JOHN A. DORE, MICHAEL J. O'ROURKE, AND MICHAEL C. MOODY, Plaintiffs,
SWEPORTS, LTD., Defendant.
Submitted: November 15, 2016
E. Jameson, John G. Day, PRICKETT, JONES & ELLIOT, P.A.,
Wilmington, Delaware; Robert E. Williams, O'ROURKE &
MOODY, Chicago, IL; Counsel for John A. Dore, Michael J.
O'Rourke, and Michael C. Moody.
D. Brown, Joseph B. Cicero, CHIPMAN BROWN CICERO & COLE,
LLP, Wilmington, Delaware; Anthony S. Divincenzo, Robert W.
Queeney, DIVINCENZO SCHOENFIELD AND SWARTZMAN, Chicago,
Illinois; Counsel for Sweports, Ltd.
LASTER, Vice Chancellor.
John Dore, Michael O'Rourke, and Michael Moody seek
indemnification from defendant Sweports Ltd. for
incurred in three proceedings that took place in Illinois.
This post-trial decision awards them $241, 492.50 for the
Illinois proceedings, plus 20% of the expenses they incurred
enforcing their indemnification right through this
took place on March 16-17, 2016. The parties submitted over
two hundred exhibits. Each of the plaintiffs testified live.
The parties relied as well on the deposition testimony of the
plaintiffs and four non-parties: George Clarke, who was a
central figure in the underlying dispute; Andrew G. Chenelle,
who participated with the plaintiffs in one of the
transactions that led to the underlying dispute; Thomas
Courtney, who served as an expert witness in the Illinois
litigation; and Robert Queeney, an attorney for Sweports in
the Illinois litigation who served as forwarding counsel in
this case. The following facts were proven by a preponderance
of the evidence.
is a Delaware corporation with its principal office located
in Skokie, Illinois. It is a holding company that owns
intellectual property rights for cleaning products and a
majority interest in UMF Corporation, an Illinois
corporation. PTO ¶ 1.
businesses and internal affairs of Sweports and UMF are
inextricably linked. UMF uses technology licensed from
Sweports to manufacture anti-microbial cleaning products that
are sold primarily in the healthcare and hospitality
industries. Sweports also engages in capital-raising
activities and provides funding for UMF.
founded both Sweports and UMF. He is the majority stockholder
and chief executive officer of Sweports, as well as a member
of its board. Through these roles, Clarke controls Sweports.
Through his control over Sweports, Clarke controls UMF. He
also serves as UMF's chief executive officer and as a
member of its board.
The Initial Sandbox Deal
2005, UMF needed capital. Clarke contacted Sandbox
Industries, LLC, a venture capital firm. In November 2005,
Sandbox agreed to provide UMF with strategic, financial, and
managerial consulting services in return for warrants to
purchase approximately 30% of UMF's equity. See
JX 139 at 1.
Sandbox's specific tasks was to help UMF raise up to $1
million in financing. Sandbox proved unable or unwilling to
locate external financing for UMF. Instead, between December
9, 2005, and February 20, 2006, Sandbox loaned $1.7 million
to UMF (the "Sandbox Loan"). The consideration for
the Sandbox Loan included warrants to purchase an additional
17.2% of the equity in UMF. Sandbox also received the right
to designate a member of the UMF board and the right to
obtain board control in the event of default by expanding the
board and filling the resulting vacancies. Id. at
1-2; JX 107 at 1.
Feldman, a managing member of Sandbox, joined the UMF board.
JX 139 at 2. At that time, the UMF board comprised Clarke,
Feldman, and Barry White.
Sandbox Introduces Clarke To The Law Firm.
2006, Clarke and Sandbox began discussing further investments
by Sandbox. The discussions progressed sufficiently that
Clarke needed counsel to render a tax opinion. Nick Rosa, a
principal at Sandbox, suggested O'Rourke, a Chicago
lawyer. Rosa was O'Rourke's "good friend and
client." Tr. 141 (O'Rourke). Rosa reached out to
O'Rourke and asked him to work with Clarke. Id.
formally retained O'Rourke Katten & Moody
to an engagement letter dated July 12, 2006. See JX
93. Sweports also retained John Perkaus of the law firm of
Perkaus & Farley, whom O'Rourke brought in to provide
additional transactional expertise. Id. O'Rourke
added his partner, Moody, to the engagement because Moody had
the expertise to render a tax opinion. See JX 93;
Tr. 27 (Moody).
Clarke Ends The Sandbox Relationship.
September 2006, the negotiations over the Sandbox investment
reached an impasse. Sandbox upped the ante by claiming that
UMF had defaulted on the Sandbox Loan. Sandbox notified UMF
that it was exercising its right to appoint a majority of the
UMF board. If successful, Sandbox would have gained control
over UMF. JX 139.
enlisted the Law Firm to defend against the takeover attempt.
In early November 2006, the Law Firm negotiated a settlement
with Sandbox. JX 108.
settlement called for UMF to pay Sandbox the amounts due
under the Sandbox Loan and to buy out Sandbox's equity
interest in UMF. See Tr. 30 (Moody); Tr. 144-45
(O'Rourke). The terms contemplated UMF making three
significant cash payments to Sandbox between November 2006
and May 2007. The parties appear to have agreed that Feldman
would remain on the UMF board until the separation was
The Law Firm Becomes Enmeshed With Its Client.
needed capital to fund the settlement. Clarke hoped to obtain
a credit line of $1.2 million. O'Rourke and Moody told
Clarke that they could raise the funds he needed because they
had wealthy friends and a relationship with American
Chartered Bank (the "Bank"), which was a client of
the Law Firm.
Bank declined to provide non-recourse financing to Sweports
or UMF. The Bank agreed to extend a loan to Sweports if
individuals of means guaranteed it. O'Rourke and Moody
therefore structured a financing transaction in which (i) the
Bank loaned $500, 000 to Sweports (the "Bank Loan")
and (ii) the plaintiffs and non-parties Chenelle and Lee
Abrams guaranteed the loan. Tr. 145 (O'Rourke); Clarke
Dep. at 54; JX 97.
and the guarantors memorialized their part of the financing
transaction in two poorly drafted documents. One of the
documents was a promissory note. JX 5.0022 (the
"Note"). In it, Sweports committed to repay the
Bank Loan and to treat any amounts that the guarantors had to
pay the Bank as amounts due under the Note.
other document was a Loan Guaranty and Stock Purchase
Agreement. JX 97 (the "Guarantee Agreement"). It
provided the guarantors with consideration for guaranteeing
the Bank Loan. Each guarantor received a 2% equity interest
in Sweports from Clarke, plus an option to buy an additional
1% equity interest from Sweports for $100, 000. Each
guarantor also received a preemptive right, styled as an
option, to acquire a proportionate share of any additional
equity that Sweports issued "for a period of 2 years on
the same terms offered to any other person or entity."
Id. at 2. The preemptive right protected the
guarantors against dilution.
and Moody also raised money from other investors. In total,
they raised approximately $1.3 million for Sweports. UMF
received over $1 million of the proceeds in the form of a
loan from Sweports.
December 2006, each of the plaintiffs exercised the option to
acquire another 1% of Sweports stock, raising their combined
ownership stake to 9%. By this time, Sweports owed the Law
Firm a substantial sum. Pursuant to an agreement dated
December 31, 2006, Sweports and the Law Firm agreed to
convert $107, 500 of its outstanding receivable into 1.25% of
Sweports equity. JX 113; Tr. 56 (Moody). The Law Firm
received the same two-year preemptive right to protect itself
this period, Clarke added O'Rourke and Dore to the
Sweports board, and Dore served as Sweports' Chief
Operating Officer. They began acting in these capacities in
November 2006. See Tr. 8 (Dore). Clarke did not
formally appoint O'Rourke and Dore to their new positions
until December 26, 2006, when he did so by written consent.
Firm drafted the written consent that Clarke executed. In
addition to the appointments, the consent adopted a set of
amended and restated bylaws for Sweports. JX 112 (the
"Amended Bylaws"). The Amended Bylaws introduced a
number of new provisions, including the following:
• Article II, Section 9(c) added a supermajority voting
provision that required the affirmative vote of not less than
75% of all outstanding shares entitled to vote for a list of
actions that included "the removal from office of a duly
elected and qualified Director prior to the expiration of his
term." JX 112 at 3. At the time, Clarke owned 73% of
Sweports equity. See JX 8 at 10.
• Article IV, Section 3 provided that "[a]ny
officer may be removed only for cause, " defined
narrowly as the conviction of a felony, a crime involving
dishonesty or theft, reckless or intentional misconduct, or
breach of fiduciary duty. JX 112 at 7.
• Article VII added mandatory indemnification rights
"to the full extent permitted by the Delaware General
Corporation Law" for any person "who at any time is
or was a director, officer, employee, or agent."
Id. at 13-14. This is the provision at issue in this
is reason to believe that when Clarke executed the written
consent that adopted the Amended Bylaws, he did not perceive
the importance of these provisions. He instead trusted his
lawyers and their representation that the changes made by the
Amended Bylaws were non-substantive clean-up items.
See JX 8 at 33-34; JX 139 at 2, 8-9.
Another Potential Sandbox Deal
after O'Rourke and Dore began functioning as directors of
Sweports, O'Rourke started discussing a new deal with
Sandbox. The concept involved forming an entity to market
consumer products that used Sweports' technology. Sandbox
would fund the entity and receive in return a supermajority
of its equity (the initial proposal was 85%; it ended up at
80%). Sweports would contribute its technology, and UMF would
contribute its operating assets. They would receive in return
a minority stake (the initial proposal was 15%; it ended up
at 20%). Sandbox and O'Rourke hoped to prevent Clarke
from having any involvement in the post-transaction entity.
They discussed "that a deal won't happen if George
[Clarke] is involved." JX 110.
January 8, 2007, the Sweports board held a regular meeting.
The members at the time were Clarke, O'Rourke, and Dore.
The minutes recite that the directors, including Clarke,
"unanimously agree[d] to consider and evaluate a joint
venture with Sandbox for exploitation of the consumer
market." JX 114. At the time, Clarke does not appear to
have known important details such as the plan to cut him out
of the new venture or the fact that the entities he
controlled (Sweports and UMF) would own a minority stake.
same meeting, the directors caused Sweports to add Dore to
the UMF board. Dore filled a vacancy created by the death of
White, who had been a member of the board. As a result, the
members of the UMF board were Clarke, Dore, and Feldman.
the meeting, O'Rourke moved forward with new Sandbox
deal. Moody handled the negotiations with Sandbox, performed
the legal work, and began drafting the implementing
documents. Tr. 37 (Moody).
a meeting of the Sweports board on February 20, 2007, Dore
suggested that O'Rourke replace him on the UMF board.
O'Rourke and Dore voted to cause Sweports to act by
written consent to appoint O'Rourke to the UMF board.
Clarke abstained. Dore subsequently executed a written
consent on behalf of Sweports. JX 116.
had to leave halfway through the February 20 meeting. After
his departure, O'Rourke and Dore resolved that Dore,
O'Rourke, Moody, and two other individuals would loan
Sweports a total of $125, 000, "secured by the
intellectual property and other assets of the Company"
and "convertible into common stock of the Company at an
agreed upon conversion rate." JX 115 at 3; cf.
JX 117. They also doubled Dore's salary to $100, 000 a
year, something Clarke opposed, and made the increase
retroactive to February 1. Compare JX 115 at 4
with JX 139 at 10.
The Schism Between Clarke And The Law Firm
the meeting of the Sweports board on February 20, 2007,
Clarke became suspicious. He seems to have gotten the sense
that the plaintiffs were plotting with Sandbox against him.
Matters came to a head in early March, when Moody and Sandbox
reached agreement on the terms of the Sandbox deal. Clarke
viewed it as "a takeover of UMF and Sweports by
Sandbox." Clarke Interrog. at 4. The record supports his
view. See JX 118.
tried to schedule a joint meeting of the Sweports and the UMF
boards to approve the Sandbox deal. He noticed a meeting for
March 12, 2007, but Clarke refused to attend. Clarke said he
was exploring a competing opportunity with a German company
and expected to hear back on March 14. See JX 121;
Tr. 151 (O'Rourke).
did not want to wait. He emailed Dore, Moody, and Perkaus
that Clarke had "gone postal." JX 124. Perkaus
He [Clarke] doesn't have the power to cancel the
meetings[.] I suggest we move forward on Tuesday as
From now on no more email[.] I'll call later.
re-noticed meetings of the Sweports and UMF boards for
Tuesday, March 20, 2007. Clarke tried to cancel the meetings,
but O'Rourke, Dore, and Feldman told him they were going
forward. During the Sweports meeting, O'Rourke and Dore
voted in favor of the Sandbox deal. Clarke voted against.
During the UMF meeting, O'Rourke and Feldman voted in
favor of the Sandbox deal. Clarke voted against. The UMF
board also made O'Rourke general counsel of UMF.
after the meetings, Clarke wrote a letter in which he raised
numerous objections to the Sandbox deal and to O'Rourke
serving as general counsel for UMF. O'Rourke responded
with an email in which he berated and belittled Clarke:
Mr. Clarke--With respect to your letter and your restated
objections to the actions of the UMF and Sweports Board [sic]
on March 20, 2007, including my appointment as general
counsel (by the way, the correct spelling for counsel is
"counsel" not "council" which means an
appointed group or tribunal, the lesson being if you intend
to make a strong statement, it would behoove you to know how
to spell), I have nothing but astonishment and disappointment
in the childish and self-centered way you have behaved. To
say you have behaved like a spoiled brat would be an unfair
slap to the spoiled brats of this world. Try growing up. As
for our actions, the actions we have taken have been entirely
lawful. They have been entirely prudent. They have been taken
in the best interests of the companies. They have reflected
the financial realities of those companies, in contrast to
your habit of dealing with our financial realities by setting
off on another one your fantasy flights into Never Never
[sic] land. Your objections are nonsensical. Thus, I can
assure you that wherever you are, the Boards of these
companies will continue to press forward to direct these
companies in a professional and businesslike fashion. I can
also assure you that wherever you are the Boards of Sweports
and UMF will continue to work to put these companies on a
sound financial footing. Finally[, ] I can assure you that
wherever you are, the Boards of these companies will not wait
to deal with your obstructionism. Wherever you are, we are
going to deal with you now.
March 26, 2007, Clarke refused to sign letters announcing the
Sandbox deal. In response, O'Rourke noticed a special
meeting of the UMF board for April 2, 2007. The agenda
included a discussion of the "performance of George
Clarke as chief executive officer." JX 132. Clarke
believed that O'Rourke and Feldman were going to fire him
at the meeting.
Clarke Retakes Control.
the board meeting could take place, Clarke reasserted control
over Sweports and UMF. He executed and circulated a document
titled "Informal Action in Lieu of a Special Meeting of
the Shareholders of UMF Corporation." JX 136 (the
"UMF Informal Action"). It is not precisely clear
when the UMF Informal Action was prepared, executed, or
circulated. The definitive version is dated April 5, 2007,
but the record suggests that Clarke signed an earlier version
on March 30 and circulated it by email on March 31.
See JX 133; JX 139 at 13.
UMF Informal Action, Clark acted in his capacities as CEO and
Chairman of the Board of Sweports to cause Sweports to vote
its shares of UMF stock in favor of the following actions at
• A declaration that O'Rourke never had been validly
appointed as a director of UMF;
• A declaration that because O'Rourke had never
validly been appointed as a director, the approval of the
Sandbox deal by a vote of 2-1 was invalid and ineffective;
• The removal of Feldman as a director of UMF.
JX 136 at 3-4.
Informal Action also contained recitals and resolutions
directed at the Law Firm. It stated:
• "[T]he Law Firm has also provided legal services
and advice to Sweports concerning inter alia, the
Alleged Sandbox Deal, the appointment of Michael J.
O'Rourke and John A. Dore to the Sweports' Board of
Directors, the Sweports Corporation's By-laws, and the
provisions of Sweport's stock purchase agreements to the
principals of the Law Firm . . . and . . . to the Law
• "[T]he Law Firm has demanded payment for alleged
legal services . . . that were negligently performed, not
performed in the best interests of [UMF] or its shareholders,
and in breach of the Law Firm's fiduciary duties to the
corporation and its shareholders."
• "None of the monies sought by the Law Firm from
[UMF] are in fact owed, due or payable, and upon information
and belief, the Law Firm is in material part responsible for
damages due to the Corporation from its acts and omissions,
including without limitation, damage from the Alleged Sandbox
Id. at 4-5. The UMF Informal Action then resolved
that "the value of any invoices or demands for payment .
. . by the Law Firm is zero; that no claims for services by
the Law Firm has or could be deemed to constitute any
consideration for any of [UMF's] stock; and that [UMF]
including any of its Directors and Officers shall not tender,
sell or exchange any of [UMF's] stock in consideration of
any such demand or claim by the Law Firm." Id.
point, Clarke executed a similar document relating to
Sweports. Based on a later document he executed on June 23,
2007, in which he described himself as "the sole
director" of Sweports, he must have acted previously by
written consent to remove O'Rourke and Dore as directors
of Sweports. There are references to such a document in the
record. See JX 133; JX 139 at 11-12.
addition to taking legal control, Clarke asserted physical
control over the companies' offices and their property.
He changed the locks and refused to let Dore onto the
premises. Tr. 35 (Moody). He also took control of the
companies' books and records.
April 10, 2007, Clarke met with representatives of Sandbox.
In return for a substantial payment from UMF, Sandbox agreed
that there were no effective agreements among Sandbox, UMF,
and Sweports. Feldman resigned from the UMF board.
See JX 138.
2007, Clarke executed a document titled "Informal Action
in Lieu of a Special Meeting of the Directors of Sweports
Ltd." JX 139 (the "Sweports Informal Action").
The document's detailed recitals spanned fourteen pages
and recounted the history of the transactions and
interactions among Sweports, UMF, the Law Firm, Sandbox, and
their principals. The document adopted the following
1. . . . [A]ll of the above described agreements and actions
. . . are part of one integrated and indivisible transaction
and scheme committed and furthered by Sandbox, [the Law
Firm], . . . Messrs. O'Rourke, Moody, . . ., Dore, [and
2. Those business transactions by and between Sweports and
Counsel and Mr. Dore . . . resulted from the self-dealing of
Counsel and Dore, are unfair to, and never knowingly or
properly approved by Sweports . . . and were effected as a
direct result of the negligent, reckless and/or intentional
breaches of the fiduciary duties owned by Counsel as
attorneys, Messrs. O'Rourke, Moody and Dore as financial
brokers and agents, and Messrs. O'Rourke [and] Dore . . .
as Directors and/or Officers of Sweports and UMF, as set
forth above and accordingly, Sweports rescinds all such
agreements and actions, including all stock rights and
certifications granted and/or issued to [the Law Firm] and
Messrs. O'Rourke, Moody, . . . Dore, [and others].
3. Their various relationships with Sweports and UMF
benefited Messrs. O'Rourke, Moody and Dore . . . Sweports
and UMF received nothing of value in connection with the
legal services and advice provided by [the Law Firm] or the
work purportedly performed by Mr. Dore and, in contrast,
suffered significant economic injury as a result of same . .
.; accordingly, and because the rescission of these
agreements and related agreements shall be addressed by some
court of equity, Sweports has no obligation to return any
such alleged consideration as part of this rescission of the
above described documents and certificates, including
specifically, the $100, 000 paid to Sweports by Messrs.
O'Rourke, Moody and Dore in connection with their
respective purchases of 1% of Sweports common stock . . .,
although Sweports will tender any such legitimate repayment,
if any, when and to the extent that by final court order it
is required to do so.
4. All of those other 2006 agreements purportedly entered
into by UMF and/or Sweports . . . were effected as a direct
result of this same . . . self-dealing, negligent, reckless
and/or intentional breaches of the fiduciary duties owed by
Counsel and Mr. Dore to Sweports and UMF . . . and,
accordingly, to the extent that Sweports was a party to
and/or it approved any such agreement or transactions,
Sweports hereby rescinds all such transactions and agreements
. . . .
. . . .
7.. Sweports hereby rescinds all retention agreements, if
any, by and between it and [the Law Firm] . . . and all of
their individual lawyers in their entirety.
8. Because of the above described acts and omissions of
Counsel and Dore, Sweports hereby resolve, determines, and
declares that it owes no monies whatsoever to any of these
entities or individuals other than any amount found due and
owing by a Court sitting in equity.
9. Sweports hereby resolves, determines and declares that the
[Amended Bylaws] were null and void at the time of their
purported approval and to the extent that one or more of the
terms of these By-Laws might be construed as valid, Sweports
hereby revokes, ...