Aveta Inc. v. Bengoa

• Decision Date: 24 December 2009
• Docket Number: C.A. No. 3598-VCL.
• Citation: 986 A.2d 1166
• Parties: AVETA INC., MMM Holdings, Inc., and Preferred Medicare Choice, Inc., Plaintiffs, v. Roberto L. BENGOA, Defendant.
• Court: Court of Chancery of Delaware

986 A.2d 1166

AVETA INC., MMM Holdings, Inc., and Preferred Medicare Choice, Inc., Plaintiffs, v. Roberto L. BENGOA, Defendant.

C.A. No. 3598-VCL.

Court of Chancery of Delaware.

Submitted: November 30, 2009.

Decided: December 24, 2009.

Richard I. Horwitz, Esquire, Brian C. Ralston, Esquire, Berton W. Ashman, Esquire, Potter Anderson & Corroon, LLP, Wilmington, DE; Andrew J. Frackman, Esquire, Kenneth Murata, Esquire, Peter C. Herrick, Esquire, O'Melveny & Myers, LLP, New York City, for Plaintiffs Aveta Inc., MMM Holdings, Inc. and Preferred Medicare Choice, Inc.

Michael J. Maimone, Esquire, Joseph B. Cicero, Esquire, Gregory E. Stuhlman, Esquire, Greenberg Traurig, LLP, Wilmington, DE, for Defendant Roberto L. Bengoa.

MEMORANDUM OPINION

LASTER, Vice Chancellor.

This opinion addresses whether defendant Roberto L. Bengoa should be held in contempt for failing to arbitrate as required by this Court's letter opinion and contemporaneously entered final order. See Aveta Inc. v. Bengoa, 2008 WL 5255818 (Del.Ch. Dec.11, 2008); Aveta Inc. v. Bengoa, C.A. No. 3598-VCL (Del. Ch. Dec. 11, 2008) (ORDER) (together, the "Merits Ruling"). Bengoa argues that I should not hold him in contempt because of substantive issues that could have been raised as affirmative defenses or counterclaims in the proceedings that led to the Merits Ruling. Applying the doctrine of res judicata, I conclude that the Merits Ruling finally resolved those issues. I reject Bengoa's other arguments and conclude that he is in contempt of the Merits Ruling.

I therefore impose sanctions on Bengoa designed to coerce compliance with the Merits Ruling and remedy the harm he caused. If Bengoa has not complied with the Merits Ruling within thirty days of this decision, then I will fine him $20,000 per day until the arbitration commences. Bengoa will bear all of the plaintiffs' attorneys' fees and expenses that were caused by his contempt, both for this proceeding and for related proceedings in the Commonwealth of Puerto Rico. In the arbitration, if the reviewing accountant determines that it needs counsel in light of the increased litigation risk resulting from Bengoa's machinations, Bengoa will bear 100% of that cost. Finally, as to a specific issue where Bengoa openly defied the Merits Ruling by refusing to arbitrate while purporting to retain his right to litigate, I hold that Bengoa has forfeited his right to dispute the calculations plaintiffs provided, and I enter judgment on that issue against Bengoa. To protect the arbitration proceeding and this Court's jurisdiction, I enjoin Bengoa, pending the entry of a final order resulting from the arbitration, from taking any action to interfere with the arbitration and from litigating any issue relating to it other than in this Court.

I. FACTUAL BACKGROUND

The factual record begins with the facts determined by the Merits Ruling, both explicitly and implicitly. It also includes a large number of exhibits submitted with the briefing on plaintiffs' motion to enforce the Merits Ruling (the "Motion to Enforce"), on the potential renewal of a temporary restraining order that I entered against Bengoa on November 12, 2009 (the "TRO"), and in response to my ruling requiring Bengoa to show cause why he should not be held in contempt (the "Rule to Show Cause").

During a hearing on November 30, 2009, the parties agreed that I could treat the Rule to Show Cause as submitted for decision on a written record. I inquired whether there were any objections to the completeness of the record or the authenticity of any document. With one exception each, the parties had none. Bengoa asked me to conduct a hearing where he could testify live if I were to consider criminal contempt sanctions. As I stated during the November 30 hearing, I consider only civil contempt. Aveta noted that it disputes whether Bengoa executed the Total Proposal, described below, when he claims. Aveta agreed that for purposes of the Rule to Show Cause, I can assume that Bengoa signed the Total Proposal when he says he did, on December 28, 2006.

In light of the parties' agreement, I am entitled to make factual findings as if after trial. I am assisted by a factual record that is largely undisputed.

A. The Parties

Plaintiff Aveta Inc. is a health insurance company that specializes in building provider networks and management service organizations. Plaintiff MMM Holdings, Inc. is a holding company through which Aveta owns business interests in Puerto Rico. Plaintiff Preferred Medicare Choice, Inc. is a corporation organized under the laws of Puerto Rico. It operates a provider network of doctors and other health professionals.

On August 14, 2006, Aveta acquired Preferred Medicare Choice. The transaction was governed by an Agreement and Plan of Merger and Stock Purchase dated as of May 4, 2006, by and among MMM Holdings, Inc., PMC Holdings, Inc., Preferred Medicare Choice, Inc., BER Health Partners Group, Inc., and certain stockholders of Preferred Medicare Choice and BER (the "Purchase Agreement," cited as "PA"). The Purchase Agreement is the central document in the case.

Defendant Bengoa is a doctor who was a principal of Preferred Medical Choice and one of its largest shareholders. Before being acquired by Aveta, Preferred Medical Choice was privately held, and many (if not all) of Preferred Medical Choice's shareholders were doctors and other health professionals who made up its provider network. The shareholders other than Bengoa are not parties to this action, but they have played a meaningful role in it. As I will discuss below, the record convinces me that Bengoa and the other shareholders have worked together in an effort to evade the Merits Ruling.

B. The Capital Structure Of Preferred Medical Choice And The Terms Of The Purchase Agreement

Before being acquired by Aveta, Preferred Medical Choice had two classes of shares issued and outstanding. The Class A shares were owned by BER, which in turn was owned by Bengoa and three other individuals. The Purchase Agreement refers to these four individuals as the "Principal Shareholders." Bengoa and at least one other Principal Shareholder also owned Class B shares. The remaining Class B shares were owned by over 100 individuals who did not sign the Purchase Agreement (collectively, the "Other Shareholders"). As represented in the Purchase Agreement, BER and the two Principal Shareholders who also owned Class B shares collectively owned at least 51% of the issued and outstanding capital stock of Preferred Medical Choice. I refer to the Principal Shareholders and the Other Shareholders together as the "Shareholders."

Pursuant to the Purchase Agreement, MMM purchased all of the shares of BER from the Principal Shareholders in return for 60.93% of the total "Transaction Consideration," a concept defined in the Purchase Agreement. As I will discuss in the next section, the Transaction Consideration included both cash to be paid at closing and the right to subsequent payments of "Additional Consideration," another defined term.

At the same time it acquired all of the shares of BER from the Principal Shareholders, MMM contributed to BER all of the common stock of PMC Holdings, Inc. PMC Holdings, Inc. thus became a wholly owned subsidiary of BER, which at that point was wholly owned by MMM.

MMM, BER, and the Principal Shareholders then approved the merger of PMH Holdings, Inc., with and into Preferred Medical Choice. In the merger, the Class A shares held by BER (which at that point was wholly owned by MMM) were cancelled. The Class B shares held by Other Shareholders were converted into the right to receive 39.07% of the Transaction Consideration. The shares of PMH Holdings were converted into shares of Preferred Medical Choice.

Aveta thus emerged with MMM owning 100% of BER, which in turn owned 100% of Preferred Medical Choice. The Principal Shareholders (who were the former owners of BER) emerged with a right to 60.93% of the Transaction Consideration. The Other Shareholders emerged with a right to 39.07% of the Transaction Consideration.

C. The Calculation Of The Transaction Consideration And The Related Arbitration Mechanism

Under Section 2.1 of the Purchase Agreement, the Transaction Consideration had two components: (i) $157 million in cash to be paid at closing, plus (ii) Additional Consideration. Under Section 2.2, the Additional Consideration likewise had two components. First, subject to certain contractually designated payments and adjustments, the Shareholders would receive "fifty percent (50%) of the amount remaining on the Closing Date Balance Sheet as Net Working Capital" (the "Post-Closing Adjustment Payment"). Second, the Shareholders could receive earn out payments for 2006 and 2007 (the "Earn Out Payments") of up to $68 million (the "Earn Out Target"), depending on how the business performed in those years.

1. The Earn Out Mechanism

Section 2.2(a) of the Purchase Agreement established a formula for calculating the 2006 Earn Out Payment. If Preferred Medical Choice did not achieve 2006 EBITDA exceeding $161 million, then no earn out was due for 2006. If Preferred Medical Choice achieved 2006 EBITDA of $215 million or more, then the Shareholders would receive the full Earn Out Target. If Preferred Medical Choice achieved 2006 EBITDA greater than $161 million but less than $215 million, then the Shareholders would receive a proportionate amount of the Earn Out Target. In describing the 2006 Earn Out in this fashion, I have identified the results of the formula set out in Section 2.2(a). That provision establishes the relationship mathematically by defining the 2006 Earn Out Payment (in the event 2006 EBITDA exceeds $161 million) as "an amount equal to the lesser of (y) the Earn Out Target or (z) the Earn Out Target multiplied by a fraction, the numerator of which equals the amount by which the Buyer's 2006 EBITDA exceeds one hundred sixty-one million dollars ($161,000,000)...