Daugherty v. Highland Capital Management ( 2018 )

COURT OF CHANCERY
OF THE
SAM GLASSCOCK III STATE OF DELAWARE COURT OF CHANCERY COURTHOUSE
VICE CHANCELLOR 34 THE CIRCLE
GEORGETOWN, DELAWARE 19947
Date Submitted: December 14, 2017
Date Decided: January 16, 2018
Thomas A. Uebler, Esquire Michael F. Bonkowski, Esquire
Kerry M. Porter, Esquire Nicholas J. Brannick, Esquire
Cooch and Taylor, P.A. Cole Schotz P.C.
3711 Kennett Pike, Suite 100 500 Delaware Avenue, Suite 1410
Greenville, DE 19807 Wilmington, DE 19801
Re: Daugherty v. Highland Capital Management, Civil Action No.
2017-0488-SG
Dear Counsel:
This matter involves purported breaches of fiduciary duty and, via Count I of
the Complaint, alleges a fraudulent transfer of funds to escape a Texas court
judgment. Before me is a Motion to Dismiss those allegations. This Letter Opinion
addresses only the Motion to Dismiss the fraudulent transfer claim in Count I. I have
asked for supplemental briefing regarding the claims raised in the other counts of
the Complaint, and will address the Motion to Dismiss those claims later, in the light
of that briefing.
Briefly, according to Count I of the Complaint, the Plaintiff brought an action
against various Defendants in Texas, alleging that they had purloined his interest in
an entity, Defendant HERA. Thereafter, the Defendants caused another entity
Defendant to deposit, perhaps as a “litigation reserve,” an amount in escrow
sufficient to make the Plaintiff whole, should he prevail. HERA then represented to
the Texas Court that the funds in escrow belonged to it, conditioned on a final
judgment against HERA; should the Plaintiff obtain a verdict, the amount in escrow
would, through HERA, then be available to the Plaintiff. Subsequently, the Plaintiff
obtained a final judgment against HERA, but immediately thereafter, the Defendants
caused the escrow agent to resign and return the funds to the other Defendants,
leaving the Plaintiff unable to collect the judgment. Again, Count I alleges that the
transfer of these funds from escrow, without value to HERA, was a fraudulent
transfer. The Motion to Dismiss that claim is denied in part. My reasoning follows.
The Defendants have moved to dismiss the Complaint under Court of
Chancery Rule 12(b)(6). When reviewing such a motion,
(i) all well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are well-pleaded if they give the opposing party
notice of the claim; (iii) the Court must draw all reasonable inferences
in favor of the non-moving party; and (iv) dismissal is inappropriate
unless the plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of proof.1
I need not, however, “accept conclusory allegations unsupported by specific facts or
. . . draw unreasonable inferences in favor of the non-moving party.”2
1
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (footnotes and internal quotation
marks omitted).
2
Price v. E.I. DuPont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011).
2
This litigation, and the precedent Texas litigation, are complicated; what
follow are only those facts alleged as necessary to understand my decision on the
instant motion. Plaintiff Patrick Daugherty filed the Complaint on July 5, 2017.
Defendants Highland Capital Management, L.P. (“Highland”), Highland Employee
Retention Assets LLC (“HERA”), Highland ERA Management LLC (“HERA
Management”), and James Dondero (collectively the “Defendants”) moved to
dismiss the Complaint on August 23, 2017. Daugherty was a partner and senior
executive of Highland from 1998 until 2011, after which the parties engaged in
litigation.3 Highland is a registered investment advisor with nearly $15 billion of
assets under management.4 As part of his employment, Daugherty was an equity
holder in HERA.5
According to the Plaintiff, a jury in Texas awarded him $2.6 million from
HERA, with pre- and post-judgment interest, “as compensation for the diminution
of value of Daugherty’s units as a result of [HERA’s] breach of the implied covenant
of good faith and fair dealing.”6 The Texas court also struck language from the
proposed judgment that would have extinguished the Plaintiff’s interest in HERA.7
HERA has not paid its judgment.8 The Plaintiff alleges that Dondero, Highland, and
3
Verified Compl. (“Compl.”) ¶ 10.
4
Id. ¶ 11.
5
Id. ¶¶ 18–19.
6
Id. ¶¶ 1–3.
7
Id. ¶ 4.
8
Id. ¶¶ 47–48.
3
HERA Management caused HERA to “fraudulently or otherwise wrongfully transfer
its assets [through an escrow] to [Highland], which purportedly left [HERA]
insolvent.”9 The Plaintiff seeks to have the Defendants return the transferred assets
to HERA and satisfy his Texas judgment.10
Under HERA’s operating agreement (the “Agreement”), any distribution from
HERA to a member litigating against HERA or Highland may be “suspended and
held in escrow by [HERA] until the final, non-appealable resolution of the
Dispute.”11 The Plaintiff alleges that Highland placed Daugherty’s HERA interests
of approximately $3.1 million into escrow with Abrams & Bayliss LLP
(“Abrams”).12 The Plaintiff alleges that, under both the Agreement and according
to Dondero’s testimony, the escrow should have been transferred to Daugherty in
satisfaction of any final judgment in favor of Daugherty in Texas.13 On December
1, 2016, an appellate court in Texas affirmed the trial court judgment.14 On
December 2, 2016, the Plaintiff contends that Abrams resigned as escrow agent and
transferred $3.1 million in Escrow assets to Highland.15 The Complaint incorporates
a letter from Abrams to the Plaintiff explaining that Highland, which had placed the
9
Id. ¶¶ 4–5, 24, 41–48.
10
Id. ¶ 6.
11
Id. ¶ 24.
12
Id. ¶¶ 41–43.
13
Id.
14
Id. ¶ 49.
15
Id. ¶¶ 51–52.
4
funds in escrow and for which Abrams acted as agent, had directed Abrams to return
the funds to Highland, which it did.16 The Complaint alleges in conclusory fashion
that all Defendants “caused” the funds to be returned to Highland, but the facts
indicate that only Highland effected the transfer.17 Subsequent to the transfer,
HERA filed an affidavit with the Texas court averring that it is insolvent.18
The Defendants first argue that Count I is barred by analogy to the four-year
statute of limitations in 6 Del. C. § 1309, because this claim arose when the assets
in question were transferred from HERA to Highland on April 30, 2013.19 The claim
in Count 1, however, accrued at the time of the transfer of funds from escrow in
2016, and laches by analogy to the statute is no bar. The Defendants also contend
that Count I is “barred by the doctrines of collateral estoppel and/or res judicata” due
to the Texas rulings.20 I have reserved consideration of the issue preclusion defenses
pending supplemental briefing. I now turn to the Defendants’ argument that the
Plaintiff failed to properly plead a fraudulent transfer claim,21 and Dondero’s
16
Id. ¶ 52.
17
Id. ¶¶ 74–80.
18
Id. ¶ 48.
19
Mot. to Dismiss 2; Opening Br. in Supp. of Mot. to Dismiss 30; Reply Br. in Supp. of Mot. to
Dismiss 3.
20
Mot. to Dismiss 2; Opening Br. in Supp. of Mot. to Dismiss 18.
21
Reply Br. in Supp. of Mot. to Dismiss 5–7.
5
assertion that Count I fails as to him because the Plaintiff “has not sufficiently pled
allegations supporting a finding of alter ego as required.”22
I find that there is a factual issue about whether HERA had a cognizable
interest in the amount in escrow. At this stage, drawing all reasonable inferences in
favor of the Plaintiff, I find that it is reasonably conceivable that HERA owned the
amount in escrow once the Plaintiff’s judgment against HERA became final; and
that Highland caused HERA’s escrowed asset to be transferred to Highland without
value, leaving HERA insolvent, to defeat the Plaintiff as a creditor of HERA. This
states a claim of fraudulent transfer.23 The Motion to Dismiss Count I for failure to
state a claim is denied.
Separately, Dondero seeks to be dismissed with regard to Count I, noting that
all non-conclusory allegations indicate that the transfer of the escrow was
accomplished by a corporate entity, Highland. The Plaintiff argues that, based on
the facts pled, Highland ERA Management was a sham entity created or maintained
to further a fraud, and that Dondero acted as Highland ERA Management’s alter ago.
The problem with this assertion is that nothing in Count I alleges that Higland ERA
Management took any act with respect to removing the escrowed amount from
HERA. The facts only reflect that Highland placed the funds in escrow, and that
22
Mot. to Dismiss 2; Opening Br. in Supp. of Mot. to Dismiss 35; Reply Br. in Supp. of Mot. to
Dismiss 8–9.
23
6 Del. C. §§ 1304–05.
6
Highland directed Abrams to return them. Assuming that the Plaintiff has
sufficiently alleged that Highland ERA Management is the alter ego of Dondero, it
nonetheless has failed to allege facts indicating liability on the part of that entity for
fraudulent transfer. Accordingly, Dondero’s Motion to be dismissed from Count I
is granted.
At this pleading stage, I assume for purposes of this motion that HERA had a
cognizable interest in the amount in escrow, that the interest was subject to a claim
by Mr. Daugherty, and that once that claim was reduced to a judgment, the amount
was transferred to insiders without value, leaving HERA insolvent, in a way that
implicates the statute on fraudulent transfers.24 Of course, these are factual
allegations subject to proof in this litigation.
For those reasons, the Motion to Dismiss is denied as to Count I, but granted
as to Dondero. To the extent the foregoing requires an Order to take effect, IT IS
SO ORDERED.
Sincerely,
/s/ Sam Glasscock III
Sam Glasscock III
24
Id. §§ 1304–05, 1309.
7