COURT OF CHANCERY
OF THE
SAM GLASSCOCK III STATE OF DELAWARE COURT OF CHANCERY COURTHOUSE
VICE CHANCELLOR 34 THE CIRCLE
GEORGETOWN, DELAWARE 19947
Date Submitted: November 9, 2015
Date Decided: February 9, 2016
Michael A. Weidinger, Esquire Blake Rohrbacher, Esquire
Alessandra C. Phillips, Esquire Elizabeth A. DeFelice, Esquire
Pinckney, Weidinger, Urban & Joyce LLC Richards Layton & Finger, P.A.
1220 North Market Street, Suite 950 One Rodney Square
Wilmington, Delaware 19801 920 North King Street
Wilmington, Delaware 19801
Re: Jerome Vaccaro v. APS Healthcare Bethesda, Inc., et al.,
Civil Action No. 9637-VCG
Dear Counsel:
This matter involves a dispute over severance obligations in an employment
agreement between Plaintiff Jerome Vaccaro and Defendants APS Healthcare
Bethesda, Inc. (“APS”) and Universal American Corp. (“Universal”). The
agreement was initially entered into the day before a merger between the
Defendants, and later amended many months thereafter. Before Vaccaro initiated
this action, Universal, the buyer, filed suit in the United States District Court for the
District of Delaware (the “Federal Action”) against a number of defendants
representing the seller, including Vaccaro, alleging, among other things, that
Universal was fraudulently induced to enter the merger. In this action, Universal
asserts that it plans to raise the affirmative defense that the employment agreement
is a nullity because, by its terms, the enforceability of the employment agreement is
based on the closing of the merger, which it argues was induced by fraud, and that
Universal was similarly fraudulently induced to enter the employment agreement.
Defendants have asked that I stay this action because the parties and issues in the
first-filed Federal Action are sufficiently similar to warrant a stay under McWane
Cast Iron Pipe Corp. v. McDowell-Wellman Engineering Comp.1 Based on the
following reasons, I find that a stay of this action is warranted and grant the
Defendants’ motion.
Before applying the factors in McWane, I first describe the relevant facts2 and
procedural history as follows. On January 11, 2012, Universal, Partners Healthcare
Solutions Holdings, L.P. (“APSLP”), and Partners Healthcare Solutions
(“Partners”), a majority-owned subsidiary of APSLP, entered into an agreement (the
“Merger Agreement”) whereby Universal would acquire Partners and rename the
company APS Bethesda, Inc., which I refer to as “APS.”3 Leading up to the
execution of the Merger Agreement, Plaintiff Jerome Vaccaro acted as President and
Chief Operating Officer of Partners.4 In contemplation that Vaccaro would continue
in that role post-transaction, on the day before the Merger Agreement was executed,
1
263 A.2d 281 (Del. 1970).
2
For purposes of this Letter Opinion, I draw the facts from the Plaintiff’s Verified Complaint
assuming their truth.
3
Pl’s Verified Complaint (“Compl.”) ¶ 9.
4
Id. at ¶ 10.
2
Vaccaro executed an employment agreement (the “Original Agreement”) with APS
and Universal that provided that Vaccaro would serve as President of APS and
included provisions entitling Vaccaro to severance benefits in certain situations.5
The vitality of the Original Agreement was made explicitly contingent on
consummation of the contemplated acquisition transaction (the “Merger”).6 The
Merger closed on March 2, 2012.
Following the Merger, Vaccaro alleges that his role in APS began to diminish
and APS’s performance dwindled.7 As a result, in August 2012, Vaccaro expressed
his desire to resign from APS and initiated discussion of an orderly transition of his
duties and responsibilities.8 Despite Vaccaro’s desire to resign, however, he
continued his employment. In early 2013, following the sustained decline in APS’s
performance, Universal began investigating an action against the sellers of APS for
their alleged fraudulent inducement of Universal into closing the Merger.9 Pursuant
to its expected litigation, Universal asked Vaccaro to provide statements to support
Universal’s position, but Vaccaro refused.10
5
Id. at ¶¶ 10–11.
6
Id., Ex. A (Original Agreement), at 1 (“This Agreement shall be of no force or effect, and none
of [Vaccaro], [APS or Universal] or any of [their] affiliates shall have any obligation or liability
hereunder, unless and until the transactions contemplated by the Merger Agreement are
consummated.”).
7
Id. at ¶¶ 13–17.
8
Id. at ¶¶ 18–19.
9
Id. at ¶¶ 29–30.
10
Id. at ¶¶ 31–38.
3
Finally, after months of pursuing an agreement concerning Vaccaro’s
transition from the company, APS, Universal, and Vaccaro executed an amendment
to the Original Agreement (as amended, the “Amended Agreement,” and together
with the Original Agreement, the “Employment Agreement”), dated April 25, 2013,
wherein Vaccaro agreed to continue his employment until June 28, 2013. The
Amended Agreement did not replace the Original Agreement; instead, the Amended
Agreement explicitly provided that the bulk of the Original Agreement remained in
force.11 Vaccaro alleges that on the final day of his employment, the Defendants
attempted to obtain a general release from Vaccaro pursuant to the Employment
Agreement.12 According to Vaccaro, the release had been improperly altered and,
rather than wait for the Defendants to draft a revised release agreement, Vaccaro
executed the general release (the “Release”) attached to the Original Agreement.13
To date, Vaccaro has not received any severance compensation pursuant to the
Employment Agreement.
A few months after Vaccaro’s employment ended, on October 22, 2013,
Universal filed the Federal Action (the “Original Federal Complaint”) against the
11
Id. at ¶ 39. The Amended Agreement purported to delete Section 8(c)(iii)(C) of the Original
Agreement, which expressed a portion of Vaccaro’s severance benefits, but otherwise stated,
“[e]xcept as amended hereby, all other terms and conditions of the [Original Agreement] shall
remain in full force and effect through the Termination Date.” Id., Ex. B (Amended Agreement),
at 1.
12
Id. at ¶ 51.
13
Id. at ¶¶ 56–57.
4
sellers of APS and former APS executives, including Vaccaro, for fraudulently
inducing the Merger and sought, among other things, rescission of the Merger on
which the Employment Agreement is conditioned. On May 9, 2014, nearly seven
months after Universal initiated the Federal Action, Vaccaro filed his Verified
Complaint in this action, which includes claims for breaches of contract, fraud, and
reformation, and seeks damages and declaratory relief. Shortly thereafter, the
Defendants moved to dismiss or stay the Plaintiff’s action (the “Motion”) on two
grounds. They argued that I should defer this action in favor of the first-filed Federal
Action14 and that this Court lacks subject matter jurisdiction to hear the dispute. In
my letter opinion of October 15, 2014, I denied the Defendants’ Motion to Dismiss
for Lack of Subject Matter Jurisdiction, leaving undecided the Defendants’ other
ground in its Motion.
In their briefing of the Motion to Dismiss or Stay, the Defendants represented
that, in the Federal Action, the District Court had dismissed the fraud counts against
Vaccaro for failure to plead fraud with sufficient particularity, but with leave to
replead those allegations. Subsequently, on September 22, 2014, Universal amended
its complaint in the Federal Action (the “Amended Federal Complaint”). The
Amended Federal Complaint reasserts many of the fraud claims against the
14
At oral argument, the Defendants clarified that they seek a stay of this action in favor of the
Federal Action, and, in the alternative, seek dismissal. Oral Argument Tr. 25:24–26:2.
5
defendants, including Vaccaro, and includes an additional claim (the “Reverse
Liability Claim”) seeking “a declaratory judgment that Vaccaro is not entitled to any
payment or other benefit under the [Employment Agreement].”15 Following oral
argument on the Motion here, the Defendants represented to the Court that Vaccaro
and other defendants had filed, on October 31, 2014, a motion to dismiss Universal’s
Amended Federal Complaint in the Federal Action. In my letter opinion of January
9, 2015, I postponed my consideration of the Defendants’ Motion to Dismiss or Stay
in this action pending resolution of Vaccaro’s motion to dismiss in the Federal
Action, the resolution of which, I noted, would necessarily clarify disputed issues
that I must consider here. I also indicated in my letter opinion that any party could
seek consideration of the Defendants’ Motion to Dismiss or Stay if circumstances so
warranted.
As discovery in this action proceeded, Vaccaro filed a Motion to Compel
Production of Documents, on which I held oral argument on October 1, 2015—
nearly ten months after my decision to continue the Defendants’ Motion to Dismiss
or Stay. At oral argument on that motion, the Defendants requested that I revisit the
continuance of my decision on the Motion to Dismiss or Stay and, as a result, I
directed the parties to submit letter memoranda on whether I should continue to hold
my decision on that Motion in abeyance. In their respective letters, both parties
15
Defs’ Reply Br. 1–2.
6
indicated that, given the passage of time, I should revisit my decision. On October
26, 2015, I lifted the stay of my decision of the Defendants’ Motion and informed
the parties that they could submit further briefing, if necessary. After consideration
of the parties briefing and argument to date, I find that a stay of this action is
warranted and grant the Defendants’ Motion.
In this action, the Defendants argue that Vaccaro seeks to enforce an
employment agreement that was merely one piece of a fraudulently induced merger,
and that Vaccaro’s claim is therefore based on facts that are already at issue in the
Federal Action. Accordingly, the Defendants assert that I should dismiss or stay this
action in favor of the first-filed Federal Action pursuant to the Delaware Supreme
Court’s holding in McWane. “The granting of a stay is not a matter of right, but rests
within the sound discretion of the court.”16 Compelled by “considerations of comity
and the necessities of any orderly and efficient administration of justice,”17 Delaware
courts perform a three-part inquiry: (1) is there a prior action pending elsewhere; (2)
involving the same parties and the same issues; (3) in a court capable of doing
prompt and complete justice?18 Through application of this inquiry, Delaware courts
16
Adirondack GP, Inc. v. Am. Power Corp., 1996 WL 684376, at *6 (Del. Ch. Nov. 13, 1996)
(citing McWane, 263 A.2d at 283).
17
McWane, 263 A.2d at 283.
18
LG Elecs., Inc. v. InterDigital Commc’ns, Inc., 114 A.3d 1246, at 1252 (Del. 2015).
7
seek to avoid wasteful and duplicative litigation, as well as the possibility of
conflicting rulings in two courts.19
In this case, Vaccaro argues that the Federal Action is not a prior action, and
thus does not implicate McWane, because the relevant counts in the Original Federal
Complaint were dismissed and because the Amended Federal Complaint was filed
after Vaccaro initiated this action. When the Court is presented with an otherwise
first-filed complaint that has been amended, the Court will “compare[] the substance
of the original case to that of the case as later composed.”20 The later-filed complaint
will relate back to the first-filed complaint if they both “arise from a common
nucleus of operative facts”—that is, if the claims “rely on and arise from the same
factual foundation,” the amended complaint should be considered filed as of the date
of the original complaint.21 Here, Universal initiated the Federal Action well before
the filing of this action. The majority of the counts, however, including fraud in the
inducement, were dismissed. Universal has represented to the Court that it has
repled many of the dismissed claims, including fraud in the inducement, with greater
particularity in the Amended Federal Complaint. I find that Amended Federal
Complaint refers back to the Original Federal Complaint. Notwithstanding the
19
See McWane, 263 A.2d at 283.
20
See Choice Hotels Int’l, Inc. v. Columbus-Hunt Park DR. BNK Investors, L.L.C., 2009 WL
3335332, at *6 (Del. Ch. Sept. 4, 2009) (quoting McQuaide, Inc. v. McQuaide, 2005 WL 1288523,
at *4 (Del. Ch. May 24, 2005)).
21
See id. at *7.
8
additional Reverse Liability Count, the Amended Federal Complaint realleges
similar, if not the same counts that, like the Original Federal Complaint, arise from
the facts surrounding the Merger. Therefore, the Federal Action constitutes a prior
action such that I must consider the remaining McWane factors.
The second factor of McWane tests whether the parties and issues in the
present action are the same as those comprised in the first-filed foreign action. In
general, it is rare that the parties and issues in each case are fully identical. This
Court has found that when the parties and issues are not identical, the Court must
balance the lack of complete identity of parties and issues against the
possibility of conflicting rulings which could come forth if both actions
were allowed to proceed simultaneously. Rather than insisting that the
parties in both actions be identical, this court only requires substantial
or functional identity.22
Here, the parties in the two cases are not identical: Defendant APS is not a party to
the Federal Action and the Federal Action includes nine parties that are not parties
to the present action. Nonetheless, I find that the parties are functionally identical.
Although APS is not a party to the Federal Action, its parent, Universal, is a plaintiff
in the Federal Action as well as a party here. Moreover, the fact that there are more
parties in the Foreign Action is not fatal because it merely reflects the fact that the
Federal Action addresses issues that are broader than the action here.
22
Id. (emphasis added) (citations omitted) (internal quotation marks omitted).
9
The issues present in the two cases are also not identical, at least they were
not initially. Two separate cases will be deemed to implicate the same issues if they
arise from a “common nucleus of operative facts.”23 In this case, the Defendants do
not allege that Vaccaro’s Complaint, by itself, implicates the Federal Action, but that
they will raise an affirmative defense that implicates the issues raised in the Federal
Action. In the Federal Action, Universal intends to show that it was fraudulently
induced to execute the Merger Agreement and close the Merger, and thus seeks its
rescission. If Universal is successful, it argues that it follows that the Employment
Agreement is a nullity, thereby preempting Vaccaro’s action here. Vaccaro argues
that the issues in the two actions are not sufficiently similar because they are
separated by time: the issues in the Federal Action are limited to the Merger, which
occurred in March 2012, and the relevant issues in this action implicate only the
facts surrounding the Amended Agreement, which was executed over a year later in
April 2013, and the Release executed in June 2013. Vaccaro misstates the breadth
of each action, however. In the Federal Action, Universal intends to establish facts
showing that Vaccaro contributed to the alleged fraudulent inducement of the
Merger Agreement; that Vaccaro helped perpetuate the fraud until the Merger
closed; and that Vaccaro aided the concealment of the fraud post-Merger. Similarly,
23
Lisa, S.A. v. Mayorga, 993 A.2d 1042, 1048 (Del. 2010) (quoting Chadwick v. Metro Corp., 856
A.2d 1066 (Del. 2004) (TABLE)).
10
in this action Universal will seek to establish these facts to show that the Merger, on
which the Employment Agreement hinged, was fraudulently induced.
Despite the apparent similarities between the two cases, Vaccaro argues that
Universal is estopped from raising pre-Merger fraud to dispute the Employment
Agreement here. According to Vaccaro, Universal waived its claims against
Vaccaro because, at the time the parties executed the Amended Agreement,
Universal was already aware of its fraudulent inducement claims. At this stage of
the litigation, Vaccaro’s “waiver” argument fails for two reasons. First, it is unclear
to what extent Universal was aware of Vaccaro’s involvement in the alleged fraud
at the time it executed the Amended Agreement. Second, to the extent Vaccaro’s
argument that Universal waived its affirmative defense requires a determination of
the merits, I find it premature to make that determination at this stage of the
litigation. In sum, I conclude that the issues raised in the Federal Action are
sufficiently similar to the issues raised in the Defendants’ affirmative defense. In
addition, despite the lack of precise identity between the parties and issues, I find
that there is a perceptible risk of conflicting rulings if both cases were to proceed
simultaneously. The Defendants have raised an affirmative defense in this action
that may lead to a determination concerning the validity of the Merger, which
determination could conflict with the findings in the first-filed Federal Action.
11
I note that Vaccaro challenges Universal’s addition of the Reverse Liability
Claim in the Amended Federal Complaint. Vaccaro asserts that the Defendants only
belatedly inserted claims concerning the Employment Agreement into the Federal
Action after Vaccaro had chosen to litigate those claims in this court. I need not
reach a determination regarding the Reverse Liability Claim because I have already
found that the remainder of Universal’s Amended Federal Complaint, which relates
back to the Original Federal Complaint, raises issues functionally identical to those
present in the affirmative defense here.
Finally, I must determine that the District Court is capable of providing
prompt and complete justice. It clearly is able to do so, and the parties do not suggest
that the District Court lacks complete competence and jurisdiction to adjudicate the
issues in question, which involve the application of New York contract law as well
as the common law doctrine of fraud in the inducement. Vaccaro argues, however,
that the District Court lacks the ability to offer prompt justice because it has failed
to render what he perceives as a timely decision on his motion to dismiss, which has
remained pending for over fifteen months. This factor alone does not render the
District Court incapable of providing reasonably prompt justice; McWane does not
instruct that an alternative forum must provide the most expeditious relief. The
District Court has already granted one motion to dismiss and is sufficiently familiar
12
with the issues to determine whether Universal was fraudulently induced. Therefore,
I find that the District Court is capable of providing prompt and complete justice.
Based on the foregoing, I conclude that the first-filed Federal Action involves
the same issues and facts as are presented here, and that the Federal Court is capable
of providing prompt and complete justice. The Defendants’ Motion to Dismiss or
Stay is GRANTED. This action is stayed pending the resolution of the Federal
Action. The parties should update the Court of the progress of the Federal Action
every 60 days or sooner, as the parties find appropriate. To the extent the foregoing
requires an Order to take effect, IT IS SO ORDERED.
Sincerely,
/s/ Sam Glasscock III
Sam Glasscock III
13