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Full Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
PERSONAL TOUCH HOLDING CORP., )
)
Plaintiff, )
)
v. ) C.A. No. 11199-CB
)
FELIX GLAUBACH, D.D.S., )
)
Defendant )
FELIX GLAUBACH, D.D.S., )
)
Counterclaim Plaintiff, )
)
v. )
)
PERSONAL TOUCH HOLDING CORP., )
)
Counterclaim Defendant. )
MEMORANDUM OPINION
Date Submitted: November 15, 2018
Date Decided: February 25, 2019
Blake Rohrbacher, Brian F. Morris, and John M. O’Toole, RICHARDS, LAYTON
& FINGER, P.A., Wilmington, Delaware; Jonathan C. Sullivan and John A.
DeMaro, RUSKIN MOSCOU FALTISCHEK, P.C., Uniondale, New York;
Attorneys for Plaintiff-Counterclaim Defendant Personal Touch Holding Corp.
Theodore A. Kittila and James G. McMillian, III, HALLORAN FARKAS KITTILA
LLP, Wilmington, Delaware; Attorneys for Defendant-Counterclaim Plaintiff Felix
Glaubach, D.D.S.
BOUCHARD, C.
This action involves a series of disputes between Personal Touch Holding
Corp., a provider of home healthcare services, and one of its co-founders, Felix
Glaubach. In April 2015, after tensions had been mounting between Glaubach and
his fellow directors for some time over the company’s management, Glaubach
announced to the company’s board of directors that he had purchased a building the
company was interested in acquiring (the “AAA Building”) and then offered to lease
the building to the company. About two months later, the company terminated
Glaubach’s employment agreement and removed him as President of the company
for allegedly usurping a corporate opportunity and other reasons. Personal Touch
then filed this action, seeking a declaration that Glaubach was validly removed from
office, damages for his alleged breaches of fiduciary duty, and disgorgement of three
years of his compensation under the New York faithless servant doctrine.
In this post-trial decision, the court concludes that Glaubach breached his
fiduciary duty of loyalty in several respects, including through his usurpation of the
opportunity to acquire the AAA Building, and that the company is entitled to a
declaration that Glaubach was validly removed as President of the company and to
$2,735,000 in damages. With respect to a number of other claims the company
advanced against Glaubach, the court concludes that Glaubach did not breach his
fiduciary duties and that disgorgement of his compensation under the faithless
servant doctrine is not warranted.
1
I. BACKGROUND
The facts recited in this opinion are my findings based on the testimony and
documentary evidence presented at a four-day trial held in June 2018. The record
includes stipulations of fact made in the Pre-Trial Stipulation and Order (“PTO”),
nearly 700 trial exhibits, thirty-five depositions, and live testimony from six fact
witnesses and one expert witness.
A. The Parties and Relevant Non-Parties
In 1974, Felix Glaubach, an orthodontist, and non-party Robert Marx, a
lawyer, co-founded the organization that later became Personal Touch Holding
Corp. (“Personal Touch” or the “Company”).1 In the beginning, Glaubach became
involved in Personal Touch’s business and continued his orthodontic practice part-
time, while Marx devoted most of his time to his law practice and his investments.2
They later became equal partners in the business.
Personal Touch is a Delaware corporation with its principal place of business
in Lake Success, New York.3 The Company provides home healthcare services,
including nursing, physical therapy, and long-term care. It currently operates
through various subsidiaries with locations in seven different states.4
1
PTO ¶ 10; Tr. 210-12 (Glaubach); 622-23 (Marx).
2
Tr. 212-13 (Glaubach).
3
PTO ¶ 9.
4
PTO ¶ 10; Tr. 8 (Goff).
2
Glaubach served as President of the Company from December 13, 2010 until
June 24, 2015, when he was terminated from that position.5 Glaubach, together with
his wife and family trusts, currently holds approximately 27% of the Company’s
outstanding common stock.6 At the time of trial, Glaubach was about eighty-eight
years old, and had been married to his wife for over fifty-eight years.7
Glaubach and Marx currently serve as special directors of the Company’s
board of directors (the “Board”), entitling them to three votes each.8 The Board has
four other members, each of whom is entitled to one vote.9 They are: John L.
Miscione, John D. Calabro, Lawrence J. Waldman, and Robert E. Goff (collectively,
the “Outside Directors”).10 Marx is Chairman of the Board and the Company’s
Senior Legal Officer.11
Two other individuals prominent in this action are David Slifkin and his wife,
Dr. Trudy Balk.12 Slifkin joined the Company in 1990 and served as its CEO from
5
PTO ¶¶ 21, 23.
6
PTO ¶ 11.
7
Tr. 209-10 (Glaubach).
8
PTO ¶¶ 15-16.
9
JX 24 at 6.
10
PTO ¶ 16.
11
Tr. 623 (Marx).
12
PTO ¶ 34.
3
January 31, 2011 until December 7, 2015.13 Slifkin resigned as CEO on the heels of
an internal investigation that uncovered his central role in a tax evasion scheme
involving many Company employees. Balk joined the Company in 1980 and was
its Vice President of Operations when she left the Company in July 2014.14
B. The Provision of Healthcare Services to Giza Shechtman
Giza Shechtman is Glaubach’s sister-in-law and was an early equity owner in
an affiliate of the Company, holding a five-percent stake.15 In or around 1996, after
suffering a stroke, Shechtman began to receive healthcare services from the
Company.16 According to Glaubach, shortly after Shechtman suffered her stroke,
Glaubach, Marx, and Shechtman entered into an oral agreement for the Company to
provide Shechtman with healthcare services at no cost as long as she needed them.17
Marx denies entering into this agreement.18
Whatever the initial arrangements may have been, they were superseded by a
letter agreement that Glaubach, Marx, and Shechtman each signed in December
2001 (the “Services Agreement”).19 The Services Agreement describes an
13
PTO ¶ 20; JX 364 at 1.
14
PTO ¶ 46.
15
Tr. 211, 444 (Glaubach); Tr. 633 (Marx).
16
Tr. 431-32 (Glaubach).
17
Tr. 214-15, 432 (Glaubach).
18
Tr. 635 (Marx).
19
JX 8; Tr. 432-33 (Glaubach); Tr. 635 (Marx).
4
arrangement under which Shechtman would reimburse the Company for healthcare
services it provided to her in the future. More specifically, the cost of the services
would, in the first instance, come out of distributions she was entitled to receive as
an equity owner:
This is to confirm our understanding regarding the amount of your
entitlement for your share of family benefits paid out of Personal Touch
Home Care of N.Y., Inc.
It is understood that you shall be entitled to 5% of this entitlement. Said
amount shall be computed within two (2) months from the end of each
fiscal year. This entitlement shall operate only as long as the
undersigned are the sole owners of the Personal Touch Metro offices.
It is further understood that at the end of each fiscal year when the
computation has been made as per your entitlement, a deduction shall
be made for any Nursing/Home Health Aide services which you may
have incurred within the year at cost. If there is any money due in the
computation it shall be paid to you upon the presentation of the
computation.20
The Services Agreement further provided that “[i]n the event of a dispute as to the
amount of [Shechtman’s] entitlement, Mr. David Slifkin, our Chief Financial
Officer, shall be the sole arbiter of said amount.”21 As Marx testified, the basic deal
was “that Giza Shechtman herself will pay for her own services providing we pay
20
JX 8. It appears that the intent of the Services Agreement was that Shechtman would
reimburse the Company for the cost of healthcare services that exceeded her five-percent
entitlement, although the language of the Services Agreement is confusing on that point.
See id. (“If the cost of Nursing/Home Health Aide services that you have incurred exceed[s]
the 5% of entitlement, then the excess shall be deducted from your 5% ownership
distribution.”).
21
Id.
5
five percent of all the operations in the metropolitan area, which included Nassau,
Suffolk, Westchester, the CHHA in Brooklyn, and the CHHA in Westchester.”22
C. The ESOP Is Formed and Glaubach Becomes President
Glaubach and Marx were the controlling stockholders of the various Personal
Touch companies until December 2010.23 At that time, they implemented two major
changes to both grow the Company and plan for succession.24
First, they established an employee stock ownership plan (“ESOP”) and
reorganized the Company’s corporate structure into its current form.25 Glaubach and
Marx sold a substantial portion of their shares to a trust created for the ESOP for
about $30 million each.26 The ESOP trust now holds 31% of the Company’s shares
and is its largest stockholder.27
Second, Glaubach, Marx, and other stockholders entered into a stockholder
agreement on December 13, 2010, that, among other changes, expanded the Board
to up to eight members.28 Glaubach and the Company simultaneously entered into
22
Tr. 635 (Marx).
23
PTO ¶ 12.
24
Tr. 17 (Goff).
25
PTO ¶ 12.
26
PTO ¶ 13; Tr. 107 (Goff).
27
PTO ¶ 13.
28
PTO ¶ 14; JX 703 § 6.1.
6
an employment agreement (the “Employment Agreement”) under which Glaubach
would serve as President of the Company until December 2015 for an annual salary
of approximately $650,000.29
In 2011, Miscione joined the Board from the investment firm of Duff &
Phelps, which advised the Company on the formation of the ESOP.30 Calabro, who
spent many years at Heller Financial and Healthcare Finance Group, joined the
Board in March 2014.31 In July 2014, Waldman and Goff joined the Board.32
Waldman is an accountant and Goff a healthcare executive, each with extensive
experience in his respective field.33
D. The AAA Building Becomes Available to Purchase
On or about February 28, 2013, Jim Clifford, the Director of Management
Services at AAA New York (“AAA”), informed Mike Macagnone, the Director of
Employee Services at the Company, that the building located next door to one of the
Company’s subsidiaries in Jamaica, New York (as defined above, the “AAA
Building”) was for sale. The Company had been seeking additional office space in
Jamaica, New York for several years and was especially interested in the AAA
29
PTO ¶¶ 21-22; JX 26.
30
PTO ¶ 17.
31
PTO ¶ 18.
32
PTO ¶ 19.
33
Tr. 9, 15 (Goff).
7
Building due to its location.34 Management believed that the AAA Building could
be used to relocate the Company’s corporate offices, to expand the Company’s
operations in the area, as additional office space for one of the Company’s
subsidiaries, or as storage.35
On March 4, 2013, Slifkin emailed Marx and Glaubach stating that the AAA
Building “is up for sale and the asking price seems reasonable.”36 Two days later,
Marx, Glaubach, and Macagnone met with Clifford to see the building and discuss
a price.37 Marx told Clifford that the Company was “very interested” in the property
but that the asking price of $1,200,000 was “a little high.”38 Marx then offered
Clifford $1 million in cash for the building.39 A few days later, Clifford responded
that AAA was concerned about the tax implications of the sale, which prompted
Marx to offer to pay AAA’s tax obligation as part of the transaction.40
Less than one month later, Clifford informed Marx that AAA could not
proceed with a sale at that time because its relocation plans had fallen through.41
34
PTO ¶ 105.
35
PTO ¶ 106; see also Tr. 392 (Glaubach).
36
PTO ¶ 104.
37
PTO ¶ 108.
38
PTO ¶ 109.
39
Tr. 625 (Marx).
40
Tr. 625 (Marx).
41
Tr. 626 (Marx).
8
Marx continued to inquire with Clifford about the AAA Building for several
months.42 During one of those inquiries, Clifford told Marx that AAA wants “to
move and we’ll call you as soon as we have anything.”43
E. The Shechtman Payment and the Jamaica Property
On July 22, 2013, Glaubach caused the Company to issue a check in the
amount of $133,177 to Shechtman because he thought that Shechtman had been
“shortchanged” in an equity distribution by the Company.44 Leon Reimer, a certified
public accountant who had been hired by the Company, provided the $133,177
figure to Glaubach.45 Slifkin, believing that Glaubach had “the authority to request
the check,” instructed Anthony Castiglione, the Company’s Treasurer at the time, to
“cut the check” to Shechtman.46
On November 1, 2013, one of the Company’s subsidiaries entered into a five-
year lease with Personal Touch Realty LLC to rent a property in Jamaica, New York
(the “Jamaica Property”).47 Marx and Glaubach each owned fifty percent of
42
Tr. 626-27 (Marx).
43
Tr. 627 (Marx).
44
JX 56; JX 708 at 1; Tr. 446 (Glaubach).
45
Tr. 223, 285 (Glaubach). Reimer had been hired by the law firm of Schlam Stone &
Dolan LLP to assist the Company in connection with audits that the Internal Revenue
Service and New York State were conducting for the 2010 tax year. JX 316 at 1-2, 4.
46
Slifkin Dep. 424 (Sept. 28, 2017).
47
JX 58; PTO ¶ 139.
9
Personal Touch Realty LLC at all relevant times.48 Only Marx and Glaubach signed
the lease—Marx for Personal Touch Realty LLC and Glaubach for the Company.49
Marx set the rental rate for the Jamaica Property.50
F. Glaubach Hires Reich and Pursues the AAA Building for Himself
On or around January 1, 2014, Glaubach hired David Reich as “Assistant to
the President” with a salary of $100,000 per year.51 Glaubach asserts he hired Reich
primarily to assist him in exposing fraud that he suspected was occurring within the
Company.52 Reich was an employee of the Company from January 8, 2014 until
April 15, 2015, during which time he was paid a total of approximately $209,440.53
Also during this time period, Reich assisted Glaubach in acquiring the AAA
Building for himself.
In 2014, Glaubach instructed Reich to contact Clifford to see whether AAA
was ready to sell the AAA Building.54 Reich and Clifford discussed the sale of the
building during the summer of 2014. Both were under the impression at the time
48
PTO ¶ 140; JX 653.
49
JX 58 at 5, 7.
50
Tr. 279, 289 (Glaubach); JX 717 at 3.
51
PTO ¶ 117; JX 712 at 1.
52
Tr. 284 (Glaubach).
53
PTO ¶¶ 119-20.
54
PTO ¶ 112.
10
that they were negotiating the sale of the building to the Company. 55 Clifford
continued to have this impression until September 24, 2014.56
At some point before September 24, Glaubach told Reich that he wanted to
buy the AAA Building himself in order to develop it or sell it for a profit.57 Glaubach
did not want anyone at the Company to know about his negotiations regarding the
AAA Building and made efforts to keep them secret.58 Reich thus stopped using his
Company email account and began using a personal one in his communications
about the AAA Building.59 Reich also suggested meeting with Clifford in a
conference room in Reich’s temple rather than on Company grounds because there
were “a lot of blabbermouths” in the Company’s offices.60
G. The Controversy About Balk’s Severance Package
In February 2013, Glaubach purported to fire Trudy Balk, Vice President of
Operations, for “unprofessional behavior and poor performance.”61 Despite
Glaubach’s efforts to fire her unilaterally, Balk remained in her position until she
decided to leave the Company in July 2014. That event precipitated a controversy
55
PTO ¶ 113.
56
JX 713.
57
PTO ¶¶ 114, 116.
58
Tr. 397, 403 (Glaubach).
59
Tr. 589-90 (Reich).
60
JX 154 at 1.
61
JX 47.
11
about paying Balk severance and allegations of tax fraud involving her husband
(Slifkin) that ultimately led to his departure from the Company in December 2015.
On July 24, 2014, the Board met and unanimously adopted a resolution
creating a special committee consisting of the Outside Directors (the “First Special
Committee”).62 The First Special Committee was charged with negotiating a
severance package with Balk and reviewing related-party transactions.63 The First
Special Committee also was empowered to amend and, if necessary, terminate any
related-party transaction it discovered.64 Relatedly, the Board resolved that “the
Company shall not enter into” such a transaction “without the prior authorization of
the [First] Special Committee.”65
On July 29, 2014, Glaubach sent letters to two of the Outside Directors
(Miscione and Goff) criticizing Balk’s performance in her role as Vice President of
Operations. In the letter to Miscione, Glaubach asserted that Balk had failed to
exercise diligence with respect to certain of her professional duties.66 In the letter to
Goff, Glaubach made a range of allegations against Balk, including that she poorly
supervised her employees, “violated federal laws/IRS regulations using Personal
62
PTO ¶ 38.
63
PTO ¶¶ 38-40.
64
PTO ¶ 41.
65
PTO ¶ 42.
66
PTO ¶ 49.
12
Touch as a vehicle for her transgressions,” and “conspired” to steal “one million
airline points” from his American Express credit card account.67 From Glaubach’s
perspective, the First Special Committee did not listen to any of the concerns he
expressed to them.68
On August 15, 2014, Glaubach sent a letter to a third Outside Director
(Waldman) regarding Balk’s departure, stating the following:
Since the full board determined that the Independent board members
should make this decision, I’ll accept whatever you decide in order to
further promote the growth of the company as soon as possible. I was
told that Dr. Balk will resign as of October 1, 2014. I can accept that
and I am willing to pay her full salary plus benefits until that time. After
that date, you suggest that she be able to serve as a consultant until April
1, 2015 and be paid on a per-diem basis. Although I am disappointed,
I can accept that with the proviso that whatever she earns be included
as part of her severance package and that no benefits whatsoever be
paid to her after October 1, 2014. David [Reich] told me that you are
suggesting a severance package of $466,000.00. I feel that that is a bit
steep and if I have to live with it I will . . . .69
Elaborating on his views about the amount of Balk’s severance, Glaubach explained
that “the highest we’ve ever given for eighteen years of service was $55,000.”70
On September 5, 2014, the First Special Committee agreed to pay Balk
approximately $466,000 in severance, equating to approximately eighteen months
67
JX 116 at 2-3.
68
Tr. 252 (Glaubach).
69
PTO ¶ 50; JX 136 at 2.
70
Tr. 253 (Glaubach).
13
of her compensation.71 In support of this decision, the First Special Committee cited
Balk’s long tenure with the Company and asserted that the severance was “consistent
with the past practices of the Company with regard to the separation of senior
executives” as well as the practices of other companies.72
On September 8, 2014, Glaubach and Balk had an argument that allegedly
resulted in Glaubach slamming the door to Balk’s office and Balk crying.73
Glaubach admits he told Balk that “she was worthless to the Company” but denies
slamming the door.74 Goff heard about this incident from Irvin Brum, a lawyer with
the Company’s outside counsel (Ruskin Moscou Faltischek, P.C.), and from “other
employees that were on the floor” at the time.75
On September 16, 2014, Slifkin sent Glaubach an email with the subject line
“I SURRENDER - you won.”76 Slifkin stated in the email that “Trudy [Balk] and I
will be 100% gone by the end of the year” and that he would “have a full
71
PTO ¶ 52.
72
PTO ¶ 53; JX 100 at 1.
73
Tr. 52-53 (Goff).
74
Tr. 254 (Glaubach).
75
Tr. 171 (Goff).
76
JX 152 at 2.
14
management team in place” in the near future.77 He also offered to cover the cost of
Balk’s severance package by giving up shares in the Company.78
On September 22, 2014, about a week after sending the email to Glaubach,
Slifkin wrote to the Board saying that the email to Glaubach “should not be
construed as a resignation” and that he intended to remain with the Company “as
long as the Board of Directors believes that me working as the CEO is in the best
interest of the Company.”79 Before Slifkin sent this letter, the Outside Directors had
strongly encouraged him to stay on.80
In or around October 2014, Glaubach initiated a search for a new CEO to
replace Slifkin without the involvement of anyone else on the Board.81 Glaubach
reached out to two recruiting agencies that the Company had used previously and
began interviewing candidates.82 Glaubach explained to the recruiting agencies that
he “needed backup in case something goes wrong here.”83 Justifying his actions,
77
JX 152 at 2.
78
Id.
79
JX 156.
80
JX 152 at 1.
81
PTO ¶¶ 56, 58.
82
PTO ¶ 57.
83
Tr. 282 (Glaubach).
15
Glaubach explained: “I didn’t feel as President of the Company I had to ask anyone.
If they’re telling me there’s a problem, it’s my job to solve that problem.”84
H. The Board Investigates Sexual Harassment Claims Against
Glaubach
On or about September 16, 2014, Rachel Hold-Weiss, the Company’s
Associate General Counsel and Chief Compliance Officer at the time, informed
Brum that she and two other female employees had alleged that Glaubach sexually
harassed them by making inappropriate comments.85 The other two employees were
Josephine DiMaggio, an Administrative Assistant, and Pauline Vargas, Director of
Purchasing and Web Development.86 About one week later, the Company hired the
law firm of Klein Zelman Rothermel Jacobs & Schess LLP (“Klein Zelman”) to
investigate the sexual harassment allegations.87 When Glaubach first heard from
DiMaggio that he was the target of the investigation, he replied, “Me? You got to
be nuts.”88
On October 23, 2014, Brum and his colleague informed Glaubach—who had
been abroad for several weeks—about the sexual harassment investigation.89 They
84
Tr. 282-83 (Glaubach).
85
PTO ¶¶ 54-55; Hold-Weiss Dep. 8, 136.
86
PTO ¶ 54.
87
PTO ¶ 59.
88
Tr. 257 (Glaubach).
89
PTO ¶ 60.
16
emphasized that the investigation had to be kept confidential and that Glaubach was
prohibited from retaliating in any way against the complainants. 90 Glaubach took
umbrage over the investigation, believing that Hold-Weiss “organized the false
sexual harassment allegations against” him.91 At a Board meeting on October 30,
2014, Glaubach told Hold-Weiss that he would “spend any amount of money to clear
my name.”92
Also on October 30, 2014, Glaubach sent a letter to the Board with the subject
line “J’accuse, J’accuse.”93 In the letter, Glaubach contended that the Outside
Directors had breached their fiduciary duties by approving Balk’s severance
package, which he described as “outrageous” and “ill-conceived.”94 He further
stated that he would “throw in a bombshell regarding a historic pattern of
misappropriation of funds and sexual misconduct, to put it nicely, on the part of the
hierarchy of our company.”95 Glaubach also demanded that the Board rescind Balk’s
severance package and ask Slifkin to resign as CEO effective immediately,96 and
90
Tr. 451 (Glaubach).
91
Tr. 260 (Glaubach).
92
Tr. 458 (Glaubach).
93
PTO ¶ 71; JX 180 at 1.
94
PTO ¶ 72; JX 180 at 1.
95
Id.
96
PTO ¶ 74.
17
asserted that, in light of the circumstances, his giving up control of the Company
was “definitely a grave mistake.”97
On November 21, 2014, Klein Zelman issued a report concerning the sexual
harassment allegations against Glaubach.98 By agreement of the parties, the
underlying allegations of sexual harassment were not the subject of testimony and
are irrelevant to the issues that were tried, which focused only on the Company’s
allegation that Glaubach retaliated against the three complainants.99
On November 25, 2014, Glaubach instructed an employee of the Company to
hang a painting of a red, jewel-encrusted hand grenade in the lobby of the
Company’s corporate offices.100 The painting was created by Anton Skorubsky
Kandinsky, a contemporary artist who was “noted for his grenade pictures” that
“hang in museums all over the world.”101 Referring to the painting, Glaubach told
an employee that there “is an explosive situation” within the Company and that “he
does not know when it is going to blow up.”102
97
JX 180 at 1.
98
PTO ¶ 61; JX 195.
99
See Personal Touch Hldg. Corp. v. Glaubach, C.A. No. 11199-CB, at 14-16, 24 (Del.
Ch. June 7, 2018) (TRANSCRIPT) (Dkt. 144); see also Dkt. 82 ¶ 25.
100
PTO ¶ 75; JX 217 at 2.
101
Tr. 267 (Glaubach).
102
PTO ¶ 76; see also Tr. 270 (Glaubach).
18
Glaubach, who collects art and had a practice of hanging art around the office,
testified that he brought the grenade painting into the office “because I like that piece
of art.”103 Slifkin removed the painting and emailed Glaubach stating that a “picture
of a grenade is inappropriate to place in the work environment. Employees feel
uncomfortable particularly in light of the degree of animosity that is currently
occurring at the company.”104 Glaubach thereafter directed an employee to re-hang
the painting.105
I. The Board Suspends Glaubach
Later on November 25, 2014, all the Board members except Glaubach held an
emergency phone conference during which they unanimously agreed to suspend
Glaubach with pay pending further Board action.106 Slifkin and Marx emailed
Glaubach about the Board’s decision, giving the following rationale:
Despite being told on numerous occasions that you are not to retaliate
in any way toward any complainant, you have ignored the Company’s
directives and continue to act in ways contrary to the Company’s
handbook and severely detrimental to its interests. Further, your
placing a picture of a grenade in front of Mr. Marx’s office, and your
refusal to permit its removal, is interpreted as an act of intimidation
towards Mr. Marx and others at the Company.107
103
Tr. 268 (Glaubach); PTO ¶ 75.
104
PTO ¶ 77.
105
PTO ¶ 78.
106
PTO ¶¶ 79-80.
107
PTO ¶ 80.
19
On December 4, 2014, Klein Zelman issued a supplemental report relating to
the sexual harassment allegations.108 On December 23, 2014, Glaubach sent a letter
addressed to Slifkin stating that a “recent review of the Company’s records going
back several years has revealed that excessive reimbursements were made to you
and other employees for Continuing Education expenses.”109 Glaubach also stated
in the letter that he would “resort to further action” if Slifkin did not return the funds
that were allegedly misappropriated.110
J. The Board Begins to Investigate Glaubach’s Allegations of Tax
Fraud While Glaubach Purchases the AAA Building
On February 10, 2015, during a regularly scheduled meeting, the Board
ratified its decision to suspend Glaubach with pay and extended his suspension for
thirty days.111 The Board also adopted resolutions (i) to create an audit committee
(the “Audit Committee”), a corporate governance committee, and a compliance
committee; and (ii) to authorize the Audit Committee to investigate the Company’s
compliance with financial and tax regulations, including with respect to allegations
that Glaubach had made against Slifkin.112
108
PTO ¶ 68; JX 231.
109
PTO ¶ 28.
110
PTO ¶ 29.
111
PTO ¶ 87.
112
PTO ¶ 83.
20
During the February 10 Board meeting, Marx “reported on . . . conversations
that he had ongoing with the owners of the AAA Building.”113 Glaubach attended
the meeting with his personal counsel but remained silent when Marx mentioned the
AAA Building.114 The next day, on February 11, 2015, Glaubach closed on his
purchase of the AAA Building for $1.8 million plus six months’ free rent for
AAA.115 Glaubach personally paid Reich $25,000 for his work on the deal.116
K. Glaubach Files a Lawsuit in New York and Tensions Continue to
Rise Between Glaubach and the Rest of the Board
On March 31, 2015, Glaubach filed a derivative lawsuit in the New York
Supreme Court against Marx, the Outside Directors, Slifkin, Balk, and four other
employees (the “New York Action”).117 On January 15, 2016, Glaubach amended
his complaint in the New York Action to add the Company and two of its subsidiaries
as nominal defendants. The amended complaint alleges that Marx and other
defendants “stole” millions of dollars from the Company and wrongly characterized
the money they stole as reimbursement for continuing education expenses.118 It
113
Tr. 100 (Goff).
114
PTO ¶ 84; Tr. 101 (Goff); JX 274.
115
PTO ¶ 115.
116
Tr. 532 (Reich); Tr. 284 (Glaubach).
117
PTO ¶ 89; Glaubach v. Slifkin, Index No. 702987/2015 (N.Y. Sup. Ct. Aug. 15, 2018).
118
PTO ¶ 90.
21
further alleges that the Outside Directors breached their fiduciary duties by “fail[ing]
to act with respect to Glaubach’s claims with any urgency.”119
On April 29, 2015, the Board held what turned out to be a highly contentious
meeting. Glaubach, represented by his personal counsel, asserted that he was being
denied access to Company information.120 The Board responded by saying that
procedures had been established to provide Glaubach with information if requested
in writing.121 Glaubach asked whether Heller Financial and Healthcare Finance
Group, one of the Company’s lenders, was aware of the New York Action, and
Slifkin said it was.122 Glaubach accused one of the directors of committing graft,
called Slifkin a “liar” and “philanderer,” and stated that he was considering creating
“dossiers” on all of the attorneys present and threatened to file grievances against
them.123 He also asserted he would not sign a written consent for the purchase of
certain assets the Company had been considering acquiring unless Slifkin’s name
was removed from it.124
119
PTO ¶ 91.
120
PTO ¶ 96.
121
PTO ¶ 96.
122
PTO ¶ 97.
123
PTO ¶ 98; Glaubach Dep. 774-75 (Sept. 8, 2017).
124
PTO ¶ 99.
22
During the April 29 Board meeting, Glaubach announced that he had
purchased the AAA Building and then offered to lease it to the Company.125 This
“surprised” Goff because the Company previously had been negotiating to purchase
the AAA Building.126 Months later, in a letter to Marx dated August 11, 2015,
Glaubach again offered to lease the AAA Building to the Company.127 Marx replied
ten days later, asserting that Glaubach’s purchase of the property “constituted a
breach of your fiduciary duties as a director of the Company.”128
L. Glaubach Is Terminated as President
On May 27, 2015, the Board created another special committee (the “Second
Special Committee”) that was empowered to decide all matters on which the
Company or the Board may be adverse to Glaubach.129 Specifically, the Second
Special Committee was authorized to determine the Company’s position on: (i) the
allegations of sexual harassment, retaliation, and breaches of fiduciary duty
involving Glaubach; (ii) claims made by Glaubach against the Company or its
125
Tr. 101 (Goff); Tr. 407 (Glaubach); PTO ¶ 100; JX 309 at 8.
126
Tr. 101 (Goff).
127
JX 326.
128
JX 329.
129
PTO ¶ 101.
23
officers, directors, or employees; and (iii) actions to be taken against Glaubach
regarding his professional relationship with the Company and related litigation.130
On June 22, 2015, the Second Special Committee voted to terminate Glaubach
as President of Personal Touch.131 The Company sent an official termination letter
two days later, on June 24, which specified, among other reasons for the decision,
that Glaubach had retaliated against the sexual harassment complainants, defied the
Board by unilaterally initiating a search for a new CEO, interfered with the
Company’s purchase of the AAA Building, and misappropriated Company assets by
having Reich work on personal matters and hiring a personal driver.132 Also on June
24, 2015, the Company filed this action.133
M. The Audit Committee Investigates Glaubach’s Allegations of Tax
Fraud and the Services Provided to Shechtman
On May 8, 2015, the Audit Committee, through its counsel James Alterbaum
of the law firm of Moses & Singer LLP, hired Friedman LLP, an accounting firm,
to perform a forensic investigation of the financial records of the Company to
determine whether any directors or employees had received improper payments or
130
PTO ¶ 101.
131
PTO ¶ 102.
132
JX 322 at 1.
133
Dkt. 1.
24
other benefits.134 From August 27 to November 9, 2015, Friedman LLP issued a
series of reports to the Audit Committee.135 The reports focused primarily on: (i)
certain payments the Company made to employees that were classified as
“continuing education” expenses; and (ii) healthcare services that the Company had
provided to Shechtman.
With respect to the first topic, Friedman LLP found that, from 2008 to 2011,
dozens of employees of the Company, including Slifkin and Balk, received
payments for bonus compensation that were characterized improperly in the
Company’s financial records as expense reimbursements for “continuing education”
courses that were never taken.136 Friedman LLP did not conclude that any of the
recipients actually evaded taxes,137 although the evident purpose of the scheme was
to mischaracterize compensation as “continuing education” expenses in order to
reduce the taxable wage income of certain employees.138
Friedman LLP found that the Company made a total of approximately
$519,965 of mischaracterized “continuing education” payments in 2008, $698,485
134
JX 310 at 1.
135
JX 346; JX 347; JX 348; JX 350; JX 351; JX 354.
136
JX 348 at 3-4 (2008); JX 350 at 3-4 (2009); JX 346 at 3 (2010); JX 354 at 3 (2011);
PTO ¶¶ 31-32; see also Tr. 222 (Glaubach) (“There was no such thing as [continuing
education]. This was not done once.”).
137
Tr. 754 (Miano); see JX 346; JX 348; JX 350; JX 351; JX 354.
138
See Tr. 133-34 (Goff).
25
in 2009, $844,194 in 2010, and $123,000 in 2011.139 Slifkin was the biggest offender
by far, receiving improperly classified “continuing education” payments of
$107,754 in 2008, $220,000 in 2009, and $527,105 in 2010.140
Friedman LLP did not determine who was responsible for the
mischaracterizations, apparently because that issue was outside the scope of its
assignment,141 but the record reflects that, at a minimum, Slifkin condoned the
practice.142 On December 7, 2015, about one month after Friedman LLP issued its
last report, Slifkin resigned as an officer and director of the Company, effective
immediately.143 The Company’s outside auditor, PricewaterhouseCoopers, also
terminated its relationship with the Company after learning about the “continuing
education” expense scandal.144
With respect to the healthcare services provided to Shechtman, Friedman LLP
concluded that, from January 2010 to June 2014, the Company provided her with
healthcare services and that “invoices were generated, but none of them were
actually sent to Ms. Schectman [sic] for payment.”145 Instead, “revenue and
139
PTO ¶ 32.
140
JX 351 at 1, 3; JX 346 at 3; PTO ¶ 31.
141
Tr. 755 (Miano).
142
Tr. 193 (Goff); Tr. 756 (Miano).
143
JX 365.
144
Tr. 194 (Goff).
145
JX 347 at 1-2.
26
accounts receivable were recorded to the [Personal Touch] general ledger for the
services rendered to Ms. Schectman [sic] but were subsequently reversed and not
reflected in the Personal-Touch Home Care and Affiliates Audited Combined
Financial Statements.”146 Friedman LLP’s memorandum states that “Joann
Piervinanzi, Director of Reimbursement, and Tom McNulty, A/R Manager,
indicated that they believe the practices were initially approved by David Slifkin
prior to the start of their employment with the Company.”147
N. Glaubach Anonymously Sends Letters to the Other Directors and
Various Employees
Beginning in March 2016, at least sixteen different individuals affiliated with
the Company received anonymous letters.148 Recipients of these letters included
Marx, each of the Outside Directors, Brum, Castiglione, DiMaggio, Macagnone, and
some of their spouses.149 Many of the letters contained biblical references and
intimated that the recipients were sinners.150
146
Id. at 2.
147
Id.
148
Tr. 141 (Goff); see JX 374; JX 397; JX 398; JX 401; JX 402; JX 403; JX 405; JX 406;
JX 407; JX 408; JX 410; JX 411; JX 415; JX 416; JX 417; JX 418; JX 419; JX 420; JX
421; JX 422; JX 445; JX 446; JX 447; JX 457; JX 458; JX 460; JX 461; JX 467; JX 473;
JX 490; JX 495; JX 500; JX 501; JX 503; JX 504; JX 515; JX 640.
149
PTO ¶¶ 121-24.
150
PTO ¶ 125; Tr. 141 (Goff).
27
For example, one letter sent to Marx and others stated in red bold letters: “To
all sinners BLOOD was the first plague[,] nine to follow, repent before its [sic] too
late.”151 Another letter was sent to an employee after one of her parents had recently
fallen and broken several bones.152 It contained a picture of a doctor holding an x-
ray of a broken bone and stated: “Who in your family is going to be stricken next
as a result of your sins? REPENT BEFORE ITS [sic] TOO LATE!”153 The same
day that letter was sent out, Reich had emailed Glaubach asking him to “[p]ick which
picture you like.”154 Other anonymous letters warned that the recipients would be
reported to the IRS, prosecuted, or imprisoned.155
Glaubach’s testimony concerning his role in sending the anonymous letters
shifted during this case. In a verified interrogatory, Glaubach attested that “he
prepared and disseminated each of the” anonymous letters “with assistance from
David Reich and Sase Dihal.”156 When deposed, Glaubach denied any involvement
in preparing and sending the letters.157 In an errata sheet to his deposition testimony,
Glaubach sought to change many of his answers, including to say he “was aware” of
151
PTO ¶ 126; JX 387; JX 389; JX 495.
152
Tr. 145 (Goff).
153
PTO ¶ 131; JX 467.
154
JX 471 at 1.
155
PTO ¶¶ 128-29.
156
JX 486 at 4.
157
Glaubach Dep. 37, 40-41 (Apr. 27, 2018).
28
the letters and “approved most” of them.158 At trial, Glaubach testified that he did
not actually send any of the anonymous letters, but that he composed some of them
as a way “of blowing off steam.”159 He further testified that Reich asked to send the
letters and that he told Reich that “[i]f it’s not illegal and you think it might help,
send them out.”160 Reich testified at trial that he “helped prepare” the letters and
“sent them” at Glaubach’s instruction.161 I credit Reich’s testimony, which is
consistent with Glaubach’s initial interrogatory response, and find that Glaubach
orchestrated the preparation and dissemination of all of the letters with the help of
others, including Reich.
O. The Jamaica Property Lease
In May 2016, after the Audit Committee identified the Jamaica Property lease
as a related-party transaction, the Company obtained an appraisal, which indicated
that the Company was paying above-market rent to Personal Touch Realty LLC, the
158
JX 903 at 1.
159
Tr. 293 (Glaubach).
160
Tr. 293 (Glaubach).
161
Tr. 558, 562 (Reich).
29
entity owned fifty-fifty by Glaubach and Marx.162 The appraisal indicated that the
amount of above-market rent due on the lease was approximately $1,270,000.163
Marx obtained his own appraisal suggesting that the lease was below-
market.164 Nonetheless, in May 2017, Marx entered into a settlement agreement
with the Company in which he agreed to provide $400,000 of consideration to the
Company, consisting of $100,000 in cash and a $300,000 reduction in his share of
rent that otherwise would be owed under the lease in the future.165
P. Glaubach Contacts the Company’s Lender
The Company has lines of credit with MidCap Financial Trust (“MidCap”), a
specialty lender and the Company’s primary source of credit.166 In or around July
2016, Glaubach learned through attending Board meetings that the Company had
violated certain covenants in its loan agreement with MidCap.167 The Company was
162
PTO ¶ 142. The Audit Committee also identified a related-party transaction between
the Company and ABN Energy LLC, which was partly owned by Glaubach’s son (Baruch
Glaubach) and which allegedly charged the Company approximately $180,000 more than
Con Edison from October 1, 2014 to April 9, 2016. PTO ¶¶ 144-46, 148; Tr. 116-17 (Goff).
Glaubach testified that he had “nothing to do with” the deal between ABN and the
Company, Tr. 291 (Glaubach), and the Company abandoned the claim. See Emerald P’rs
v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (“Issues not briefed are deemed waived.”).
163
JX 717 at 166.
164
PTO ¶ 143.
165
JX 730 § 2(a)-(b).
166
Tr. 15 (Goff); PTO ¶ 135.
167
PTO ¶ 135; Tr. 416 (Glaubach).
30
trying to fix the defaults in order to preserve its financial relationship with
MidCap.168
On July 6, 2016, Glaubach wrote to two executives at MidCap, stating that “I
understand that Personal Touch Holding Corp. is presently seeking to renegotiate its
loan.”169 Glaubach also asked in his letter whether he would be repaid $10 million
that he had loaned the Company as part of the renegotiation of the Company’s loan
agreement with MidCap and whether his approval would be required for a new deal
to be effective.170
On August 15, 2016, Glaubach wrote to Brett Robinson, a managing director
at MidCap, reiterating that he had questions concerning the loan renegotiation and
asserting that “towards the end of 2014, Personal Touch was being audited by the
IRS and the NYS Department of Taxation,” that “fraudulent tax returns were filed”
due to mischaracterized “continuing education” reimbursements, and that that was
“a major reason why I had to bring a lawsuit against them in March of 2015.”171
Three days later, Glaubach sent a letter to Leon Black, chairman of Apollo
Global Management, LLC, which manages MidCap.172 Glaubach wrote that “I will
168
PTO ¶ 137.
169
JX 427.
170
Id.
171
JX 437.
172
JX 439.
31
not sign any documents with respect to the loan because I do not know the true
financial condition of the company” and “I feel they are operating at a true deficit
since they are spending excessive amounts in salaries and separation packages to
hush up some of their violations of the tax laws.”173 He concluded: “If you extend
them credit, you are doing so at your own risk.”174
At the time he sent these letters, Glaubach believed that, without credit from
MidCap, the Company would be in financial jeopardy. 175 The Company ultimately
succeeded in renegotiating its line of credit with MidCap.176
Q. Glaubach Contacts Employees
On or around October 27, 2016, a sign appeared in the window of the AAA
Building that stated: “If you work for Personal Touch and would like to speak with
Dr. Glaubach, please call [number deleted]. All calls will be kept strictly
confidential.”177 That same day, Dihal, Glaubach’s driver, delivered letters to
various administrators of the Company saying “Dr. Glaubach would like to speak to
you. Please call him at [number deleted].”178
173
Id.
174
Id.
175
Tr. 415 (Glaubach); Glaubach Dep. 13-14 (Apr. 27, 2018).
176
Tr. 511-12 (Glaubach).
177
PTO ¶ 132.
178
PTO ¶ 133.
32
In December 2016, Dihal delivered other letters to employees of the Company
at a holiday party. These letters said that:
Dr. Glaubach was unjustly removed from Personal Touch while trying
to uncover fraud. He is fighting in court for the right to come back to
the company he founded and was President of for over 40 years. If you
have information that could help him, please call [number deleted]. All
calls will be kept strictly confidential.179
R. The New York Action Progresses
As of August 15, 2018, the court in the New York Action had made a number
of rulings touching on some issues pertinent to the claims in this case. For example:
The court granted Glaubach summary judgment against Slifkin on
claims that Slifkin breached his fiduciary duties, wasted corporate
assets, and unjustly enriched himself by directing “that misclassified
income be paid to himself” and others, thus exposing the Company
to tax and legal liability.180 The court noted that Slifkin could not
avoid liability for these claims “merely by producing evidence that
although the payments he received were misclassified to evade
taxes, he did not receive more in compensation than was his
contractual due.”181
The court granted the Outside Directors summary judgment on
Glaubach’s claim that they breached their fiduciary duties by failing
to promptly respond when Glaubach raised the issue of misclassified
payments and thus allowing the statute of limitations to run on
certain of the Company’s claims.182
179
PTO ¶ 134.
180
Glaubach v. Slifkin, Index No. 702987/2015, at 5 (N.Y. Sup. Ct. July 2, 2018).
181
Id. at 6.
182
Glaubach v. Slifkin, Index No. 702987/2015, at 5 (N.Y. Sup. Ct. Aug. 14, 2018).
33
The court denied Castiglione, DiMaggio, and two other Company
employees summary judgment on the claim that they had breached
their fiduciary duties, finding that the employee defendants, who
had received misclassified payments, failed to show “prima facie
that they committed no breach of fiduciary duty.”183
The court granted Balk and Slifkin summary judgment on
Glaubach’s claim that they engaged in a conspiracy “to induce
company employees to make false accusations of sexual harassment
against Glaubach for the purpose of forcing him to drop his
objections to the severance package.”184
The court granted Marx summary judgment on Glaubach’s claim
that Marx breached his fiduciary duties by accepting improper
payments because the “forensic accounting firm found no evidence
that Marx had received any payments that had been misclassified as
the reimbursement of educational expenses or that Marx had issued
instructions that anyone be given misclassified payments.”185
II. PROCEDURAL HISTORY
On June 24, 2015, the Company filed its original complaint in this action,
which it amended on September 18, 2017 (the “Amended Complaint”). The
Amended Complaint contains four claims. Count I asserts that Glaubach breached
his fiduciary duties in various respects. Count II asserts a claim for unjust
enrichment. Count III asserts that the Company is entitled to recover compensation
paid to Glaubach under the New York faithless servant doctrine. Count IV seeks a
183
Id. at 4.
184
Id. at 8.
185
Glaubach v. Slifkin, Index No. 702987/2015, at 3 (N.Y. Sup. Ct. Aug. 15, 2018).
34
declaration that Glaubach breached his employment agreement and was properly
and validly removed as President of the Company.
On March 18, 2016, Glaubach asserted in a counterclaim that the Company
breached Glaubach’s employment agreement by terminating him without proper
cause. Following a four-day trial held in June 2018, post-trial submissions were
completed on November 15, 2018.
III. ANALYSIS
The parties’ submissions tee up a wide-ranging mishmash of issues, which the
court will address in six parts. Sections A-C address three theories the Company has
advanced against Glaubach for breach of fiduciary duty concerning actions he took
before he was terminated as the Company’s President in June 2015, namely that
Glaubach: (i) usurped a corporate opportunity by acquiring the AAA Building; (ii)
engaged in self-dealing transactions; and (iii) engaged in certain disruptive and
retaliatory behavior. Section D addresses the Company’s request for a declaration
that Glaubach was properly terminated as President for breaching his Employment
Agreement and Glaubach’s counterclaim for damages against the Company for
breach of the same agreement. Section E addresses the Company’s claim against
Glaubach under the New York faithless servant doctrine. Section F addresses the
aspect of the Company’s breach of fiduciary duty claim against Glaubach
35
concerning certain actions he took after he was terminated as President but was still
a director of the Company.
The Company did not brief and thus waived its claim for unjust enrichment.186
Accordingly, judgment will be entered in Glaubach’s favor on Count II of the
Amended Complaint.
Unless otherwise indicated below, the proponent of each claim “ha[s] the
burden of proving each element, including damages, of each” cause of action “by a
preponderance of the evidence.”187 “[P]roof by a preponderance of the evidence
means that something is more likely than not.”188
A. Glaubach Usurped a Corporate Opportunity by Secretly
Acquiring the AAA Building for Himself
The Company contends that Glaubach breached his fiduciary duty of loyalty
by usurping the corporate opportunity of acquiring the AAA Building for himself. I
agree for the reasons explained below.
Eighty years ago, in its seminal decision of Guth v. Loft, Inc., our Supreme
Court described the corporate opportunity doctrine as follows:
[I]f there is presented to a corporate officer or director a business
opportunity which the corporation is financially able to undertake, is,
from its nature, in the line of the corporation’s business and is of
186
Emerald P’rs, 726 A.2d at 1224 (“Issues not briefed are deemed waived.”).
187
Physiotherapy Corp. v. Moncure, 2018 WL 1256492, at *3 (Del. Ch. Mar. 12, 2018)
(citation and internal quotation marks omitted).
188
Id.
36
practical advantage to it, is one in which the corporation has an interest
or a reasonable expectancy, and, by embracing the opportunity, the self-
interest of the officer or director will be brought into conflict with that
of his corporation, the law will not permit him to seize the opportunity
for himself.189
The high court explained that the question of whether a usurpation of a corporate
opportunity has occurred “is not one to be decided on narrow or technical grounds,
but upon broad considerations of corporate duty and loyalty.”190 The corporate
opportunity doctrine is therefore rightly considered “a subspecies of the fiduciary
duty of loyalty.”191 That “duty has been consistently defined as ‘broad and
encompassing,’ demanding of a director ‘the most scrupulous observance.’”192
In Broz v. Cellular Information Systems, Inc., our Supreme Court more
recently explained that:
The corporate opportunity doctrine, as delineated by Guth and its
progeny, holds that a corporate officer or director may not take a
business opportunity for his own if: (1) the corporation is financially
able to exploit the opportunity; (2) the opportunity is within the
corporation’s line of business; (3) the corporation has an interest or
expectancy in the opportunity; and (4) by taking the opportunity for his
own, the corporate fiduciary will thereby be placed in a position
inimicable to his duties to the corporation.193
189
5 A.2d 503, 511 (Del. 1939).
190
Id.
191
Eric Talley, Turning Servile Opportunities to Gold: A Strategic Analysis of the
Corporate Opportunities Doctrine, 108 Yale L.J. 277, 279 (1998).
192
BelCom, Inc. v. Robb, 1998 WL 229527, at *3 (Del. Ch. Apr. 28, 1998) (quoting Cede
& Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993)).
193
673 A.2d 148, 154-55 (Del. 1996).
37
Although these four factors are articulated in the conjunctive, the Supreme Court in
Broz emphasized “that the tests enunciated in Guth and subsequent cases provide
guidelines to be considered by a reviewing court in balancing the equities of an
individual case” and that “[n]o one factor is dispositive and all factors must be taken
into account insofar as they are applicable.”194 Consistent with this approach, the
Supreme Court previously referred to the “line of business” and “interest or
expectancy” factors in the disjunctive, suggesting that proof of either factor could
sustain a corporate opportunity claim,195 and this court has decided the viability of
corporate opportunity claims by weighing the four Broz factors in a holistic
fashion.196 With the above principles in mind, the court next considers each of the
Broz factors based on the trial record.
194
Id. at 155.
195
Equity Corp. v. Milton, 221 A.2d 494, 497 (Del. 1966) (“[W]hen there is presented to a
corporate officer a business opportunity which the corporation is financially able to
undertake, and which, by its nature, falls into the line of the corporation’s business and is
of practical advantage to it, or is an opportunity in which the corporation has an actual or
expectant interest, the officer . . . may not take the opportunity for himself.”) (emphasis
added).
196
See Beam v. Stewart, 833 A.2d 961, 975 (Del. Ch. 2003) (finding that stockholder failed
to state a claim for usurpation of a corporate opportunity based “[o]n balancing the four
factors” enumerated in Broz), aff’d, 845 A.2d 1040 (Del. 2004); Kohls v. Duthie, 791 A.2d
772, 784 (Del. Ch. 2000) (finding that stockholders stated a corporate opportunity claim
where corporation had an expectancy in repurchasing a block of its stock for a nominal
price even though the opportunity was not in the corporation’s line of business).
38
1. The Company Was Financially Able to Acquire the AAA
Building
Although Delaware courts have not delineated a clear standard for
determining whether a corporation is financially able to avail itself of a corporate
opportunity, our Supreme Court has opined (albeit in dictum) that this court may
consider “a number of options and standards for determining financial inability,
including but not limited to, a balancing standard, temporary insolvency standard,
or practical insolvency standard.”197 Since then, this court has applied various
standards, “including the ‘insolvency-in-fact’ test, as well as considering whether
the corporation is in a position to commit capital, notwithstanding the fact that the
corporation is actually solvent.”198
Glaubach purchased the AAA Building for $1.8 million in February 2015 and
gave AAA six months of free rent as part of the transaction. This equates, at most,
to an acquisition price of approximately $2.4 million, as discussed below.199
Applying any reasonable standard of financial ability, I am convinced that the
197
Yiannatsis v. Stephanis by Sterianou, 653 A.2d 275, 279 n.2 (Del. 1995) (declining to
adopt “insolvency-in-fact” test where “the question of what test should be used to
determine financial inability is not presently before the Court”).
In re Riverstone Nat’l, Inc. S’holder Litig., 2016 WL 4045411, at *9 (Del. Ch. July 28,
198
2016) (citation omitted).
199
See infra Section III.A.5.
39
Company was financially able to acquire the AAA Building in this price range
during the time period when purchase discussions were occurring with AAA.
Marx and Goff (an Outside Director) both testified that they believed the
Company could afford to purchase the AAA Building, with Goff explaining that
Slifkin, the Company’s CEO at the time, reported at a February 2015 Board meeting
that the Company “could easily finance the acquisition of the AAA Building.”200
Their views are substantiated by evidence that the Company generated well over
$300 million in revenues and earned approximately $15 million in EBITDAE in
2014, had cash on hand of approximately $30.4 million as of December 31, 2014,
and that its annualized EBITDAE for “2015 and beyond” was expected as of April
2015 to increase from approximately $15 million to approximately $20 million after
a planned acquisition.201 On the other side of the ledger, the record is devoid of any
evidence indicating that the Company’s financial position was precarious when the
AAA Building was purchased, and Glaubach offered no evidence suggesting that
the Company was not financially able to purchase it for what he paid.
200
Tr. 100-01 (Goff); Tr. 628 (Marx).
201
Tr. 9 (Goff) (as of July 2014, the Company’s approximate revenues were about $320
million); JX 281 at 4 (estimating 2014 revenues and EBITDAE at approximately $372.5
million and $11.6 million, respectively); JX 309 at 3 (reporting that 2014 EBITDAE was
22% higher than previously projected); id. at 4 (noting that the Company’s cash as of
December 31, 2014 was approximately $30.4 million and that its “current annualized
EBITDAE” was approximately $15 million).
40
2. The Company Had a Clear Interest and Expectancy in
Acquiring the AAA Building
With respect to the third Broz factor, I find that the Company clearly had an
interest and expectancy in acquiring the AAA Building. It is stipulated that the
Company “had been seeking additional office space in the Jamaica, New York area
for years and was particularly interested in the AAA Building because it was located
next door to the offices of one of the Company’s key operating subsidiaries” and
“could be used to relocate the Company’s corporate offices, for expansion of the
Company’s Jamaica operations, as offices for the Company’s other subsidiaries and
for storage.”202
The Company’s general interest in acquiring the AAA Building became an
actual opportunity in March 2013, when Slifkin learned that the AAA Building was
for sale.203 On March 4, 2013, Slifkin reported this news to Marx and Glaubach in
an email, explaining that the “asking price seems reasonable” and discussing several
ways the Company could use the property.204 Two days later, Marx and Glaubach
met with Clifford of AAA to inspect the building and negotiate a price for the
202
PTO ¶¶ 105-06.
203
JX 48.
204
PTO ¶ 104; JX 48. Glaubach makes no argument that the opportunity to acquire the
AAA Building came to him in an individual rather than corporate capacity, nor could he.
The Slifkin email was a corporate communication from the Company’s CEO using his
corporate email address that focused on potential uses for the property that would benefit
the Company. See id.
41
Company to purchase it.205 Glaubach understood at the time that it was the Company
that was the intended purchaser of the building.206 Marx’s negotiations with Clifford
stalled not because the Company lost interest in the property, but because AAA’s
plans to move to a different location fell through for a time.207 Clifford reassured
Marx, however, that “we want to move and we’ll call you as soon as we have
anything.”208
While the Company was waiting to hear back from AAA, Glaubach stepped
in to take the opportunity for himself by instructing his assistant (Reich) to contact
Clifford to see whether AAA was ready to sell the building.209 Tellingly, when Reich
and Clifford were engaged in discussions during the summer of 2014, they were both
under the impression that the Company was to be the purchaser of the building.210
And when Reich learned later that Glaubach wanted the building for himself, he took
steps at Glaubach’s direction to conceal his negotiations with AAA from others at
the Company.211
205
PTO ¶¶ 108-11.
See JX 333 (letter from Glaubach to Marx stating: “The Company was unwilling to
206
meet the prior owner’s terms of sale . . . .”) (emphasis added).
207
Tr. 626 (Marx).
208
Tr. 627 (Marx).
209
PTO ¶ 112.
210
PTO ¶ 113.
211
See Tr. 400, 403, 407 (Glaubach); Tr. 589-90 (Reich).
42
The Company’s interest in acquiring the AAA Building continued right up to
the time Glaubach closed on his own purchase. As Goff testified, Marx updated the
Board about “conversations that he had ongoing with the owners of the AAA
Building” at a Board meeting on February 10, 2015—the day before Glaubach
closed on the property.212
Glaubach’s assertion that the Company lost interest in acquiring the AAA
Building is not supported by the record. To the contrary, after Marx initiated a
dialogue with AAA to acquire the building, AAA’s representative expressly told him
that he would contact Marx when AAA was ready to move forward. Glaubach used
that opening to hijack the negotiations for his own benefit while concealing from
AAA that he was acting on his own behalf (instead of the Company’s) and while
concealing from the Board his interactions with AAA up to the very end, including
at the February 2015 Board meeting. In sum, the record clearly supports the
conclusion that the Company was keenly interested in, and had a reasonable
expectation of, acquiring the AAA Building at all relevant times.
3. The Line of Business Inquiry
The second Broz factor asks whether the opportunity to acquire the AAA
Building was within Personal Touch’s line of business. Noting that the Company
historically had leased office space and that it had owned a piece of real estate only
212
Tr. 100-01 (Goff).
43
once before, Glaubach argues that owning real estate is not in the Company’s line of
business.213 Quoting the Company’s own brief, Glaubach contends that the
Company’s “two main lines of business” consist of “(i) a managed long-term
healthcare program that provides home-based services to patients who would
otherwise be in nursing homes; and (ii) a more traditional home care operation,
which is in seven states and provides home healthcare aides, nurses, physical therapy
and other home-based healthcare services.”214
The Company counters that the Company’s past practice of leasing office
space, including from Marx and/or Glaubach,215 rather than owning it does not
matter because the “line of business” inquiry should be construed broadly based “on
the current needs of the Company, not on past practices.”216 According to Personal
Touch, “the Company had significantly changed following the ESOP transaction,
because it was no longer controlled by Marx and Glaubach alone.”217
Consistent with its doctrinal moorings in the duty of loyalty, the “line of
business” concept was intended to be applied flexibly. In Guth, the Supreme Court
stated that “[t]he phrase is not within the field of precise definition, nor is it one that
213
Def.’s Opening Br. 38-39 (Dkt. 133).
214
Id. at 38 (quoting Pl.’s Opening Br. 3 (Dkt. 127)).
215
See Tr. 114 (Goff); Tr. 284 (Glaubach); JX 360 at 4-6.
216
Pl.’s Reply Br. 13 (Dkt. 135).
217
Id. at 12-13.
44
can be bounded by a set formula.”218 Rather, “[i]t has a flexible meaning, which is
to be applied reasonably and sensibly to the facts and circumstances of the particular
case,” and “latitude should be allowed for development and expansion.”219
Delaware courts accordingly have “broadly interpreted” the “nature of the
corporation’s business” when “determining whether a corporation has an interest in
a line of business.”220
In my opinion, Glaubach takes a crabbed view of the line of business inquiry
that misses the central point of the corporate opportunity doctrine. Although the
record bears out that the Company historically did not purchase real estate to house
its operations, the Company has never been engaged in the business of purchasing
and leasing real estate. Personal Touch is a healthcare provider, not a commercial
real estate venture. Applying the line of business concept flexibly, the sensible way
to consider the issue in the context of this case is that, irrespective of its past practice
of leasing office space, the Company was presented with a rare opportunity to
acquire a building with a highly desirable location that it could use to relocate or
218
Guth, 5 A.2d at 514.
219
Id.
220
Dweck v. Nasser, 2012 WL 161590, at *13 (Del. Ch. Jan. 18, 2012); see also Riverstone,
2016 WL 4045411, at *10 (“[T]he nature of the corporation’s business should be
interpreted broadly, giving latitude to the corporation for development and expansion.”).
45
expand its healthcare operations. In that sense, the opportunity to acquire the AAA
Building fit within the Company’s existing line of business.
An equally sensible way to consider the issue is that the line of business test
is simply not relevant here, where (i) the Company had a clear interest and
expectancy in acquiring the AAA Building for the reasons explained previously, and
(ii) the opportunity presented concerns an operational decision about how to manage
or expand an existing business—i.e., whether it is better to buy or lease office
space—as opposed to the opportunity to acquire a new business.221 Vice Chancellor
Lamb’s decision in Kohls v. Duthie222 exemplifies this approach.
In Kohls, the court found that stockholders of Kenetech Corporation stated a
derivative claim for usurpation of a corporate opportunity where one of the
corporation’s directors purchased a block of the corporation’s stock from its largest
stockholder for a nominal price.223 The court noted that “because corporate
opportunity cases arise in widely varying factual contexts, ‘[h]ard and fast rules are
not easily crafted to deal with such an array of complex situations.’”224 The court
221
See R. Franklin Balotti & Jesse A. Finkelstein, 2 The Delaware Law of Corporations
and Business Organizations § 4.16[C], at 4-154 (3d ed. 2018 Supp.) (“Where the
opportunity does not involve the corporation’s existing business operations, the ‘line of
business’ test is not applicable.”)
222
791 A.2d 772 (Del. Ch. 2000).
223
Id. at 786-87.
224
Id. at 784 (quoting Broz, 673 A.2d at 155).
46
then rejected the argument that the offer to purchase the stock “did not constitute an
opportunity in the company’s line of business” given that the corporation “did not
have in place any policy or plan for repurchasing its stock” and “had no share
repurchase program in effect.”225 It was sufficient, the court concluded, that the
corporation logically would have an “expectancy in being presented with an
opportunity to repurchase a large block of its own stock for little or no
consideration.”226
I agree with this reasoning. Even if the opportunity to acquire the AAA
Building could be said not to fall within the Company’s existing line of business
under a strict interpretation of that concept, that is not fatal to the Company’s claim.
To the contrary, it is sufficient that the Company had a clear interest and expectancy
in the property at the time the opportunity to acquire it arose.
4. Glaubach Acted Inimicably to His Fiduciary Duties
The fourth Broz factor prohibits a corporate officer or director from taking an
opportunity for his own if “the corporate fiduciary will thereby be placed in a
position inimicable to his duties to the corporation.”227 Elaborating on this factor,
the Supreme Court explained that “the corporate opportunity doctrine is implicated
225
Id.
226
Id.
227
Broz, 673 A.2d at 155.
47
only in cases where the fiduciary’s seizure of an opportunity results in a conflict
between the fiduciary’s duties to the corporation and the self-interest of the director
as actualized by the exploitation of the opportunity.”228 That is what occurred here.
After learning about the opportunity to purchase the AAA Building from
Slifkin, Glaubach attended the initial meeting with Marx and Clifford in March 2013
and knew full well that the Company was interested in purchasing it. Putting his
self-interest above his duty of loyalty to Personal Touch, Glaubach chose to compete
directly with the Company to acquire for himself an admittedly “vital property”
while making concerted efforts to conceal his activities from the Company until after
he had closed on the deal.229 Indeed, Glaubach did not disclose to his fellow
directors his efforts to buy the building for himself even when Marx was updating
the Board about his efforts to purchase the property for the Company in Glaubach’s
presence.230
Removing any doubt about the importance of the building to the Company
and the conflicted nature of what Glaubach did, Glaubach sought to lease the
building to the Company almost immediately after he purchased it.231 In short,
Glaubach was acutely aware of the value the opportunity to acquire the AAA
228
Id. at 157.
229
PTO ¶¶ 114, 116; Tr. 400 (Glaubach).
230
Tr. 100 (Goff); see also PTO ¶ 84; JX 274.
231
Tr. 101 (Goff); PTO ¶ 100; JX 326.
48
Building presented to the Company because of the building’s unique location and,
instead of looking out for the interests of Personal Touch, he secretly thwarted its
ability to take advantage of that opportunity so that he could profit personally by
acquiring the building for himself.
Finally, I reject Glaubach’s contention that he “did not place himself in a
position ‘inimical’ to his corporate duties by purchasing the building” based on
Section 2.2 of his Employment Agreement.232 That provision states simply that
“[t]he Company acknowledges that [Glaubach] has business interests outside of the
Company and will continue to devote a material portion of his business time,
attention and affairs to such other business interests.”233 Nothing in this provision
allows Glaubach to compete with the Company for opportunities in which it has an
interest or expectancy. Indeed, the preceding sentence in Section 2.2 states that
Glaubach “shall not engage, directly or indirectly, in any other business,
employment or occupation which is competitive with the business of the
Company.”234
*****
232
Def.’s Opening Br. 41.
233
JX 27 § 2.2.
234
Id.
49
For the reasons explained above, balancing each of the Broz factors and
considering them in a holistic fashion, the court concludes that Glaubach breached
his fiduciary duty of loyalty by usurping the opportunity to purchase the AAA
Building. I turn next to determining the damages resulting from this breach.
5. Damages for the AAA Building
In Guth, our Supreme Court explained that “[i]f an officer or director of a
corporation, in violation of his duty as such, acquires gain or advantage for himself,
the law charges the interest so acquired with a trust for the benefit of the corporation,
at its election, while it denies to the betrayer all benefit and profit.”235 Applying this
principle, this court has awarded lost profits as a measure of damages for usurpation
of ongoing business opportunities.236 More generally, Chancellor Allen once
summarized basic principles for awarding damages as follows:
The law does not require certainty in the award of damages where a
wrong has been proven and injury established. Responsible estimates
that lack m[a]thematical certainty are permissible so long as the court
has a basis to make a responsible estimate of damages. Speculation is
an insufficient basis, however. Each situation must be evaluated to
know whether justice will permit an estimation of damages given the
testimonial record or whether the record affords insufficient basis to fix
an award.237
235
5 A.2d at 510.
236
See In re Mobilactive Media, LLC, 2013 WL 297950, at *23-28 (Del. Ch. Jan. 25, 2013);
Dweck, 2012 WL 161590, at *17-18.
237
Red Sail Easter Ltd. P’rs, L.P. v. Radio City Music Hall Prods., Inc., 1992 WL 251380,
at *7 (Del. Ch. Sept. 29, 1992, revised Oct. 6, 1992).
50
Here, the opportunity Glaubach usurped was not an ongoing operating
business but the opportunity to acquire a building at an attractive price that the
Company could have used to relocate and/or expand its operations with the potential
for the property to appreciate in value. The Company contends an appropriate
measure of damages is the increase in value of the building from February 2015,
when Glaubach acquired it, to the date of trial. In response, Glaubach appears to
suggest that no damages may be awarded until such time, if ever, that Glaubach
actually sells the AAA Building and realizes a profit on it.238 I reject Glaubach’s
argument, for which no legal support is provided and which would lead to the
inequitable result of affording the Company no remedy for Glaubach’s breach of
duty. In my view, the Company has advanced a logical theory for quantifying
damages that can be reasonably estimated based on record evidence.
Specifically, the Company offered the expert opinion of Matthew J.
Guzowski, a professional appraiser, who credibly testified that the value of the AAA
Building as of the time of trial was $4.5 million based on a “market valuation.”239
Glaubach offered no expert testimony of his own concerning the value of the AAA
Building. I thus use the unrebutted figure of $4.5 million to which Guzowski opined
as the current value of the AAA Building.
238
See Def.’s Opening Br. 52-53; Post-Trial Tr. 99 (Dkt. 142).
239
Tr. 803-07 (Guzowski); JX 717 at 3, 89.
51
The Company seeks $2.7 million in damages as compensation for Glaubach’s
usurpation of the opportunity to purchase the AAA Building. That amount reflects
the difference between its current value ($4.5 million) and the amount of cash
Glaubach paid to acquire it ($1.8 million). This calculation, however, overstates the
amount of damages somewhat because it fails to account for the fact that Glaubach
provided AAA with six months of free rent as part of the deal.
The record does not contain evidence of the rental value of the AAA Building
at the time in question. But the record does show that AAA “wanted $2.4 million”
for the building and only accepted Glaubach’s offer of $1.8 million after he added
six months of free rent.240 To be conservative in determining damages, I assume that
the difference of $600,000 represents a reasonable estimate of six months of rent for
the building. Using this figure, the amount of damages the court will award Personal
Touch for its corporate opportunity claim is $2.1 million, which reflects the
difference between the AAA Building’s current value ($4.5 million) and Glaubach’s
estimated acquisition price ($1.8 million + $600,000 = $2.4 million).
B. The Alleged Self-Dealing Transactions
The Company asserts that Glaubach breached his fiduciary duties by engaging
in “self-dealing” transactions that fall into four categories: (i) the provision of
240
Tr. 278 (Glaubach).
52
$422,000 worth of healthcare services to his sister-in-law, Giza Shechtman; (ii) the
issuance of a $133,177 check to Shechtman; (iii) entering into the Jamaica Property
lease; and (iv) his use of an assistant (Reich) and a driver (Dihal).
“Classic examples of director self-interest in a business transaction involve
either a director appearing on both sides of a transaction or a director receiving a
personal benefit from a transaction not received by the shareholders generally.” 241
In other words, in a typical self-dealing transaction, the fiduciary is the recipient of
an allegedly improper personal benefit, which usually comes in the form of obtaining
something of value or eliminating a liability. With this framework in mind, the court
addresses next the Company’s four categories of self-dealing claims.
1. Glaubach Did Not Engage in Self-Dealing with Respect to
the Healthcare Services Provided to Shechtman
The Company seeks to hold Glaubach personally liable for $422,000 in
damages for healthcare services provided to Shechtman over a three-year period
before the filing of this action (i.e., from June 25, 2012 to June 25, 2015) on the
theory that the provision of these services constituted self-dealing by Glaubach.242
It is a strange theory because Glaubach was not the recipient of any of these
healthcare services and there is no evidence that Glaubach had a legal obligation to
241
Cede & Co., 634 A.2d at 362.
242
Pl.’s Opening Br. 50, 58.
53
pay for them. Shechtman was the beneficiary of the services, and the Company
apparently never made any effort to collect the $422,000 in question from her. In
support of this “self-dealing” claim against Glaubach, the Company advances
essentially two arguments, neither of which has merit.
First, citing Chaffin v. GNI Group, Inc.,243 the Company contends that
“[u]nder Delaware law, a fiduciary may be deemed self-interested if a family
member benefits from a transaction.”244 In Chaffin, the court denied a motion to
dismiss a stockholder challenge to a merger transaction because it “was not approved
by a majority of independent directors” and thus would not be protected under the
business judgment standard.245 The Company relies on the court’s finding that one
of the directors who approved the merger—who had a son who stood to receive
“economic and career benefits” from the transaction—“must . . . be deemed
interested” because “[i]nherent in the parental relationship is the parent’s natural
desire to help his or her child succeed.”246 Chaffin is readily distinguishable. It did
not concern self-dealing by a corporate fiduciary. The court merely considered
243
1999 WL 721569 (Del. Ch. Sept. 3, 1999).
244
Pl.’s Reply Br. 18.
245
1999 WL 721569, at *6.
246
Id. at *5.
54
whether board approval of the challenged transaction was sufficiently disinterested
and independent to warrant business judgment review.247
Second, the Company contends it “demonstrated that Glaubach—through
threats and inside dealing—prevented the Company from billing Schechtman [sic]
for the services she received.”248 This argument fails because, even if this factual
contention were true, the Company has not shown that Glaubach engaged in self-
dealing. To repeat, Glaubach was not the recipient of any of the healthcare services
at issue and had no legal obligation to pay for them. The Company has not identified
any authority where a corporate fiduciary has been found liable for self-dealing for
a benefit he did not receive personally. In the absence of such authority, I decline to
hold Glaubach personally liable for the cost of healthcare services that Shechtman
received under a theory of self-dealing.
In the interest of completeness, I note that although the Company did not
challenge Glaubach’s conduct with respect to Shechtman’s healthcare services as an
act of bad faith, the evidence would not support such a theory in any event. The
Company’s case for finding Glaubach personally liable for $422,000 in healthcare
247
The Company also relies on a statement in Grimes v. Donald, that a basis for demand
excusal “would normally be that . . . a majority of the board has a material financial or
familial interest.” 673 A.2d 1207, 1216 (Del. 1996). This citation is of no aid to the
Company. Like the court in Chaffin, Grimes did not find self-dealing by a corporate
fiduciary; the high court merely mentioned the word “familial” without any analysis.
248
Pl.’s Reply Br. 18.
55
services provided during the three-year period ending in June 2015 consists of
testimony from Glaubach and Susan Miano.249 But neither person’s cited testimony
would support a finding of bad faith conduct relating to the healthcare services
Shechtman received during the relevant period.
With respect to Glaubach, the cited testimony shows that Glaubach sent a
letter to JoAnn Piervinanzi, the Company’s Director of Reimbursement, threatening
to hold her “fully responsible” for terminating Shechtman’s healthcare services if
“something untoward happens to her as a result of the cessation of services.”250 That
letter was written, however, in September 2016 and pertained to a bill for services
rendered to Shechtman “since July 1, 2015”—after the period relevant to the
Company’s claim for $422,000 in damages.251
The cited testimony of Miano is equally if not more unhelpful to the
Company. Miano is a partner at Friedman LLP, the accounting firm that performed
a forensic analysis of the healthcare services the Company provided to Shechtman
from January 2010 to June 2014.252 She testified that Friedman LLP found that
249
Id.
250
JX 733; Tr. 437-41 (Glaubach).
251
JX 733. The questioning of Glaubach leading up to the discussion of this letter is too
imprecise and ambiguous to allow the court to find that Glaubach made any threats
pertaining to healthcare services provided to Shechtman before July 2015. See Tr. 437-39
(Glaubach).
252
Tr. 743, 746-50 (Miano); JX 347.
56
“there was a systematic suppression of invoicing to Giza Shechtman” but, despite
being asked the same question twice, she did not testify that Glaubach was
responsible for it.253 Nor could she credibly do so. Friedman LLP’s report never
mentions Glaubach and actually explains that not billing Shechtman was a standard
practice that apparently was approved by Slifkin:
The testing of the samples of transactions we selected revealed that 1)
the health care providers were paid by the Company for their time
rendered to Ms. Schectman [sic] as indicated on the Patient Activity
Reports; 2) invoices were generated, but none of them were actually
sent to Ms. Schectman [sic] for payment; and 3) revenue and accounts
receivable were recorded to the [Personal Touch] general ledger for the
services rendered to Ms. Schectman [sic] but were subsequently
reversed and not reflected in the Personal-Touch Home Care and
Affiliates Audited Combined Financial Statements as of, and for the
years ended, December 31, 2010 through 2014. Based on interviews
with various [Personal Touch] accounting and billing department
personnel . . . Friedman understands that these are standard practices
that have been historically conducted at the Company for many years.
While Friedman has seen no written documentation indicating any
approval of the reversal of the revenue and accounts receivable, Joann
Piervinanzi, Director of Reimbursement, and Tom McNulty, A/R
Manager, indicated that they believe the practices were initially
approved by David Slifkin prior to the start of their employment with
the Company.254
The fact that Friedman LLP attributed the Company’s failure to bill
Shechtman to Slifkin is not surprising because the Services Agreement that
253
Tr. 753 (Miano); see Tr. 750-51 (Miano).
254
JX 347 at 2 (emphasis added). The Friedman report further explained that this standard
practice dated back to at least 2000 according to Piervinanzi. Id. at 4.
57
Glaubach, Marx, and Shechtman signed in 2001 designated Slifkin as “the sole
arbiter” in “the event of a dispute as to the amount of [her] entitlement.” 255 As
explained previously, the Services Agreement also provided that the cost of services
provided to Shechtman would be netted against distributions to which she was
entitled.256 Significantly, the Company’s damages calculation of $422,000 does not
take into account whatever distributions Shechtman was entitled to receive during
the period in question, which undermines its reliability. In any event, for the reasons
explained above, the court concludes that Glaubach did not engage in self-dealing
with respect to healthcare services Shechtman received from the Company.
2. Glaubach Did Not Engage in Self-Dealing with Respect to
the $133,177 Payment to Shechtman
The Company next seeks to hold Glaubach personally liable for a payment it
made to Shechtman in July 2013. According to the Company, Glaubach “caused the
Company to issue a $133,177 check to Schectman [sic] because he claims she was
shortchanged as part of the ESOP transaction.”257 This would be improper, the
Company contends, because it would mean that Shechtman was shortchanged not
255
JX 8. The Company offered no evidence suggesting that the Services Agreement was
no longer effective during the relevant period and, to the contrary, acted at trial as if it was.
See Post-Trial Tr. 58.
256
See supra Section I.B; see also Tr. 635 (Marx) (testifying that, under the Services
Agreement, “Shechtman herself will pay for her own services providing we pay five
percent of all the operations in the metropolitan area”).
257
Pl.’s Opening Br. 50-51.
58
by the Company, but “by the participants in the ESOP transaction, including Dr.
Glaubach himself.”258
There is some confusion in the record about the reason for this payment. Goff
suggested the payment “related to the ESOP” transaction based on Glaubach’s
“J’accuse” letter.259 But that letter does not connect the check in question to the
ESOP transaction. The letter just states, without referring to the ESOP transaction,
that an accountant for the Company (Reimer) informed Glaubach that Shechtman
“was shortchanged close to $200,000.00 in distributions.”260 When the court asked
Glaubach about the check, he explained emphatically that the payment “had nothing
to do with the ESOP transaction,” and that it was made to compensate Shechtman
for an equity distribution that, according to the Company’s advisors, she should have
received from the Company before the ESOP transaction.261 I credit this testimony
and thus find that the $133,177 payment to Shechtman was not a self-dealing
transaction and that the Company otherwise has failed to prove that Glaubach should
be held liable for it.262
258
Tr. 300; see Tr. 299-300 (colloquy with Company counsel).
259
Tr. 105 (Goff).
260
JX 180 at 2.
261
Tr. 446-48 (Glaubach).
262
The Company suggests that it was Glaubach’s burden to prove that he was entitled to
have the check issued to Shechtman based on a self-dealing theory that would trigger entire
59
3. Glaubach Is Liable for his Portion of the Above-Market
Rent on the Jamaica Property Lease
The Company seeks to hold Glaubach liable for $635,000 in damages
representing his share of the above-market rent that was charged for a five-year lease
on the Jamaica Property. Unlike the transactions involving Shechtman, the Jamaica
Property lease is a classic example of self-dealing because Glaubach and Marx, both
fiduciaries of Personal Touch at the time, stood “on both sides” of the transaction.
On one side, Glaubach signed the lease on behalf of an affiliate of Personal Touch.263
On the other side, Marx signed the lease on behalf of the owner of the Jamaica
Property, Personal Touch Realty LLC, an entity that Marx and Glaubach co-owned
on a fifty-fifty basis.264
Glaubach argues he should be exempt from liability for the Jamaica Property
lease because Marx was the one who set the rental rate in the lease.265 The record
bears this out, but it is no defense to liability for self-dealing “[b]ecause under the
traditional operation of the entire fairness standard, the self-dealing director would
fairness review. Pl.’s Reply Br. 19. I disagree. Because the transaction was not an act of
self-dealing for the reasons explained above, it does not trigger entire fairness review.
263
JX 58 at 5.
264
Id.; PTO ¶ 140.
265
Tr. 279 (Glaubach).
60
have breached his duty of loyalty if the transaction was unfair, regardless of whether
he acted in subjective good faith.”266
With respect to the measure of damages, Guzowski credibly opined that the
rental term of the Jamaica Property lease was $1,270,000 above market based on an
analysis of comparable rental rates (on a per-rentable-square-foot basis) over the
five-year period of the lease.267 Glaubach did not submit any expert opinion (or even
lay testimony) to counter Guzowski’s opinion. The court thus credits Guzowski’s
testimony and enters judgment for $635,000 in damages against Glaubach and in the
Company’s favor for his share of liability for the above-market rent the Company
was charged under the Jamaica Property lease.
4. The Company Acquiesced to Glaubach’s Personal Use of
Employees Reich and Dihal
The Company’s final theory of “self-dealing” seeks damages from Glaubach
for the salaries it paid to two employees who assisted Glaubach: (i) $209,439.60
that was paid to David Reich during his tenure as a Company employee for
approximately sixteen months from January 2014 to April 2015; and (ii) $147,000
(or $49,000 per year) that was paid to Sase Dihal, Glaubach’s driver, for the three-
266
Venhill Ltd. P’ship v. Hillman, 2008 WL 2270488, at *22 (Del. Ch. June 3, 2008)
(Strine, V.C.).
267
Tr. 809-11(Guzowski); JX 717 at 99, 166. Guzowski’s report was the same one that
was used in connection with the Company’s negotiation of a settlement with Marx for his
share of the above-market rent. See supra Section I.O.
61
year period before this action was filed.268 This is yet another odd theory of self-
dealing for which the Company cites no supporting legal authority.
Glaubach argues that “[t]he Company had knowledge of and consented to, or
acquiesced in,” the employment of Reich and Dihal.269 In response to this defense,
the Company makes no comment about Dihal and, with respect to Reich, says only
that it “was left in the dark regarding Reich’s efforts to purchase the AAA Building
for Glaubach.”270 On this point, however, the record is undisputed that Glaubach
personally paid Reich $25,000 for the work he performed concerning Glaubach’s
purchase of the AAA Building.271
“A claimant is deemed to have acquiesced in a complained-of act where he:
has full knowledge of his rights and the material facts and (1) remains inactive for a
considerable time; or (2) freely does what amounts to recognition of the complained
of act; or (3) acts in a manner inconsistent with the subsequent repudiation, which
leads the other party to believe the act has been approved.”272 In my view, the
Company acquiesced to its employment of both Reich and Dihal.
268
Pl.’s Opening Br. 59-60; PTO ¶ 119.
269
Def.’s Opening Br. 44.
270
Pl.’s Reply Br. 21.
271
Tr. 531-32 (Reich); Reich Dep. 54-58 (Sept. 18, 2017); Glaubach Dep. 144 (July 28,
2017).
272
Klaassen v. Allegro Dev. Corp., 106 A.3d 1035, 1047 (Del. 2014).
62
With respect to Reich, it is beyond dispute that the Company was fully aware
of the nature of his employment by the Company. Reich had an official title
(Assistant to the President), a Company email address, and he met with Slifkin
“[e]arly on” to discuss some initial tasks he would perform for the Company.273 He
regularly attended Board meetings as Assistant to the President,274 and he directly
corresponded with Slifkin and Hold-Weiss about tasks he was working on for
them.275 The Company had full knowledge about Reich’s activities, yet there is no
evidence that anyone at the Company took issue with Reich’s work or disputed the
propriety of the Company paying his salary to assist Glaubach as the Company’s
President at any point during the time he worked for the Company. Indeed, Reich’s
employment was terminated only after Glaubach had been suspended from his duties
as President, obviating the need for an assistant for that position.276
With respect to Dihal, Glaubach testified that he and Marx agreed around the
time of the ESOP transaction that the Company would provide him with a driver—
just as it had provided Marx with a secretary for over thirty years for “private
work.”277 Marx did not testify otherwise and the Company does not suggest it was
273
Tr. 530-31 (Reich); see JX 63; JX 70; JX 77.
274
See, e.g., JX 68; JX 74; JX 104.
275
JX 70; JX 77.
276
Tr. 539-40 (Reich).
277
Tr. 287-88 (Glaubach); Glaubach Dep. 458-60 (Sept. 6, 2017).
63
unaware that it was paying Dihal to serve as Glaubach’s driver. The Company’s
grievance with paying Dihal boils down to “the fact that [Glaubach] is not entitled
to [a driver] under his Employment Agreement.”278 But nothing in that agreement
prohibits the Company from paying for a driver for Glaubach.279
In sum, the record shows that the Company was fully aware of the services
Reich and Dihal were providing to Glaubach during the time period in question and
did nothing to question or object to paying their salaries until the Company’s
relationship with Glaubach ruptured in June 2015 when it initiated this lawsuit. This
constitutes acquiescence. Accordingly, the Company’s request to recoup from
Glaubach the salaries it paid to Reich and Dihal lacks merit.
C. The Company Has Failed to Prove that Glaubach Acted in Bad
Faith Before his Termination as President of the Company
The Company next advances the novel argument that Glaubach breached his
fiduciary duties by conducting a “campaign of harassment” against fellow Board
members and employees of the Company.280 In this section, the court considers that
argument with respect to events that occurred before Glaubach was terminated as
278
Pl.’s Opening Br. 51.
279
See JX 26. The Employment Agreement does entitle Glaubach to “full-time use of a
Company automobile” but, to repeat, nothing in that provision or elsewhere in the
Employment Agreement prohibits Glaubach from receiving the services of a driver. See
id. § 3.4.
280
Pl.’s Opening Br. 46.
64
President of the Company in June 2015, which can be analyzed in two parts: (i)
Glaubach’s interactions with other Board members; and (ii) his alleged retaliation
against three employees who made complaints about sexual harassment against
Glaubach (the “Complainants”).
The Company acknowledges that “[l]imited case law exists in the corporate
context relating to harassing conduct because (in most cases) this type of behavior
is often dealt with in the criminal courts as harassment or witness tampering.”281 The
Company then relies on several cases for support, but they are inapposite. They
either involved situations where this court sanctioned a party for compromising the
integrity of a judicial proceeding282 or where the fiduciary’s conduct was motivated
by a desire to procure financial or other benefits to the detriment of the
corporation.283 Neither scenario is present here. I thus turn to first principles to
analyze this claim.
281
Id.
282
See OptimisCorp v. Waite, 2015 WL 5147038, at *2 (Del. Ch. Aug. 26, 2015) (court
imposed sanctions against plaintiffs after concluding they had “threatened the integrity of
this proceeding” based on findings that they “paid witnesses for the content of their
testimony, threatened witnesses with criminal charges, attempted to open criminal
investigations, and generally engaged in threats of civil litigation based on questionable or
baseless claims, all in an effort to secure ‘evidence’ that would aid the plaintiffs in this
case”).
283
See CSH Theatres, L.L.C. v. Nederlander of S.F. Assocs. 2018 WL 3646817, at *27
(Del. Ch. July 31, 2018) (finding that defendant breached her duty of loyalty and “placed
her own interests above those of the Company” by refusing to approve a project unless her
co-president “agreed to modify the LLC Agreement to give her more control” and by
“us[ing] her fiduciary position to prevent the Company from pursuing shows she wanted
65
“Directors of a Delaware corporation owe two fiduciary duties—care and
loyalty.”284 Broadly speaking, “the duty of loyalty mandates that the best interest of
the corporation and its shareholders takes precedence over any interest possessed by
a director, officer or controlling shareholder and not shared by the stockholders
generally.”285 “The duty of loyalty includes a requirement to act in good faith . . .
.”286 “To act in good faith, a director must act at all times with an honesty of purpose
and in the best interests and welfare of the corporation.”287 “A failure to act in good
faith may be shown, for instance, where the fiduciary intentionally acts with a
purpose other than that of advancing the best interests of the corporation . . . .”288
With these principles in mind, I turn to the two categories of alleged harassment.
With respect to Glaubach’s interactions with Board members, the Company
focuses on a single meeting that occurred on April 29, 2015. Although Glaubach
for her competing business”); BelCom, Inc. v. Robb, 1998 WL 229527, at *1 (Del. Ch. Apr.
28, 1998) (finding that defendant “breached the duty of loyalty that he owed to [the
corporation] by trying to extract millions of dollars from BelCom, Inc., based on frivolous
invoices submitted by defendant and coupled with a dedicated campaign designed to harass
and publicly embarrass BelCom and its affiliates, as well as individuals associated with
these entities”).
284
In re Orchard Enters., Inc. S’holder Litig., 88 A.3d 1, 32 (Del. Ch. 2014).
285
Cede & Co., 634 A.2d at 361.
286
Orchard, 88 A.3d at 32.
287
In re Walt Disney Co. Deriv. Litig., 907 A.2d 693, 755 (Del. Ch. 2005), aff’d, 906 A.2d
27 (Del. 2006).
288
Walt Disney, 906 A.2d at 67.
66
engaged in inflammatory name-calling and was aggressive with his fellow directors
at that meeting,289 I find that his actions were not motivated by an intention to
procure benefits for himself at the expense of the Company or to otherwise harm the
Company so as to constitute bad faith. To the contrary, the weight of the evidence
suggests that Glaubach’s behavior, although uncivil, was motivated by a genuinely
held belief on his part that Personal Touch was being mismanaged and a sense of
frustration that his fellow directors were ignoring concerns he had been expressing
to them for many months about the Company’s management.290
The allegations of retaliation arose out of an investigation into whether
Glaubach sexually harassed three employees of the Company. The Company
retained outside counsel (Klein Zelman) to investigate that matter. The investigation
began on September 30, 2014, and is summarized in a November 21, 2014 report,
which was supplemented on December 4, 2014.291
The record evidence of retaliation is limited. Neither DiMaggio nor Hold-
Weiss testified at trial, and the Company does not rely on their deposition testimony.
Vargas is the only one of the three Complainants who testified at trial. She credibly
289
See supra Section I.K.
290
Tr. 247-52, 264-65 (Glaubach) (testifying about Board’s failure to respond to concerns
he expressed in letters he sent to directors in July and October 2014).
291
See JX 195; JX 232. Glaubach objects to the admissibility of these reports on hearsay
grounds. That objection is sustained, except with respect to the portions of the reports that
were included in the Pre-Trial Stipulation and Order. See PTO ¶¶ 62-70.
67
testified that she felt like Glaubach was retaliating against her after she spoke to
Klein Zelman because Glaubach stopped speaking to her and publicly ignored her,
and because Glaubach’s driver (Dihal) started checking on her attendance and his
assistant (Reich) started checking on her work.292 Vargas also admitted, however,
that Glaubach never threatened to fire her or to harm her in any way after she spoke
to Klein Zelman.293
Glaubach vehemently denies retaliating against any of the Complainants,
although he admits that he did not speak to Vargas and treated her as if “[s]he doesn’t
exist” after she spoke to Klein Zelman.294 Glaubach also testified that the
investigation was retaliatory against him.295 This contention finds support in Klein
Zelman’s report, which suggests that Slifkin and Balk started the investigation in
reaction to Glaubach’s criticisms of them. The report concludes, for example, that
“it appears unlikely that Complainants would have pursued filing ‘formal’
complaints against Glaubach, or that Glaubach’s conduct would have been
investigated, but for the escalating issues between Glaubach and Balk.”296 Glaubach
292
Tr. 784-93 (Vargas).
293
Tr. 797-99 (Vargas).
294
Tr. 280-81 (Glaubach).
295
Tr. 260 (Glaubach).
296
PTO ¶ 64; JX 195 at 19. The Klein Zelman report also states that “Slifkin, Balk and
[Hold-]Weiss did not decide to investigate Glaubach’s behavior until after the [September
8, 2014] door slamming incident with Balk,” and that the “Complainants generally do not
68
also points out that DiMaggio admitted that he did not retaliate against her in any
way except by naming her (along with ten others) as a defendant in the New York
Action for her involvement in the alleged tax fraud scheme.297 As mentioned above,
the court denied DiMaggio’s motion for summary judgment on this claim.298
Based on this record, I find that Glaubach acted improperly to make Vargas
feel uncomfortable at the office after he learned about the Klein Zelman
investigation, but that his conduct was directed at Vargas and was not motivated by
a desire to gain any personal benefit for himself to the Company’s detriment or to
otherwise harm the Company so as to constitute bad faith.299
In sum, although all of the conduct discussed above is troubling, it does not
constitute a breach of the duty of loyalty. None of this conduct afforded Glaubach
any personal benefit at the Company’s expense, none of it was motivated by an
document Glaubach’s behavior until late August or early September 2014 when
Glaubach’s treatment of Balk seemed to significantly worsen.” Id.
297
DiMaggio Dep. 152-54.
298
See supra Section I.R.
299
No authority applying Delaware law has been brought to the court’s attention addressing
a breach of fiduciary duty claim based on allegations of retaliation against employees of a
corporation. Outside of Delaware, one court has held that allegations of sexual harassment
would not constitute a breach of a corporate fiduciary’s duty of loyalty. See Pozner v. Fox
Broad. Co., 74 N.Y.S.3d 711, 713-14 (N.Y. Sup. Ct. 2018) (concluding that a claim for
breach of the fiduciary duty of loyalty against a former executive vice president based on
allegations of sexual harassment was not “tenable” because the duty of loyalty “has only
been extended to cases where the employee act[s] directly against the employer’s
interests—as in embezzlement, improperly competing with the current employer, or
usurping business opportunities”) (internal quotation marks omitted).
69
intention to harm Personal Touch, and none of it resulted in any apparent harm to
the Company. Accordingly, judgment will be entered in Glaubach’s favor with
respect to this aspect of Count I of the Amended Complaint.
D. The Company Is Entitled to a Declaration that its Termination of
Glaubach’s Employment Was Proper and Valid
In Count IV of the Amended Complaint, the Company seeks a declaration that
“Glaubach’s employment was properly and validly terminated” under his
Employment Agreement.300 Reciprocally, Glaubach asserts in his counterclaim that
he was invalidly terminated and seeks $302,739.73 in damages, “representing the
remaining value due under his Employment Agreement, plus pre- and post-judgment
interest.”301
The resolution of these two claims turns on the application of Section 5.2(c)
of the Employment Agreement, which was the cited basis for the Company’s
termination of the Employment Agreement and removal of Glaubach from his
position as President of the Company.302 Section 5.2(c) states, in relevant part, that:
The Company shall . . . have the right to terminate the
employment of [Glaubach] under this Agreement and [Glaubach] shall
forfeit the right to receive any and all further payments hereunder . . . if
[Glaubach] shall have committed any of the following acts of default:
*****
300
Am. Compl. ¶ 213 (Dkt. 49).
301
Def.’s Opening Br. 36.
302
JX 323 at 2.
70
(c) [Glaubach] shall have committed any material act
of willful misconduct, dishonesty or breach of trust
which directly or indirectly causes the Company or
any of its subsidiaries to suffer any loss, fine, civil
penalty, judgment, claim, damage or expense . . . .303
Under New York law, which governs the Employment Agreement,304 the
“essential elements of a breach of contract cause of action are ‘the existence of a
contract, the plaintiff’s performance pursuant to the contract, the defendant’s breach
of his or her contractual obligations, and damages resulting from the breach.’”305
The element of damages is not relevant to the Company’s claim for declaratory
relief, and it is not disputed that the Employment Agreement is a valid contract and
that the Company performed its obligations under the contract. Thus, the only open
question is whether Glaubach breached Section 5.2(c) of the agreement.
The Company asserts that Glaubach breached this provision by usurping the
opportunity to purchase the AAA Building. I agree.
To establish a breach of Section 5.2(c), the Company must prove that
Glaubach committed a material act of either (i) willful misconduct, (ii) dishonesty,
or (iii) breach of trust that caused the Company to suffer a loss. Glaubach’s
usurpation of the opportunity to purchase the AAA Building clearly was a material
303
JX 26 § 5.2(c).
304
Id. § 9.5.
305
Canzona v. Atanasio, 989 N.Y.S.2d 44, 47 (N.Y. App. Div. 2014) (quoting Dee v.
Rakower, 976 N.Y.S.2d 470, 474 (N.Y. App. Div. 2013)).
71
act that caused the Company to suffer a loss for the reasons discussed previously,
i.e., it involved the purchase of a building located on a property uniquely valuable
to the Company given its location, for a significant sum ($1.8 million plus six months
of free rent), and caused the Company to suffer a loss warranting an award of $2.1
million in damages. The usurpation also is of a character that fits within each of the
three types of acts that can trigger Section 5.2(c).
Glaubach’s usurpation constituted a material act of “willful misconduct”
because he intentionally violated his fiduciary duties.306 The usurpation constituted
a material act of “dishonesty” because, for months, Glaubach intentionally hid from
the Company his efforts to purchase the building for himself to ensure that the
Company did not bid on the property.307 And the usurpation constituted a material
“breach of trust” because it amounted to a flagrant breach of Glaubach’s duty of
loyalty by putting his personal self-interests ahead of Personal Touch’s corporate
interests.
In Guth itself, the Delaware Supreme Court explained that, “[w]hile
technically not trustees,” “[c]orporate officers and directors are not permitted to use
their position of trust and confidence to further their private interests” because “they
306
See supra Section III.A.
307
Tr. 397-400 (Glaubach).
72
stand in a fiduciary relation to the corporation and its stockholders.”308 Here,
contrary to the duty of loyalty he owed to Personal Touch, Glaubach willfully and
dishonestly used his position of trust as a fiduciary to further his own self-interest
by taking for himself a valuable corporate opportunity in the form of the AAA
Building. Based on that breach, the Company was warranted in terminating
Glaubach’s employment with the Company.309
*****
For the reasons stated above, the Company is entitled to a declaration that its
termination of the Employment Agreement and removal of Glaubach from his
position as the Company’s President were proper and valid. Accordingly, judgment
will be entered against Glaubach and in the Company’s favor with respect to Count
IV of the Amended Complaint and Glaubach’s counterclaim.
E. The Company Has Failed to Prove that Glaubach’s Compensation
Should Be Forfeited Under the Faithless Servant Doctrine
In Count III of the Amended Complaint, the Company seeks to recoup under
the New York “faithless servant” doctrine approximately $2 million in compensation
308
5 A.2d at 510 (emphasis added).
309
The Company also asserts that Glaubach breached Section 5.2(c) by engaging in self-
dealing and retaliating against the sexual harassment Complainants. Given the court’s
finding that the usurpation of the AAA Building constitutes a breach of Section 5.2(c), the
court does not reach those issues.
73
Glaubach earned in the three years leading up to June 24, 2015, when he was
terminated.310 The Company has failed to demonstrate a basis for this relief.
The faithless servant doctrine is based on agency law and has roots in New
York law going back to the late 1800s.311 As the Second Circuit has explained,
“[u]nder New York law, an agent is obligated to be loyal to his employer and is
prohibited from acting in any manner inconsistent with his agency or trust and is at
all times bound to exercise the utmost good faith and loyalty in the performance of
his duties.”312
“In order to make out a claim of breach of the duty of loyalty in New York—
sometimes referred to as the ‘faithless servant doctrine’—the employer plaintiff
must show (1) that the employee’s disloyal activity was related to ‘the performance
of his duties’ . . . and (2) that the disloyalty ‘permeated the employee’s service in its
most material and substantial part.’”313 If an employee is found to be faithless, the
310
Am. Compl. ¶¶ 202-06; Pl.’s Opening Br. 56, 60; PTO ¶¶ 24-27.
311
See Carman v. Beach, 63 N.Y. 97 (N.Y. 1875); Murray v. Beard, 7 N.E. 553 (N.Y.
1886).
312
Phansalkar v. Andersen Weinroth & Co., L.P., 344 F.3d 184, 200 (2d Cir. 2003)
(internal quotation marks omitted). The interplay between the faithless servant doctrine
under New York law for an individual resident in New York who is an officer of a
Delaware corporation and thus owes fiduciary obligations governed by Delaware law is
not clear to the court. The court assumes without deciding that the doctrine can be applied
in this scenario.
313
Schanfield v. Sojitz Corp. of Am., 663 F. Supp. 2d 305, 348 (S.D.N.Y. 2009) (quoting
Phansalkar, 344 F.3d at 200, 203).
74
remedy is forfeiture of compensation.314 With respect to the second element of the
claim, another court has explained that, to be entitled to forfeiture under the faithless
servant doctrine, the employer must show a “persistent pattern of disloyalty.” 315
These authorities are consistent with Personal Touch’s articulation of the
operative legal standard. Citing City of Binghamton v. Whalen,316 the Company
contends that under the faithless servant doctrine, “[a]n employee who has engaged
in repeated acts of disloyalty must forfeit the compensation he received from his
employer.”317
Here, the Company has failed to prove that Glaubach engaged in a persistent
pattern or repeated acts of disloyalty in performing his duties as an officer of
Personal Touch during the three years predating his termination so as to warrant
forfeiture of the compensation he received in that capacity during that period. To be
sure, Glaubach breached his fiduciary duty of loyalty by usurping a corporate
opportunity in the form of the AAA Building. But as egregious as that conduct was,
it was an isolated incident that occurred late in Glaubach’s tenure as President of the
Company. With respect to all of the other acts identified in the Company’s post-trial
314
City of Binghamton v. Whalen, 32 N.Y.S.3d 727, 728-29 (N.Y. App. Div. 2016).
315
Bon Temps Agency, Ltd. v. Greenfield, 622 N.Y.S.2d 709, 710 (N.Y. App. Div. 1995)
(quoting Schwartz v. Leonard, 526 N.Y.S.2d 506, 508 (N.Y. App. Div. 1988)).
316
32 N.Y.S.3d at 728.
317
Pl.’s Opening Br. 56.
75
briefs for application of the faithless servant doctrine—the provision of healthcare
services to Shechtman, the $133,177 payment to Shechtman, and the alleged
retaliation against the Complainants318—Glaubach did not commit any breaches of
fiduciary duty for the reasons explained above. Accordingly, judgment on Count III
of the Amended Complaint will be entered in Glaubach’s favor.
F. Glaubach Acted in Bad Faith as a Director in Two Respects After
His Termination as President of the Company
The Company’s final two fiduciary duty claims concern actions Glaubach
took after he was terminated as President in June 2015 but while he was still a
director of the Company: (i) sending anonymous letters over an eight-month period
318
Id. at 56, 60; Pl.’s Reply Br. 35. In its post-trial briefs, the Company does not argue
that Glaubach’s involvement in the Jamaica Property lease is relevant to its faithless servant
claim, and thus waived that argument. Emerald P’rs, 726 A.2d at 1224 (“Issues not briefed
are deemed waived.”). Even if the court were to put this transaction into the mix, the
outcome would not change for two reasons. First, two unrelated and distinct breaches of
duty still do not amount to a persistent pattern of disloyalty so as to warrant forfeiture of
one’s entire compensation. See Phansalkar, 344 F.3d at 202 (forfeiture warranted where
defendant’s disloyal actions “occurred repeatedly, in nearly every transaction on which he
worked”); Schanfield, 663 F. Supp. 2d at 321 (forfeiture warranted where employee “had
sent hundreds of confidential or privileged SCA documents from his SCA computer to
third parties”); Whalen, 32 N.Y.S.3d at 728 (forfeiture warranted where Director of Parks
and Recreation admitted to “stealing more than $50,000 from plaintiff over the course of a
nearly six-year period”). Second, the circumstances concerning the Jamaica Property lease
are qualitatively different than those concerning the AAA Building. The Jamaica Property
lease was approved by both Glaubach and Marx in November 2013—before the Company
had installed an independent Board majority in 2014—and it is undisputed that the rent
term was negotiated by Marx, not Glaubach. Although the court has found Glaubach liable
for one-half of the amount of the above-market rent associated with the Jamaica Property
lease given its self-dealing nature, Glaubach’s role in this transaction has a completely
different complexion than his secret usurpation of the AAA Building.
76
extending from March to November 2016;319 and (ii) attempting to disrupt the
Company’s loan negotiations with its primary lender (MidCap) in the summer of
2016. The Company argues that each of these actions amounts to a breach of the
duty of loyalty. I agree and will address each category in turn, applying the same
fiduciary duty principles outlined above in Section III.C.
Beginning in March 2016, Glaubach orchestrated sending over fifty letters
anonymously to at least sixteen different individuals associated with the Company,
including all of the other Board members, numerous Company officers and
employees, outside counsel, and even some of their spouses.320 The letters were
addressed to the recipients’ homes; contained biblical references and disturbing
images; suggested that the recipients were guilty of crimes, infidelity, and other
offenses; and plainly were intended to provoke anxiety when they were opened.321
A sampling of the letters follows:
Letters sent to several Board members stating: “To all sinners
BLOOD was the first plague[,] nine to follow, repent before its
[sic] too late.”322
319
See JX 374 (dated March 24, 2016); JX 473 (dated November 17, 2016).
320
PTO ¶ 121-24; see JX 374; JX 397; JX 398; JX 401; JX 402; JX 403; JX 405; JX 406;
JX 407; JX 408; JX 410; JX 411; JX 415; JX 416; JX 417; JX 418; JX 419; JX 420; JX
421; JX 422; JX 445; JX 446; JX 447; JX 457; JX 458; JX 460; JX 461; JX 467; JX 473;
JX 490; JX 495; JX 500; JX 501; JX 503; JX 504; JX 515; JX 640.
321
See supra Section I.N; PTO ¶¶ 125-31.
322
JX 387; JX 389; JX 495.
77
A letter addressed to Marx’s wife, Frances Marx, stating that her
husband had engaged in “sexual indiscretions.”323
Letters sent to multiple Board members and outside counsel for
the Company (Brum) and for the Board’s Audit Committee
(James Alterbaum) along with his wife, some with biblical verses
and a picture of a noose,324 and others suggesting they would be
stricken by biblical plagues.325
Letters sent to Board members and Company employees
suggesting they would be prosecuted and/or jailed for crimes.326
A letter sent to a Company employee after one of her parents was
injured containing an image of an x-ray of a broken bone that
asked: “Who in your family is going to be stricken next as a
result of your sins?”327
The letters had their intended effect. One employee explained that his wife
started crying when she opened one of the letters.328 Another employee recounted a
similar experience: “What frightened my wife the most, that we were receiving these
kinds of threatening letters at our home. Okay. I don’t need to say more.” 329 As
323
Tr. 323 (Glaubach); JX 401.
324
JX 405; JX 406; JX 407; JX 496.
325
JX 410; JX 411; JX 505.
326
See, e.g., JX 374; JX 377; JX 397; JX 398; JX 399; JX 445.
327
Tr. 145 (Goff); JX 467.
328
Calabro Dep. 171-72.
329
Waldman Dep. 223.
78
director Goff testified, the letters were “extremely distressing to everybody
involved.”330
“[T]he duty of loyalty mandates that the best interest of the corporation and
its shareholders takes precedence over” a director’s self-interest.331 Given the
intended audience, and the magnitude, nature, and duration of the anonymous letter-
writing campaign that Glaubach orchestrated, his conduct to my mind is inexplicable
as anything but an act of bad faith. The sheer pervasiveness of the letter-writing and
the inclusion of spouses as targets of his letters belie the notion that Glaubach was
merely “blowing off steam,” as he testified.332 Rather, the evidence shows that
Glaubach was engaged in a systematic effort to harass and annoy the entire
management structure of the Company, the logical and foreseeable consequence of
which was to hurt morale and create an enormous distraction of time and resources
to the detriment of the Company.333 In doing so, Glaubach exalted his own personal
interests while serving as a fiduciary of the Company above the best interests of
Personal Touch and thus acted in bad faith in breach of his duty of loyalty.
330
Tr. 147 (Goff).
331
Cede & Co., 634 A.2d at 361.
332
Tr. 293 (Glaubach).
333
See, e.g., Tr. 147 (Goff) (testifying that the anonymous letters “became an incredible
disruption to the Company” as a “distraction of time and effort”).
79
I reach the same conclusion with respect to Glaubach’s letter-writing to
MidCap, the Company’s primary lender, during the summer of 2016. At that time,
the Company was negotiating to resolve certain loan covenant defaults in order to
preserve its lending relationship with MidCap. Having learned that the Company
was in the midst of these negotiations through attending Board meetings,334
Glaubach interjected himself and portrayed the Company to MidCap in a highly
negative light in a series of letters ostensibly calculated to sabotage the Company’s
relationship with MidCap in order to advance his own interests.335
In a letter addressed to a managing director of MidCap, for example, Glaubach
described as “fraudulent” the continuing education expense scheme and the
Company’s tax returns for this period:
My purpose in reaching out, was to get the answers to a couple of
questions and also to inform you that towards the end of 2014, Personal
Touch was being audited by the IRS and the NYS Department of
Taxation. At that time, David Slifkin, our then CEO and Mr. Robert
Marx hired James Sherwood, a tax attorney and Leon Reimer, a
forensic accountant to do a complete review of Personal Touch’s
records.
Sherwood and Reimer found that David Slifkin, Robert Marx and about
20 other employees fraudulently characterized salary payments as
reimbursements for continuing education expenses. As a result,
fraudulent tax returns were filed.
334
Tr. 416 (Glaubach).
335
JX 427; JX 437; JX 439.
80
Two years ago I brought this information to the attention of the board
of directors and they refused to do anything. That is a major reason
why I had to bring a lawsuit against them in March of 2015. As such,
I will not sign any documents authorizing another amendment to the
loan agreement.336
Notably, Glaubach openly admits that he was not concerned about the damage this
letter or the others he sent to MidCap might do to the Company’s relationship with
its lender:
Q. Dr. Glaubach, you sent all three of these letters in the summer of
2016. Correct?
A. Yes. 100 percent.
Q. And you weren’t concerned at all that MidCap might stop
lending money to Personal Touch. Correct?
A. I wasn’t interested in that.
Q. And you weren’t at all worried that MidCap might refuse to
negotiate its loan agreement with Personal Touch as a result of your
letters. Correct?
A. That was not my concern.337
Relying on Odyssey Partners, L.P. v. Fleming Companies, Inc.,338 Glaubach
argues that he did not breach his duty of loyalty in communicating with MidCap
because he was only attempting to protect his interests as a creditor of the Company
336
JX 437.
337
Tr. 427 (Glaubach).
338
1996 WL 422377 (Del. Ch. July 24, 1996).
81
rather than “acting in a fiduciary capacity.”339 In Odyssey, the court commented that
“fiduciary obligation does not require self-sacrifice . . . . Thus one who may be both
a creditor and a fiduciary . . . does not by reason of that status alone have special
limitations imposed upon the exercise of his or her creditor rights.”340
Glaubach’s argument fails because his assertion that he was merely acting to
protect his interests as a creditor cannot be squared with the evidence. In his letters
to MidCap, Glaubach asked few questions relevant to his status as a creditor.
Glaubach instead made concerted efforts to place the Company in a bad light and
actively discouraged MidCap from continuing to lend to the Company. Specifically,
in a letter addressed to Leon Black, the Chairman of the company that manages
MidCap, Glaubach wrote: “If you extend them credit, you are doing so at your own
risk.”341 In that same letter, Glaubach did not even mention his status as a creditor;
the letter only said negative things about the Company’s financial condition.342
Glaubach’s letters thus cannot reasonably be understood to have been motivated by
a bona fide exercise of creditor rights.
*****
339
Def.’s Opening Br. 45-46.
340
1996 WL 422377, at *3.
341
JX 439; Tr. 420-21 (Glaubach).
342
JX 439.
82
For the reasons explained above, the court concludes that Glaubach acted in
bad faith and breached his fiduciary duty of loyalty by (i) orchestrating the sending
of the anonymous letters and (ii) attempting (albeit unsuccessfully) to disrupt the
Company’s negotiations with MidCap. The Company does not seek damages with
respect to either of these matters, thus the only relief to be granted is a declaration
of these breaches of duty.343
G. Attorneys’ Fees
The Company requests that the court award it attorneys’ fees and costs for the
expenses it incurred in this litigation, to be paid by Glaubach. The request is denied.
Delaware follows the “American Rule,” which provides that litigants “are
generally responsible for paying their own counsel fees, absent special
circumstances or a contractual or statutory right to receive fees.”344 Special
circumstances include:
(1) the presence of a common fund created for the benefit of others; (2)
where the judge concludes a litigant brought a case in bad faith or
through his bad faith conduct increased the litigation’s cost; and (3)
cases in which, although a defendant did not misuse the litigation
process in any way, . . . the action giving rise to the suit involved bad
faith, fraud, conduct that was totally unjustified, or the like and
attorney’s fees are considered an appropriate part of damages.345
343
See PTO ¶ 155.
344
Scion Breckenridge Managing Member, LLC v. ASB Allegiance Real Estate Fund, 68
A.3d 665, 686 (Del. 2013) (citations and internal quotation marks omitted).
345
Id. at 687 (internal quotation marks omitted).
83
More broadly, this court “may award fees in the limited circumstances of an
individual case [that] mandate that the court, in its discretion, assess counsel fees
where equity requires.”346
The court declines to exercise its discretion to shift fees in this case. As the
prior discussion reflects, the outcome of this case is very much a split decision. The
Company won some significant claims and lost a number of others. This litigation
was protracted, hard fought, and involved some troubling conduct, but the conduct
at issue did not rise to the level of such egregiousness so as to warrant a deviation
from the American Rule. Thus, the Company’s request for an award of attorneys’
fees is denied.
IV. CONCLUSION
For the reasons explained above, judgment will be entered in the Company’s
favor on Count I of the Amended Complaint, in part, entitling the Company to an
award of damages in the amount of $2,735,000 and declaratory relief. Judgment
also will be entered (i) in the Company’s favor on Count IV of the Amended
Complaint and on Glaubach’s counterclaim, entitling the Company to declaratory
relief; and (ii) in Glaubach’s favor on Counts II, III, and the remaining parts of Count
I of the Amended Complaint.
346
Id. (internal quotation marks omitted).
84
The parties are directed to confer and to submit a form of final judgment and
order to implement this decision within five business days. The form of final
judgment and order should address pre-judgment interest,347 recognizing that the
amount of damages for the usurpation claim is based on a valuation of the AAA
Building as of the time of trial, and post-judgment interest using the Delaware legal
rate. Each party will bear its own costs.
IT IS SO ORDERED.
347
Glidepath Ltd. v. Beumer Corp., C.A. No. 12220-VCL, at 56-57 (Del. Ch. Feb. 21,
2019) (“In Delaware, pre-judgment interest is awarded as a matter of right.”) (citing
Brandywine Smyrna, Inc. v. Millennium Builders, LLC, 34 A.3d 482, 485-87 (Del. 2011)).
85