Lake Treasure Holdings, Ltd.

• Court: Court of Chancery of Delaware
• Decided: October 10, 2014
• Docket: CA 6546-VCL
• Status: Published

Opinion

EFiled: Oct 10 2014 04:35PM EDT Transaction ID 56181675 Case No. 6546-VCL IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

LAKE TREASURE HOLDINGS, LTD., KAJEER YAR, and ) WATERCOLOR VENTURES, LLC, ) ) Plaintiffs, ) ) v. ) C.A. No. 6546-VCL ) FOUNDRY HILL GP LLC, FOUNDRY HILL ) ELECTRONIC TRADING LLC, FOUNDRY HILL ) CAPITAL LLC, FOUNDRY HILL TRADING LLC, CP-1 ) LLC, ULRIC TAYLOR, CHRISTOPHER KLEE, ) PROGRESSIVE PACKAGING CORP., MILTON R. ) SMITH III, BUTTONWOOD GROUP TRADING LLC, ) THREE ZERO THREE CAPITAL PARTNERS, LLC, and ) TRIPLE LINE TRADING, LLC, ) ) Defendants, ) ) and ) ) FOUNDRY HILL HOLDINGS, LP and CP-1 LLC, ) ) Nominal Defendants. )

MEMORANDUM OPINION

Date Submitted: July 24, 2014 Date Decided: October 10, 2014

Philip Trainer, Jr., Toni-Ann Platia, ASHBY & GEDDES, Wilmington, Delaware; Robert A. Chapman, Peter M. Spingola, Shannon T. Smith, CHAPMAN SPINGOLA, LLP, Chicago, Illinois; Attorneys for Plaintiff Lake Treasure Holdings, Ltd., Kajeer Yar, and Watercolor Ventures, LLC.

Evan O. Williford, THE WILLIFORD FIRM LLC, Wilmington, Delaware; Norman J. Lerum, NORMAN J. LERUM P.C., Chicago, Illinois; Attorneys for Defendants Foundry Hill GP, LLC, Foundry Hill Electronic Trading, LLC, Foundry Hill Capital LLC, Foundry Hill Trading LLC, CP-1 LLC, Triple Line Trading, LLC, and Ulric Taylor. David E. Wilks, Thad J. Bracegirdle, Douglas J. Cummings, Jr., WILKS, LUKOFF & BRACEGIRDLE, LLC, Wilmington, Delaware; Attorneys for Defendants Christopher Klee and Progressive Packaging Corp.

LASTER, Vice Chancellor. The plaintiffs invested in a software-based trading business that defendant Ulric

Taylor proposed to develop. When the startup failed, they sued. During discovery, they

learned that the firm had developed seemingly valuable trading software. Later in

discovery, they learned that Taylor had transferred the software covertly to an entity

controlled by his longtime friend, defendant Christopher Klee.

From then on, the plaintiffs focused on the software. At trial, they contended that

Taylor breached his duty of loyalty by granting Klee a security interest in the software in

return for loan proceeds representing a fraction of what Taylor thought the software was

worth, followed by an amicable surrender of the software to Klee. They contended that

Klee aided and abetted Taylor‟s breach of duty. They argued that the same facts

supported remedies under the Delaware Uniform Fraudulent Transfer Act (“DUFTA”).

Premised on an order restoring ownership of the software to the firm, they sought

additional remedies under the Delaware Uniform Trade Secrets Act (“DUTSA”).

The plaintiffs proved that Taylor breached his duty of loyalty by transferring the

software and that Klee aided and abetted the breach. Yet the defendants convinced me at

trial that the ostensibly valuable trading software actually was a simplistic arrangement of

public domain components and concepts. Given that Taylor and Klee acted as if the

software had substantial value, I approached trial skeptical of their strategy. Nevertheless,

their expert cogently explained how anyone with moderate skill with computers and basic

knowledge of trading could reproduce the software using retail programs and sources

freely available on the internet. Despite Taylor and Klee‟s earlier belief to the contrary,

the software did not have any value as intellectual property. The software had not

1 generated any trading profits for the defendants, so there was nothing to disgorge, and the

evidence convinced me that the software was not likely to produce trading profits in the

future. Consequently, this decision awards nominal damages of $1.00 on the claims for

breach of fiduciary duty and aiding and abetting.

Analyzed under DUFTA, Taylor and Klee‟s conduct constituted a fraudulent

transfer. As a remedy, the defendants shall return the software to the firm. Given what

trial showed about the software, it is not clear why the plaintiffs want it, but they do, and

the firm is entitled to it.

The plaintiffs cannot obtain any relief under DUTSA. The defendants proved at

trial that the software was not a trade secret, rendering DUTSA inapplicable.

I. FACTUAL BACKGROUND

The parties tried the case over three days. The following facts were proven by a

preponderance of the evidence.

A. The Foundry Hill Startup

Plaintiff Kajeer Yar and Taylor were friends from college. Years later, Yar found

himself working for the Hille Foundation (the “Foundation”), a private, family

foundation with approximately $60 million in assets. Yar served as in-house legal

counsel and an investment consultant. The Foundation‟s two trustees were Maggie Hille

Yar and Mary Ann Hille. As their names suggest, Maggie was Yar‟s wife, and Mary Ann

was Yar‟s mother-in-law.

In 2008, Yar and Taylor discussed having the Foundation back Taylor in starting a

new firm under the name “Foundry Hill.” They contemplated that its first venture would

2 be to develop algorithmic trading strategies and deploy them in electronic trading. Yar

convinced his wife and mother-in-law to invest.

A lengthy series of entity formations and substitutions ensued. The results were (i)

Foundry Hill Capital, LLC, a Delaware limited liability company, which served as

Taylor‟s management company; (ii) Lake Treasure Holdings, Ltd. (“Lake Treasure”), a

Cayman Islands limited liability company, which served as the Foundation‟s investment

vehicle for projects with Taylor; and (iii) Foundry Hill Holdings LP (the “Partnership”), a

Delaware limited partnership, that served as the holding company for interests in

business-specific Foundry Hill entities. For simplicity, this decision refers to the final

entities rather than any of their predecessors.

Taylor ended up with control over the Partnership and a majority of its equity. He

controlled the Partnership through his control over Foundry Hill GP LLC (the “General

Partner”), a Delaware limited liability company, which was the Partnership‟s sole general

partner. The members of the General Partner were Taylor himself, with a 99% member

interest, and the Ulric Taylor Descendants Trust, with a 1% member interest.

The Partnership‟s limited partner interest was divided into two classes of units:

Class A units for the principals, and Class B units for employees. Lake Treasure made a

capital contribution of $2 million and received 32% of the Class A units. Yar personally

made a capital contribution of $40,000 and received 2% of the Class A units. Taylor held

the remaining 66% of the Class A units. Employees who subsequently left the business

briefly owned Class B units; for purposes of this litigation, they can be ignored.

3 To pursue the algorithmic trading business, Taylor and Yar formed Foundry Hill

Trading LLC (“Trading LLC”). The Partnership received a 66 2/3% member interest in

Trading LLC. Lake Treasure received the remaining 33 1/3% member interest in return

for a capital contribution of $300,000. Taylor controlled Trading LLC through his control

over the Partnership.

Taylor and Yar created an additional entity CP-1, LLC (“CP-1”), a Delaware

limited liability company, to hold the intellectual property that they expected the

Partnership to develop. CP-1 was a wholly owned subsidiary of the Partnership. CP-1

entered into an Intellectual Property Assignment and License Agreement with Foundry

Hill Capital, dated July 14, 2008, which licensed Foundry Hill to use CP-1‟s intellectual

property.

B. The Initial Efforts at Algorithmic Trading

As planned, Taylor tried to develop an algorithmic trading business. Taylor hired

Chris Preston, who developed various computer trading models, including programs

called Axon, Chi, and Oboe.

In August 2008, Trading LLC engaged in production trading with Axon. Taylor

pulled Axon after it failed to produce positive results. The other programs did not fare

any better.

During this period, Yar was closely involved with the business. He consulted

frequently with Taylor and received regular reports on his progress. He gave Taylor

advice and served as counsel to the Partnership for specific purposes, such as negotiations

with current or prospective employees, business partners, and vendors.

4 C. The High Frequency Trading Business

In April 2009, Taylor met Adam Krauszer, a high frequency trader employed at a

major hedge fund. Krauszer gave Taylor a business plan for a high frequency trading

business. Taylor discussed the plan with Yar, and they became excited about it. On June

17, 2009, Taylor and Yar met with Maggie, Mary Ann, and Frank McDonald, a Hille

family advisor, at the Foundation‟s offices. Maggie and Mary Ann decided to support the

high frequency business.

In October 2009, Taylor formed Foundry Hill Electronic Trading LLC (the “High

Frequency LLC”), a Delaware limited liability company, to as the entity for conducting

the high frequency trading business. The Partnership was its sole member. Foundry Hill

Capital served as its manager, giving Taylor control. The operating agreement specified

that the Foundation would invest up to $2.25 million if High Frequency LLC met certain

funding milestones, such as executing live trades using a custom-made order

management system that Taylor planned to develop.

D. Taylor Takes On Overhead

In October 2009, after the Foundation committed to support the high frequency

trading business, Taylor signed a five-year lease for 3,760 square feet of Class-A office

space on the 55th floor of 300 North LaSalle in Chicago. The lease required a $100,000

security deposit and minimum monthly payments of $9,500 in rent, plus other expenses.

On December 11, 2009, Taylor certified to the Foundation that High Frequency

LLC‟s customized order management system was exceeding expectations, satisfying the

5 first funding milestone. The Foundation wired the initial $1.5 million of its $2.25 million

commitment. Disputes later arose about Taylor‟s certification.

On January 18, 2010, Taylor leased an additional 4,407 square feet of office space,

bringing the total monthly rent to almost $20,000, plus other expenses. At the time,

Foundry Hill had three employees.

In April 2010, after months of negotiation, Taylor hired Krauszer. As part of his

compensation package, Taylor gave Krauszer a 30% member interest in High Frequency

LLC. The Partnership retained the remaining 70%. Krauszer began developing a high-

frequency trading model called Bumblebee and later worked on a model called

Afterburner.

In June 2010, Bumblebee began live trading. In July 2010, Taylor entered into a

contract with GuavaTech, Inc. for a low-latency line running between Chicago and

NASDAQ‟s co-location facility in New Jersey to be used in the high-frequency business.

The GuavaTech line cost $75,000 per month for the first three months, $125,000 per

month for the next three months, and $250,000 per month during the final six months of

the one year contract. Adding in fees and initial charges, the total cost of the contract was

$2,375,000, for an average charge of $197,917 per month.

As with the algorithmic trading business, Yar was closely involved with the high

frequency business. He consulted frequently with Taylor, provided advice, and served as

counsel for specific purposes.

In September 2010, the Foundation decided to provide Taylor with $1 million in

trading capital to deploy in high-frequency trading. The Foundation formed WaterColor

6 Ventures, LLC (“WaterColor”) as its vehicle for providing the $1 million. Yar served as

manager of WaterColor. Pursuant to a subscription agreement dated September 1, 2010,

WaterColor purchased Class A interests in High Frequency LLC, the terms of which

were governed by a certificate of designation. Among other things, the certificate of

designations stated that WaterColor‟s trading capital could be traded only using the

“Class A Strategy,” meaning high-frequency trading. The certificate of designation

authorized Taylor to allocate a portion of High Frequency LLC‟s overhead expenses to

Watercolor‟s capital account.

In October 2010, Krauszer launched Afterburner in live trading. That same month,

Taylor pulled Bumblebee from live trading because of poor performance.

In December 2010, Taylor signed yet another lease with 300 North LaSalle for an

additional 3,923 square feet of office space. By the end of 2010, Foundry Hill‟s rent was

running more than $35,000 per month. At the time, it had eight employees.

In late December 2010, Taylor told Yar that Afterburner had been pulled from live

trading because of poor performance.

E. The Chess Champions

Meanwhile, in September 2010, Taylor hired Milton R. Smith, III, as a

quantitative trader. Between September 2010 and March 2012, Smith developed a series

of trading algorithms known as the Chess Champions. Each algorithm was named for a

chess grandmaster: Karpov, Capablanca, Tal, Marshall, Lasker, and Smyslov. The Chess

Champions were not high-frequency trading programs. They were computer programs

that executed trades according to pre-determined rules:

7  Karpov used classic trend-following techniques supplemented by indicators about whether a security was overbought or oversold.

 Tal was a trend-following, day-trading model for stock index futures.

 Capablanca was a general-purpose trend-following model for stock index futures.

 Lasker was a selective trend-following system that used basic elements like a trailing stop loss and a profit target.

 Smyslov traded based on the twice-daily price fixes in the London gold market.

 Marshall resembled the other models but added features to prevent the premature closing of a position.

Smith wrote the source code for the Chess Champions on a platform called TradeStation

using EasyLanguage. To engage in trading using the Chess Champions, Smith used a

retail platform called NinjaTrader.

Given the poor results of the high-frequency trading business, Taylor asked Yar to

let him trade WaterColor‟s capital using the Chess Champions. Yar agreed.

F. A Falling Out

In February 2011, Taylor made a capital call on the Foundation for an additional

$250,000. The Foundation provided it, but Maggie and Mary Ann were becoming

concerned. Mary Ann testified that she expected to see a profit within six months after

the Foundation‟s original investment, and Maggie testified about growing impatient with

Taylor and Foundry Hill. They had good reason to ask questions. By this point, the

Foundation had invested $4.4 million and provided another $1 million in trading capital,

but had nothing to show for it. That said, the evidence indicated that building a high

frequency trading business was projected to be a capital intensive undertaking. With the

benefit of hindsight, it seems likely that Taylor and Yar convinced Maggie and Mary Ann 8 to invest, but that Maggie and Mary Ann did not fully understand (or later became

uncomfortable with) the extent of the startup costs. Regardless, matters soon took a turn

for the worse.

On March 15, 2011, Maggie, Mary Ann, Yar, and McDonald traveled to Chicago

to meet with Taylor in Foundry Hill‟s offices. They found a dismaying scene. Taylor had

not kept electronic records, and his filing system for paper records consisted of a single,

over-stuffed, and disorganized file folder that contained invoices interspersed with

restaurant menus and various owners‟ manuals, plus several years‟ worth of envelopes

stacked against his office wall. If Taylor‟s operation had projected competence and

organization, perhaps the Foundation representatives would have been reassured. Instead,

their fears appeared justified.

Yar and McDonald returned for additional meetings with Taylor. They collected

checkbooks and other documents and took them back to Tulsa to examine.

That same month, Taylor made another $250,000 capital call on the Foundation.

The Foundation wired $150,000 to the High Frequency LLC on April 1, 2011. Shortly

thereafter, Taylor demanded an additional $350,000. The Foundation responded him that

the earlier capital contributions, combined with various letters of credit provided for the

Partnership‟s benefit, had satisfied the Foundation‟s obligations.

At this point, the relationship between the Foundation and Foundry Hill broke

down. Maggie and Mary Ann no longer trusted Taylor. Yar was caught between his wife

and mother-in-law on one side and the college friend he had backed on the other. Yar

sided with his family and employer, and his interactions with Taylor became combative.

9 On May 20, 2011, the Foundation and Yar gave Taylor written notice that they

believed he had breached his fiduciary duties. At the same time, WaterColor demanded

the return of its trading capital via a repurchase of its Class A Interests. Taylor responded

that WaterColor‟s capital account had a balance of $0 such that WaterColor was “not

entitled to any payment whatsoever in consideration for its Class A Interest.” JX 156.

G. This Lawsuit

In June 2011, the plaintiffs filed their original complaint in this action, which

asserted claims against Taylor for fraud, breach of contract, and breach of fiduciary duty

and sought, among other things, the dissolution of the Partnership and the appointment of

a liquidating receiver. Discovery revealed that in May 2011, as the dispute between the

Foundation and Taylor was coming to a head, Smith deployed the Chess Champions in

live trading. Between June and November 2011, the Chess Champions generated a

trading profit of more than $500,000. Taylor calculated that the results equated to an

annualized trading return in excess of 200%. Smith achieved these results using a retail

trading platform, and Taylor believed the results could have been better with a

professional-grade order management system.

Taylor decided that he wanted, above all else, to secure control of the Chess

Champions for himself. In an email to his advisors discussing a potential deal with the

Foundation, he wrote:

The more I think about it the more I really want to keep [the Foundation] away from the work we are running right now - the Chess Champions models. I can sacrifice the high frequency work, especially if we retain a copy or license to it.

10 Either way, the high frequency IP is not essential right now, and the Chess Champions are.

JX 159. If the Partnership had been dissolved and liquidated, as the plaintiffs sought, the

Partnership Agreement called for the assets to be distributed in accordance with the

partners‟ capital contributions. The Chess Champions and the Partnership‟s other

intellectual property (“IP”) would go to the Foundation.

In December 2011, Taylor began talking with Klee, a long-time friend whom

Taylor thought of as a brother, about investing in Foundry Hill. Up to this point, Taylor

had discussed the progress of the Partnership periodically with Klee, and Klee had

considered having Taylor manage his personal investments, but Klee had not considered

investing. Klee became interested in investing after Taylor sent him a profit and loss

statement showing the Chess Champions‟ $500,000 profit and a research report showing

the spectacular results generated by backtesting.

Klee and Taylor discussed having Klee invest between $300,000 and $500,000 in

return for 10-15% of the Partnership, implying a valuation for the business of

approximately $3 million. Since the only part of the business that appeared profitable was

the Chess Champions, the implied value of the business was synonymous with the

implied value of those programs. But Klee saw the Partnership‟s overhead as a barrier to

its success. In an email to Taylor, Klee wrote:

Not to beat a dead horse, but we really need a solution to the huge monthly overhead expense which is my single biggest concern as a potential investor and in my opinion is the single biggest impediment to your survival. A $500k investment could be drained in just a few short months if ac[c]ounts of significant size do not come on board AND you have month after month positive results, the latter of which is not a realistic expectation.

11 ***

When I run a similar calculation on your business with it‟s [sic] current capital reserves, it does not appear sustainable. Worst case scenario is that my investment will simply postpone the inevitable. Not because your business does not have the ability to succeed, but because it will be dragged down by unsustainable overhead without a significant investment.

***

I cannot put into words how impressed I am at the Chess Champs performance, and I‟m excited about the other models that are in development now, and extremely excited about just being a part of a business with such incredible potential and with a trusted great friend. In this regard I feel very grateful and fortunate, but I do not want to throw a hail mary pass, and you do not want me to throw a hail mary pass so we really need to come up with a plan to address overhead.

JX 198. At the time, Klee calculated that Taylor had taken on approximately $60,000 in

recurring monthly expenses, including $35,000 in rent and $15,000 in equipment leases.

Klee, Taylor, and Taylor‟s personal attorneys at Katten Muchin Rosenman LLP

(“Katten”) held a call to discuss potential business solutions to their predicament. One of

the Katten lawyers suggested that Klee purchase the Partnership‟s IP for $500,000. Later,

after Taylor had resolved the lawsuit with the Foundation, Taylor would “call the IP back

and convert [Klee‟s] IP ownership into a 15% ownership stake.” JX 203. The substance

of the transaction would be the same: Klee would purchase a 15% stake in Taylor‟s

business for $500,000, implying a value of approximately $3 million. Tactically, the deal

would be accomplished by transferring the IP to Klee, thereby achieving Taylor‟s goal of

keeping the Foundation away from the Chess Champions models.

During the same period, Klee formed Chess Champions LLC and Chess

Champions LP as vehicles to raise capital for the Partnership to trade using the Chess

12 Champions algorithms. Klee was the manager of Chess Champions LLC, which was the

general partner of Chess Champions LP. Klee anticipated contributing a portion of his

retirement funds to Chess Champions LP and raising additional funds from friends and

family. The Partnership would trade the capital of Chess Champions LP pursuant to a

trading advisory agreement under which the Partnership would receive 50% of the net

trading profits.

H. The Aborted Sale, The Loan, And The Amicable Foreclosure

In February 2012, Taylor and Klee attempted to effectuate a transfer of the

Partnership‟s IP in the manner suggested by the Katten lawyer, but for only $28,000—a

fraction of the $500,000 they previously contemplated. In an email to Taylor dated

February 7, 2012, Klee stated:

Per our conversation, [Klee‟s company,] Progressive Packaging Corp. [will] be wiring $28,000 today to Foundry Hill Capital, LLC for its payroll obligation because Foundry Hill has no other options for meeting this obligation and is facing the real possibility of having to cease business operations . . . you are authorized and agree to accept this $28,000 from Progressive Packaging Corp as payment for the purchase of the Chess Champions portfolio of algorithmic trading models that are currently owned by CP-l, LLC. Progressive Packaging agrees to lease back the Chess Champions portfolio of algorithmic trading models to Foundry Hill Trading, LLC. exclusively for $5,000 per month and Foundry Hill Holdings has the option to buy back the Chess Champions portfolio of trading models at any time for the total amount paid to Progressive Packaging Corp.

JX 240. Progressive Packaging Corporation was an Illinois corporation, wholly owned

and managed by Klee, through which Klee conducted his principal business. Taylor‟s

reply was telling. Rather than raising any objection to the economics, he replied that the

13 purchase would encompass all of the Partnership‟s IP, not just the Chess Champions. JX

241. Progressive Packaging wired $28,000 to the Partnership that day.

The next morning, Klee and Taylor participated in a conference call with Katten

about whether Klee‟s $28,000 investment should be framed as a loan or a sale. Katten

observed that Section 6.1(e) of the Partnership Agreement did not give the General

Partner the authority to execute a sale of Partnership assets without the Foundation‟s

consent, so the transaction should be restructured as a loan. Less than two hours after the

call with Katten, Taylor sent an email to Klee stating: “After further review, I don‟t think

I am authorized to make a sale transaction of this type. This will have to be a loan, with

the amount wired to apply to the loan amount.” JX 244.

Taylor and Klee subsequently documented the loan through a promissory note and

security agreement. Klee filed a UCC financing statement with the Delaware Secretary of

State to perfect his interest in the IP. Over the following weeks, Klee wired the

Partnership additional sums, eventually totaling $175,073.75. Taylor used virtually all of

the funds to meet payroll. Taylor did not make any payments on the Partnership‟s office

lease or its equipment leases. Klee later assigned his interest in the promissory note and

security agreement to Progressive Packaging.

Under the original promissory note, the Partnership would not owe any amounts

until February 2013. In mid-April, Progressive Packaging and Taylor executed a letter

agreement that required the Partnership to pay interest in May 2012. They backdated the

letter agreement to March 21, 2012.

14 Less than one week after executing the modification agreement, on April 25, 2012,

Klee instructed Taylor to stop trading Klee‟s capital with the Chess Champions. Klee and

Taylor agreed to spend two to three months re-optimizing the Chess Champions so that

they could be redeployed.

During the same period, Taylor and Klee discussed with Greg Veselica of

Buttonwood Group Trading LLC (“Buttonwood”) the possibility of Taylor and Smith

working for him and “get[ting] Chess Champions back to trading profitably.” JX 365 at

CKPPC002494. At Veselica‟s request, on May 3, 2012, Taylor sent a written proposal

titled the “Taylor/Klee proposal” to Veselica. JX 364. The proposal stated that Taylor and

Klee would bring Foundry Hill‟s IP, including the Chess Champions, to Buttonwood,

plus more than $1 million in trading capital, in exchange for Buttonwood paying

operational expenses and providing office space and IT support for Taylor and Klee‟s

new company. Taylor and Klee told Veselica that they would wind down Foundry Hill

and create a new entity to “enter into the deal with Buttonwood.” Id.

Around May 15, 2012, Taylor abandoned the Partnership to work as a “senior

trader” for Buttonwood. JX 369. Taylor convinced Smith, who was unaware of Taylor

and Klee‟s dealings, to come to work at Buttonwood at the same time.

On May 22, 2012, Klee wrote to Taylor, declared the Partnership in default, and

stated that he was foreclosing on the loan from Progressive Packaging. On May 24, 2012,

two days after declaring the purported default, Taylor asked an attorney for “a quote for

setting up the new LLC, to be called Triple Line Trading LLC.” JX 375. Taylor

15 introduced Klee as his “partner” and explained that the Partnership “ha[d] ceased doing

business and [would] be dissolving soon.” Id.

In June, the Partnership and Progressive Packaging executed a Collateral

Surrender Agreement pursuant to which the Partnership surrendered all of its assets to

Progressive Packaging to satisfy $100,000 of the $136,200 due under the loan. The

balance remained outstanding. No one notified the court, the plaintiffs, or the Foundation

about the transaction.

I. Triple Line Trading and the Philosopher Kings

Triple Line Trading was formed during this period. Taylor prepared drafts of an

operating agreement under which Taylor and Klee would be Class A members and Smith

would be a Class B member. The operating agreement contemplated that Klee would

receive his interests in return for the IP formerly held by the Partnership, including the

Chess Champions. Smith would receive a Class B interest. Klee never signed the

operating agreement, but he anticipated receiving a membership interest, and he

contributed $120,000 to Triple Line Trading. Consistent with the draft agreement, Taylor

and Smith continued using the Partnership‟s computer equipment and intellectual

property, including the Chess Champions. The virtually identical Trader Agreements that

Taylor and Smith entered into with Buttonwood represented that Triple Line Trading, not

Progressive Packaging, owned the Partnership IP.

When Smith began working at Buttonwood, Taylor, Klee, and Veselica directed

him to redeploy the Chess Champions onto a new platform called RTD Tango. Toward

that end, Smith first developed general-purpose libraries and intelligent order handling

16 algorithms to assist with actual trading. Then, Smith redeployed two of the Chess

Champions—Marshall and Lasker—onto the RTD Tango Platform.

Triple Line Trading began trading at Buttonwood in September 2012 using the re-

deployed Chess Champions algorithms. On September 18, 2012, after live trading had

resumed, Taylor sent Klee a “[r]evised Chess Champions report” for the “Chess

Champions Algorithms: Lasker, Tal, Capablanca, Marshall, Smyslov.” JX 398 at

CKPPC002269. Taylor wrote in the report that “[t]hese algorithms and the work

preceding them were successfully traded at our predecessor company as the Diversified

Portfolio (including Karpov) for the last six months of 2011.” Id. at CKPPC002270.

Trading went well during the next couple of months with actual results tracking

projected results. Then, over Thanksgiving weekend, Taylor instructed Smith to liquidate

all his positions. Buttonwood had suffered a funding crisis and, by the first week of

December 2012, had fired virtually all of its employees, including Taylor and Smith.

Buttonwood allowed Taylor and Smith to continue working out of its offices, and Smith

used the time to redeploy the other Chess Champions onto RTD Tango and enhance the

models.

By December 2012, Klee and Taylor were discussing Triple Line‟s business

nearly every day. Seeking trading and investment capital from a packaging industry

colleague, Klee drafted an email describing the actual trading results and historical

backtesting analysis for the Chess Champions. This was accurate. The evidence at trial

established that the Taylor and Klee continued using the Chess Champions but called

17 them the Philosopher Kings, and that although the programs evolved, the Philosopher

Kings were always derived from the Chess Champions.

After reviewing Klee‟s email, Taylor “reminded” Klee that they were “NOT

trading the Chess Champions models, as those [were] dormant,” but they were trading the

“new models named „Philosopher Kings.‟” JX 406. This was false. Taylor wanted Klee to

state that the Philosopher Kings were different than the Chess Champions to insulate the

models from claims by the plaintiffs and other creditors.

J. A Further Round of Transfers

In April 2013, Klee and Taylor caused Progressive Packaging to loan Triple Line

$5,000 in return for a promissory note. As with the earlier promissory note between the

Partnership and Progressive Packaging, the new promissory note was secured by all of

Triple Line‟s intellectual property.

On April 17, 2013, Taylor and Smith went to work with 303 Proprietary Trading

LLC (“303 Proprietary”). Smith had resumed trading Klee‟s account in January 2013,

and he now also traded an account for 303 Proprietary. For both, Smith used the

redeployed Chess Champions algorithms, now called the Philosopher Kings. Taylor and

Smith used the redeployed programs in live trading until September 2013 when 303

Proprietary terminated Taylor and Smith.

In September 2013, Taylor and Smith began trading an account for a London-

based investment group called ISAM using the Philosopher Kings. On October 29, 2013,

Taylor stopped trading ISAM‟s capital.

18 K. Trial

As noted, the plaintiffs initially filed suit on June 2011. Discovery was lengthy

and contentious, with the plaintiffs eventually learning in early 2013 about Taylor‟s

transactions with Klee involving the Chess Champions. The plaintiffs updated their

complaint, and the operative pleading for purposes of trial contained claims for

fraudulent transfer and misappropriation of trade secrets against Taylor and claims for

aiding and abetting breaches of fiduciary duty and tortious interference with contract

against Klee. The case proceeded to trial on March 31 through April 2, 2014.

II. LEGAL ANALYSIS

The plaintiffs proved at trial that Taylor breached his duty of loyalty and that Klee

aided and abetted Taylor‟s breach. The plaintiffs did not, however, prove that the

Partnership suffered any compensable damages. As a remedy, the Partnership is awarded

nominal damages of $1.

The plaintiffs proved at trial that Taylor and Klee caused the Partnership to engage

in a fraudulent transfer by which Progressive Packaging gained title to the Chess

Champions software and derivative works, including the Philosopher Kings. As a

remedy, Taylor and Klee shall cause the Chess Champions software, the Philosopher

Kings software, and all related code to be restored to the Partnership. Klee‟s loan to the

Partnership in the amount of $136,200, together with any interest, is equitably

subordinated to the claims of all other creditors.

The plaintiffs proved their entitlement to have the Partnership dissolved. They did

not establish an entitlement to any other relief.

19 A. Breach of Fiduciary Duty and Aiding and Abetting

The plaintiffs‟ most straightforward claims are for breach of fiduciary duty against

Taylor and for aiding and abetting a breach of fiduciary duty against Klee. The plaintiffs

proved both claims.

As the general partner of the Partnership, the General Partner owed fiduciary

duties to the Partnership for the benefit of all of its limited partners. Wallace ex rel.

Cencom Cable Income P’rs II, Inc., L.P. v. Wood, 752 A.2d 1175, 1180 (Del. Ch. 1999)

(“Unquestionably, the general partner of a limited partnership owes direct fiduciary

duties to the partnership and to its limited partners.”). As the party who controlled the

General Partner, Taylor owed a fiduciary duty of loyalty which required that he act in the

best interests of the Partnership for the ultimate benefit of its limited partners. See Mobil

Oil Corp. v. Linear Films, Inc., 718 F. Supp. 260, 271 (D. Del. 1989); Feeley v.

NHAOCG, LLC, 62 A.3d 649, 666-71 (Del. Ch. 2012). The duty of loyalty obligated

Taylor and the General Partner “not to use [their] control over the partnership's property

to advantage [themselves] at the expense of the partnership.” Wallace, 752 A.2d at 1180.

Delaware‟s default standard of review for fiduciary decision-making is the

business judgment rule. The rule presumes that when making a decision, the fiduciary

acted on an informed basis, in good faith, and in the honest belief that the action taken

was in the best interests of the entity. Entire fairness is Delaware‟s most onerous standard

of review. It applies when a plaintiff rebuts one or more of the presumptions of the

business judgment rule. Once entire fairness governs, the defendants must establish “to

the court’s satisfaction that the transaction was the product of both fair dealing and fair

20 price.” Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1163 (Del. 1995) (internal

quotation marks omitted) (emphasis in original).

The former embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed . . . , and how the [necessary] approvals . . . were obtained. The latter aspect of fairness relates to the economic and financial considerations of the proposed [transaction], including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of [the interest in the entity]. However, the 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 v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983) (internal citations omitted).

The plaintiffs proved at trial that Taylor orchestrated for his own benefit the series

of transactions by which the Partnership transferred the Partnership‟s IP, including the

Chess Champions, to Progressive Packaging and then to Triple Line Trading. Through

those transactions, Taylor placed what he believed was the only “essential” asset of the

Partnership, JX 159, in the hands of a friend who was like a brother to him, expecting that

they later would form a new entity in which Taylor would own a majority stake so they

could use the IP for their mutual advantage. Because of Taylor and Klee‟s plan to create a

new entity that would use the IP, Taylor stood on both sides of the loan transaction by

which Progressive Packaging acquired its rights in the IP, then again stood on both sides

of the Collateral Surrender Agreement by which Taylor caused the Partnership to

surrender the IP amicably to Progressive Packaging.

Taylor failed to prove that the Partnership‟s transfer of the IP to Progressive

Packaging was entirely fair. Taylor did not follow any process designed to achieve a fair

price or otherwise ensure the fairness of the transaction. Taylor does not appear to have

21 bargained at arms‟ length with Klee. To the contrary, in lieu of the $500,000 payment

that Taylor and Klee originally discussed, Taylor accepted $28,000. Although there was a

possibility that Klee might provide more money, and although he ultimately advanced

$175,073.75, nothing required that he provide more than the initial $28,000. Taylor again

negotiated backwards, although to a lesser extent, regarding the scope of Klee‟s rights.

Klee originally stated that he was purchasing only the Chess Champions for $28,000.

Taylor countered that the sale would cover all of the Partnership‟s IP. Shortly thereafter,

when Katten advised that Taylor did not have authority to sell the IP, Taylor did not seize

the opportunity to negotiate better terms. He simply accepted the same amount of funds

from Klee, but now in the form of a loan secured by all of the Partnership‟s assets.

The terms of the loan agreement permitted Klee to foreclose in the event the

Partnership became unable to pay its debts as they became due. JX 242, § 8(b). The

Partnership relied on Klee‟s loan to make payroll, and Klee knew the Partnership was not

making payments on its office lease and equipment leases. Klee could thus declare a

default and obtain title to the Partnership‟s IP from the moment was loan was extended.

When Klee declared a default in May 2013, Taylor did not resist or attempt to negotiate

the value of the collateral that Klee took. Klee specified a total loan amount of $136,000

and decided the collateral would offset $100,000 of that amount, and Taylor signed the

Collateral Surrender Agreement agreeing to those terms. By contrast in January 2013,

Taylor and Klee were contemplating Klee investing $300,000 to $500,000 for a 10-15%

stake in the Partnership, implying a value of approximately $3 million for the Partnership

and the Chess Champions, which was the Partnership‟s only valuable asset.

22 The transfer of the Partnership‟s IP to Klee was not entirely fair to the Partnership,

and Taylor breached his duty of loyalty by engaging in the transaction. For similar

reasons, the plaintiffs proved that Klee aided and abetted Taylor‟s breach of the duty of

loyalty. The elements of an aiding and abetting claim are “(1) the existence of a fiduciary

relationship, (2) a breach of the fiduciary's duty, … (3) knowing participation in that

breach by the defendants, and (4) damages proximately caused by the breach.” Malpiede

v. Townson, 780 A.2d 1075, 1096 (Del. 2001) (internal quotations omitted). The analysis

of the breach of fiduciary duty claim against Taylor shows that the first two elements are

met. The third element, knowing participation, “requires that the nonfiduciary act with

the knowledge that the conduct advocated or assisted constitutes . . . a breach.” Triton

Constr. Co., Inc. v. E. Shore Elec. Servs., Inc., 2009 WL 1387115, at *16 (Del. Ch. May

18, 2009). Section 876 of the RESTATEMENT (SECOND) OF TORTS states that a defendant

can be liable for “harm resulting ... from the tortious conduct of another” if the defendant:

(a) does a tortious act in concert with the other or pursuant to a common design with him, or

(b) knows that the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other so to conduct himself, or

(c) gives substantial assistance to the other in accomplishing a tortious result and his own conduct, separately considered, constitutes a breach of duty to the third person.

Id. § 876.

In this case, Klee is jointly liable with Taylor under Section 876(a) for engaging in

a tortious act “in concert with” Taylor and “pursuant to a common design with him.”

23 During an initial call with Taylor‟s personal lawyer at Katten to brainstorm potential

business solutions, Klee and Taylor came up with the scheme of transferring the

Partnership‟s IP to Klee. Later, after they learned during a second call with Katten that

Taylor could not transfer the IP, they decided to structure the transaction as a loan. The

series of transactions that led to the transfer of the Chess Champions from the

Partnership, to Klee, to Preferred Packaging, to Triple Line Trading was part of a

common design by which Taylor and Klee acted in concert to move the Partnership‟s IP

out of the Partnership and into an entity where Taylor and Klee could enjoy its benefits.

Although Klee denied participating in the scheme at trial, the objective evidence

proves otherwise. “[I]n some circumstances, the nonfiduciary‟s actions may be so suspect

as to permit, if proven, an inference of knowledge of an intended breach of trust.” Triton

Constr., 2009 WL 1387115, at *16. Knowledge also can be inferred from the

circumstances. Cf. 11 Del. C. § 307(a) (“The defendant's intention, recklessness,

knowledge or belief at the time of the offense for which the defendant is charged may be

inferred by the jury from the circumstances surrounding the act the defendant is alleged

to have done.”); In re Bailey, 821 A.2d 851, 863 (Del. 2003) (explaining in context of

attorney disciplinary proceeding that “[b]ecause a person is presumed to intend the

natural consequences of his or her actions, we have held that „knowing‟ misconduct may

be inferred from the circumstances.”).

Klee was intimately involved in Taylor‟s plan. Klee reviewed a copy of the

Partnership Agreement and understood that Taylor owed fiduciary duties to the

Partnership. Klee participated in a brainstorming call with Taylor and his counsel where

24 they came up with the idea of having the Partnership sell Klee its IP, then later

participated in a call with Katten after which the transaction was re-structured as a loan.

Klee knew that he had been contemplating an investment of $300,000 to $500,000 in

return for a 10-15% equity stake in the Partnership, yet shortly thereafter he acquired its

only valuable asset in return for a $28,000 loan. Klee assisted Taylor in making his pitch

to Buttonwood, which rested on Taylor‟s ability to use the Chess Champions, and Klee

participated with Taylor in the formation of Triple Line Trading so that the two of them

could benefit from the Partnership‟s IP. The evidence establishes Klee‟s knowledge of

and participation in Taylor‟s self-interested transfer of the Partnership IP. Klee and

Taylor‟s knowledge is imputed to Progressive Packaging and Triple Line Trading,

respectively, as entities that they controlled.

The final requirement for the plaintiffs to obtain a monetary recover on their

claims for breach of fiduciary duty and aiding and abetting is proof of quantifiable

damages that are “logically and reasonably related to the harm or injury for which

compensation is being awarded.” In re J.P. Morgan Chase & Co. S'holder Litig., 906

A.2d 766, 773 (Del. 2006). “The law does not require certainty in the award of damages

where a wrong has been proven and injury established. Responsible estimates that lack

mathematical certainty are permissible so long as the court has a basis to make a

responsible estimate of damages. Speculation is an insufficient basis, however.” Del. Exp.

Shuttle, Inc. v. Older, 2002 WL 31458243, at *15 (Del. Ch. Oct. 23, 2002).

The plaintiffs failed to provide a basis for a responsible estimate of damages

reasonably related to the injuries that the Partnership suffered from Taylor‟s breaches of

25 fiduciary duty, aided and abetted by Klee. The plaintiffs argued at trial that without

Klee‟s involvement, the Partnership would have dissolved, and the Foundation would

have received the Partnership‟s IP in the liquidation. The Foundation then could have

used the Chess Champions to generate trading profits, which the plaintiffs‟ expert

projected would yield investment returns of $2.3 million to $29 million over a two year

period. This damages theory is too speculative to support relief.

First, the plaintiffs claim that they would have invested $2 to $4 million dollars to

trade using the Chess Champions, if the software had been available. The plaintiffs‟ past

behavior undercuts this claim. When Taylor previously sought additional capital from the

Foundation, the plaintiffs refused to provide it. They were entitled not to throw good

money after bad, and it was understandable for them not to want to back Taylor after his

trading strategies had failed repeatedly. This history, however, renders suspect the

plaintiffs‟ contention at trial that they would have provided $2 to $4 million to trade

using the relatively untested Chess Champions programs. It also renders doubtful their

ability to stomach the volatility of the Chess Champions‟ trading results. For purposes of

a damages calculation, this decision will not credit the plaintiffs with an outsized figure

that would have depended on the existence of committed trading capital that they were

unlikely to provide.

Second, the plaintiffs‟ expert derived his anticipated returns from the Chess

Champions‟ backtested results, but he did not establish that his backtesting provided a

sufficiently reliable indicator of future performance on the facts of this case. The wide

range of potential results provides little guidance, essentially inviting the court to pick a

26 number between $2.3 million and $29 million. The actual performance of the algorithms

differed significantly from the backtested results, and except for one exceptional period

from June to November 2011, the algorithms lost money. Klee never made a profit. The

evidence at trial established that the performance of even successful algorithms

deteriorates over time, rendering it speculative that the Chess Champions could have

retained an edge over a two-year period. The defendants‟ expert further undercut the

reliability of the projected returns by explaining that the Chess Champions consisted

primarily of simple arrangements of public domain components, such that it was unlikely

that the Chess Champions could provide a sustained advantage over time.

Because the plaintiffs failed to provide a basis for a responsible estimate of

damages reasonably related to their injuries from the breach of fiduciary duties, this

decision awards nominal damages of $1.00 for the breach of fiduciary duty and aiding

and abetting claims.

B. Other Theories Supporting Monetary Damages

In addition to their claims for breach of fiduciary duty and aiding and abetting, the

plaintiffs sought to recover monetary damages from the defendants under alternative

theories of breach of contract, tortious interference with contract, and civil conspiracy

grounded in the same facts. Assuming the alternative theories have merit, the plaintiffs

failed to prove non-speculative damages, so their recovery is limited to nominal damages.

This decision therefore does not separately analyze the plaintiffs‟ alternative theories.

C. Fraudulent Transfer

27 The plaintiffs claim that the defendants violated DUFTA by engaging in

fraudulent transfers. “DUFTA provides remedies to creditors who are defrauded by

debtors who transfer assets or incur obligations [with, inter alia,] actual intent to hinder,

delay or defraud any creditor of the debtor.” In re Mobilactive Media, LLC, 2013 WL

297950, at *30 (Del. Ch. Jan. 25, 2013) (internal quotation marks omitted). DUFTA

defines a creditor as “a person who has a claim.” 6 Del. C. § 1301(4). Claims include the

“unliquidated, contingent, disputed, unsecured right to payment” in lawsuits such as this

one. Mobilactive, 2013 WL 297950, at *31. DUFTA defines the concept of “transfer”

broadly as “every mode, direct or indirect, absolute or conditional, voluntary or

involuntary, of disposing of or parting with an asset or an interest in an asset, and

includes payment of money, release, lease and creation of a lien or other encumbrance.”

6 Del. C. § 1301(12). The transfer of the Partnership‟s IP to Progressive Packaging

pursuant to the Collateral Surrender Agreement constituted a fraudulent transfer under

Section 1304(a)(1) of DUFTA. Id § 1304(a)(1).

Section 1304(a) identifies two grounds on which a transfer could be fraudulent as

to both present and future creditors. The first ground, set forth in Section 1304(a)(1),

states:

(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:

(1) With actual intent to hinder, delay or defraud any creditor of the debtor . . . .

28 6 Del. C. § 1304(a)(1). Section 1304(b) of DUFTA identifies a non-exclusive list of

factors for a court to consider when evaluating “actual intent.” They include whether:

(1) The transfer or obligation was to an insider;

(2) The debtor retained possession or control of the property transferred after the transfer;

(3) The transfer or obligation was disclosed or concealed;

(4) Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;

(5) The transfer was of substantially all the debtor's assets;

(6) The debtor absconded;

(7) The debtor removed or concealed assets;

(8) The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;

(9) The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;

(10) The transfer occurred shortly before or shortly after a substantial debt was incurred; and

(11) The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.

Id. § 1304(b). “It is not necessary that all of the factors support a finding of actual intent.

Rather, the confluence of several factors in one transaction generally provides conclusive

evidence of an actual intent to defraud.” Mobilactive, 2013 WL 297950, at *31 (footnotes

and internal quotation marks omitted).

The plaintiffs proved at trial that Taylor acted with actual intent to defraud the

Partnership‟s creditors, including the plaintiffs, when he agreed to the $28,000 loan with

29 Klee and subsequently agreed to the Collateral Surrender Agreement. The transfer of the

Partnership‟s IP represented substantially all its assets, and the only assets that Taylor

thought had value. See Id. § 1304(b)(5). At the time of the transfer, the Partnership was

insolvent and unable to pay its debts as they became due. See id. § 1304(b)(9). The value

of the consideration received by the Partnership was only $28,000, representing a fraction

of the $300,000 to $500,000 that Taylor and Klee had been discussing and less than 1%

of the implied value for the Partnership and its IP of approximately $3 million. See id. §

1304(b)(8). Taylor transferred the Partnership‟s essential assets to Klee, having used

precisely that term (“essential”) when referring to the Chess Champions in an email to his

advisors, and Klee later transferred the IP to Triple Line Trading, an entity that Taylor

formed. See id. § 1304(b)(11). After the transfer, Taylor and Smith continued using the

IP. See id. § 1304(b)(2). At the time of the transfer, Taylor was in the midst of this

litigation. See id. § 1304(b)(4). Rather than disclosing the transfer, Taylor concealed it.

See id. § 1304(b)(7). Perhaps most tellingly, Taylor stated in an email to his advisors that

he wanted to prevent the Foundation from gaining access to the Chess Champions

algorithms. JX 159. Taylor acted with actual intent to hinder, delay, and defraud the

Partnership‟s creditors, thereby violating Section 1304(a)(1).

As a defense to the plaintiffs‟ claims, Klee relies on Section 1308(a) of DUFTA,

which states: “A transfer or obligation is not voidable under § 1304(a)(1) of this title

against a person who took in good faith and for a reasonably equivalent value.” 6 Del. C.

§ 1308(a). The plaintiffs proved at trial that Klee did not act in good faith. He conspired

with Taylor to obtain title to the Chess Champions, extract them from a failing entity, and

30 use them through Triple Line Trading. Klee also did not provide reasonable equivalent

value for the Partnership‟s IP. At the time, Klee and Taylor believed (incorrectly) that the

Chess Champions algorithms were valuable. They had contemplated Klee receiving a 10-

15% equity interest in the Partnership in return for an investment of $300,000 to

$500,000, implying a value for the Partnership of approximately $3 million. Klee and

Taylor later contemplated having Klee buy the IP for $500,000. Shortly thereafter, Taylor

granted Klee a security interest in all of the Partnership‟s IP, including the Chess

Champions, in return for a loan of $28,000, plus a non-binding opportunity to provide

more funding. Although Klee eventually provided loan proceeds of $175,073.75, that

amount was not reasonably equivalent to what Klee and Taylor believed the Chess

Champions were worth. Klee cannot rely on a good faith defense.

As a remedy, the plaintiffs seek avoidance of the transfer and an order that the

defendants “hold in constructive trust and turn over to the Partnership all the Partnership

assets, including the Partnership IP and any derivatives.” DUFTA contemplates remedies

that include the “[a]voidance of the transfer or obligation to the extent necessary to

satisfy the creditor's claim.” 6 Del. C. § 1307(a)(1). DUFTA grants a court “broad

latitude” for the court to craft a remedy to “put a creditor in the position she would have

been in had the fraudulent transfer not occurred.” August v. August, 2009 WL 458778, at

*10 (Del. Ch. Feb. 20, 2009) (Strine, V.C.). “Delaware courts utilize the equitable

remedy of imposing a constructive trust when one party, by virtue of fraudulent, unfair or

unconscionable conduct, is enriched at the expense of another and where other legal

31 remedies are inadequate.” Wilm. Sav. Fund Soc., FSB v. Kaczmarczyk, 2007 WL 704937,

at *3 (Del. Ch. Mar. 1, 2007).

As a remedy for Taylor‟s fraudulent transfer of the Partnership‟s IP to Klee,

Taylor and Klee shall hold in a constructive trust for the benefit of the Partnership all of

the Partnership‟s IP, including the Chess Champions, the Philosopher Kings, and any

related software. The so-called Philosopher Kings are encompassed by the constructive

trust because the plaintiffs proved at trial that the Philosopher Kings were versions of the

Chess Champions. Taylor and Klee shall take all steps necessary to restore the

Partnership‟s title to the Partnership IP. All transactions by which Taylor and Klee

transferred the Partnership IP out of the Partnership, and all subsequent transactions by

Taylor and Klee are void. As a consequence of the rescission of these transactions, Klee

has an unsecured claim against the Partnership in the amount of $175,073.75, which is

equitably subordinated so that it is junior to all other creditors of the Partnership but

senior to the Partnership‟s equity investors.

D. Misappropriation of Trade Secrets

Because title to the Partnership‟s IP properly rests with the Partnership, the

plaintiffs assert a claim for misappropriation of trade secrets under DUTSA. To maintain

such a claim, the plaintiffs must show that the Chess Champions qualified as trade secrets

under DUTSA, which defines that term as

information, including a formula, pattern, compilation, program, device, method, technique or process, that:

a. Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means

32 by, other persons who can obtain economic value from its disclosure or use; and

b. Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

6 Del. C. § 2001(4). Even if parts of a process are publicly known, “[t]he combination of

steps into a process” may qualify as a trade secret, “so long as it is a unique process

which is not known in the industry.” Merck & Co. v. SmithKline Beecham Pharm. Co.,

1999 WL 669354, at *15-16 (Del. Ch. Aug. 5, 1999) (internal quotations omitted).

The defendants‟ expert explained convincingly at trial that the Chess Champions

primarily comprised components taken from the public domain. He further explained that

the arrangements of the public domain elements in the Chess Champions were

elementary, even simplistic, and that similar arrangements are widely discussed in

publicly available literature and on the internet. As noted, I approached trial skeptical

about his testimony, because everyone in the case had acted as if the Chess Champions

algorithms were trade secrets with substantial value. In November 2012, as part of a

discovery dispute, Taylor had submitted a sworn declaration stating that all of the

Partnership‟s IP constituted protectable trade secrets, including the Chess Champions

source code, notes relating to the source code‟s development, and manuals relating to the

source code. He testified in deposition that the Chess Champions were trade secrets.

There was also contemporaneous evidence that the Partnership regarded the Chess

Champions as trade secrets: during development, Smith saved all of his work (including

models that were not used in live trading) and testing results to the Partnership‟s

encrypted Subversion repository. Other security measures included (i) not allowing

33 employees to take source code or backtesting results out of the office, (ii) not allowing

employees to email source code, (iii) using encrypted thumb drives to transfer code, and

(iv) requiring confidentiality agreements from employees, consultants, and potential

investors.

The evidence as a whole established that Taylor subjectively believed that the

Chess Champions were trade secrets, treated them as such, and convinced Klee of that

fact. An expert in the field, however, could readily determine that the Chess Champions

were not unique, not sophisticated, and not trade secrets. The defendants retained such an

expert, who analyzed the programs, reached those conclusions, and explained his analysis

persuasively at trial. The defendants proved that the Chess Champions did not qualify as

a trade secret. Relief under DUTSA is therefore unavailable.1

E. Dissolution

The plaintiffs ask that the court order the Partnership dissolved and appoint an

independent liquidating trustee to wind up the Partnership‟s affairs. Section 9.1 of the

Partnership Agreement provides that the Foundation can require that the Partnership be 1 A fair analogy would be if a renter discovered an old document in the attic of his landlord‟s building, concluded that it was a copy of the Declaration of Independence from 1776, but never had its authenticity tested. Assume the renter acted as if the document were authentic, such as by purchasing an expensive, climate-controlled encasement to protect it. Assume the renter convinced a friend of its authenticity, that they recognized that the landlord would have a claim to the document, and that they manufactured an alternative story about the document‟s provenance to support their own claim of title. Now assume that in eventual litigation with the landlord over ownership of the document, a forensic examiner tested the document and established that it was a modern facsimile, cleverly done, but reproducible by anyone with an art school degree, access to period paper and some chemicals, and the ability to follow instructions available on the internet. For the renter and his friend to have believed sincerely that the facsimile was the genuine article, and to have acted consistently with their convictions, would not require the court to find that the facsimile was, in fact, a copy of the Declaration of Independence from 1776. The same is true here.

34 dissolved if either Taylor or the General Partner commits a breach of fiduciary duty. This

decision has found that such a breach occurred, making dissolution appropriate. In

addition, the plaintiffs have shown good cause for appointing of a liquidating trustee

under 6 Del. C. § 17-803(a). The parties shall confer and attempt to reach agreement on a

liquidating trustee. If they are unable to do so, the plaintiffs shall submit three names to

the court.

As part of the liquidation process, the trustee shall determine what expenses

should be allocated to WaterColor‟s capital account. The plaintiffs proved at trial that

Taylor did not use reasonable discretion to allocate expenses to WaterColor‟s capital

account and that the capital account was burdened with excessive allocations. Rather than

making a good faith allocation, Taylor allocated 100% of a number of categories to

WaterColor, including expenses incurred before WaterColor provided trading capital to

the Partnership. The liquidating trustee will address the allocation of expenses to

WaterColor‟s capital account without giving any deference to Taylor‟s allocation.

III. CONCLUSION

The Partnership is awarded nominal damages of $1. The transfer of the

Partnership IP is rescinded, and Taylor and Klee shall take all steps necessary to return

the Partnership IP to the Partnership. Pending the return of the Partnership IP, Taylor and

Klee hold the Partnership IP in a constructive trust for the benefit of the Partnership. The

Partnership is dissolved. The plaintiffs are awarded costs as prevailing parties. Counsel

shall submit a form of order implementing the rulings in this decision.