DG BF, LLC v. Ray

• Decision Date: 23 May 2022
• Docket Number: Civil Action 2020-0459-MTZ
• Parties: DG BF, LLC, et al. v. Michael Ray, et al.,
• Court: Court of Chancery of Delaware

DG BF, LLC, et al. v. Michael Ray, et al.,

Civil Action No. 2020-0459-MTZ

Court of Chancery of Delaware

May 23, 2022

Andrew H. Sauder, Esquire Dailey LLP

Sean A. Meluney, Esquire Benesch, Friedlander, Coplan &amp Aronoff LLP

David B. Anthony, Esquire Berger Harris LLP

Dear Counsel, I write to address the Defendants' pending Application for Attorneys' Fees and Costs (the "Application").^[1] The Application seeks fees over and above those that were already shifted for discovery misconduct, citing the bad faith exception to the American Rule and a new fee-shifting provision in the governing operating agreement. Plaintiffs argue that the additional fees sought are unreasonable, and that they did not bring or litigate this matter in bad faith. Plaintiffs' litigation misconduct already resulted in dismissal of their claims, as I detailed in an order dated November 19, 2021 (the "Order").^[2] This letter presumes familiarity with the Order's series of unfortunate events and its defined terms. For the additional reasons I will explain Defendants' Application is granted.

I. Plaintiffs Litigated In Bad Faith.

My analysis begins where the Order left off. That Order explained that while other sanctions had been levied against Plaintiffs for their misconduct, they had failed to remedy and stop Plaintiffs' contempt, so no sanction other than dismissal would suffice.^[3] It is difficult for me to discern any space between litigation so contumacious that only the ultimate sanction of dismissal will have any effect, and bad faith litigation. If there is any such space, this case does not fall within it. I conclude Plaintiffs litigated in bad faith.

Under the American Rule, litigants are expected to bear their own costs of litigation absent some special circumstances that warrant a shifting of attorneys' fees, which, in equity, may be awarded at the discretion of the court. The bad faith exception to the American Rule applies in cases where the court finds litigation to have been brought in bad faith or finds that a party conducted the litigation process itself in bad faith, thereby unjustifiably increasing the costs of litigation. There is no single standard of bad faith that warrants an award of attorneys' fees in such situations; rather, bad faith is assessed on the basis of the facts presented in the case. Courts have found bad faith conduct where parties have unnecessarily prolonged or delayed litigation, falsified records, or knowingly asserted frivolous claims. Specific behavior that has been found to constitute bad faith in litigation includes misleading the court, altering testimony, or changing position on an issue. The bad faith exception is not lightly invoked. The party seeking a fee award bears the stringent evidentiary burden of producing "clear evidence" of bad-faith conduct.^[4]

Defendants have produced such evidence. First, Plaintiffs "unnecessarily prolonged [and] delayed litigation."^[5] By way of example:

• "Rather than focusing on discovery, Plaintiffs engaged in motion practice, filing a motion to appoint a receiver over AGR (which Plaintiffs withdrew after Defendants moved to strike it) and two motions to extend the scheduling order (which Defendants briefed and which were denied for failure to establish excusable neglect). Plaintiffs also took time to amend their nearly identical complaint in a parallel action pending before the Supreme Court of the State of New York."^[6]

• Plaintiffs opposed a motion to compel "without offering any substantive grounds for their opposition."^[7]

• "Plaintiffs' forwarding counsel was extremely obstructive at the Court of Chancery Rule 30(b)(6) deposition of Menashe as DG BF's representative on document retention. Defendants were again forced to resort to motion practice, and were awarded a second deposition on August 17."^[8]

• After the Court ordered Plaintiffs to image and search Demeter's server, Demeter (which Menashe controls) filed a motion to quash production of the server image.^[9] "And again, rather than attending to their own obligations, Plaintiffs took countermeasures, demanding on August 24 that Plaintiffs image AGR's server 'for all financial records going back to when [Menashe] invested in the company.'"^[10]

• Plaintiffs' utter failure to properly collect, produce, and log discovery, in knowing and brash contempt of orders as detailed in the Order, also contributed substantially to the well-over thirty motions or letter applications filed in this case over eighteen months.^[11] Second, Menashe made false statements on the record.

• "Menashe used text messaging to conduct AGR business, but continued his practice of actively deleting his text messages through the pendency of this litigation. Menashe testified that he did not text about business matters, but that testimony was undermined by texts Defendants produced; when confronted, Menashe then testified he deleted all such messages."^[12]

• Menashe also represented in briefing, attempting to defend his litigation misconduct, that he had never been involved in litigation before.^[13] This was demonstrably false.^[14]

Finally, Plaintiffs "knowingly asserted frivolous claims," most significantly a claim that Defendants fraudulently induced Plaintiffs into investing in AGR by presenting false financials that were later revised downward.^[15] Plaintiffs' litigation conduct regarding their anchoring fraud claim betrays that they knew that claim was frivolous all along.^[16]

• Plaintiffs "refused to answer several core questions, including to identify the due diligence they performed relating to DG BF's investment in AGR, and to identify the material omissions Plaintiffs contend were concealed and the financial statements or projections that Plaintiffs believed included misrepresentations."^[17]

• "Plaintiffs' failure to answer written discovery substantially weakened that [fraud] claim, as they declined to identify any omissions or misrepresentations in written discovery and so were precluded from offering any at trial."^[18]

• "Plaintiffs have filed a claim for fraudulent inducement in New York State based on these same facts, telling that court that New York state and federal courts have exclusive jurisdiction over any disputes arising out of, or relating to the Purchase Agreement, including, without limitation, Plaintiff's claims that Defendants fraudulently induced it to enter into the Purchase Agreement by which it invested in AGR. Plaintiffs withdrew all claims relating to that Purchase Agreement from this case."^[19]

And after the Court ordered Plaintiffs' repositories to be turned over to Defendants for review by Defendants' counsel, Defendants' counsel discovered a June 2020 email that revealed Menashe was never concerned that the financials he saw fraudulently induced his investment.^[20] Menashe forwarded an email he sent his counsel to a friend; in the underlying email, Menashe gave his counsel his thoughts on a draft complaint:

• The issue is NOT that financials were revised downward - so avoid mentioning $s and %s - the issue is they were not transparent, did not disclose Roach issue, and extended Series E to a closing date of Oct 31 when they knew company was insolvent (per BOD mtg 34 days later)

• Need to focus on the key issues (mis-management, potential fraud, covering up actions, no governance etc,

• Lastly, there is no mention of my demands I have presenting since mid February including now repricing Series D and getting Vlad completely out of company including Board, and Cary on Board, indemnification to me for financials, etc… my list. Instead it says I want my $5m back which is fine, but think we should list demands instead^[21]

Menashe's focus on corporate governance over fraudulent inducement is consistent with Menashe's goal in May 2020, as related by his friend who introduced Menashe to his counsel:

As I see it the Company has not done what it should have done to protect his investment and, if appropriate, could use the Fox review and potential "shot over the bow" to ensure his ownership and rights are protected………. and begin serious discussions.^[22]

Defendants' counsel also discovered a text message, which Menashe had deleted, in which he proposed leading the next round of financing-after the projections were revised.^[23] Menashe's "shot across the bow" comprised a fraud claim that he knew was a blank. I conclude Menashe knowingly and in bad faith pressed litigation based on a frivolous claim.

I conclude that fee-shifting is warranted under the bad faith exception.^[24] I do not reach whether the fee-shifting provision in the Company's operating agreement, introduced after this litigation began, can compel fee-shifting in this case.

II. The Fees Defendants Seek Are Reasonable.

Defendants' Application, supported by the necessary Court of Chancery Rule 88 affidavits, requests over two million dollars in fees and expenses incurred by counsel for the individual defendants and separate counsel for the nominal defendant.^[25] Of that amount, $608, 666.88 is tied to previous fee awards and fees on fees for the Application;^[26] the remainder is requested under today's bad faith award.

"Delaware law dictates that, in fee shifting cases, a judge determine[s] whether the fees requested are reasonable."^[27] The Court "has broad discretion in determining the amount of fees and expenses to award."^[28] The Court reviews a fee application pursuant to the factors set forth in Rule 1.5(a) of the Delaware Lawyers' Rules of Professional Conduct:

(1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;

(2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude

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