” that support a finding of bad faith.
Accordingly, Plaintiffs’ request for attorneys’ fees is denied.
IV. CONCLUSION
This Court enters judgment in favor of Plaintiffs to the extent and on the basis
set forth herein. If there are any open issues not addressed by this post-trial opinion,
the parties shall notify the Court by letter within five days. If no such letter is filed,
the parties shall confer and prepare a proposed form of final order within 20 days,
setting forth the principal amount to which each Plaintiff is entitled based on the
Court’s rulings, along with pre- and post-judgment interest. The appeal period for
this post-trial opinion shall not begin to run until the final order is entered as an order
of the Court.
256 Arbitrium (Cayman Is.) Handels AG v. Johnston, 705 A.2d 225, 232 (Del. Ch. 1997).
Related
Cite This Page — Counsel Stack
Catalyst Advisors Investors Global Inc. v. Catalyst Advisors, L.P., Counsel Stack Legal Research, https://law.counselstack.com/opinion/catalyst-advisors-investors-global-inc-v-catalyst-advisors-lp-delsuperct-2024.