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Horne v. OptimisCorp

Court of Chancery of Delaware

March 3, 2017

WILLIAM HORNE, Plaintiff,
v.
OPTIMISCORP, a Delaware corporation, Defendant.

          Date Submitted: February 16, 2017

          Bruce E. Jameson, Esquire and Eric J. Juray, Esquire of Prickett, Jones & Elliott, P.A., Wilmington, Delaware, Attorneys for Plaintiff.

          John G. Harris, Esquire of Berger Harris LLP, Wilmington, Attorney for Defendant.

          MEMORANDUM OPINION

          SLIGHTS, Vice Chancellor

         Plaintiff William Horne ("Horne") is a former officer of Defendant OptimisCorp (or the "Company"). He has initiated this action pursuant to 8 Del. C. § 145(c) to recover indemnification for (1) all fees and expenses he incurred for the successful defense of the case captioned OptimisCorp v. Waite, C.A. No. 8773-VCP (Del. Ch.)[1] and (2) his fees on fees and expenses incurred in the prosecution of this action.

         OptimisCorp, along with its controlling stockholder, Alan Morelli ("Morelli"), filed the underlying action against several defendants, including Horne, and alleged various claims relating to the decision of the Company's Board of Directors (the "Board") to remove Morelli as CEO of the Company. The litigation was intense and featured active pre-trial motion practice, including discovery-related and case dispositive motions. The discovery was likewise extensive, including over thirty depositions. The case was tried over six days in February 2015. The court's 213-page Trial Opinion determined that plaintiffs had failed to prove any of their claims against Horne and entered judgment in his favor. The Supreme Court affirmed by order dated April 25, 2016.[2]

         The Company opposes Horne's demand for indemnification. Specifically, the Company contends that certain of the claims in the underlying litigation did not arise by reason of Horne's service as an officer of the Company and also that certain of the fees charged by Horne's counsel are unreasonable. Horne disagrees and seeks summary judgment on his claims for: (i) fees and expenses incurred in successfully defending the underlying litigation, (ii) fees and expenses incurred prosecuting this action, and (iii) pre- and post-judgment interest on all amounts. For the reasons that follow, the motion is GRANTED.

         I. BACKGROUND

         A. The Parties

         OptimisCorp is a privately held Delaware corporation with its principal place of business in Pacific Palisades, California.[3] It provides physical therapy services and develops software to support physical therapy practices.[4] Horne became OptimisCorp's CFO in 2008.[5] He was terminated as CFO on May 13, 2013.[6] Horne owns 167, 668 shares of the Company's stock, or less than 1% of the outstanding shares.[7]

         B. The Underlying Litigation

         The three plaintiffs in the underlying litigation were OptimisCorp, Morelli and Analog Ventures, LLC, a California LLC managed by Morelli that holds many of his OptimisCorp shares (collectively the "Morelli Plaintiffs").[8] With the exception of a brief period from October 20, 2012 through March 21, 2013, Morelli has always been the Company's CEO and Chairman of its Board of Directors.[9]Morelli "claim[ed] to be the victim of a vast conspiracy that undermined his authority and attempted to seize control of OptimisCorp from him."[10] The other defendants in the underlying litigation were John Waite ("Waite"), William Atkins ("Atkins") and Gregory Smith ("Smith") (collectively the "Director Defendants"). The Director Defendants jointly owned a physical therapy company known as Rancho Physical Therapy, Inc. ("Rancho"), which they sold to OptimisCorp in an all-stock transaction in 2007.[11] Horne has never been an officer, director or employee of Rancho.

         The sordid factual background that gave rise to the underlying litigation was described in considerable detail in the Trial Opinion. My focus here is on the facts necessary to inform the indemnification analysis. In September 2012, a Company employee reported to Waite that she and Morelli had engaged in a sexual relationship over a period of time and that she believed Morelli had sexually harassed her.[12] This report prompted a series of responses from Horne and the Director Defendants that ultimately led to Morelli's removal as CEO. In the underlying litigation, Morelli contended that the defendants had been looking to remove him for years and that the reported sexual misconduct with an employee was merely a pretext to allow the defendants to seize to control of the Company.[13] He alleged that the defendants bribed and coaxed the female employee to make a false claim of sexual harassment as the first step of their plan and then initiated a bogus investigation of the report to provide cover for the challenge they knew would follow his removal as CEO.[14]

         In the Trial Opinion, the Court summarized Horne's very limited involvement in the sexual harassment investigation and subsequent attempt to remove Morelli as CEO. In essence, Horne gave statements to lawyers charged with leading the investigation and pointed out to the lawyers that a stockholders agreement would have to be amended if the Board decided to remove Morelli in order to prevent Morelli from simply replacing the majority of directors as controlling stockholder and then reinstating himself as CEO.[15] When the Board met to consider Morelli's removal, Horne was not present and did not otherwise participate.[16]

         The Board removed Morelli as CEO on October 20, 2012. He soon after initiated an action pursuant to 8 Del. C. § 225 seeking a declaration that he was invalidly removed.[17] That action settled on March 21, 2013, with Morelli being restored as CEO.[18] Horne was terminated shortly thereafter on May 10, 2013.[19]

         The underlying litigation was initiated on August 5, 2013. As noted, the complaint (the "Morelli Complaint") alleged in seven counts that Horne and the Director Defendants (and many others) bribed the female employee to make a false claim of sexual harassment as a pretext to remove Morelli as CEO:[20]

• Counts 1 and 2 alleged that Horne breached his fiduciary duties to the Company, with one count seeking injunctive relief and the other damages;
• Counts 3 and 4 alleged that Horne breached the stockholders agreement in undefined ways, with one count seeking injunctive relief and the other damages;
• Counts 5 and 6 alleged that Horne tortiously interfered with unidentified "third parties, including the Company's existing and prospective employees, consultants, vendors, business partners and financing sources, " with one count seeking injunctive relief and the other damages.[21]

         The parties dispute whether Count 7 purported to state a claim against Horne, but it is clear that the allegations there are directed only against the "Rancho Defendants" which the Morelli Complaint (at ¶ 2) defines not to include Horne.

         While the Morelli Complaint named Horne in several counts, the claims actually presented against Horne during the six-day trial were much more limited.[22]Indeed, the trial court recounted how the Plaintiffs had either abandoned or waived nine of the claims they alleged in the Morelli Complaint.[23] As to Horne, the court noted that the primary claim prosecuted against him at trial was that he aided and abetted the Director Defendants in their alleged breaches of fiduciary duty.[24] The Trial Opinion characterized the Plaintiffs' claims as "a shifting target and impossible to defend against without enormous expense"[25] and rejected each claim against Horne out of hand.[26] The Supreme Court affirmed by Order dated April 25, 2016, noting that the litigation involved "complicated and unusual facts."[27]

         C. Procedural History

         Horne filed his Verified Complaint for advancement and indemnification on April 27, 2016. He filed the motion for summary judgment sub judice on August 17, 2016. In his motion, Horne seeks a declaration that he is entitled to mandatory indemnification for all fees and expenses he incurred in the underlying litigation and for "fees on fees" incurred in his prosecution of this action. Defendant opposes the motion on limited grounds, meaning it acknowledges that Horne is entitled to some indemnification but not all that he seeks in this action. First, Defendant contends that Horne was not sued in all respects in the underlying action by reason of the fact that he was an officer of OptimisCorp. Second, it argues that some of the fees incurred by Horne in the underlying litigation were for work performed in advancing positions that benefited other defendants who do not have indemnification rights. Finally, it contends that it is entitled to discovery to allow it to challenge whether Plaintiff's counsel fees are reasonable. In reply, Horne argues that Defendant has avoided its mandatory indemnification obligations long enough and that he is entitled to full indemnification for every penny he seeks. I agree.

         II. LEGAL ANALYSIS

         A. Summary Judgment and Indemnification

         "A ruling on indemnification is . . . appropriate at the summary judgment stage where there are no material factual disputes germane to indemnification and the moving party is entitled to judgment as a matter of law."[28] "The party opposing summary judgment . . . may not rest upon the mere allegations or denials contained in its pleadings, but must offer, by affidavit or other admissible evidence, specific facts showing that there is a genuine issue for trial."[29] This burden upon the party opposing summary judgment is particularly appropriate when a non-moving defendant is resisting a claim for mandatory indemnification under 8 Del. C. § 145(c) because the ultimate burden of proof is on the defendant corporation to prove that the indemnitee is not entitled to indemnification.[30]

         Under 8 Del. C. § 145(c):

To the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. (Emphasis added).

         In determining whether Horne is entitled to mandatory indemnification under § 145(c), the Court's focus is narrowly upon the outcome of the underlying action; it is neither fair nor efficient for the Court to facilitate prolonged and expensive discovery into the facts of the underlying litigation or to revisit the reasons for the results achieved there.[31] Having said this, the reference in § 145(c) to §§ 145 (a) and (b) makes clear that, as a threshold matter, the Court must inquire into whether Horne was sued "by reason of the fact that [he] is or was a director [or] officer [of OptimisCorp]. . . ." The Court must then review the outcome of the underlying litigation in a general sense ...


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