CHANCERY COURT FINDS THAT FAILURE TO EXERCISE THE APPROPRIATE DEGREE OF DILIGENCE IN BRINGING CLAIMS CAN RESULT IN THEM BEING TIME BARRED AT THE MOTION TO DISMISS STAGE

By: David Lehman and Calvin Kennedy

In Richard Forman v. CentrifyHealth Inc. et al., C.A. No. 2018-0287-JRS (Del. Ch. April 25, 2019), the Court of Chancery found that a stockholder’s failure to exercise the “degree of diligence” which fairness requires and delay in prosecuting claims was sufficient grounds to bar by laches a variety of claims; the standard used by the Court to determine the unreasonableness of the plaintiff’s delay was the analogous statute of limitations period for the respective claim. The Court also found that the plaintiff’s claims of fraud and unjust enrichment that were not barred sufficiently alleged specific misrepresentations, justifiable reliance on those misrepresentations, and the defendants’ gains resulting from the misrepresentations.

Richard Forman (“Forman”) alleged that Ralph Korpman (“Korpman”) promised him “Founder’s Shares” in 2005 to induce Forman to join the CentriHealth (the “Company”) board of directors (the “Board”). On February 12, 2006, members of the Board, including Forman, approved the Company’s 2006 Stock Option Plan, which provided Forman with 5,000 option shares (the “Forman Options”). Forman first pressured Korpman to acknowledge the Founder’s Shares in May 2007, when he asked for a copy of the Company’s current capitalization table; it showed that Forman held only preferred and common stock, not Founder’s Shares. On May 22, 2007, Forman requested certificates for the Founder’s Shares; Korpman ignored his request. On July 16, 2010, Korpman confirmed that Forman held 8,000 option shares. When asked by Forman if they had vested and if they would terminate upon resignation, Korpman explained the vesting details, but did not discuss termination.

On August 31, 2010, Forman resigned from the Board and shortly thereafter requested information on the vesting of his options. Korpman told Forman that 5,000 of his options vested in February 2010 and the remaining 3,000 were to vest on August 23, 2011. On February 13, 2013, Forman again asked Korpman to confirm Forman’s ownership position, and he was informed he owned 32,500 Preferred A shares and 8,000 options. In May 2015, Forman requested information from both Korpman and Board member Steven McLean (“McLean”) about how to exercise the Forman Options. McLean replied that he would ask Korpman about the redemption process and “[k]eep [Forman] up to date,” although it is alleged that McLean never answered Forman’s inquiry. On July 14, 2017, Forman received a letter from a CentriHealth lawyer stating that Forman did not own any “initial equity” and had “forfeited his options upon his resignation from the Board.”

Forman filed his initial complaint on April 17, 2018 and his amended complaint on August 1, 2018 (the “Amended Complaint”). The Amended Complaint set forth nine separate claims. With regards to the Founder’s Shares, Forman asserted claims for breach of contract, promissory estoppel, unjust enrichment/constructive trust, breach of fiduciary duty, equitable fraud, and conversion. With regards to the Forman Options, Forman asserted claims for breach of contract, promissory estoppel, misrepresentation/fraud, breach of fiduciary duty, unjust enrichment/constructive trust, and equitable fraud. The defendants moved to dismiss all claims on the grounds that they were barred by laches.

To determine whether the claims were barred by laches, the Court “generally requires proof of (1) plaintiff’s knowledge of the invasion of his rights; (2) unreasonable delay in bringing suit to vindicate those rights, and (3) resulting prejudice to the defendant.” The Court found that all claims related to the Founder’s Shares were barred by laches. Forman requested share certificates as early as the end of July 2007 and never received them; this “mistake” remained uncorrected for more than 11 years. The analogous limitations period for each of Forman’s claims, under Title 10, Section 8106 of the Delaware Code, is three years. The Court further found that, at the latest, as of February 2013, when the Company again confirmed that the Founder’s Shares did not exist within the capital structure of the Company, he was required to file suit without unreasonable delay, but he remained silent for another five years.

Additionally, the Court found that all claims based on the defendants’ failure to provide a copy of the option plan were barred by laches. Forman approved the option plan as a Board member without the specifics on February 12, 2006. Further, Forman was told by Korpman in May 2007 that the option plan was not memorialized in writing, violating Section 157 of the Delaware General Corporation Law. Forman’s eleven year delay in bringing the claims was presumed unreasonable by application of the analogous three-year statute of limitations.

Lastly, Forman’s claims with respect to the Forman Options based on Korpman’s misrepresentations were found to not be barred by laches at the dismissal stage. The Court found that it was reasonably conceivable that Forman did not have knowledge of his injuries or claims arising from the alleged misrepresentations until he received the letter from the Company’s counsel in July 2017. The Court then considered whether the claims had been adequately pled to survive a motion to dismiss and found that Forman’s common law fraud complaint survived because he alleged: (i) specifics of several misrepresentations made by Korpman; (ii) justifiable reliance in refraining from exercising the Forman Options; and (iii) a gain to the defendants as a result of the false representation. Forman’s equitable fraud claim also survived, as Forman had well-pled that a special relationship existed between Korpman, as the controlling stockholder and chairman of the Company, and Forman, as a stockholder of the Company. However, those same claims against McLean and other Board members were dismissed, as there were no allegations that McLean had any more access to information than Forman or that McLean, or any other Board member, intentionally hid information or provided Forman with false information.