Kristen C. Wright v. Clinton A. Phillips

• Court: Court of Chancery of Delaware
• Decided: May 28, 2020
• Docket: CA No. 11536-VCG
• Status: Published

Opinion

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

KRISTEN C. WRIGHT, ) ) Petitioner, ) ) v. ) C.A. No. 11536-VCG ) CLINTON A. PHILLIPS, ) ) Respondent. )

MEMORANDUM OPINION

Date Submitted: February 21, 2020 Date Decided: May 28, 2020

Richard E. Berl, Jr., of HUDSON, JONES, JAYWORK & FISHER, LLP, Lewes, Delaware, Attorney for Petitioner.

Stephen A. Spence, of BAIRD MANADLAS BROCKSTEDT, LLC, Lewes, Delaware, Attorney for Respondent.

GLASSCOCK, Vice Chancellor This superannuated matter has here reached, I hope, its last hurrah.

Practitioners before this Court often refer, metaphorically, to litigation regarding the

break-up of joint ventures and the like as “business divorces.” Occasionally, the

Court must resolve true business divorces, as joint romantic and business

relationships come a-cropper. These matters, in my experience, are among the most

contentious in our docket, and likewise provide the forum where it is most likely that

litigation effort will be disproportionate to the amounts at stake. Such litigation, and

the underlying behavior of the parties so engaged, increases my admiration of my

Family Court colleagues’ dogged pursuit of just litigation outcomes, without, on my

part, any hint of jealousy for their dockets.

This is one such unfortunate litigation. Petitioner Kristen C. Wright and

Respondent Clinton A. Phillips were wife and husband, and together owned a

recycling business reposed in several entities of which they were co-owners. They

divorced, and the resulting divorce agreement confirmed their continuing ownership

of the business, fifty/fifty. As is not unusual in such circumstances, the problems

that drove them apart as marriage partners apparently left them unable to continue

to function as business partners as well. Both parties in this litigation made

allegations of breach of fiduciary duty and other contract- or tort-based misconduct

against the other. Ultimately, a receiver was appointed and Phillips agreed to buy

out Wright. I held a valuation trial and valued the entities. All that remains is to apply certain offsets requested by the parties to the valuation of Wright’s interest to

be purchased by Phillips. Those issues are addressed below.

I. BACKGROUND1

The parties held a one-day trial on November 18, 2019 and submitted a joint

exhibit list of 78 exhibits. The following facts were stipulated by the parties or

proven by a preponderance of evidence at trial. I also draw some general background

facts from a previous decision rendered in this case.2

A. The Parties

Petitioner Wright and Respondent Phillips are former joint business owners

and former spouses, divorced under a Final Decree of the Family Court of the State

of Delaware in 2013.3

Non-parties Data Guard, Inc. (“DG Shredding”), Data Guard Recycling, Inc.

(“DG Recycling”), CK Aurora, Inc., and CK Aurora Business Ventures, LLC (“CK

Aurora”) are businesses that Wright and Phillips jointly owned.4 I refer to these

businesses collectively as the “Companies.”

1 The parties submitted joint trial exhibits. Citations to the joint trial exhibits are expressed as JX __, at __. Citations in the form “Tr.” refer to the trial transcript. At my request, the parties also submitted a Joint Stipulation of Facts. Joint Stipulation of Facts, Docket Item (“D.I.”) 166 (“JSOF”). 2 Wright v. Phillips, 2017 WL 6539383 (Del. Ch. Dec. 21, 2017). 3 JSOF, ¶ 1. 4 Wright, 2017 WL 6539383, at *1; JX 1, ¶ 2(a).

2 B. Factual Background Regarding the Parties, the Companies, and the Litigation

1. The Divorce and the Buyout

As a part of their divorce in 2013, the parties entered an Ancillary Consent

Order and Agreement (the “Divorce Agreement”) on October 18, 2013.5 Under the

Divorce Agreement, the parties continued to own and operate the Companies jointly

until 2015.6 In 2015, the parties sued each other, alleging breaches of fiduciary duty

and contract, with each party seeking to force a sale of the Companies.7 However,

while the litigation was still in its nascent stages, the parties reached an agreement

that Phillips would purchase Wright’s fifty-percent interest in each of the jointly

owned businesses.8

Following an evidentiary hearing for the purpose of valuing Wright’s half of

the Companies, I issued a Letter Opinion on December 21, 2017 holding that

“[t]aken together, the combined pre-adjustment value of the [Companies] is

$1,767,465, with a pre-adjustment half interest value of $883,733.”9 The parties

litigated further over anticipated adjustments, and I held a second hearing on May 1,

5 JX 1. 6 Wright, 2017 WL 6539383, at *1. The Divorce Agreement governed certain aspects of the parties’ continued joint ownership of the Companies. JSOF, ¶ 2; JX 1, ¶ 2. 7 Wright, 2017 WL 6539383, at *1. 8 Id. 9 Id. at *5.

3 2019, where I adjusted the value of the Companies to $2,196,003.10 Given this

adjustment, I declared Wright’s fifty-percent interest to be worth $1,098,001.50 (the

“Valuation Price”).11

Both parties, as of the time of the May 1, 2019 hearing, anticipated a further

accounting phase to make additional adjustments. The parties differed on the scope

of this final phase of litigation: Wright seeks two accounting adjustments to increase

the Valuation Price;12 Phillips seeks to decrease or eliminate the Valuation Price both

through accounting adjustments and by demonstrating Wright’s liability for the

breach of fiduciary duty and contract counterclaims he originally brought.13

2. Wright’s Work History and Earnings

Wright is a Certified Public Accountant.14 During the parties’ marriage, she

assisted with bookkeeping and tax preparation for the Companies while acting as

primary caregiver for the parties’ children.15 To facilitate these dual roles, Wright

generally worked from home in an office the parties built onto their residence.16 By

10 JSOF, ¶ 5. 11 Id. 12 See Pet’r Kristen Wright’s Closing Argument, D.I. 167 (“Petitioner’s Opening Br.”), at 2. 13 Resp’t’s Post-Trial Closing Argument, D.I. 168 (“Respondent’s Opening Br.”), at 20; Resp’t’s Reply to Pet’r’s Post-Trial Closing Argument, D.I. 170 (“Respondent’s Reply Br.”), at 1–3. 14 Tr. 100:2–101:16 (Phillips). 15 Id. 16 JSOF, ¶ 37.

4 shortly before the divorce, however, Wright had begun to spend more hours at the

office.17 As a part of the Divorce Agreement, Wright agreed to take equal

responsibility for the operation of the Companies.18 As time went on, though, her

appearances at the office dwindled.19 For almost nine months preceding the

appointment of a receiver for the Companies in February 2016, Wright did not

appear in the office at all.20 Because of this situation, Phillips testified that he had

to transport materials back and forth from Wright’s home to provide her with work,

as had been the “standard operating procedure” prior to their divorce.21

Due to deadlocks between the parties that made operation of the Companies

impossible, on February 2, 2016, I appointed Jennings Hastings, CPA, with the firm

of Faw Casson Company, as interim receiver (the “Receiver”).22 Following his

appointment, the Receiver set expectations that Wright would work from 8:00 a.m.

to 4:00 p.m. daily in the office.23 At the time he set these expectations, the Receiver

17 Tr. 30:18–24 (Phillips). 18 JX 1, ¶ 2(a) (“Each party shall also be equally responsible for the ongoing management and operation of the businesses in all respects.”); Tr. 29:3–30:1 (Phillips). 19 Tr. 32:19–33:8 (Phillips). 20 Id. at 231:10–14 (Wright). 21 Id. at 35:9–36:5 (Phillips). 22 JX 2. 23 JSOF, ¶ 13; Tr. 231:15–24 (Wright). The parties no longer had children in the home at this point, which previously was Wright’s primary reason for working from home. JSOF, ¶ 13.

5 was unaware of Wright’s lengthy work-from-home history.24 By that point, the

parties’ relationship, both personally and professionally was, to put it succinctly,

strained.25 The parties stipulated to the fact that their “presence . . . together at times

created a toxic environment.”26 Wright generally agreed to the Receiver’s

expectation, with conditions.27 She expressed concern to the Receiver about her

personal safety while she was at the office and made her presence there contingent

on safety protocols.28

Wright’s behavior at the office, according to Phillips, was disruptive.29 She

attempted on multiple occasions to fire personnel he considered integral to

operations.30 A few months after the Receiver’s appointment, Wright’s hours at the

office once again dwindled.31 In April 2016, the Receiver sent the parties a list of

24 Tr. 145:5–13 (Hastings). 25 See, e.g., JX 23, at 2 (text message warning, “[s]top fucking with my employee. I will burry [sic] your ass.”); JX 21 (desktop background installed by Wright on Phillips’ computer reading, “I have your diagnosis. You’re an asshole. Kill yourself.”). 26 JSOF, ¶ 35. 27 Id. ¶ 13; Tr. 231:15–233:18 (Wright). 28 JSOF, ¶ 36; JX 33, at 1 (Wright emailing Receiver, “[f]or my safety I feel it is necessary to change locks on my office doors as I will work with the door locked when I am there. Also, I will not work past 4pm because I can[]not run the risk of being on property with no one but [Phillips] and me there. He has locked me into spaces at the plant where the only way for me to get out was to climb a barbed wire fence.”). 29 Tr. 33:21–35:8 (Phillips); JX 19. 30 See JX 23, at 2–4; Tr. 112:24–113:20 (Smith). 31 See JX 29; JX 30; Tr. 114:22–116:5 (Smith), 127:18–22 (Hastings).

6 responsibilities, intending, among other things, to give Wright “more responsibility

for the accounting function of the companies. . .”32

In addition to work issues, Wright was involved in two incidents at the office

where she removed files and equipment. The parties characterize these incidents

differently: Phillips described them as “weekend raids” that undermined the basic

operations of the Companies33; Wright described them as necessary transfers of files

or equipment she required in order to file taxes and work from home, given the toxic

environment at the office.34

The first incident occurred in August 2015.35 Wright entered the office after

hours and removed computers and other equipment.36 Among other things, Wright

removed computers that contained certain QuickBooks files and software for the

shredding business.37 Phillips testified that the removal left the office space

“trashed” and “in shambles.”38 While Wright had this equipment, the business

performed certain essential tasks by hand, which Phillips testified disrupted

32 JSOF, ¶ 14; JX 6, Ex. 1, at 3. 33 Respondent’s Opening Br., at 2. 34 Pet’r’s Response to Resp’t’s Closing Argument, D.I. 169 (“Petitioner’s Reply Br.”), at 5, 7–8. 35 Tr. 223:7–12 (Wright). 36 JSOF, ¶ 9. 37 Tr. 38:4–20 (Phillips). 38 Id.

7 operations.39 Wright, on the other hand, testified that she merely “swapped” certain

equipment to allow her to work from home with programs she needed on her local

hard drive.40 Wright testified that she provided instructions for personnel to log into

the systems remotely, and that any disruptions were caused by their unfamiliarity

with remote access procedures.41 She eventually returned the computers and worked

from the office, but she testified that she continued to be deprived of internet access

and other basic amenities.42

The second incident occurred in April 2017.43 The Receiver had instructed

that all company files should remain in the office.44 Wright, however, came in on a

weekend and removed approximately seventy percent of the physical files from the

office without notifying the Receiver.45 She testified she required these files to

complete personal tax returns.46 The removed files were hardcopy backup files to

entries on the QuickBooks system, and while they were absent, no one at the

Companies requested their return.47 Wright eventually returned the records under

39 Id. at 40:16–43:24 (Phillips). 40 Id. at 191:4–192:13 (Wright). 41 Id. at 192:14–193:2 (Wright). 42 Id. at 194:9–20 (Wright), 145:22–148:1 (Hastings); JX 33. 43 Tr. 77:7–17 (Phillips); JX 28. 44 JSOF, ¶ 10. 45 Id. ¶ 11. 46 Tr. 193:3–194:4 (Wright). 47 Id. at 121:4–17 (Smith).

8 court order a year-and-a-half later.48 Both the August 2015 and the April 2017

incidents occurred without permission and without notifying Phillips or the

Receiver.49

Phillips also testified that Wright’s practices with accounting caused

dangerous cash shortages. The parties typically compensated themselves by

transferring cash from the Companies to CK Aurora—which they treated as the

management company—and paying themselves from CK Aurora.50 In the fall of

2015, Wright increased the amounts going to CK Aurora by an excess of $70,000

over a six-week period.51 Phillips testified that these increased payments created a

severe cash shortage that required him to support operations with personal funds.52

Wright, in turn, testified that Phillips’ improper comingling of personal and business

funds caused the cash shortages in the first place.53

48 Id. at 229:12-22 (Wright); Order for Interim Relief, D.I. 117. 49 Tr. 227:5–17 (Wright); see also JX 42; JX 43; JX 44. 50 Tr. 44:16–45:7 (Phillips). 51 Id. at 45:20–47:12 (Phillips); JX 69 (check numbers 4777, 4799, 4800, 4802, and 4813). 52 Tr. 49:6–51:2 (Phillips); JX 68, at 8 (bank statement showing operating account at just over $3,000). 53 Tr. 236:24–237:11 (Wright); see also JX 56.

9 Ultimately, the Receiver testified that he did not believe the Companies

sustained losses or damages as a result of the parties’ conflicts during his

appointment.54

C. Factual Background Regarding Accounting Adjustments

1. Wright’s Personal Credit Cards

The parties both possessed business and personal credit cards.55 Phillips

testified that he discovered Wright was paying personal credit card bills using

company funds.56 He reviewed QuickBooks and bank records to explore the extent

of Wright’s alleged misuse of personal credit cards.57 At trial, Phillips testified that

while he could not “remember the specifics,” the misuse “was in the hundreds of

thousands of dollars.”58 He also testified “there were, like, 20 different credit cards

that were not company credit cards that were controlled by Mrs. Wright.”59

Wright testified, to the contrary, that while business funds were used to pay

personal credit cards, the transactions were mostly legitimate business expenses.60

She testified the payments resulted from personal credit cards that both parties kept

54 JSOF, ¶ 34; Tr. 143:10–21 (Hastings). 55 See Tr. 88:5–12 (Phillips). 56 Id. at 88:13–89:11 (Phillips). 57 Id. at 89:12–90:17 (Phillips). 58 Id. at 90:18–23 (Phillips). 59 Id. at 94:21–24 (Phillips). 60 See id. at 205:2–10 (Wright).

10 at the office for use by the Companies’ truck drivers, and also that despite attempts

to keep them separate, the parties sometimes put business expenses on personal

credit cards.61

2. Wright’s Movement of Funds to New Company Accounts

In September 2017, Wright removed $45,000 from two of the Companies’

operating accounts into two new company bank accounts that she controlled.62 She

wrote to the Receiver that she did so because Phillips had opened new bank accounts

without her knowledge and was similarly moving funds out of the operating

accounts; thus, she felt she needed to withdraw money to ensure she had funds to

pay professional and legal fees.63 The Receiver instructed Wright to transfer the

$45,000 back into the operating accounts once Phillips reinstated her salary—which

he had unilaterally cut off—but Phillips never reinstated the salary, and so Wright

never returned the funds.64 Wright used the bulk of the funds in the new bank

accounts to pay legal and professional fees for this litigation.65 No funds remain in

the accounts.66

61 Id. at 205:2–10 (Wright). 62 Id. at 19:2-15 (Sterner), 238:16-239:2 (Wright); JX 56. 63 JX 56. 64 JX 65. 65 Tr. 21:21–22:3 (Sterner), 242:21–243:7 (Wright); see also JX 18. 66 Tr. 243:14–16 (Wright).

11 3. The Parties’ Joint Account

From early in their marriage, the parties operated a joint bank account (the

“Joint Account”), which they used as their personal checking account.67 The

Divorce Agreement obliged the parties to make equal contributions to the Joint

Account and only spend funds from the account with the other party’s approval.68

After Phillips raised concerns, the Receiver, authorized by court order, investigated

the Joint Account.69 In my May 24, 2016 receivership order, I instructed the parties

to provide documentations to the Receiver “in order to fully reconcile [the Joint

Account] issue and determine whether either party or the businesses were negatively

affected by such transactions and, in such event, to report his findings to the Court.”70

Both parties’ experts, as well as the Receiver, confirmed that contributions to

the Joint Account were equal.71 The Receiver issued a report concluding that Wright

spent $119,880 more than Phillips from the Joint Account.72 In addition, in the same

report, the Receiver concluded that Wright received distributions from the

67 JX 1, ¶ 13; JSOF, ¶ 31. 68 JX 1, ¶ 13. 69 JX 3, at 1–2; JX 4, at 1; Tr. 157:22–158:4 (Hastings). 70 JX 3, at 2. 71 JX 10, at 1; JX 16, at 1; Tr. 154:9–12 (Hastings). 72 JX 10, Ex. A, “Summary”; Tr. 141:4–142:18 (Hastings).

12 Companies in excess of Phillips in the amount of $36,801.73 Wright does not dispute

Phillips’ contention regarding her excess spending from the Joint Account. She

does, however, contend that she managed spending from the Joint Account for both

parties and had done so for almost their entire marriage, and that many of her

withdrawals were to provide spending cash to Phillips.74

4. Phillips’ Use of His Personal Bank Account for Business Purposes

Early in the litigation, the Receiver instructed Phillips to cease utilizing his

personal bank account for business purposes, as it caused comingling of funds. 75

Wright’s expert, Charles Sterner, reviewed bank records, checks, and deposits

associated with Phillips’ personal bank accounts and concluded that of the business

income deposited into those accounts, Phillips failed to return $38,545.61.76

However, after reviewing Phillips’ expert’s report, Sterner made a correction,

reducing that amount to $35,545.61.77

Both the Receiver and Sterner agree that Phillips was using personal funds to

help run the Companies in 2015 and 2016.78 Phillips testified the discrepancies

73 JX 10, Ex. B, “Summary”; Tr. 141:4–142:18 (Hastings). The Receiver’s conclusions regarding these distributions do not appear to be related to the Joint Account. This is discussed further in the Analysis, below. 74 Tr. 205:17–207:5 (Wright). 75 JX 6, Ex. 1, at 1. 76 JX 15, at 1–3. 77 JX 17, at 1. 78 JX 6, Ex. 1, at 1; JX 15, at 3.

13 alleged by Wright are explained by the fact that he occasionally assisted customers

with “one-off” projects that were outside the Companies’ ordinary scope of business

but were nonetheless customer-related.79 Thus, according to Phillips, Sterner failed

to recognize that some of the payments from Phillips’ personal accounts were in fact

business expenses.80 Phillips also testified that the cash crunch caused by Wright’s

accounting practices forced him to write business checks from his personal accounts

in the first place.81

5. The Costs of the Receiver and Legal Fees Paid by the Companies

Under the receivership order of February 2, 2016, “[t]he compensation of the

Receiver . . . shall be paid as an expense to the businesses.”82 To date, the Companies

have paid the Receiver a total of $174,307.17.83 Of these costs, certain amounts

occurred after Phillips purchased Wright’s portion of the Companies in 2017;

however, these additional expenses resulted largely from Phillips’ failure to

cooperate with payment orders following the sale.84 On December 6, 2018, I ordered

79 Tr. 250:21–253:1 (Phillips). 80 Id. 81 Id. at 50:4–18 (Phillips); see also id. at 159:18–160:4 (Hastings). 82 JX 2, at 3. 83 JSOF, ¶ 7. 84 See Mot. for Payment of Receiver’s Fees, D.I. 124 (requesting payment for “outstanding invoices and/or unbilled time entries that currently exist and that may be necessary as [Receiver] extricates himself from this matter.”); Order dated December 6, 2018, D.I. 126 (ordering Respondent Phillips and Companies to split remaining costs of Receiver).

14 that Phillips and the Companies should split the costs for the remaining Receiver’s

fees.85 I also noted, however, at a hearing, that Phillips could seek to have the post-

valuation Receiver’s fees “applied as a court cost at the final resolution” of the

litigation.86

During this litigation, at the Receiver’s direction, the Companies also paid

legal and professional fees for both parties.87 As described above, in September

2017, Wright removed $45,000 from the operating accounts without consulting the

Receiver, and she deposited these funds into two new accounts that she controlled.88

Wright used the $45,000 to pay for legal fees.89

85 Order dated December 6, 2018, D.I. 126 (ordering Respondent Phillips and Companies to split remaining costs of Receiver). 86 See Teleconference on Application for Payment of Receiver’s Fees, D.I. 127. The transcript of this telephonic hearing was not made part of the docket. Phillips stated in post-trial briefing, “[t]he Court stated on the record during the December 6, 2018 teleconference that Respondent may request a credit from Petitioner for these costs.” Respondent’s Opening Br., at 18–19. It appears from Phillips’ post-trial brief that he interpreted my guidance as permitting a request for credit for the entire amount of the Receiver’s fees. However, the telephone conference focused on the Receiver’s fees incurred after the valuation, and my guidance permitting Phillips to request a credit concerned those post-valuation fees incurred by the Receiver. 87 JSOF, ¶ 30. 88 Id. ¶ 15. 89 Id. ¶ 17. Phillips agreed to the Joint Statement of Facts, which states, “[t]he Petitioner used the funds in the new bank accounts for legal fees and fees for Charles Sterner.” Id. ¶ 17. In Phillips’ post-trial briefing, however, he notes, “Petitioner also spent some of the money on an auto lease, Verizon wireless bills, and American Express bills.” Respondent’s Opening Br., at 7 n.3. The Respondent cites to JX 18, at 1, which is a bank statement from Wright’s new accounts showing withdrawals for “Auto Lease,” “VZ Wireless,” “AMEX EPayment,” and a check, totaling $1,336.99. JX 18, at 1.

15 6. Phillips’ Interim Payments

As a result of a Motion for Sanctions from Wright, I ordered Phillips to make

monthly payments to her in the amount of $12,500.90 Phillips makes these payments

on the fifth of each month.91 As of December 31, 2019, Phillips had made interim

payments in the amount of $200,000.92

D. Procedural History

Wright originally filed a Complaint and a Motion for a Temporary Restraining

Order on September 23, 2015.93 Phillips filed an answer with counterclaims on

October 26, 2015.94 After I denied the Temporary Restraining Order, the parties

conferred and stipulated to the appointment of the Receiver on February 2, 2016 to

assist with the deadlock of the Companies.95

On July 21, 2016, Wright filed a Motion for Order of Sale.96 Phillips answered

this motion on September 20 and filed a Cross Motion for Sale on September 22,

90 Order for Interim Relief, D.I. 117. 91 JSOF, ¶ 6. 92 Id. 93 Verified Compl. for Inj. and Other Relief, D.I. 1; Pet’r’s Mot. for Temporary Restraining Order, D.I. 2. 94 Resp’t’s Verified Answer and Countercl. to Verified Compl., D.I. 9. 95 Stipulated Order for Appointment of Receiver, D.I. 25. 96 Pet’r’s Mot. for Order of Sale, D.I. 39.

16 2016.97 I held a hearing on November 22, 2016 regarding the cross motions for

sale.98 Afterward Phillips elected to purchase Wright’s share of the Companies.99

On May 25, 2017, I held an evidentiary hearing for the purpose of conducting a

valuation.100 I issued a Letter Opinion on December 21, 2017.101

Wright filed a Motion for Sanctions against Phillips on April 10, 2018 for

delays and complications related to payment.102 An Order for Interim Relief

partially resolved these issues by requiring Phillips to pay $12,500 per month toward

the purchase price of Wright’s 50% share.103 Phillips’ subsequent delay of the

ordered payments resulted in an Order for Contempt.104

Around this same time, on October 26, 2018, Wright sought a final order of

valuation.105 I held a second evidentiary hearing on May 1, 2019.106 Based on the

parties’ anticipated adjustments, I then held a one-day trial on November 18, 2019.107

97 Resp’t’s Answer to Pet’r’s Mot. for Order of Sale, D.I. 46; Resp’t’s Cross-Mot. for Sale, D.I. 47. 98 D.I. 52. 99 Wright v. Phillips, 2017 WL 6539383, at *1 (Del. Ch. Dec. 21, 2017). 100 D.I. 73. 101 Letter Op., D.I. 87. 102 Pet’r’s Mot. for Rule to Show Cause, D.I. 89. 103 Order for Interim Relief, D.I. 117. 104 Order for Contempt, D.I. 122. 105 Pet’r’s Mot. for Final Order of Valuation, D.I. 120. 106 D.I. 133. 107 D.I. 163.

17 After the parties completed post-trial briefing, with the parties’ agreement, I

considered the matter submitted without further argument.

II. ANALYSIS

As noted, the parties differed on the scope of this final phase of litigation;

Wright viewed it as an evidentiary hearing to facilitate accounting adjustments,

while Phillips viewed it as a trial to support his original counterclaims for breach of

fiduciary duty, breach of contract, and his equitable defense of unclean hands, all of

which he argues he preserved prior to the 2017 valuation hearing.108 Resulting from

this disagreement, prior to trial, Wright filed a Motion in Limine seeking to exclude

the key documentary evidence and (anticipated) testimony to be offered by

Phillips.109

In his post-trial brief, Phillips stated, “[i]n the May 2017 Pre-Trial Stipulation,

the parties agreed with the Court’s approval to bifurcate this case into two stages—

valuation and then personal claims.”110 This is a capacious reading of the 2017 pre-

trial order, which mentions the counterclaims only once in passing.111 Nonetheless,

108 Tr. 65:20–77:2. 109 Pet’r’s Mot. in Limine, D.I. 159. 110 Respondent’s Answering Br., at 1. 111 Pre-Trial Stipulation and Order dated May 22, 2017, D.I. 71, at 9–10 (“In addition, Respondent has counterclaimed for additional reductions that, if granted, would further reduce the amount to be received by Petitioner.”).

18 at trial, I noted that the counterclaims were potentially preserved.112 Because Phillips

made Wright aware of his intended scope prior to trial, Wright was able to oppose

the counterclaims through record evidence and cross-examination. Thus, I find there

is no prejudice to Wright in addressing the counterclaims. In the interest of

providing as complete relief as possible, I therefore address Phillips’ counterclaims

as briefed. I find that resolution of these claims, as well as the accounting

adjustments, renders Wright’s Motion in Limine moot.

A. Phillips Counterclaims and Defenses

1. Breach of Fiduciary Duty

Because Wright jointly owned the Companies and served as an officer, she

owed fiduciary duties of loyalty and care.113 To prove a breach of the duty of care,

Phillips must show that Wright acted with gross negligence, meaning that she

engaged in “conduct that constitutes reckless indifference or actions that are without

112 See Tr. 73:6–11. 113 Wright acknowledged her fiduciary duties in her original complaint in this matter. See Verified Compl. for Inj. and Other Relief, D.I. 1, ¶ 20 (“As a share holder, Petitioner and Respondent owe fiduciary duties to one another including duties of care and loyalty, and a general duty of good faith and fair dealing.”). Wright served as Chief Financial Officer for the Companies. Id. ¶ 7. Also, as regards CK Aurora, Delaware’s common law fiduciary duties apply to mangers and managing members of Delaware LLCs. Feeley v. NHAOCG, LLC, 62 A.3d 649, 661 (Del. Ch. 2012) (citing 6 Del. C. § 18-1104; 6 Del. C. § 18-1101(c)). While an LLC may eliminate those common law duties in its operating agreement, provided that it does so clearly, the parties did not have an operating agreement for CK Aurora and so did not eliminate these duties. See 6 Del. C. § 18–1101(e); Bay Ctr. Apartments Owner, LLC v. Emery Bay PKI, LLC, 2009 WL 1124451, at *9 (Del. Ch. Apr. 20, 2009)

19 the bounds of reason.”114 To prove that Wright breached her duty of loyalty, Phillips

must show that she put her own interests before those of the Companies or acted

with bad faith, which means showing that she “knowingly and completely failed to

undertake [her] responsibilities.”115

Phillips argues that Wright breached her fiduciary duties in five ways: (1)

using company funds to pay personal credit card bills; (2) “raiding” the offices to

take files and equipment; (3) engaging in accounting practices that caused cash

crunches, (4) failing to follow the Receiver’s instructions, and (5) removing money

to bank accounts that she independently controlled.116 After reviewing the evidence

and hearing the parties’ testimony at trial, I find that none of Phillips’ allegations

against Wright rise to the level of a breach of her duty of care or loyalty. Phillips’

evidence demonstrates that the parties have a toxic personal relationship; it does not

demonstrate that Wright acted in self-interest or with gross negligence.

First, regarding Wright’s personal credit cards, I find that Phillips has not

proved that she in fact used company funds improperly. Phillips testified that he

personally went through bank records and QuickBooks entries and assigned

114 See Zucker v. Hassell, 2016 WL 7011351, at *7–8 (Del. Ch. Nov. 30, 2016), aff’d, 165 A.3d 288 (Del. 2017) (defining a breach of the duty of care as “having committed gross negligence.”). 115 In re Oracle Corp. Deriv. Litig., 2018 WL 1381331, at *11 (Del. Ch. March 19, 2018) (describing duty of loyalty); Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 243–44 (Del. 2009) (describing bad faith). 116 Respondent’s Opening Br., at 10.

20 unrecognized credit card charges to Wright’s personal use.117 He offered examples

of his method with a single page of QuickBooks entries.118 Wright testified credibly

why personal credit card charges appeared on the company accounts.119 My analysis

on this issue is described in more detail in the accounting adjustments, Section

II.B.2, below, but I find there is insufficient evidence to find that this activity was

wrongful or that it breached Wright’s fiduciary duties.

Second, regarding the “weekend raids,” I find that Wright’s careless actions

were directed at the disintegrated personal relationship between the parties. As

Phillips testified, Wright came into the offices in 2015 and again in 2017 and took

equipment and files, leading to long disputes between the parties about returning

those items, and requiring intervention from the Receiver and this Court. Wright

credibly testified that she had legitimate reasons for each of these actions related to

work, and that, even if destructive, much of the “harm” was actually the result of

Phillips’ unwillingness to provide her the support she needed in her role at the

Companies. Although Wright’s behavior was less than admirable, I do not find that

it was destructive in a manner that would rise to gross negligence or bad faith. In

other words, to the extent Wright acted with scienter, it was her intent to irritate

117 Tr. 90:18–94:24 (Phillips). 118 Id. at 90:18–93:8 (Phillips); JX 16, at 15 119 Tr. 205:2–10 (Wright).

21 Phillips, and not to hurt the business for which she was a fiduciary and of which she

owned half.

Third, Phillips argues that Wright’s accounting practices, including

accelerating draws in a way that created a “cash crunch,” violated Wright’s fiduciary

duties. Wright testified that it was Phillips’ own deposit of business income in his

accounts that caused the situation.120 The Receiver himself recognized that Phillips’

comingling of business and personal accounts was a problem.121 Wright’s actions

put a heavy burden on Phillips to maintain operations, requiring the use of his

personal funds.122 But this issue, as with so many in this litigation, stems from the

Receiver’s observation that “[b]oth parties seem more interested in finding fault with

the other than working together.”123 Wright’s accounting choices were a part of the

parties’ infighting, and while perhaps careless of the Companies’ bank account

balance, do not contain the requisite scienter against the Companies to constitute a

breach of fiduciary duty.

Fourth, Phillips focused strongly on Wright’s dilatory work habits and her

failure to follow the Receiver’s instructions. The Receiver provided guidelines for

120 Id. at 236:24–237:11 (Wright); see also JX 56. 121 JX 6, Ex. 1, at 4. 122 Tr. 49:6–51:2 (Phillips); JX 68, at 8 (bank statement showing operating account at just over $3,000). 123 JX 11, at 1.

22 Wright’s work at the businesses, including daily office hours. Phillips’ secretary,

Ms. Smith, unilaterally began keeping extensive daily records on an Excel

spreadsheet documenting Wright’s arrivals and departures at the office.124 These

records, which Wright did not disagree with, show that her presence at the office

was decidedly part-time, when she was there at all.125 In addition, Wright failed to

follow other instructions from the Receiver, including returning money to company

accounts and returning files and equipment. This behavior does not prove, however,

that she acted with gross negligence or disloyalty to the Companies in her fiduciary

role. There is no evidence of a disloyal intent to harm the Companies, or that she

acted with reckless abandon. A failure to obey guidelines set by a Receiver is not a

per se violation of fiduciary duties. Here, Wright testified credibly that she had

logical reasons for her choices regarding work hours and location that included her

safety and her long history of working from home.126

Fifth, and finally, Phillips argues Wright breached her fiduciary duties when

she moved funds into new company accounts that she controlled. Phillips does not

assert that she misappropriated these funds or removed them from the businesses

124 Smith was not asked to do so by this Court or the Receiver. There appears to be tension between Smith and Wright. See, e.g., Tr. 112:24–113:20 (Smith testifying that she arrived at work one day to find her office things on the lawn and her employment terminated by Wright, only to have her employment reinstated a few minutes later by Phillips). 125 JX 29; JX 30. 126 JSOF, ¶ 36–37; JX 33, at 1.

23 entirely. Wright testified that she moved the funds to ensure the Companies had

money to pay for her legal and professional fees as agreed in light of the fact that

Phillips had also started new bank accounts and was depositing revenues into those

accounts.127 It appears Wright had cognizable reasons to move the funds, and, as

she points out, the Receiver’s instruction to transfer them back was contingent on

Phillips reinstating her salary, which he did not do.128 As with Phillips’ other

allegations, Wright acted unwisely, and to an extent improperly, in furtherance of

her personal dispute with Phillips, but Wright’s actions do not rise to the level of a

lack of care or loyalty in violation of her fiduciary duties.

2. Breach of Contract

Phillips argues that Wright breached a contract by failing to adhere to the

guidelines in the Divorce Agreement. The elements of a breach of contract are (1)

a valid contract, (2) a breach of that contractual agreement, and (3) resulting

damages.129 Phillips argues that the Divorce Agreement should be treated as a de

facto operating agreement for the Companies and therefore a contract that Wright

could breach. The Divorce Agreement permits the parties “to sue for damages for a

127 JX 56. 128 See JX 65. 129 H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 140 (Del. Ch. 2003).

24 breach of this agreement or to enforce at law or in equity the same and seek such

legal remedies as may be available.”130

I find, however, that even if the Divorce Agreement is a personal contract

between Wright and Phillips (rather than solely a court order, as Wright contends),

and even if Wright breached it, Phillips has not proved resulting damages. Nor does

he attempt to do so.131 Instead, he relies on a theory of disgorgement. He argues:

(1) under the Divorce Agreement, Wright agreed to accept fifty-percent

responsibility for the operations of the Companies; (2) instead of undertaking her

responsibilities as agreed, Wright violated her fiduciary duties and breached the

“contract” by failing to work hard and vexing Phillips, to the detriment of operations;

(3) therefore, she earned her salary and benefits “while acting wrongfully,”

subjecting her salary and benefits to disgorgement.132 Phillips’ argument misses the

mark. Disgorgement prevents a defendant from keeping ill-gotten gains earned

through or by means of wrongful acts.133 It does not, as Phillip contends, justify the

130 JX 1, ¶ 35. 131 See Respondent’s Opening Br., at 15 (“Respondent has not tried to articulate specific monetary damages to the Companies or himself. Rather, Respondent’s theory of damages and relief against Petitioner is about what Petitioner gained while acting wrongfully.”). The Receiver himself testified he did not believe the Companies suffered any damages under his watch. Tr. 143:10–21, 159:6–13 (Hastings). 132 Respondent’s Opening Br., at 14–15. 133 E.g. Triton Const. Co. v. Eastern Shore Elec. Servs., 2009 WL 1387115, at *28 (Del. Ch. May 18, 2009) (“Delaware law prohibits fiduciaries from profiting personally from disloyal acts that constitute fiduciary breaches”) (emphasis added); Pfeiffer v. Lord, 989 A.2d 683, 699 (Del. Ch. 2010). To succeed on an argument for disgorgement, Phillips would need to show that Wright’s 25 claw-back of earnings that a defendant received “while acting wrongfully.”134

Moreover, as described above, I do not find Wright’s actions constituted a breach of

her fiduciary duties.

Even if Phillips pursued a traditional contract remedy, his claim would fail for

an additional reason. To find for Phillips, I would have to determine that Wright

agreed that her salary and benefits were being paid as consideration for her promise

to take fifty-percent responsibility for the Companies in the Divorce Agreement, and

that she breached that promise. There is no evidence of such a promise. The Divorce

Agreement states, “each party shall receive a salary equal to the salary of the other

party . . . Each party shall also be equally responsible for the ongoing management

and operation of the businesses.”135 This does not demonstrate a quid pro quo; equal

salaries for equal responsibility. Her salary, to my mind, is more in line with a

presumptive draw on her ownership share in the Companies. In other words, she

earned her draw because she was a fifty-percent owner, not because she agreed to

certain work hours or work responsibilities.

accounting work for the Companies—which is how she earned her salary and benefits—was itself somehow illegal or disloyal. 134 Respondent’s Opening Br., at 15. 135 JX 1, ¶ 2(a).

26 Finally, I note that if I were to find that Wright had breached a contractual

duty, I would need to determine if performance was excused, given the parties’

conduct while at work together.

In sum, even if the Divorce Agreement properly constituted a contract

between the parties that Wright breached, Phillips has failed to offer any theory of

damages under which Wright’s salary and benefits could properly become a setoff

of the Valuation Price, as he requests.

3. Unclean Hands

Phillips argues that the Valuation Price should be reduced due to Wright’s

unclean hands.136 The doctrine of unclean hands is inapplicable to adjust a legal

valuation of an asset. Unclean hands is a defense to an equitable proceeding, which

invokes the interest of the Court in its own reputation. Where a plaintiff in equity

appears with unclean hands in the matter at bar, this Court will not lend to that

turpitude the power of equity.137 Unclean hands is not a valuation tool; moreover, I

have not found Wright’s actions breached duties in equity. Phillips reliance on the

doctrine of unclean hands is misplaced.

136 Respondent’s Opening Br., at 13–14. 137 Nakahara v. NS 1991 Am. Tr., 718 A.2d 518, 522–23 (Del. Ch. 1998).

27 B. Accounting Adjustments to the Valuation

In addition to Phillips’ counterclaims, addressed above, both parties seek

accounting adjustments to the Valuation Price. The burden is on the party seeking

the adjustment to prove that the Valuation Price should be so adjusted.

1. Adjustment for Wright’s Work History and Earnings

Phillips seeks to reduce the Valuation Price in the amount of salary and

benefits Wright received from the Companies generally between the Divorce

Agreement and the sale. Phillips’ expert, Hall, calculates that Wright earned

$818,244.74 in compensation from October 2013 to the end of 2017.138 Phillips

argues that due to Wright’s behavior, her compensation should be viewed as “an

early advancement on her buyout price” and thus “paying her twice would be

unjust.”139 As detailed above, I found that Phillips did not prove his counterclaims

for breach of fiduciary duty or breach of contract. I also find Wright’s salary, rather

than “earned” as a result of her efforts at the Companies, was in the way of a

presumptive draw on her ownership share. As such, I find nothing “unjust” in her

compensation up to the time of the sale. I therefore decline to adjust the Valuation

Price based on Wright’s work history and earnings.

138 JX 16, at 1–2. 139 Respondent’s Answering Br., at 12.

28 2. Adjustment for Wright’s Credit Card Bills

Phillips seeks to reduce the Valuation Price in the amount of the company

funds he alleges Wright used to pay personal credit card bills. At trial, Phillips

testified that Wright’s illegitimate payments accumulated to “hundreds of thousands

of dollars” and arose from, “like, 20 different credit cards that were not company

credit cards.”140 He testified that he personally went through bank records and

QuickBooks entries and assigned unrecognized credit card charges to Wright’s

personal use.141 He offered a summary example of his method, pointing to a single

page of QuickBooks entries and a catalog of bank records.142 Nothing more specific

was offered. Wright countered this summarily by testifying that the parties left

personal credits cards at the office for drivers to use, and that both she and Phillips

sometimes put business expenses on their personal credit cards.143

In contrast to his vague testimony at trial, in post-trial briefing, Phillips

contends that his review of bank statements from August 2015 to March 2016 shows

that Wright used the Companies’ funds to pay personal credit card bills in the amount

of $42,108.92.144 For this statement, Phillips cites to his trial testimony as well as a

140 Tr. 90:18–23, 94:21–24 (Phillips). 141 Id. at 90:18–94:24 (Phillips). 142 Id. at 90:18–93:8 (Phillips); JX 16, at 15; JX 68. 143 Tr. 205:2–10 (Wright). 144 Respondent’s Opening Br., at 7.

29 collection of County Bank statements.145 Phillips then contends that Wright made

entries in the Companies’ QuickBooks showing payments of personal credit card

bills in the amount of $46,426.07.146 To support this, he cites again to his trial

testimony and the single page of QuickBooks entries he used as an example of how

he made his calculations.147 It does not appear that Phillips had his expert or an

accountant review his calculations or the supporting documents—certainly, there is

no record evidence that his expert signed off on Phillips’ calculations.

Phillips is the party seeking this adjustment and thus bears the burden of proof

to demonstrate that it is more likely than not that improper use of company funds

occurred, and the amount. I find he has not done so. Without further insight into

Phillips’ final figure of $88,534.99 (and not, as he testified, “hundreds of thousands

of dollars”), I am left with an issue of proof. I find it plausible—indeed, Wright

seemed to affirm as much in her trial testimony—that the Companies may have paid

some of Wright’s personal credit card expenses.148 In fact, as with many small

family-operated businesses, comingling of personal and business debt and assets

was, unfortunately, not a concern of the principals—Phillips own actions in this

145 Id. (citing Tr. 88:13–95:9 (Phillips); JX 68). 146 Id. 147 Id. (citing Tr. 88:13–95:9 (Phillips); JX 16, at 15). 148 Tr. 205:2–10 (Wright) (testifying that both parties “also had credit cards that we used for more personal items but still ended up with some business items in there as well.”).

30 regard are discussed, below. To make the adjustment in the amount that Phillips

requests, however, I must have a basis in the record. Phillips urges me to find that

(1) every charge from a credit card he did not recognize represented an improper

personal charge by Wright, (2) those charges by Wright were entirely personal in

nature, and (3) Phillips’ calculations are accurate without the assistance of an

accountant or expert, and without providing a full record of his calculations.

Weighing against this, Wright testified that personal credit cards showed up

on the business accounts because they were sometimes used by drivers and by both

parties for business expenses. I credit this testimony. While it conflicts with

Phillips’ testimony that he never paid personal credit cards with company funds, I

find that representation unlikely, in view of his regular commingling of business and

personal funds.149 Additionally, Phillips’ vague testimony at trial, that he could not

“remember the specifics” but that the figure “was in the hundreds of thousands of

dollars,” and later that it was “well in excess” of $100,000, compared to the number

after trial—$88,534.99, citing to his vague testimony, a page of QuickBooks entries,

and bank statements—does not allow me to verify his calculations. It is plausible

that Wright may have used company funds for some personal expenses, but Phillips

has failed to prove that she did, and, if so, to what extent. Therefore, I decline to

149 Such comingling is technically improper, but not uncommon in the scenario of a jointly-owned family business. I note it not to indicate that Phillips’ actions were wrongful, but to explain why I question his testimony here.

31 adjust the Valuation Price for Phillips’ allegations regarding Wright’s personal credit

cards.

3. Adjustment for the Movement of Funds to New Company Accounts

Phillips argues that the Valuation Price should be reduced for the funds Wright

removed from the Companies’ operating accounts into two new accounts controlled

exclusively by her. The parties agree that Wright in fact removed $45,000 into new

accounts.150 The parties further agree that she spent this money on legal and

professional fees for this litigation.151

Phillips appears to argue that the spent funds merit an adjustment because the

Receiver instructed Wright to return them, and she did not.152 Wright points out,

however, that the Receiver made his instruction contingent on Phillips’ restoring her

suspended salary, which Phillips did not do.153 I find the pertinent question to be

how the funds were used. This makes resolution simple: the Receiver confirmed

that the Companies would pay for both parties’ litigation expenses.154 Wright used

150 Tr. 19:2–15 (Sterner), 238:16–239:2 (Wright); JX 56. 151 Tr. 21:21–22:3 (Sterner), 242:21–243:7 (Wright). Phillips points out that she also used money from the account for an auto lease (“$579.40”), a Verizon Wireless bill (“$165.80”), an American Express bill (“$108.79”), and an unidentified check (“$483.00”). See JX 18, at 1. Phillips pointed to these expenses both at trial and in post-trial briefing but never indicated whether he thought they were inappropriate personal expenses or what he wished the Court to do with them. Respondent’s Opening Br., at 7 n.3 (citing Tr. 19:16–20:16 (Sterner)). 152 Respondent’s Opening Br., at 7. 153 See JX 65. 154 See Tr. 243:1–7 (Wright), 96:7–17 (Phillips).

32 the funds for litigation expenses. As such, they were company funds used for an

ordinary business expense. I therefore decline to adjust the Valuation Price based

on the $45,000 Wright moved out of the operating accounts.155

4. Adjustment for the Parties’ Joint Account

Phillips argues the Valuation Price should be reduced to account for Wright’s

disproportionately greater spending from the parties’ personal “Joint Account.” In

total, Phillips asserts that Wright benefited an additional $119,880 from the Joint

Account.156 The parties agree, however, that their contributions to the Joint Account

were equal.157 Wright does not dispute that she spent more of the Joint Account

funds. Instead, she argues that the Joint Account, a personal checking account, has

nothing to do with the value of the Companies beyond the fact that each party

contributed equally to it.158 Because I find that draws from the Joint Account were

not a part of the business interest before me, I decline to adjust the valuation for such

draws.

155 I also decline to adjust for the $1,336.99 from these accounts that Phillips vaguely suggests— but never alleges—were improper. See JX 18. 156 Respondent’s Opening Br., at 7–8. Phillips also contends, based on the Receiver’s report of August 10, 2016, that Wright received $36,801 in excess distributions, and he lumps this sum into discussions regarding the Joint Account for a total requested adjustment of $156,681. Id. I resolve the issue of the excess distributions separately below. 157 JX 16, at 1. 158 Petitioner’s Opening Br., at 9–11.

33 Phillips makes three arguments regarding why the Joint Account is a proper

subject for an accounting adjustment. None, to my mind, has merit.

First, Phillips claims the Joint Account “was funded by the Companies,” and

therefore it should be part of the valuation process.159 He does not cite anything to

support this statement. The parties stipulated that “[t]he ‘joint account’ was not a

Company account.”160 Phillips seems to be pointing out merely that the parties

contributed to the Joint Account through draws and paychecks from the Companies.

Those contributions were equal.

Second, Phillips argues that this Court ordered the Receiver to review the Joint

Account, and therefore Phillips’ requested adjustment “draw[s] on the court-

appointed Receiver’s work.”161 Both Phillips and the Receiver appear to believe the

Joint Account pertains to the valuation because the Court ordered the review.162 But

this does not properly construe the record. On April 4, 2016, the Receiver submitted

a report stating that to resolve the “payroll issue,” he required documentation on the

Joint Account because “[s]ome of the payroll and distribution checks” were

deposited in that account163 On May 2, 2016, he confirmed this need: “The joint

159 Respondent’s Opening Br., at 7. 160 JSOF, ¶ 31. 161 Respondent’s Answering Br., at 14. 162 See Tr. 249:4–6 (Phillips), 137:23–138:6 (Hastings). 163 JX 6, at 1.

34 account . . . goes to the heart of the payroll issue. While we have been able to

determine that the payroll amounts have been equal . . . we have not been able to

determine where they were deposited and what they were used for.”164 Based on

these reports, I authorized review on May 24, 2016, stating that such review fell

under “the broad authority granted to the Receiver to verify that business funds were

only used for business purposes or were consistent with the [Divorce Agreement] . .

.”165 Therefore, to my reading of the Receiver’s reports and this Court’s Order, the

purpose of the Receiver’s review of the Joint Account records was to resolve the

payroll issue. The fact that the Receiver chose to conduct a broad review analyzing

all contributions and expenditures does not make the expenditures a valuation issue.

It is difficult to conceive—given the parties’ equal contributions from the

Companies to the Joint Account—how an imbalance of spending from that personal

checking account affects the value of the Companies. Nothing in the record indicates

that the law of the case is otherwise.

Third, Phillips argues that Wright’s use of the Joint Account violated the

Divorce Agreement, which required “prior agreement of the other party” to use the

funds in that account.166 But nothing in the Divorce Agreement connects the Joint

164 JX 7, at 1. 165 JX 3, at 1. 166 See JX 1, ¶ 13.

35 Account to the Companies or suggests that the Joint Account should be viewed as a

business account or business asset. Even if I credited Phillips’ argument that the

Divorce Agreement is a de facto corporate document, it would be unreasonable to

construe everything in the Divorce Agreement as somehow connected to the

Companies. The Divorce Agreement addresses the Companies in one cabined

section with its own subheading; the Joint Account, like other personal assets, is

dealt with elsewhere, in a section regarding the parties’ personal financial

accounts.167 Disputes over whether spending from this personal checking account

complied with certain non-business requirements of the Divorce Agreement is a

personal issue between the parties and does not affect the Valuation Price.

In addition to excess spending in the amount of $119,880, Phillips also relies

on the Receiver’s report for his argument that the Valuation Price should be reduced

for excess “distributions” in the amount of $36,801.168 This is based on the

Receiver’s statement that “[i]n addition, we have analyzed the distributions for 2014

and 2015 for Data Guard Recycling, Inc., Data Guard, Inc. and CK Aurora, Inc. . . .

for the two year period Mrs. Wright’s distributions exceed [Phillips’] by $36,801.”169

Phillips examined the Receiver on this figure at trial and lumps the amount into the

167 See id. ¶¶ 2, 13. 168 Respondent’s Opening Br., at 8. 169 Ex. 10, at 2.

36 request for an adjustment related to the Joint Account.170 Confusingly, Phillips never

clarifies how these “distributions” are related to the Joint Account and how they

differ from “contributions,” which the parties agree were equal.171 Phillips has not

met his burden of proof on this adjustment. Accordingly, I decline to adjust the

Valuation Price for issues regarding the Joint Account or the Receiver’s calculation

of excess distributions.

5. Adjustment for Phillips’ Use of His Personal Bank Account for Business Purposes

Wright argues that the Valuation Price should be increased for business

income that she alleges Phillips deposited in his personal account and never returned

to the Companies.172 To support her claim, Wright’s expert, Sterner, reviewed

checks, bank statements, and deposit tickets associated with Phillips’ personal bank

170 Tr. 141:24–142:6 (Hastings); Respondent’s Opening Br., at 8. 171 Upon review of the Receiver’s report and the exhibits included therein, it appears that the Receiver was calculating distributions that went directly to the parties, unrelated to the Joint Account. See JX 10, Exs. B, L, M. Thus, it appears that this part of the Receiver’s report is duplicative of the analysis conducted by Phillips’ expert, Hall, regarding “salary and draws.” See JX 16, at 1–2. I examine this adjustment request, and deny it, for reasons stated infra. Just as confusing, Phillips examined Hall extensively about his findings regarding “salary and draws” and his conclusion that Wright received $17,655.56 more than Phillips, but he did not address this figure at all in his post-trial briefing. Tr. 165:13–173:2 (Hall). Meanwhile, having asked the Receiver a single question regarding the “distributions,” Phillips lumped a request for adjustment in with the Joint Account figure, without explanation. 141:24–142:6 (Hastings); Respondent’s Opening Br., at 7–8. If Phillips is submitting the requested adjustment of $36,801 in excess “distributions” as part of the Joint Account, I find that it is not related to the business and no adjustment is appropriate, as explained above. If he is submitting it to substitute for Hall’s lower finding of excess distributions, I find this prejudicial to Wright, who was not alerted to such a request prior to trial and thus had no opportunity to have her expert properly respond. 172 Petitioner’s Opening Br., at 2.

37 accounts and categorized deposits and expenditures based on the item descriptions

and his experience with the Companies into “business” and “personal” categories.173

He reviewed the items based on their facial descriptions and did not inquire with

Phillips or the recipients of the payments to confirm whether they were business or

personal expenses.174 Using these methods, Sterner concluded that Phillips had

retained an excess of $35,545.61 in his personal accounts.175

Phillips’ expert, Hall, did not respond to Sterner’s report or his testimony.

Phillips himself testified at trial that he believed the discrepancies were caused by

“one-offs” where he provided customers with services outside of the ordinary scope

of the business; thus, according to his testimony, expenses that appeared facially to

be personal were in fact business expenses.176

I found Sterner’s method adequate and his testimony and supporting evidence

credible. Other than Phillips’ testimony that one-off customer projects could have

accounted for the discrepancies, his report went unrebutted. At trial, Phillips’

counsel sought to undermine Sterner’s report by pointing out that he had not verified

the source of funds with the third parties sending the payments or Phillips himself to

173 JX 15, at 1–3. 174 Tr. 17:16–18:11 (Sterner). 175 Originally, Sterner opined that Phillips had wrongfully retained $38,545.61, but review of Hall’s report alerted him to the fact that he had erroneously “double-booked” $3,000 to Phillips. Tr. 20:18–21:7 (Sterner). 176 Tr. 250:21–253:1 (Phillips).

38 confirm their business or personal nature.177 To my mind, this is not a sufficient

rebuttal. Sterner provided the detailed records that he reviewed; he testified that he

based his review on his historical knowledge of the Companies; he reviewed Hall’s

report to verify his findings; and he reconciled his report to Hall’s findings by

correcting errors.178 I therefore find that the Valuation Price should be increased by

$35,545.61 to account for business funds deposited in Phillips’ personal accounts

and not returned to the Companies.

6. Adjustment for the Costs of the Receiver and Legal Fees Paid by the Companies

Phillips argues that the buyout price should be reduced in the amount of half

the costs of the Receiver and for any legal fees paid by the Companies on Wright’s

behalf. I have already resolved the issue of legal and professional fees, which I

found to be ordinary business expenses. Additionally, the parties agreed that the

Receiver’s fees would be paid by the Companies.179 The Receiver was appointed

for the benefit of the Companies after I found that the owners were effectively

deadlocked.180 Therefore, I find that the expenses and benefits generated by the

177 Id. at 17:18–18:11 (Sterner). 178 Id. at 6:4–13:3 (Sterner). I find the evidence here stands in contrast to Phillips’ request for an adjustment based on Wright’s use of personal credit cards, where the evidence was simply inadequate. Here, Wright had an expert conduct the review and submit a report explaining his methods and conclusion, both of which were consistent with his trial testimony. 179 JX 2, at 3–4. 180 See id.

39 Receiver while the parties remained co-owners were properly born by the

Companies as an ordinary business expense that rolled into the valuation.

Alternatively, Phillips argues that the buyout price should be reduced for half

of the Receiver’s fees incurred after the sale in 2017. This argument has more merit.

After the sale occurred, the Receiver continued to provide services, which the

Companies paid, but which were not accounted for in the valuation. I noted at a

hearing that Phillips could seek to have the post-valuation Receiver’s fees “applied

as a court cost at the final resolution” of the litigation. 181 Wright argues that the

Receiver’s fees, after the Valuation, were accrued almost entirely to enforce Phillips’

compliance with this Court’s orders. I find, however, that the Receiver’s post-

valuation efforts were aimed at brokering the parties’ differences, and thus benefited

both parties. As sole owner, Phillips bore these post-valuation Receiver costs alone.

Phillips states the Receiver’s costs, post-valuation, totaled $23,500, and requests an

adjustment of $11,750.182 Wright does not dispute this amount. Therefore, I find

the Valuation Price should be reduced by $11,750.

181 See Teleconference on Application for Payment of Receiver’s Fees, D.I. 127. As noted in the Background section, Phillips interpreted my guidance as permitting a request for credit for the entire amount of the Receiver’s fees, but the scope of the request was limited at the hearing to post-valuation fees. 182 Respondent’s Opening Br., at 19.

40 7. Adjustment for Phillips’ Interim Payments

Phillips requests a reduction of the Valuation Price to account for his monthly

court-ordered payments to Wright. Wright does not dispute this reduction. As of

December 31, 2019, Phillips had made interim payments in the amount of

$200,000.183 He pays $12,500 on the fifth of each month.184 Therefore, as of the

date of this Memorandum Opinion, he has paid $262,500 in interim payments.

Therefore, the Valuation Price should be reduced by $262,500.

8. Additional Adjustments

Finally, Hall found in his expert report and testified at trial that Wright

received salary and draws in excess of Phillips in the amount of $17,655.56.185

Phillips did not address this purported excess in his post-trial briefing or include it

in his summary of requested adjustments.186 This arguably waives the requested

adjustment, but even if it did not, Hall’s cross-examination demonstrated several

items he had not attributed correctly that would erase the purported excess in

Wright’s favor.187

183 JSOF, ¶ 6. 184 Id. 185 JX 16, at 2. 186 See Respondent’s Opening Br., at 20. 187 Tr. 173:10–180:12 (Hall).

41 Wright, however, goes further: based on Hall’s cross-examination and her

own testimony, she appears to request an adjustment of the Valuation Price upward

by an additional $49,841.74.188 Wright did not request this adjustment in the joint

pre-trial stipulation. Even in her post-trial briefing, she does not expressly assert the

request; rather, she suggests that if I find her testimony credible and discredit Hall’s

report, it would skew his results in her favor.189 I find that this request for an

adjustment—if it is a request—was improperly raised for the first time at trial and in

post-trial briefing, without giving Phillips a proper chance to respond.190 Therefore,

no adjustment to the Valuation Price is warranted based on Wright’s “rebuttal” of

Hall’s report.

III. CONCLUSION

Phillip’s counterclaims for breach of fiduciary duty and breach of contract are

denied, and his attempt to invoke unclean hands is misplaced. The Valuation Price

of $1,098,001.50 is adjusted as follows:

1. The Valuation Price is increased by $35,545.61 to account for business funds that remain in Phillips’ personal accounts; 2. The Valuation Price is decreased by $11,750 to account for costs of the Receiver incurred by the Companies after the valuation;

188 Petitioner’s Opening Br., at 4–5, 12. 189 Id. at 5 (“At the very least, the Hall report should be disregarded . . . If the Court accepts Ms. Wright’s testimony as to the items factoring into the Hall report (most of which Hall admitted were in error), the effect is that Mr. Phillips was paid $49,841.74 more than Petitioner.”). 190 I suggested as much at trial. See Tr. 217:23–219:4.

42 3. The Valuation Price is decreased by $262,500 to account for interim payments made by Phillips.

These adjustments result in an adjusted and final valuation of Wright’s ownership

interest in the Companies of $859,297.11. The parties should confer and submit an

appropriate form of order.