Glenn Starkman and Kenneth Paul IHME v. Christopher O'Rourke and Soteria, LLC ( 2020 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
GLENN STARKMAN and KENNETH PAUL
IHME, individually and derivatively on behalf of
SOTERIA, LLC,
Plaintiffs/Counterclaim Defendants,
V. C.A. No. 2018-0901-KSJM
Defendant/Counterclaim Plaintiff,
and
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CHRISTOPHER O’ROURKE, )
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SOTERIA, LLC, )
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Nominal Defendant.
ORDER RESOLVING CROSS-MOTIONS
TO ENFORCE SETTLEMENT TERM SHEET
1. Glenn Starkman and Kenneth Paul Ihme (“Plaintiffs”) filed this action
asserting claims for declaratory relief, breach of contract, and breach of fiduciary
duty against Christopher O’Rourke (“Defendant”), the former CEO of nominal
defendant Soteria, LLC (the “Company”. Plaintiffs alleged that Defendant made
multiple unauthorized and unreasonable personal expenditures using Company
funds. Defendant counterclaimed for declaratory relief, an accounting of the
Company, breach of fiduciary duty, conversion, and defamation.
2. The parties submitted their dispute to mediation pursuant to Court of
Chancery Rule 174.! That mediation took place on July 9, 2019, before a member
of this Court. After a long day of negotiations, the parties agreed to settlement terms,
which were reduced to writing in a document titled “Settlement Term Sheet” (the
“Term Sheet”).
3. The following prefatory language appears at the top of the Term Sheet:
“The undersigned Parties through counsel agree to settle the action . . . on the
following terms.”? The “following terms” are then listed in the form of a detailed
two-column chart. The left column identifies thirteen categories, and the right
column details the terms agreed upon for each of those categories.
4, In the first row of the chart regarding the “Execution of a Formal
Settlement Agreement,” the parties agreed as follows:
Term sheet is binding upon the Parties pending the
execution of a formal settlement agreement on or before
July 31, 2019. The parties through their counsel, shall
draft such other documents as are consistent with this
Term Sheet.’
'C.A. No. 2018-0901-KSJM, Docket (“Dkt.”) 40, Pls.’ Mot. to Enforce Settlement Term
Sheet (“Pls.” Mot.”) § 2; Dkt. 43, Christopher O’Rourke’s Opp’n to Pls.’ Mot. to Enforce
Settlement Term Sheet and Cross-Mot. to Enforce Settlement Term Sheet and for
Attorneys’ Fees (“Def.’s Opp’n”) § 6.
* Pls.’ Mot. Ex. 1.
3 Jd. at 1 (emphasis added).
“ Id. (emphasis added).
5. The parties began performing under the Term Sheet shortly after it was
executed. Plaintiffs deposited the first installment payment required by the Term
Sheet into an escrow account with Defendant’s counsel.’ Plaintiffs also allowed
Defendant to retrieve personal items from the Company’s office as required by the
Term Sheet.® Defendant gave the Company three pieces of intellectual property the
Company used in its business, which were licensed and maintained under
Defendant’s name.’
6. In the course of negotiating a formal settlement agreement, the parties
reached an impasse. Their dispute centered on several of the Company’s tax filings,
which Defendant believes incorrectly attribute the allegedly misappropriated funds
to Defendant as income. Defendant maintains that Plaintiffs agreed to correct those
tax filings during mediation in exchange for a certification that Defendant did not
misappropriate Company funds. Plaintiffs deny agreeing to this term, which is not
expressly memorialized in the Term Sheet.
q. When Defendant refused to execute a formal settlement agreement,
Plaintiffs filed a motion to enforce the Term Sheet on August 23, 2019. Defendant
filed his opposition to Plaintiffs’ motion on September 6, 2019. Contemporaneously
> Pls.’ Mot. 4 9.
614.48.
’Def.’s Opp’n ¥ 8.
with his opposition, Defendant filed a cross-motion to enforce the Term Sheet and a
motion for attorneys’ fees. The parties fully briefed the motions, and the Court heard
oral arguments on October 2, 2019. At that hearing, the Court requested
supplemental briefing, which the parties completed on October 25, 2019.
8. Delaware courts follow the objective theory of contracts, giving words
“their plain meaning unless it appears that the parties intended a special meaning.”®
In practice, the objective theory of contracts requires a court to “give priority to the
parties’ intentions as reflected in the four corners of the agreement, construing the
agreement as a whole and giving effect to all its provisions.”’ The “true test is not
what the parties to the contract intended it to mean, but what a reasonable person in
the position of the parties would have thought it meant.”!°
9. The plain language of the Term Sheet reflects that the parties viewed it
as a “binding” agreement containing the terms upon which the parties “agree[d] to
® Allen v. Encore Energy P’rs, L.P., 72 A.3d 93, 104 (Del. 2013) (citing AT & T Corp. v.
Lillis, 953 A.2d 241, 252 (Del. 2008)); see also Salamone v. Gorman, 106 A.3d 354, 367--
68 (Del. 2014) (“A contract’s construction should be that which would be understood by
an objective, reasonable third party.” (quoting Osborn ex rel. Osborn v. Kemp, 991 A.2d
1153, 1159 (Del. 2010))).
” In re Viking Pump, Inc., 148 A.3d 633, 648 (Del. 2016) (citing Salamone, 106 A.3d at
368).
'° Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728, 739 (Del. 2006) (quoting
Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del.
1992)).
settle.”!! Although the Term Sheet is fairly detailed, it makes no mention of
correcting the Company’s tax filings.
10. The context in which the Term Sheet was negotiated —as part of a Rule
174 mediation—supports a conclusion that the parties intended the Term Sheet to
include all material terms of their agreement. Rule 174 is incorporated by reference
into every agreement to mediate before a member of this Court.!? Rule 174 provides
that “[t]he mediator and any participant in the mediation may not be compelled to
testify in any judicial or administrative proceeding concerning any matter relating to
the mediation.”'? And “[a]ny communications made during or in connection with
the mediation that relate to the controversy being mediated, whether with the
mediator or another participant in the mediation, are not subject to discovery.” !4
'l Term Sheet at 1.
2 Ct. Ch. R. 174(e).
3 Td. 174(h)(2).
'4 Id. 174(h)(3) (emphases added). The strict confidentiality provisions of Rule 174 serve
well-established policy rationales under Delaware law. When serving as Vice Chancellor,
former Chief Justice Strine emphasized Delaware’s “recognition that confidentiality is vital
to the effectiveness of mediation.” Princeton Co. v. Vergano, 883 A.2d 44, 62 (Del. Ch.
2005). As the former Chief Justice explained, the chief rationale underlying that
recognition is complete candor amongst the parties: “By its nature, mediation is a process
that aims towards voluntary settlements and not compulsory outcomes. The process works
best when parties speak with complete candor, acknowledge weaknesses, and seek
common ground, without fear that . . . their words will be later used against them in the
more traditionally adversarial litigation process.” Jd. “Frank exchange can be achieved
only if the participants know that what is said in the mediation will not be used to their
detriment through later court proceedings and other adjudicatory processes.” Jd. at 63; see
Wilm. Hospitality, L.L.C. v. New Castle Cty. ex rel. New Castle Cty. Dep’t of Land Use,
788 A.2d 536, 541 (Del. Ch. 2001) (“Without the expectation of confidentiality, parties
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11. In view of the parties’ mutually expressed intent to enter into a binding
agreement as evidenced in the plain language of the Term Sheet, and the parties’
agreement to mediate with the understanding that mediation communications could
not be used to supply terms of their settlement, a reasonable person in the position
of the parties would have thought that the Term Sheet addressed all terms considered
material and essential to the settlement.
12. To avoid this conclusion, Defendant first argues that because the tax
filings created liabilities to Defendant resulting from Plaintiffs’ misappropriation
claim, and because Plaintiffs are agreeing to settle that claim, amending the tax
filings flows from the agreement to settle.'!? Defendant then logically extends this
point, arguing that an agreement to amend the tax filings must be read into the
general language in the release. Specifically, Defendant argues that “a reasonable
would hesitate to propose compromise solutions out of the concern that they would later
be prejudiced by their disclosure.”). Another rationale underlying Delaware’s approach to
confidentiality as a “fundamental element” of mediation is public confidence in the
neutrality of the mediation process and the mediator. See Alan Kirtley, The Mediation
Privilege’s Transition from Theory to Implementation: Designing a Mediation Privilege
Standard to Protect Mediation Participants, the Process and the Public Interest, 1995 J.
Disp. Resol. 1, 10 (1995) (“Another critical purpose of the privilege is to maintain the
public’s perception that individual mediators and the mediation process are neutral and
unbiased.”). Former Chief Justice Strine recognized this rationale as well, explaining:
“[P]ublic confidence in and the voluntary use of mediation can be expected to expand if
people have confidence that the mediat[or] will not take sides or disclose their statements,
particularly in the context of other investigations or judicial processes.” Princeton, 883
A.2d at 63.
'S Def.’s Opp’n § 20.
negotiator in the position of the parties would understand the mutual release
provision of the Term Sheet to require the Company to correct the [tax filings].”!®
13. Defendant’s logic does not support his conclusion. The mutual release
provision of the Term Sheet does not refer to the Company’s tax returns at all.
Rather, that provision states: “The Parties shall exchange general mutual releases,
except Defendant’s SC wage claim is tolled until final payment is made at which
time those claims are also released. The tolled claims may only be brought in event
of a breach by the opposing parties.”'? On its face, this general release language
cannot reasonably be read to include the specific obligation Defendant seeks to
impose. Nor has any argument been made that the sole carve-out to the release
would require filing amended tax forms.
14. Defendant next argues that “there was no need to specifically
articulate” the alleged agreement to correct the tax filings in the Term Sheet because
it was an enforceable oral agreement.'® Defendant urges the Court to consider “the
circumstances surrounding the mediation,”’’ including that “[d]uring the mediation,
le Va.
'! Term Sheet at 1.
'§ Def.’s Opp’n § 21.
9 Id. 420.
Plaintiffs knew and understood that the [tax filings] must be corrected’?° and that,
orally, “[t]he parties reached agreement before [the mediator].””!
15. As discussed above, however, the circumstances in which the Term
Sheet was negotiated support Plaintiffs’ position. Given the unavailability of “[a]ny
communications made during or in connection with the mediation that relate to the
controversy being mediated”” to supplement the written term sheets prepared in
Rule 174 mediation, the parties to a Rule 174 mediation may not rely on parol
evidence to supply additional terms to the parties’ settlement agreement. For this
reason, no reasonable person in the position of the parties would view the Term
Sheet as an incomplete recitation of the material terms of their agreement.
16. Defendant last contends that if, as Plaintiffs argue, the correction of the
tax filings was an essential term not encompassed within the Term Sheet, then there
was no meeting of the minds and there is no settlement agreement to enforce.”
Defendant takes the position that the parties’ negotiation history “supports the
conclusion that no settlement agreement has been reached.”** As discussed above,
9 Dkt. 59, Christopher O’Rourke’s Suppl. Submission in Supp. of his Opp’n to Pls.’ Mot.
to Enforce Settlement Term Sheet and Cross-Mot. to Enforce Settlement Term Sheet and
for Attorneys’ Fees § 10.
“1 Def.’s Opp’n § 21.
2 Ct. Ch. R. 174(h)(3) (emphasis added).
*3 Def.’s Opp’n FJ 22-24.
24 Id 924.
however, the Term Sheet’s plain language and the context in which it was negotiated
compels the conclusion that the parties came to an agreement and reduced all
material terms of that agreement to the Term Sheet.”
17. The case on which Defendant relies for his last argument—United
Health Alliance, LLC v. United Medical, LLC°—is inapposite. In United Health,
the parties “appeared to reach an oral agreement to settle the dispute” in the course
of private mediation.”’ The parties realized when attempting to paper the deal that
they disagreed concerning critical components of the settlement—“the breadth of
the release and the claims that the settlement would extinguish.”** At the parties’
request, then-Vice Chancellor Parsons conducted an evidentiary hearing to
determine whether the parties had reached a meeting of the minds. Before
conducting that hearing, the Vice Chancellor found that the mediation was not
subject to Rule 174.”? Following the hearing, the Vice Chancellor concluded that
*S See supra 4f 10-11.
6 2013 WL 6383026 (Del. Ch. Nov. 27, 2013).
*7 Id. at *1,
28 Td.
2 United Health Alliance, LLC vy. United Medical, LLC, 2013 WL 1874588, at *2 (Del.
Ch. May 6, 2013).
“the release was a material term, and that the parties failed to reach a meeting of the
minds regarding it.”°° He thus declined to enforce the alleged agreement.?!
18. In this case, unlike in United Health, the mediation is subject to
Rule 174 and thus the Court cannot consider communications made throughout the
mediation process. As important, the Court in this case need not examine whether
the parties reached an agreement, because the parties executed a written Term Sheet
reflecting their agreement “to settle the action . . . on the following terms.”*?
19. One final point warrants mention. At oral argument, the Court
identified Jn re Jefferies Group, Inc. Shareholders Litigation as potentially relevant
to this dispute.*? In Jefferies, the parties agreed to settle a class action and reduced
their agreement to a settlement term sheet. In the course of preparing a formal
settlement agreement, the parties disputed whether the term sheet adequately
captured the parties’ agreement concerning the definition of the class. The term
sheet defined the relevant class as “[a]ll persons or entities who or which held
Jefferies common stock at any time during” the relevant period.** The defendants
argued that the class should be defined to include “holders of ‘Jefferies Deferred
309013 WL 6383026, at *8.
31 Ig.
32 Term Sheet at 1.
339015 WL 151618 (Del. Ch. Jan. 13, 2015).
34 Id. at *1,
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Shares’ as well as holders of Jefferies common stock.”*° The plaintiffs disagreed
and moved to enforce the plain language of the term sheet. Chancellor Bouchard
found in favor of the plaintiffs, holding that “a reasonable person in the position of
the parties” would have thought that the class definition in the term sheet did not
include holders of deferred shares.°° The Chancellor reasoned that “the definition
of the class in the Term Sheet . . . applied], on its face, only to holders of Jefferies
‘common stock.’’?’? At no point in Jefferies did the Court consider extrinsic
statements or other evidence concerning the term sheet.
20. Jefferies is instructive in that it provides another instance in which this
Court enforced a settlement term sheet without considering parol evidence. On
reflection, however, Jefferies has limited application to this case. In Jefferies, the
parties disputed the interpretation of a provision included in a term sheet. In this
case, the parties dispute the effect of a provision not included in a term sheet.
35 Tq.
36 Td. at *2.
37 Id.
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21. For the foregoing reasons, Plaintiffs’ Motion to Enforce Settlement
Term Sheet is GRANTED. Defendant’s Cross-Motion to Enforce Settlement Term
Sheet is DENIED. Defendant’s Motion for Attorneys’ fees is DENIED.
Kb Den Ss -) MA Crm KO
Vice Chancellor Kathaleen St. J. McCormick
Dated: January 14, 2019
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