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Zimmerman v. Crothall

Court of Chancery of Delaware

October 14, 2013

KATHERINE D. CROTHALL, MICHAEL GAUSLING, PETER MOLINARO, ROBERT TONI, STEVE BRYANT, ORIGINATE ADHEZION A FUND, INC., a Delaware corporation, ORIGINATE ADHEZION Q FUND, INC., a Delaware corporation, ORIGINATE VENTURES, LLC, a Delaware limited liability company, LIBERTY VENTURES H, L.P., a Delaware limited partnership, LIBERTY ADVISORS, INC., a Delaware corporation, and THOMAS R. MORSE, Defendants, and ADHEZION BIOMEDICAL LLC, a Delaware limited liability company, Nominal Defendant.

Submitted: June 28, 2013.

Evan O. Williford, Esq., THE WILLIFORD FIRM LLC, Wilmington, Delaware; Attorneys for Intervenor.

Richard A. Barkasy, Esq., SCHNADER HARRISON SEGAL & LEWIS LLP, Wilmington, Delaware; David Smith, Esq., Stephen A. Fogdall, Esq., Benjamin D. Wanger, Esq., SCHNADER HARRISON SEGAL & LEWIS LLP, Philadelphia, Pennsylvania; Attorneys for Defendants.

David J. Margules, Esq., BOUCHARD MARGULES & FRIEDLANDER, P.A., Wilmington, Delaware; Attorneys for Nominal Defendant.


PARSONS, Vice Chancellor.

After conducting a full trial in this matter, I entered an Opinion on the merits on January 31, 2013 (the "Post-Trial Opinion").[1] At the conclusion of the Post-Trial Opinion, I directed counsel to confer and submit a proposed form of final judgment. This action currently is before me on two substantive motions: Defendants' motion to dismiss for lack of standing, and Plaintiff's motion to enter a final judgment and petition for an award of attorneys' fees. For the reasons set out below, I grant Defendants' motion, and thus, also deny Plaintiff's motion for entry of final judgment on the merits of the underlying dispute. After Plaintiff, Robert Zimmerman, moved for entry of a final, post-trial order, he divested all of his interests in the Nominal Defendant, Adhezion Biomedical LLC (the "Company" or "Adhezion"), on whose behalf he had sued. Thereafter, Defendants moved to dismiss, arguing that Zimmerman no longer had standing to prosecute this derivative action. I grant the petition, however, of Zimmerman's former counsel, now Intervenor, The Williford Firm LLC ("TWF"), and award them $300, 000.00 in attorneys' fees and expenses, payable by Adhezion.


A. The Parties

Plaintiff, Zimmerman, is the co-founder, former CEO, and a former director of Adhezion. At the time of my Post-Trial Opinion, Zimmerman owned 86, 900 Class A Common units and 40, 000 Class B Common units in Adhezion. On April 12, 2013, he sold all of his Adhezion stock to William A. Graham, IV, an Adhezion investor who held Series A and B Preferred units.

Intervenor, TWF, represented Zimmerman from the commencement of this action through the conclusion of trial, post-trial briefing, and issuance of the Post-Trial Opinion. On April 1, 2013, TWF simultaneously filed (1) a motion to withdraw as counsel to Zimmerman and to intervene as an interested party and (2) a reply in support of the motion to enter a final order and petition for attorneys' fees. On May 10, 2013, I granted TWF's motion, thereby enabling it to withdraw as Zimmerman's counsel and to intervene on its own behalf.[2]

Nominal Defendant, Adhezion, is a privately held Delaware limited liability company with its principal place of business in Wyomissing, Pennsylvania. Adhezion is an early-stage medical device company that develops and commercializes surgical, wound management, and infection-prevention technologies.

The defendants in this action include the five members of Adhezion's board of directors (the "Board") and entities that, directly or indirectly, have invested in Adhezion (collectively, "Defendants").

Defendants Katherine D. Crothall, Michael J. Gausling, Peter Molinaro, Robert Toni, and Steven R. Bryant are Adhezion's Board members. Molinaro is Adhezion's CEO and the Board Chairman.

The remaining named Defendants, Liberty Advisors, Inc., and Originate Ventures, LLC, are not relevant to the pending motions.

B. Facts and Procedural History

The background facts relevant to the underlying disputes between the parties are recited in detail in the Post-Trial Opinion. This Memorandum Opinion recites only those facts necessary to my decision on the pending motions.

On November 18, 2010, Zimmerman filed a derivative complaint in this action alleging that the individual defendants breached their fiduciary duties by causing the Company to enter into several financing transactions (the "Challenged Transactions") that Zimmerman contended violated the Company's Operating Agreement (the "Operating Agreement" or the "Agreement"). On May 19, 2011, I granted Zimmerman's motion to amend the complaint to add additional defendants, and he filed an amended complaint the same day. Defendants later moved for summary judgment. In a Memorandum Opinion dated March 5 and revised on March 27, 2012, I granted summary judgment in Defendants' favor on Zimmerman's duty of care claims, but denied summary judgment on his claims for breach of the duty of loyalty, breach of contract, and aiding and abetting a breach of the duty of loyalty.[3] Trial on these surviving claims took place on April 23–25, 2012. After hearing post-trial arguments on September 14, 2012, I issued the Post-Trial Opinion on January 31, 2013.[4]

In the Post-Trial Opinion, I held that Defendants breached the Operating Agreement by entering into the Challenged Transactions without first obtaining the approval of the Class A Common unitholders. Because I also held, however, that the breach caused no damage to Adhezion, i.e., that the Challenged Transactions were entirely fair, I awarded the Company nominal damages of only $1. I also held that the director Defendants did not breach their fiduciary duties and that, therefore, there could be no liability for aiding and abetting ...

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