Personal Touch Holding Corp. v. Glaubach, C.A. No. 11199-CB (Del. Ch. Feb. 25, 2019) (Bouchard, C.)
In this post-trial decision, the Court of Chancery found that Felix Glaubach breached his fiduciary duty of loyalty as a director and officer of Personal Touch Holding Corp. (“Personal Touch” or the “Company”) and that the Company was entitled to a declaration that Glaubach was validly removed as President of the Company. The Court also awarded the Company $2,735,000 in damages, but determined that disgorgement of Glaubach’s compensation under the faithless servant doctrine was not warranted.
Personal Touch, a home healthcare provider, brought claims against Glaubach, its co-founder and former President, in connection with, among other things, Glaubach’s purchase of a building in Jamaica, New York, near one of the Company’s subsidiaries (the “AAA Building”). In early 2013, the Company had expressed interest in the AAA Building, but the seller declined to proceed with a sale at that time. In 2014, Glaubach, through his assistant, reached out to the seller and secretly commenced negotiations with the seller to purchase the AAA Building himself, despite knowing that the Company remained interested in the building.
In determining that Glaubach breached his fiduciary duty of loyalty by usurping the corporate opportunity of acquiring the AAA Building, the Court of Chancery considered the four factor test articulated by the Delaware Supreme Court in Broz v. Cellular Information Systems, Inc., which provides that a director or officer may not take a business opportunity for himself 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.” The Supreme Court further explained that no factor is dispositive and that the factors should be weighed holistically.
In applying the Broz test, the Court of Chancery found the first factor easily satisfied because, under any reasonable standard of financial ability, the Company could have acquired the AAA Building. The Court also found the second factor had been satisfied. Although Glaubach argued that the acquisition of the AAA Building was not within the Company’s line of business because Personal Touch was a home healthcare company that historically leased office space, the Court explained that the “line of business” concept was meant to be broadly interpreted and applied flexibly. The Court further stated that, regardless of the Company’s past practices 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 expand its healthcare operations. The Court also explained that the line-of-business test was not particularly relevant under the circumstances, given that the opportunity concerned an operational decision about how to manage or expand an existing business.
In determining the third factor had been satisfied, the Court found that the negotiations in 2013 ceased because the seller determined that they could not move forward at that time, not because the Company lost interest in the property, and that the Company remained interested in purchasing the building up until the time of Glaubach’s purchase, which included discussion of the AAA Building at a meeting of the Company’s Board of Directors the day before Glaubach closed on the property.
As to the fourth factor, whether the corporate fiduciary would be placed in a position inimicable to his fiduciary duties, the Court found that Glaubach competed directly with the Company to purchase a property that was important to the Company, and that any doubt regarding the AAA Building’s importance was eliminated when Glaubach sought to lease it to the Company immediately after purchase.
Based on the foregoing, the Court found that Glaubach breached his duty of loyalty by usurping a corporate opportunity. In determining damages, the Court took the value of the AAA Building and subtracted the amount Glaubach paid for the property and the value of six months of free rent that Glaubach provided the seller. As a result, the Court awarded Personal Touch $2.1 million in connection with Glaubach’s usurpation of the corporate opportunity.
With respect to the claims of self-dealing, including claims that Glaubach caused Personal Touch to enter into a lease of a separate property co-owned by Glaubach at an above-market rate, provide healthcare services to Glaubach’s sister-in-law, issue a check to his sister-in-law, and pay the salaries of his assistant and driver, the Court found that Glaubach engaged in self-dealing only with respect to the Company’s lease of property co-owned by Glaubach.
The Court explained that Glaubach’s decision to cause the Company to lease a property that he co-owned with another individual, at an above-market rate, was a classic example of self-dealing because he stood on both sides of the transaction. Accordingly, the Court awarded the Company damages representing Glaubach’s share of the liability for the excessive rent.
With respect to services provided to Glaubach’s sister-in-law, the Court found that they did not constitute self-dealing because Glaubach was neither the recipient of them nor was obligated to pay for them. In addition, the Court found that the check issued to his sister-in-law was not self-dealing because it related to an equity distribution his sister-in-law was owed. The Court also found no liability for Glaubach’s use of his assistant and driver because the Company was fully aware of the services, did nothing to object to payment of the individuals’ salaries, and, as a result, acquiesced.
Personal Touch also alleged that Glaubach acted in bad faith in connection with his campaign to harass the other directors and his retaliation against three employees who complained of sexual harassment by Glaubach prior to his removal as President. With respect to Glaubach’s behavior towards the other directors, the Court found that Glaubach’s actions did not constitute bad faith because he was not motivated by an intention to procure benefits for himself at the expense of the Company or to otherwise harm the Company. The Court likewise found that, while Glaubach’s retaliation was improper, it was not bad faith because there was no desire to gain personal benefits or harm the Company.
Given’s Glaubach’s actions, including the usurpation of a corporate opportunity, the Court determined the Company was entitled to a declaration that Glaubach’s termination was proper and valid under his employment agreement. The Court further determined that, despite Glaubach’s breach of his duties, Personal Touch did not prove that Glaubach engaged in a persistent pattern or repeated acts of disloyalty and, accordingly, Glaubach was not required to disgorge compensation he had received from the Company.
Lastly, the Court ruled on claims that Glaubach, following his removal as President, breached his duty of loyalty as a Personal Touch director by sending letters to other directors and their families with biblical references, disturbing images, and suggestions that the recipients were guilty of crimes, infidelity, or other offenses, and by sending letters to the Company’s primary lender for the purpose of interfering with the Company’s loan negotiations. In holding that the actions constituted bad-faith conduct, the Court found that the letter campaign was intended to hurt morale and create a distraction of time and resources at the Company, as well as sabotage the Company’s relationship with its lender.