Gb-sp Holdings LLC v. Wayne R. Walker
This text of Gb-sp Holdings LLC v. Wayne R. Walker (Gb-sp Holdings LLC v. Wayne R. Walker) is published on Counsel Stack Legal Research, covering Court of Chancery of Delaware primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
GB-SP HOLDINGS, LLC, on behalf of itself ) and derivatively on behalf of ) BRIDGESTREET WORLDWIDE, INC., ) and DONAL KINSELLA, ) ) Plaintiffs, ) ) v. ) C.A. No. 9413-VCF ) WAYNE R. WALKER, DAVID ) ORLOFSKY, KEITH R. ALBRIGHT, ) SEAN WORKER, LEE CURTIS, EUGENE ) I. DAVIS, ANTHONY J. LACIVITA, ) MATT DOHENY, BRAD SCHER, VERSA ) CAPITAL MANAGEMENT, LLC, ) DOMUS BWW FUNDING, LLC, and ) BRIDGESTREET WORLDWIDE, INC., ) ) Defendants, ) ) and ) ) BRIDGESTREET WORLDWIDE, INC., ) ) Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: January 24, 2024 Date Decided: November 15, 2024
Paul D. Brown, CHIPMAN BROWN CICERO & COLE, LLP, Wilmington, Delaware; Robert O’Hare, Jr. Michael Zarocostas, Andrew C. Levitt, O’HARE PARNAGIAN LLP, New York, New York; Attorneys for Plaintiffs GB-SP Holdings, LLC and Donal Kinsella. Rebeca L. Butcher, Jennifer L. Cree, LANDIS RATH & COBB LLP, Wilmington, Delaware; Neil A. Steiner, DECHERT LLP, New York, New York; Attorneys for Defendants Versa Capital Management, LLC and Domus BWW Funding, LLC.
Sean J. Bellew, BELLEW, LLC, Wilmington, Delaware; Attorney for Wayne R. Walker, David Orlofsky, Keith R. Albright, Sean Worker, Lee Curtis, Eugene I. Davis, Anthony J. LaCivita, Matthew Doheny, Bradley E. Scher, and BridgeStreet Worldwide, Inc.
FIORAVANTI, Vice Chancellor In the early 2010s, BridgeStreet WorldWide, Inc. (“BSW” or the “Company”)
was deep in debt to its lender syndicate. The Company initiated an ultimately
unsuccessful sale process, but one of the bidders for the Company had another idea:
to purchase the Company’s senior secured debt from its existing creditors, with the
ultimate goal of acquiring the entire Company. After BSW defaulted on its debt
obligations, it entered into a forbearance agreement with its new creditor. During
negotiations of the forbearance agreement, the Company’s board refused to honor
the contractual rights of its largest stockholder under a shareholders agreement to
have its designee elected to the Company’s board of directors. The Company and
the board also refused to provide requested information to the stockholder, again in
violation of the shareholders agreement.
As part of the forbearance agreement, the creditor agreed to indemnify the
directors for claims asserted by the Company’s largest stockholder. Senior
management, which included two directors, secured continued employment and
bonuses from the creditor. In addition, the four ostensibly “independent” directors
agreed not to stand for re-election—effectively resigning as part of the transaction.
A few weeks later, five new directors were elected to join the board. Four of
the new directors required the approval of the creditor; the fifth new director was the
designee of the Company’s largest stockholder that had been demanding that he be
seated on the board. The next month, the Company violated the financial covenants in the forbearance agreement. Following months of negotiations and in consultation
with its advisers, the board approved a consensual foreclosure with the creditor. In
the foreclosure, the Company transferred all of the equity of its operating
subsidiaries to the creditor in exchange for cancellation of approximately $38
million of the remaining $46 million owed to the creditor.
In this action, the Company’s largest stockholder and its director designee
assert a variety of claims. They allege, as headline claims, that the Company and
certain directors breached the shareholders agreement and that the Company’s
directors breached their fiduciary duties in approving the forbearance agreement and
the consensual foreclosure. The plaintiffs further allege that the creditor aided and
abetted the directors’ breach of fiduciary duty. The creditor has asserted a
counterclaim against the stockholder plaintiff, alleging that the stockholder breached
a pledge agreement by filing and maintaining this action.
In this post-trial opinion, the court concludes that the Company and certain
directors breached the shareholders agreement, and the stockholder plaintiff is
entitled to nominal damages for proving those breaches. The court also concludes
that the directors who approved the forbearance agreement breached their fiduciary
duty of loyalty, and that the creditor aided and abetted that breach. As a remedy for
the breach of fiduciary duty, the directors who approved the forbearance agreement
must disgorge and return to the Company all amounts paid to them or their counsel
2 as indemnification from the creditor and management bonuses approved in
connection with the transaction. And, as a remedy for the creditor’s aiding and
abetting that breach, its debt is equitably subordinated as to any amounts collected
or received by or on behalf of the Company from the directors as a result of that
disgorgement.
Finally, the court concludes that the consensual foreclosure was not the
product of a fiduciary breach, and that the stockholder plaintiff did not breach the
pledge agreement by filing this action.
I. BACKGROUND
These are the facts as the court finds them after trial.1
This case involves two groups of director defendants. Between December 24,
2012 and October 11, 2013, BSW’s board of directors comprised Lee Curtis, Eugene
I. Davis, Matthew Doheny, Anthony J. LaCivita, Bradley E. Scher, and Sean Worker
(the “Pre-Forbearance Board” or the “Pre-Forbearance Directors”).2 After October
1 Other factual findings are contained in the analysis of the claims. The record consists of 253 joint trial exhibits, trial testimony from five fact witnesses and one expert, deposition testimony from seven fact witnesses, and 68 stipulations of fact in the pretrial order. Trial exhibits are cited as “JX”; stipulated facts in the pre-trial order are cited as “PTO”; and references to the docket are cited as “Dkt.,” with each followed by the relevant section, page, paragraph, exhibit, or docket number. Citations to testimony presented at trial are in the form “Tr. # (X)” with “X” representing the surname of the speaker, if not clear from the text. 2 PTO ¶¶ 8–13.
3 11, 2013, the BSW board comprised Curtis, Worker, Keith R. Albright, 3 Donal
Kinsella, David Orlofsky, and Wayne R. Walker (the “Post-Forbearance Board” or
the “Post-Forbearance Directors,” and together with the Pre-Forbearance Directors,
the “Director Defendants”).4 Worker, BSW’s CEO, and Curtis, BSW’s President,
served on the BSW board at all relevant times.5
A. The Company’s Business BSW was a Delaware corporation that serviced apartments and corporate
housing in thousands of locations around the world through its various operating
3 On June 22, 2023, counsel for the Director Defendants filed a suggestion of death advising the court that Albright had died during the pendency of this litigation. Dkt. 266. Court of Chancery Rule 25(a)(1) provides that, if a party dies during the pendency of litigation, a motion for substitution must be filed within 90 days after a suggestion of death is filed on record. If a motion for substitution is not filed within 90 days, “the action by or against the decedent must be dismissed.” Ct. Ch. R. 25(a)(1). After counsel filed a suggestion of death, no motion for substitution was filed. Accordingly, the claims against Albright are dismissed with prejudice. Wilson v. Joma, Inc., 1989 WL 68304, at *1 (Del. May 19, 1989); Smith v. Pritzker, 1981 WL 88243, at *1 (Del. Ch. Oct. 20, 1981). 4 PTO ¶¶ 8–9, 14–16, 47.
Free access — add to your briefcase to read the full text and ask questions with AI
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
GB-SP HOLDINGS, LLC, on behalf of itself ) and derivatively on behalf of ) BRIDGESTREET WORLDWIDE, INC., ) and DONAL KINSELLA, ) ) Plaintiffs, ) ) v. ) C.A. No. 9413-VCF ) WAYNE R. WALKER, DAVID ) ORLOFSKY, KEITH R. ALBRIGHT, ) SEAN WORKER, LEE CURTIS, EUGENE ) I. DAVIS, ANTHONY J. LACIVITA, ) MATT DOHENY, BRAD SCHER, VERSA ) CAPITAL MANAGEMENT, LLC, ) DOMUS BWW FUNDING, LLC, and ) BRIDGESTREET WORLDWIDE, INC., ) ) Defendants, ) ) and ) ) BRIDGESTREET WORLDWIDE, INC., ) ) Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: January 24, 2024 Date Decided: November 15, 2024
Paul D. Brown, CHIPMAN BROWN CICERO & COLE, LLP, Wilmington, Delaware; Robert O’Hare, Jr. Michael Zarocostas, Andrew C. Levitt, O’HARE PARNAGIAN LLP, New York, New York; Attorneys for Plaintiffs GB-SP Holdings, LLC and Donal Kinsella. Rebeca L. Butcher, Jennifer L. Cree, LANDIS RATH & COBB LLP, Wilmington, Delaware; Neil A. Steiner, DECHERT LLP, New York, New York; Attorneys for Defendants Versa Capital Management, LLC and Domus BWW Funding, LLC.
Sean J. Bellew, BELLEW, LLC, Wilmington, Delaware; Attorney for Wayne R. Walker, David Orlofsky, Keith R. Albright, Sean Worker, Lee Curtis, Eugene I. Davis, Anthony J. LaCivita, Matthew Doheny, Bradley E. Scher, and BridgeStreet Worldwide, Inc.
FIORAVANTI, Vice Chancellor In the early 2010s, BridgeStreet WorldWide, Inc. (“BSW” or the “Company”)
was deep in debt to its lender syndicate. The Company initiated an ultimately
unsuccessful sale process, but one of the bidders for the Company had another idea:
to purchase the Company’s senior secured debt from its existing creditors, with the
ultimate goal of acquiring the entire Company. After BSW defaulted on its debt
obligations, it entered into a forbearance agreement with its new creditor. During
negotiations of the forbearance agreement, the Company’s board refused to honor
the contractual rights of its largest stockholder under a shareholders agreement to
have its designee elected to the Company’s board of directors. The Company and
the board also refused to provide requested information to the stockholder, again in
violation of the shareholders agreement.
As part of the forbearance agreement, the creditor agreed to indemnify the
directors for claims asserted by the Company’s largest stockholder. Senior
management, which included two directors, secured continued employment and
bonuses from the creditor. In addition, the four ostensibly “independent” directors
agreed not to stand for re-election—effectively resigning as part of the transaction.
A few weeks later, five new directors were elected to join the board. Four of
the new directors required the approval of the creditor; the fifth new director was the
designee of the Company’s largest stockholder that had been demanding that he be
seated on the board. The next month, the Company violated the financial covenants in the forbearance agreement. Following months of negotiations and in consultation
with its advisers, the board approved a consensual foreclosure with the creditor. In
the foreclosure, the Company transferred all of the equity of its operating
subsidiaries to the creditor in exchange for cancellation of approximately $38
million of the remaining $46 million owed to the creditor.
In this action, the Company’s largest stockholder and its director designee
assert a variety of claims. They allege, as headline claims, that the Company and
certain directors breached the shareholders agreement and that the Company’s
directors breached their fiduciary duties in approving the forbearance agreement and
the consensual foreclosure. The plaintiffs further allege that the creditor aided and
abetted the directors’ breach of fiduciary duty. The creditor has asserted a
counterclaim against the stockholder plaintiff, alleging that the stockholder breached
a pledge agreement by filing and maintaining this action.
In this post-trial opinion, the court concludes that the Company and certain
directors breached the shareholders agreement, and the stockholder plaintiff is
entitled to nominal damages for proving those breaches. The court also concludes
that the directors who approved the forbearance agreement breached their fiduciary
duty of loyalty, and that the creditor aided and abetted that breach. As a remedy for
the breach of fiduciary duty, the directors who approved the forbearance agreement
must disgorge and return to the Company all amounts paid to them or their counsel
2 as indemnification from the creditor and management bonuses approved in
connection with the transaction. And, as a remedy for the creditor’s aiding and
abetting that breach, its debt is equitably subordinated as to any amounts collected
or received by or on behalf of the Company from the directors as a result of that
disgorgement.
Finally, the court concludes that the consensual foreclosure was not the
product of a fiduciary breach, and that the stockholder plaintiff did not breach the
pledge agreement by filing this action.
I. BACKGROUND
These are the facts as the court finds them after trial.1
This case involves two groups of director defendants. Between December 24,
2012 and October 11, 2013, BSW’s board of directors comprised Lee Curtis, Eugene
I. Davis, Matthew Doheny, Anthony J. LaCivita, Bradley E. Scher, and Sean Worker
(the “Pre-Forbearance Board” or the “Pre-Forbearance Directors”).2 After October
1 Other factual findings are contained in the analysis of the claims. The record consists of 253 joint trial exhibits, trial testimony from five fact witnesses and one expert, deposition testimony from seven fact witnesses, and 68 stipulations of fact in the pretrial order. Trial exhibits are cited as “JX”; stipulated facts in the pre-trial order are cited as “PTO”; and references to the docket are cited as “Dkt.,” with each followed by the relevant section, page, paragraph, exhibit, or docket number. Citations to testimony presented at trial are in the form “Tr. # (X)” with “X” representing the surname of the speaker, if not clear from the text. 2 PTO ¶¶ 8–13.
3 11, 2013, the BSW board comprised Curtis, Worker, Keith R. Albright, 3 Donal
Kinsella, David Orlofsky, and Wayne R. Walker (the “Post-Forbearance Board” or
the “Post-Forbearance Directors,” and together with the Pre-Forbearance Directors,
the “Director Defendants”).4 Worker, BSW’s CEO, and Curtis, BSW’s President,
served on the BSW board at all relevant times.5
A. The Company’s Business BSW was a Delaware corporation that serviced apartments and corporate
housing in thousands of locations around the world through its various operating
3 On June 22, 2023, counsel for the Director Defendants filed a suggestion of death advising the court that Albright had died during the pendency of this litigation. Dkt. 266. Court of Chancery Rule 25(a)(1) provides that, if a party dies during the pendency of litigation, a motion for substitution must be filed within 90 days after a suggestion of death is filed on record. If a motion for substitution is not filed within 90 days, “the action by or against the decedent must be dismissed.” Ct. Ch. R. 25(a)(1). After counsel filed a suggestion of death, no motion for substitution was filed. Accordingly, the claims against Albright are dismissed with prejudice. Wilson v. Joma, Inc., 1989 WL 68304, at *1 (Del. May 19, 1989); Smith v. Pritzker, 1981 WL 88243, at *1 (Del. Ch. Oct. 20, 1981). 4 PTO ¶¶ 8–9, 14–16, 47. Paul Seitz was also elected to the board on October 11, 2013, but resigned shortly thereafter for reasons not explained in the record. Id. ¶¶ 47–48. Seitz is not a defendant in this action. 5 Id. ¶¶ 8–9.
4 subsidiaries.6 BSW did not own any real estate.7 Rather, BSW held an inventory
mix of short, medium, and long-term leased units. 8
In 2007, BSW, then known as Amkadian Holdings, Inc., entered into a $30
million credit agreement with a lender syndicate led by Credit Suisse, Cayman
Islands Branch (“Credit Suisse”). 9 Credit Suisse and the lenders obtained a
first-priority lien on substantially all of BSW’s assets, including the capital stock of
BSW’s subsidiaries, with the exclusion of certain foreign subsidiaries.10 In
connection with the credit agreement, Credit Suisse and certain BSW stockholders
entered into a pledge agreement (the “Pledge Agreement”), pledging the
stockholders’ shares as collateral for the loan. 11 The Pledge Agreement appointed
Credit Suisse as attorney-in-fact for the pledgors and gave Credit Suisse the right
6 Id. ¶ 3. BSW filed its certificate of dissolution on March 4, 2014. The court may take judicial notice of filings with the Delaware Secretary of State. See Swift v. Hous. Wire & Cable Co., 2021 WL 5763903, at *2 n.14 (Del. Ch. Dec. 3, 2021); D.R.E. 201(b)(2) (“The court may judicially notice a fact that is not subject to reasonable dispute because it . . . can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned.”); id. at 201(c)–(d) (“The court . . . may take judicial notice on its own . . . at any stage of the proceeding.”). 7 Tr. 441:1 (Halpern). 8 JX 11 at 7; Tr. 441:2–10 (Halpern). 9 JX 4. 10 Id. §§ 4.1(j), 6.8, 6.12(b). 11 JX 6 § 2.1; but see JX 38 at 6 (“CS does not have a pledge of 100% of the equity interests of the Borrower as a result of the issuance of equity pursuant to the Shareholders Agreement to certain officers and directors which were not pledged in favor of the lenders.”).
5 upon an event of default under the credit agreement “to commence and prosecute
any and all suits, actions or proceedings at law or in equity in any court of competent
jurisdiction to collect or otherwise realize on all or any of the Collateral or to enforce
any rights in respect of any Collateral” and “to settle, compromise, compound, adjust
or defend any claims, actions, suits or proceedings relating to all or any of the
Collateral.”12
B. BSW’s Debt Restructuring In January 2011, BSW restructured its $30 million credit facility and entered
into an amended and restated credit agreement with Credit Suisse (the “Credit
Agreement”).13 In connection with the restructuring, GB-SP Holdings, LLC
(“GB-SP”) acquired 1,470 shares of BSW’s Class A common stock, which
represented more than 60% of BSW’s outstanding common stock.14 At that time,
GB-SP executed a joinder agreement (the “Joinder Agreement”) and became a party
to the Pledge Agreement, which caused GB-SP to pledge its shares of BSW common
12 JX 6 §§ 6.1(a)(i)(C)–(D). The appointment is coupled with an interest and is irrevocable. Id. § 6.2. Collateral is defined as “the property of the Pledgors described in Section 2.1 in which Security Interests are granted to the Agent for the benefit of the Secured Parties.” Id. § 1.3. 13 JX 8; PTO ¶ 5. 14 JX 1 at 1; PTO ¶ 6.
6 stock as collateral. 15 GB-SP also executed an irrevocable proxy (the “Proxy”),
which appointed the Company’s board of directors
as [GB-SP’s] proxy to vote all the Shares . . . now owned or hereafter acquired, and to exercise all powers which [GB-SP] would be entitled to exercise if personally present, on all matters upon which [GB-SP] may be entitled to vote or act at any annual or special meeting of shareholders of the Company . . . and to sign any written consent of shareholders on [GB-SP’s] behalf to vote or otherwise act on [GB-SP’s] behalf with respect to all of the Shares in lieu of any annual or special meeting of shareholders.16
BSW and its then-stockholders, including GB-SP, entered into a shareholders
agreement (the “Shareholders Agreement”) as part of the restructuring.17 The
Shareholders Agreement dictated stockholder information rights, stockholder voting
rights, and board composition. Section 2.2 required the Company to “furnish to each
Shareholder . . . such information relating to the financial condition, business,
prospects or corporate affairs of the Company as that such Shareholder . . . may from
15 PTO ¶ 5; JX 9. Under the Joinder Agreement, GB-SP agreed that it “pledges, assigns, transfers and grants to [Credit Suisse] . . . a continuing security interest in and Lien on all of its right, title and interest in, to and under the Collateral[.]” JX 9 at 1. GB-SP also agreed that it would “assume[] all obligations and liabilities of a Pledgor under the Pledge [] Agreement.” Id. 16 JX 7. The Proxy was given “in consideration of the restructuring of the Company and the agreement of the Senior Lenders . . . to renew their outstanding credit facilities.” Id. Further, GB-SP expressly agreed that the Proxy “shall be irrevocable and is coupled with an interest and shall remain in place until payment in full of all obligations” BSW had under any senior credit agreement. Id. JX 1. No party has raised a challenge to the validity of any provision of the Shareholders 17
Agreement.
7 time to time reasonably request.” 18 Section 3.3(a) established a board consisting “of
not more than seven (7) members.”19 The seven directors consisted of one director
designated by GB-SP (the “GB-SP Director”), the CEO and President (the
“Management Directors”), and four independent directors designated collectively by
the GB-SP director and the Management Directors, subject to approval by the senior
lenders under the Credit Agreement.20 Each BSW stockholder was required to “vote
all of its Voting Stock and take all other necessary or desirable actions within its
control (whether in the capacity of stockholder, director, member of the executive
committee or officer of the Company or otherwise)” to implement that structure.21
Section 3.3(c) delineated certain qualifications that individuals must meet to serve
as directors.22
The Shareholders Agreement was amended on September 20, 2011.23 Curtis,
Doheny, LaCivita, Scher, and Worker each executed the amendment as a
18 Id. § 2.2. 19 Id. § 3.3(a)(i). 20 Id. §§ 3.3(a)(ii)(A)–(C). 21 Id. § 3.3(a). Section 3.6(d) granted the GB-SP Director and the Management Directors the right to select and appoint one independent director to serve as chairman of the board, subject to the lenders’ approval. Id. § 3.6(d). 22 Id. § 3.3(c). 23 JX 10.
8 “shareholder and director.” 24 The amendment revised the director qualifications in
Section 3.3(c), but otherwise maintained the terms and provisions of the original
agreement.25
C. BSW’s Financial Distress and Quest for Strategic Alternatives
Shortly after the January 2011 restructuring, BSW began looking for a
strategic purchaser. 26 BSW retained Houlihan Lokey (“Houlihan”) in November
2011 to market the Company to potential buyers.27 Before embarking on a broad
sale process, Houlihan approached Oakwood Worldwide (“Oakwood”), BSW’s
most logical strategic acquirer.28 In January 2012, Oakwood submitted a
non-binding letter of intent (“LOI”) to purchase BSW for $25 million in cash.29 The
Pre-Forbearance Board rejected the offer as insufficient to pre-empt a broader
marketing process and instructed Houlihan to seek other buyers.30 Houlihan
contacted 75 financial sponsors and 17 strategic buyers.31 Thirty-one financial
sponsors signed non-disclosure agreements (an “NDA”) and received a confidential
24 Id. at 3–8. Curtis executed the amendment on behalf of GB-SP pursuant to the Proxy. Id. at 3. 25 Id. at 1–2. 26 Tr. 784:2–18 (Worker). 27 PTO ¶ 19; JX 72 at 2. 28 JX 72 at 2. 29 Id. 30 Id. 31 Id.
9 information memorandum (“CIM”). Two private equity firms—Versa Capital
Management LLC (“Versa”) and H.I.G. Capital (“HIG”)—each submitted a
non-binding LOI.32 Of the 17 strategic buyers, six signed an NDA and received a
CIM. 33 Oakwood was the only potential strategic buyer to submit a non-binding
LOI. 34
HIG made the highest offer, bidding $42 million in cash and $5 million in a
note payable with a six-year maturity.35 Following due diligence, HIG rescinded its
offer, noting that its financial diligence had revealed a less attractive value
proposition than initially believed.36 The Pre-Forbearance Board then directed
Houlihan to re-engage with both Oakwood and Versa.37 Oakwood, which had just
acquired Marriott ExecuStay, was not interested in pursuing another acquisition at
that time. 38 Versa, on the other hand, resubmitted a non-binding LOI for $35 million,
after which the parties entered into an exclusivity agreement in July 2012. 39 After a
thorough diligence process, Versa submitted a revised offer in October 2012 to
32 Id. 33 Id. 34 Id. 35 Id. at 3. 36 Id. at 7. 37 Id. 38 Id. 39 Id.
10 acquire BSW and its operating subsidiaries for $30 million free of debt.40 In
December 2012, Versa revised its offer to $30.5 million, and the parties entered into
another non-binding LOI.41 Thereafter, the parties were unable to agree on a
purchase price or deal structure, and Versa walked away from an outright purchase
of the Company.42 On December 31, 2012, BSW failed to make its interest and
principal payments under the Credit Agreement. 43
D. Kinsella Acquires GB-SP In July 2012, a company owned by Kinsella, IEOT Holdings LLC (“IEOT”),
acquired GB-SP in satisfaction of a €1,262,356 judgment against GB-SP’s former
owner, Sorrento Asset Management (“Sorrento”). 44 Kinsella had invested $1.8
million in Sorrento.45 After Sorrento mishandled Kinsella’s investment, Kinsella
filed suit against Sorrento’s promotors—Darina Heavy, Ken Hely, John Ryan, and
Bryan Turley—in Dublin High Court and prevailed in that litigation. 46 To satisfy
40 Id.; JX 19 at 1. 41 JX 22. 42 PTO ¶ 21; JX 72 at 7. 43 JX 28 at 3; JX 66 §§ 2.1(a)–(b). 44 Tr. 12:20–13:20, 15:15–21 (Kinsella); JX 30 at 3–19. 45 Tr. 12:22–13:3 (Kinsella). 46 Id. at 13:7–8 (Kinsella); JX 30.
11 the judgment, Sorrento’s promoters transferred their ownership interests in GB-SP
to IEOT.47
In a December 24, 2012 letter to BSW, IEOT advised that IEOT “now owns
all of the issued and outstanding common stock in BSW previously owned by GB-
SP” and “hereby appoints [Donal Kinsella] to serve as the [GB-SP] Director” under
Section 3.3 of the Shareholders Agreement.48 IEOT’s letter included a letter of
resignation by GB-SP’s current director designee, Bryan Turley. 49 IEOT’s letter
also demanded information pursuant to Section 2 of the Shareholders Agreement.50
On December 28, 2012, Worker exchanged emails with Kerry Berchem, an
attorney at the Company’s outside counsel, Akin Gump Strauss Hauer & Feld, LLP
(“Akin Gump”) regarding IEOT’s demand. The exchange stated the following:
WORKER: What are the next steps with this group?
BERCHEM: I am reading this weekend. Not sure we can do anything.
WORKER: Really? They are demanding information and calling this their right? How can they transfer stock that is pledged to Goodbody?
BERCHEM: Arguably could transfer it w the lien. I really haven’t had time to focus on this. But can take a look at our s/h agreement and the llc agmt this weekend. That said the letter doesn’t explain how they got the stock and I think we could push back asking for evidence of the
Tr. 13:13–20 (Kinsella); JX 30. Kinsella testified that the only asset the promoters had 47
was their equity interests in GB-SP. Tr. 74:12–75:1 (Kinsella). 48 JX 23 at 4. 49 Id. at 9. 50 Id.
12 transfer. We could write a letter that there is no evidence of the transfer and until such cannot effectuate the appointment of Donal Kinsella. Do you know this person?
BERCHEM: We could also take the position that since GBSP holdings did not comply w the ROFR in the s/h agmt the transfer is null and void. A little aggressive but colorable position.
WORKER: I like it, GREAT color[.]51
Worker also replied, “Makes sense to attack this. I do not know Mr. Kinsella[.]”52
IEOT soon dispelled the notion that GB-SP had transferred its BSW stock in
violation of the right of first refusal in the Shareholders Agreement. In a January 4,
2013 letter to BSW, IEOT explained that it had acquired GB-SP itself, and that
GB-SP still owned the BSW shares. 53 With that clarification, GB-SP renewed its
demand to have Kinsella seated on the BSW board and for BSW documents.54
On January 14, 2013, Akin Gump requested documentation from Kinsella’s
counsel of IEOT’s ownership of GB-SP and Kinsella’s qualification as a director
under Section 3.3(c) of the Shareholders Agreement.55 On February 5, 2013,
51 JX 218. 52 JX 217. 53 JX 25 at 1. 54 Id. at 2. BSW claimed that there was confusion as to whether GB-SP had the right to appoint a director to the board. BSW also claimed that there were questions regarding Kinsella’s suitability to serve. Tr. 384:4–7, 384:15–24, 388:4–389:20 (Worker). 55 JX 26 at 2.
13 GB-SP’s counsel responded to BSW with the requested documentation.56 GB-SP’s
counsel also reiterated its demand to seat Kinsella as the GB-SP Director and to
supply information pursuant to the Shareholders Agreement and requested a meeting
between Kinsella and a BSW officer or director. 57
BSW was reluctant to seat Kinsella as the GB-SP Director. BSW was
concerned that if it recognized the transaction between GB-SP and IEOT, BSW
would not be able to use its net operating losses (“NOLs”) to offset its income under
the Internal Revenue Code, and BSW would be required to begin paying income
taxes.58 BSW’s general counsel, J.R. Dembiec, noted that a “[p]reliminary analysis
by [BSW’s] accountants indicates that this transaction, if approved, between GB-SP
and IEOT may negatively impact, if not eliminate, our ability to use existing NOLs
56 JX 30. 57 Id. at 2. 58 JX 219 at 1; JX 215 at 1. On February 28, 2013, Worker emailed Davis, Doheny, LaCivita, and Scher with a board agenda that included IOET’s “request and related issues (nols, director request)” and a “[h]eavy letter/response” to follow separately. JX 34 at 2. Worker lacked credibility when he testified at trial that he had “no idea what that was a response to.” Tr. 722:16–17 (Worker). See also JX 232 at 2 (“Just a reminder that by recognizing the transfer we will nearly wipe out all of the NOL’s [sic] that are currently on our books due to IRS change of control rules. You may recall the conversations we had with Watkins a few months back related to this. I don’t know what Versa’s strategy is going forward, but if there is an event that produces income to Bridgestreet Worldwide (i.e. forgiveness of debt) it could put this entity into an income tax paying position.”).
14 in connection with the Versa sale.”59 Berchem from Akin Gump replied, “Don’t
think approval is within our discretion, unless I missed something.” 60
On March 26, 2013, John Holland from Akin Gump sent an email to Davis,
Dembiec, and Worker, stating:
As you know, we’ve received several correspondences from Donal Kinsella and his attorneys regarding [IEOT’s] acquisition of [GB-SP’s] equity (the latest of which are attached). IEOT’s counsel, at our request, also has provided us with documentation of the transfer, including a purchase agreement, resignation letters and judgments pursuant to which the transfer was effected. At this time, the equity transfer appears to be legitimate.
Under the [Shareholders] Agreement, GB-SP [] is entitled to nominate one director and also is entitled to certain information rights. [] Kinsella has requested that GB-SP [] be permitted to exercise its right to nominate [] Kinsella for election to the Board and to receive the Company’s financials. Please let us know when you’d like to discuss next steps. 61
In other words, Akin Gump informed BSW that there was no good faith basis to
continue to deny GB-SP’s information requests or its designation of Kinsella as the
GB-SP Director.
On April 11, 2013, Dembiec asked Akin Gump to clarify the status of
GB-SP’s board seat and the implications of GB-SP’s demand to seat Kinsella on the
renewal of the Company’s director and officer (“D&O”) insurance policy:
59 JX 220 at 1. 60 Id. 61 JX 170 at 1.
15 [W]e are discussing a renewal of the current D&O policy which is set to expire April 30. One question that has come up is the status of the Board seat for GB[-SP]. My understanding is that GB[-SP] had their Board seat but when Turley resigned they lost their presence on the Board. I am not sure how we want to handle that question and would like your input. Also, I’m not sure how to address the proposed and pending IEOT transfer and their request for a Board seat.62
Holland pointed Dembiec to Section 3.3(a) of the Shareholders Agreement,
remarking that GB-SP “has the right to nominate someone for election to the Board
of Directors,” and “the official size of the Board still is seven directors, even though
[GB-SP] currently doesn’t have a director on the Board.”63
E. BSW Continues to Default on its Obligations Under the Credit Agreement, and Versa Acquires BSW’s Debt Through Domus The Pre-Forbearance Board met on February 4, 2013, with representatives
from Akin Gump and Houlihan to discuss the status of Houlihan’s sale process.64
The minutes of the meeting do not reflect any discussion about seating Kinsella as
the GB-SP Director. 65 Around this time, BSW’s lenders sought permission to
engage Versa directly about selling BSW’s outstanding debt.66 On February 6, 2013,
62 JX 171 at 3. 63 Id. at 2. 64 PTO ¶ 27. 65 JX 29. 66 JX 31 at 2–3; Tr. 447:18–24 (Halpern). Paul Halpern, Versa’s chief investment officer and Rule 30(b)(6) witness, testified that it was important that BSW’s lenders receive permission to speak directly to Versa because “it’s really bad for a deal to mess up the process. This deal was dead stuck, and this was the appropriate next step. But to have --
16 Davis, BSW’s then-board chairman, confirmed that BSW’s lenders could negotiate
a potential acquisition of BSW’s outstanding debt directly with Versa. 67 Versa and
BSW’s lenders scheduled an introductory call for the next day.68 Versa also engaged
in parallel discussions with BSW to acquire the Company. 69
Shortly after BSW again failed to make its interest and principal payments
under the Credit Agreement, the Pre-Forbearance Board met on April 2 and April 9,
2013. 70 The April 2 minutes reference the status of a potential sale of BSW and
Akin Gump’s communications with Plaintiffs’ counsel,71 and the April 9 minutes
reference requests from the Company’s lenders for additional collateral.72
Versa chose to forgo an outright purchase of the Company and, instead,
adopted a loan-to-own strategy.73 On April 11, 2013, Versa, through its newly
to take it unilaterally could ruffle a lot of feathers and possibly implicate commitments the different parties had to each other.” Tr. 449:17–22 (Halpern). 67 JX 31 at 2; Tr. 448:16–449:5 (Halpern). 68 JX 31 at 1. 69 JX 35; Tr. 452:1–453:1 (Halpern). 70 PTO ¶¶ 30–31; JX 39; JX 40. 71 JX 39. 72 JX 40. 73 A loan-to-own transaction is a change in control transaction by which an acquirer becomes the target’s senior secured lender and then obtains ownership of the target’s equity or assets through a liquidation process. See David A. Skeel Jr., The Past, Present and Future of Debtor-in-Possession Financing, 25 Cardozo L. Rev. 1905, 1921 (2004) (describing loan-to-own transactions as comparable to change-in-control transactions as they are often intended to ensure that the acquirer can “purchase the [debtor’s] assets free
17 formed subsidiary Domus BWW Funding LLC (“Domus”), 74 executed the
documents necessary to acquire all of the secured debt of BSW and its subsidiaries
from Credit Suisse under the Credit Agreement. 75 Through Domus, Versa paid
roughly $23 million for the debt and the rights associated with it. 76
An internal Versa presentation dated April 13, 2013, provided an update on
its BSW acquisition strategy. 77 Among other things, the update outlined different
means by which Versa could gain control of BSW’s assets, including through a
consensual transaction, a strict foreclosure, a public foreclosure, or an asset sale
pursuant to Section 363 of the U.S. Bankruptcy Code (the “Bankruptcy Code”).78
The presentation explained that a consensual transaction would require board and
stockholder approval, but indicated that the current independent BSW board
and clear of any existing or future claims, and [] eliminate the claims of [] unsecured creditors”). Versa specializes in distressed control investments. Tr. 424:14–17 (Halpern) (“So the investment strategy has been, and remains today, for these funds, control investments in distress and special situations in middle-market companies in North America.”). 74 PTO ¶ 18; Tr. 454:6–14 (Halpern) (explaining that Domus was “an entity owned by one or more of the funds advised by Versa” and “set up to execute these trades and acquire [BSW’s] debt”). Tr. 454:1–5 (Halpern); see also JX 211; JX 212; JX 213. These transactions closed on 75
May 1, 2013. Tr. 460:14–17 (Halpern); PTO ¶ 32. 76 Tr. 457:18–458:12 (Halpern). 77 JX 41. 78 Id. at 5.
18 members would not approve a consensual transaction. 79 Because BSW’s board held
the Proxy to vote all of GB-SP’s shares, a stockholder vote would also involve board
approval.80 As an alternative, Versa noted that BSW’s CEO and President—Walker
and Curtis—could vote to replace or fire the independent directors and then approve
the transaction, but acknowledged that replacing or firing the independent directors
could give rise to claims for breach of fiduciary duty or fraudulent conveyance.81
Another alternative was to modify the transaction to facilitate approval from the
current BSW board through (1) enhanced D&O coverage or direct indemnification
of directors; (2) assumption of all liabilities; and (3) removal of the requirement that
BSW remain in existence for two years. 82 The presentation also explained that BSW
could go bankrupt before Versa obtained its assets, but an imminent bankruptcy
filing was unlikely since most of the necessary bankruptcy preparation work had not
been completed. 83
F. The Pre-Forbearance Board Negotiates a Forbearance Agreement At a board meeting held on May 2, 2013, Credit Suisse informed the Pre-
Forbearance Board that the lenders under the Credit Agreement had sold their
79 Id. at 6. 80 Id. 81 Id. 82 Id. 83 Id.
19 respective interests in BSW’s first and second lien loans to Domus. 84 At this same
board meeting, Worker proposed retention bonuses for himself and members of
senior management. 85 As justifications for the bonus package, Worker cited the
uncertainty facing BSW and the need to ensure the continued employment of certain
BSW executives by underwriting the financial and employment risks of being an
executive at a distressed company.86 The Pre-Forbearance Board then unanimously
approved an executive compensation memorandum of understanding (“MOU”).87
The MOU provided that, in various circumstances, the executives would be paid the
following retention bonuses:
84 JX 43 at 2. 85 Id. at 3. 86 Id. 87 Id. The MOU stated the following in its background section: The Company is at a critical juncture. It will either be sold in the near future to a private equity fund investor or, failing the completion of such transaction, may become subject to a foreclosure action or bankruptcy proceeding undertaken by the Lenders or others, or subject to other remedies available to the Lenders under law and as prescribed by the Amended and Restated Credit Agreement to which the Company and the Lenders are a party. Such proceedings and/or remedies would allow the Lenders to take control of the Company’s assets and operations. In light of this situation, and in view of other reasonably predictable outcomes, there is significant risk and uncertainty with respect to financial outcomes for the Executives and the shareholders generally. Id. at 8.
20 Executive Sale of the Sale or No Sale, Company Reorganization of the Bankruptcy, or (Outside of Company (Pursuant Foreclosure90 Bankruptcy) 88 to a Bankruptcy Filing or Foreclosure Proceeding)89
Sean Worker $142,199 $150,500 $142,199
Lee Curtis $107,417 $120,500 $107,417
Dale Gingrich $56,777 $85,000 $56,777
JR Dembiec $56,777 $85,000 $56,777
Jeffrey Dunn $36,830 $59,999 $36,830
To be allocated 91 $40,000 $50,000 $40,000
Total Bonus $440,000 $550,999 $440,000
In addition to the retention bonuses, the MOU provided for severance
payments to the BSW executives. 92 The MOU retained the severance provisions in
Curtis’s and Worker’s existing employment agreements with the Company. The
88 Id. at 9. 89 Id. at 10. 90 Id. at 11. 91 Each scenario had additional requirements and terms. For example, in the case of a sale outside of bankruptcy, the MOU provided that the retention bonus “shall be paid, by the Company or the acquiring entity, to the Executives upon closing of the Sale Transaction regardless of whether the Executives (other than Worker and Curtis) continue to be employed by the acquiring entity.” Id. at 9. 92 Id. at 11.
21 other BSW executives would receive six months of salary and all accrued paid time
off as severance if their employment was terminated without cause. 93 Additionally,
if BSW’s lenders foreclosed on the Company, BSW’s lenders would continue to
employ Curtis and Worker under the terms of their existing employment
agreements. 94
In June 2013, Versa and BSW began exchanging drafts of a forbearance
agreement.95 On July 23, 2013, Akin Gump sent the Pre-Forbearance Directors and
BSW executives a list of issues regarding a potential forbearance agreement.96
Among the issues were (1) indemnification for claims arising from, or relating to,
the forbearance agreement; (2) a release of claims against BSW’s directors and
officers by Versa; and (3) payment of advisers’ fees.97 In exchange for the release
of claims, Versa requested that Davis, Doheny, LaCivita, and Scher deliver
irrevocable resignations to be held in escrow. 98
Meanwhile, GB-SP continued to press for its informational and corporate
governance rights in numerous letters to the Pre-Forbearance Directors and Akin
93 Id. 94 Id. 95 See JX 172. 96 JX 49 at 3–4. 97 Id. at 3. 98 JX 50 at 3. Davis, Doheny, LaCivita, and Scher refused to resign but instead signed agreements not to stand for re-election or to accept any such nomination. Id. at 2.
22 Gump, even threatening legal action. 99 BSW’s counsel sought to string Plaintiffs
along until after they could finalize a forbearance agreement with Versa. Indeed,
one Akin Gump attorney asked internally, “Is there any additional information that
we can provide to [Plaintiffs’ counsel] to keep them warm while we’re sorting out
the forbearance agreement?”100
The Pre-Forbearance Directors’ continuing refusal to seat Kinsella as the
GB-SP Director created a potential liability that BSW’s insurers were not willing to
cover. The insurers carved out this coverage through a “major stockholder
exclusion.”101 BSW’s D&O policy excluded claims brought by holders of 10% or
99 See JX 44 (May 2, 2013 email indicating that GB-SP had not received information under the Shareholders Agreement and Kinsella had not been seated as the GB-SP Director in the “four months since [the] original notice [was sent] to BSW” and demanding that an initial meeting be scheduled); JX 45 (June 10, 2013 letter restating that GB-SP had designated Kinsella to serve as the GB-SP Director); JX 47 at 3–5 (June 14, 2013 letter demanding certain financial statements, organizational documents, minutes of BSW board and stockholders meetings, and information concerning capital structure); JX 48 at 2 (July 10, 2013 letter reconfirming that Kinsella had been designated as the GB-SP Director, demanding notice of BSW board meetings, and requesting additional documents); JX 57 at 4 (August 20, 2013 letter complaining that Plaintiffs were being ignored by BSW and threatening legal action); JX 58 at 1 (August 30, 2013 letter requesting to inspect certain books and records of BSW pursuant to 8 Del. C. § 220(d)). 100 JX 240 at 2. 101 A “major stockholder exclusion” is a provision in a D&O insurance policy which removes claims from coverage when they are brought by or on behalf of a major stockholder of the company, typically a stockholder that owns more than 5–10% of the company’s outstanding equity. See, e.g., EMSI Acq., Inc. v. RSUI Indem. Co., 787 F. App’x 97, 99 (3d Cir. 2019) (excluding claims from coverage when they are brought by a stockholder with more than 5% of the company’s equity); McGowan v. Liberty Ins. Underwriters, Inc., 2020 WL 8186268, at *1 (S.D. Fl. Oct. 26, 2020) (same); Abrams v. Allied World Assurance Co. (U.S.) Inc., 657 F. Supp. 3d 1280, 1288–98 (N.D. Cal. 2023)
23 more of the Company’s stock.102 On August 1, 2013, BSW’s insurance broker
informed Akin Gump and BSW:
We have requested AIG to remove the Major Shareholder exclusion on the policy which they denied. We asked them if they could give us an option, even if that would change some of the terms and conditions i.e. premium etc. AIG declined this request as well. AIG is concerned with the fact that GB-SP Holdings does not have active representation on the board and fear that due to the fact that their investment is at risk that they may sue. This is exposure that they did not want to pick up as such they put the exclusion on the policy last year. 103
In an email to the insurance broker the next day, Akin Gump inquired: “If we added
another director to the board from [GB-SP] now, would that help to get the major
shareholder exclusion deleted?”104
Two weeks later, on August 16, 2013, Akin Gump informed Dembiec and the
Pre-Forbearance Directors that, despite its efforts, BSW’s insurance carrier may not
agree to remove the major stockholder exclusion from the D&O policy. 105 To
remedy this gap in coverage, Akin Gump recommended that Versa provide broad
indemnification coverage for any claims brought by GB-SP. 106
(interpreting a “Major Security Holder Claims Exclusion” which excluded claims brought by a stockholder who owns more than 10% of the company’s equity). 102 JX 174 at 1. 103 JX 173 at 2. Two separate insurers also declined to provide supplemental coverage. Id. 104 Id. at 1. Akin Gump’s inquiry indicates that Akin Gump believed Kinsella could be seated at any time. 105 JX 174. 106 Id.
24 Around the time the parties were negotiating the proposed forbearance
agreement, Versa contacted Walker about serving as a director on the BSW board.107
Walker is the president and founder of Walker Nell Partners, Inc. (“Walker Nell”),
a business consulting firm focused on corporate restructuring and fiduciary
services.108 Walker did not have a previous relationship with Versa or BSW. 109
Versa also contacted Albright and Orlofsky about serving as directors on the
BSW board.110 Albright was the president of the Pinnacle Group, a consulting firm
that specializes in franchising. 111 Albright does not appear to have had any other
business dealings with Versa or BSW. Orlofsky, on the other hand, had a prior
relationship with Versa. Between 2001 and 2005, Orlofsky served as interim chief
financial officer and chief operating officer of Malden Mills, a company whose
operations a Versa affiliate acquired out of bankruptcy. 112 In addition, Orlofsky
107 JX 55; JX 163 at 35:15–18 (Walker Dep.); Tr. 615:11–19 (Walker). JX 163 at 8:17–19 (Walker Dep.); id. at 8:22–9:2 (Walker Dep.); Tr. 613:23–614:3 108
(Walker). 109 JX 163 at 27:3–10 (Walker Dep.); id. at 49:1–4 (Walker Dep.); Tr. 615:20–616:19 (Walker). Following the foreclosure, Versa asked Walker to serve as an independent director on the board of SeaStar Holdings, Inc., which the parties refer to as “Seaborne Airlines.” JX 163 at 30:7–12 (Walker Dep.); Tr. 699:16–700:21 (Walker); JX 175 at 25. Seaborne Airlines was acquired by a Versa affiliate following its bankruptcy. Tr. 702:17– 20 (Walker). Between August 2017 and January 2018, Walker Nell earned approximately $65,000 in fees in connection with Seaborne Airlines’s bankruptcy. JX 175 at 13. 110 See Tr. 585:20–24 (Orlofsky); id. at 514:9–16 (Halpern). 111 JX 62 at 121. 112 JX 166 at 18:6–19:24, 20:16–21:23 (Orlofsky Dep.); Tr. 555:3–9, 581:9–13 (Orlofsky); id. at 514:2–6 (Halpern); JX 62 at 57.
25 served as chairman and sole board member of American Laser Skincare LLC
(“ALS”) in 2011. 113 As its sole member, Orlofsky caused ALS to file for
bankruptcy, and in February 2012, a Versa affiliate acquired ALS through those
proceedings.114 Orlofsky’s firm, Zolfo Cooper, served as a pre-petition adviser to
ALS, earning approximately $300,000 to $400,000 in fees working on ALS’s
ultimate bankruptcy. 115
G. The Forbearance Agreement Akin Gump updated the Pre-Forbearance Board on the status of the proposed
forbearance agreement with Domus at a September 17, 2013 board meeting.116
Under the terms of the forbearance agreement, Domus would not exercise its right
to foreclose under the Credit Agreement for a five-month period, so long as BSW
did not otherwise breach the Credit Agreement or fail to satisfy the additional
financial covenants imposed by the forbearance agreement.117 Dale Gingrich,
BSW’s Senior Vice President of Finance, and Worker told the Pre-Forbearance
Board that they believed BSW should be able to satisfy the additional financial
JX 166 at 22:20–23:23 (Orlofsky Dep.); Tr. 581:14–18, 582:10–583:9 (Orlofsky); id. at 113
513:9–14 (Halpern). 114 Tr. 583:10–16 (Orlofsky); JX 166 at 26:8–18, 27:14–18 (Orlofsky Dep.). 115 JX 166 at 8:16–20, 25:13–26:8, 31:20–32:4 (Orlofsky Dep.); Tr. 584:17–585:7 (Orlofsky). 116 JX 61 at 2. 117 Id.
26 covenants based on currently available information. 118 The proposed forbearance
agreement also provided for Domus to extend additional first lien loans to BSW to
cover items such as past due interest payments owed under the Credit Agreement
and BSW’s working capital needs.119 For its part, BSW agreed to grant first priority
interests in additional collateral in favor of Domus and undertake stringent financial
covenants.120
On September 19, 2013, Versa’s counsel at Dechert LLP (“Dechert”)
delivered to BSW’s counsel an updated draft of the proposed forbearance agreement,
along with a draft indemnity agreement. 121 The indemnity agreement required Versa
to indemnify BSW’s directors and officers for claims arising out of the forbearance
agreement, as well as for claims brought by GB-SP, IEOT, or Kinsella.122 Dechert
also transmitted resumes for Albright, Orlofsky, Seitz, and Walker, who Versa
proposed to fill the four independent director positions on the BSW board.123
118 Id. 119 Id. 120 Id. 121 PTO ¶ 43; see also JX 62. 122 See JX 62 at 49–56. The provision did not expressly reference GB-SP but covered claims by “any Person(s) that own or control (whether beneficially, directly or indirectly) 10% or more of the outstanding stock of the Company” and by “any security holder of the Company, whether directly or derivatively, unless such security holder’s claim is instigated and continued independent of, and without the solicitation or assistance of, any Major Shareholder[.]” Id. at 50. GB-SP was BSW’s majority stockholder. PTO ¶ 6. 123 PTO ¶ 43; see also JX 62.
27 On September 30, 2013, BSW and Domus entered into a forbearance
agreement (the “Forbearance Agreement”), under which Domus advanced
approximately $12.5 million to BSW and agreed to forbear on exercising its right to
foreclose under the Credit Agreement for five months. 124 As consideration for the
loan, Domus received additional security interests in BSW’s foreign subsidiaries.125
BSW utilized the $12.5 million to pay the accrued interest on its debt owed to Versa
and Domus, past due rent payments, its D&O policy, and fees for its legal counsel
and financial advisers. 126
The terms of the executed Forbearance Agreement were materially similar to
those of the drafts that were exchanged earlier that month.127 The Forbearance
Agreement required BSW to maintain the following EBITDA and gross margin
financial ratios for the duration of the five-month forbearance period:
124 PTO ¶ 44; JX 66 § 2.2. 125 JX 66 § 4.1(e). 126 Id. at 35. 127 Compare JX 62 at 2–48, with JX 66.
28 Month Ending Minimum Interest Minimum Gross Coverage Ratio 128 Margin Percentage129
September 30, 2013 1.10:1.00 18%
October 31, 2013 1.20:1.00 20.5%
November 30, 2013 1.20:1.00 18.9%
December 31, 2013 1.15:1.00 16.9%
January 31, 2014 1.15:1.00 13.8%
If BSW’s financial ratios fell below the above amounts, then BSW would be
in default under the Forbearance Agreement, and Versa could exercise its right to
foreclose on its collateral under the Credit Agreement. 130 The Forbearance
Agreement also provided that BSW, Domus, the Pre-Forbearance Directors, and
certain BSW officers would enter into a mutual release agreement on the date that
the new independent directors were elected to the Company’s board. 131
128 JX 66 § 5.3(a). The minimum interest coverage ratio represented the minimum threshold for the Company’s ratio of Consolidated EBITDA to Consolidated Interest Expense. Id. 129 Id. § 5.3(e). 130 Id. §§ 3.1, 3.2(a), 3.3. 131 Id. § 9(b); id. at 39–47. The executed release agreement is not in the record. The Company agreed to hold its annual meeting of stockholders within 30 days of the funding of the $12 million loan. Id. §9(a). Davis, Doheny, LaCivita, and Scher agreed to not seek re-election at the annual meeting of stockholders. See JX 50 at 2; JX 63 at 2–5; JX 226 at 1; JX 234 at 1.
29 That same day, Domus, the Pre-Forbearance Directors, and certain BSW
officers entered into the indemnity agreement (the “Indemnity Agreement”).132 The
material terms of the executed Indemnity Agreement were the same as those in
Dechert’s September 19, 2013 draft. 133 The Indemnity Agreement provided for
Domus to defend and indemnify the Pre-Forbearance Directors against any claim or
proceedings brought by GB-SP, IEOT, or Kinsella related to BSW or its subsidiaries,
and included any judgments or settlements. 134 Domus also successfully limited its
obligation to the costs of “one counsel” for the Pre-Forbearance Directors, unless
otherwise prohibited by the applicable rules of professional responsibility.135
BSW, Domus, Curtis, and Worker also entered into a memorandum of
understanding on September 30, 2013 (the “September 2013 MOU”).136 The
September 2013 MOU obligated Domus, in the event of a consensual foreclosure,
to: (1) assume the employment agreements of Curtis and Worker; (2) pay retention
bonuses for Curtis and Worker; and (3) pay retention bonuses for other BSW
132 JX 70 at 22–36. 133 Compare JX 62 at 49–56, with JX 70 at 22–36. 134 JX 70 at 23. 135 Id. 136 PTO ¶ 45.
30 executives. 137 The September 2013 MOU incorporated the terms of the retention
bonuses from the MOU approved by the Pre-Forbearance Directors.138
H. The Post-Forbearance Events and Consensual Foreclosure
BSW held an annual meeting of stockholders on October 11, 2013.139
Kinsella was elected as the GB-SP Director; Curtis and Worker were elected as the
Management Directors; and Albright, Orlofsky, Seitz, and Walker were elected as
independent directors. 140 Seitz resigned from the BSW board shortly thereafter for
reasons not reflected in the record.141 Walker was named as board chairman.142 On
October 28, 2013, the Post-Forbearance Board held its first meeting with
representatives from Akin Gump and Houlihan.143 At the meeting, the Post-
Forbearance Board discussed with its advisers the various options available in light
137 See JX 67; id. at 7 (“If the Lenders (or any of the Lenders’ affiliates) acquire all or substantially all of the equity or assets of the Company or its operating subsidiaries, in a transaction or a series of related transactions, through a reorganization, restructuring, recapitalization, stock sale, asset sale or foreclosure action or other exercise of any remedies available to the Lenders under the Credit Agreement or related loan documents, the Lenders agree to continue to employ Sean C. Worker and H. Lee Curtis under the terms of their current employment agreements. For the avoidance of doubt, if the Lenders (or any of the Lenders’ affiliates) acquire the Company or its operating subsidiaries in a Sale Transaction, the Lenders agree to continue to employ Sean C. Worker and H. Lee Curtis under the terms of their current employment agreements.”). 138 Compare JX 43 at 8–12, with JX 67. 139 PTO ¶ 47; JX 69. 140 PTO ¶ 47. 141 Id. ¶ 48. 142 Id. ¶ 49. 143 Id. ¶ 50; JX 71.
31 of the forbearance period under the Forbearance Agreement. 144 Houlihan provided
an overview of its prior sale process and opined that effectuating a sale of the
Company “would be very difficult, especially in light of the fact that the Company’s
EBIDTA [sic] had declined since [Houlihan’s] original marketing and sales
efforts.” 145
At the next board meeting on November 18, 2013, BSW management
informed the Post-Forbearance Board that BSW had breached the minimum interest
coverage ratio and the minimum gross margin percentage in the Forbearance
Agreement during the month of October. 146 In an executive session, Kinsella
requested additional information to substantiate these breaches and asked if Domus
might be willing to invest another $10 million in BSW or to waive the breaches.147
BSW’s counsel reminded the directors that the Forbearance Agreement would expire
by its terms in approximately three months, so even if Domus granted a waiver, the
entire amount of the senior secured debt would still be due and owing at that time.148
The Post-Forbearance Board then discussed potential alternatives available to BSW,
such as third-party financing, a sale of the Company or its assets, re-financing the
144 JX 71 at 2. 145 Id. at 2–3. 146 JX 80 at 2. 147 Id. 148 Id.
32 Company’s debt, an out-of-court restructuring, and a bankruptcy filing under either
chapter 7 or chapter 11 of the Bankruptcy Code.149 The Post-Forbearance Board
resolved that BSW would notify Domus of the breaches, as required by the Credit
Agreement, and request a waiver to give the board additional time to examine
potential paths forward. 150
On November 20, 2013, BSW informed Domus of BSW’s default. 151 Domus
responded the next day, declaring that the default terminated the Forbearance
Agreement and reserving Domus’s rights under the Credit Agreement. 152 That same
day, BSW began to discuss the idea of using an assignment for the benefit of
creditors or “ABC” proceeding. 153 Walker instructed the Company to include an
ABC proceeding as a potential restructuring option but emphasized that the
Company’s “primary concern . . . is to make sure that the [Post-Forbearance] Board
149 Id. at 3. 150 Id. 151 JX 83. 152 JX 144. 153 JX 84. In an ABC, the entity, or assignor, assigns its assets to an assignee, which is charged with liquidating the assets and distributing the proceeds to the assignor’s creditors. In re Wack Jills, Inc., 322 A.3d 1132, 1145 (Del. Ch. 2024). In Delaware, ABCs are governed by 10 Del. C. §§ 7381–7387.
33 is advised of and complies with Delaware fiduciary law in the performance of its
duties.”154 Six days later, Domus delivered a foreclosure proposal to BSW. 155
On December 4, 2013, the Post-Forbearance Board met and, over Kinsella’s
opposition, passed a budget for 2014.156 Kinsella wanted a budget that incorporated
aggressive cost cutting, and he demanded more information before approving the
proposed budget.157 The other board members did not share Kinsella’s concerns,
and each voted to approve the budget. 158 In an executive session, Walker reminded
the Post-Forbearance Directors that BSW had defaulted on the terms of the
Forbearance Agreement and had requested a waiver of that default. 159 The
Post-Forbearance Board discussed its various options. Houlihan advised that
refinancing BSW’s debt or selling BSW’s equity or assets was highly unlikely in
light of the Company’s current business operations, the investment market’s overall
154 JX 84 at 1. During this period, Kinsella was regularly requesting additional information from the Company. See, e.g., JX 87; JX 89. 155 JX 86. 156 JX 91 at 2. 157 Id. at 1–2. 158 Id. at 2. 159 Id. Members of the Post-Forbearance Board inquired whether any additional covenants under the Forbearance Agreement or Credit Agreement had been breached, and management responded that, based upon information available as the date of the meeting, BSW had also breached the “cash covenant” in the Forbearance Agreement. Id. Management noted, however, that the month was not yet closed from a financial standpoint and, as such, it was too early to tell whether additional covenants had been breached. Id.
34 condition, and the Company’s senior secured debt.160 The Post-Forbearance Board
discussed the possibility of an additional equity investment from GB-SP or IEOT,
or from an entity known as “Goodbody.”161 Kinsella indicated that he was not
willing to make an additional investment at that time.162 The Post-Forbearance
Board resolved to seek an additional equity investment from Goodbody and to ask
Domus to waive BSW’s technical default under the Forbearance Agreement. 163
On December 16, 2013, Plaintiffs’ counsel sent a letter to BSW outlining
Kinsella’s dissatisfaction with the actions of the Post-Forbearance Board, BSW’s
responses to their requests for information, and BSW’s refusal to seat Kinsella as the
GB-SP Director from December 2012 to October 2013.164 Kinsella urged the board
to chart a course other than a consensual foreclosure.165
The Post-Forbearance Board met the next day. At an executive session,
Albright, Curtis, Orlofsky, Walker, and Worker discussed the correspondence
received from Kinsella’s counsel, but took no specific actions. 166 After Kinsella
160 Id. at 3. Id. Goodbody appears to be a reference to Goodbody Stockbrokers Nominees Limited, 161
which was the general partner of an entity that once held debt of GB-SP. See JX 1 at 3. 162 JX 91 at 3; see Tr. 136:9–23 (Kinsella) (confirming that Kinsella was not interested in putting more money into BSW). 163 JX 91 at 3. 164 See PTO ¶ 55; JX 94. 165 JX 94 at 2–3. 166 JX 96 at 1.
35 joined the meeting, Albright and Walker reported that Domus refused to discuss a
default waiver and requested that BSW start working towards a consensual
foreclosure in accordance with Domus’s November 26 proposal.167 The Post-
Forbearance Board discussed the Company’s options. 168 A representative from
Houlihan opined that a sale of the Company or debt refinancing would be extremely
difficult due to the decline in the Company’s EBITDA.169 Akin Gump explained the
differences between a chapter 7 and a chapter 11 bankruptcy.170 Kinsella proposed
that BSW file for bankruptcy, but the motion failed to pass.171 Two days later, Akin
Gump forwarded draft foreclosure documents prepared by Versa and Domus’s
counsel to Walker. 172 Before year’s end, Houlihan delivered a draft chapter 11
bankruptcy analysis to BSW. 173
167 Id. at 2. 168 Id. at 3. 169 Id. 170 Id. 171 Id. The draft minutes indicated that Kinsella had specified a chapter 7 bankruptcy filing. But at the next meeting, Kinsella insisted that “he had moved to have the company file for ‘bankruptcy’ generally and not a bankruptcy under Chapter 7.” JX 102 at 1. Kinsella also requested that the minutes reflect that he made the motion because the Company was insolvent. Id. The December 17 minutes were approved with these changes. Id. 172 JX 98. 173 JX 100 at 1.
36 At the board’s next meeting on January 3, 2014, Walker, Worker, and
Houlihan presented a bankruptcy analysis. 174 They explained that a bankruptcy
filing would require debtor in possession (“DIP”) financing in amounts ranging from
$7 to $9 million and that it would be difficult to obtain DIP financing from any party
other than Versa. 175 They also noted that Versa’s approval would be needed to file
for chapter 11 and that they believed chapter 11 would cause damaging disruptions
to the Company’s ongoing operations. 176 In an executive session, the
Post-Forbearance Board further discussed whether the Company should file for
chapter 11 bankruptcy or if it should agree to a consensual foreclosure.177 The board
minutes state the following:
Mr. Albright stated that, under all the circumstances and weighing the advice of counsel and the Company’s financial advisors, he didn’t see a viable option other than a consensual foreclosure. Mr. Orlofsky added that in light of the combined management and Houlihan Lokey analysis, a Chapter 11 filing would be difficult and expensive and if the Company could essentially achieve a similar result while avoiding the time, costs and damage to the business, he believed a consensual foreclosure made the most sense. Mr. Kinsella disagreed, stating again that he felt the Company was insolvent and that a bankruptcy filing was
174 JX 102 at 1–2. 175 Id. at 2. Orlofsky testified that DIP financing would only realistically come from Versa because there was no value beyond the amount of the bank debt. Tr. 570:4–13 (Orlofsky). Orlofsky has a background in bankruptcy and corporate restructurings. Id. at 552:16–17, 553:8–10 (Orlofsky) (testifying that he had been in the restructuring business “for the last 23 years” and believed to “have expertise in corporate restructurings”). The court found Orlofsky to be a credible witness at trial. 176 JX 102 at 2. 177 Id.
37 the best course of action. Mr. Walker encouraged Mr. Kinsella to more fully explain his reasoning for supporting a bankruptcy filing, but Mr. Kinsella declined, stating that he didn’t feel a need to add anymore to his position on the matter. Mr. Worker and Mr. Curtis had no further comment. 178
After additional discussion, the Pre-Forbearance Board, with the exception of
Kinsella, voted to approve a consensual foreclosure, subject to negotiation and
finalization of definitive documentation. 179
On January 27, 2014, BBK, Ltd. (“BBK”), a business consulting firm that
services under-performing and financially challenged companies, delivered to BSW
a valuation of BSW’s total market value as of December 31, 2013, in anticipation of
a consensual foreclosure.180 BBK determined BSW’s fair market value was $29.7
million as a going concern. 181 That same day, Kinsella sent another letter to BSW
restating his grievances with the board’s management of the Company, his exclusion
from the board, the Company’s refusal to produce documents, and the board’s
apparent single-minded focus on a consensual foreclosure. 182 Kinsella reiterated
many of these same concerns at a board meeting the next day, lamenting that a
178 Id. 179 Id. 180 JX 104. 181 Id. at 8. 182 JX 106 at 1–2.
38 consensual foreclosure would result in the elimination of his equity stake in BSW.183
In an executive session, the Post-Forbearance Board, including Kinsella, discussed
the specifics of a consensual foreclosure and weighed the benefits of an ABC as
opposed to a statutory dissolution. 184 After the executive session, “it was the
consensus of the [Post-Forbearance] Board that the January interest payment to
[Domus] should not be paid under the current circumstances.”185
On February 25, 2014, the Post-Forbearance Board met to address Kinsella’s
letters and concerns. 186 In an executive session, the Post-Forbearance Board
recounted all of its efforts up until that point, highlighting its deliberative process
and the various alternatives to a consensual foreclosure it had considered.187
Midway through, Kinsella, apparently fed up with the board’s recitation, left the
meeting.188 The remaining Post-Forbearance Directors continued to discuss the
work they had done to chart BSW’s course and specifically noted Kinsella’s
183 JX 107 at 2. 184 Id. at 3. 185 Id. 186 JX 111. 187 Id. at 1–4. 188 Id. at 2; Tr. 159:5–7 (Kinsella) (“Q. And so when you got upset at board meetings, you just walked out; right, sir? A. I probably left. I really did.”).
39 December 4, 2013 statement that neither GB-SP nor IEOT was willing to contribute
any additional capital to BSW.189
On Friday, February 28, 2014, at 4:08 p.m., Holland from Akin Gump sent an
email notice of a telephonic special meeting of the board to be held on Sunday,
March 2, 2014, at 4:00 p.m. ET to each of the Post-Forbearance Directors. 190 The
email included an agenda for the meeting, prior meeting minutes, an executive
summary, draft resolutions, and BBK’s valuation report for the Company as of
December 31, 2013.191 Kinsella was in Ireland at the time the notice was sent.192
Kinsella read the notice on Saturday morning, March 1, and chose not to participate
in the March 2 meeting.193
At the March 2 meeting, Albright, Curtis, Orlofsky, Walker, and Worker all
voted in favor of resolutions authorizing the consummation of a consensual
foreclosure in favor of Domus (the “Consensual Foreclosure”) and to pursue an
ABC.194 Walker’s company, Walker Nell, was chosen to be the assignee.195 Domus
189 JX 111 at 3–4. 190 JX 115. 191 Id. 192 Tr. 60:1–4 (Kinsella). 193 Id. at 61:7–22 (Kinsella). 194 PTO ¶ 65; JX 116. The Post-Forbearance Board also authorized BSW to file a certificate of dissolution with the Delaware Secretary of State. JX 116 at 10–11. 195 PTO ¶ 66; JX 116 at 9.
40 advanced $425,000 to BSW under the Credit Agreement to fund the services and
expenses of Walker Nell as assignee. 196 The Post-Forbearance Directors also
discussed finalizing Domus’s assumption of Curtis’s and Worker’s employment
agreements with BSW that were memorialized in the September 2013 MOU.197
The Consensual Foreclosure closed on March 3, 2014. 198 At the time of the
Consensual Foreclosure, BSW owed $46,996,687.56 to Domus under the Credit
Agreement.199 As part of the Consensual Foreclosure, BSW transferred its equity
interests in its operating subsidiaries to Domus in satisfaction of $30 million of the
outstanding loan obligations.200 Domus also canceled $9,496,687.56 of the
remaining obligations of $16,966,687.56.201 That left $7.5 million, plus interest,
outstanding. 202
196 PTO ¶ 68. 197 JX 116 at 3. Curtis and Worker executed the amendment and assumption agreements on March 3, 2014. JX 124; JX 125. 198 PTO ¶ 69; see also JX 118; 119; JX 120; JX 121; JX 122; JX 123; JX 124; JX 125. 199 JX 118 at 2. 200 Id. at 3, 28. 201 Id. at 28. 202 Id.; Tr. 473:4–10 (Halpern).
41 I. Procedural History 1. This Action and the ABC Actions
On March 4, 2014, Plaintiffs commenced this action.203 That same day, BSW
and BridgeStreet Corporate Housing Worldwide, Inc. (“BSW Corporate Housing”)
filed separate ABC actions in this court. Both entities selected Walker Nell as the
assignee for their respective assets.204 These ABC actions have been, for the most
part, dormant. Both remain pending at the time of this opinion.
After Plaintiffs filed their complaint, this action was largely inactive for two
years, prompting the court to request status reports three times. 205 On June 20, 2016,
the parties filed a stipulation of settlement. 206 The settlement provided for Domus
to pay $327,500 to GB-SP and Kinsella in exchange for a release. 207 On November
4, 2016, the court rejected the settlement, noting that the Company would receive
effectively nothing for release of the derivative claims.208
203 Dkt. 1 (“Compl.”). 204 In re BridgeStreet Corp. Housing Worldwide, Inc., C.A. No. 9411-VCF (Del. Ch.), Dkt. 1; In re BridgeStreet Worldwide, Inc., C.A. No. 9412-VCF (Del. Ch.), Dkt. 1. 205 Dkts. 25, 31, 34. 206 Dkt. 47. 207 Id. at 11–13, 16–20. 208 Dkt. 54 at 17:2–18:13.
42 On February 9, 2017, Defendants filed motions to dismiss the complaint under
Court of Chancery Rules 12(b)(6), 23, and 23.1.209 On April 7, 2017, Defendants
filed motions to enforce the stipulation of settlement that the court previously
rejected. 210 Defendants sought enforcement of the settlement as to Plaintiffs’ direct
claims, arguing that the court’s prior ruling does not “alter[] the enforceability of the
release of direct claims executed by the individual Plaintiffs[.]” 211 Defendants also
argued that the existing settlement should be enforced as to the derivative claims
upon payment of $50,000 to the Company.212
On May 31, 2018, the court denied the Defendants’ motion to enforce the
existing settlement and granted in part and denied in part the Defendants’ motion to
dismiss. 213 On June 21, 2018, Versa and Domus (the “Versa Defendants”) filed their
answer to the complaint, along with a counterclaim against GB-SP asserting a breach
of the Pledge Agreement. 214 BSW and the Director Defendants (the “BSW
Defendants”) filed their answer on September 17, 2018.215 Thereafter, the case
moved at a snail’s pace. In August 2019, the court entered a scheduling order
209 Dkts. 55, 57. 210 Dkts. 60–63. 211 Dkt. 61 at 15. 212 Id. 213 Dkts. 88, 92. 214 Dkt. 89. The Versa Defendants filed an amended answer on July 8, 2021. Dkt. 119. 215 Dkt. 93.
43 providing for an October 2020 trial.216 Trial was then rescheduled for May 2021.217
Another period of inactivity required the court to hold a status conference in March
2021 and to reschedule trial a second time. 218 The parties participated in an
unsuccessful mediation in September 2021. 219
After fairly contentious discovery motions, 220 the court held a four-day trial
from January 10–13, 2022, using Zoom technology.221 Following briefing and
post-trial argument,222 the parties provided supplemental authority for the court’s
review on September 22, 2023, and January 24, 2024.223
216 Dkt. 98. 217 Dkts. 105, 108. 218 Dkts. 109, 111–12. 219 Dkts. 126, 128. 220 Dkt. 130 (Plaintiffs’ September 24, 2021 Motion to Compel Discovery); Dkt. 144 (Plaintiffs’ November 18, 2021 Motion to Compel Compliance with Subpoena); Dkt. 151 (Plaintiffs’ November 23, 2021 Motion to Compel Discovery and for Sanctions and Other Relief); Dkts. 195–97 (Versa Defendants’ December 23, 2021 Motions in Limine); Dkt. 199 (Plaintiffs’ December 28, 2021 Motion in Limine for Spoliation Sanctions); see Dkts. 148, 150, 182–83, 217–20 (addressing discovery disputes). 221 Dkt. 229. 222 Dkts. 237, 243–44, 256, 259, 262, 264. On May 5, 2022, during post-trial briefing, the Versa Defendants advised the court that they had filed bankruptcy petitions under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Pennsylvania. Dkt. 246. Accordingly, this action was subject to the automatic stay in 11 U.S.C. § 362. On September 21, 2022, the bankruptcy court approved a stipulation that provided relief from the stay to allow this action to proceed. Dkt. 249. 223 Dkts. 267–69, 272.
44 2. The New York Action This is not the only proceeding related to Domus’s acquisition of BSW’s
assets. On July 3, 2018, a commercial landlord filed an action in New York state
court against BSW, Versa, Domus, and the officers and directors of those entities
regarding a commercial lease agreement. 224 The lease gave BSW’s subsidiary,
BridgeStreet Corporate Housing LLC (“BCH LLC”), the right to sublease
apartments for temporary corporate housing. 225 The action sought, among other
things, enforcement of a guaranty contained in the lease. 226
The New York trial court granted the landlord’s motion for summary
judgment, finding that Versa and Domus were merely continuing the operations of
BCH LLC, and thus remained liable for the lease.227 The New York Supreme Court,
47 E. 34th St. (NY), L.P. v. BridgeStreet Worldwide, Inc., C.A. No. 653057/2018 (N.Y. 224
Sup. Ct. July 3, 2018). 225 Dkt. 267 Ex. A at 2. 226 Id. at 2–3. 227 Id. at 1. Plaintiffs argued in their post-trial reply brief that the New York trial court’s decision in 47 East 34th Street (NY), L.P. v. BridgeStreet Worldwide, Inc., 2022 WL 1225381 (N.Y. Sup. Ct. Apr. 26, 2022), collaterally estopped Defendants to argue that entire fairness does not apply to the Pre- and Post-Forbearance Directors’ actions. Pls.’ Post-Trial Reply Br. 1–6. The New York trial court’s decision has since been reversed. See 47 E. 34th St. (NY) L.P. v. BridgeStreet Worldwide, Inc., 197 N.Y.S.3d 3, 13 (N.Y. App. Div. 2023). Regardless, the issues before the New York trial court that Plaintiffs rely upon were not identical to those in this case and were not necessary to the judgment in the New York action. See D’Arata v. N.Y. Cent. Mut. Fire Ins. Co., 564 N.E.2d 634, 636 (N.Y. 1990) (noting that collateral estoppel bars a party from relitigating an issue decided against it only when the identical issue was necessarily decided in the prior action). In any event, the trial court’s decision was reversed, and neither party asks the court to apply collateral
45 Appellate Division, First Department later reversed that decision, finding that there
was no evidence of any conveyance for less than fair value. 228 The landlord’s
subsequent applications for reargument or for leave to further appeal the First
Department’s decision were denied.229
II. ANALYSIS
To succeed at trial, Plaintiffs must prove each element of each of their claims
against each defendant by a preponderance of the evidence. S’holder Representative
Servs. LLC v. Gilead Scis., Inc., 2017 WL 1015621, at *15 (Del. Ch. Mar. 15, 2017),
aff’d, 177 A.3d 610 (Del. 2017) (TABLE). Preponderance of the evidence “has been
defined to mean the side on which ‘the greater weight of the evidence’ is found.”
Taylor v. State, 748 A.2d 914, 914 (Del. 2000) (TABLE) (quoting Reynolds v.
Reynolds, 237 A.2d 708, 711 (Del. 1967)); Del. Express Shuttle, Inc. v. Older, 2002
WL 31458243, at *17 (Del. Ch. Oct. 23, 2002) (“Proof by a preponderance of the
evidence means proof that something is more likely than not. It means that certain
evidence, when compared to the evidence opposed to it, has the more convincing
force and makes you believe that something is more likely true than not.” (internal
quotation marks omitted)).
estoppel based upon the First Department’s September 2023 decision reversing the New York trial court. 228 Dkt. 267 Ex. A at 13. 229 Dkt. 272 Ex. 1.
46 A. Count V (Breach of Shareholders Agreement) To prevail on a breach of contract claim, a plaintiff must meet its burden of
proof on, “first, the existence of the contract, whether express or implied; second,
the breach of an obligation imposed by that contract; and third, the resultant damage
to the plaintiff.” VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 612 (Del.
2003).
GB-SP argues that BSW, Curtis, Davis, Doheny, LaCivita, Scher, and Worker
(the “Count V Defendants”) breached the Shareholders Agreement by depriving GB-
SP of its rights to (1) receive information concerning BSW; (2) inspect BSW’s
finances and accounts; (3) designate Kinsella as the GB-SP Director; (4) select and
appoint the independent directors and board chairman alongside the Management
Directors; and (5) have the GB-SP Director attend BSW board meetings held no less
than every other month.230
1. The Count V Defendants are Parties to the Shareholders Agreement.
Five of the seven Count V Defendants—Davis, Doheny, LaCivita, Scher, and
Worker—argue that they cannot be liable for any breach of the Shareholders
Agreement because they are not parties to the agreement.231 The original
230 Pls.’ Post-Trial Opening Br. 47; see, e.g., JX 1 §§ 2.1(a)–(b), 2.2, 3.3(a)(ii)(A), 3.3(a)(ii)(C), 3.5, 3.6(d). 231 BSW Defs.’ Post-Trial Answering Br. 22.
47 Shareholders Agreement, executed in January 2011, is signed by BSW, GB-SP,
Curtis, Stephen Hanton, Jon Wohlfert, and BridgeStreet Worldwide Management
Company Phantom Share Program Trust. 232 Sections 6.3 and 6.4 of the Shareholders
Agreement state that BSW will sell shares of Class B common stock to Worker, as
CEO, and each of the directors appointed pursuant to Section 3.3(a)(ii)(C).233 Each
purchaser of equity securities pursuant to Sections 6.3 and 6.4 is required to execute
a joinder agreement binding them to the conditions and provisions of the
Shareholders Agreement.234
There are no executed joinder agreements in the trial record for Davis,
Doheny, LaCivita, Scher, or Worker. Nevertheless, it is apparent that Davis,
Doheny, LaCivita, and Scher were each appointed pursuant to Section 3.3(a)(ii)(C),
and under Section 6.6, they were required to execute joinder agreements.235
Additionally, Davis, Doheny, LaCivita, Scher, and Worker each executed the
September 2011 amendment to the Shareholders Agreement, signing “as shareholder
232 JX 1 at 23–24. 233 Id. §§ 6.3, 6.4. 234 Id. § 6.6; id. at 26. 235 Pursuant to Section 3.3 of the Shareholders Agreement, the two Management Directors, the GB-SP Director, and four independent directors comprised the BSW board. Curtis and Worker were the Management Directors. Therefore, Davis, Doheny, LaCivita, and Scher were the four independent directors.
48 and director.”236 Both the Shareholders Agreement and the amendment defined
“shareholders” as “all other holders of shares of capital stock of the Company from
time to time,”237 and the amendment provided that it and the Shareholders
Agreement are “one and the same instrument.” 238 By signing the amendment as
shareholders, each of Davis, Doheny, LaCivita, Scher, and Worker became parties
to and bound by the Shareholders Agreement. Thus, Plaintiffs proved that the Count
V Defendants are all parties to the Shareholders Agreement.
2. The Count V Defendants’ Attempts to Evade Liability are Without Merit. The Count V Defendants assert an array of defenses and arguments to evade
liability for breach of the Shareholders Agreement. Each is without merit. First, the
Count V Defendants cite Huff Energy Fund, L.P. v. Gershen, 2016 WL 5462958
(Del. Ch. Sept. 29, 2016), for the proposition that directors or officers “are not liable
on corporate contracts as long as they do not purport to bind themselves
individually.”239 Huff Energy does not help the Count V Defendants. Unlike the
directors in Huff Energy, who bound themselves to the shareholders agreement
236 JX 10 at 3–8. In addition, the stipulation of settlement identified Curtis, Davis, Doheny, LaCivita, Scher, and Worker as BSW stockholders and was signed on their behalf by their counsel. Dkt. 47 ¶ 3. 237 JX 1 at 1; JX 10 at 1. 238 JX 10 § 2. 239 BSW Defs.’ Post-Trial Answering Br. 23 (quoting Huff Energy, 2016 WL 5462958, at *7).
49 solely in their representative capacity, Davis, Doheny, LaCivita, Scher, and Worker
bound themselves individually as “shareholders” to the Shareholders Agreement, as
amended. Cf. Huff Energy, 2016 WL 5462958, at *7 (“While it is true that [the
directors] signed the Shareholders Agreement, it is clear on the face of the document
that they did so in a representative, not individual, capacity. . . . The [directors] were
not personally obligated to perform under the contract and cannot be held liable for
breach of the contract.”).
The Count V Defendants next argue that claims pertaining to the Shareholders
Agreement may only be asserted as part of GB-SP’s fiduciary duty claims.240 This,
too, ignores that Curtis, Davis, Doheny, LaCivita, Scher, and Worker are parties to
the Shareholders Agreement as directors and as stockholders. Cf. Lacey v. Mota-
Velasco, 2021 WL 508982, at *1 (Del. Ch. Feb. 11, 2021) (concluding that claims
asserted against directors, solely in that capacity, for breach of the company’s
certificate of incorporation sounded in fiduciary liability, not contractual liability).
Unlike in Lacey, GB-SP asserted its breach of contract claim against the Count V
Defendants as stockholders and contractual parties to the Shareholders Agreement.
Therefore, Lacey is inapposite, and GB-SP’s claim for breach of the Shareholders
240 Id. at 24.
50 Agreement against the parties to that agreement is a direct claim for breach of
contract.241
The Count V Defendants next contend that they cannot be held liable for
breach of the Shareholders Agreement because they relied on the Company’s
counsel and are protected under 8 Del. C. § 141(e).242 Under Delaware law, directors
are permitted to rely on the advice and counsel of professionals and experts:
A member of the board of directors, or a member of any committee designated by the board of directors, shall, in the performance of such member’s duties, be fully protected in relying in good faith upon the records of the corporation and upon such information, opinions, reports or statements presented to the corporation by any of the corporation’s officers or employees, or committees of the board of directors, or by any other person as to matters the member reasonably believes are within such other person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the corporation.
8 Del. C. § 141(e).
The Count V Defendants’ invocation of Section 141(e) fails for at least three
independent reasons. First, a defense based on Section 141(e) is an affirmative
defense. See Manzo v. Rite Aid Corp., 2002 WL 31926606, at *3 n.7 (Del. Ch. Dec.
19, 2002) (observing that “the protections of § 141(e) would constitute an
241 The Count V Defendants’ argument also ignores that they acknowledged specific performance and damages would be available against them in the event of a breach of the Shareholders Agreement. JX 1 § 7.10. 242 BSW Defs.’ Post-Trial Answering Br. 25–27.
51 affirmative defense”), aff’d, 825 A.2d 239 (Del. 2003) (TABLE); In re Trados Inc.
S’holder Litig. (Trados II), 73 A.3d 17, 56 (Del. Ch. 2013) (referring to a defense of
reliance on advisers under Section 141(e) as an “affirmative defense”); In re
Orchard Enters., Inc. S’holder Litig., 88 A.3d 1, 48 (Del. Ch. 2014) (same).
Affirmative defenses are required to be asserted in an answer or in an amended
answer. See Ct. Ch. R. 8(c) (“In responding to a pleading, a party must affirmatively
state any avoidance or affirmative defense.”); Knutkowski v. Cross, 2011 WL
6820335, at *2 (Del. Ch. Dec. 22, 2011) (observing that Court of Chancery Rules
8(c), 12(b), and 15(a) “suggest that a defendant is required to plead affirmative
defenses in her answer, but that, if the defendant fails to do so, the Court has
discretion to allow the defendant to amend her answer”); Anderson v. Hill, 2020 WL
2128738, at *5 n.35 (Del. Ch. May 5, 2020) (“Court of Chancery Rule 8(c) requires
a defendant to raise an affirmative defense . . . in a responsive pleading.”). As a
general rule, the failure to raise an affirmative defense in an answer constitutes
waiver. See Anderson, 2020 WL 2128738, at *5 n.35 (“[An affirmative defense]
was not plead in Defendants’ answer, nor is there a motion before the Court to amend
Defendants’ answer, so that defense is waived unless an amendment is subsequently
sought and allowed.”). Here, the Count V Defendants did not assert a Section 141(e)
defense in their answer and did not at any point seek to amend their answer. Thus,
the defense is waived.
52 Second, the Count V Defendants cite no authority for the proposition that they
can rely on Section 141(e) as a complete defense to claims asserted against them for
breach of the Shareholders Agreement in their capacities as stockholders.243 Third,
the Count V Defendants cite no specific evidence of any attorney advising them that
they could refuse to seat Kinsella as the GB-SP Director or deprive GB-SP of its
information rights under the Shareholders Agreement.244 At best, Akin Gump
created a gauntlet to slow GB-SP from enforcing its rights after it had been acquired
by IEOT. But by March 26, 2013, there could be no mistake that IEOT’s acquisition
of GB-SP had not violated the Shareholders Agreement, and IEOT-controlled
GB-SP had an enforceable right under the Shareholders Agreement to designate
Kinsella as the GB-SP Director and to obtain information as a stockholder.245
3. The Alleged Breaches
With the Count V Defendants’ preliminary defenses resolved, the court
evaluates each provision of the Shareholders Agreement that GB-SP claims was
breached.
243 See id. at 25–27. 244 Worker said it was not in his “purview” to make decisions concerning GB-SP’s rights and claimed not to know if the Pre-Forbearance Directors discussed Akin Gump’s conclusions. Tr. 718:4–13, 721:10–17, 728:5–22 (Worker). Worker’s testimony did not come close to establishing a legitimate defense based on Section § 141(e). 245 See JX 170 at 1.
53 a. Sections 2.1(b) and (c)
Section 2.1(b) of the Shareholders Agreement required BSW to furnish to
each stockholder, as soon as practicable after the end of each fiscal year and in any
event within 120 days thereafter, BSW’s audited consolidated balance sheet, income
statement, and cash flow statement.246 Section 2.1(c) required BSW to furnish to
each shareholder, as soon as practicable after the end of the first, second, and third
quarterly accounting periods and in any event within 45 days thereafter, a
consolidated balance sheet, income statement, and cashflow statement. 247
GB-SP, in all relevant periods to this dispute, was a stockholder of BSW.248
BSW’s fiscal year ended on December 31, 2012. Under the Shareholders
Agreement, BSW had 120 days from that date to provide GB-SP with BSW’s
audited consolidated balance sheet, income statement, and cash flow statement. The
first quarter ended on March 31, 2013, triggering BSW’s obligation to provide
GB-SP with a consolidated balance sheet, income statement, and cash flow
statement within 45 days. On June 14, 2013, more than two months after the yearly
information was due and around a month after the quarterly information was due,
GB-SP had yet to receive the required financial information and sent a letter to BSW
JX 1 § 2.1(b). Section 2.1(b) did not impose an obligation on stockholders, just the 246
Company. 247 Id. § 2.1(c). 248 PTO ¶¶ 6, 25; Tr. 13:13–20 (Kinsella).
54 requesting it. 249 GB-SP again renewed its request on July 10, 2013, asking for
largely the same information 250 and noting that since its last letter, “most of the
demanded documents and other materials have not been provided.” 251
Despite these repeated requests and GB-SP’s contractual rights to receive the
requested information, the Count V Defendants did not fulfill these requests.
GB-SP’s July 10 letter noted that most of the demanded documents had not yet been
delivered. The Count V Defendants do not attempt to argue that these requests were
ever fulfilled. GB-SP should not have even needed to request this information, as
BSW was required to deliver it under the Shareholders Agreement. When BSW
failed to deliver the required information, BSW breached Sections 2.1(b) and (c) of
the Shareholders Agreement.
b. Section 2.2
Section 2.2 of the Shareholders Agreement required BSW to provide a
stockholder with information relating to the financial condition, business, prospects,
249 JX 47. 250 The requests made on June 14, 2013, differ from those made on July 10, 2013, in two respects. The first request sought an audited consolidated balance sheet, income statement, and cash flow statement for fiscal years ended December 31, 2012, and December 31, 2013. JX 47 at 3. The second request sought the same information, but for fiscal years ended December 31, 2011, and December 31, 2012. JX 48 at 4. The second request also sought “all documents relating to the investment in BSW by Versa [] or any of its affiliates.” Id. at 5. 251 JX 48 at 2.
55 or corporate affairs of BSW that a stockholder reasonably requested.252 GB-SP’s
June 14 and July 10 letters also requested BSW’s organizational documents, records
from board and stockholder meetings, information about the Company’s capital
structure, and other reasonable categories of information under Section 2.2.253 As
with the financial statements, GB-SP did not receive this information despite
repeated requests over several months. The Company does not dispute the
reasonableness of GB-SP’s requests or contend that the Company had a right to
withhold such information. BSW simply failed to comply with GB-SP’s requests
and kept GB-SP in the dark, thereby violating GB-SP’s inspection rights as a
stockholder under Section 2.2 of the Shareholders Agreement. When BSW failed to
deliver the required information, BSW also breached Section 2.2 of the Shareholders
c. Section 3.3(a)(ii)(A) Section 3.3 of the Shareholders Agreement detailed the procedures for
electing or designating members to BSW’s board of directors. Section 3.3(a) states:
For so long as any obligations under the Senior Credit Agreement remain outstanding or the Senior Lenders hold any Shares or the Warrants, each Shareholder will vote all of its Voting Stock and take all other necessary or desirable actions within its control (whether in the capacity of stockholder, director, member of the executive
252 JX 1 § 2.2. Section 2.2 did not impose an obligation on stockholders, just the Company. 253 JX 47 at 3–5; JX 48 at 4–6.
56 committee or officer of the Company or otherwise) in order to accomplish the following:
(i) Cause the Board to consist of not more than seven (7) members; and
(ii) If necessary for the election of such individuals to the Board, vote all of its Voting Stock in favor of the following persons:
(A) One (1) representative designated by [GB-SP] who shall not be an executive of the Company . . . (the “[GB-SP] Director”)[.] 254
Preventing a stockholder from exercising its bargained-for contractual protections in
a stockholders agreement constitutes a violation of the implied obligation to perform
the stockholders agreement in good faith. See Moore Bus. Forms, Inc. v. Cordant
Hldgs. Corp., 1998 WL 71836, at *8 (Del. Ch. Feb. 4, 1998), as revised (Mar. 5,
1998). Section 3.3(a)(ii)(A) required the Pre-Forbearance Directors, as
stockholders, to take all actions necessary or desirable to vote their stock in favor of
electing Kinsella as the GB-SP Director.
On December 24, 2012, IEOT sent a letter notifying BSW that IEOT “now
owns all of the issued and outstanding common stock in BSW previously owned by
GB-SP.”255 The letter also notified BSW that IEOT was appointing Kinsella as the
254 JX 1 § 3.3(a). 255 PTO ¶ 22; JX 23 at 4.
57 GB-SP Director.256 At this point, the Pre-Forbearance Board should have begun
taking the actions necessary to elect Kinsella as the GB-SP Director. Instead, on
December 28, 2012, Berchem from Akin Gump and Worker began scheming to
devise any basis to prevent Kinsella from being seated on the board. First, they
questioned the propriety of Kinsella’s ownership of GB-SP.257 This concern grew
out of GB-SP’s December 24, 2012 letter, which could be read to suggest that GB-
SP had directly transferred its BSW stock to IEOT. A transfer of GB-SP’s BSW
stock might have violated transfer restrictions imposed by GB-SP’s operating
agreement and the notice provisions of the Shareholders Agreement.258 On January
4, 2013, however, IEOT clarified that it had acquired ownership of GB-SP itself, and
GB-SP was still the owner of the BSW shares. 259 Having explained why BSW’s
concerns regarding GB-SP’s letter were unfounded, GB-SP renewed its demand to
have Kinsella seated as the GB-SP Director and to receive the requested
documents.260
256 Id. 257 See JX 217; JX 218. 258 JX 24 at 2. 259 JX 25 at 1. 260 Id. at 2.
58 For the next ten months, BSW and the Pre-Forbearance Directors stonewalled
GB-SP and prevented Kinsella from being seated until October 11, 2013.261 GB-SP
proved that each of the Count V Defendants failed to take “all . . . necessary or
desirable actions within its control” to seat Kinsella on the BSW board. 262 The
ten-month delay in seating Kinsella was antithetical to the Count V Defendants’
obligations in the Shareholders Agreement and constituted a breach of Section
3.3(a)(ii)(A).263 Because the Count V Defendants breached Section 3.3(a)(ii)(A),
GB-SP was deprived of its governance rights in Sections 3.3(a)(ii)(C) and 3.6(d).
4. The Remedy for Breach of the Shareholders Agreement
GB-SP seeks various forms of relief for breach of the Shareholders
Agreement. First, it seeks rescission of all board action taken after the Count V
261 See JX 29, JX 36, JX 39, JX 40, JX 43, JX 46, JX 52, JX 61 (February 4, March 10, April 2, April 9, May 2, June 12, August 2, and September 17, 2013 board meetings held without a GB-SP designee); JX 45, JX 47, JX 48, JX 57 (June 10, June 14, July 10, August 20, 2013 letters to BSW and Akin Gump pressing for GB-SP’s informational and corporate governance rights under the Shareholders Agreement). 262 JX 1 § 3.3(a). 263 The Count V Defendants make two other arguments that do not merit serious consideration. First, they argue that the delay did not harm Kinsella because “[o]nce Kinsella was seated on the Board, he had ample opportunity to voice his thoughts on the best solution to BSW’s debt crisis.” BSW Defs.’ Post-Trial Answering Br. 33. But by October 2013, the Company had already entered into the Forbearance Agreement, and by failing to elect Kinsella, the Count V Defendants had already breached the Shareholders Agreement. Second, the Count V Defendants point to the director exculpation provision in Section 7(a) of BSW’s amended and restated certificate of incorporation. Id. at 36–37; see JX 5 § 7(a). Section 7(a) of BSW’s certificate exculpates directors from personal liability for money damages for duty of care claims, not breach of contract claims in their individual capacities as parties to the Shareholders Agreement.
59 Defendants refused to seat Kinsella as a director.264 Second, in the alternative, GB-
SP seeks rescissory damages.265 Third, GB-SP seeks an order requiring the
production of information sought under the Shareholders Agreement.266 GB-SP
separately argues that it is entitled to its attorneys’ fees and costs pursuant to Section
7.6 of the Shareholders Agreement.267
a. Rescission
Rescission is an equitable remedy that “results in abrogation or ‘unmaking’
of an agreement, and attempts to return the parties to the status quo.” Norton v.
Poplos, 443 A.2d 1, 4 (Del. 1982). Rescission is an extraordinary remedy and is
granted in “rare scenarios.” Grzybowski v. Tracy, 2013 WL 4053515, at *7 (Del.
Ch. Aug. 9, 2013); see Craft v. Bariglio, 1984 WL 8207, at *12 (Del. Ch. Mar. 1,
1984) (“[R]escission will not be granted unless the Court can and does, by its decree,
restore the parties substantially to the position which they occupied before making
the contract.”). GB-SP acknowledges that rescission is impractical at this stage,
given that the challenged transactions occurred more than a decade ago. 268 Instead,
it seeks the alternative remedy of rescissory damages.
264 Pls.’ Post-Trial Opening Br. 54–56. 265 Id. at 55. 266 Id. at 48. 267 Id. at 49; Pls.’ Post-Trial Reply Br. 7. 268 Pls.’ Post-Trial Opening Br. 11, 55.
60 b. Rescissory Damages
Rescissory damages are the “monetary equivalent of rescission,” and may be
awarded if the remedy of rescission is impractical but otherwise warranted. Lynch
v. Vickers Energy Corp., 429 A.2d 497, 501 (Del. 1981), overruled in part on other
grounds by Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983). “Rescissory
damages are designed to be the economic equivalent of rescission in a circumstance
in which rescission is warranted, but not practicable.” Gotham P’rs, L.P. v.
Hallwood Realty P’rs, L.P., 855 A.2d 1059, 1072 (Del. Ch. 2003), aff’d, 840 A.2d
641 (Del. 2003) (TABLE). “[R]escissory damages are the exception, not the rule.”
Universal Enter. Gp., L.P. v. Duncan Petroleum Corp., 2014 WL 1760023, at *6
(Del. Ch. Apr. 29, 2014), aff’d, 99 A.3d 228 (Del. 2014) (TABLE).
An award of rescissory damages “rests in the court’s sound discretion.”
Telstra Corp. v. Dynegy, Inc., 2003 WL 1016984, at *8 n.22 (Del. Ch. Mar 4, 2003).
Rescissory damages are inappropriate here for the simple reason that GB-SP has
delayed far too long in presenting its claim. “It is a well-established principle of
equity that a plaintiff waives the right to rescission by excessive delay in seeking it.”
Gotham P’rs L.P. v. Hallwood Realty P’rs, L.P., 817 A.2d 160, 174 (Del. 2002)
(internal quotation marks omitted); see In re S. Peru Copper Corp. S’holder Deriv.
Litig., 52 A.3d 761, 815 (Del. Ch. 2011) (stating that a “plaintiff’s delay in litigating
the case renders it inequitable to use a rescission-based approach”), aff’d sub nom.
61 Ams. Mining Corp. v. Theriault, 51 A.3d 1213 (Del. 2012). Accordingly, “if
rescission itself is unwarranted because of the plaintiff’s delay, so are rescissory
damages.” S. Peru Copper, 52 A.3d at 815.
GB-SP has unreasonably delayed in seeking rescissory relief. GB-SP could
have asserted its claims to enforce its inspection and director designation rights in
early 2013 after BSW rejected its initial requests. Instead, GB-SP waited until
March 2014 to file this action, five months after Kinsella had already been seated as
a director, and after the Post-Forbearance Board had approved the Consensual
Foreclosure. Moreover, even after filing the complaint, GB-SP delayed for years in
litigating the case. Accordingly, GB-SP is not entitled to rescissory damages for
breach of the Shareholders Agreement. See Cobalt Operating, LLC v. James Crystal
Enters., LLC, 2007 WL 2142926, at *29 (Del. Ch. July 20, 2007) (stating that
rescinding a transaction five years after its consummation would be an extraordinary
remedy), aff’d, 945 A.2d 592 (Del. 2008) (TABLE); S. Peru Copper, 52 A.3d at 815
(declining to award rescissory damages where plaintiffs delayed in litigating their
case); but see Orchard Enters., 88 A.3d at 40–41 (refusing, at the summary judgment
stage, to preclude an award of rescissory damages where plaintiff waited two years
to file its complaint and discussing cases where rescissory damages were awarded
with even greater delays). GB-SP’s delay in asserting its contract claims and then
62 its prolonged delay in bringing its case to trial renders rescissory damages an unjust
result at this stage. 269
c. Compensatory Damages
GB-SP has proved that the Count V Defendants breached the Shareholders
Agreement and that those breaches deprived GB-SP of its information and
governance rights. In a breach of contract case, the non-breaching party is entitled
to recover “damages that arise naturally from the breach or that were reasonably
foreseeable at the time the contract was made.” Tackett v. State Farm Fire & Cas.
Ins. Co., 653 A.2d 254, 265 (Del. 1995). “Contract damages ‘are designed to place
the injured party in an action for breach of contract in the same place as he would
have been if the contract had been performed. Such damages should not act as a
windfall.’” Paul v. Deloitte & Touche, LLP, 974 A.2d 140, 146 (Del. 2009) (quoting
Huggins v. B. Gary Scott, Inc., 1992 WL 179482, at *1 (Del. Super. June 25, 1992)).
269 GB-SP also fails to articulate a coherent rescissory damages theory. “Rescissory damages restore a plaintiff to the position occupied before the defendant’s wrongful acts.” Schultz v. Ginsburg, 965 A.2d 661, 669 (Del. 2009) (internal quotation marks omitted), overruled on other grounds by Urdan v. WR Cap. P’rs, LLC, 244 A.3d 668 (Del. 2020). GB-SP attempts to equate the value of GB-SP’s equity interest to the value of GB-SP’s information and governance rights. See JX 157 at 18–19, 20 (Plaintiffs’ expert valuing GB-SP’s equity interest in BSW as $4.8 million as of December 31, 2012); Pls.’ Post-Trial Opening Br. 46 (arguing that GB-SP has rescissory damages of either $4.8 million, or alternatively, $2.5 million, which represents the value of GB-SP’s equity interest as of December 13, 2013). But GB-SP does not explain how awarding it the value of its equity stake in BSW would put it in the same position as if GB-SP had received the information that it requested and if BSW had promptly seated Kinsella as the GB-SP Director.
63 “‘Expectation damages are measured by the losses caused and gains prevented by
defendant’s breach.’” Id. at 146–47 (quoting ATACS Corp. v. Trans World
Commc’ns, Inc., 155 F.3d 659, 669 (3d Cir. 1998)).
Quantifying the value of governance rights is a difficult endeavor. See W.
Palm Beach Firefighters’ Pension Fund v. Moelis & Co., 311 A.3d 809, 860, 865
(Del. Ch. 2024) (explaining that “[g]overnance arrangements . . . involve control
rights [] so the presumptive remedy will be equitable relief enforcing the right” and
“it would be difficult for a court to construct a damages remedy for breach”); see
also Avner Kalay, The Market Value of Corporate Votes: Theory and Evidence from
Option Prices, 69 J. Fin. 1235, 1236 (2014) (explaining that “[s]eparating the value
of voting rights from that of cash flow rights . . . is not trivial” and analyzing three
different methods of estimating the value of voting rights). GB-SP does not attempt
to establish the value of its information and governance rights or to present a
damages theory. The court declines to do so on its own. That does not mean,
however, that GB-SP is entitled to no relief.
“Even if compensatory damages cannot be or have not been demonstrated, the
breach of a contractual obligation often warrants an award of nominal damages.”
Ivize of Milwaukee, LLC v. Compex Litig. Support, LLC, 2009 WL 1111179, at *12
(Del. Ch. Apr. 27, 2009); LaPoint v. AmerisourceBergen Corp., 2007 WL 2565709,
at *9 (Del. Ch. Sept. 4, 2007) (“[W]here the amount of damages may not be
64 estimated with reasonable certainty despite a showing of breach on the part of
defendant, the Court may still award nominal damages.”), aff’d, 956 A.2d 642 (Del.
2008) (TABLE). Nominal damages are “‘usually assessed in a trivial amount,
selected simply for the purpose of declaring an infraction of the Plaintiff’s rights and
the commission of a wrong.’” Ivize of Milwaukee, 2009 WL 1111179, at *12
(quoting Penn Mart Supermarkets, Inc. v. New Castle Shopping LLC, 2005 WL
3502054, at *15 (Del. Ch. Dec. 15, 2005)).
The Count V Defendants argue that the breach of contract claim has no
associated harm, as Kinsella’s vote, numerically, would not have changed the
board’s ultimate decisions. That cannot be the case. Delaware has a board-centric
system. See OptimisCorp v. Waite, 137 A.3d 970, 970 (Del. 2016) (TABLE) (noting
that Delaware “value[s] the collaboration that comes when the entire board
deliberates on corporate action and when all directors are fairly accorded material
information”); J. Travis Laster & John Mark Zeberkiewicz, The Rights & Duties of
Blockholder Directors, 70 Bus. Law. 33, 35 (2015) (“Delaware corporate law
embraces a ‘board-centric’ model of governance. This model expects that all
directors will participate in a collective and deliberative decision-making process.”).
As a foundational case in this jurisdiction has explained:
Each member of a corporate body has the right to consultation with the others and has the right to be heard upon all questions considered, and it is presumed that if the absent members had been present they might have dissented and their arguments might have convinced the majority
65 of the unwisdom of their proposed action, and thus have produced a different result.
Lippman v. Kehoe Stenograph Co., 95 A. 895, 899 (Del. Ch. 1915) (internal
quotation marks omitted). In recognition of this principle, “[w]e proceed on the
premise that if proper procedures were followed, then even a director in the minority
could, like the 12th juror, sway the rest of his board colleagues to what he believed
was the right answer.” Perry v. Sheth, C.A. No. 2020-0024-JTL, at 51:21–52:1 (Del.
Ch. Jan. 16, 2020) (TRANSCRIPT). The Count V Defendants’ breach of the
Shareholders Agreement prevented GB-SP’s designee from being heard in the
boardroom. They also purposefully delayed seating Kinsella so as to prevent him
from exercising the contractual right to vote on the Forbearance Agreement and to
appoint the independent directors who would replace Davis, Doheny, LaCivita, and
Scher when they agreed not to seek re-election. GB-SP was harmed and is entitled
to a remedy.
Accordingly, having proved breach, but having failed to prove damages, GB-
SP is awarded nominal damages of $1.
d. Attorneys’ Fees and Expenses
“Delaware generally follows the American Rule, under which litigants are
responsible for their own attorneys’ fees, regardless of the outcome of the lawsuit.”
Bako Pathology LP v. Bakotic, 288 A.3d 252, 280 (Del. 2022). An exception to the
American Rule “is found in contract litigation that involves a fee shifting provision.”
66 Id. (internal quotation marks omitted). When a contract contains a fee shifting
provision, Delaware courts will enforce that provision. Id.
Section 7.6 of the Shareholders Agreement provides that the prevailing party
in any dispute “shall be entitled to recover from the losing party all fees, costs and
expenses of enforcing any right of such prevailing party under or with respect to [the
Shareholders] Agreement,” including reasonable attorneys’ fees and expenses.270
Having prevailed in proving a breach of the Shareholders Agreement, GB-SP is
entitled to recover under Section 7.6 its attorneys’ fees and expenses incurred in
proving the Count V Defendants’ breach of the Shareholders Agreement.
B. Count VI (Tortious Interference with Shareholders Agreement)
In the complaint, GB-SP asserted a claim against the Versa Defendants for
tortious interference with the Shareholders Agreement. 271 On May 31, 2018, the
court granted the Versa Defendants’ motion to dismiss this claim with prejudice.272
In their post-trial briefing, however, GB-SP seeks to resurrect this claim.273 GB-SP
may not do so. A “dismissal with prejudice is law of the case.” Sciabacucchi v.
Malone, 2021 WL 3662394, at *1 (Del. Ch. Aug. 18, 2021). “The law of the case
doctrine . . . is intended to prevent pernicious serial litigation of issues already
270 JX 1 § 7.6. 271 Compl. ¶¶ 100–02. 272 Dkt. 92 at 26:1–8. 273 Pls.’ Post-Trial Opening Br. 10–11, 49–51; Pls.’ Post-Trial Reply Br. 19–25.
67 decided in the matter at bar.” Id. “The efficient disposition of a case requires that
each stage of litigation build on the previous stages, and that parties not be free to
relitigate every earlier ruling.” Nebel v. Sw. Bancorp., Inc., 1999 WL 135259, at *5
(Del. Ch. Mar. 9, 1999). “[T]o avoid dismissal under the law of the case doctrine,
the plaintiffs must submit some new information or allegations that would serve to
revitalize the claims that were previously raised, adjudicated, and found deficient.”
Id. Thus, “[o]nly where the moving party can show that justice compels departure
from the doctrine due to clear error, injustice, or a change in circumstances is such
relief granted.” Sciabacucchi, 2021 WL 3662394, at *1.
Plaintiffs do not attempt to address the law of the case doctrine in their
briefing. Accordingly, they have waived any argument against its application. See
Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (“Issues not briefed are
deemed waived.”). As such, here, the law of the case doctrine operates to bar the
re-litigation of Count VI.
C. Count IV (Violation of BSW’s By-Laws)
Count IV alleges that the BSW Defendants breached BSW’s by-laws by not
providing notice of board meetings to Kinsella or permitting him to attend board
meetings from late December 2012 until his election in October 2013. The BSW
Defendants argue that the exclusion of Kinsella from board meetings prior to
October 11, 2013, did not violate the by-laws because Kinsella was not a director
68 prior to that date.274 Because Kinsella was not a director, the BSW Defendants
maintain that Kinsella had no right to be informed of or participate in board
meetings. The court agrees. Under the by-laws, Kinsella had no right to receive
notice of or to attend board meetings until he became a director. 275 The Company’s
refusal to seat Kinsella as a director violated the Shareholders Agreement, not the
by-laws.
In addition, Kinsella claims that the BSW Defendants violated the by-laws
because the March 2, 2014 special meeting of the board was not called by the
President, and Kinsella did not receive timely notice of the meeting. Kinsella argues
that the actions taken at the March 2 special meeting were void ab initio and not
subject to ratification. 276
As a general matter, “[u]nlike with regular meetings, directors must be given
notice of special meetings.” Klaassen v. Allegro Dev. Corp., 106 A.3d 1035, 1045
n.64 (Del. 2014); see also Lippman, 95 A. at 898 (“It is, of course, fundamental that
a special meeting held without due notice to all the directors is not lawful[.]”). The
274 BSW Defs.’ Post-Trial Answering Br. 44. 275 JX 2 Art. III § 6 (“Regular meetings of the Board of Directors may be held with one (1) day’s notice to each director[.]” (emphasis added)); id. Art III § 7 (“Special meetings of the Board of Directors may be called by the President on two (2) days’ notice to each director[.]” (emphasis added)). 276 Pls.’ Post-Trial Opening Br. 52–55.
69 BSW by-laws required two-days’ notice for special meetings of the board.277
Kinsella argues that the BSW Defendants breached the by-laws because notice of
the March 2 special meeting was sent eight minutes after the two-day notice
deadline. Kinsella cites to this court’s decisions in Schroder v. Scotten, Dillon
Company, 299 A.2d 431 (Del. Ch. 1972), Moore Business Forms, Inc. v. Cordant
Holdings Corporation, 1998 WL 71836 (Del. Ch. Feb. 4, 1998), and Rainbow
Mountain v. Begeman, 2017 WL 1097143 (Del. Ch. Mar. 23, 2017), in support of
his position.
In Schroder, a board of directors failed to provide notice to a director of one
special meeting and falsely informed the same director that a second special meeting
was rescheduled. 299 A.2d at 435–36. This court held that the actions taken at both
meetings were invalid because the director did not receive notice of the meetings,
and “special meeting[s] held without due notice to all directors as required by the
by-laws [are] not lawful and all acts done at such [] meeting[s] are void.” Id. at 435.
This court also held that the director’s absence at the second meeting was procured
by trickery because the board chairman represented that the meeting had been
rescheduled, and the director relied on that representation in not attending the
277 JX 2 Art. III § 7. The by-laws do not speak in terms of hours or minutes. The BSW Defendants concede that the notice was late but argue that the minor delay does not constitute a breach because Kinsella would not have seen the notice until the next morning even if it had been sent eight minutes earlier. BSW Defs.’ Post-Trial Answering Br. 46– 48.
70 meeting. Id. at 436 (“A quorum obtained by trickery is invalid, and the reasoning
which forbids trickery in securing a quorum applies equally well to securing the
absence of opposing directors from a meeting by representing that such a meeting
will not be held.” (citations omitted)).
In Moore, a board of directors intentionally did not give notice of a special
meeting to a director. 1998 WL 71836, at *4, *7. At a second special meeting a few
weeks later that the director attended, the board purported to ratify resolutions that
it had adopted at the first special meeting. Id. at *7. This court held that actions
taken at the first special meeting were void and could not be ratified because the
director was intentionally not given notice of the meeting. Id. In doing so, this court
observed that “Delaware law is well settled that board action taken in the absence of
a director, where the absence is obtained by trickery or deceit or where notice of a
special meeting was not given to a director, is void.” Id.
In Rainbow Mountain, the court held that two members were removed without
cause in violation of the company’s by-laws because they were not given notice of
their proposed removal or the opportunity to be heard. 2017 WL 1097143, at *9.
Because the removal contravened the company’s by-laws, the court concluded that
equitable defenses could not be asserted, and the defendant was not estopped to
71 argue that the members were improperly terminated even though he participated in
their removal. Id. at *10.278
These cases are distinguishable. Rainbow Mountain did not involve a dispute
over notice of a special board meeting, so it is inapposite. And, unlike in Schroder
and Moore, there was no trickery employed by the BSW Defendants to procure
Kinsella’s absence at the special meeting. 279 Kinsella received notice of the special
278 The court in Rainbow Mountain cited approvingly the following proposition: Delaware law distinguishes between (i) a failure to give notice of a board meeting in the specific manner required by the bylaws and (ii) a contention that the lack of notice was inequitable. In the former scenario, board action taken at the meeting is void. In the latter scenario, board action is voidable in equity, so equitable defenses apply. . . . [T]raditionally when a board took action in contravention of a mandatory bylaw, the board action was treated as void. 2017 WL 1097143, at *9 (quoting Klaassen v. Allegro Dev. Corp., 2013 WL 5739680, at *19 (Del. Ch. Oct. 11, 2013), aff’d, 106 A.3d 1035 (Del. 2014)). The Supreme Court affirmed the holding in Klaassen but declined to opine on this rule. Klaassen, 106 A.3d at 1046 n.75 (“We need not approve or disapprove that rule, because such a broad pronouncement is not necessary to decide this case.”). In a later case, this court questioned whether Klaassen accurately expressed the rule, explaining instead that “action taken in violation of a bylaw” should be treated “as voidable, not void (as long as it was action that the corporation otherwise had authority to take under the DGCL and in compliance with its certificate of incorporation.” XRI Inv. Hldgs. LLC v. Holifield, 283 A.3d 581, 667 (Del. Ch. 2022), aff’d in part, rev’d in part, 304 A.3d 896 (Del. 2023). The Supreme Court did not address this issue on appeal. XRI Inv. Hldgs., 304 A.3d at 918 n.93. 279 Both parties cite to this court’s decision in Pepsi-Cola Bottling Company v. Woodlawn Canners, Inc., 1983 WL 18017 (Del. Ch. Mar. 14, 1983). Unlike in this case, the by-laws at issue in Pepsi-Cola expressly provided that notice was not required for special board meetings. Id. at *12. As such, Pepsi-Cola is distinguishable.
72 meeting, appreciated its significance, and decided not to attend. 280 At no time prior
to the meeting did Kinsella complain that the notice failed to comply with the
The purpose of advanced notice for special board meetings is to ensure full
participation in corporate democracy and to disincentivize conduct designed to
prevent directors from participating in board decision making. See Lippman, 95 A.
at 898; OptimisCorp, 137 A.3d at 970. Kinsella was not prevented from
participating in the board’s decision-making process. To the contrary, Kinsella was
aware of the special meeting and could have attended but made the decision not to.281
In light of these circumstances, the court concludes that the minor delay in the
delivery of notice does not warrant invalidating the actions taken at the special
meeting.
Kinsella next argues that the BSW Defendants breached the by-laws because
“the [special] meeting was not called by the President or upon written request by
280 Tr. 61:7–22 (Kinsella) (explaining that he “decided not to attend [the special meeting] in protest”). Kinsella also conceded at trial that the delay was probably the result of “human error,” and even if the notice had been sent eight minutes earlier, he still would not have seen it until the next morning. Id. at 61:17, 163:20–164:20 (Kinsella). 281 JX 161 at 146:19–20 (Kinsella Dep.) (“It would’ve have been no problem to attend [the special meeting] by telephone.”); Tr. 164:21–165:4 (Kinsella) (“Q. And it would have been easy for you to attend the board meeting because it was telephonic; right, sir? A. I think I could have made the phone call, all right, if I -- yes, I think I could. Q. Right. And you chose not to; right, sir? A. I chose not to, yes.”).
73 two directors.”282 The by-laws provide that “[s]pecial meetings . . . may be called
by the President . . . [and] shall be called by the President . . . upon the written
request of a [sic] two (2) of the directors then in office.” 283 The by-laws further
provide that “[a]ny notice may be given by the Secretary.” 284 At the time the notice
was sent, Holland from Akin Gump was acting as BSW’s secretary. 285 Under the
by-laws, “[t]he Secretary . . . shall perform such other duties as may be prescribed
by the Board of Directors or President, under whose supervision he shall be.”286
There is nothing in the record to indicate that Holland was not acting on behalf of
the board or the President when he sent the notice of the special meeting—BSW’s
President, Curtis, was not deposed and did not testify at trial. 287 As such, the court
concludes that the BSW Defendants did not breach the by-laws.
282 Pls.’ Post-Trial Opening Br. 53. 283 JX 2 Art. III § 7. 284 Id. See JX 111 at 4 (February 25, 2014 board meeting minutes signed by Holland as “Acting 285
Secretary”); JX 116 at 5 (March 2, 2014 board meeting minutes signed by Holland as “Acting Secretary”). 286 JX 2 Art. VI § 10. 287 To the extent there is any dispute over whether Holland’s sending of the notice constituted a breach of the by-laws, the court concludes that no breach occurred. As acting Secretary, Holland was authorized under the by-laws to send notice of the special meeting. Id. Art. VI § 10 (“The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors[.]”). Further, the requirement of who sends the notice “must be regarded as precatory and ministerial, not mandatory.” In re Bigmar, Inc., 2002 WL 550469, at *19 (Del. Ch. Apr. 5, 2002); see, e.g., Sarabyn v. Jessco, Inc., 1978 WL 2504, at *2 (Del. Ch. Sept. 20, 1978) (declining to
74 D. Count I (Breach of Fiduciary Duty) Count I is a derivative claim for breach of fiduciary duty against the Director
Defendants. 288 “A claim for breach of fiduciary duty requires proof of two elements:
(1) that a fiduciary duty existed and (2) that the defendant breached that duty.”
Beard Rsch., Inc. v. Kates, 8 A.3d 573, 601 (Del. Ch. 2010), aff’d sub nom. ASDI,
Inc. v. Beard Rsch., Inc., 11 A.3d 749 (Del. 2010).
Directors of Delaware corporations owe two fundamental fiduciary duties to
the corporation and its stockholders—the duty of care and the duty of loyalty. Polk
v. Good, 507 A.2d 531, 536 (Del. 1986). “The fiduciary relationship requires that
the directors act prudently, loyally, and in good faith to maximize the value of the
corporation over the long-term[.]” Frederick Hsu Living Tr. v. ODN Hldg. Corp.
(ODN I), 2017 WL 1437308, at *18 (Del. Ch. Apr. 14, 2017), corrected (Apr. 25,
2017) (citing Gantler v. Stephens, 965 A.2d 695, 706 (Del. 2009)); see also Dohmen
v. Goodman, 234 A.3d 1161, 1168 (Del. 2020) (“These duties ‘do[] not operate
intermittently’ but are ‘the constant compass by which all director actions for the
corporation and interactions with its shareholders must be guided.’” (alteration in
original) (quoting Malone v. Brincat, 722 A.2d 5, 10 (Del. 1998))).
issue a TRO to enjoin a special meeting of stockholders where the notices and proxy materials were sent by the company’s president instead of the secretary as provided by the by-laws and characterizing the objection as “hyper-technical”). 288 The court previously concluded that demand was excused as to the fiduciary duty claims. Dkt. 92 at 13:18–15:4.
75 When a Delaware corporation is facing insolvency, a director’s fiduciary
responsibilities “do[] not change: directors must continue to discharge their
fiduciary duties to the corporation and its shareholders by exercising their business
judgment in the best interests of the corporation for the benefit of its shareholder
owners.” N. Am. Cath. Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d
92, 101 (Del. 2007); see also McRitchie v. Zuckerberg, 315 A.3d 518, 546 (Del. Ch.
2024) (“[E]ven in the vicinity of insolvency, the directors remain[] obligated to
strive to increase the value of the corporation for the ultimate benefit of its
stockholders.”).
When a Delaware corporation becomes insolvent, directors “continue to owe
fiduciary duties to the corporation for the benefit of all of its residual claimants, a
category which now includes creditors.” Quadrant Structured Prods. Co., Ltd. v.
Vertin, 115 A.3d 535, 546–47 (Del. Ch. 2015).289 In circumstances of insolvency, a
director’s duty to maximize the long-term value of the corporation does not
necessarily equate to “acting to ensure the corporation’s perpetual existence.” ODN
I, 2017 WL 1437308, at *19. Rather, “the efficient liquidation of an insolvent firm
289 As this court recently explained, when a corporation is insolvent, “the value of the corporation is insufficient to pay all of its fixed claimants and leave a residuum. The residual distribution—in the sense of the last money the corporation has—goes at least partially to pay a class of creditors. Those not-fully-paid creditors therefore enter the class of residual claimants.” McRitchie, 315 A.3d at 547. Directors, however, “do not owe fiduciary duties to creditors in their capacities as creditors” after the point of insolvency— only as residual claimants. Id.
76 might well be the method by which the firm’s value is enhanced.” Prod. Res. Gp.,
L.L.C. v. NCT Gp., Inc., 863 A.2d 772, 791 n.60 (Del. Ch. 2004); see, e.g., Quadrant
Structured Prods., 115 A.3d at 546–47 (noting that directors of an insolvent
company may make a business judgment that “the best route to maximize the firm’s
value” is to cease operations and distribute assets to the company’s creditors).
GB-SP asserts that the Director Defendants breached their fiduciary duties by
approving the Forbearance Agreement and the Consensual Foreclosure and contends
that the court should consider both as a single transaction constituting a single
fiduciary breach by the Director Defendants collectively. While these two
transactions appear, in hindsight, to be causally related, the record does not support
GB-SP’s proffered approach. Simply put, GB-SP challenges two different decisions
made by two different boards separated in time by several months. There is no
evidence that Davis, Doheny, LaCivita, and Scher, who did not stand for re-election
in October 2013, played any role in approving the Consensual Foreclosure. Nor has
GB-SP articulated how Albright, Orlofsky, and Walker, who joined the board in
October 2013, could have breached their fiduciary duties as directors in connection
with a transaction that predated their tenure on the board. Accordingly, the court
considers the merits of the fiduciary claim as against the Pre-Forbearance Directors
77 with respect to the Forbearance Agreement, and as against the Post-Forbearance
Directors with respect to the Consensual Foreclosure.290
1. Approval of the Forbearance Agreement
a. Standard of Review
Delaware has three levels of judicial review for evaluating director decision-
making: the business judgment rule, enhanced scrutiny, and entire fairness. Unitrin,
Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1371 (Del. 1995); Reis v. Hazelett
Strip-Casting Corp., 28 A.3d 442, 457 (Del. Ch. 2011). GB-SP argues that the entire
fairness standard of review applies to the approval of the Forbearance Agreement
because a majority of the Pre-Forbearance Board was interested in the transaction.
The Pre-Forbearance Directors argue that their decision to approve the Forbearance
Agreement is subject to the business judgment rule. 291
The “default standard of review is the business judgment rule, which is a
‘presumption that in making a business decision[,] the directors of a corporation
acted on an informed basis, in good faith and in the honest belief that the action taken
was in the best interests of the company.’” In re Match Gp., Inc. Deriv. Litig., 315
290 Evaluating the facts that underly the fiduciary duty claims is not an easy task on this record. Only three of the nine Director Defendants testified in this case, either at trial or by deposition—Orlofsky, Walker, and Worker. Worker was the only Pre-Forbearance Director that testified. None of the Company’s advisers testified at trial or were deposed, and the Defendants did not offer any expert testimony. The court must rely heavily on the documentary record, which is also incomplete in many respects. 291 Neither party argues that enhanced scrutiny is the applicable standard of review.
78 A.3d 446, 459 (Del. 2024) (alteration in original) (quoting Aronson v. Lewis, 473
A.2d 805, 812 (Del. 1984), overruled in part by Brehm v. Eisner, 746 A.2d 244 (Del.
2000)).292 “If the business judgment standard of review applies, a court will not
second guess the decisions of disinterested and independent directors. The
reviewing court will only interfere if the board’s decision lacks any rationally
conceivable basis, thereby resulting in waste or a lack of good faith.” Id.
There are several ways to rebut the business judgment presumption,
“including by showing that: (1) a controlling stockholder stands on both sides of a
transaction or (2) at least half of the directors who approved the transaction were not
disinterested or independent.” In re KKR Fin. Hldgs. LLC S’holder Litig., 101 A.3d
980, 990 (Del. Ch. 2014) (footnotes omitted), aff’d sub nom. Corwin v. KKR Fin.
292 In Brehm, the Delaware Supreme Court overruled seven precedents, including Aronson, to the extent those precedents reviewed a Rule 23.1 decision by the Court of Chancery under an abuse of discretion standard or otherwise suggested a deferential appellate review. See Brehm, 746 A.2d at 253 & n.13 (overruling in part on this issue Aronson, 473 A.2d at 814; Scattered Corp. v. Chicago Stock Exch., Inc., 701 A.2d 70, 72–73 (Del. 1997), as modified on denial of reh’g (Oct. 22, 1997); Grimes v. Donald, 673 A.2d 1207, 1217 n.15 (Del. 1996); Heineman v. Datapoint Corp., 611 A.2d 950, 952 (Del. 1992); Levine v. Smith, 591 A.2d 194, 207 (Del. 1991); Grobow v. Perot, 539 A.2d 180, 186 (Del. 1988); and Pogostin v. Rice, 480 A.2d 619, 624–25 (Del. 1984)). The Brehm Court held that going forward, appellate review of a Rule 23.1 determination would be de novo and plenary. 746 A.2d at 253–54. The seven partially overruled precedents otherwise remain good law. This opinion does not rely on any of them for the standard of appellate review. Although the technical rules of legal citation would require noting that each was reversed on other grounds by Brehm, this decision omits the subsequent history, which creates the misimpression that Brehm rejected core elements of the Rule 23.1 canon.
79 Hldgs. LLC, 125 A.3d 304 (Del. 2015). 293 “If the plaintiff rebuts the business
judgment presumption, the Court applies the entire fairness standard of review[.]”
Id. (internal quotation marks omitted). “Entire fairness, Delaware’s most onerous
standard, applies when the board labors under actual conflicts of interest.” Trados
II, 73 A.3d at 44. Under entire fairness, the court evaluates whether “the corporate
act being challenged is entirely fair to the corporation and its stockholders.” Match,
315 A.3d at 459. The court considers whether “the transaction was the product of
both fair dealing and fair price.” Cinerama, Inc. v. Technicolor, Inc. (Technicolor
Plenary III), 663 A.2d 1156, 1163 (Del. 1995) (internal quotation marks omitted).
GB-SP does not argue that any of the Pre-Forbearance Directors lacked
independence, but instead argues that they were interested in the transaction. The
Pre-Forbearance Board had six members when it caused the Company to enter into
the Forbearance Agreement: Curtis, Davis, Doheny, LaCivita, Scher, and Worker.
Accordingly, GB-SP must demonstrate that at least three of those directors were
interested in the transaction for entire fairness to apply. Trados II, 73 A.3d at 44
(“To obtain review under the entire fairness test, the stockholder plaintiff must prove
that there were not enough independent and disinterested individuals among the
293 The complaint had originally asserted claims against the Versa Defendants as controlling stockholders of BSW, but the court dismissed those claims in 2018 because GB-SP failed to allege facts supporting a reasonable inference that Domus or Versa were controlling stockholders of the Company. Dkt. 92 at 18:7–19:4.
80 directors making the challenged decision to comprise a board majority.”); see
Delman v. GigAcquisitions3, LLC, 288 A.3d 692, 718 (Del. Ch. 2023) (“[T]he Board
had six members. The plaintiff must demonstrate that at least three of those directors
were interested or lacked independence to support the application of entire fairness
on that basis.”).
A director is interested in a transaction if the director “‘will receive a personal
financial benefit from a transaction that is not equally shared by the stockholders’ or
if ‘a corporate decision will have a materially detrimental impact on a director, but
not on the corporation and the stockholders.’” In re Trados Inc. S’holder Litig.
(Trados I), 2009 WL 2225958, at *6 (Del. Ch. July 24, 2009) (quoting Rales v.
Blasband, 634 A.2d 927, 936 (Del. 1993)); see also Cede & Co. v. Technicolor, Inc.,
634 A.2d 345, 362 (Del. 1993) (“Classic examples of director self-interest in a
business transaction involve either a director appearing on both sides of a transaction
or a director receiving a personal benefit from a transaction not received by the
shareholders generally.”). “The personal benefit must be so significant that it is
improbable that the director could perform her fiduciary duties . . . without being
influenced by her overriding personal interest.” Pfeffer v. Redstone, 965 A.2d 676,
690 (Del. 2009) (alteration in original) (internal quotation marks omitted); Trados I,
2009 WL 2225958, at *6 (explaining that personal benefit received by the director
81 must be “of a sufficiently material importance[] in the context of the director’s
economic circumstances” (internal quotation marks omitted)).
GB-SP argues that all of the Pre-Forbearance Directors were interested in the
Forbearance Agreement because, in connection with their approval of the agreement,
each received: (1) D&O insurance coverage; (2) indemnification from Domus for
claims arising out of the Forbearance Agreement and for any claims related to the
Company asserted by or with the assistance of GB-SP; and (3) a release from Domus
of any claims against them in connection with the Forbearance Agreement. GB-SP
argues that Curtis and Worker were interested in the Forbearance Agreement for the
additional reason that they entered into the September 2013 MOU, which provided
them with continued employment, retention of their salaries,294 and additional
six-figure bonuses if a consensual foreclosure was approved. 295
The court finds the benefits Curtis and Worker obtained in the September
2013 MOU, particularly the guaranty of continued employment in the event of a
294 Worker’s base salary was $465,000. JX 164 at 85:25–86:4 (Worker Dep.); Tr. 408:9– 12, 783:6–10 (Worker). The level of Curtis’s compensation is not a part of the trial record. Curtis was not deposed and did not testify at trial. Given Worker’s six-figure salary and Curtis’s six-figure retention bonus, the court finds it more likely than not that Curtis’s salary was in the six-figure range. 295 If a bankruptcy or foreclosure transaction was approved, Worker would earn a bonus of $150,500, and Curtis would earn a bonus of $120,500. JX 67 at 4. If a sale outside of bankruptcy occurred, Worker would receive $142,199, and Curtis would receive $107,417. Id. at 2. Whereas the bonuses of the other BSW executives were to be paid out regardless of their retention, Curtis’s and Worker’s bonuses were only to be paid out in the event of a sale outside of bankruptcy if the acquiring company elected to retain them. Id.
82 foreclosure, rendered them interested in the Forbearance Agreement. “Delaware law
[] recognizes that management’s prospect of future employment can give rise to a
disabling conflict in the sale context.” In re Mindbody, Inc., 2020 WL 5870084, at
*15 (Del. Ch. Oct. 2, 2020) (collecting authorities). “This theory is particularly
viable where the future employment offers a marked increase in compensation from
the status quo.” Id.; cf. In re Cogent, Inc. S’holder Litig., 7 A.3d 487, 498 (Del. Ch.
2010) (concluding, at the preliminary injunction stage, that a director was
disinterested despite receiving a retention bonus because the bonus was for less than
1% of the consideration the director would have received from an alternative
transaction, and the director’s interests were aligned with the company’s
stockholders).
Whether the remaining four directors were materially interested in the
Forbearance Agreement is, however, a closer call. Davis, Doheny, LaCivita, and
Scher received D&O insurance, indemnification from Domus for claims arising
from the Forbearance Agreement and for claims asserted by GB-SP, and a release
of claims by Domus. “Normally, the receipt of indemnification is not deemed to
taint related director actions with a presumption of self-interest. That is because
indemnification has become commonplace in corporate affairs, and because
indemnification does not increase a director’s wealth.” In re Sea-Land Corp.
S’holders Litig., 642 A.2d 792, 804 (Del. Ch. 1993) (citations omitted), aff’d sub
83 nom. Sea-Land Corp. S’holder Litig. v. Abely, 633 A.2d 371 (Del. 1993) (TABLE);
see also Chester Cty. Empls.’ Ret. Fund v. New Residential Inv. Corp., 2017 WL
4461131, at *7 (Del. Ch. Oct. 6, 2017) (concluding, in the demand futility context,
that a director’s receipt of indemnification and exculpation rights did not render him
interested in the transaction); Edgewater Growth Cap. P’rs LP v. H.I.G. Cap., Inc.,
68 A.3d 197, 231–32 (Del. Ch. 2013) (finding post-trial that a secured creditor’s
providing indemnification to directors did not render them beholden to the creditor
or prove any violation of the directors’ fiduciary duties).
Moreover, although it is well-settled that a plaintiff must establish, director-
by-director, the materiality of differential benefits received in connection with a
challenged transaction, GB-SP has not attempted to do so here. See City of Miami
Gen. Empls.’ v. Comstock, 2016 WL 4464156, at *18 (Del. Ch. Aug. 24, 2016)
(“[W]hen a party challenges a director’s action based on a claim of the director’s
debilitating pecuniary self-interest, that party must allege that the director’s interest
is material to that director.” (internal quotation marks omitted)); In re Gen. Motors
(Hughes) S’holder Litig, 2005 WL 1089021, at *8 (Del. Ch. May 4, 2005)
(“[P]laintiffs’ allegations of pecuniary self-interest must allow the Court to infer that
the interest was of a sufficiently material importance [to the director].” (internal
quotation marks omitted)), aff’d, 897 A.2d 162 (Del. 2006). Nevertheless, the
troubling circumstances surrounding the receipt of indemnification in this case lead
84 the court to conclude that all of the Pre-Forbearance Directors were materially
interested in the Forbearance Agreement.
At the time the Pre-Forbearance Directors were negotiating the Forbearance
Agreement, they were aware that GB-SP had an unfettered contractual right to
designate a director and that GB-SP had repeatedly demanded Kinsella be seated on
the BSW board.296 As explained above, the Pre-Forbearance Board knew that it did
not have a colorable argument to refuse to seat Kinsella by, at the latest, March
2013. 297 Instead, the Pre-Forbearance Directors resolutely refused to seat Kinsella
and searched for a strategy “to keep [Kinsella and GB-SP] warm while we’re sorting
out the forbearance agreement[.]”298 The resulting real, unmitigated litigation risk
arising from the Pre-Forbearance Directors’ intentional exclusion of Kinsella was
not lost on the Pre-Forbearance Directors—or their D&O insurance providers.
296 See JX 170 at 1 (March 26, 2013 email from Akin Gump to Davis, Dembiec, Worker, and other BSW executives indicating that GB-SP “is entitled to nominate one director and also is entitled to certain information rights” under the Shareholders Agreement); JX 44, JX 45, JX 47, JX 48, JX 57, JX 58 (May to August 2013 correspondence from GB-SP and Kinsella requesting documents and demanding that Kinsella be seated as the GB-SP Director); JX 59 at 1 (September 3, 2013 email from Akin Gump to Pre-Forbearance Directors requesting to schedule a call “to discuss the recent correspondences received on behalf of [] Kinsella”); JX 208 (September 16, 2013 letter from Kinsella to Worker regarding director seat on BSW board). 297 See JX 170 at 1. 298 JX 240 at 2.
85 Keenly aware that GB-SP might sue them personally, the Pre-Forbearance
Directors were, in the months leading up to the Forbearance Agreement, persistently
trying to obtain D&O insurance coverage for potential suits by GB-SP. BSW’s
insurance provider, however, refused to remove the major stockholder exclusion
from the Company’s policy.299 BSW’s insurance broker asked two other insurers if
they would provide coverage for major stockholder claims, and both similarly
declined. 300 Due to the high litigation risk, none of the insurers were interested in
negotiating a premium to provide coverage for claims asserted by GB-SP.301
To fill this gap in coverage, Akin Gump recommended that the
Pre-Forbearance Directors ask Versa and Domus to provide broad indemnification
coverage for any claims brought by GB-SP. 302 Acknowledging that “this would be
a new proposal” and “the indemnification issue has been a big point,” Akin Gump
299 JX 51 at 3 (“We have requested AIG to remove the Major Shareholder exclusion on the policy which they denied.”); JX 174 (“As you know, the Company’s current D&O policy excludes claims brought by 10% holders.”). The insurer indicated that it might be willing to eliminate the major stockholder exclusion with respect to the Post-Forbearance Board if the Company sat Kinsella on the board but did not indicate any flexibility with respect to the Pre-Forbearance Board’s coverage. Compare JX 51 at 3, with id. at 4. 300 JX 51 at 3. 301 Id. (“In our dialogue with Zurich and Excel who are considering providing excess coverage, we asked if they could provide a drop down mechanism or a separate policy to cover this exposure. Both declined this and stated that they would not look to cover the exposure that the primary is excluding. When asked to provide an option inclusive of additional premium, they declined as they feel this is a real exposure that they are not looking to cover.”). 302 JX 174.
86 asked to get “the full board’s input” before sending this request across to Versa.303
Notwithstanding this warning, the Pre-Forbearance Board decided to ask for this
significant new term, and Domus ultimately agreed to provide this expanded
indemnity. 304
The Pre-Forbearance Directors and Domus entered into the Indemnity
Agreement on September 30, 2013, the same day the Pre-Forbearance Directors
executed the Forbearance Agreement.305 The Indemnity Agreement provided the
Pre-Forbearance Directors with indemnification against any claims arising out of the
Forbearance Agreement and against any claims related to the Company or its
subsidiaries asserted by or with the assistance of GB-SP. 306 The scope of the
indemnity goes beyond what is provided in the ordinary course. It is tailored to
specifically address a litigation risk the Pre-Forbearance Directors created for
themselves by refusing to seat Kinsella on the board.
These facts persuade the court that Domus’s agreement to indemnify the
Pre-Forbearance Directors was a material benefit not shared by BSW or its
stockholders generally and rendered the Pre-Forbearance Directors interested in the
303 Id. Earlier on in the negotiations, the Pre-Forbearance Directors sought indemnification just for claims arising out of the Forbearance Agreement and related transactions. See JX 49 at 1. 304 See JX 59; see also JX 70. 305 JX 70 at 22–36. 306 Id. at 22–23.
87 Forbearance Agreement. Therefore, the decision of the Pre-Forbearance Board to
approve the Forbearance Agreement is subject to review under the entire fairness
standard. Trados II, 73 A.3d at 55 (“A reviewing court deploys the entire fairness
test to determine whether the members of a conflicted board of directors complied
with their fiduciary duties.”).
b. Entire Fairness Analysis
“To satisfy entire fairness review, the defendants bear the burden of
demonstrating that the corporate act being challenged is entirely fair to the
corporation and its stockholders.” Match, 315 A.3d at 459. “[E]ntire fairness is a
unitary test, under which a reviewing court will scrutinize both the price and the
process elements of the transaction as a whole.” Id.
In applying entire fairness, the court “must carefully analyze the factual
circumstances, apply a disciplined balancing test to its findings, and articulate the
bases upon which it decides the ultimate question of entire fairness.” Technicolor
Plenary III, 663 A.2d at 1179. Put differently, the court must make inquiries into
both fair price and fair dealing, evaluate whether and the degree to which the board
has deviated from an acceptable range of conduct in both categories, and balance
those findings to make a unitary decision as to the entire fairness of the transaction.
Weinberger, 457 A.2d at 711. As the Supreme Court explained in In re Tesla
Motors, Inc. Stockholder Litigation, 298 A.3d 667 (Del. 2023), “‘[a] strong record
88 of fair dealing can influence the fair price inquiry, reinforcing the unitary nature of
the entire fairness test. The converse is equally true: process can infect price.’” Id.
at 733 (alteration in original) (emphasis omitted) (quoting Reis, 28 A.3d at 467);
accord HBK Master Fund, L.P. v. Pivotal Software, Inc., 2023 WL 10405169, at
*25 (Del. Ch. Aug. 14, 2023), corrected (Mar. 12, 2024).
i. Fair Dealing “The element of ‘fair dealing’ focuses upon the conduct of the corporate
fiduciaries in effectuating the transaction.” Kahn v. Tremont Corp., 694 A.2d 422,
430 (Del. 1997). Fair dealing involves “questions of when the transaction was timed,
how it was initiated, structured, negotiated, disclosed to the directors, and how the
approvals of the directors and the stockholders were obtained.” Weinberger, 457
A.2d at 711. This is a fact-specific inquiry, and “[t]he absence of certain elements
of fair dealing does not mandate a decision that the transaction was not entirely fair.”
Tesla, 298 A.3d at 702 n.143 (internal quotation marks omitted). 307
307 Our Supreme Court in Tesla stated a strong preference for trial courts to organize the fair dealing analysis in a way that independently addresses each of the Weinberger factors. See Tesla, 298 A.3d at 702, n.146. This case does not lend itself to a clean, carefully demarcated analysis of the Weinberger factors. The court endeavors to do so here, but given the overlapping nature of the facts as to each element, it may result in redundancy and, hence, a longer opinion.
89 1. Initiation and Timing “The first Weinberger factor examines how the decision under challenge was
initiated.” Tornetta v. Musk, 310 A.3d 430, 527–28 (Del. Ch. 2024) (internal
quotation marks omitted). The scope of the first Weinberger factor is “not limited
to the . . . formal act of making the proposal; it encompasses actions taken . . . in the
period leading up to the formal proposal.” In re Dole Food Co., Inc. S’holder Litig.,
2015 WL 5052214, at *26 (Del. Ch. Aug. 27, 2015).
On May 2, 2013, the Pre-Forbearance Directors learned that Versa, through
Domus, had acquired the Company’s debt from its secured lenders.308 At that time,
BSW was already in default, and the debt was nearing maturity on June 30, 2013.309
When the Forbearance Agreement was executed on September 30, 2013, it identified
15 separate and existing defaults under the Credit Agreement. Among the most
serious defaults were: (a) the failure to make interest payments for the quarters
ending December 31, 2012, March 31, 2013, and June 30, 2013; (b) the failure to
make principal payments at the same three payment dates; (c) the failure to deliver
year-end 2012 audited financial statements; (d) the failure to cause certain of BSW’s
subsidiaries to pay taxes and to remain in good standing where they conducted
308 JX 43 at 2. 309 JX 8 at 17, 28 (identifying the first and second lien loan maturity date as June 30, 2013). Prior to that time, BSW did not have a forbearance agreement with Credit Suisse or its secured lenders. See JX 27 at 1. Rather, at that stage, BSW was hoping to finalize a sale of the entire Company to Versa. Id.; JX 28.
90 operations; and (e) the failure to maintain the minimum EBITDA and leverage ratios
for each fiscal quarter since April 2011.310 GB-SP does not dispute the existence of
any of the identified defaults. It is also undisputed that these defaults gave Versa the
unilateral right under the Credit Agreement to foreclose on the collateral, which
consisted of most of the Company’s assets.
The Pre-Forbearance Board also had no immediate prospect for a sale of the
Company that would satisfy BSW’s obligations under the Credit Agreement, let
alone result in any payment to equity holders. BSW, with the help of Houlihan, had
contacted more than 92 parties—both financial and strategic buyers. 311 HIG
rescinded its LOI after conducting due diligence and chose not to pursue an
acquisition, and Oakwood declined to reengage after being denied exclusivity a year
earlier.312 The third option was Versa, which chose to acquire the Company’s debt
at a steep discount with the goal of leveraging its contract rights to acquire the
Company. The Forbearance Agreement was one of the limited options available to
BSW after Versa decided to forgo a direct acquisition of BSW and acquired the
Company’s outstanding debt from the Company’s secured lenders. The initiation
and timing of the Forbearance Agreement in the face of these circumstances does
310 JX 66 § 2.2. 311 JX 72 at 2. 312 Id. at 7.
91 not suggest that the transaction was the product of unfair dealing. Other events,
however, do.
The approval of the Forbearance Agreement was timed to occur before
Kinsella was seated as the GB-SP Director and had any opportunity to weigh in on
its terms or the desirability of entering into the transaction. The Pre-Forbearance
Directors knew that Kinsella had a right to be seated as a director, but they chose not
to elect him out of concern that he or GB-SP might take action to thwart entry into
the Forbearance Agreement, such as by filing litigation.313 In that event, the Pre-
Forbearance Directors faced the prospect of having no D&O insurance to defend
against or settle the claims due to the major stockholder exclusion in the D&O policy
that was, itself, the product of their excluding Kinsella. Moreover, the
Pre-Forbearance Directors chose to approve the Forbearance Agreement only after
obtaining an agreement with Domus to indemnify them against any claims asserted
or supported by GB-SP. It is apparent that the Pre-Forbearance Directors held out
on approving the transaction until these terms were added.
The general initiation and timing of the Forbearance Agreement were the
product of the Company’s financial circumstances. But the Pre-Forbearance
313 The Pre-Forbearance Directors appeared to have some concern that GB-SP could prevent the Company from entering into the agreement by filing for bankruptcy itself. See JX 41 at 6; JX 158 at 163:24–164:6 (Halpern Dep.). Although that was a theoretical possibility, there is no evidence in the record that there was any serious threat of that occurring.
92 Directors’ intentional timing of the Forbearance Agreement to circumvent Kinsella
and GB-SP’s rights and to ensure that the Pre-Forbearance Directors obtained
valuable personal guarantees was a product of their own making. On balance, this
factor weighs against a finding of fair process.
2. Negotiation and Structure
“The next Weinberger factor examines how the transaction was negotiated
and structured.” Tornetta, 310 A.3d at 529. The Pre-Forbearance Board’s
negotiations with Versa were led by the Company’s counsel at Akin Gump. Akin
Gump was ostensibly independent and regularly kept the Pre-Forbearance Board
apprised of the negotiations. Nevertheless, Akin Gump actively worked to keep
GB-SP in the dark about the Forbearance Agreement until after it was approved.314
Akin Gump took the lead in negotiating the terms of indemnification, D&O
insurance coverage, and releases with Versa on behalf of the Pre-Forbearance
Directors. The prospect of having no D&O insurance coverage in the event of a
GB-SP lawsuit figured prominently in the Pre-Forbearance Directors’ discussions
during the negotiations for, and ultimately the structure of, the Forbearance
Agreement. The Company’s D&O policy was set to expire in April 2013, and the
Company’s insurance carrier had raised concerns about entering into a long-term
314 See JX 240 at 2.
93 renewal. 315 The insurance carrier was also unwilling to waive the major stockholder
exclusion and raised concerns over GB-SP’s lack of board representation.316 The
Company’s efforts to obtain coverage from excess D&O carriers were also
unsuccessful. 317
Even before realizing the gap in their D&O insurance coverage, the
Pre-Forbearance Directors and Akin Gump insisted on Versa indemnifying the
directors for liabilities arising from the Forbearance Agreement. 318 Versa initially
rejected this request, 319 but ultimately agreed to provide indemnity for claims related
to the Forbearance Agreement and for claims initiated or supported by GB-SP.320
Versa also agreed to fund D&O insurance premiums and to release claims against
the Pre-Forbearance Directors. 321 The Indemnity Agreement and the release are
separate agreements, but they were integral to the Pre-Forbearance Directors’
decision to approve the Forbearance Agreement. The four independent
315 JX 42. 316 Id. It appears that in mid-April 2013, BSW was able to temporarily mollify the insurer by falsely claiming that there was an issue over the “pending transfer of [GB-SP’s] interest to IEOT.” Id. But by that time, as explained above, BSW knew that GB-SP was not transferring its interest to IEOT; rather, IEOT acquired GB-SP. 317 See JX 51 at 3. 318 See JX 49; JX 50; JX 51; JX 59. 319 See JX 49; JX 50. 320 See JX 59; JX 62; JX 229; see also JX 70. 321 See JX 50; JX 229.
94 Pre-Forbearance Directors—Davis, Doheny, LaCivita, and Scher—also agreed not
to seek re-election following approval of the Forbearance Agreement, which led to
Versa’s proposed directors being appointed by Curtis and Worker in October
2013. 322
Worker also pushed through the September 2013 MOU in connection with the
Forbearance Agreement. The September 2013 MOU incorporated the terms of the
retention bonuses from the MOU approved by the Pre-Forbearance Directors in May
2013, which provided for Curtis’s and Worker’s continued employment, retention
of salaries, and additional six-figure bonuses if a consensual foreclosure was
approved. 323 Worker saw the negotiation of the Forbearance Agreement as an
opportunity to prompt Versa’s execution of the MOU. During the negotiation of the
Forbearance Agreement, on August 14, 2013, Worker emailed Dembiec and
requested that he contact Versa and ask “when they will sign off on the Retention
322 Had Kinsella been appointed earlier, as he should have been, Kinsella would have had a say in the appointment of the four new independent directors. Although Kinsella would have been only one of three votes, his voice should have been heard in the process. Lippman, 95 A. at 899. 323 See JX 43. Although the MOU was approved by the Pre-Forbearance Directors, BSW’s counsel at Akin Gump explained that because Versa would need to execute the MOU, it necessarily had the right to negotiate its terms. See JX 224 at 1 (in response to a question asking why the resolutions approving the MOU contemplated further negotiation with the “Company’s Lenders,” counsel at Akin Gump stated that he was “[n]ot sure we can take the position that Versa needs to execute the MOU, but that Versa doesn’t have the right to negotiate its terms. If the bonuses will be paid from the additional loans the company may be receiving from Versa, then we’ll have to have that discussion with Versa anyway.”).
95 Incentive agreement as approved by the Board and assumption of employment
agreements.”324 In the same email, Worker stated that he wanted the MOU to be
“signed in conjunction with the Forbearance Agreement.” 325 On September 24,
2013, six days prior to the execution of the Forbearance Agreement, Worker again
demonstrated the importance of getting Versa to sign the MOU when he requested
that Akin Gump “ensure that [the MOU] is added to all the final docs with
simultaneous signature” and provided that he “would prefer [Versa’s] signature first
as it pertains to this matter.”326
As for what the Company got as part of the transaction, the primary benefit
was time—Domus agreed not to exercise its right to foreclose for five months. But
that benefit was not guaranteed and came with harsh conditions. To avoid defaulting
during the forbearance period, the Company had to satisfy a slew of stringent
financial covenants, and failing even one would permit Domus to immediately
foreclose. Not surprisingly, these financial covenants were not particularly
favorable to BSW. The Forbearance Agreement provided that BSW would
technically default on its obligations if it had a gross margin of less than 20.5% for
the period ended October 31, 2013. 327 For the prior two fiscal years ended 2011 and
324 JX 229 at 1. 325 Id. 326 JX 236 at 1. 327 JX 66 § 5.3(e).
96 2012, BSW had a gross margin of 19.8% and 19.6% respectively. 328 The last time
BSW had a gross margin greater than 20.5% was in the fiscal year ended 2010 and
even then, it only cleared that margin by 0.4%. 329 In addition, the required minimum
gross margin in the Forbearance Agreement jumped from 18% for the period ending
September 30, 2013, to 20.5% for the period ending October 31, 2013.330
While unfavorable, these terms were slightly more favorable than those
presented by Versa in previous drafts. For example, a July 19, 2013 draft of the
Forbearance Agreement required a gross margin of 20.2% for the period ending
September 30, 2013, whereas the final version provided for 18.0%. 331 The Company
likewise received adjustments in its favor as to the minimum occupancy rate
requirements for the period ending September 30, 2013.332 The Company also
received more favorable qualitative terms, extending the period in which they were
required to provide compliance reports from five to 20 days after the end of each
month. 333 In reality, most of these improvements were short term stopgaps, with the
Company’s obligations ballooning to unreduced requirements at the end of October
328 JX 105 at 11. 329 Id. 330 JX 66 § 5.3(e). 331 Compare JX 51 at 22, with JX 66 at 15. 332 Compare JX 51 at 22 (95.1% minimum occupancy rate), with JX 66 at 15 (94% minimum occupancy rate). 333 Compare JX 51 at 20–23, with JX 66 at 13–15.
97 2013—shortly after the pre-planned departure of the four independent directors on
the Pre-Forbearance Board.
As for the financial component, the Forbearance Agreement facially conveyed
approximately $12.5 million to BSW. Based on the “Use of Proceeds” schedule,
approximately $7.6 million of the funds went directly back to Versa and Domus,
including for the payment of outstanding interest on BSW’s debt and collateral agent
fees.334 Approximately $3.5 million covered BSW’s operating expenses, including
the payment of overdue rent and tax liabilities.335 The remainder of the funds
covered a tail for the Company’s D&O policy, Versa and Domus’s transaction
expenses, and the Company’s adviser fees. 336 Ultimately, the overall economics of
BSW’s debt remained unchanged.
As part of the Forbearance Agreement, BSW and its subsidiaries pledged all
of their equity interests as collateral. 337 This was a critical component of the
334 JX 66 at 35 (allocating $2,848,477.86 for payment of accrued interest on Company’s outstanding debt, $250,000 for payment of an upfront fee payable to Domus as collateral agent, and $4,500,000 for payment of a restructuring fee payable to Domus as collateral agent). 335 Id. (allocating $460,000 for payment of partner catch-up fees, $743,853.63 for payment of tax liabilities, and $2,300,000 for payment of past due rent). 336 Id. (allocating $189,118 for payment of D&O tail coverage, $550,293.55 for payment of Versa and Domus’s transaction expenses, and $679,242.65 for payment of BSW’s legal and financial adviser fees). 337 Id. § 4.1(e) (requiring delivery of “100% of [the] equity interests in any Subsidiary of such Loan Party over which the Collateral Agent does not currently have the benefit of
98 Forbearance Agreement for Versa and Domus. Long before purchasing the
Company’s debt from Credit Suisse and the Company’s secured lenders, Versa
understood that only 65% of the equity of BSW’s foreign subsidiaries had been
pledged as collateral. 338 In order to obtain control over all of the Company’s
operating assets, Versa would need to obtain the remaining 35% equity in these
subsidiaries, and it achieved that in the Forbearance Agreement.
Overall, the terms of the Forbearance Agreement were not favorable to the
Company. But given its precarious financial position and minimal leverage against
a senior secured creditor that could foreclose at any time, that is not surprising. That
the Company got a bad deal is not, alone, indicative of unfair process, given the
broader circumstances.
The benefits that the Pre-Forbearance Directors got as part of the transaction,
however, are indicative of unfair process, as is the broader negotiation process. It is
apparent that the Pre-Forbearance Directors were not prioritizing the Company’s
best interests during the negotiation process. For example, internal emails in July
2013 identified indemnification and Versa’s release of claims against the Pre-
such security interest (including, but not limited to, BridgeStreet Singapore PTE LTD, BridgeStreet Australia Pty Limited, BWW Accommodations, Inc., BridgeStreet Accommodations Ltd. and BridgeStreet Corporate Housing Limited)”). 338 See JX 38 at 6 (Internal Versa presentation dated March 14, 2013); JX 41 at 5 (Internal Versa presentation dated April 13, 2013); id. at 7 (“In order to ensure that Versa can achieve the desired flow-through structure, it should obtain a pledge on the remaining 35% equity interests in the non-U.S. subsidiaries prior to foreclosure.”).
99 Forbearance Directors as main open issues, while the Company’s financial
covenants appeared lower on the list. 339 Additionally, indemnification proved to be
a “big point” in the negotiations, and one which the Pre-Forbearance Directors
consistently pushed and even increased their ask over the course of negotiations.340
Worker was also heavily focused on negotiating and pushing through the September
2013 MOU. The record does not reflect similarly persistent efforts to improve the
Company’s terms, and what few improvements the Pre-Forbearance Board got for
the Company were limited in scope.
On balance, the court concludes the negotiations and structure of the
Forbearance Agreement weigh against a finding of fair process.
3. Approval The final Weinberger factor examines how the transaction was approved.
Tornetta, 310 A.3d at 532. The Pre-Forbearance Directors formally met to consider
the Forbearance Agreement on September 17, 2013. 341 Prior to that date, they had
received updates from Company management and counsel on the negotiations. At
the meeting, certain board members inquired as to the likelihood that the Company
would be able to meet the financial covenants in the Forbearance Agreement.342
339 Compare JX 49 at 1, with id. at 2. 340 JX 174. 341 JX 61 at 2. 342 Id.
100 Gingrich and Worker told the Pre-Forbearance Board that, based on currently
available information, the Company should be able to satisfy the covenants. 343
The Pre-Forbearance Board approved the Forbearance Agreement by
unanimous written consent on or around September 23, 2013. 344 The transaction
was not subjected to a stockholder vote, and none was required. 345 Earlier drafts of
the Forbearance Agreement, however, contemplated GB-SP as a signatory to the
agreement.346 When Akin Gump saw this, it informed BSW’s management and
Worker that “[GB-SP’s] signature may be difficult to obtain and the need for this
signature needs to be discussed.”347 The final draft did not include GB-SP as a party
because doing so would have tipped GB-SP off to the transaction, risking potential
litigation.
Weighing the approval together with the other Weinberger factors, the court
concludes the Pre-Forbearance Directors have not carried their burden to prove that
the process for the Forbearance Agreement was fair. The Company was in a bad
343 Id. 344 See JX 235. The executed written consent is not in the trial record. Even if stockholder approval had been required, the board had the authority to vote the 345
Company’s stock pursuant to the Shareholders Agreement. See JX 1 § 3.1(b). 346 See JX 51 at 33 (July 19, 2013 draft of the Forbearance Agreement including GB-SP as a signatory). 347 JX 49 at 2. GB-SP was included as a party to the Forbearance Agreement as late as September 3, 2013. See JX 59 at 1 (email from Akin Gump stating that “GB-SP [] has been re-inserted as a party to the Forbearance Agreement. We propose that GB-SP [] be removed as a party to the Forbearance Agreement”).
101 spot and had minimal leverage going into the negotiations, so a weak negotiating
position is to be expected. But the evidence shows that the Pre-Forbearance
Directors stiff-armed Kinsella and GB-SP throughout negotiations, pushed through
the deal in a manner designed to avoid stockholder detection, and prioritized terms
benefiting them personally over those benefiting BSW. Based on the scant record
before the court, it concludes the process was unfair.
ii. Fair Price The court’s determination on fair process does not end the inquiry. Even if
the board engaged in an unfair process in approving the transaction, “it is possible
that the pricing terms were so fair as to render the transaction entirely fair.” Valeant
Pharms. Int’l v. Jerney, 921 A.2d 732, 748 (Del. Ch. 2007). “When considering fair
price, the court looks at the economic and financial considerations of the transaction
to determine if it was substantively fair” and the court’s task “is to determine whether
the transaction price falls within a range of fairness.” Buddenhagen v. Clifford, 2024
WL 2106606, at *33 (Del. Ch. May 10, 2024) (internal quotation marks omitted);
see also In re BGC P’rs, Inc. Deriv. Litig., 2022 WL 3581641, at *28 (Del. Ch. Aug.
19, 2022) (observing that the economic inquiry in a fair price analysis is “not a
remedial calculation”), aff’d, 303 A.3d 337 (Del. 2023) (TABLE).
Fair price is a fact intensive, context-specific determination that results in a
unique outcome in every case. Compare Ams. Mining Corp., 51 A.3d at 1249–52
102 (affirming this court’s analysis of the fair price for a challenged transaction, which
resulted in entry of a $1.347 billion post-trial base damages award), with Trados II,
73 A.3d at 76–78 (finding post-trial that the fair value of the company’s common
stock was zero). Here, the Pre-Forbearance Board bears the burden of proving the
Forbearance Agreement was financially fair to the Company at the time it was
entered. Match, 315 A.3d at 459.
The parties devoted little effort to address the financial fairness of the
Forbearance Agreement. Neither side offered expert testimony on the terms of the
Forbearance Agreement,348 sparring instead over the conclusions the court should
draw from the terms and circumstances of the transaction. GB-SP centered its
argument on the personal benefits the Pre-Forbearance Directors received in
exchange for their approval of the Forbearance Agreement and their agreement to
not seek re-election in order to allow Curtis and Worker to appoint four new
directors. 349 For their part, the Defendants lamented the Company’s dire financial
condition, downplaying the personal benefits the Pre-Forbearance Directors
obtained in connection with the transaction. 350
348 Plaintiffs only offered an expert for the purposes of valuing BSW. JX 165 at 26:9–14 (Rosen Dep.). The Defendants elected not to offer expert testimony on any subject. 349 See Pls.’ Post-Trial Opening Br. 58–59. 350 See Versa Defs.’ Post-Trial Answering Br. 21–23.
103 Witness testimony was similarly unhelpful. Only one of the Pre-Forbearance
Directors testified in this case: Worker. Worker’s credibility is suspect for several
reasons. First, Worker led the effort to keep Kinsella off the board until after the
Forbearance Agreement had been approved. 351 Second, Worker’s proffered excuse
that the Company’s counsel advised him that Kinsella did not need to be elected was
false. Worker also led the effort to obtain severance and bonus packages for himself
and Company management in conjunction with the approval of the Forbearance
Agreement. 352 In short, Worker had personal self-interests in the Forbearance
Agreement, as well as the Indemnity Agreement and the September 2013 MOU, and
his testimony was not credible.
On this sparse post-trial record, the court simply has no basis to assess whether
the Pre-Forbearance Directors could have obtained a better deal than the one they
negotiated. Could the Pre-Forbearance Directors have obtained better financial
terms if they had not been so focused on obtaining releases, insurance, and indemnity
from Versa—and in the case of Curtis and Worker—additional compensation? Who
knows? Nothing in the record points convincingly one way or another. Indeed, it is
not even apparent to the court that allowing Domus to foreclose on the collateral
351 See, e.g., JX 217; JX 218. 352 See, e.g., JX 43 at 3 (proposing that the Pre-Forbearance Board approve retention bonuses for senior management at the May 2, 2013 board meeting); JX 229, JX 236 (pushing for Versa to sign the MOU in connection with the Forbearance Agreement).
104 would have been a worse outcome for the Company than the Forbearance
Agreement. What is clear, however, is that the Pre-Forbearance Directors have the
burden of proving the Forbearance Agreement gave the Company a fair price. That
is not a burden the Pre-Forbearance Directors have satisfied. Based upon the
evidence presented—and perhaps more so by what was not presented—the
Pre-Forbearance Directors did not prove the Company received a fair price in the
Forbearance Agreement.
iii. Unitary Determination “[T]he entire fairness test is a ‘unitary standard.’” Tesla, 298 A.3d at 733
(quoting Tremont, 694 A.2d at 432). “[T]he test for fairness is not a bifurcated one
as between fair dealing and price. All aspects of the issue must be examined as a
whole since the question is one of entire fairness.” Weinberger, 457 A.2d at 711.
“Th[e] judgment concerning ‘fairness’ will inevitably constitute a judicial judgment
that in some respects is reflective of subjective reactions to the facts of a case.”
Cinerama, Inc. v. Technicolor, Inc. (Technicolor Plenary II), 663 A.2d 1134, 1140
(Del. Ch. 1994), aff’d, 663 A.2d 1156 (Del. 1995).
The Pre-Forbearance Directors’ approval of the Forbearance Agreement was
not entirely fair as to process or price. Although the Company was in default under
the Credit Agreement, the Pre-Forbearance Directors placed their own interests and
Versa’s interests ahead of the Company’s interests. They desperately wanted to be
105 indemnified for any litigation by GB-SP, and indemnification was a central focus of
the negotiation over the Forbearance Agreement even before Akin Gump proposed
asking Versa to indemnify the Pre-Forbearance Directors for any claims brought by
GB-SP.353 In certain circumstances, it might not be a breach of fiduciary duty for
directors to negotiate for and obtain indemnity from a purchaser. See Edgewater, 68
A.3d at 231–32 (concluding post-trial that broad indemnification did not render the
board beholden to the indemnitor). The specific facts of this case, however, lead the
court to conclude that it was here. The prominence that indemnification played
throughout the negotiation of the Forbearance Agreement underscored that the
Pre-Forbearance Directors, who, with the exception of Curtis and Worker, were
planning a mass departure from the Company after its execution, wanted to be
indemnified for any liability that might follow them. In addition to transaction
specific liability, the Pre-Forbearance Directors anticipated that GB-SP or Kinsella,
or both, would initiate litigation once they became aware the Pre-Forbearance
Directors purposefully kept them in the dark and refused to provide GB-SP with
353 See JX 49 at 1–2 (Akin Gump email to BSW management listing director indemnification and releases, respectively, as the first two of 10 items being negotiated as of July 24, 2013); JX 50 at 2–3 (listing director releases and indemnification as the first two “major open points” of negotiation over the Forbearance Agreement); id. at 1–2 (email from Davis to other Pre-Forbearance Directors and Akin Gump stating that “[i]ndemnity has to be from dollar 1. . . . Indemnity must come from Versa rather than a thinly capitalized Newco. . . . We will not provide resignations, but we will sign agreements not to stand for re-election or to accept any such nomination.”).
106 information until after the Pre-Forbearance Directors approved the Forbearance
Agreement. Notwithstanding this risk, the Pre-Forbearance Directors continued to
stonewall GB-SP, and instead persistently sought expanded D&O insurance
coverage from three different providers to no avail. Unable to obtain coverage for
their self-inflicted litigation risk in the market, they used the Company’s leverage to
get Versa to indemnify them instead. Six of the seven Pre-Forbearance Directors
did not testify to try to persuade the court otherwise, and Worker did not address the
issue. Meanwhile, the Pre-Forbearance Directors placed terms beneficial to the
Company at the bottom of their issues lists and achieved only nominal benefits for
the Company during negotiations.
The Pre-Forbearance Directors did not prove the financial terms of the
Forbearance Agreement were fair, either. They offered no expert testimony to
support the financial fairness of the Forbearance Agreement. Instead, the
Pre-Forbearance Directors merely argued the transaction must be fair because BSW
was in default, and the Forbearance Agreement gave the Company $12 million and
a bit more runway before the ultimate foreclosure. The Pre-Forbearance Directors
brush aside the value of the Indemnity Agreement and the bonuses under the
September 2013 MOU. 354 They also completely ignore the additional collateral that
354 It is particularly difficult to accept the Pre-Forbearance Directors’ dismissal of the value of the Indemnity Agreement when considering that, unlike additional funds paid to the
107 BSW provided to Versa, including the 35% equity interests in BSW’s foreign
subsidiaries.
Accordingly, the court finds the Forbearance Agreement and related
transactions were not entirely fair to BSW, and the Pre-Forbearance Directors
breached their duty of loyalty.
c. Damages
Determining the Company’s damages resulting from the Pre-Forbearance
Directors’ breach of fiduciary duty is a difficult task based upon the record.355 As
explained above, the Pre-Forbearance Directors did not proffer an expert. Plaintiffs’
expert, Gary Rosen, prepared a valuation of GB-SP’s equity interests in BSW as of
December 31, 2012, but provides no explanation as to how this valuation could be
used to quantify damages to BSW. In fact, Rosen testified that he was not providing
a damages analysis at all.356 Like the harm to GB-SP caused by the breach of the
Company or its management team, this was a real outlay for Domus, from which it could expect no return on investment or round-trip of funds in the event of ultimate foreclosure. 355 GB-SP incorrectly claims that it is entitled to recover damages for its breach of fiduciary duty claims. There is no dispute that all of the breach of fiduciary duty claims asserted in this case are derivative. See Dkt. 92 at 3:22–24 (“[P]laintiffs assert derivative claims on behalf of [BSW] for breach of fiduciary duty against the directors. . . .”); id. at 4:12–13 (“I refer to Counts I, II, and III [the breach of fiduciary duty claims] together as the derivative claims.”). “Because a derivative suit is . . . brought on behalf of the corporation, the recovery, if any, must go to the corporation.” Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1036 (Del. 2004). 356 JX 165 at 25:18–23 (Rosen Dep.) (“Q. Have you prepared any type of damages report? A: Not that I recall. . . . Q. Do you consider your valuation report to be a damages report,
108 Shareholders Agreement, the harm to BSW caused by the Forbearance Agreement
is difficult to quantify. The limited trial record provides the court with no basis to
assess the harm the Pre-Forbearance Directors’ breach of the duty of loyalty caused
to BSW. As a result, the court is unable to determine a transactional damages
remedy with any reasonable degree of confidence.
Even if there are no transactional damages resulting from a breach of the duty
of loyalty, “a fiduciary [may] not profit personally from his conduct.” Thorpe v.
CERBCO, Inc., 676 A.2d 436, 445 (Del. 1996). When a fiduciary has breached the
duty of loyalty, the fiduciary must be deprived of all profit flowing from the breach.
Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939) (“If an officer or director of a
corporation, in violation of his duty as such, acquires gain or advantage for himself,
the law charges the interest so acquired with a trust for the benefit of the corporation,
at its election, while it denies to the betrayer all benefit and profit. The rule,
inveterate and uncompromising in its rigidity, does not rest upon the narrow ground
of injury or damage to the corporation resulting from a betrayal of confidence, but
upon a broader foundation of a wise public policy that, for the purpose of removing
all temptation, extinguishes all possibility of profit flowing from a breach of the
an expert report on damages? A. It’s a valuation report.”); id. at 26:9–14 (“Q. Putting aside whether it’s called a damages report or not, is this an expert report on damages? A. That’s a hypothetical question. . . . It’s not damages . . . it was done for purposes of valuing the company.”).
109 confidence imposed by the fiduciary relation.”); accord Mills Acq. Co. v. Macmillan,
Inc., 559 A.2d 1261, 1280 (Del. 1989). To that end, this court has broad equitable
power in fashioning a remedy “for fiduciary breaches based upon the circumstances
of each case.” Technicorp Int’l II, Inc. v. Johnston, 2000 WL 713750, at *53 n.268
(Del. Ch. May 31, 2000) (citing Weinberger, 457 A.3d at 714).
While the harm to the Company is too speculative to quantify, the benefits to
the Pre-Forbearance Directors are clear: each received indemnification for all claims
brought by GB-SP, and Curtis and Worker received lucrative bonuses under the
September 2013 MOU. The Pre-Forbearance Directors cannot retain the benefits
they received as a result of their breaches of fiduciary duty. Therefore, the
Pre-Forbearance Directors are liable to BSW for all amounts paid to them or their
counsel under the Indemnity Agreement. In addition, the bonuses paid to Curtis and
Worker under the September 2013 MOU must be disgorged and returned to BSW.
See Valeant, 921 A.2d at 752–53 (requiring former director and president to disgorge
and return $3 million bonus to the company after he failed to show at trial that the
challenged transaction was entirely fair).
2. Approval of the Consensual Foreclosure a. Standard of Review
GB-SP argues that the Post-Forbearance Directors’ approval of the
Consensual Foreclosure should also be subject to entire fairness review, contending
110 that a majority of the Post-Forbearance Board was not disinterested or independent.
The Post-Forbearance Directors were Albright, Curtis, Kinsella, Orlofsky, Walker,
and Worker. For the entire fairness standard to apply, GB-SP must demonstrate that
at least three of the six directors on the Post-Forbearance Board were either
interested in the transaction or lacked independence from an interested party. See
Trados II, 73 A.3d at 44.
i. Disinterestedness GB-SP argues that Curtis and Worker were interested in the Consensual
Foreclosure because of the financial benefits they received under the September
2013 MOU. As explained above, the September 2013 MOU provided that Domus
would assume Curtis’s and Worker’s employment agreements and pay them
retention bonuses in the event of a consensual foreclosure or bankruptcy filing.357
On the other hand, if BSW was sold outside of bankruptcy, Curtis and Worker might
not continue to be employed and, if not retained by the acquiring entity, might not
receive bonuses of $107,417 and $142,199, respectively.358
The Consensual Foreclosure ensured that Curtis and Worker would retain
their management positions and entitlement to retention bonuses. Accordingly, both
Curtis and Worker had an interest in seeing the Consensual Foreclosure occur
357 JX 67 at 3–4. 358 Id. at 2.
111 instead of an open market sale. Lacking evidence in the record that Curtis and
Worker had alternate sources of income, the court finds that their salaries and
guaranteed bonuses were material to them. See, e.g., Trados II, 73 A.3d at 45–46
(concluding post-trial that lucrative payments from a management incentive plan,
coupled with post-transaction employment and directorships, were material financial
benefits to management directors and concluding the management directors were
interested in the challenged transaction); Oliver v. Boston Univ., 2006 WL 1064169,
at *27 (Del. Ch. Apr. 14, 2006) (concluding post-trial that board chairman and CEO
was interested in transaction where he would receive an asset value realization bonus
of 8.5% of net proceeds in the event of any change of control transaction). These
financial benefits led to a misalignment of Curtis’s and Worker’s interests when
considering the Consensual Foreclosure. Although the same benefits would accrue
to Curtis and Worker if BSW filed for bankruptcy and Domus purchased BSW out
of bankruptcy, a disinterested director would have had full flexibility to consider
potential paths forward for the Company on the merits without the influence of
personal financial gain attached to one of the transaction alternatives. See Aronson,
473 A.2d at 816 (explaining that the decisions of a disinterested and independent
director are “based on the corporate merits of the subject before the board rather than
extraneous considerations or influences”). Because of Curtis’s and Worker’s
112 arrangements for bonuses and continued employment under the September 2013
MOU, they cannot be found to be disinterested in the Consensual Foreclosure.
In addition, GB-SP argues that Walker was interested in the Consensual
Foreclosure because his company, Walker Nell, received $425,000 to serve as the
assignee in the ABC proceedings authorized in connection with the Consensual
Foreclosure. Walker first expressed his support in favor of BSW considering an
ABC in November 2013, indicating that he was “very familiar with ABCs, having
served several times as an assignee including in Delaware.” 359 In February 2014,
Walker had discussions with Versa about the available funding to administer an
ABC, including Walker’s fees for serving as assignee.360 At the March 2, 2014
special board meeting where the Post-Forbearance Board approved the Consensual
Foreclosure, the Post-Forbearance Board concurrently authorized BSW and BSW
Corporate Housing to commence ABC proceedings and selected Walker Nell to be
359 JX 84 at 1. 360 Tr. 677:1–13 (Walker) (“Q. Did you negotiate with anyone at Versa concerning how much money would be left behind in a consensual foreclosure to cover your work as the assignee under an ABC proceeding? A. I negotiated to cover the work of an assignment for the benefit of creditors. And that work would include not simply fees for the assignee, but would also include other expenses associated with the administration and wind-down liquidation of the affairs. Q. Right. But your fees would be paid out of that pot of money, if you will; right? A. Yes.”). Walker testified that he specifically spoke with Paul Halpern. Id. at 677:15–21 (Walker); see JX 108.
113 the assignee,361 through which $425,000 in fees flowed from Domus to Walker
Nell.362
Walker’s approval of the Consensual Foreclosure enabled Walker Nell to
receive substantial fees by facilitating the ABCs. As with Curtis and Worker, the
court concludes that these financial benefits were material to Walker and led to a
misalignment of Walker’s incentives as compared to those of a BSW stockholder.363
Therefore, the court concludes that Walker was interested in the Consensual
Foreclosure.
361 Walker claims to have abstained from voting on the ABCs at the March 2 meeting. Tr. 692:12–693:1 (Walker). Walker’s testimony is not credible and not supported by the documentary record. The minutes of the March 2 meeting indicate that (1) Walker was in attendance for the entire meeting; and (2) the Post-Forbearance Directors in attendance approved the resolutions to proceed with the Consensual Foreclosure and the ABCs. There is no indication that any board member in attendance abstained or recused himself from the vote. See JX 116 at 2–3. More important, the pre-trial order stipulates that Walker and the Post-Forbearance Directors in attendance at the March 2 meeting “unanimously authorized resolutions and documents to consummate the consensual ‘strict’ foreclosure in favor of Domus and an assignment for the benefit of creditors in connection with the assets of BSW.” PTO ¶ 65. 362 JX 116 at 2–3, 9. BSW management originally contemplated $100,000 in expenses in connection with an ABC proceeding, but the total compensation paid to Walker Nell for serving as the assignee was significantly higher. JX 84 at 2. 363 The record indicates that between October and December 2013, Walker invoiced $43,043.79 for working on BSW matters as a director. JX 97. Based on this figure, the $425,000 fee that Walker received for serving as the assignee in the ABC proceedings was a substantial financial benefit.
114 ii. Independence GB-SP argues Orlofsky lacked independence from Versa and Domus. A
director lacks independence when he is beholden to or dominated by an interested
party. Aronson, 473 A.2d at 815. A director’s discretion may be sterilized where a
director expects to be considered for highly compensated directorships at companies
that an interested party launches in the future. See Delman, 288 A.3d at 716, 720
(concluding it was reasonably conceivable that directors lacked independence where
they “had close ties” to the alleged controller and “expect[ed] to be considered for
[future] directorships” (internal quotation marks omitted)); In re MultiPlan Corp.
S’holders Litig., 268 A.3d 784, 814 (Del. Ch. 2022) (explaining that a director’s
discretion may be sterilized where the director expects to be considered for future
directorships); cf. In re MFW S’holders Litig., 67 A.3d 496, 509 (Del. Ch. 2013)
(“Our law is clear that mere allegations that directors are friendly with, travel in the
same social circles, or have past business relationships with the proponent of a
transaction or the person they are investigating, are not enough to rebut the
presumption of independence.”), aff’d sub nom. Kahn v. M & F Worldwide Corp.,
88 A.3d 635 (Del. 2014).
Versa and Domus were interested parties in the Consensual Foreclosure.
Orlofsky had an existing relationship with Versa prior to joining the BSW board.
115 Orlofsky previously served as the CFO and COO of Malden Mills. 364 During his
tenure at Malden Mills, Orlofsky met Gregory Segall of Versa, who joined the
Malden Mills board in conjunction with a bankruptcy process that Orlofsky was
facilitating. 365 Thereafter, Orlofsky served as the chairman and sole board member
of ALS at Segall’s request. 366 As sole board member, Orlofsky authorized ALS to
file for bankruptcy, and a Versa affiliate purchased ALS out of bankruptcy in
2012. 367 Orlofsky’s consulting firm was paid approximately $400,000 to facilitate
ALS’s bankruptcy.368 The following year, Versa tapped Orlofsky again, this time to
serve as a director of BSW. This pattern of director nominations and business
dealings between Orlofsky and Versa indicates that Orlofsky, unlike a typical
independent director, had an expectation that Versa would consider him for future
director appointments. Therefore, the court cannot conclude that Orlofsky was
independent of Versa for the purposes of the Consensual Foreclosure. See Caspian
Select Credit Master Fund Ltd. v. Gohl, 2015 WL 5718592, at *7 (Del. Ch. Sept. 28,
364 JX 166 at 18:6–19:1 (Orlofsky Dep.). 365 Id. at 19:1–11, 20:16–21:3 (Orlofsky Dep.); Tr. 555:3–9, 581:9–13 (Orlofsky). Orlofsky left Malden Mills in 2005, and several years later, a Versa affiliate purchased Malden Mills out of a subsequent bankruptcy. JX 166 at 19:18–24 (Orlofsky Dep.). 366 JX 166 at 23:4–11, 27:11–1 (Orlofsky Dep.); id. at 30:21–31:11 (testifying that Segall contacted him about serving on the board of ALS). 367 JX 166 at 26:8–18, 27:14–18 (Orlofsky Dep.); Tr. 583:5–14 (Orlofsky). 368 JX 166 at 8:16–20, 25:13–26:11, 31:20–32:9 (Orlofsky Dep.).
116 2015) (finding there was reasonable doubt as to two directors’ independence because
of their relationship with the company’s controlling stockholder who had nominated
them to numerous boards and with whom they reasonably had a strong expectation
of future business dealings).369
In sum, the court concludes that Curtis, Walker, and Worker were interested
in the Consensual Foreclosure, and Orlofsky lacked independence from Versa and
Domus. Because a majority of the Post-Forbearance Board was conflicted, the
decision to approve the foreclosure is subject to review under the entire fairness
standard. Trados II, 73 A.3d at 55. 370
b. Entire Fairness Analysis In applying entire fairness, the court examines whether the challenged
transaction was a product of fair dealing and fair price. Match, 315 A.3d at 459.
369 GB-SP also argues that Walker lacked independence from Versa and Domus. Pls.’ Post- Trial Opening Br. 7, 30. Walker, however, did not have a previous relationship with Versa or Domus. JX 163 at 27:3–10 (Walker Dep.); Tr. 615:20–616:11 (Walker). Therefore, the court finds that Walker was independent from Versa and Domus. 370 At the pleadings stage, the court concluded it was reasonably conceivable that Curtis, Orlofsky, Walker, and Worker breached their duty of loyalty in approving the foreclosure. See Dkt. 92 at 13:18–16:17. The court concluded the complaint sufficiently alleged that Curtis, Walker, and Worker were interested in the foreclosure and received a benefit from the foreclosure not shared with the other BSW stockholders. Id. at 16:2–7. The court also concluded the complaint sufficiently alleged that Orlofsky, who had a prior business relationship with Versa, lacked independence from Versa. Id. at 16:8–17.
117 i. Fair Dealing The Weinberger factors form the core of the court’s fair dealing analysis.
Tornetta, 310 A.3d at 527. The court considers how the transaction was timed,
negotiated and structured, and approved. Weinberger, 457 A.2d at 711.
1. Initiation and Timing
From a 30,000-foot view, Versa and Domus initiated the foreclosure when
Versa, through Domus, first acquired BSW’s first and second lien loans from Credit
Suisse in April 2013 as part of Versa and Domus’s loan-to-own strategy. The
foreclosure itself began to crystalize at the Company level with the Pre-Forbearance
Board’s approval of the ill-fated Forbearance Agreement. As GB-SP’s counsel aptly
put it at post-trial argument: “at that point, the die was cast.”371 That may be so,
and the court does not blind itself to the circumstances leading up to the Consensual
Foreclosure. As the court has already found, the Pre-Forbearance Board failed to
prove that the Forbearance Agreement was entirely fair, and it is clear from its
substance that by the time the Post-Forbearance Directors made it to the table, the
deck was stacked. But the focus of the analysis with respect to the Post-Forbearance
Directors’ discharge of their fiduciary duties is not the quality of the hand they were
dealt, but how they played it. Here, the determination of whether the
Post-Forbearance Directors breached their fiduciary duties in approving the
371 Dkt. 265 at 21:8–9.
118 Consensual Foreclosure begins with events after the date of the Forbearance
On October 11, 2013, Albright, Kinsella, Orlofsky, and Walker were elected
to the BSW board, along with Curtis and Worker, who were re-elected as the
Management Directors. 372 BSW management informed the board at its November
18, 2013 meeting that the Company had violated two of the covenants in the
Forbearance Agreement.373 One of the violations was the Company’s inability to
achieve a 20.5% gross margin by October 31, 2013.374 Two days later, BSW sent a
letter to Domus notifying it that BSW had defaulted under the Forbearance
Agreement and requesting a waiver of that default.375 Domus responded the next
day, declaring that as a consequence of the default under the Credit Agreement and
Forbearance Agreement: “(i) the Forbearance Period has terminated, (ii) the
Forbearance is of no further force and effect, and (iii) each of the Existing Defaults
is reinstated with the same force and effect as if the Forbearance had not been agreed
to.”376 Domus reserved its rights to commence a collection action, to foreclose on
372 PTO ¶ 47. As noted earlier, Seitz was also elected, but for reasons unknown, resigned shortly thereafter. 373 See id. ¶ 50. 374 JX 82 at 2, 10. 375 JX 85 at 4; see also JX 82 (attaching draft compliance notice). 376 JX 144 at 1.
119 the collateral, or to take other enforcement actions. 377 Internal documents indicated
that Domus intended to foreclose within the next four weeks.378 Pursuant to this
plan, Domus sent BSW an outline of preliminary foreclosure steps on November 26,
2013. 379
By late November 2013, the Post-Forbearance Board’s hands were tied. This
was not a circumstance akin to a board acceding to a sale transaction to satisfy a
private equity investor’s exit strategy. See, e.g., Trados II, 73 A.3d at 56 (finding
unfair dealing where “directors did not make [the] decision [to pursue a merger] after
evaluating [the company] from the perspective of the common stockholders, but
rather as holders of preferred stock with contractual cash flow rights that diverged
materially from those of the common stock and who sought to generate returns
consistent with their [venture capital] funds’ business model”). Domus had the right
to foreclose on all of BSW’s assets and was taking immediate steps to do so. The
Post-Forbearance Directors had to select the best choice from a menu of unattractive
options and had to do so in a situation when their fiduciary duties required them to
consider the interests of residual claimants. See McRitchie, 315 A.3d at 547. With
input of legal and financial advisers, the Post-Forbearance Directors carefully
377 Id. at 1–2. 378 JX 214. 379 JX 86.
120 evaluated all of the available options, and following rigorous debate over several
months, approved a consensual foreclosure on March 2, 2014. What follows is a
general chronology of the Post-Forbearance Board’s deliberative process.
On December 4, 2013, the Post-Forbearance Board discussed potential
alternatives, including seeking an additional forbearance period via waiver of the
breaches, selling the Company, refinancing the outstanding senior secured debt,
restructuring out-of-court, filing for bankruptcy, or undergoing a strict
foreclosure.380 Houlihan advised that a refinancing of the Company’s debt or a sale
of the Company were “highly unlikely in light of the Company’s current business
operations, the investment market’s overall condition and majority of the
Company’s senior secured debt.”381 The Post-Forbearance Board discussed seeking
additional equity investments in order to disincentivize Domus from exercising its
contractual rights. 382 Kinsella stated that neither GB-SP nor IEOT would be willing
to make an equity investment in the Company.383 The Post-Forbearance Board
resolved to reach out to a third party, Goodbody, to solicit interest in making a capital
investment.384 The Post-Forbearance Board also authorized Albright and Walker to
380 JX 91 at 2–3. 381 Id. at 3. 382 Id. 383 Id. 384 Id.
121 enter into negotiations with Domus, instructing them to reassert the Company’s
request for a waiver of default, seek clarity on the November 26 letter, and discuss
the potential paths forward. 385
At a December 17, 2013 board meeting, Albright and Walker reported that
they had met with Domus representatives and had transmitted the Company’s
request for a waiver of its default.386 Domus refused to engage with this proposal
absent a significant reduction in outstanding debt or the provision of a significant
amount of additional collateral.387 Instead, Domus again requested that the
Company begin taking steps towards a consensual foreclosure in line with its
November 26 letter. 388
The Post-Forbearance Board then discussed the potential alternatives. In
response to a previous request by Kinsella, Gingrich and Worker presented an
analysis of operating costs that could be reduced to increase profitability and pay
down the outstanding debt.389 They warned that such a strategy would present
negative consequences, such as reducing the Company’s EBITDA and risking the
385 Id. 386 JX 96 at 2. 387 Id. 388 Id. 389 Id. at 3.
122 loss of significant international clients. 390 Houlihan reiterated that a potential sale
or refinancing would be very difficult. 391 While the Post-Forbearance Directors
continued to discuss other options, including seeking a sale, refinancing, or
additional forbearance period, they specifically resolved to investigate and review
two parallel paths: the filing of a chapter 11 bankruptcy proceeding or entering into
a consensual foreclosure with Domus.392 The Post-Forbearance Board also
authorized the Company’s officers to continue negotiating a potential consensual
foreclosure with Domus. 393
Walker presented an analysis of a potential chapter 11 filing at a January 3,
2014 board meeting.394 Houlihan reported that a bankruptcy filing would require
between $7 to $9 million in DIP financing, which would be difficult to get from
anyone other than Versa or Domus, who would have to consent to the bankruptcy
filing.395 Worker then reported that filing bankruptcy would have negative
consequences for the business which would result in a “seriously diminished value”
for the enterprise.396 Orlofsky remarked, relying on a combined management and
390 Id. 391 Id. 392 Id. at 3–4. 393 Id. at 4. 394 JX 102 at 1–2. 395 Id. 396 Id.
123 Houlihan analysis, that a consensual foreclosure could achieve a similar result as
bankruptcy while avoiding the time, cost, and damage to the business which would
be incurred in a bankruptcy. 397 Kinsella expressed, but did not elaborate on, a
preference for a bankruptcy filing.398 After the adviser presentations and lengthy
discussion, Albright, Curtis, Orlofsky, Walker, and Worker voted to approve a
consensual foreclosure, “subject to the negotiation and finalization of definitive
documentation.” 399
On January 27, 2014, BBK delivered a draft analysis that valued the Company
at $29.7 million as of December 31, 2013.400 The Post-Forbearance Directors
discussed the status of the Consensual Foreclosure negotiations in a meeting on
January 28, 2014.401 In this meeting, the Post-Forbearance Directors also discussed
the relative advantages and disadvantages of pursuing an ABC proceeding as
397 Id. 398 Id. (“Mr. Walker encouraged Mr. Kinsella to more fully explain his reasoning for supporting a bankruptcy filing, but Mr. Kinsella declined, stating that he didn’t feel a need to add anymore [sic] to his position on the matter.”). 399 Id. Kinsella opposed this resolution. Id. 400 JX 104 at 8. 401 JX 107. Prior to Kinsella joining the meeting, the rest of the Post-Forbearance Board met in executive session to discuss correspondence from Kinsella’s counsel the day before. Id. at 1.
124 opposed to a statutory dissolution. 402 At a February 25, 2014 meeting, the
Post-Forbearance Directors, in response to multiple letters from Kinsella, reviewed
the available options again.403 During those deliberations, the Company’s advisers
and members of management warned that bankruptcy could be value destructive to
the business.404 After a thorough discussion, “the [Post-Forbearance] Board
affirmed its judgment that due and careful consideration had been given to Mr.
Kinsella’s demands and to the options available to the Company to maximize the
value of the Company and its assets.”405
In light of the foregoing, it is apparent that the Post-Forbearance Board
engaged in a careful evaluation of the Company’s options and elected to initiate and
pursue the Consensual Foreclosure at the conclusion of a deliberative process. This
factor supports a finding of fair process.
402 Id. at 3. During the meeting, Kinsella announced that he “no longer wanted to participate” and left the meeting but later rejoined and remained for the rest of the meeting. Id. at 2–3. 403 JX 111. Kinsella refused to remain for the advisers’ discussion of the options that had been considered and the reasons why alternative paths had been foregone, and instead left the meeting, this time not rejoining. Id. at 2. Nevertheless, the remaining Post-Forbearance Directors still considered the full scope of concerns Kinsella had raised, even after his departure from the meeting. Id. at 2–4. 404 Id. at 2–3. 405 Id. at 4.
125 2. Negotiation and Structure Turning to the second Weinberger factor, the negotiation and structure of the
Consensual Foreclosure were suboptimal in several ways, but their results were not
unexpected and, on balance, do not tip the scales towards unfair process.
The Post-Forbearance Board’s greatest fault in the negotiation and structure
of the deal arises from the conflicts of one of its negotiators. On December 4, 2013,
the Post-Forbearance Board resolved that Walker and Albright would negotiate with
Domus on the Company’s behalf.406 Albright’s disinterestedness and independence
is unchallenged, and his role as a negotiator is a plus for the Post-Forbearance
Directors on process. But, as explained above, the roughly half a million dollars
paid to Walker Nell for the ABC proceeding renders Walker interested in the broader
transaction, and his role as a negotiator, as well as the structural presence of
payments rendering him conflicted, weigh against a finding of fair process.
On the whole, however, the final structure of the Consensual Foreclosure was
about the best that the Company was going to get. By the time BSW breached its
financial covenants in the Forbearance Agreement, the Company had few remaining
options, and none were preferable to the Consensual Foreclosure. For instance, a
sale to another company that could satisfy BSW’s increased post-forbearance debt
load and deliver value to stockholders—or even more debt relief for the Company—
406 JX 91 at 3.
126 was very unlikely in light of both BSW’s earlier failed sale process and the $29.7
million BBK valuation.407 Versa declined to extend forbearance or to provide the
Company with additional capital.408 Kinsella, GB-SP, and IEOT were also unwilling
to provide additional investment, and other efforts to solicit equity investment were
unsuccessful. That left bankruptcy or foreclosure.
GB-SP argues that the Post-Forbearance Board should have elected to file for
bankruptcy, which it asserts might have provided an opportunity for the stockholders
to receive a marginal recovery on their investment. But GB-SP provides nothing
concrete to indicate that bankruptcy would have allowed for any residual benefits to
flow to the Company’s stockholders or otherwise provide greater value to BSW than
the Consensual Foreclosure. As Kinsella acknowledged, the Company was
insolvent.409 And although Kinsella advocated for bankruptcy, he was unable to
articulate why that was the better option, and he did not explain whether chapter 7
or chapter 11 was the right course, either during the Post-Forbearance Board’s
deliberations or during this case.410
407 JX 110 at 4; JX 104. 408 JX 110 at 4–5. Tr. 146:16–18 (Kinsella) (“When I say ‘insolvent,’ I’m aware that, in actual fact, the 409
company is insolvent, and it isn’t [able] to pay its debts.”). 410 JX 102 at 2 (January 3, 2014 board meeting where Kinsella indicated that a bankruptcy filing would be “the best course of action” but declined to “fully explain his reasoning for supporting a bankruptcy filing”); Tr. 193:22–194:15 (Kinsella) (“Q. [W]hat would have
127 By contrast, the Post-Forbearance Board was repeatedly advised that
bankruptcy could be more disruptive and costly than a friendly foreclosure.
Specifically, the Company’s advisers noted that a bankruptcy would require an
additional $7 to $9 million in DIP financing, whereas wind-up through an ABC
proceeding would require $425,000. 411 The Post-Forbearance Board also
appreciated that such DIP financing would be difficult, if not impossible, to receive
from anyone other than Domus, given its senior secured position—and Domus
wanted to foreclose.412 Moreover, a strict foreclosure provided BSW with the ability
to significantly reduce its indebtedness at a juncture where few other alternatives
were available. The Company would receive $38 million in the form of satisfied
and cancelled indebtedness, which would exceed the BBK valuation of the Company
by more than $8 million.413
Altogether, negotiation was impaired because of Walker’s conflicts, weighing
against a finding of fair process. But those conflicts do not appear to have affected
happened if the company did file for bankruptcy?. . . . A. I believe that a liquidator would have succeeded in getting decent value for this company, and realizing the equity value that was in it. . . . Q. Did you have a liquidation analysis done to support that conclusion? A. No. . . . Q. And have you been involved in a Chapter 7 liquidation process before? A. No, sir. . . . In a Chapter 7, I must admit, I am without authority there.”). 411 JX 108. 412 See JX 110 at 5; Tr. 574:22–575:8 (Orlofsky) (testifying that bankruptcy “would have been a last resort” and “was really not a good idea”); id. at 398:18–399:14 (Worker) (noting that bankruptcy would cost between $7 to $9 million, making it “financially impossible”). 413 JX 110 at 5.
128 the ultimate structure of the transaction. While far from an optimal outcome for the
Company, the Consensual Foreclosure was the best of bad options. On balance, this
factor slightly favors a finding of fair process.
3. Approval Turning to the final Weinberger factor, the Post-Forbearance Board approved
the foreclosure at a special meeting on March 2, 2014. Kinsella chose not to attend
the meeting. All five of the Post-Forbearance Directors in attendance at the meeting
authorized resolutions to consummate the Consensual Foreclosure and the ABC
proceedings.414 The Post-Forbearance Board also directed that the Company’s
stockholders approve the Consensual Foreclosure and ABC under its authority in the
Shareholders Agreement. 415 Approval of the Consensual Foreclosure came after
three months of negotiations, numerous board meetings, and genuine debate among
the Post-Forbearance Directors.
GB-SP argues that the Consensual Foreclosure was inappropriately approved
on January 3, 2014, without a valuation of BSW or a substantive chapter 11
analysis.416 That argument is contrary to the stipulated facts and mischaracterizes
414 JX 116 at 3. 415 Id. at 10. 416 Pls.’ Post-Trial Opening Br. 61; Pls.’ Post-Trial Reply Br. 41.
129 the meeting.417 At the January 3, 2014 meeting, the Post-Forbearance Board
approved “a consensual foreclosure, subject to negotiation and finalization of
definitive documentation regarding same as well as further and final authorization
by the Board of all relevant and appropriate transaction documents (and related steps
and undertakings).”418 The Post-Forbearance Board authorized the Company’s
executive officers to continue negotiating a consensual foreclosure with Domus, but
did not preclude the exploration of other alternatives.419 At this same January 3
meeting, prior to the resolution, BSW management provided the Post-Forbearance
Board with a “detailed” “quantitative and qualitative analysis of a potential Chapter
11 bankruptcy filing.” 420 Although the Post-Forbearance Board did not receive
BBK’s valuation analysis until after the January 3 meeting, it had already been
informed by its advisers that a sale beyond the value of the Company’s debt was
very unlikely, an observation which had been proven true by the Company’s failed
sale process with Houlihan.421 And after January 3, the Post-Forbearance Board
continued consulting with its advisers and received additional information at its
417 See PTO ¶ 65 (stipulating that the Post-Forbearance Directors in attendance at the March 2, 2014 special meeting “unanimously authorized resolutions and documents to consummate the consensual ‘strict’ foreclosure”). 418 JX 102 at 2. 419 Id. 420 Id. at 1–2. 421 JX 96 at 3.
130 January 28 and February 25 meetings.422 To the extent the Post-Forbearance
Directors lacked all of the materials Kinsella claims they needed on January 3, that
cannot be said for subsequent meetings, including the March 2 special meeting when
the Consensual Foreclosure was approved.
Outside of this information deficit, GB-SP’s remaining challenge to the
approval of the Consensual Foreclosure is that the Post-Forbearance Board was
conflicted. The court has considered the conflicts of Curtis, Walker, and Worker,
and the evidence and extent to which Orlofsky was not independent of Versa. Each
conflict is concerning, and those issues required the application of the entire fairness
standard of review. But the determination of the applicable standard of review is a
procedural question, and in the resulting substantive analysis, these facts are not
considered in a vacuum. See Trados II, 73 A.3d at 45 (explaining that the application
of entire fairness “does not mean that the [] directors necessarily breached their
fiduciary duties, only that entire fairness is the lens through which the court evaluates
their actions”). In weighing the evidence, the court finds that the Post-Forbearance
Board met several times to discuss BSW’s options, listened, considered, and
responded to Kinsella’s concerns, and received advice from its legal and financial
advisers. 423 The Post-Forbearance Directors carefully evaluated the few remaining
422 JX 107 at 3; JX 111. 423 Plaintiffs did not allege that the board’s advisers were conflicted.
131 options that remained for the Company and chose to enter into the Consensual
Overall, all of the Weinberger factors counsel a finding that the
Post-Forbearance Board’s decision to approve the Consensual Foreclosure was the
product of fair dealing, despite the conflicts of a majority of the directors. The
process was not perfect, but “‘perfection is not possible, or expected’ as a condition
precedent to a judicial determination of entire fairness.” Technicolor Plenary III,
663 A.2d at 1179 (quoting Weinberger, 457 A.2d at 709 n.7); see also Wayne Cty.
Empls.’ Ret. Sys. v. Corti, 2009 WL 2219260, at *13 n.71 (Del. Ch. July 24, 2009)
(“While it is possible that the board . . . could arguably have better navigated the sale
process, Delaware law does not require perfection.”), aff’d, 996 A.2d 795 (Del.
2010) (TABLE); BGC P’rs, 2022 WL 3581641, at *18 (explaining that perfection
“is an unattainable standard that Delaware law does not require” (internal quotation
marks omitted)). Despite conflicts, the Post-Forbearance Board navigated the
Consensual Foreclosure process in a thorough, well-advised manner and fairly
evaluated all the options and concerns raised by Kinsella. The court concludes the
Consensual Foreclosure’s process was fair to the Company’s stockholders.
ii. Fair Price
In examining fair price, the court considers whether the price falls within a
range of reasonableness. BGC P’rs, 2022 WL 3581641, at *29. Given BSW’s
132 distressed financial condition and the burden of its debt obligations, the price
received in the Consensual Foreclosure was fair to the Company. In the months
leading up to the Consensual Foreclosure, BSW had defaulted on its debt obligations
and, in the weeks leading up to the Consensual Foreclosure, BSW had stopped
making interest and principal payments to Domus. BBK determined that BSW had
a negative net book value as of November 30, 2013.424 At any point, Domus could
have foreclosed on the collateral without BSW’s consent or could have forced BSW
into bankruptcy due to BSW’s defaults under the Forbearance Agreement and on-
going defaults under the Credit Agreement. Because substantially all of BSW’s
assets secured this debt obligation, which was now in default, BSW had no realistic
prospect of receiving any value in excess of its debt obligations.
The give of the Consensual Foreclosure was 100% of the equity interests in
BSW’s entities and the get was the satisfaction of approximately $38 million of
BSW’s outstanding debt to Domus, which was more than $8 million above BBK’s
valuation of all BSW’s assets. 425 In considering these circumstances, the price was
fair. See Cancan Dev., LLC v. Manno, 2015 WL 3400789, at *26 (Del. Ch. May 27,
2015) (noting that a fiduciary “can satisfy the entire fairness standard in a transaction
where an interest holder receives nothing if the fiduciary proves that ‘there was no
424 JX 104 at 7; see id. at 10–14. 425 JX 116 at 8; JX 118 at 3, 28.
133 future for the business and no better alternative for the [interest] holders.’”
(alteration in original) (quoting Blackmore P’rs, L.P. v. Link Energy LLC, 864 A.2d
80, 86 (Del. Ch. 2004))), aff’d, 132 A.3d 750 (Del. 2016) (TABLE). Because BSW’s
equity interest in its subsidiaries was so deeply underwater, the Consensual
Foreclosure provided fair value for those interests. See Trados II, 73 A.3d at 78
(“[T]he directors breached no duty to the common stock by agreeing to a Merger in
which the common stock received nothing. The common stock had no economic
value before the Merger, and the common stockholders received in the Merger the
substantial equivalent in value of what they had before.”); Frederick Hsu Living Tr.
v. Oak Hill Cap. P’rs III, L.P. (ODN II), 2020 WL 2111476, at *37 (Del. Ch. May
4, 2020) (concluding post-trial that the challenged transaction was substantively fair
where the company’s “common stock would have ended up worthless with or
without the [transaction]” and “[t]he weight of the evidence demonstrate[d] that
there was no acquisition or growth opportunity that the Company’s former
executives and directors could have pursued that would have changed the
outcome”); Jacobs v. Akademos, Inc., --- A.3d ----, 2024 WL 4614682, at *35 (Del.
Ch. Oct. 30, 2024) (“The common stock . . . had no value before the Merger. The
common stockholders received nothing in the Merger, but that was the substantial
equivalent of what they had before. The Merger therefore offered a fair price.”).
134 Plaintiffs’ expert criticizes the BBK report on multiple grounds, none of
which the court finds credible. First, Rosen claims that “the BBK report assumes an
unusually high cost of equity [] of 35%,” which results from BBK’s 20% company
specific risk premium assumption. 426 In disagreeing with the 20% company specific
risk premium, Rosen opines that “[a] more reasonable company specific risk
premium for the Company would be in the 3% range,” without explanation.427 “The
calculation of a company specific risk is highly subjective and often is justified as a
way of taking into account competitive and other factors that endanger the subject
company’s ability to achieve its projected cash flows.” Del. Open MRI Radiology
Assocs., P.A. v. Kessler, 898 A.2d 290, 339 (Del. Ch. 2006). Given BSW’s financial
distress and the fact that it was in continuing default on its loan obligations, Rosen’s
significant downward adjustment of the company specific risk premium is not
credible. In fact, Rosen testified at trial that he did not even consider the financial
distress of the Company or the fact that it was already in default when estimating the
company specific risk premium or preparing his valuation of the Company.428
426 JX 157 at 26–27. 427 Id. at 27. 428 See, e.g., Tr. 316:17–21 (Rosen) (“Q. In selecting 3 percent, you didn’t consider the financial distress that the company was in, that it was in default on its secured -- on its loan agreements; right, sir? A. No, I did not.”); id. at 317:22–318:2 (“Q. [D]id the company’s default due to its failure to make interest payments on its credit agreement as of December 31, 2012, have any impact on your view of the value of the company? A. No.”).
135 Second, Rosen claims that “the BBK Report states that the Market Approach
presented in BBK’s Exhibit H should be adjusted to add estimated working capital
and subtract debt.”429 But that is not what the BBK report says—the BBK report
merely points out that “Amkadian Holdings, Inc. acquired BridgeStreet on January
26, 2007 for a purchase price of $32.0 million plus estimated working capital, less
an amount required at closing to discharge in full the estimated indebtedness.”430
The BBK report, however, does not say that its valuation should be adjusted to add
estimated working capital. In short, the court finds that Rosen’s criticisms of the
BBK report are not persuasive, and Plaintiffs have offered no other evidence to rebut
BBK’s findings.
The evidence in the record supports a finding of fair price. The combination
of BSW’s secured debt obligations and its perpetual defaults resulted in the
Company’s interests in all of its assets, which served as security for Versa’s debt,
being completely underwater. The Company received nothing beyond satisfaction
of the debt secured by the assets foreclosed upon in connection with the Consensual
Foreclosure, but this was a fair exchange. The Post-Forbearance Directors have
carried their burden and shown that the Consensual Foreclosure offered a fair price
to the Company.
429 JX 157 at 27. 430 JX 104 at 7 (emphasis added).
136 iii. Unitary Determination Having examined fair dealing and fair price individually, the court addresses
whether, under a unitary analysis of both prongs, the Post-Forbearance Directors
proved that the Consensual Foreclosure was entirely fair.
The Post-Forbearance Directors have carried their burden of proving the
fairness of the Consensual Foreclosure by a preponderance of the evidence on both
prongs. The Post-Forbearance Board employed a thorough process when
negotiating the Consensual Foreclosure. Unlike the negotiations of the Forbearance
Agreement, Kinsella was on the board for this process and participated actively
throughout, raising challenges to the proposed transaction, pushing for alternative
structures, and overall promoting boardroom discussion. The Post-Forbearance
Board responded constructively to Kinsella’s vocal dissent and actively explored
alternatives to a foreclosure, received guidance from legal and financial advisers,
and assessed the costs and feasibility of the options available to them. Considering
all relevant evidence in the post-trial record, despite the presence of a conflicted
negotiator, and a majority conflicted board, the Post-Forbearance Directors
succeeded in proving that these conflicts did not interfere with their ultimate
decision-making. That is not to say that the process contained no flaws, but when
considering the initiation, negotiation, structure, and approval of the Consensual
Foreclosure together, the court concludes that the process was entirely fair. See
137 Tesla, 298 A.3d at 710 (affirming this court’s finding that although the sale process
had some flaws, it had “several redeeming features that emulated arms-length
bargaining to the benefit of Tesla stockholders” (internal quotation marks omitted));
ACP Master, Ltd. v. Sprint Corp., 2017 WL 3421142, at *29 (Del. Ch. July 21, 2017)
(noting that subsequent actions “freshened the atmosphere” and led to a fair process
despite acts of unfair dealing occurring early in the process), aff’d, 184 A.3d 1291
(Del. 2018) (TABLE); Technicolor Plenary II, 663 A.2d at 1144 (concluding the
challenged transaction was substantively fair even though “the process followed by
the board in authorizing the corporation to enter into the [challenged] transaction
was flawed”); BGC P’rs, 2022 WL 3581641, at *18 (concluding the deal process,
“albeit imperfect,” was “ultimately fair”).
The Post-Forbearance Directors also proved, by a preponderance of the
evidence, that the price received by the Company for its equity interests in its
subsidiaries in the Consensual Foreclosure was objectively fair under the
circumstances. Specifically, the Post-Forbearance Directors introduced credible
evidence that the Company received satisfaction of debts in material excess of the
fair value of the collateral the Company surrendered, and GB-SP failed to credibly
rebut that valuation of the Company’s equity interests in its subsidiaries. The
Company may not have gotten any cash, or even satisfaction or release of all its
138 debts, but, based on the circumstances, the price BSW received was fair. See Trados
II, 73 A.3d at 76; ODN II, 2020 WL 2111476, at *37.
Accordingly, the court finds the Post-Forbearance Directors have satisfied
their burden of proof to demonstrate that the Consensual Foreclosure was entirely
fair to the Company, and the Post-Forbearance Directors are not liable for a breach
of fiduciary duty for approving the Consensual Foreclosure.
E. Count III (Aiding and Abetting Breach of Fiduciary Duty) GB-SP seeks to hold the Versa Defendants liable for aiding and abetting the
Director Defendants’ breach of fiduciary duty. To establish a claim for aiding and
abetting a breach of fiduciary duty, a plaintiff must prove: “(i) the existence of a
fiduciary relationship, (ii) a breach of the fiduciary’s duty, (iii) knowing
participation in that breach by the defendants, and (iv) damages proximately caused
by the breach.” RBC Cap. Mkts., LLC v. Jervis, 129 A.3d 816, 861 (Del. 2015)
(citations omitted).
“Knowing participation in a board’s fiduciary breach requires that the third
party act with the knowledge that the conduct advocated or assisted constitutes such
a breach.” Malpiede v. Townson, 780 A.2d 1075, 1097 (Del. 2001). To establish
the requisite level of scienter, a plaintiff “must demonstrate that the aider and abettor
had ‘actual or constructive knowledge that their conduct was legally improper.’”
RBC, 129 A.3d at 862 (quoting Wood v. Baum, 953 A.2d 136, 141 (Del. 2008)).
139 Whether a party acted with scienter is a factual determination. Id. A plaintiff can
prove knowing participation by showing that the third party “attempt[ed] to create
or exploit conflicts of interest in the board.” Malpiede, 780 A.2d at 1097; accord
RBC, 129 A.3d at 862. As with the breach of fiduciary duty claim, the court
addresses the aiding and abetting claim with respect to each transaction separately.
1. Forbearance Agreement GB-SP argues that the Versa Defendants exploited the Pre-Forbearance
Directors’ conflicts of interest—and thereby aided and abetted their breaches of
fiduciary duty—by offering them “complete insulation from liability and impunity”
through the Indemnity Agreement, the release of claims, and the funding of D&O
insurance coverage.431 As explained above, GB-SP proved the existence of a
fiduciary relationship and a breach of fiduciary duty. Thus, the first two elements
have been satisfied.
The third element has also been satisfied. The Versa Defendants knew that
GB-SP had a right to designate a director on the BSW board and that the
Pre-Forbearance Directors were deliberately delaying seating Kinsella on the board
until the Forbearance Agreement was in place. 432 In addition, the Versa Defendants
431 Pls.’ Post-Trial Opening Br. 65. 432 See, e.g., JX 158 at 98:14–99:5 (Halpern Dep.) (testifying that, as of September 2013, the Versa Defendants “would not have any objection to [Kinsella] being seated on the board, and that fighting about it was a waste of time and money,” and that Kinsella was
140 knew the Pre-Forbearance Directors were demanding indemnification for any claims
brought by GB-SP. 433 The Versa Defendants exploited the Pre-Forbearance
Directors’ conflicts of interest and induced the fiduciary breach by agreeing to
indemnify them as part of the Forbearance Agreement, which delivered to the Versa
Defendants exactly what they wanted—the remaining 35% equity in BSW’s foreign
subsidiaries and the departure of Davis, Doheny, LaCivita, and Scher from the
board.434
seated on the BSW board following the Forbearance Agreement); id. at 102:8–14 (“Q. What was the change that was going to take place in terms of composition following the [F]orbearance [A]greement? A. The -- the -- the number of directors were going to go off of the board. And then the new directors were going to be named to the board, including [Kinsella].”). 433 See JX 174; JX 59. 434 The Versa Defendants argue that they cannot be liable for aiding and abetting because they negotiated the Forbearance Agreement at arm’s length. Versa Defs.’ Post-Trial Answering Br. 26. The court is not persuaded by this argument. A plaintiff faces a high burden when asserting an aiding and abetting claim against a transactional counterparty, and absent actual collusion and facilitation of fiduciary wrongdoing, arm’s length bargaining does not constitute aiding and abetting. Cambria Equity P’rs L.P. v. Relight Enters. S.A., 2021 WL 2336984, at *12 (Del. Ch. Jan. 5. 2021). But the record here demonstrates that the Versa Defendants intentionally facilitated fiduciary wrongdoing. An April 13, 2013 internal Versa document discussing its loan to own strategy with respect to BSW highlighted that two issues for Versa were the “Unpledged 35% equity interests” and that “Current independent board members will not approve the existing transaction.” JX 41 at 6. The same document then explained Versa’s solution: “Versa can modify the transaction to facilitate approval from current board” by adding “Enhanced D&O coverage or direct indemnification of directors” and “Assumption of all liabilities.” Id. The Versa Defendants executed this strategy, capitalized on the Pre-Forbearance Board’s conflicts as the Versa Defendants discovered them, and intentionally induced a breach of fiduciary duty at the expense of the Company.
141 Fourth and finally, the Versa Defendants’ conduct proximately caused the
injury to BSW resulting from the Forbearance Agreement. To prove proximate
cause, a plaintiff “‘must show that the result would not have occurred ‘but for’ the
defendant’s action.’” RBC, 129 A.3d at 864 (quoting Mazda Motor Corp. v. Lindahl,
706 A.2d 526, 532 (Del. 1998)). There may be more than one proximate cause of
an injury. Id. Here, the Versa Defendants were in a unique position to exploit the
conflicted Pre-Forbearance Board and cause a fiduciary breach and seized that
opportunity to extract additional benefits from the Company at its own expense.
Specifically, the Versa Defendants diverted potential consideration away from BSW
and into the pockets of the Pre-Forbearance Directors by agreeing to provide broad
indemnification for claims brought by GB-SP to induce the Pre-Forbearance
Directors to grant the Versa Defendants additional collateral. All four elements have
been satisfied, and the court finds that the Versa Defendants are liable for aiding and
abetting the Pre-Forbearance Directors’ breach of the duty of loyalty.
Fashioning a remedy for the Versa Defendants’ aiding and abetting the
Pre-Forbearance Directors’ breach of the duty of loyalty is challenging given the
lack of a damages analysis, and the parties’ failure to argue this issue. Nevertheless,
this court “has broad latitude to exercise its equitable powers to craft a remedy,” and
its “remedial powers are complete to fashion any form of equitable and monetary
relief as may be appropriate and to grant such other relief as the facts of a particular
142 case may dictate.” In re Columbia Pipeline Gp., Inc. Merger Litig., 299 A.3d 393,
494 (Del. Ch. 2023) (internal quotation marks omitted).
The appropriate remedy here, albeit a modest one, is equitable subordination.
“‘Equitable subordination is a doctrine that, based on a creditor’s inequitable
conduct and its effect on other creditors, allows that creditor’s debt to be
subordinated to other claims in bankruptcy or allows the creditor’s liens to be
transferred to the bankruptcy estate.’” Grassi Fund Admin. Servs., Inc. v. Crederian,
LLC, 2022 WL 1043626, at *4 n.43 (Del. Ch. Apr. 7, 2022) (quoting Nelson v.
Emerson, 2008 WL 1961150, at *4 n.13 (Del. Ch. May 6, 2008)).
BSW no longer has any operating business and the Company has been
dissolved. There are long-pending ABC proceedings before this court, through
which the assets of BSW will be paid to its creditors. Based on the record, BSW is
still indebted to the Versa Defendants for at least $7 million.435 As BSW’s first
position creditor, the Versa Defendants would be first in line to receive any of the
amounts collected by BSW from the Pre-Forbearance Directors for their breach of
fiduciary duty. But the Versa Defendants induced the Pre-Forbearance Directors’
fiduciary breach by payment of the very sums the Pre-Forbearance Directors must
now disgorge, and it would be inequitable to permit the Versa Defendants to recover
435 JX 118 at 28; Tr. 473:4–10 (Halpern).
143 from BSW the amounts collected from the Pre-Forbearance Directors as damages.
Just as the disloyal fiduciaries must not be permitted to profit from their breach, nor
should the parties who aided and abetted in the same receive a windfall from a
finding of the fiduciaries’ liability. Therefore, as a remedy for their aiding and
abetting in the Pre-Forbearance Directors’ fiduciary breach, the Versa Defendants’
outstanding BSW debt shall be subordinated to that of BSW’s other creditors as to
any amounts collected or received by or on behalf of BSW from the Pre-Forbearance
Directors pursuant to this ruling.
2. Consensual Foreclosure
The Versa Defendants cannot be held liable for aiding and abetting a breach
of fiduciary duty in relation to the Consensual Foreclosure. To prove a claim for
aiding and abetting a breach of fiduciary duty, the plaintiff must establish an
underlying breach of fiduciary duty. RBC, 129 A.3d at 861; Malpiede, 780 A.2d at
1096. Because the Post-Forbearance Directors did not breach their fiduciary duties
in connection with the Consensual Foreclosure, the Versa Defendants are not liable
for aiding and abetting a breach of fiduciary duty as to the foreclosure. See In re
Wayport, Inc. Litig., 76 A.3d 296, 323 (Del. Ch. 2013) (concluding post-trial that
plaintiff failed to prove a claim for aiding and abetting where there was no
underlying breach of fiduciary duty).
144 F. Count VIII (Indemnification) Kinsella seeks indemnification under BSW’s by-laws for his attorneys’ fees
and costs in litigating his claims. 436 Article VIII of BSW’s by-laws governs
indemnification. Section 1(a) of Article VIII states, in pertinent part:
The corporation shall indemnify any director or officer of the corporation . . . who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director . . . against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation[.]437
436 In the complaint, Kinsella sought indemnification pursuant to the Shareholders Agreement, the by-laws, and 8 Del. C. § 145. Compl. ¶¶ 108–11. At the pleadings stage, the court found that “[g]iven the current stage of this litigation, [Kinsella] actually seek[s] advancement rather than indemnification.” Dkt. 92 at 29:21–23. Because the Shareholders Agreement does not provide for advancement, and because advancement is only permissive under the by-laws and Section 145, the court denied Kinsella’s claim “for indemnification and advancement at this stage and grant[ed] defendants’ motion to dismiss that count.” Id. at 31:6–8. Kinsella seeks to revive his claim for indemnification pursuant to the Company’s by-laws in his post-trial briefing. The BSW Defendants did not raise any procedural objections in their post-trial briefing and presented substantive arguments. Any procedural objections are therefore waived. Emerald P’rs, 726 A.2d at 1224. The court will consider Kinsella’s claim for indemnification pursuant to the BSW by-laws at this stage of the proceedings. 437 JX 2 Art. VIII § 1(a).
145 Article IX of the by-laws further provides that BSW “shall indemnify its officers and
directors to the fullest extent permitted by the Delaware General Corporation
Law.” 438
“General rules of contract interpretation apply when construing the provisions
of a company’s charter or bylaws.” Krauss v. 180 Life Scis. Corp., 2022 WL 665323,
at *3 (Del. Ch. Mar. 7, 2022). “Words and phrases used in [] bylaw[s] are to be
given their commonly accepted meaning ‘unless the context clearly requires a
different one or unless legal phrases having a special meaning are used.’” Bernstein
v. TractManager, Inc., 953 A.2d 1003, 1008 (Del. Ch. 2007) (quoting Hibbert v.
Hollywood Park, Inc., 457 A.2d 339, 343 (Del. 1983)).
BSW’s by-laws mandate indemnification for current and former directors and
officers. 439 Kinsella is entitled to indemnification if (1) he is or was a party to a
438 Id. Art. IX § 7. 439 The indemnification provision mirrors the statutory language in 8 Del. C. § 145(a) (“A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation[.]”). Pursuant to 8 Del. C. § 145(f), a corporation may provide for mandatory indemnification in its corporate charter or by-laws. 8 Del. C. § 145(f); Hibbert, 457 A.2d
146 threatened or pending action, suit, or proceeding by reason of the fact that he is or
was a director of BSW; (2) he actually and reasonably incurred expenses in
connection with such action, suit, or proceeding; and (3) he “acted in good faith and
in a manner he reasonably believed to be in, or not opposed to, the best interests of
the corporation.” 440 Because BSW adopted a mandatory indemnification provision,
BSW has the burden of proof to demonstrate why it should not be required to
indemnify Kinsella. VonFeldt v. Stifel Fin. Corp., 1999 WL 413393, at *3 (Del. Ch.
June 11, 1999) (“By using the phrase ‘shall indemnify,’ the bylaw not only mandates
indemnification; it also effectively places the burden on [BSW] to demonstrate that
the indemnification mandated is not required.”); see Donald J. Wolfe, Jr. & Michael
A. Pittenger, Corporate and Commercial Practice in the Delaware Court of
Chancery § 9.02[f] (2022) (“[T]he Court of Chancery has held that the adoption by
a corporation of a mandatory indemnification provision will place the burden of
proof in any ensuing litigation concerning its application upon the corporation to
demonstrate why it should not be required to indemnify.”).
at 344 (explaining that a corporation is permitted to “grant indemnification rights beyond those provided by [Section 145]”). 440 JX 2 Art. VIII § 1(a).
147 The parties dispute whether Kinsella acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of BSW.441
Kinsella argues that he acted in good faith and in the best interests of the Company
to obtain his corporate governance and information rights as a director, to protect the
Company’s corporate governance procedures, and to compel the BSW Defendants
to abide by Delaware law and the Company’s by-laws. 442 The BSW Defendants
argue that Kinsella failed to act in good faith and in the best interests of BSW
because he brought his claims to recover the value of his equity interests in GB-SP
and to advance his personal interests. 443 According to the BSW Defendants, Kinsella
441 The parties do not dispute that Kinsella is a “party” to this action “by reason of the fact that he is or was a director” of BSW, or that this action is a covered proceeding under the by-laws. At post-trial argument, the BSW Defendants argued that Kinsella is not entitled to indemnification because this proceeding “was styled as a derivative action” and, therefore, falls within the carveout in the indemnification by-law for “action[s] by or in the right of the corporation.” Dkt. 265 at 81:23–82:10; see JX 2 Art. VIII § 1(a). The BSW Defendants did not address this argument in their post-trial briefing. “Issues not briefed are deemed waived.” Emerald P’rs, 726 A.2d at 1224. Notwithstanding, the BSW Defendants’ argument misses the mark. GB-SP, as a BSW stockholder, asserted derivative claims on behalf of the Company. Kinsella did not, nor could he, assert derivative claims on behalf of BSW as a director of the Company. See Schoon v. Smith, 953 A.2d 196, 210 (Del. 2008) (declining to extend the doctrine of equitable standing to allow corporate director, who was not a stockholder, to bring a derivative action on behalf of a corporation). Kinsella did assert that he was deprived of information as a director, and that the BSW Defendants violated the BSW by-laws. See Pls.’ Post-Trial Opening Br. 52–53. 442 Pl.’s Post-Trial Opening Br. 56; Pl.’s Post-Trial Reply Br. 31–32. 443 BSW Defs.’ Post-Trial Answering Br. 53–55.
148 brought his claims “because he was angry that he had been taken advantage of by
the promoters of Sorrento,” not because it was in the best interests of BSW. 444
The court concludes that Kinsella acted in good faith and, at a minimum, in a
manner he reasonably believed was not opposed to BSW’s best interests. Kinsella
sought to vindicate his rights as a director and to promote corporate policy interests
of the Company.445 BSW points to no credible evidence to the contrary. The record
does not support BSW’s contention that Kinsella’s prior dispute with Sorrento has
any relationship to the claims asserted by Kinsella in this case.
Kinsella’s status as a plaintiff in this case does not change the result. The
Supreme Court has held that a plaintiff may be entitled to indemnification in certain
circumstances. See Hibbert, 457 A.2d at 343–44. In Hibbert, the Supreme Court
held that a group of directors who initiated litigation against an adverse group of
directors in connection with a proxy contest were entitled to indemnification because
the language of the by-laws did not preclude indemnification for affirmatively filed
actions. Id. at 343.446 In doing so, the Supreme Court stated:
444 Id. at 54. 445 Tr. 21:24–22:5, 28:3–9 (Kinsella) (testifying that he made requests to BSW to be seated on the BSW board and to obtain his information rights as a director). 446 The plaintiff directors voluntarily dismissed their cases in California prior to seeking indemnification in this court. Hibbert, 457 A.2d at 341. In interpreting the plain language of the company’s indemnification by-law, the Supreme Court concluded that an “indemnitee’s role or position in the litigation is not a prerequisite to indemnification; he must only be involved as ‘a party or otherwise,’” and “‘[p]arty,’ as used [in the by-laws]
149 Plaintiffs, through the California litigation, sought to compel the defendant directors to attend board meetings and to protect the independence of the board’s internal auditing procedures. We can not say that such litigation was entirely initiated without regard to any duty the plaintiffs might have had as directors. In short, those lawsuits served, as we see it, to uphold the plaintiffs’ “honesty and integrity as directors.”
Id. at 344. In Shearin v. E.F. Hutton Group, Inc., 652 A.2d 578 (Del. Ch. 1994),
this court interpreted Hibbert as “recogniz[ing] that permissible indemnification
claims will include those deriving from lawsuits brought by directors, officers,
agents, etc., only insofar as the suit was brought as part of the employee’s duties to
the corporation and its shareholders.” 652 A.2d at 594 (emphasis omitted). There,
Chancellor Allen concluded that the plaintiff, a former officer of the company, was
not entitled to indemnification because the litigation “involve[d] purely the assertion
of plaintiff’s personal rights (i.e., defamation, breach of contract), and thus
advance[d] no interest of, or duty to, [the company].” Id. 447
The BSW Defendants rely on Hibbert and Shearin to argue that Kinsella did
not bring his claims as part of his duties as a director to BSW and its stockholders.448
refers to either the plaintiff or the defendant in a lawsuit.” Id. at 343 (internal quotation marks omitted). 447 Because the plaintiff’s claims were not “motivated by a fiduciary or other obligation to the corporation,” and her “demand that the corporation bear her expenses [was] without merit,” Chancellor Allen denied the plaintiff’s motion for leave to amend her complaint to add a claim for indemnification. Shearin, 652 A.2d at 594–95. 448 BSW Defs.’ Post-Trial Answering Br. 55–57. The BSW Defendants also cite to this court’s decisions in Gentile v. SinglePoint Financial, Inc., 787 A.2d 102 (Del. Ch. 2001),
150 The court disagrees. Based on the record, the court cannot conclude that Kinsella’s
claims were “initiated without regard to any duty [Kinsella] might have had as [a]
director[]” of BSW. Hibbert, 457 A.2d at 344. Therefore, the court finds that
Kinsella is entitled to indemnification.449
G. Domus’s Counterclaim
Domus asserts a counterclaim contending that GB-SP’s filing and maintaining
of this action is a breach of the Pledge Agreement. 450 The Pledge Agreement is
aff’d, 786 A.2d 111 (Del. 2001), and Baker v. Impact Holding, Inc., 2010 WL 2979050 (Del. Ch. July 30, 2010). These cases are distinguishable. In Gentile, this court concluded that the plaintiff, a former officer and director, was not entitled to advancement for affirmatively filing litigation against the company because the company’s by-laws limited indemnification and advancement to proceedings in which the indemnitee is named as a defendant or a respondent. 787 A.2d at 110. Similarly, in Baker, this court concluded that the plaintiff, a former director, was not entitled to advancement because the company’s certificate of incorporation “expressly limit[ed] the right of advancement to expenses incurred by a covered person ‘in defending’ a proceeding asserted against that person.” 2010 WL 2979050, at *6; id. at *9 (“[T]he Advancement Provision requires advancement only for reasonable expenses actually incurred ‘in defending’ a proceeding and there is no evidence that [the company] intended to or did mandate advancement for affirmative claims.”). BSW’s indemnification by-law contains no such limitations. 449 The parties also stipulated that “[u]nder the by-laws of BSW and applicable law, each of the directors of BSW (including Kinsella) is entitled to indemnification in respect of threatened and pending actions.” Dkt. 47 ¶ 32. The amount of indemnification and the claims for which Kinsella must be indemnified must await further proceedings. 450 Dkt. 89. At the pleadings stage, the Versa Defendants argued that GB-SP lacked standing to assert its claims because it had assigned its right to assert such claims to Credit Suisse under the Pledge Agreement. Dkt. 61 at 16–18; Dkt. 92 at 10:13–15. The court rejected that argument. Dkt. 92 at 12:2–10. The Versa Defendants have used their breach of contract counterclaim to reassert many of the same arguments. Compare Dkt. 61 at 16 (“GP-SP signed away its right to bring any claim by entering into the Pledge Agreement, pursuant to which GB-SP granted Domus, as successor in interest to Credit Suisse, the power of attorney to commence and prosecute any suit with respect to its shares of BSW
151 governed by New York law. 451 “To recover for a breach of contract, a party must
establish the existence of a contract, the party’s own performance under the contract,
the other party’s breach of its contractual obligations, and damages resulting from
the breach.” Adirondack Classic Design, Inc. v. Farrell, 122 N.Y.S.3d 790, 793
(N.Y. App. Div. 2020).
“Under New York law, as in Delaware, the construction and interpretation of
an unambiguous written contract is an issue of law within the province of the court.”
San Antonio Fire & Police Pension Fund v. Amylin Pharms., Inc., 983 A.2d 304,
313 (Del. Ch. 2009) (internal quotation marks omitted), aff’d, 981 A.2d 1173 (Del.
2009) (TABLE); see Kotler v. Shipman Assocs., LLC, 2019 WL 4025634, at *16
n.191 (Del. Ch. Aug. 21, 2019), corrected (Aug. 27, 2019) (“As to matters of
contract formation and interpretation . . . Delaware and New York law are not in
conflict,” and this court will “look to both Delaware and New York law for basic
principles.”). The court is “required to adjudicate [the parties’] rights according to
the unambiguous terms of the contract and therefore must give the words and phrases
employed their plain meaning.” Laba v. Carey, 277 N.E.2d 641, 644 (N.Y. 1971);
during the pendency of an Event of Default under the Credit Agreement”), with Versa Defs.’ Post-Trial Answering Br. 51 (“GB-SP [] assigned away its right ‘to commence and prosecute any and all suits’ arising out of the Collateral—i.e., GB-SP’s shares in the Company. GB-SP therefore breached the [Pledge] [A]greement by bringing this lawsuit[.]”). 451 JX 6 § 9.7.
152 see Salamone v. Gorman, 106 A.3d 354, 368 (Del. 2014) (“When interpreting a
contract, this Court will give priority to the parties’ intentions as reflected in the four
corners of the agreement, construing the agreement as a whole and giving effect to
all its provisions.” (internal quotation marks omitted)).
Under the Pledge Agreement, GB-SP appointed Credit Suisse as its attorney
in-fact, “with full authority . . . to take any action and to execute any instrument that
[Credit Suisse] may deem reasonably necessary or advisable to accomplish the
purposes of [the Pledge] Agreement.” 452 This includes, upon an “Event of Default,”
for Credit Suisse “to commence and prosecute any and all suits, actions or
proceedings at law or in equity in any court of competent jurisdiction to collect or
otherwise realize on all or any of the Collateral or to enforce any rights in respect of
any Collateral” and “to settle, compromise, compound, adjust or defend any claims,
actions, suits or proceedings relating to all or any of the Collateral.”453
The parties do not dispute that the Pledge Agreement is a valid and
enforceable contract, or that GB-SP became a party to the Pledge Agreement through
execution of the Joinder Agreement.454 Domus contends that, through the Pledge
Agreement, GB-SP assigned away its rights to bring any suit “arising out of the
452 Id. § 6.1(a). 453 Id. §§ 6.1(a)(i)(C)–(D). 454 JX 9.
153 Collateral.”455 “Collateral” is defined to include GB-SP’s shares in BSW, 456 which
Domus interprets to mean that the Pledge Agreement irrevocably assigns GB-SP’s
right to “enforce any rights in respect” of those shares, foreclosing GB-SP from
bringing its claims in this action.457
This argument is unpersuasive because it is contrary to the plain language of
the Pledge Agreement. First, the Pledge Agreement does not go so far as to assign
claims “arising out of the Collateral.” Rather, it only provides Domus, as successor-
in-interest to Credit Suisse, the right to “enforce any rights in respect of any
Collateral” and “to settle, compromise, compound, adjust or defend” any claims
“relating to all or any of the Collateral.” 458 Second, reading the plain language of
this subsection in the context of the entire provision, Section 6.1 does not extend to
derivative or direct suits which are unrelated to the purpose of the Pledge Agreement
or to the features of GB-SP’s stock as collateral. 459 Finally, although Section 6.1
allows Domus to bring and defend suits on GB-SP’s behalf, it contains no language
indicating that GB-SP acceded its independent authority to bring suits on its behalf,
455 Versa Defs.’ Post-Trial Answering Br. 51. 456 See JX 6 §§ 1.3, 2.1. 457 Id. § 6.1(a)(i)(C). 458 Id. §§ 6.1(a)(i)(C)–(D). 459 Id. § 6.1(a) (appointing Credit Suisse as “attorney-in-fact” to “take any action and to execute any instrument” that Credit Suisse “may deem reasonably necessary or advisable to accomplish the purposes of this Agreement” (emphasis added)).
154 as Domus contends. Rather, the language of Section 6.1 grants Domus the non-
exclusive authority to bring suits on behalf of GB-SP in the “Event of Default.”
Therefore, the court concludes that GB-SP did not breach the Pledge Agreement by
bringing its claims in this action.460
III. CONCLUSION
GB-SP proved its direct claims that BSW and the Pre-Forbearance Directors
breached the Shareholders Agreement. GB-SP did not, however, establish its
entitlement to the full scope of damages it sought to remedy those breaches. For
establishing breaches of the Shareholders Agreement, GB-SP is awarded nominal
damages of $1, and judgment on Count V is entered in favor of GB-SP. GB-SP is
also entitled to its reasonable attorneys’ fees and expenses as the prevailing party
under Section 7.6 of the Shareholders Agreement.
GB-SP did not overcome the law of the case with respect to its claim for
tortious interference and, accordingly, Count VI remains barred. Nor did Plaintiffs
460 In the complaint and the pre-trial order, Plaintiffs sought the appointment of a receiver on behalf of BSW. Compl. ¶¶ 103–07; PTO ¶ 72(M). Plaintiffs did not address the appointment of a receiver at trial or in their post-trial briefing. As such, the court deems this request for relief to have been abandoned. Oxbow Carbon & Min. Hldgs., Inc. v. Crestview-Oxbow Acq., LLC, 202 A.3d 482, 502 n.77 (Del. 2019) (“The practice in the Court of Chancery is to find that an issue not raised in post-trial briefing has been waived, even if it was properly raised pre-trial.”); MHS Cap. LLC v. Goggin, 2018 WL 2149718, at *16 (Del. Ch. May 10, 2018) (treating claims not briefed as abandoned).
155 establish a breach of the Company’s bylaws, and judgment is entered in favor of the
BSW Defendants on Count IV.
GB-SP proved, on behalf of the Company, that the Pre-Forbearance Directors
were conflicted in approving the Forbearance Agreement, subjecting their conduct
to entire fairness review. The Pre-Forbearance Directors did not carry their burden
to prove the fairness of the Forbearance Agreement, and, therefore, the court finds
that they breached their fiduciary duty of loyalty. As a remedy for their fiduciary
breach, the Pre-Forbearance Directors must disgorge to BSW all amounts paid to
them or their counsel under the Indemnity Agreement, and Curtis and Worker must
disgorge to BSW the bonuses they received pursuant to the September 2013 MOU.
To this extent, judgment on Count I is entered for GB-SP, on behalf of the Company.
GB-SP also proved, on behalf of the Company, that the Versa Defendants aided and
abetted that breach and, as a remedy, the Versa Defendants’ BSW debt shall be
equitably subordinated as to any amounts collected or received by or on behalf of
BSW from the Pre-Forbearance Directors pursuant to this ruling, and GB-SP, on
behalf of BSW, is entitled to judgment on Count III to the forgoing extent.
GB-SP proved, on behalf of the Company, that the Post-Forbearance
Directors were conflicted in approving the Consensual Foreclosure, subjecting their
conduct to entire fairness review. The Post-Forbearance Directors, however, carried
their burden and proved that the Consensual Foreclosure was entirely fair to the
156 Company, and judgment on Count I is entered for the Post-Forbearance Directors
with respect to the Consensual Foreclosure. Accordingly, GB-SP’s claim on behalf
of the Company that the Versa Defendants aided in such breach also fails, and
judgment for Count III is entered in favor of the Versa Defendants as it relates to the
Consensual Foreclosure.
Judgment is entered in favor of Kinsella with respect to Count VIII, but the
amount of indemnification and the claims for which Kinsella must be indemnified
must await further proceedings.
Judgment for Domus’s counterclaim alleging breach of the Pledge Agreement
is entered in favor of GB-SP. Plaintiffs have abandoned their request to appoint a
receiver on behalf of BSW.
The parties shall confer and submit an implementing order to the court within
ten days of this opinion.
Related
Cite This Page — Counsel Stack
Gb-sp Holdings LLC v. Wayne R. Walker, Counsel Stack Legal Research, https://law.counselstack.com/opinion/gb-sp-holdings-llc-v-wayne-r-walker-delch-2024.