Pentwater Capital Management LP v. Arthur Kaz ( 2022 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
PENTWATER CAPITAL )
MANAGEMENT LP and HALBOWER )
HOLDINGS, INC., )
)
Plaintiffs, )
)
v. ) C.A. No. 2021-1087-SG
)
)
ARTHUR KAZ, )
)
Defendant. )
MEMORANDUM OPINION
Date Submitted: April 1, 2022
Date Decided: April 8, 2022
Stephen B. Brauerman, Jason C. Jowers, Sarah T. Andrade, and Justin C. Barrett, of
BAYARD, P.A., Wilmington, Delaware, Attorneys for Plaintiffs Pentwater Capital
Management LP and Halbower Holdings, Inc.
Rudolf Koch and Kyle Lachmund, of RICHARDS, LAYTON & FINGER, P.A.,
Wilmington, Delaware; OF COUNSEL: Daniel Lynch, of LYNCH THOMPSON
LLP, Chicago, Illinois, Attorneys for Defendant Arthur Kaz.
GLASSCOCK, Vice Chancellor
The power of the common-law courts is largely limited to awards of damages.
Not so with this court of equity, which in addition to damages may use its equitable
puissance to order litigants to refrain from, and even to take, actions. This injunctive
power is an awesome power. It requires a court wielding it to be mindful not only
of legal rights but equitable considerations as well. As a result, actions seeking
injunctive relief have two components. The court must determine whether a legal
entitlement exists. That is a necessary, but insufficient, requirement for equitable
relief. When it appears that the court can apply its equitable power, it must answer
a second question: should it so act? Application of equity without such consideration
would be intolerable in a free society.
The parties here were formerly in an employee/employer relationship. They
are currently engaged in litigation in Illinois, involving three contracts between them
providing the terms of compensation for the employment. Two of those contracts
have Illinois forum selection clauses; one provides for exclusive jurisdiction in
Delaware. The Illinois Defendants—the “Employer entities”—contend that the
latter contract controls; they have invoked equity in this action seeking an anti-suit
injunction. They seek a Preliminary Injunction, directing the employee, the
Defendant here—the Illinois Plaintiff—to abandon the Illinois litigation.
The familiar test for a preliminary injunction is tricorn: likelihood of success
on the merits, imminent irreparable harm, and the test referred to above, a balance
2
of the equities to determine if an injunction is justified. On April 1, 2022, I heard
oral argument on the PI request. That argument focused, unsurprisingly, on the first
prong; is it more likely than not that the Employer entities have an enforceable forum
selection clause in favor of a proceeding in a Delaware court? If so, and if that
contract right should go unvindicated, at least some quantum of irreparable harm can
be assumed to exist. That contractual issue, I confess, is not immediately clear. I
need not resolve the issue here, because I do not find it appropriate for equity to act
in any event. That is because, before bringing this action for an anti-suit injunction,
the Employer entities sought a dismissal of the Illinois action, on the same grounds.
They fully briefed the issue. According to the transcript of a hearing from March 30,
2022, the court in Illinois was about to deliver a decision. At that point, the
Employer entities used what to my Delaware-adapted mind seems an unusual
procedural tactic—they moved for substitution of the judge without cause. The
Illinois court expressed its frustration at this motion—the second such filed in that
case at the pleading stage—but found itself bound by Illinois procedure to stand
down in favor of a new judge. The court decried this as gamesmanship, which I can
only conclude was designed to preserve the forum issue for what they perceived to
be a more amenable decision, here.
If so, they misperceived. I conclude that, having raised the issue before the
Illinois court, having briefed the forum selection clause, having reached the brink of
3
a decision, only to invoke a procedural sleight-of-hand1 scant days before receiving
a decision, the Employer entities cannot satisfy the third prong of the PI test. That
is, having sought, briefed and then eschewed a decision from the Illinois court, they
have created their own harm—the jurisdictional question would have been resolved,
and any possible irreparable harm would have been avoided, if the Illinois court had
been permitted to proceed. Moreover, having put the parties and the court to the
expense and effort of briefing, arguing and deciding the issue, and by then removing
the decision from the judge, to my mind the Employer entities have forfeited a
position of equitable suasion. I understand that the new judge in Illinois is prepared
to hear the motion to dismiss this month. Any brief period of additional litigation in
Illinois, while it might represent some minor but irreparable harm to the Employer
entities, is outweighed by the actions of those entities in employing tactics
incompatible with equity. The facts, and a fuller explanation, are below.
I. BACKGROUND
A. The Parties
Plaintiff Pentwater Capital Management LP (“Pentwater”), a Delaware
limited partnership, is a private investment firm headquartered in Naples, Florida,
1
I do not mean to imply that the actions of the Employer entities in Illinois were procedurally
improper under the rules of that jurisdiction, with which I am unfamiliar. I also do not mean to
implicate Delaware counsel for the Plaintiffs in any litigatory impropriety; Delaware counsel
have acted candidly and appropriately in this proceeding.
4
with offices in Illinois, New York, Minneapolis and London.2 Plaintiff Halbower
Holdings, Inc. (“Holdings”) is a Delaware corporation and general partner of
Pentwater.3
Defendant Arthur Kaz is a former fund manager at Pentwater, a position he
held from August 24, 2011 until July 22, 2013.4
B. Factual Background
On July 23, 2021, Kaz initiated an action in Illinois (the “Illinois Action”)
seeking, among other things, to recover amounts allegedly owed to him under the
agreements governing his employment with and separation from Pentwater.5 Those
agreements feature competing forum selection clauses, which are at issue here.
First, when Kaz began his employment with Pentwater, he executed an
employment agreement on August 24, 2011 (the “Employment Agreement”).6 The
Employment Agreement includes a forum selection clause providing that “the
appropriate venue for any enforcement of this agreement shall lie in the state or
federal courts of Illinois.”7
2
Verified Compl., Dkt. No. 1 ¶ 2 [hereinafter “Compl.”].
3
Id. ¶ 3.
4
Id. ¶ 4.
5
See generally Unsworn Decl. Kyle H. Lachmund Pursuant 10 Del. C. § 3927 [hereinafter the
“Lachmund Decl.”], Ex. 28.
6
See generally Lachmund Decl., Ex. 1.
7
Id. § 14.
5
Second, certain of Kaz’s compensation was distributed pursuant to a
Pentwater Capital Management LP Employee Bonus Plan (the “Bonus Plan”).8
Although Kaz did not sign the Bonus Plan itself,9 the Employment Agreement,
which he did sign, references the Bonus Plan in discussing Kaz’s compensation.10
Specifically, the Employment Agreement provides that, in addition to Kaz’s base
salary and bonus, he “shall receive an award effective January 1, 2012 of 2.50% of
Pentwater’s synthetic equity under the [Bonus Plan].”11 The Bonus Plan, in turn,
provides for the manner in which synthetic equity holder-participants become
eligible to receive certain incentive cash awards.12 The Bonus Plan features a forum
selection clause designating Delaware state or federal courts as the “exclusive
jurisdiction” for actions seeking to enforce its provisions:
7.8. GOVERNING LAW. . . . All Participants in this Plan agree
to the exclusive jurisdiction of the state or federal courts in the
state of Delaware and all Participants agree that no action shall
be brought to enforce any provision of this plan outside of the
courts of the state of Delaware.13
Finally, when Kaz’s employment with Pentwater terminated in July 2013, Kaz
and Pentwater negotiated a separation agreement that “set forth the specific terms
which shall govern [Kaz’s] departure from Pentwater” (the “Separation
8
See generally Lachmund Decl., Ex. 2.
9
See id. at 7.
10
Lachmund Decl., Ex. 1 § 4.
11
Id.
12
See generally Lachmund Decl., Ex. 2.
13
Id. § 7.8.
6
Agreement”).14 Under the Separation Agreement, which was executed on August 7,
2013, Kaz “acknowledge[d] receipt of the current copy of [the Bonus Plan] from
which [Kaz] may or may not be eligible for future bonus payments from
Pentwater.”15 The Separation Agreement also required Kaz to acknowledge that
“failure by [Kaz] to abide by the terms of the [Employment Agreement], failure by
[Kaz] to abide by Pentwater’s Compliance Manual, or failure by [Kaz] to abide by
the terms of this [Separation] Agreement will disqualify [Kaz] from any future
bonuses under the [Bonus Plan].”16 The Separation Agreement includes a forum
selection clause providing that “the federal U.S. and state courts located in Chicago,
Illinois shall have exclusive jurisdiction to settle any disputes arising in connection
with this Agreement.”17
Around July 15, 2013, shortly before Kaz executed the Separation Agreement,
Pentwater purported to amend the Bonus Plan to change the definition of “Post
Termination Incentive Bonus Cap.”18 According to Kaz, this amendment had the
effect of reducing the incentive bonus owed to him under the Bonus Plan.19 Several
months later, on December 18, 2013, Pentwater again purported to amend the Bonus
Plan, “[b]ased upon Arthur Kaz’s conduct,” to specifically eliminate Kaz as a Bonus
14
See Lachmund Decl., Ex. 3 at 1.
15
Id. § 1(d).
16
Id. § 8.
17
Id. § 12.
18
Lachmund Decl., Ex. 2 at 8.
19
Def.’s Br. Opp. Pls.’ Mot. Prelim. Inj., Dkt. No. 38 [hereinafter “Def.’s AB”] at 8–16.
7
Plan Participant, “thereby eliminating any award of synthetic equity under the Plan
and eliminating any future required future payments under the Plan.”20
C. The Illinois Action and This Action
Kaz filed the Illinois Action on July 23, 2021, seeking to recover amounts
allegedly owed to him pursuant to his employment with Pentwater, including based
on provisions of the Bonus Plan.21 As discussed below, the parties have proceeded
to litigate the Bonus Plan’s Delaware forum selection clause, first in the Illinois
action, and in this Delaware action as well.
On October 22, 2021, the Defendants to the Illinois Action, which include
Pentwater and Holdings, moved to dismiss the initial complaint in that action on
several grounds.22 As relevant to this action, the Defendants to the Illinois Action
argued that the complaint should be dismissed in light of the Bonus Plan’s Delaware
forum selection clause.23 While that motion to dismiss was pending, Pentwater and
Holdings brought this action on December 14, 2021, seeking to enforce the Bonus
Plan’s Delaware forum selection clause and enjoin Kaz from asserting claims under
the Bonus Plan in the Illinois Action.24
20
Lachmund Decl., Ex. 2 at 9.
21
Lachmund Decl., Ex. 28.
22
Lachmund Decl., Ex. 29.
23
Id. § I; Lachmund Decl., Ex. 31 § I.
24
See generally Compl.
8
On January 19, 2022, Kaz amended his complaint in the Illinois Action,25 and
the Defendants to the Illinois Action, including Pentwater and Holdings, renewed
their motions to dismiss on February 14, 2021.26 In their renewed motions to
dismiss, the Defendants to the Illinois Action again argued that all the claims in the
amended complaint should be dismissed in light of the Bonus Plan’s Delaware forum
selection clause.27
Pentwater and Holdings then filed a motion for preliminary injunction in this
action, on March 8, 2022, seeking to enjoin Kaz from asserting three of the counts
in the Illinois Action outside Delaware.28 The parties completed briefing on the
motion for preliminary injunction in this action on March 25, 2022,29 and I scheduled
oral argument for April 1, 2022.
Meanwhile, the court in the Illinois Action scheduled a status conference for
March 30, 2022, during which it planned to issue (or at least announce) a decision
on the motions to dismiss.30 On March 28, 2022, two days before the scheduled
hearing in the Illinois Action, one of the defendants to the Illinois Action moved to
substitute the judge “without cause”31—a statutory right that exists under Illinois
25
Lachmund Decl., Ex. 34.
26
Lachmund Decl., Ex. 36.
27
Id. § I.A.; Lachmund Decl., Ex. 38 § I.A.
28
Pls.’ Mot. Prelim. Inj., Dkt. No. 33; Pls.’ Opening Br. Supp. Prelim. Inj., Dkt. No. 34.
29
Def.’s AB; Pls.’ Reply Br. Further Supp. Prelim. Inj., Dkt. No. 42.
30
See Dkt. No. 47, Ex. 1 at 28:5–6.
31
See Dkt. No. 46 at 2.
9
law.32 This was the second motion for “substitution” that the defendants to the
Illinois Action had filed.33
The Illinois court convened a status conference on March 30, 2022 to address
the motion for substitution. Despite expressing displeasure with the timing of the
motion for substitution, the judge in the Illinois Action granted the motion during
the March 30, 2022 status conference, because the rule did not allow “any room for
wiggling”:
THE COURT: You know, as irritated as I am of the timing of
the motion, the failure to contact my office, the five days of
wasted time that I spent reviewing the materials and considering
everything that was raised by the parties, all of the time I spent
yesterday preparing my written ruling to review for the parties,
I find it utterly astounding that at this late date this motion is
brought. Nevertheless, the Supreme Court has given its
imprimatur to gamesmanship of this sort. It has said that these
things can be strategically times as a form of gamesmanship as
a matter of right. That’s exactly what’s going on here, and the
Court isn’t fooled by arguments to the contrary. But the
Supreme Court doesn’t give me any room for wiggling. . . . So
when, at the 11th hour and 59th minute, this motion is presented
to the Court, I have no choice but to grant the motion.34
I heard oral argument on the Plaintiffs’ motion for a preliminary injunction in
this action on April 1, 2022. During oral argument, I invited the Plaintiffs to consider
whether supplemental briefing on the issue of whether gamesmanship in the Illinois
action was relevant to the issues here, and the Plaintiffs submitted a letter on April 1,
32
See 735 ILCS 5/2-1001(a)(2).
33
Dkt. No. 46 at 2.
34
Dkt. No. 47, Ex. 1 at 28:1–29:12.
10
2022 stating that they “do not believe supplemental briefing is necessary.” 35 I
consider the matter fully submitted as of that date. In light of the expedited
consideration due a motion for preliminary injunctive relief, I have issued this brief
and rough-hewn decision, in lieu of a more polished but tardy opinion.
II. ANALYSIS
To obtain a preliminary injunction, the Plaintiffs must demonstrate “(1) a
reasonable probability of success on the merits; (2) that irreparable harm will occur
absent the injunction; and (3) that the balance of the equities favors granting the
injunction.”36 Anti-suit injunctions will issue from this Court where equity dictates,
but are disfavored, for reasons of comity. This Court has held that anti-suit
injunctions “should be entered sparingly,” and “only where there is clear evidence
of threatened irreparable harm, equity supports the injunction, the relief will be
effective, and comity has been fully exercised.”37 As discussed below, I find that
the Plaintiffs have failed to establish by clear evidence that equity supports an
injunction here. The Plaintiffs’ motion is accordingly denied.
I first note that the relief requested does not easily lend itself to a preliminary
analysis. A preliminary injunction is intended to preserve the status quo pending a
final decision on the merits, leading to permanent injunctive relief. It may be granted
35
Dkt. No. 49.
36
Conduent State Healthcare, LLC v. ACE Am. Ins. Co., 2022 WL 414597, at *2 (Del. Ch. Feb.
10, 2022).
37
Id.11
upon a truncated record, sufficient to demonstrate a likely favorable outcome on the
merits when the matter is fully litigated. It does not lend itself to entry of mandatory
injunctions.38
Here, the relief sought is to have Kaz withdraw that portion of the Illinois
action that, according to the Plaintiff Employer entities,39 is focused on the Bonus
Plan. This would require some action on the part of Kaz—tending toward mandatory
relief—and would, I suspect, terminate in final form that portion of the Illinois
litigation—indicating that a PI here would in fact be final in nature. It is likely that
more temporary relief—a TRO leading to a stay—or conversely an expedited
hearing leading to a final injunction, would be appropriate here. Nonetheless, I do
not deny the preliminary injunction request on that ground.
Instead, for purposes of analysis, I assume without deciding40 that the
Plaintiffs can show a contract right to a Delaware forum, and that being forced to
litigate in Illinois in derogation of that right results in some quantum of irreparable
harm. I make those assumptions because under the facts before me, the Plaintiffs
38
See C & J Energy Servs., Inc. v. City of Miami Gen. Emps.’, 107 A.3d 1049, 1071–73 (Del.
2014).
39
I use this term to refer to both the Plaintiffs here and the Defendants in Illinois, composed of
these Plaintiffs and additional defendants, as well. It is not clear which of the Employer entities
have moved for withdrawal without cause in that action. I gave the Plaintiffs the opportunity to
supplement the record to indicate that the Illinois withdrawal motions should not be attributed to
a tactical decision of the Plaintiffs here; they declined that opportunity. I therefore conclude that
the motion practice in Illinois is imputed to these Delaware Plaintiffs.
40
As I have pointed out, I do not find the contractual issues to be simple ones.
12
are nonetheless unable to invoke equity. The Employer entities were sued in Illinois.
They moved to dismiss a portion of the complaint on the same grounds on which
they proceed here—in reliance on the forum selection provision of the Bonus Plan.
They fully briefed—and caused the Plaintiff there to brief—the issue. The Illinois
court took the matter under consideration, and prepared a decision. As this Court
has noted in denying a similar request for an anti-suit injunction that followed
litigation of case dispositive motions in the courts of a sister state, after causing the
parties “and the Alabama court, [to] expend[] invaluable resources litigating and
adjudicating, respectively, its legal arguments in Alabama . . . [i]t comes with ill
grace to seek equity’s intervention in this Court now.”41
Moreover, if the Employer entities are correct on the merits, presumably the
counts against them reliant on the Bonus Plan would have been dismissed in the
Illinois court ruling they themselves deferred. Instead of receiving the decision of
the court, however, they decided to defer a ruling by using what I view as a
procedural oddity—the right to a “substitution without cause” of the presiding jurist.
I will not repeat the language of the transcript—quoted above—by which the Illinois
judge described his frustration with what he called gamesmanship. It is sufficient
here to note that any ongoing irreparable harm is thus of the Employer entities’ own
making. Having used a procedural tactic to defer a ruling on their own motion to
41
FP UC Holdings, LLC v. Hamilton, 2020 WL 1492783, at *15 (Del. Ch. Mar. 27, 2020).
13
dismiss, they can hardly complain that they are suffering incremental irreparable
harm while the litigation in Illinois remains pending. Equity, accordingly, will not
act in their behalf here. A party cannot act intentionally to create harm, then invoke
equity in relief of that harm.42 If that is not a traditional equitable maxim, it should
be.43
The parties have informed me that the Illinois replacement jurist will consider
the motion to dismiss later this month, absent, I suppose, more motion practice in
delay thereof. Any incremental harm, even if cognizable here, is limited, therefore.
I accordingly deny the motion for preliminary injunctive relief, and stay any further
proceedings until the Illinois court has addressed the motion to dismiss. Any party
may move to lift this stay, as it finds appropriate.
III. CONCLUSION
The Plaintiffs’ Motion is DENIED. The action is STAYED. The parties
should submit an appropriate form of order.
42
Cf. Cantor Fitzgerald, L.P. v. Cantor, 724 A.2d 571, 587 (Del. Ch. 1998) (no “immediate,
irreparable harm” based on the plaintiff’s own decision to “improvidently reduc[e]
commissions”).
43
“[A] right cannot arise to anyone out of his own wrong” comes close. Harton v. Little, 65 So.
951, 952 (Ala. 1914).
14