In re Dura Medic Consolidation Litigation

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

IN RE DURA MEDIC HOLDINGS, INC. ) Cons. C.A. No. 2019-0474-JTL
CONSOLIDATED LITIGATION )

POST-TRIAL OPINION ADDRESSING FIDUCIARY DUTY CLAIMS

Date Submitted: December 19, 2024
Date Decided: January 29, 2025

Raymond J. DiCamillo, Robert L. Burns, Matthew W. Murphy, Kyle H. Lachmund,
Sandy Xu, Alfred P. Dillione, RICHARDS, LAYTON & FINGER, P.A., Wilmington,
Delaware; David L. Barrack, WINSLETT STUDNICKY MCCORMICK & BOMSER
LLP, New York, New York; Counsel for Greg Bailey; Karen Lee Bryant; Gary Lee
Campbell; Selle D’Shanna Campbell; Robert Chicoine; Crown Predator Holdings 1,
LLC; DM Seller Representative LLC; James T. Doody; Grant Eckberg; Tim
Einwechter; Jessica Evans; Deborah Fedorak; Rick Ferreira; Fisher Holdings LLC;
G&D Progressive Services, Inc.; Kevin J. Harrington; Sherrie Horton; Becki Jaynes;
KLBK Investments, LLC; Lewin Investments, LLC; Marc Mazur; Steven Mintz; Steve
E. Nelson; Don Newton; Mark Newton; Stephen J. Nicholas, MD; George Shelton
Ochsner; Stephen Ochsner; Jason Pauletto; Richard A. Danzig Profit Sharing Plan &
Trust; Martin J. Rucidlo; Kim Sauber; Gavin Scotti; Morton Stayton; Steve E. Nelson
Trust; Symcox Family Limited Partnership; Jay Symcox; Ellen Walsh; WIU
Foundation; and Edward J. Zecchini.

David S. Eagle, KLEHR HARRISON HARVEY BRANZBURG LLP, Wilmington,
Delaware; Stuart Singer, Carl Goldfarb, BOIES SCHILLER FLEXNER LLP, Fort
Lauderdale, Florida; Counsel for Jonathan Black; Maneesh Chawla; Comvest
Investment Partners Holdings, LLC; Dura Medic Holdings, Inc.; Dura Medic, Inc.;
Dura Medic Parent Holdings, LLC; and Roger Marrero.

Steven L. Caponi, Megan E. Hunt, K&L GATES LLP, Wilmington, Delaware; Counsel
for AdaptHealth, LLC, and DM Acquisition Sub LLC.

LASTER, V.C.
A private equity firm acquired a privately held company through a reverse

triangular merger. The acquired company performed terribly. Two years later, the

private equity firm sold the acquired company’s assets to a strategic buyer for one-

fifteenth of the purchase price. The private equity firm lost its entire investment. The

CEO whom the private equity firm installed likewise lost his entire investment, plus

all the money that his friends and family invested.

One of the sellers was the company’s co-founder. He rolled over a portion of his

merger proceeds and received equity in a holding company two levels above the post-

merger company. He asserted derivative claims on behalf of three entities: the

company, the first-level holding company, and the second-level holding company.

The co-founder claimed that the officers, directors, and controllers of the post-

merger company breached their fiduciary duties by (i) depressing the company’s

revenue and (ii) harming the company by firing key employees (including himself).

The co-founder failed to prove that either alleged breach involved a conflict of

interest. The business judgment rule applies, and judgment will be entered in favor

of the defendants on those claims.

The co-founder next challenged three self-interested financings, raising both

legal and equitable claims. The co-founder partially succeeded on his legal claim by

proving that the defendants violated the second-level holding company’s LLC

agreement when they engaged in one of the financings. The co-founder achieved

greater success with his equitable claims. He proved that the entire fairness standard

applied to the self-interested financings, and the defendants failed to prove that those
financings were entirely fair. As a remedy, the financings are equitably subordinated

to a note that the selling stockholders received as part of the consideration for the

merger. Judgment will be entered imposing that form of relief.

The co-founder also challenged the asset sale as a breach of fiduciary duty. The

asset sale was an arm’s-length end-stage transaction. Enhanced scrutiny therefore

applies.

The trial record established that the defendants’ actions fell within a range of

reasonableness, as did the asset sale itself. The defendants made debatable decisions

during the sale process that might have rendered the process unreasonable had

conflicted fiduciaries been involved, but the opposite was true. The sell-side private

equity firm held a dominant economic position in the company and had every

incentive to find the best deal possible. The company’s CEO led the sale process, and

he had invested millions of dollars of his own money and his family’s. He too had

every incentive to find the best deal possible. Perhaps they could have done a better

job selling a distressed asset that could no longer operate as a going concern. That,

however, is not the standard. Judgment will be entered for the defendants on that

claim.

The seller representative also brought claims challenging the asset sale. The

seller representative failed to prove that the asset sale constituted a fraudulent

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transfer. The company received reasonably equivalent value for its assets. Judgment

will be entered for the defendants on that claim as well.1

I. FACTUAL BACKGROUND

The facts are drawn from the post-trial record. Having evaluated the credibility

of witnesses and weighed the evidence, the court makes the following findings.2

A. The Company

In 2004, Mark Newton co-founded Dura Medic, Inc. (“Dura Medic” or the

“Company”). As its name implies, the Company supplied durable medical equipment

(“DME”), such as crutches, splints, and braces.

The Company conducted business using a stock-and-bill model. That means

the Company entered into contracts with hospitals to stock a supply closet with DME.

The hospital did not pay the Company for this service. Instead, when a physician

prescribed an item of DME, the hospital would take the item from the supply closet

and provide it to the patient. The hospital would notify the Company, and the

Company would bill a third-party payor, typically a private insurer or a government

health insurance program like Medicare or Medicaid. Before the merger, Medicare

1 This decision addresses a subset of the claims in this consolidated case. The

parties also asserted contract claims arising out of the merger agreement. The court
will issue a separate decision addressing those claims.

2 The parties agreed to stipulations of fact in the pre-trial order, cited as “PTO

¶ __.” Citations in the form “[Name] Tr. __” refer to witness testimony from the trial
transcript. Citations in the form “[Name] Dep. __” refer to witness testimony from a
deposition transcript. Citations in the form “JX __ at __” refer to trial exhibits. When
more convenient, references to trial exhibits use internal paragraphs or sections.

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claims made up about 20% of the Company’s gross billings. Sometimes—but rarely—

the Company billed the patients. The Company also sometimes negotiated with a

hospital to pay cost for any item of DME where the Company otherwise would go

unpaid.

The Company did not expect to collect on every claim, but it could operate

profitably if it charged sufficiently high prices and collected on enough claims. From

2015 through the first half of 2017, the Company generally billed at 200% of the

standard Medicare fee schedule. At that rate, the Company could generate profits

even if it collected on a relatively small percentage of claims.

The Company’s financial statements distinguished between the gross amount

billed, known as “Gross Patient Revenue,” and the net amount the Company

collected, known as “Net Patient Revenue.” The Company recognized Gross Patient

Revenue when billed. To derive Net Patient Revenue, the Company started with

Gross Patient Revenue and deducted a “Net Revenue Adjustment,” representing

amounts that the Company likely would not or in fact did not collect.

The Company calculated Net Revenue Adjustment by adding together

“Contractual Adjustments,” “Bad Debt Expense,” and “Adjustments to Patient

Revenue.” The Contractual Adjustments estimated the amount of Gross Patient

Revenue that the Company would not collect based on historical averages. The

Company applied the Contractual Adjustment when it billed the payor. As of June

2017, the Company used a Contractual Adjustment of 70%, meaning the Company

estimated that it would only collect 30% of Gross Patient Revenue.

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The Bad Debt Expense reflected amounts the Company no longer expected to

collect. The Company based the Bad Debt Expense on the actual accounts receivable

in the billing system that management wrote off as uncollectable.

The Adjustments to Patient Revenue represented amounts that the Company

billed directly to patients but could not collect. Because billing patients directly

involved high collection risk, the Company often negotiated with hospitals to bill

them at cost for unpaid patient claims.

The Company referred to the ratio of Net Patient Revenue to Gross Patient

Revenue as its “Gross-to-Net Ratio” or GNR. The resulting percentage used Net

Patient Revenue as the numerator and Gross Patient Revenue as the denominator.

The Company’s collections were unpredictable, both as to timing and amount.

The Company collected the bulk of its payments within a year, but some receivables

remained outstanding longer, and some could linger for five to seven years.

Eventually, management wrote off the amounts it could not collect.

B. The Company’s Pre-Merger Performance

From 2006 to 2013, Newton ran the Company. During this period, it “limped

along” financially. Newton Tr. 17. That changed in late 2013, when Grant Eckberg

and his spouse Deborah Fedorak took over the Company’s operations. Both were early

investors in the Company.

Eckberg became CEO and managed the Company’s day-to-day operations.

Fedorak served as CFO. Having Eckberg and Fedorak at the helm freed up Newton

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to focus on what he did best: establishing and maintaining relationships with hospital

clients. He took on the title of chief marketing officer.

With Eckberg and Fedorak in charge, the Company generated healthy

revenue. Between 2014 and 2017, the Company increased its yearly revenue from

about $3.5 million to $12 million.

During the same period, however, the Company’s Gross-to-Net Ratio steadily

declined. In other words, the Company was submitting claims with a higher

aggregate dollar value, but it was getting paid at an increasingly lower rate. As long

as that trend continued, the Company’s financial statements risked overstating the

Company’s value by understating the amount of revenue the Company could

eventually collect.

C. Early Regulatory Activity

By 2016, the Company’s claims began to attract regulatory scrutiny. The

Centers for Medicare and Medicaid Services (“CMS”) administers Medicare and

Medicaid. CMS regulations impose requirements that payees must meet when

submitting claims. For example, CMS requires that any claim for DME include the

doctor’s signatures, the patient’s signatures, and item descriptions.

CMS contracts with private firms to administer and enforce its requirements.

The pertinent types for this case are Medicare Administrative Contractors (“MACs”),

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Zone Program Integrity Contractors (“ZPICs”), and Recovery Audit Contractors

(“RACs”).3

MACs are private healthcare insurers that manage Medicare claims in

designated geographical regions. A MAC can deny payment if a claim lacks the

required documentation. MACs also conduct prepayment reviews of some or all of a

provider’s claims. When conducting a prepayment review, a MAC may require the

provider to provide additional documentation, such as information demonstrating

that the equipment was medically necessary.

MACs also administer the Target Probe and Educate Program (“TPE”). Under

that program, a MAC identifies a provider with a high claim error rate, reviews a

sample of twenty to forty claims, then provides feedback to the provider about the

errors in the sample and how the provider can improve. A TPE audit can involve

multiple rounds of review. If a provider fails the first round, then the provider has

forty-five days to improve its procedures, and the MAC conducts a second round of

review. The process can continue through at least three rounds.

If a provider does not show sufficient improvement after three rounds, then the

MAC can refer the provider to CMS for further review plus a range of possible

consequences. If warranted, CMS can revoke the provider’s authorization to submit

3 Some ZPICs are now called Uniform Program Integrity Contractors
(“UPICs”). ZPICs and UPICs are functionally identical, with ZPICs maintaining the
zone terminology from an earlier version of the CMS regime. Over time, UPICs have
replaced ZPICs. For simplicity, this decision uses the ZPIC nomenclature.

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claims to Medicare. CMS may also refer a provider to the Office of Inspector General,

which can pursue litigation against the provider or impose civil or criminal penalties.

ZPICs audit claims that providers have submitted to Medicare to ensure

compliance with CMS rules. ZPICs focus their audits on potential fraud, waste,

abuse, and overpayments. ZPICs can audit claims before providers have been paid

and require additional documentation before approving the claim. ZPICs also can

audit claims that already have been paid.

RACs investigate whether Medicare or Medicaid paid non-compliant claims. A

RAC can pursue a provider for any improper payments.

On June 1, 2017, a ZPIC named Health Integrity, LLC, informed the Company

it would be reviewing selected claims. Health Integrity was the ZPIC for Zone 4, so

this decision calls it the “Zone 4 ZPIC.”

On July 10, 2017, a RAC named Performant Recovery, Inc. (the “RAC Auditor”)

contacted the Company as part of a nationwide review aimed at identifying improper

Medicare payments. In the letter, the RAC Auditor told the Company that it was no

longer reviewing a list of Company claims from 2016 and 2017. The RAC Auditor did

not say whether or not it was reviewing other claims.

D. The Company Explores A Potential Sale.

In spring 2017, the Company’s board of directors (the “Board”) decided to

explore a sale or other strategic transaction. To reduce the level of concern that

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buyers might have about the Company’s financial performance, the Company

commissioned a quality-of-earnings report from FTI Consulting Inc.

FTI calculated that the Company generated $7.5 million in EBITDA for the

trailing twelve months (“TTM”) ending June 30, 2017. FTI estimated EBITDA using

a Gross-to-Net Ratio of 29.7%. That ratio assumed a Contractual Adjustment of 70%.

FTI observed that the Company “calculate[d] contractual adjustments using a [year-

end] hindsight review of closed-out patient accounts.” JX 16 at 21. FTI concluded that

“[m]anagement’s contractual process appears reasonable.” Id.

The Company hired Covington Associates, a boutique investment bank, to

contact potential buyers. The Company hired Tim Einwechter as a consultant to help

with the sale process. The Company also contracted with Rick Ferreira, then

chairman of the Board, to help with the sale process as a paid consultant.

In September 2017, Covington pitched the Company to Jonathan Black, an

executive partner with a private equity firm known as Comvest Partners. At

Comvest, executive partners are former executives charged with looking for deals in

sectors that align with their experience. If a deal looked sufficiently attractive, then

Comvest could back the executive partner in an acquisition.

Black had been chief development officer and later chief executive officer at

Liberty Medical Supply, a DME provider of diabetes testing supplies. After leaving

Liberty, Black started his own business manufacturing and selling blood glucose

meters and test strips, two other types of DME.

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Black recruited Timothy Tidd to help him evaluate the Company. Tidd had

been Liberty’s chief information officer and chief operating officer.

Black liked the Company and pitched an acquisition to Roger Marrero, a

Comvest senior partner and member of its investment committee. Intrigued, Marrero

staffed Comvest vice president Will Callahan and associate Gordon Carroll to a deal

team. Comvest partner Maneesh Chawla later joined the team.

E. The Negotiations

In September 2017, Comvest began conducting due diligence, assisted by a

phalanx of advisors. On October 19, 2017, Comvest sent the Company an initial letter

of intent (the “Initial LOI”). It contemplated a purchase price of $60 million, based in

part on the FTI quality-of-earnings report. The Initial LOI gave Comvest a forty-five-

day exclusivity period.

On October 24, 2017, Comvest and the Company executed the Initial LOI.

Meanwhile, CMS contractors continued to audit the Company.

• From August 4 to October 26, 2017, a MAC called Noridian Healthcare
Solutions, LLC (the “TPE Reviewer”) conducted a first round of TPE review.
On November 14, the TPE Reviewer informed the Company that twenty-four
of the thirty claims it reviewed contained errors, for an error rate of 80%. The
TPE Reviewer advised the Company that it would be “moved to the second
round of review.”4

4 JX 49 at 6; accord PTO ¶ 70. Company management didn’t pay much
attention to the TPE audit. Newton testified that he was not aware of it. Newton Tr.
37. Eckberg testified that he “never paid a lot of attention to the TPE.” Eckberg Tr.
142. Both claimed that they did not regard a TPE as an “audit.” Id. at 142–43; Newton
Tr. 81. The Company’s compliance counsel made clear that a TPE is an audit, albeit
“the least worrisome” kind of audit. Leard Dep. 35.

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• On December 7, 2017, the Zone 4 ZPIC informed the Company that it was
initiating a “comprehensive [prepayment] medical review of [the Company’s]
billing for Medicare services.” JX 67. The Zone 4 ZPIC selected the Company
for the review based on an analysis suggesting “aberrancies in your billing.”
Id. The Zone 4 ZPIC later sent the Company several hundred document
requests about its Medicare claims. PTO ¶ 71. The Zone 4 ZPIC also told the
Company that ZPICs from the areas where patients lived could send additional
document requests. JX 67. This decision refers to this audit as the “Second
Zone 4 ZPIC Audit,” because the Company later learned that it had been the
subject of an earlier Zone 4 ZPIC audit.

• In December 2017, AdvanceMed, a Zone 5 ZPIC, sent the Company several
hundred document requests about its Medicare claims. Those requests were
part of the Second Zone 4 ZPIC Audit.

• In December 2017 and January 2018, SafeGuard Services, a Zone 7 ZPIC, sent
the Company eleven document requests about its Medicare claims. Those
requests were part of the Second Zone 4 ZPIC Audit.

• On January 5, 2018, the Zone 4 ZPIC told the Company that it had performed
a post-payment review of claims for services provided from July 11, 2016,
through September 21, 2017. JX 98 at 1. The Zone 4 ZPIC reported that
twenty-six claims out of a sample of thirty-seven had errors, for an error rate
of 68.8%. Id. Although the Company learned of this audit after the Second Zone
4 ZPIC Audit, the audit itself happened first. This decision therefore refers to
it as the “First Zone 4 ZPIC Audit.”

The Company retained the van Halem Group to respond to the document

requests and improve its claim submission process. The Company also consulted with

Denise Leard, the Company’s longtime CMS compliance counsel.

On January 8, 2018, Leard sent a letter to Newton and Einwechter that

summarized the TPE process and provided advice about the Second Zone 4 ZPIC

Audit. On January 30, Leard sent a letter to Ferreira that summarized van Halem’s

findings about the Second Zone 4 ZPIC Audit. Leard reported that the Company’s

documentation was likely “not sufficient to justify payment in all cases.” JX 139 at 4.

Damning the Company with faint praise, she added that “the errors do not amount

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to fraud.” Id. Leard advised the Company that it needed to lower its error rate to exit

from the Second Zone 4 ZPIC Audit. Ferreira forwarded Leard’s letter to Black.

Kim Sauber was a key employee for the audits. She was the Company’s

business analyst and oversaw its billing operations. On February 12, 2018, Sauber

told Newton, Einwechter, and Eckberg that CMS contractors had conducted 193

reviews of claims relating to a range of the Company’s products and that only fourteen

were approved. Einwechter forwarded the email to Ferreira with the following

comment:

So they pick 193 claims and of this ONLY 14 were approved. That is
scary with over 90% rejection. Sure the $’s were not large however if if
[sic] was sitting on the purchaser side of this transaction the
“perception” would clearly be I have revenue model out of control. I will
craft email to Comvest tomorrow and try to avoid discussion of number
of claims and only report on $’s.

JX 150 at 3. Referring to Comvest, Ferreira responded, “Not sure how we report this

and not make these guys nervous.” Id. at 2–3. Ferreira later added, “F*&k - I don’t

know how you even defend that!!” Id. at 2. He concluded, “Can’t get this [deal] closed

fast enough!!!” Id. at 1–2.

F. Comvest Learns About The Second Zone 4 ZPIC Audit.

In early January 2018, Comvest learned about the Second Zone 4 ZPIC Audit.

Comvest put the Initial LOI on hold to see how the ZPIC audit played out. Marrero

described the deal as “now on life support given some recent diligence findings.” JX

119. Later that month, Comvest learned that the Company also had “an ongoing audit

in Zone 5.” JX 131.

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Because of the audits, Comvest sought additional information from the

Company. Comvest learned that the Company’s monthly cash collections declined

from $1,454,000 in October 2017 to $862,000 in February 2018, then rebounded

slightly to $947,000 in March 2018. Comvest attributed the decline to the distraction

of the Second Zone 4 ZPIC Audit and the sale process. Comvest estimated that

without those distractions, the Company would have generated approximately

$150,000 more in collections per month.

Ferreira understood that selling the Company was a challenge. On April 1,

2018, he reminded Einwechter in an email that “21 banks looked at this deal and

ALL turned it down. A variety of reason [sic] here but three main ones were the ever-

increasing contractual allowance, the industry headwinds and the ZPIC audit.” JX

231 at 1.

G. The Revised Letter of Intent

Having learned about the CMS audits and identified a declining trend in

collections, Comvest recalculated the Company’s adjusted EBITDA for 2017, reducing

it from $7.5 million to $4.3 million.

In April 2018, Comvest sent a revised letter of intent to the Company. It

lowered the deal price to $30 million, with $18 million paid in cash at closing plus

another $12 million taking the form of an unsecured subordinated promissory note

that would be paid over six years.

Eckberg thought the lowered price was reasonable in light of the trend in

collections and the audits. In an email to Newton, he noted that the Company was

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struggling to meet Medicare’s requirements for submitting claims, that fixing the

Company’s problems would require overhauling its procedures, slowing down the

submission rate, and spending 30% to 50% more to process claims. Eckberg told

Newton, Ferreira, and Einwechter that without a sale to Comvest, it would take “at

least a year (or probably more) to address issues that have been recently created and

discovered.” JX 230 at 2.

With the Company putting more upfront work into the quality of its claims,

the rate of claim submission slowed precipitously from 2,507 in January to 217 claims

in April 2018.5 The average submission rate for February and March (1071 claims

per month) was about a third of the average submission rate for October 2017 through

January 2018 (3181 claims per month). As of May 30, 2018, the Company had a

backlog of over 5,000 unsubmitted claims.

H. More Bad News For The Company

In April and May 2018, the Company received negative feedback from key

customers. The Company’s largest client by revenue was Stanford Health Care. On

April 11, 2018, Stanford gave notice that the Company’s contract would terminate in

six months. Newton received a copy of the notice.

5 JX 240 at 1; see Tidd Tr. 556 (estimating the Company released about 50% of

Medicare claims in January–February 2018 but about 10–20% in March–May 2018).

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Baptist Health System was another of the Company’s largest customers. That

same month, Baptist reduced the Company’s coverage from five of its hospitals to

four.

The Company also continued to struggle with the audits. In April 2018, a Zone

3 ZPIC started an inquiry and sent the Company document requests. Van Halem told

the Company to expect follow-up requests because of the Company’s high error rate.

In May, the contractor leading the Zone 5 ZPIC audit told the Company that it had

reviewed 220 claims and found errors in 214 of them, for an error rate of 97%.

In emails between themselves, Ferreira and Einwechter candidly

acknowledged the Company’s problems and plummeting value. In a May 13, 2018

email exchange, Ferreira told Einwechter that “we are selling a house that is

springing leaks every day.” JX 283 at 1.

I. The Merger Agreement And The Seller Note

On May 7, 2018, the Comvest deal team sought formal approval from the

Comvest investment committee to buy the Company. The investment committee

approved the deal.

On May 22, 2018, the Company entered into a merger agreement with two

newly created Comvest entities: an acquisition vehicle named Dura Medic Merger

Sub, Inc. (“Merger Sub”) and a holding company named Dura Medic Holdings, Inc.

(“Holdings”). Holdings was a wholly owned subsidiary of another newly created

entity, Dura Medic Parent Holdings, LLC (“Parent”), but Parent was not a party to

the agreement.

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There were thirty-nine selling stockholders (the “Sellers”).6 The agreement

designated DM Seller Representative LLC, a newly created entity managed by

Ferreira and Eckberg, as the “Seller Representative.” See JX 312 (the “Merger

Agreement”).

Under the Merger Agreement, Merger Sub would merge with and into the

Company, with the Company surviving as a wholly owned subsidiary of Holdings (the

“Merger”). At closing, the selling stockholders’ shares would be converted into the

right to receive a total of $18 million in cash from Holdings, subject to potential

adjustments. The selling stockholders also would share in a note issued by Holdings

with a face value of $12 million (the “Seller Note”).

The Merger closed June 6, 2018. That day, Holdings delivered the Seller Note

to the Seller Representative.

After the Merger, Parent owned 100% of Holdings, which owned 100% of the

Company. A Comvest affiliate owned 63.6% of Parent’s units. Other investors,

including Black, his friends and family, and Tidd, owned 26.7% of Parent’s units.

6 The Sellers are Greg Bailey; Karen Lee Bryant; Gary Lee Campbell; Selle

D’Shanna Campbell; Robert Chicoine; Crown Predator Holdings 1, LLC; James T.
Doody; Grant Eckberg; Tim Einwechter; Jessica Evans; Deborah Fedorak; Rick
Ferreira; Fisher Holdings LLC; G&D Progressive Services, Inc.; Kevin J. Harrington;
Sherrie Horton; Becki Jaynes; KLBK Investments, LLC; Lewin Investments, LLC;
Marc Mazur; Steven Mintz; Steve E. Nelson; Don Newton; Mark Newton; Stephen J.
Nicholas, MD; George Shelton Ochsner; Stephen Ochsner; Jason Pauletto; Richard
A. Danzig Profit Sharing Plan & Trust; Martin J. Rucidlo; Kim Sauber; Gavin Scotti;
Morton Stayton; Steve E. Nelson Trust; Symcox Family Limited Partnership; Jay
Symcox; Ellen Walsh; WIU Foundation; and Edward J. Zecchini.

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Newton rolled over $1 million of his proceeds from the Merger and received Parent

units.

The investments in Parent were structurally subordinated to the Seller Note,

which Holdings had issued. The Seller Note in turn was structurally subordinated to

any debt at the Company level.

J. Comvest Gets More Bad News.

After the Merger, Comvest controlled the boards of Parent, Holdings, and the

Company. Each entity’s governing board had the same five members: Marrero,

Chawla, Callahan, and Stacie Brachter, plus Black as the Company’s CEO. Tidd

became the Company’s COO.7

Even before the Merger closed, Black and Tidd decided to withhold all

Medicare claims until the Company improved its submission process. On May 30,

2018, a week before the Merger closed, Tidd reported on the decision to the Comvest

deal team:

Upon close, I have informed Kim [Sauber] to stop all Medicare claims
from billing until we have a QC process in place that ensures that the
only claims that go out are clean. This will create more of a backlog in
unbilled claims, but I want to ensure that the next audit that surfaces
will show that all submitted claims post-close are clean based on what
we know, so that our denial rate comes in at under 30%.

7 The Company’s headquarters was in Austin, Texas. Black and his family lived

in Boston, and he did not relocate after the deal. He tried to manage the Company
remotely, visiting Austin as necessary. Newton complains about this arrangement,
and while it may have made Black marginally less effective as a leader, it did not
contribute materially to the Company’s problems.

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JX 335 at 1. Black agreed.

After the Merger, the Company began withholding all Medicare claims. The

Company continued to submit claims to third-party payors and private insurers.

Black and Tidd decided to withhold claims without knowing about the TPE

audit. Black learned about the TPE audit and the first round of results on June 8,

2018, two days after closing.

The Company also faced a new ZPIC audit. One day before closing, on June 5,

2018, the Zone 7 ZPIC selected one of Dura Medic’s subsidiaries for “a comprehensive

medical review of your billing services.” PTO ¶ 86. Two weeks later, the TPE

Reviewer reported that the Company had reduced its error rate from 80% to 41.85%,

but that was still too high and required a third round of review.

The third round of TPE threatened the Company with the loss of its ability to

submit claims to Medicare. A sanction of that magnitude was unlikely but possible.

On June 21, 2018, Black emailed the Seller Representative about the TPE

audit. Black was blunt: “The ramifications of a failed round three are not only serious,

but also potentially threatening to the continuance of Dura Medic’s business, whereby

failure could mean everything from an extrapolation and fine to revoking Dura

Medic’s Medicare provider number.” JX 381. He continued: “We are doing everything

in our power to ensure clean claims are going out the door to be process [sic] and paid,

and in the interim, holding all claims until thoroughly reviewed. This will put a

serious burden on our cash flow, but for the long-term good (and compliance) of the

business, this is what needs to be done.” Id.

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Ferreira and Einwechter thought they had dodged a bullet by selling the

Company. Ferreira emailed Einwechter, asking, “Remember the game ‘pass the

parcel’????” JX 381. Einwechter responded by describing the deal as “[t]he all-time

escape job.” Id.

Meanwhile, the Company learned that it had been the subject of additional

RAC audits and that the RACs were demanding reimbursement for noncompliant

claims. By October 2019, the Company had received over 100 recoupment demands

for the pre-Merger period from 2016 to 2018. The total claims amounted to several

hundred thousand dollars of reimbursements.

K. Comvest Gets A Bit Of Good News.

In September 2018, the Company’s efforts to improve its claim submission

process started to bear fruit. The Company resumed submitting claims that it

believed were fully compliant with CMS requirements. But the rate of claim

submission remained low; by October the Company had submitted only 299 claims.

The Company’s clean-claims rate—the percentage of claims that did not require any

additional documentation after being submitted—also remained low. It improved

from 5% to 16%. It was not until mid-2019 that the clean-claims rate approached 40%.

The efforts to improve the claim process came at a cost. Submitting complete

claims took more time than submitting incomplete claims and rationalizing that the

Company could always find and submit more information if it were audited. The new

informational demands frustrated the Company’s field representatives, who had

gotten used to the lackadaisical pre-Merger system. The new informational demands

19
also frustrated hospital personnel, because the Company’s field representatives had

to track them down to get all of the information required for a clean claim.

The Company’s cash flow also suffered. With the Company withholding

incomplete claims, its accounts receivable grew. To address its cash flow needs, the

Company secured a $1 million revolving line of credit from CIBC Bank USA (“CIBC”)

in November 2018.

L. Comvest Sues for Indemnification.

The Company’s claims processes and financial performance were so poor that

by fall 2018, Comvest began investigating whether it had claims against the Sellers.

By October 2018, Comvest was preparing to assert claims for indemnification. By

February 2019, Comvest had retained litigation counsel. On March 28, 2019,

Comvest’s counsel delivered a claim notice to the Seller Representative that

demanded $16,585,605 in indemnification.

On June 21, 2019, Comvest caused the Company and Holdings to sue the Seller

Representative and each of the Sellers. The complaint sought indemnification for

breaches of representations and warranties in the Merger Agreement. On August 27,

2019, the Seller Representative asserted counterclaims and third-party claims.

M. The Company Continues To Struggle.

After the Merger, Newton stayed on as chief marketing officer. In March 2019,

Black asked Newton to resign. Newton agreed, ending his employment on March 12.

Black also terminated senior employees for poor performance, HR reasons, or both.

20
To improve the Company’s processes, Black decided to switch the Company

over to Brightree, a different inventory and billing program. The Company had

considered and rejected Brightree before the Merger. Getting Brightree installed took

time. It was not until February 2019 that the Company started using Brightree for

new claims.

Meanwhile, the CMS audits continued:

• On April 15, 2019, the Zone 4 ZPIC selected the Company for prepayment
review of a single claim.

• On July 23, 2019, the RAC Auditor demanded that the Company return money
for overpayment on four Medicare claims.

• On August 13, 2019, the TPE Reviewer asked the Company for “medical record
documentation associated with the reopening of certain Medicare claims
previously submitted for payment.” JX 620.

• On August 13, 2019, CMS asked for records for seventeen patients who
received DME from the Company.

When it purchased the Company, Comvest anticipated J-curve growth.

Comvest envisioned that EBITDA initially would fall because of expenditures like

switching over to Brightree. After that, growth would pick up and accelerate. Instead,

the Company’s performance continued to decline.

N. The Mid-Stream Financings

By spring 2019, the Company needed cash. In April 2019, CIBC increased the

Company’s line of credit to $2 million. To reduce expenses, Black gave up his salary

indefinitely starting in September 2019. Tidd gave up his salary as well.

Between April 2019 and March 2020, the Company obtained capital from

Comvest affiliates (the “Mid-Stream Financings”):

21
• In April 2019, the Company borrowed $750,000 in exchange for secured
subordinated promissory notes that paid interest at 15% per annum (the “First
Debt Issuance”).

• In September 2019, the Company borrowed $1.75 million in exchange for
secured subordinated promissory notes that paid interest at 15% per annum
(the “Second Debt Issuance”).

• In December 2019, the Company issued a new class of Series A Preferred Stock
in return for $2.5 million (the “First Preferred Equity Issuance”). The Series A
Preferred Stock carried a liquidation preference equal to the face value plus all
declared but unpaid dividends plus interest accruing at 15% per annum.

• In March 2020, the Company issued additional shares of Series A Preferred
Stock in return for $1.25 million (the “Second Preferred Equity Issuance”). The
Comvest investment committee refused to approve the purchase unless the
Company hired Silverman Consulting, a restructuring firm.

Comvest gave Newton the opportunity to participate in the Mid-Stream Financings,

but he declined.

O. The Company Looks To Raise Capital Or Sell.

In January 2020, a mutual acquaintance introduced Black to Luke McGee,

CEO of defendant AdaptHealth, LLC. Black and McGee discussed how their

companies might work together.

After the Company engaged Silverman in March 2020, management cut costs

dramatically, including by laying off over 60% of the Company’s employees. The

Company also terminated its less profitable customer relationships.

In March 2020, the World Health Organization declared that COVID-19 had

caused a global pandemic. The pandemic crushed the Company’s business. With

fewer people engaging in outdoor sports and similar activities, fewer people suffered

injuries that could lead to a purchase from the Company’s inventory. Many hospitals

22
limited access to their facilities, so Company employees could not restock the

equipment closets. The Company’s sales plummeted.

By spring 2020, it was clear that the Company needed more financing. As an

alternative, on May 18, 2020, Black emailed McGee about a potential transaction.

The next day, McGee proposed a “structured asset deal” in which AdaptHealth would

acquire the Company’s assets. JX 819. Black agreed to explore the idea. When McGee

did not hear back, he emailed Black to confirm the deal was dead. Black responded

that Comvest preferred to raise $4–5 million in new capital.

During summer 2020, Black and Comvest contacted dozens of potential

investors. Call logs document the investors they contacted and the investors’

responses. A handful of investors asked for an introductory memo about the

Company. That memo described the Company as “well-positioned to be a stable

platform post-COVID,” with “actionable momentum to achieve significant growth in

the near term.” JX 822 at 12. The memo projected gross profits of $8.2 million in 2022.

Id. at 13.

1. The Beach Possibility

In June and July 2020, Marrero met with John Beach, an investor in skilled

nursing facilities and the former CEO of a DME business. They discussed the

possibility of Beach leading a consortium of investors to provide capital to the

Company. For Beach, any investment would be conditioned on the Company hiring

Scott Klosterman, Beach’s preferred CEO.

23
On July 9, 2020, the Comvest deal team briefed the investment committee on

a potential transaction with Beach. The deal team assessed the merits and risks of

three strategies: Medium/Long Term Exit, Short/Medium Term Exit, and Near Term

Liquidation.

The Medium/Long Term Exit option could create the most value, because “[i]f

the company can become EBITDA breakeven, there is significant option value

between the ongoing business and litigation.” JX 842 at 13. But the deal team thought

achieving profitability after COVID-19 was unlikely. The Near Term Liquidation

option was undesirable and “[l]ikely to lead to least recovery for [Comvest] and co-

investors.” Id. at 16.

At that same meeting, the deal team briefed the investment committee on

possibly engaging an investment bank to lead an effort to sell the Company or raise

capital. The Company ultimately did not retain a financial advisor.

On July 27, 2020, Marrero spoke to Beach and sent him another set of

materials about the Company. Marrero claimed the materials “show[ ] your ability to

make real payday once we hit our budgeted number which I think can be conservative

case.” JX 868 at 1. Those positive words implied that Marrero saw value in the

Company. In a follow-on email to Comvest colleagues, Marrero reported that Beach

was on the fence and would insist on Klosterman running the Company. Marrero saw

no future for Black, reporting that “Jonathan is unbackable.” Id.

24
2. The Breg Offer

Between June 1 and July 10, 2020, Black, Marrero, Chawla, and Hamilton

contacted over three dozen potential investors. No one was interested.

One potential investor proposed an acquisition. On July 14, 2020, DME

competitor Breg Group Holdings, Inc., sent Black a non-binding offer to acquire the

Company’s assets for consideration at closing of $3.5 million to $5 million, paid 80%

in Breg common stock and 20% in cash. The offer also contemplated an earnout that

could increase the total consideration to $15 million. The Breg offer required sixty

days of exclusivity, meaning the Company would have to stop negotiating with Beach.

Black rejected the Breg offer because the Company was “looking to raise $5

million.” Black Tr. 385. Put differently, Comvest was pursuing the Medium/Long

Term Exit option.

During the two months between July 10 and September 11, 2020, Black and

his colleagues contacted Beach six times. During those two months, Black went back

to Breg twice. On July 24, Black informed Breg that “we’re exploring other

investment options for capital and will follow-up.” JX 944 at 2. Black went back to

Breg again on September 11, 2020. At that point, Breg only was willing to assume

the Company’s contracts and “provid[e] a soft landing for employees and clients” but

without providing any “purchase consideration.” JX 939. Black also contacted ten

other potential deal partners. Each declined to make an offer.

25
P. The AdaptHealth Sale

While Black and Comvest looked for investors or purchasers, the Company’s

performance deteriorated further. By summer 2020, the Company’s net losses

exceeded $6 million, with over $2.7 million coming during the first half of the year.

By mid-2020, neither Silverman nor Black thought the Company was a going

concern. Silverman “project[ed] that the company will not be able to cover payroll the

week ending September 11th [2020].” JX 861 at 1. Silverman repeated these warnings

in August and September. In August, Tidd and Black worried that without funding

from Comvest, the Company could not make its next payroll.

On August 4, 2020, CMS gave notice that it would revoke the Company’s

provider number in thirty days because of the Company’s failure to respond to its

inquiries. That same month, Tidd informed the Company he was resigning.

In a final effort to land the Beach investment, Comvest offered Klosterman a

position as president and CFO. A month later, Klosterman turned it down. Beach and

his co-investors declined to invest.

At that point, the Company had two options: liquidate or sell for whatever it

could get. On September 9, 2020, Comvest invested $100,000 to facilitate an orderly

process.

On September 15, 2020, Black reconnected with McGee, the CEO of

AdaptHealth. Black sent McGee some “high-level data” that McGee forwarded to a

colleague, commenting, “Fire sale[.] Thinking we may want to do something here.”

JX 2017 at 1.

26
The next morning, McGee sent Black the following proposal:

• $2 million in cash for substantially all of the Company’s assets;

• Up to 25,000 shares of AdaptHealth stock if the Company’s “top three
accounts” exceed certain billable order targets in 2021;

• Up to 25,000 shares of AdaptHealth stock if the Company’s “two new accounts”
exceed certain billable order targets in 2021;

• AdaptHealth hires all Company employees for a minimum of ninety days;

• “Black agrees to a 6 month transition agreement for 25k per month and we
hopefully discuss longer-term partnership”;

• The Company retains its pre-closing receivables; and

• AdaptHealth agrees to collect the Company’s pre-closing receivables for a 15%
fee.

JX 910 at 1.

Black did not attempt to negotiate the amount of cash consideration at closing.

Black did negotiate the earnout and other provisions. The negotiations were difficult,

with McGee presenting the offer as “a little bit of a take it or leave it.” Black Tr. 280.

On September 17, 2020, Black and McGee reached agreement on key terms.

They continued to negotiate a handful of ancillary terms.

There is no persuasive evidence indicating that, other than Black, the directors

of the Company, Holdings, or Parent participated in or oversaw the negotiations. The

minutes are formulaic and perfunctory.

Between September 18 and October 1, 2020, AdaptHealth conducted due

diligence. On September 22, AdaptHealth learned that CMS had revoked the

Company’s Medicare license. AdaptHealth was surprised and concerned, but did not

27
lower the price because AdaptHealth always planned to use its own Medicare license

to conduct business.

Comvest and Silverman believed a sale to AdaptHealth was preferable to a

liquidation. Silverman estimated that a liquidation would yield a total recovery of

$829,092, less liquidation costs of $787,083, resulting in net proceeds of $42,009.

Internally, Comvest described the sale to AdaptHealth as a way to “maximize senior

lender recovery, with potential full 1st lien recovery and some return for 2nd lien

lenders.” JX 969 at 2.

On October 1, 2020, the Company and AdaptHealth executed a letter

agreement governing the sale of assets (the “Sale”). The principal terms had not

changed meaningfully from McGee’s initial proposal, except that AdaptHealth agreed

to issue the Company up to 80,000 additional shares of AdaptHealth Class A common

stock if AdaptHealth received orders from the Company’s “pre-closing referral

sources” and “new referral sources” that hit specified thresholds. JX 1009 § 2(b)(1).

The Company committed to provide AdaptHealth with access to Brightree so

AdaptHealth could use the database to collect receivables. Another change was to

limit the noncompete period under Black’s six-month consulting agreement.8

8 In earlier negotiations, AdaptHealth proposed that Black would be subject to

a three-year noncompete after the six-month consulting agreement. He and McGee
eventually agreed to lower the noncompete to one year. JX 2021 at 4.

28
Comvest’s investment committee approved the Sale. The boards of the

Company, Holdings, and Parent approved the transaction by written consent. No one

engaged an investment bank or secured a fairness opinion.

CIBC, the Company’s first-position lender, approved the Sale. CIBC received

$1.282 million, less than its outstanding loan. The Company later paid CIBC

additional amounts as AdaptHealth collected receivables.

The Sale closed on October 2, 2020. It was not a good outcome for the

Company’s investors. Comvest had invested more than $18 million and lost it all.

Black had personally invested $1.5 million. His friends and family had invested over

$4 million. They lost it all.

The closing of the Sale accelerated the Seller Note, which immediately became

due in full with interest. Holdings was the obligor, but no proceeds flowed up to

Holdings to pay the Seller Note. The proceeds went to the Company’s creditors.

After the Sale, AdaptHealth’s collection efforts stalled before meeting any of

the earnout thresholds. Brightree terminated the Company’s access to its platform

for non-payment. Without access to Brightree, AdaptHealth terminated its

agreement to collect the Company’s receivables in return for a 15% cut.

Q. This Litigation

On June 21, 2019, Comvest caused the Company and Holdings to sue the Seller

Representative and each of the Sellers individually (the “Contract Action”). In that

action, the Company and Holdings seek indemnification for breaches of

representations and warranties in the Merger Agreement.

29
On August 27, 2019, the Seller Representative asserted counterclaims and

third-party claims in the Contract Action. They contended that Holdings breached

the Seller Note through non-payment. They also contended that Holdings and the

Company breached the Merger Agreement by intentionally withholding Medicare

claims to sabotage the Company’s short-term revenues while maximizing the

Comvest’s indemnification claims and depriving Holdings of distributions that could

be used to pay the Seller Note.

On March 18, 2020, Newton asserted derivative claims on behalf of Parent,

Holdings, and the Company (the “Derivative Action”). Newton named as defendants

Comvest Investment Partners Holdings, LLC, Marrero, Chawla, and Black

(collectively, the “Comvest Parties”). Newton also sued Callahan. Newton alleged that

the defendants breached their fiduciary duties by engaging in self-interested

financing transactions, paying excessive compensation and management fees, and

sabotaging the Company’s short-term revenues to maximize their indemnification

claims and avoid paying the Seller Note.

The Comvest Parties and Callahan moved to dismiss the Derivative Action. On

January 11, 2023, the court dismissed the claims as to Callahan. The court also

dismissed the claim that Comvest paid itself illicit management fees and overpaid

Black.

On February 15, 2021, the Seller Representative filed suit against

AdaptHealth, Merger Sub, Holdings, and the Company alleging that the Sale was a

fraudulent transfer (the “Fraudulent Transfer Action”).

30
On April 29, 2022, the court granted summary judgment in the Contract Action

on the Seller Representative’s claim for breach of the Seller Note. As a result of this

ruling, Holdings became liable for principal plus interest.

The court consolidated the cases for trial, which lasted five days. The parties

introduced 1288 exhibits and deposition transcripts from nineteen individuals.

Eleven fact witnesses and three expert witnesses testified live.

II. LEGAL ANALYSIS

This decision addresses the claims in the Derivative Action. This decision also

addresses the claims in the Fraudulent Transfer Action.

A. Claims Relating To The Post-Merger Management Of The Company

Newton contends in the Derivative Action that the Comvest Parties breached

their fiduciary duties by depressing the Company’s short-term revenues both to

maximize the value of their indemnification claims and avoid paying the Seller Note.

The business judgment rule protects those decisions. Judgment will be entered in

favor of the defendants on these claims.

“A claim for breach of fiduciary duty requires proof of two elements: (1) that a

fiduciary duty existed and (2) that the defendant breached that duty.”9 The

evidentiary record easily establishes the first element. But the evidentiary record

fails to support the second element.

9 Beard Rsch., Inc. v. Kates, 8 A.3d 573, 601 (Del. Ch. 2010), aff’d sub nom.

ASDI, Inc. v. Beard Rsch., Inc., 11 A.3d 749 (Del. 2010).

31
1. Fiduciary Status

Directors of a Delaware corporation owe default common law fiduciary duties.10

Unless a Delaware limited liability agreement provides otherwise, managers owe the

same common law fiduciary duties.11 A majority stockholder or member likewise owes

fiduciary duties.12

Newton has sued derivatively on behalf of three entities: the Company,

Holdings, and Parent. The Company and Holdings are Delaware corporations. Parent

is a Delaware limited liability company. The Parent LLC Agreement does not waive

fiduciary duties.13

Defendants Marrero, Chawla, and Black served as directors or mangers of each

entity and owed fiduciary duties in those capacities. Through an affiliate, Comvest

was the majority member in Parent, and Parent controlled Holdings and the

Company. Comvest therefore owed fiduciary duties to the Company, Holdings,

Parent, and Parent’s minority members.

10 Frederick Hsu Living Tr. v. ODN Hldg. Corp., 2017 WL 1437308, at *16 (Del.

Ch. Apr. 14, 2017).

11 Feeley v. NHAOCG, LLC, 62 A.3d 649, 661 (Del. Ch. 2012).

12 Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1113–14 (Del. 1994); Kelly

v. Blum, 2010 WL 629850, at *1 (Del. Ch. Feb. 24, 2010).

13 JX 346 § 16.5(b).

32
2. A Breach Relating To The Post-Merger Management Of The
Company

To determine whether a fiduciary has breached her duties, the court must

identify the applicable standard of review.14 “Delaware has three tiers of review for

evaluating [fiduciary] decision-making: the business judgment rule, enhanced

scrutiny, and entire fairness.”15

The business judgment rule is Delaware’s default standard of review.16 The

rule presumes that “in making a business decision the directors of a corporation acted

on an informed basis, in good faith and in the honest belief that the action taken was

in the best interests of the company.”17 Unless a plaintiff rebuts one of the elements

of the rule, “the court merely looks to see whether the business decision made was

rational in the sense of being one logical approach to advancing the corporation’s

objectives.”18 If the decision was rational, then the inquiry ends.

14 See Chen v. Howard-Anderson, 87 A.3d 648, 666 (Del. Ch. 2014); In re
Volcano Corp. S’holder Litig., 143 A.3d 727, 737 (Del. Ch. 2016), aff’d, 145 A.3d 697
(Del. 2017) (TABLE).

15 Chen, 87 A.3d at 666.

16 Firefighters’ Pension Sys. of City of Kan. City, Mo. Tr. v. Found. Bldg. Mat’ls,

Inc., 318 A.3d 1105, 1139 (Del. Ch. 2024).

17 Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (subsequent history omitted).

18 In re Dollar Thrifty S’holder Litig., 14 A.3d 573, 598 (Del. Ch. 2010).

33
Enhanced scrutiny is Delaware’s intermediate standard of review.19 Enhanced

scrutiny applies to specific, recurring, and readily identifiable situations marked by

two features. First, there is a distinct decision-making context where the realities of

the situation can subtly undermine the decisions of even independent and

disinterested fiduciaries.20 Second, the decision under review involves the fiduciary

intruding into a space where stockholders possess rights of their own. The fiduciary’s

exercise of corporate power therefore raises questions about the allocation of

authority within the entity and, from a theoretical perspective, implicates the

principal-agent problem.21 The resulting situation calls for an intermediate standard

of review that examines “the reasonableness of the end that the directors chose to

pursue, the path that they took to get there, and the fit between the means and the

end.”22

19 Firefighters’ Pension Sys. of City of Kan. City, Mo. Tr. v. Presidio, Inc., 251

A.3d 212, 249 (Del. Ch. 2021).

20 In re Trados Inc. S’holder Litig. (Trados II), 73 A.3d 17, 43 (Del. Ch. 2013).

21 To be clear, directors and officers are not agents of the stockholders, nor are

the stockholders their principals. “A board of directors, in fulfilling its fiduciary duty,
controls the corporation, not vice versa. It would be an analytical anomaly, therefore,
to treat corporate directors as agents of the corporation when they are acting as
fiduciaries of the stockholders in managing the business and affairs of the
corporation.” Arnold v. Soc’y for Sav. Bancorp., Inc., 678 A.2d 533, 540 (Del. 1996)
(footnote omitted); see also Presidio, 251 A.3d at 286 (“Rather than treating directors
as agents of the stockholders, Delaware law has long treated directors as analogous
to trustees for the stockholders.”). The principal-agent problem uses the language of
economic theory, not the language of legal relationships.

22 Obeid v. Hogan, 2016 WL 3356851, at *13 (Del. Ch. June 10, 2016).

34
Delaware’s most onerous standard is the entire fairness test.23 That standard

applies when the fiduciary labors under an actual conflict of interest. Entire fairness

is a unitary standard that combines a substantive dimension (fair price) and a

procedural dimension (fair dealing).24 Although the two aspects may be examined

separately, they are not distinct elements of a two-part test. Instead, “[a]ll aspects of

the issue must be examined as a whole since the question is one of entire fairness.”25

Although the transaction must be entirely fair, “perfection is not possible, or

expected.”26

Newton contends that the Comvest Parties breached their fiduciary duties by

depressing the Company’s short-term revenues to maximize the Comvest Parties’

indemnification rights and avoid paying the Seller Note. Newton asserts that to

achieve that goal, the Comvest Parties withheld Medicare claims, fired Newton and

other key employees, and diverted the Company’s resources to litigation.27

23 Presidio, 251 A.3d at 249.

24 See Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1973).

25 Id.

26 Id. at 709 n.7.

27 Newton also criticized Black as a generally incompetent CEO. For example,

Newton noted that Ochsner speculated about COVID-19 being a missed business
opportunity to sell personal protective equipment that Black allegedly lacked the
vision to pursue. That is not a breach of duty.

35
Newton argues that the court should review these decisions under the entire

fairness standard. At the pleading stage, the court viewed Newton’s theory as

reasonably conceivable. At trial, Newton bore the burden of proving in the first

instance that a conflict of interest existed sufficient to implicate the entire fairness

test. Newton failed to carry that initial burden.

a. Withholding Medicare Claims

Newton alleges that Black withheld pre-closing Medicare claims to depress the

Company’s performance and support an indemnification claim. Newton also alleges

that Black withheld Medicare claims so that the Comvest Parties could avoid paying

the Seller Note. Under the terms of the Seller Note, Holdings’ obligation to make

payments depended on the Company hitting an EBITDA threshold. JX 414 § 3(a).

Newton alleges that the Comvest Parties depressed the Company’s short-term

revenues to avoid hitting the threshold.

Absent a conflict of interest, the business judgment rule applies to the types of

managerial decisions that Newton challenges. Newton failed to prove that the

decision to withhold Medicare claims post-closing could create a conflict for the

Comvest Parties in the form of a desire to maximize their indemnification claims.

Under the Merger Agreement, Comvest could only obtain indemnification for pre-

closing issues.28 Under Newton’s theory, Black and Tidd should have withheld pre-

28 JX 312 § 4.5(a) (financial statements up to April 30, 2018); id. § 4.5 (e) (Gross-

to-Net Ratio up to April 30, 2018); id. § 4.7(a) (general legal compliance from January
36
Merger claims but not post-Merger claims. Instead, they withheld all Medicare

claims. They also continued withholding claims long after doing so could result in an

indemnification claim.29 Black, Marrero, and Chawla credibly denied having any

intention to sabotage the Company, short-term or otherwise.30

Newton also failed to prove that the decision to withhold Medicare claims

resulted from a desire to avoid paying interest on the Seller Note. Under the Seller

Note, Holdings had to pay interest if the Company’s “[c]onsolidated EBITDA for the

12-month period ending on the month immediately prior to such interest [is] at least

$5,000,000.” JX 414 § 3(a). The Company could not include revenue for pre-closing

Medicare claims in its post-closing EBITDA calculations. The Company booked

revenue at the time of billing, not the time of collection. At best, the Comvest Parties

could have avoided paying the seven percent annual interest on the Seller Note, but

the interest was capitalized and due at the maturity date. Id. Delaying payments

would not have made the obligation disappear.

Without an overarching conflict, Newton had to rebut the business judgment

rule by providing that Black acted disloyally, in bad faith, or in a grossly negligent

1, 2015, until Merger); id. § 4.8(a) (healthcare legal compliance for three years before
Merger).

29 See JX 606 at 2, 13 (July 22, 2019); JX 507 at 3 (February 25, 2019); JX 750

at 4 (February 24, 2020).

30 Black Tr. 341–42; Marrero Tr. 894, 961; Chawla Tr. 1124–25.

37
manner. Instead, the evidence showed that Black and Tidd’s decision to withhold

Medicare claims resulted from a good-faith effort to comply with the law.

Black and Tidd testified credibly that they did not withhold Medicare claims

for any improper purpose. Both also testified credibly that they sought to comply with

the law.

Newton argues that Black breached his fiduciary duties by not maintaining

the Company’s pre-Merger billing practices. But Black concluded in good faith that

the Company’s pre-Merger billing practices generated such high rates of non-

compliant claims as to put the Company at legal risk. The numerous audits of the

Company provided ample basis for that conclusion. Other individuals involved with

the Company reached the same conclusion in real time. See JX 222; JX 267.

Newton contends that Black and Tidd overreacted to the TPE audit, implying

pretense. To the contrary, Black and Tidd explained credibly why they took a

conservative position. At the time, Company’s internal clean-claims rate was only 5%.

In other word, 95% of the Company’s claims did not comply with CMS requirements.

Given that rate of non-compliance, the decision to withhold claims was reasonable.

Black and Tidd also justifiably feared serious consequences if the Company’s clean-

claims rate did not improve, such as the revocation of the Company’s Medicare

license, a referral to the Office of Inspector General, or other enforcement actions. If

anything, Newton’s cavalier attitude to the Company’s compliance problem suggests

that he either was reckless in his own approach to compliance or was willing to break

the law in pursuit of profits.

38
The evidence at trial showed that the high rate of bad claims resulted from

pre-Merger business practices. Newton disagreed and argued that the high rate of

bad claims resulted from CMS conducting more audits industry-wide in response to

an increase in providers using misleading television advertisements to solicit

patients. See Newton Tr. 33–34. To the contrary, the Company faced the First Zone 4

ZPIC Audit for claims dating back to July 2016, before the industry-wide crackdown

in late 2017 or early 2018. JX 98 at 1; Leard Dep. 48–49. That ZPIC audit revealed a

68.8% error rate and “a pattern of claim denials.” JX 98 at 1. The abysmal claims rate

resulted from how Newton and his colleagues ran the business, not from anything

Black or Tidd did.

Newton also suggested that the Company’s claims problems resulted from its

high growth rate, which suggested to CMS that its claims submissions could be

flawed. The evidence instead showed that the Company’s irresponsible approach to

pre-Merger claims submissions enabled the Company to appear to have achieved a

high growth rate. The Company engaged in a form of channel stuffing by which it

submitted a high rate of non-compliant claims to boost its revenue numbers. That

was not real growth. It was a business plan that prioritized profits over legal

compliance.

The business judgment rule protects the decision Black made about submitting

claims. The evidence at trial showed that Black was motivated by a desire to comply

with CMS regulations and end the CMS audits. That was the correct choice under

Delaware law. A fiduciary does not breach his duties by being too law-abiding.

39
b. Terminating Key Employees

Newton also contends that the Comvest Parties breached their fiduciary duties

by terminating Newton and other key employees in an effort to reduce the Company’s

short-term performance, support an indemnification claim, and avoid payments on

the Seller Note. The record did not support that claim. The business judgment rule

applies.

Newton again fails to identify an overarching conflict of interest that could

elevate the standard for review. The Comvest Parties lacked any motivation to

terminate employees to depress the Company’s short-term revenue. Comvest’s

indemnification claims turned on pre-Merger performance, and interest on the Seller

Note would accrue regardless.

Black was not self-interested in any personnel decisions. He had nothing to

gain personally from firing employees, and he did not fire anyone to meet cost-cutting

criteria that might help him achieve a bonus or promotion. Having personally

invested $1.5 million in the Company and convinced members of his friends and

family to invest over $4 million, Black had every incentive to maximize profits from

day one. Evidencing that he made good-faith efforts to cut costs, Black decided to

forgo his own salary indefinitely just six months after firing Newton.

Given the Company’s struggles, reducing headcount was a necessary step in

cutting costs. In early 2020, Silverman recommended laying off 61% of the Company’s

employees. JX 938 at 2; Nerger Tr. 1035–36.

40
Black had good reasons for terminating employees. He testified credibly that

he terminated Newton for poor performance and “HR reasons.” Black Tr. 353. He

explained that Newton was “checked out” and not generating new clients. Black Tr.

264–65. Others at the Company documented similar impressions before the Merger

closed. See JX 219 at 1; JX 222 at 1; JX 224 at 1. And the Company’s HR director

informed Black that Newton was sometimes intoxicated on the job and had

inappropriate exchanges with a female employee. JX 445 at 1; Guevara Tr. 991–92.

Newton tried to defend his performance by testifying that he and another terminated

employee were responsible for landing over 100 new accounts after the Merger. But

that employee testified at deposition that he “was typically lead on–on all sales,” and

that “[he] brought in somewhere between a hundred and two hundred accounts,” and

he did not mention Newton when asked who participated in bi-weekly sales meetings.

Ochsner Dep. 61. Black also had convincing reasons for firing other employees. See

Black Tr. 266–68, 353, 358–60; JX 665 at 1–2. Black was a credible witness.

The business judgment rule protects the decisions Black made about firing

employees.

c. Allocating Funds To Potential Litigation

In a third theory, Newton argues that the Comvest Parties breached their

fiduciary duties by diverting Company resources to litigate their indemnification

claims. At the pleading stage, that theory was reasonably conceivable. At trial, there

was no evidence to support it. The Company had legitimate indemnification claims.

It was entitled to develop and pursue them.

41
3. The Conclusion Regarding The Claims Relating To Managing
The Company

Newton failed to prove that the Comvest Parties faced any conflict when

deciding how to manage the Company. The business judgment rule therefore applied,

and Newton failed to rebut any of its presumptions. Judgment will be entered in favor

of the Comvest Parties on those claims.

B. Claims Relating To The Mid-Stream Financings

Newton asserts two challenges to the Mid-Stream Financings. One challenge

is legal; the other is equitable. The legal challenge to one financing succeeds. The

equitable challenge to three financings succeeds.

1. The Legal Challenge

Newton alleges that the Comvest Parties and Parent breached Parent’s LLC

Agreement when engaging in the Second Debt Issuance, the First Preferred Equity

Issuance, and the Second Preferred Equity Issuance (collectively, the “Challenged

Financings”). Newton alleges that the defendants failed to obtain approval from

Parent’s unaffiliated managers as required by Section 6.6. of the LLC Agreement.

Section 6.6. of the LLC Agreement states:

Neither the Company nor any of its Subsidiaries shall enter into,
directly or indirectly, any contract, agreement, arrangement or
transaction or series of transactions, whether or not in the ordinary
course of business, with any Comvest Related Party (each, an “Affiliate
Transaction”), unless such Affiliate Transaction is, determined by the
Board of Managers in good faith using its reasonable business judgment
on terms that are arms’ length and no less favorable to the Company or
any of its Subsidiaries as those that could reasonably be expected to be
obtained by the Company or any of its Subsidiaries at that time in a
comparable arm’s length transaction with a Person that is not a
Comvest Related Party . . . .

42
JX 355 § 6.6. Under the LLC Agreement, the term “Comvest Related Parties”

included the Comvest entities and “each of their respective general partners,

managers, directors, and employees, as well as any investment fund managed by the

foregoing.” Id. § 1. This provision thus prohibits transactions with a “Comvest Related

Party” unless the Parent board determines that the “Affiliate Transaction” is on

market terms.

As a baseline matter, Section 6.6 would cover the Challenged Financings

because each involved the issuance of securities to a Comvest affiliate. But there is a

carveout that states:

[E]ach of the following shall not be subject to this Section 6.6 (and shall
not be considered an “Affiliate Transaction”):

(a) payments and reimbursements to the Investor Member or any of its
Affiliates in accordance with the terms and conditions of the applicable
Management Agreement,

(b) the entry into transactions with and/or any payments to any portfolio
companies of the Investor Member or its Affiliates which are,
determined by the Board of Managers in good faith using its reasonable
business judgment, on terms that are arms’ length and no less favorable
to the Company or any of its Subsidiaries as those that could reasonably
be expected to be obtained by the Company or any of its Subsidiaries at
that time in a comparable arm’s length transaction with a Person that
is not a Comvest Related Party,

(c) the issuance of Units or other securities (other than Profits Interest
Units) of the Company to the Investor Member or its Affiliates (other
than the Company and its Subsidiaries) so long as such issuance is in
compliance with the terms and conditions of Section 12.2, and/or

(d) any transaction (including any transaction contemplated by this
Agreement, the Plan, the Executive Plan, any Award Agreement, the
Management Agreements, and for employee benefits and employment
agreements entered into in the ordinary course of business) entered into
by the Company or any of its Subsidiaries in the ordinary course of
business if such arrangements are on terms, determined by the Board
43
of Managers in good faith using its reasonable business judgment to be
arms’ length and no less favorable to the Company or any of its
Subsidiaries as those that could reasonably be expected to be obtained
by the Company or any of its Subsidiaries at that time in a comparable
arm’s-length transaction with a Person that is not a Comvest Related
Party.

JX 355 § 6.6(a)–(d) (formatting added).

Section 6.6(c) covers the Challenged Financings. Section 6.6(c) exempts “the

issuance of . . . securities” to the “Investor Member or its Affiliates (other than the

Company and its Subsidiaries).” The LLC Agreement does not define “securities,” but

Black’s Law Dictionary defines “security” as “[a]n instrument that evidences the

holder’s ownership rights in a firm (e.g., a stock), the holder’s creditor relationship

with a firm or government (e.g., a bond), or the holder’s other rights (e.g., an

option).”31 The Challenged Financings involved debt and equity issuances. Each was

an “issuance of . . . securities.”

The carveout in Section 6.6(c) applies if “such issuance is in compliance with

the terms and conditions of Section 12.2.” Section 12.2(a) states:

[Parent] agrees that neither it nor any Subsidiary will sell or issue or
agree to sell or issue (i) any Units or other equity securities of the
Company or any Subsidiary, (ii) securities convertible into or exercisable
or exchangeable for Units or other equity securities of the Company or
any Subsidiary, or (iii) options, warrants, convertible debt, or rights
carrying any rights to purchase Units or other equity securities of the
Company or any Subsidiary (collectively, the “Company Securities”),
unless the Company

(A) submits a written notice to all Preferred Unit Holders and all
Common Unit Holders (in each case, a “Participating Member” and

31 Security, Black’s Law Dictionary (11th ed. 2019).

44
collectively, the “Participating Members”) identifying the terms of the
proposed sale (including price, number or aggregate principal amount of
securities and all other material terms), and

(B) offers to each Participating Member the opportunity to purchase its
Participating Share (or any portion thereof) of the Company Securities
(subject to increase for over-allotment if any Participating Member does
not fully exercise his, her or its respective right) on terms and conditions,
including price, not less favorable than those on which the Company
proposes to sell such Company Securities to the Investor Member or any
third party (a “Pre-Emptive Right Notice”).

JX 355 § 12.2(a) (formatting added). Newton received notices inviting him to

participate in each of the Challenged Financings. Newton Tr. 90–93; JX 639; JX 640;

JX 643; JX 659; JX 690; JX 743.

To save his claim, Newton argues that the Section 12.2(a) notices were

deficient. At trial, Newton identified only one deficiency: The written notice for the

Second Debt Issuance did not identify the interest rate. Newton Tr. 92–93; JX 639;

JX 640; JX 643. He had no other challenges to the First Preferred Equity Issuance or

the Second Preferred Equity Issuance.

The interest rate is a “material term.”32 Parent therefore technically breached

Section 6.6. as to the Second Debt Issuance by issuing a deficient notice. Otherwise,

Newton failed to prove that the notices for any of the other issuances were deficient.

32 See, e.g., APS Cap. Corp. v. Mesa Air Gp., Inc., 580 F.3d 265, 273 (5th Cir.

2009) (“[I]n a contract to loan money, the material terms will generally be: the amount
to be loaned, maturity date of the loan, the interest rate, and the repayment terms.”).

45
Judgment will be entered establishing that the Second Debt Issuance violated

the LLC Agreement. Otherwise, judgment will be entered in favor of the defendants

on this claim.

2. The Equitable Challenge

Newton also contends that the defendants breached their fiduciary duties by

effectuating the Second Debt Issuance, the First Preferred Equity Issuance, and the

Second Preferred Equity Issuance. Newton alleges that the Challenged Financings

were interested transactions and not entirely fair.

The entire fairness standard applies to a transaction between an entity and its

controller.33 The entire fairness standard also applies when the board making the

decision lacks a majority of disinterested and independent decision makers.34 The

Challenged Financings were interested transactions with a controller, and the

Company’s board lacked an independent and disinterested majority. The entire

fairness standard applies.

The substantive dimension of the fairness inquiry examines the transactional

result. The cases that developed the entire fairness test historically involved freeze-

outs or squeeze-outs. The earliest freeze-outs involved corporations selling all of their

assets for a package of consideration, typically cash, then dissolving and distributing

33 In re Match Gp., Inc. Deriv. Litig., 315 A.3d 446, 451 (Del. 2024).

34 Aronson, 473 A.2d at 812.

46
the net cash to stockholders.35 After mergers became the preferred transactional

vehicle, the leading cases involved squeeze-outs in which the minority shares were

converted into the right to receive a specific amount of cash.36 The substantive

fairness of the transaction therefore largely turned on the price that the minority

stockholders received, and “fair price” became the dominant nomenclature for the

substantive dimension. In that setting, the fair price inquiry generally involved

comparing what the stockholders received with their proportionate share of the

corporation’s value as a going concern. Thus, in the canonical framing, fair price

“relates to the economic and financial considerations of the proposed merger,

including all relevant factors: assets, market value, earnings, future prospects, and

any other elements that affect the intrinsic or inherent value of a company’s stock.”37

But the substantive dimension of the entire fairness inquiry has never been narrowly

focused on price. The true “test of fairness” is whether the minority stockholder

receives at least “the substantial equivalent in value of what he had before.”38

35 See Stream TV Networks, Inc. v. SeeCubic, Inc., 250 A.3d 1016, 1033–34 (Del.

Ch. 2020) (describing history of asset sales and mergers).

36 Id.

37 Weinberger, 457 A.2d at 711.

38 Sterling v. Mayflower Hotel Corp., 93 A.2d 107, 114 (Del. 1952); accord
Rosenblatt v. Getty Oil Co., 493 A.2d 929, 940 (Del. 1985) (“[T]he correct test of
fairness is ‘that upon a merger the minority stockholder shall receive the substantial
equivalent in value of what he had before.’” (quoting Sterling, 93 A.2d at 114)); see
Lawrence A. Hamermesh & Michael L. Wachter, The Fair Value of Cornfields in
Delaware Appraisal Law, 31 J. Corp. L. 119, 139 (2005) (arguing for a remedial
47
The procedural dimension of the entire fairness inquiry examines the process

that generated the result. Known as “fair dealing,” it “focuses upon the conduct of the

corporate fiduciaries in effectuating the transaction.”39 The procedural dimension

addresses how the transaction came about and “embraces questions of when the

transaction was timed, how it was initiated, structured, negotiated, disclosed to the

directors, and how the approvals of the directors and the stockholders were

obtained.”40

The procedural dimension matters because the substantive dimension is often

contestable. “The concept of fairness is of course not a technical concept. No litmus

paper can be found or [G]eiger-counter invented that will make determinations of

fairness objective.”41 Instead, a judgment concerning fairness “will inevitably

constitute a judicial judgment that in some respects is reflective of subjective

reactions to the facts of a case.”42 Thus, if fiduciaries successfully replicate arm’s-

standard that “provides the minority shareholders with the value of what was taken
from them”).

39 Kahn v. Tremont Corp. (Tremont II), 694 A.2d 422, 430 (Del. 1997).

40 Weinberger, 457 A.2d at 711.

41 Kahn v. Tremont Corp. (Tremont I), 1996 WL 145452, at *8 (Del. Ch. Mar.

21, 1996) (Allen, C.) (“A fair price is a price that is within a range that reasonable
men and women with access to relevant information might accept.”), rev’d on other
grounds, Tremont II, 694 A.2d 422.

42 Cinerama, Inc. v. Technicolor, Inc. (Technicolor Plenary III), 663 A.2d 1134,

1140 (Del. Ch. 1994) (Allen, C.), aff’d, Cinerama, Inc. v. Technicolor, Inc. (Technicolor
Plenary IV), 663 A.2d 1156 (Del. 1995).

48
length bargaining, then that evidence of fair dealing can validate a debatable

outcome. But the opposite is also true: a dubious process can call into question a low

but nominally fair price.43 “Factors such as coercion, the misuse of confidential

information, secret conflicts, or fraud could lead a court to hold that a transaction

that fell within the range of fairness was nevertheless unfair compared to what

faithful fiduciaries could have achieved.”44 Where those factors are present, a court

may conclude that the transaction is not entirely fair. As a remedy, the court could

award a “fairer price”45 or rescissory damages.

43 See Tremont II, 694 A.2d at 432 (“[H]ere, the process is so intertwined with

price that under Weinberger’s unitary standard a finding that the price negotiated by
the Special Committee might have been fair does not save the result.”); Basho Techs.
Holdco B, LLC v. Georgetown Basho Invs., LLC, 2018 WL 3326693, at *37 (Del. Ch.
July 6, 2018) (“Just as a fair process can support the price, an unfair process can taint
the price.”), aff’d sub nom. Davenport v. Basho Techs. Holdco B, LLC, 221 A.3d 100
(Del. 2019); Bomarko, Inc. v. Int’l Telecharge, Inc., 794 A.2d 1161, 1183 (Del. Ch.
1999) (“[T]he unfairness of the process also infects the fairness of the price.”), aff’d,
766 A.2d 437 (Del. 2000) (per curiam).

44 ACP Master, Ltd. v. Sprint Corp., 2017 WL 3421142, at *19 (Del. Ch. July

21, 2017), aff’d, 184 A.3d 1291 (Del. 2018) (TABLE).

45 Id.; accord Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 467 (Del. Ch.

2011) (“Depending on the facts and the nature of the loyalty breach, the answer can
be a ‘fairer’ price.”); see, e.g., In re Dole Food Co., Inc. S’holder Litig., 2015 WL
5052214, at *2 (Del. Ch. Aug. 27, 2015) (finding that controller and his associate had
engaged in fraud; holding that “[u]nder these circumstances, assuming for the sake
of argument that the $13.50 price still fell within a range of fairness, the stockholders
are not limited to a fair price. They are entitled to a fairer price designed to eliminate
the ability of the defendants to profit from their breaches of the duty of loyalty.”);
HMG/Courtland Props., Inc. v. Gray, 749 A.2d 94, 116–17 (Del. Ch. 1999) (finding
that although price fell within lower range of fairness, “[t]he defendants have failed
to persuade me that HMG would not have gotten a materially higher value for
Wallingford and the Grossman’s Portfolio had Gray and Fieber come clean about
Gray’s interest. That is, they have not convinced me that their misconduct did not
49
a. Procedural Fairness

Indicia of a fair process include negotiations by a majority of disinterested and

independent directors or appointment of a special committee, actual negotiation over

price, obtaining stockholder approval, receiving guidance from qualified advisors, and

testing the market.46 None of these traditional indicia of fairness were present for the

Challenged Financings.

At trial, Marrero stated that there were no negotiations “because we were the

people stepping up.” Marrero Tr. 903. If the boards had canvassed the market and

found none, then a fair process might involve a counterparty dictating price. But that

is not what happened. The last financing took place in March 2020. The Company did

not begin searching for investors until June 2020.

Comvest also argues that the process was fair because all Parent unitholders

and all Company shareholders were given an opportunity to participate. In some

circumstances, an opportunity to participate can be evidence of fair dealing.47 But

taint the price to HMG’s disadvantage.”); Bomarko, 794 A.2d at 1184–85 (holding that
although the “uncertainty [about] whether or not ITI could secure financing and
restructure” lowered the value of the plaintiffs’ shares, the plaintiffs were entitled to
a damages award that reflected the possibility that the company might have
succeeded absent the fiduciary’s disloyal acts).

46 See In re Columbia Pipeline Gp., Inc. Merger Litig., 2021 WL 772562, at *45

(Del. Ch. Mar. 1, 2021); In re Cox Commc’ns, Inc. S’holder Litig., 879 A.2d 604, 606
(Del. Ch. 2005); Sealy Mattress Co. of N.J., Inc. v. Sealy, Inc., 532 A.2d 1324, 1336–
37 (Del. Ch. 1987).

47 See Cancan Dev., LLC v. Manno, 2015 WL 3400789, at *24 (Del. Ch. May 27,

2015) (finding capital calls were entirely fair where investor “was the only possible
50
when a controller leads the financing, minority investors face the risk that by

participating, they will open themselves to greater exploitation. A minority investor

can decline to make itself more vulnerable without giving up its ability to challenge

a transaction. That was particularly true here because the relationship between the

parties had become strained. Black had fired Newton, and Newton thought Black was

destroying the Company. Newton was never going to participate in a financing in

which he gave Black and Comvest more money to misuse (his view). Newton Tr. 93.

In the absence of other procedural safeguards, the Comvest Parties’ decision to offer

the Challenged Financings to other holders cannot save the process. The fair process

aspect of the entire fairness test weighs heavily against a finding of fairness.

b. Substantive Fairness

Substantive fairness considers indications like contemporaneous market

evidence, expert analysis, and contemporaneous financial analyses.48 None of the

traditional indicia of fairness were present in the pricing of the Challenged

Financings.

source of funds” and that investor gave other unitholders “the opportunity to
participate on equal terms”).

48 See In re Appraisal of Dole Food Co., Inc., 114 A.3d 541, 557 (Del. Ch. 2014)

(“One informative source of probative evidence is the contemporaneous views of
financial professionals who make investment decisions with real money[.]”); Dole
Food, 2015 WL 5052214, at *34 (“The principal evidence on the issue of fair price
consists of the expert opinions at trial, the Committee’s negotiations, Lazard’s
fairness opinion, and market indications.”).

51
To demonstrate fair price, the Comvest Parties testified that the boards and

Comvest investment committee deliberated about the interest rate for the debt

issuances and the dividend rate for the preferred stock issuances. Black Tr. 254;

Marrero Tr. 785–88. Consideration by interested fiduciaries is not persuasive.

Black and Marrero also testified that the boards determined that the interest

and dividend rates were consistent with market rates. They did not provide any

evidence other than their say-so.

Marrero also testified at trial that the boards measured the interest rates and

dividend rates against the CIBC loan. That comparison hurts rather than helps the

Comvest Parties. The interest rate on the CIBC loan was LIBOR plus 300bps. JX 442

at 14. The Second Debt Issuance occurred in September 2019, when LIBOR was

approximately 2%.49 The First Preferred Equity Issuance occurred in December 2019,

when LIBOR was even lower.50 And the Second Preferred Equity Issuance occurred

in March 2020, when LIBOR was around 1%.51 To be comparable to the CIBC loan,

the Second Debt Issuance would have had an interest rate of 5% rather than an

interest rate of 15%, and the preferred share issuances should have had dividend

rates of 4% to 4.5% rather than 15%. Of course, the CIBC loan was secured, and the

49 LIBOR Rates—30 Year Historical Chart, MACROTRENDS, https://www.
macrotrends.net/1433/historical-libor-rates-chart (last visited Jan. 28, 2025).

50 Id.

51 Id.

52
Challenged Financings were either junior debt or equity. The Challenged Financings

therefore commanded a greater rate of return. But the Comvest Parties did not

explain credibly why they imposed a rate of 15%.

Finally, the Comvest Parties argue that Newton provided no testimony that

the interest and dividend rates were excessive. Under the entire fairness test, the

Comvest Parties had the burden to prove fairness, not the other way around.

The Comvest Parties failed to prove that the Second Debt Issuance, the First

Preferred Equity Issuance, and the Second Preferred Equity Issuance were entirely

fair. Judgment will be entered in Newton’s favor on that point.

c. The Remedy

Equitable subordination is a remedy that a court can deploy to address a

breach of duty. “Equitable subordination is a doctrine that, based on a creditor’s

inequitable conduct and its effect on other creditors, allows that creditor’s debt to be

subordinated to other claims in bankruptcy or allows the creditor’s liens to be

transferred to the bankruptcy estate.”52 That is an appropriate remedy here.

The Comvest Parties engaged in the Challenged Financings at the Company

level. That gave those financings structural priority over the Seller Note, which

Holdings issued. As a remedy for the Comvest Parties’ legal and equitable violations,

the Challenged Financings are equitably subordinated to be junior to the Seller Note.

52 Grassi Fund Admin. Servs., Inc. v. Crederian, LLC, 2022 WL 1043626, at *4

n.43 (Del. Ch. Apr. 7, 2022) (quoting Nelson v. Emerson, 2008 WL 1961150, at *4 n.13
(Del. Ch. May 6, 2008)).

53
To implement this relief, the court will treat the Seller Note as if the Company issued

it. To the extent the Company has funds it can use to pay down debt, the Seller Note

and the Challenged Financings will have a priority junior to other Company creditors

but senior to the holders of common equity, and the Seller Note will have priority

senior to the Challenged Financings.

C. Claims For Breach Of Fiduciary Duty Relating To The Sale

Newton finally asserts challenges to the Sale. He contends that the defendants

breached their fiduciary duties when searching for financing and when negotiating

and approving the Sale. Enhanced scrutiny applies, and the defendants proved that

the Sale fell within a range of reasonableness. The defendants therefore did not

breach their fiduciary duties.

The parties debate the proper standard of review. The Comvest Parties want

the business judgment rule to apply. Newton wants entire fairness to apply. This

decision applies enhanced scrutiny.

As discussed previously, enhanced scrutiny is Delaware’s intermediate

standard of review. One scenario where it applies is where corporate fiduciaries are

considering whether to sell a corporation or engage in a similar type of end-stage

transaction for stockholders. In this manifestation, enhanced scrutiny carries

forward the standard of review that the Delaware Supreme Court expressly applied

54
in Revlon.53 Although that opinion relied more on stirring rhetoric (auctioneers!) than

a clearly articulated justification, then-Vice Chancellor Strine subsequently

explained that enhanced scrutiny in this setting is

rooted in a concern that the board might harbor personal motivations in
the sale context that differ from what is best for the corporation and its
stockholders. Most traditionally, there is the danger that top corporate
managers will resist a sale that might cost them their managerial posts,
or prefer a sale to one industry rival rather than another for reasons
having more to do with personal ego than with what is best for
stockholders.54

He later explained that because “the potential sale of a corporation has enormous

implications for corporate managers and advisors, and a range of human motivations,

including but by no means limited to greed, can inspire fiduciaries and their advisors

to be less than faithful . . . .”55 The scenario also involves possible encroachments on

the stockholders’ right to vote on (and potentially reject) the board’s preferred

transaction.

To satisfy enhanced scrutiny in an M&A setting, the defendant fiduciaries

must prove both (i) the reasonableness of “the decisionmaking process employed by

the directors, including the information on which the directors based their decision”

and (ii) “the reasonableness of the directors’ action in light of the circumstances then

53 See Revlon, Inc. v. MacAndrews & Forbes Hldgs., Inc., 506 A.2d 173, 179–82

(Del. 1982).

54 Dollar Thrifty, 14 A.3d at 597 (footnotes omitted).

55 In re El Paso Corp. S’holder Litig., 41 A.3d 432, 439 (Del. Ch. 2012).

55
existing.”56 “Through this examination, the court seeks to assure itself that the board

acted reasonably, in the sense of taking a logical and reasoned approach for the

purpose of advancing a proper objective, and to thereby smoke out mere pretextual

justifications for improperly motivated decisions.”57

“The reasonableness standard permits a reviewing court to address inequitable

action even when directors may have subjectively believed that they were acting

properly.”58 The reasonableness standard, however, does not permit a reviewing court

to freely substitute its own judgment for the directors’ judgment.

There are many business and financial considerations implicated in
investigating and selecting the best value reasonably available. The
board of directors is the corporate decisionmaking body best equipped to
make these judgments. Accordingly, a court applying enhanced judicial
scrutiny should be deciding whether the directors made a reasonable
decision, not a perfect decision. If a board selected one of several
reasonable alternatives, a court should not second-guess that choice
even though it might have decided otherwise or subsequent events may
have cast doubt on the board’s determination. Thus, courts will not
substitute their business judgment for that of the directors, but will
determine if the directors’ decision was, on balance, within a range of
reasonableness.59

56 Paramount Commc’ns, Inc. v. QVC Network, Inc., 637 A.2d 34, 45 (Del. 1994).

57 Dollar Thrifty, 14 A.3d at 598.

58 In re Del Monte Foods Co. S’holders Litig., 25 A.3d 813, 830–31 (Del. Ch.

2011).

59 QVC, 637 A.2d at 45.

56
Enhanced scrutiny “is not a license for law-trained courts to second-guess reasonable,

but debatable, tactical choices that directors have made in good faith.”60 “[A]t

bottom Revlon is a test of reasonableness; directors are generally free to select the

path to value maximization, so long as they choose a reasonable route to get there.”61

The Comvest Parties argue that the court should apply the business judgment

rule, but the transactional context elevates the standard of review from the business

judgment rule to enhanced scrutiny. The Sale was a final-stage transaction that

effectively ended the stockholders’ ongoing investment in the Company. The Sale

thus implicated the last-period problem and the attendant possibility that the

60 In re Toys “R” Us, Inc. S’holder Litig., 877 A.2d 975, 1000 (Del. Ch. 2005).

61 Dollar Thrifty, 14 A.3d at 595–96.

57
interests of the corporate fiduciaries and their beneficiaries could diverge.62

Enhanced scrutiny therefore provides the operative standard of review.63

62 See In re Columbia Pipeline Gp., Inc. Merger Litig., 299 A.3d 393, 460 (Del.

Ch. 2023) (“The period leading up to the Merger was a time when the hydraulic
pressures of the last period of play could and did cause the interests of the corporate
fiduciaries and their beneficiaries to diverge.”); Dollar Thrifty, 14 A.3d at 597 (“The
heightened scrutiny that applies in the Revlon (and Unocal) contexts [is], in large
measure, rooted in a concern that the board might harbor personal motivations in the
sale context that differ from what is best for the corporation and its stockholders.”).
For scholarly discussions of this common scenario, see, for example, Ronald J. Gilson
& Bernard S. Black, The Law and Finance of Corporate Acquisitions 719–21 (2d ed.
1995); Stephen M. Bainbridge, Unocal at 20: Director Primacy in Corporate
Takeovers, 31 Del. J. Corp. L. 769, 788–89 (2006); Sean J. Griffith, The Costs and
Benefits of Precommitment: An Appraisal of Omnicare v. NCS Healthcare, 29 J. Corp.
L. 569, 615–16 (2004); Sean J. Griffith, Deal Protection Provisions in the Last Period
of Play, 71 Fordham L. Rev. 1899, 1947–53 (2003); Bernard Black & Reinier
Kraakman, Delaware’s Takeover Law: The Uncertain Search for Hidden Value, 96
Nw. U. L. Rev. 521, 536 (2002).

63 Delaware decisions have acknowledged that “a final-stage transaction for all

shareholders” is one that warrants application of enhanced scrutiny. McMullin v.
Beran, 765 A.2d 910, 918 (Del. 2000); see In re Mindbody, Inc. S’holder Litig., 2020
WL 5870084, at *13 (Del. Ch. Oct. 2, 2020) (“The cash-for-stock Merger was a final-
stage transaction presumptively subject to enhanced scrutiny under Revlon.”); Huff
Energy Fund, L.P. v. Gershen, 2016 WL 5462958, at *13–14 (Del. Ch. Sept. 29, 2016)
(explaining that Revlon applies in “final stage” transactions because of the inherent
conflicts present in such situations); Chen, 87 A.3d at 679 (“Delaware decisions have
recognized that the standard of review changes to enhanced scrutiny for decisions
made during the final period.”); Reis, 28 A.3d at 458 (“Final stage transactions for
stockholders provide another situation where enhanced scrutiny applies.”); Lonergan
v. EPE Hldgs. LLC, 5 A.3d 1008, 1019 (Del. Ch. 2010) (“In a final stage transaction—
be it a cash sale, a break-up, or a transaction like a change of control that
fundamentally alters ownership rights—there are sufficient dangers to merit
employing enhanced scrutiny . . . .”); In re Pennaco Energy, Inc. S’holders Litig., 787
A.2d 691, 704 (Del. Ch. 2001) (applying enhanced scrutiny to “an end-game
transaction that represents the final opportunity for Pennaco’s stockholders to realize
value from their investment in the company”); Mendel v. Carroll, 651 A.2d 297, 306
(Del. Ch. 1994) (“[I]f the board were to approve a proposed cash-out merger, it would
have to bear in mind that the transaction is a final-stage transaction for the public
shareholders. Thus, the timeframe for analysis, insofar as those shareholders are
58
The fact that a sale of all assets creates a pool of consideration that the

Company theoretically could deploy in a new business does not prevent enhanced

scrutiny from applying. The stockholders would never again have an opportunity to

obtain a return on the capital they invested in the business the Company conducted.

And if the Company dissolved, there would not be any ongoing relationship between

the Company, its stockholders, and the sell-side fiduciaries. The Sale was an end-

stage transaction.

The Comvest Parties are similarly wrong to claim that the business judgment

rule applies because of the nature of the Sale. They contend that AdaptHealth

provided a package of consideration to the Company that its investors would receive

concerned, is immediate value maximization.”); see also TW Servs., Inc. v. SWT Acq.
Corp., 1989 WL 20290, at *7 (Del. Ch. Mar. 2, 1989) (reasoning that Revlon applies
to a cash sale because “[i]n the setting of a sale of a company for cash, the board’s
duty to shareholders is inconsistent with acts not designed to maximize present share
value, acts which in other circumstances might be accounted for or justified by
reference to the long run interest of shareholders. In such a setting, for the present
shareholders, there is no long run.” (footnote omitted)). See generally J. Travis Laster,
Omnicare’s Silver Lining, 38 J. Corp. L. 795, 804–11 (2013) (discussing final period
problem and resulting situational conflicts as justification for the Delaware Supreme
Court’s otherwise difficult-to-rationalize and much maligned ruling in Omnicare, Inc.
v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003)); J. Travis Laster, Revlon Is A
Standard of Review: Why It’s True and What It Means, 19 Fordham J. Corp. & Fin.
L. 5, 8–18 (2013) (discussing final period problem and implications of situational
conflicts for Revlon as a standard of review); Morgan White-Smith, Revisiting Revlon:
Should Judicial Scrutiny of Mergers Depend on the Method of Payment?, 79 U. Chi.
L. Rev. 1177 (2012) (discussing final-stage rationale for enhanced scrutiny); Marcel
Kahan, Paramount or Paradox: The Delaware Supreme Court’s Takeover
Jurisprudence, 19 J. Corp. L. 583, 589–602 (1994) (arguing that enhanced scrutiny
should apply when stockholders no longer have the ability to reverse the board’s
decision by electing new directors).

59
in order of priority—including Comvest as the Company’s controller. In Synthes, this

court held that the business judgment rule would apply when the company engaged

in a merger in which all of the company’s stockholders received the same

consideration.64

Synthes stands in tension with McMullin v. Beran, where the Delaware

Supreme Court addressed a sale process where a controlling stockholder ultimately

received the same per-share consideration as the minority.65 The Delaware Supreme

Court held that in that setting, enhanced scrutiny applied.66 In reaching this

conclusion, the Delaware Supreme Court recognized that enhanced scrutiny applies

not only when a company that previously lacks a controlling stockholder is sold to a

controller (as in QVC), but also when the sale is a “a final-stage transaction for all

shareholders.”67

“There is no question that, if the Supreme Court has clearly spoken on a

question of law necessary to deciding a case before it, this court must follow its

64 See In re Synthes, Inc. S’holder Litig., 50 A.3d 1022, 1035 (Del. Ch. 2012).

65 765 A.2d at 918–20.

66 Id. at 919; accord Mohsen Manesh, Defined by Dictum: The Geography of

Revlon-Land in Cash and Mixed Consideration Transactions, 59 Vill. L. Rev. 1, 24 &
n.145 (2014) (noting that McMullin “expressly stated that Revlon was implicated”).

67 McMullin, 765 A.2d at 919.

60
answer.”68 As between the Delaware Supreme Court’s decision in McMullin and this

court’s decision in Synthes, the former controls.69

Even though a controlling stockholder cannot dock in the safe harbor of the

business judgment rule, the fact that a controller did not extract any differential

consideration provides powerful evidence that the transaction falls within the range

of reasonableness.70 Applying enhanced scrutiny as the transactional standard of

review does not alter the premise that “investors act to maximize the value of their

own investments.”71 It remains likely that a controller will bargain for the highest

value that it can get, making it likely that the resulting transaction represents the

best deal reasonably available for all stockholders. A court can give heavy weight to

the views of an aligned controller when assessing whether a transaction satisfies

enhanced scrutiny.

68 In re MFW S’holders Litig., 67 A.3d 496, 520 (Del. Ch. 2013), aff’d sub nom.

Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014).

69 See Presidio, 251 A.3d at 263–66.

70 Id. at 266.

71 Chen, 87 A.3d at 670 (internal quotation marks omitted). When a fiduciary

owns a material amount of common stock, that interest gives the fiduciary a
“motivation to seek the highest price” and a “personal incentive . . . to think about the
trade off between selling now and the risks of not doing so.” Dollar Thrifty, 14 A.3d
at 600; see In re Mobile Commc’ns Corp. of Am., Inc. Consol. Litig., 1991 WL 1392, at
*9 (Del. Ch. Jan. 7, 1991) (Allen, C.) (noting that directors’ substantial stockholdings
gave them “powerful economic (and psychological) incentives to get the best available
deal”), aff’d, 608 A.2d 729 (Del. 1992).

61
Newton attempts to elevate the standard of review to entire fairness. He does

not argue that the Comvest Parties stood on both sides of the transaction, received a

non-ratable benefit, or avoided a unique detriment. He instead argues that a breach

of the duty of care can elevate the standard of review in a third-party sale setting

from enhanced scrutiny to entire fairness.72

There is support for that proposition. In Cede & Co. v. Technicolor, Inc. (“Cede

II”),73 the Delaware Supreme Court examined a third-party sale that was subject to

enhanced scrutiny.74 Chancellor Allen had assumed that the directors failed to

exercise due care, then relied on Barnes v. Andrews75 to hold that the assumed breach

had not proximately caused any damages.76 On appeal, the Delaware Supreme Court

reversed, relied on what it described as the Chancellor’s “presumed findings” to hold

that the directors had breached their duty of care, rejected the Chancellor’s reliance

72 See Dkt. 358 (Sellers’ Opening Post-Trial Brief) at 60 (“The Comvest Parties’

lazy search for capital in the months preceding the sale was grossly negligent at
least.”); id. at 61 (“[B]etween May and September 2020, the Comvest Parties acted
with astonishing sloth and indifference.”); id. at 64 (describing the Sale process as
“abysmal”).

73 634 A.2d 345 (Del. 1993), decision modified on reargument, 636 A.2d 956

(Del. 1994).

74 Id. at 361 (“[I]n the review of a transaction involving a sale of a company,

the directors have the burden of establishing that the price offered was the highest
value reasonably available under the circumstances.”).

75 298 F. 614 (S.D.N.Y. 1924).

76 Cinerama, Inc. v. Technicolor, Inc., 1991 WL 111134, at *17 (Del. Ch. June

24, 1991) (subsequent history omitted).

62
on Barnes, and imposed on the directors an obligation to prove on remand that the

transaction was entirely fair.77

The Cede II holding has been criticized for equating a breach of the duty of care

with a breach of the duty of loyalty for purposes of establishing the standard of review

and for imposing too great a burden on directors when facing a duty of care claim.

Chief Justice Strine argued in an opinion written while serving as a Vice Chancellor

that if a corporation has an exculpatory provision and if the plaintiff only seeks

damages, then a breach of the duty of care should not elevate the standard of review.78

He offered similar criticisms in a series of articles.79 The Cede II decision also

preceded considerable judicial effort to develop the framework for Delaware’s three

standards of review and recognize enhanced scrutiny as a co-equal standard.

Moving from enhanced scrutiny to entire fairness based on a claimed breach of

the duty of care makes little sense. Enhanced scrutiny already incorporates a species

of care analysis that examines whether the sell-side fiduciaries followed a process

77 634 A.2d at 351, 370.

78 Goodwin v. Live Ent., Inc., 1999 WL 64265, at *24 n.17 (Del. Ch. Jan. 25,

1999).

79 See William T. Allen, Jack B. Jacobs & Leo E. Strine, Jr., Function Over

Form: A Reassessment of the Standards of Review in Delaware Corporation Law, 56
Bus. Law. 1287, 1301–05 (2001) (examining policy implications of decision); William
T. Allen, Jack B. Jacobs & Leo E. Strine, Jr., Realigning the Standard of Review of
Director Due Care with Delaware Public Policy: A Critique of Van Gorkom and its
Progeny as a Standard of Review Problem, 96 Nw. U. L. Rev. 449, 460–62 (2002); and
Leo E. Strine, Jr. et al., Loyalty’s Core Demand: The Defining Role of Good Faith in
Corporation Law, 98 Geo. L.J. 629, 673–84 (2010) (analyzing decision’s reasoning).

63
that fell within a range of reasonableness. If the defendant fiduciaries fail to make

the necessary showing, then a breach of duty exists.80 Because the enhanced scrutiny

standard applies in distinct and easily identified situations, there is no need in that

context to start with a business judgment rule analysis and then elevate the standard

of review to entire fairness.

Newton also argues that the court should elevate the standard of review from

the business judgment rule because the Comvest Parties acted in bad faith.81

Enhanced scrutiny accounts for the possibility of bad faith conduct as well. “What

typically drives a finding of unreasonableness is evidence of self-interest, undue

favoritism or disdain towards a particular bidder, or a similar non-stockholder-

motivated influence that calls into question the integrity of the process.” 82 “[W]hen

there is a reason to conclude that debatable tactical decisions were motivated not by

a principled evaluation of the risks and benefits to the company’s stockholders, but

by a fiduciary’s consideration of his own financial or other personal self-interests,

then the core animating principle of Revlon is implicated.”83 But the converse is also

80 In re Mindbody, Inc., S’holder Litig., 2024 WL 4926910, at *1 (Del. Dec. 2,

2024) (“[W]e affirm the trial court’s holding that Stollmeyer breached his fiduciary
duty of loyalty under Revlon by having disabling conflicts and tilting the sale process
in Vista’s favor for his own personal interests in ways inconsistent with maximizing
stockholder value.”).

81 Dkt. 358 at 60.

82 Del Monte, 25 A.3d at 831.

83 El Paso, 41 A.3d at 439.

64
true. When sell-side fiduciaries and their advisors do not face conflicts of interest and

there is no evidence of a bad-faith motive, then a court grants more deference to

otherwise debatable decisions during a sale process.84

On the facts presented, entire fairness is not the proper standard. The Sale

warrants review under enhanced scrutiny, not entire fairness.

1. The Process Fell Within A Range Of Reasonableness.

Newton asserts that the process that led to the Sale constituted a breach of

duty. He objects that management failed to secure financing that could enable the

Company to continue as a standalone entity instead of engaging in the Sale. He also

attacks the process that led to the Sale.

a. The Search For Financing

Newton’s attack on the pre-Sale financing efforts fails. The record shows that

the Company’s efforts fell within a range of reasonableness. Indeed, the Comvest

Parties provided the Company with more financing than the Company likely

warranted.

A party who controls a company’s access to financing can use its control to force

the company into a vulnerable position.85 The Comvest Parties did not do that here.

84 E.g., Presidio, 251 A.3d at 267–68.

85 See Basho, 2018 WL 3326693, at *28–31 (finding that controller used
contractual rights to force a company into a financial crisis, then took advantage of
the company by imposing an unfair transaction).

65
Affiliates of Comvest supplied the Company with virtually all of the following

financings:

• The First Debt Issuance ($750,000),

• The Second Debt Issuance ($1.75 million),

• The First Preferred Equity Issuance ($2.5 million),

• The Second Preferred Equity Issuance ($1.25 million),

• A Comvest loan to facilitate the sale of the company ($100,000).

The Company also obtained the initial CIBC loan in the amount of $1 million and

later an increase in the CIBC loan for another $1 million. The Comvest investment

committee also authorized acquiring an additional $1.25 million of Series A Preferred

Stock in the Second Preferred Equity Issuance.

Far from forcing the Company into a financial crisis, affiliates of Comvest

provided the Company with much-needed financing. Although the Comvest Parties

failed to prove that the Challenged Financings were entirely fair, that is a different

question than whether affiliates of Comvest provided the Company with sufficient

financing to achieve a liquidity event.

Newton responds that the Comvest Parties should have sought—and the

Comvest Parties should have provided—another short-term capital infusion so that

the Company could extend its efforts.86 The Comvest Partes had no obligation to

86 Dkt. 358 at 60; Dkt. 385 (Sellers’ Post-Trial Reply/Answering Brief) at 43–

44.

66
provide additional funding, and they had already invested a sufficient amount to

demonstrate that they acted within a range of reasonableness in supporting a

business that was no longer a going concern.87 The fact that the Comvest Parties were

not willing to invest further also made it highly unlikely that other financial sources

would step up.88

The financing component of the Sale process fell within a range or

reasonableness.

87 See, e.g., Equity-Linked Invs., L.P. v. Adams, 705 A.2d 1040, 1057 (Del. Ch.

1997) (“[The Series A] were unwilling to put in more money. The preferred is of course
not to be criticized for that. They have every right to send no good dollars after bad
ones.”); Trados II, 73 A.3d at 66–67 (“None of the VC firms would put more money
into Trados, and they had no obligation to.”).

88 See Trados II, 73 A.3d at 77 (“As a practical matter no outside VC firm would

invest without participation from the Company’s existing backers.”); see also Josè M.
Padilla, What’s Wrong with a Washout?: Fiduciary Duties of the Venture Capitalist
Investor in a Washout Financing, 1 Hous. Bus. & Tax L.J. 269, 279–80 (2001)
(“[V]enture capitalists will not invest in a company where existing investors do not
participate.”); Joseph W. Bartlett & Kevin R. Garlitz, Fiduciary Duties in
Burnout/Cramdown Financings, 20 J. Corp. L. 593, 601 (1995) (“[O]nce a group of
VCs have invested, it is rare that an issuer will have the ability to raise substantial
capital unless the existing investors agree to ‘play’—continue to invest—in future
rounds of financing. . . . [T]he company can be given the putative opportunity to seek
alternative sources, but the venture capital community is small and incestuous, with
most managers knowing each other. If the company’s existing cadre of VC investors
is not willing to continue to support the company, then it is unlikely that any new
investor will be interested.”). For outside VCs to invest without existing investor
participation would run the risk of buying a lemon. See generally George A. Akerlof,
The Market for “Lemons”: Quality Uncertainty and the Market Mechanism, 84 Q.J.
Econ. 488 (1970).

67
b. The Search For A Transaction Partner

Newton next contends that the Company botched the search for a transaction

partner. “When applying enhanced scrutiny, a court evaluates the sale process as a

whole, not just the final decision to sell or the decisions that the directors formally

made.”89 The operative question is whether the process fell within a range of

reasonableness.

The process that led to the Sale was not ideal. The trial record lacks any

evidence indicating that the board members of the Company, Holdings, or Parent

other than Black played any meaningful role. The board’s skeletal minutes, drafted

months after the meetings took place, reference the Sale at a high level, but do not

evidence meaningful board involvement. At the same time, a privately held company

controlled by a private equity firm may not always observe aspirational standards for

legal formalities. Black was on the Board. He doubtless kept the Comvest

representatives—his bosses—informed about what was happening.

Black led the sale process and negotiated with McGee. Outside financial or

legal advisors were not involved, likely because of the cost. Fairness opinions also are

not customary for distressed asset sales.

Black’s interactions with McGee carry the hallmarks of arm’s-length

negotiation. They had no prior relationship. McGee dominated the discussions

because he had all of the leverage, not because of a fiduciary breach by Black or the

89 Columbia Pipeline, 299 A.3d at 460.

68
other Comvest Parties. Black’s decision not to negotiate over the consideration paid

at closing fell within a range of reasonableness. Instead, he negotiated a more

favorable earnout. Black and McGee also negotiated over indemnification,

representations, and other ancillary matters.

Black was not conflicted during the negotiation process. Newton argued that

Black was conflicted while negotiating the Sale because he was bargaining for a

larger long-term role at AdaptHealth. At the pleading stage, the court drew this

plaintiff-friendly inference and denied the Comvest Parties’ motion to dismiss. But

the trial record showed otherwise. McGee’s original proposal included the terms that

“Jonathan Black agrees to 6 month transition agreement for 25K per month and we

hopefully discuss longer-term partnership.” JX 910 at 1. Black did not propose the

consulting agreement. Black did not propose discussing a longer-term partnership.

AdaptHealth proposed that Black would be subject to a three-year noncompete after

the six-month consulting agreement. JX 2021 at 4. Black believed three years was

disproportionate and attempted to increase his consulting agreement to one year. Id.

He and McGee eventually agreed to keep the consulting agreement to six months but

lower the noncompete to one year. Id. Black did not compromise his negotiations

because of the consulting agreement.

Taking into account that the Company was a distressed asset, the process that

led to the Sale fell within a range of reasonableness.

69
2. The Price Fell Within A Range Of Reasonableness.

Enhanced scrutiny requires that the fiduciaries show that the transactional

outcome fell within a range of reasonableness. The record at trial satisfied that

requirement.

a. Breg’s Offers

At trial, the Comvest Parties proved that Breg made the only other actionable

proposal to buy the Company and that the terms were worse than the Sale. Both Breg

offers provide contemporaneous evidence that the consideration in the Sale fell within

a range of reasonableness.

Breg made its first offer on July 14, 2020. The offer included a payment at

closing of $3.5 million to $5 million, consisting of about 80% in Breg common stock

and 20% in cash. Put differently, Breg offered $700,000 to $1,000,000 in cash—about

half the AdaptHealth offer—and the rest in Breg securities. The offer also included

an earnout potentially increasing the total consideration to $15 million.

Breg based its original offer on information Black sent on June 9, 2020. Any

definitive offer was conditioned on due diligence. After receiving Breg’s offer, the

Company’s finances deteriorated. Silverman forecasted that the Company would run

out of cash by the end of August or early September. Breg would not have maintained

its original offer given the downturn in the Company’s performance.

The Company deferred Breg’s first offer to pursue the Medium/Long Term Exit

plan—securing incremental investment, landing Klosterman to run the Company,

70
and turning the Company around. That decision fell within the range of

reasonableness.

The Company’s plan died in early September when Klosterman declined. At

that point, on September 15, 2020, Black reached out to Breg, shared updated

materials, and reported on the state of the business. Breg responded the next day

that he was willing to “take over the contracts” and “provide a soft landing for

employees and clients,” but there would be no payment for the business. Black Tr.

278–79.

The updated Breg offer confirms that the Company was in desperate straits.

Black instead secured the Sale, which represented a superior transaction. That

decision fell within the range of reasonableness.

b. The Expert Opinions

Both sides relied on experts to value the Company relative to the consideration

obtained in the Sale. The Comvest Parties’ expert Scott Bouchner sought to show that

the Sale price was reasonable. He valued the assets AdaptHealth purchased at $1.14

million, meaning the Sale consideration exceeded the fair market value of the

transferred assets. JX 1155 at 31; Bouchner Tr. 1271, 1297–98. Bouchner used a net

asset approach because he credibly concluded that the Company was not a going

concern as of October 1, 2020. Bouchner Tr. 1304, 1347. Bouchner prepared a credible

valuation, and the court takes it into account.

Newton’s expert Boris Steffen opined that Bouchner’s valuation was not

reasonable. Using a discounted cash flow methodology, Steffen opined that the

71
Company’s value on the date of the Sale ranged from $44.3 million to $73 million,

with a median of $58.7 million. JX 1125 at 19; Steffen Tr. 1173. That figure was

preposterous, and the problem stemmed from Steffen’s reliance on projections

Comvest prepared in May 2018, two years before the Sale closed. Those projections

were stale by 2020 and no longer provided a reliable basis for a valuation. In between,

the Company had suffered from the CMS audits, the impact of COVID-19, and rapid

decline in the Company’s business. That Company in October 2020 bore little

resemblance to what Comvest thought it was buying in May 2018. Indeed, it was no

longer a going concern. The court cannot rely on Steffen’s valuation.

3. The Conclusion Regarding The Claims Relating To The Sale
Process And Sale

The evidence at trial proved that the defendants satisfied their duties under

the enhanced scrutiny standard when pursuing and entering into the Sale. Judgment

will be entered in the defendants’ favor on that issue.

D. The Fraudulent Transfer Claim

The Seller Representative contends that the Sale constituted a fraudulent

transfer. The Seller Representative relies on 6 Del. C. § 1304(a)(2) and 6 Del. C. §

1305(a), which prohibit transfers that render the debtor insolvent and where the

debtor does not receive reasonably equivalent value.90

90 The Seller Representative initially pursued a claim that the Sale violated 6

Del. C. § 1304(a)(1), which prohibits a transfer made “with actual intent to hinder,
delay or defraud.” The Seller Representative did not press that claim in its post-trial
72
“Whether the debtor received ‘reasonably equivalent value’ depends on ‘(1)

whether the transaction was at arm’s length, (2) whether the transferee acted in good

faith, and (3) the degree of difference between the fair market value of the asset

transferred and the price paid.’”91 As shown above, Black and McGee negotiated the

Sale at arm’s length, McGee acted in good faith, and Comvest sold the Company’s

assets at fair market value. The Sale did not violate 6 Del. C. § 1304(a)(2) or 6 Del. C.

§ 1305(a).

III. CONCLUSION

The defendants largely prevailed on the claims addressed in this decision.

Newton established only that (i) one of the Challenged Financings—the Second Debt

Issuance—violated Parent’s LLC Agreement but that (ii) all three of the Challenged

Financings—the Second Debt Issuance and the First and Second Preferred Equity

Issuances—were interested transactions subject to the entire fairness test. The

defendants then failed to prove that those financings were entirely fair. As a remedy,

the court will equitably subordinate the Challenged Financings to the Company’s

other creditors and to the Seller Note. Otherwise, judgment on the claims that this

decision has addressed will be entered in favor of the defendants.

briefing. Dkt. 358 at 70–73. Regardless, the trial record contains no evidence
suggesting fraudulent intent.

91 Seiden v. Kaneko, 2015 WL 7289338, at *13 (Del. Ch. Nov. 3, 2015) (internal

citation omitted).

73