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FILED: NEW YORK COUNTY CLERK 02/04/2015 06:37 PM INDEX NO. 653358/2014
NYSCEF DOC. NO. 84 RECEIVED NYSCEF: 02/04/2015
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YO
DUGGAL DIMENSIONS LLC, Individually as Plaintiff,
and Derivatively on behalf of Nominal Defendant
PeekAnalytics, Inc.
PIaintffi Index No. 65335812014
-against- Motion Sequence 003
(Bransten, J.)
MICHAEL HUSSEY, DONALD DODGE,
JOSEPH SAVIANO, BRETT SCHNITTLICH AND
MARK ROSENBLATT,
Defendants, and
PEEKANALYTICS, INC. d/b/a StatSocial, a
Delaware Corporation,
Nominal Defendant
X
REPLY MEMORANDUM OF LA\ry IN FURTHER SUPPORT
OF MOTION FOR ATTORNEYS' FEES AND COSTS
V/ROBEL SCHATZ & FOX LLP
1040 Avenue of the Americas, Suite 1101
New York, New York 10018
(2r2) 42r-8t00
Attorneys þr the Individual Defendants
TABLE OF CONTENTS
TABLE OF AUTHORITIES
PRELIMINARY STATEMENT 1
ARGUMENT. 2
A. The Court Has Expressly Granted Defendants
Leave to Make this Motion ...................2
B. Defendants Are Entitled to an Award of Attomeys' Fees
and Costs Pursuant to 22 NYCRR $ 130-1.1................... 2
C. Defendants Are Entitled to an Award of Attorneys' Fees
and Costs Under the Stockholders' Agreement 6
1. The Dismissed Claims Are for Alleged Breaches
of the Stockholders' Agreement ............ 6
2. Defendants Are the "Prevailing Party". 7
3. Duggal Is Factually Precluded from Relitigating Its Claims 1'0
D. Standard Practice Is to Submit Evidence of the Amount of
Reasonable Attorneys' Fees After a Decision as to Entitlement. 10
CONCLUSION.. 11
TABLB OF AUTHORITIES
CASES
Brehm v. Eìsner, 7 46 A.2d 244 (Del. 2000) 8
Carroll v. McKinnell,2008 N.Y. Slip Op. 50567, Index No. 601879106
(Sup. Ct. N.Y. Co. Mar. 17,2008) (Fried, J.)............. 9
David Shaev Profit Sharing Account v. Riggio,2014 N.Y. Slip Op. 31776,lndex No.
654339 1201 3 (July 3, 20 I 4) (Schweitzer, J.) ................ 9
Grimes v. Donald,673 A.2d 1207 (DeLl996)........ 8
Guttman v. Huang,823 A.2d 492 (Del Ch. 2003) 4
Henrikv. LaBranche,433 F. Supp. 2d372 (S.D.N.Y. 2006)........., 9
In re Citigroup Inc. Shareholders Litig.,2003 WL 21384599 (Del Ch June 5, 2003).. 4
In re Menill Lynch & Co., Inc., Sec., Derivative & Erisa Litig.,
773 F . Supp. 2d 330 (S.D.N.Y. 20 1 1 )............. 4
trn re Sonus lVetworks, Inc., 499 F .3d 47 (1st Cir. 2007) .10
Levin v. Kozlowski, 13 Misc. 3d 1236, aff'd,45 A.D.3d 387 (lst Dep't 2007).... .10
Louisiana Mun. Police v. Pyott, 46 A3d 313 (Del. Ch.2012).. 9
Roxborough Apt. Corp. v. Becker,l 77 Misc. 2d, 408 (Civ. Ct. Kings Co. 1 998) . 8
South v. Baker,62 A.3d 1 (Del. Ch.2012) 4
Speigel v. Buntrock,5Tl A.2d767 (DeL.1990) .10
West Coast Mgmt. & Cap., LLC v. Carrier Access Corp.,
914 A.2d 636 (Del Ch. Oct. 2006)........ 9
STATUTES
11
22 NYCRR 5 130-1.1 . l-J
CPLR $ 5513(a) .............:. 8
DGCL ç220......... 4
Del. Ch. Ct. Rule l5(aaa) 8
Del. Ch. Ct. Rule 23.1...... 8
OTHER AUTHORITIES
4 Commercial Litigation in New York State Courts, $ 52:4 (3d ed. 2010) 8
This Individual Defendants,l by their attorneys, Wrobel Schatz & Fox LLP, respectfully
submit this reply memorandum of law in further support of the motion for an Order awarding
Defendants their attorneys'fees and costs in this action pursuant to $ 7.13 of the Company's
Stockholder's Agreement and 22 NYCRR $ 130-1.1, together with such other and further relief
as this Court deems just and proper.
PRELIMINARY STATEMBNT
Defendants are entitled to an award of attorneys' fees and costs incurred defending this
action both contractually as the "prevailing party," and pursuantto22 NYCRR 5 130-1.1, based
on Plaintiffls frivolous and vexatious conduct.
Plaintiffls opposition asks the Court to ignore reality. Trying to escape liability under 5
7.l3,it contends that its claims do not seek to enforce the Stockholders'Agreement. But it has
repeatedly argued that they do. Insisting that Defendants are not the "prevailing party," it argues
that this case was dismissed "without prejudice" and has not reached its "ultimate outcome.": But
the Decision and Order suggest only that dismissal was with prejudice and, in any event, Duggal
is precluded under black-letter Delaware law from repleading or recommencing this action, so
the outcome is as ultimate as it gets, and Defendants prevailed.
The frivolous and vexatious nature of this action and Plaintiffs conduct are equally
undeniable. It filed a half-baked Complaint without bothering to investigate the facts necessary
to maintain this action, with the sole purpose of leveraging a settlement in an unrelated
Arbitration, and with no regard whatsoever for the interests of the Company. It continued
litigating over the Court's express suggestion that it withdraw this action. And then it filed an
I Capitalized terms herein have the meanings ascribed to them in the Affirmation of David C.
'Wrobel, ("Wrobel Aff.").
dated January 13,2015
Amended Complaint that, in addition to having no more basis in law or fact than its concededly
deficient Complaint, is full of knowingly false allegations (that are still ineffective). Rule 130 is
the appropriate mechanism for punishing Duggal's exploitation of the litigation process to furlher
ìts improper agenda.
ARGUMENT
A. The Court Has Expressly Granted
Defendants Leave to Make this Motion
The Court expressly granted leave to make this motion for an award of attorneys' fees
and costs, thus negating Duggal's contention that the Court implicitly disposed of the application
adversely andlor failed to retain jurisdiction over this case for purposes of ruling on this motion.
See Affirmation of Justin Kelton in Opposition to Defendants' Motion for Attomeys' Fees, dated
Jan.2l,2015 ("Kelton Opp. Aff.") Ex. D.
B. Defendants Are Entitled to an Award of Attorneys'
Fees and Costs Pursuant to 22 NYCRR E I3O.I.1
This lawsuit and Plaintiff s conduct have been frivolous from start to finish. ,
Not only is this action so patently devoid of merit that itcannot even get past the starting
gate, but Duggal underlook and continued to prosecute it with conscious disregard for that fact,
without any interest in the Company or protecting or furthering its interests (or even Duggal's
own interests as a shareholder), and with the sole purpose of putting the Company and the
Individual Defendants at risk in order to cause the Individual Defendants to exefi pressure on
Hussey to settle the unrelated Arbitration with Duggal.
Duggal's counsel all but admitted that this was Duggal's purely frivolous and vexatious
purpose when she advised Company counsel that Duggal's threats against the Company would
2
"go away" if Hussey capitulated in the Arbitration. See Affidavit of Michael Yang, sworn to
Nov.24, 2C14.2
True to its word, when Hussey failed to capitulate, Duggal upped the ante by
precipitously moving for drastic temporary and preliminary injunctive relief itknew would put
the Company out of business (initially without any notice to any of the Defendants),3 based on a
Complaint for which it knew it did not have, and had not even attempted to acquire, a sufficient
factual basis. Indeed, a central theme of Duggal's Complaint and other submissions is its
admitted lack of facts, including the facts necessary to assert derivative claims. See, e.9.,
Affidavit of Baldev Duggal, swom to Dec. 1,2014 ("Duggal Reply Aff."), at \fl 2 ("This action
was filed because of the Defendants' chronic refusal to provide me with the information to which
I am entitled:'),4,6,24,25 ("such disclosure will allow me to evaluate and pursue my claims"),
26.4
That problem was entirely of Duggal's own making. One of the key factors a court
should consider in determining whether conduct was frivolous is "[t]he circumstances under
which the conduct took place, including the time available for investigating the legal or factual
basis of the conduct." 22 NYCRR $ 130-1.1(c)(1). Here, Delaware General Corporation Law
("DGCL") 5 220 provided Duggal with a specific mechanism for investigating its claims,
2
A true and correct copy of the Nov. 24, 2014 Affidavit of Michael Yang is attached as Ex. A to
the accompanying Reply Aff,rrmation of Luisa M. Kaye, dated February 4,2015 (the "Kaye
Reply Aff.").
3
Exposing the vexatiousness of Duggal's emergency motion for a TRO/preliminary injunction ,
including its allegation that it would suffer irreparable harm as a result of the actions it
challenged, Duggal ultimately requested that the Court stay this action and refer it to mediation.
See Duggal Reply Aff.n26.
o
A t.ue and correct copy of the Duggal Reply Aff. is attached as Ex. B to Kaye Reply Aff.
J
including whether it could sue derivatively, which Delaware courts adamantly hold shareholders
must do employ before suing, not afterwards to cure defective pleading. See e.g. South v. Baker,
62 A.3d 1 (Del. Ch.2012); Guttman v. Huang, 823 A.2d 492 (Del Ch. 2003); In re Cftigroup
Inc. Shareholders Litig.,2003 WL 21384599 (Del. Ch. June 5, 2003); see also In re Merrill
Lynch & Co., Inc., Sec., Derivative & Erisa Litig.,l73F. Supp.2d330,350 (S.D.N.Y.2011).
But Duggal's purpose in bringing this litigation was to ter¡orize the Individual Defendants into
doing its bidding with Hussey, which it planned on happening relatively quickly. The facts were
therefore of little to no concern.
Duggal's lack of any sincere interest in the facts was readily apparent, even when it did
get around to serving a demand for documents on the Company pursuant to DGCL $ 220, eight
days after commencing this action and moving for drastic injunctive relief. Duggal waited an
entire month after serving its demand just to follow up on the Company's pronlpt agreement to
make almost everything it had asked for available for its inspection, and Duggal would not
actually inspect the documents until January 9,2015.
Meanwhile, even before making its appointment to inspect the documents being produced
by the Company in response to its S 220 demand, and disregarding the Court's express
suggestion that Duggal withdraw the action,'Wrobel Aff. Ex. B at 5:77-23, Duggal hastily filed
an Amended Complaint that had no further factual underpinning than the Complaint, did nothing
to cure the fatal defects of the Complaint identified in detail in Defendants' motion to dismiss,
and is a study in sloppiness. A case in point is fl 85 of the Amended Complaint, in which Duggal
alleges that each Individual Defendant is not "independent" because each Individual Defendant
"has a direct and substantial interest in the merger that is not shared will [sic] all shareholders,
i.e., Hussey will retain his current ownership position after the merger through the grant of stock
4
option." See Verified Complaint fl 85(a)(i)-(v). Of course, whether or not Hussey retains his
curent ownership position (he will not) is completely irrelevant to each of the other Individual
Defendants' independence.
The Amended Complaint also contained a host of allegations made (and verified) by
Duggal that are either knowingly false or made with reckless disregard for the truth. Among
them are:
1. Duggal has no basis for alleging in flfl 3 and 58 that the proposed merger with lMind
would "cause the Company to take on signif,rcant debt" or that lMind is "burdened with
debt and Defendant Dodge may be the sole guarantor on that debt." The term sheet
supplied to Duggal (which Duggal submitted to this Court in support of his motion for
preliminary injunction), provides that the Company imposed as a condition of the merger
that lMind be completely free of debt and liabilities. See Affirmation of Emergency,
dated Nov. 3, 2014 Ex.B, aL 4.s Duggal has no information to the contrary, and indeed
there is none.
2. There is no reasonable basis for Duggal's allegation in fl 4 that the merger will proht
Saviano, Schnittlich.and Rosenblatt. _The sworn-affidavits submitted in oppositign tg
Duggal's motion for preliminary injunction establish the contrary. See Wrobel Aff. Ex. G
atl66, Ex. H, atl22, Ex. I at fl 39, and Ex. J at fl 9.
3. It is knowingly false of Duggal to allege in fl 8 that it has been deprived of access to
corporate books. As explained above, Duggal did not make a request for corporate books
prior to hling the Complaint.
4. There is no basis for the allegation in flfl 36 and 39 that "the other Director Defendants
were also [in addition to Hussey] granted stock options allowing them to retain or raise
their ownership stakes." The sworn affidavits negate the allegation that any conlemplated
stock options would allow anyone, including Hussey, to "retain or raise" their ownership
stakes. S¿e Wrobel Aff. Ex. G atll63-64, Ex. F atll9l-92, and Ex. H at fl36.
5. It is knowingly false of Duggal to allege in fl 3 8 that "no explanation was ever provided
for why stock options were granted to Defendant Hussey and/or other members of the
Board, to the exclusion of other shareholders (including Plaintiff)," Duggal admits in
fl 50 that the October 24, 2014 letter from the Company advised that the Company
"intends to grant additional stock options to members of the management team and
employees of both the Company and lMind Inc. in order to properly incentivize such
t A copy of the Affìrmation of Emergency is attached to the Kaye Reply Aff. as Ex. C
5
management, employees and consultants to integrate the two companies and implement
the combined companies' business plan."
6. It is knowingly false of Duggal to allege in\47 that the Company "addressed the issues
relating to the financing and the merger in only a cursory fashion, and did not identify the
purporled beneht to PeekAnalytics, or deal in any way with the valuation issues involved
in the merger." The referenced October 24,2074 letler from the Company's counsel,
which Duggal submitted as Ex. B to his affìdavit in support of Plaintiffs motion for
preliminary injunction, sets forth all of the details of the proposed merger and financing,
even annexing the exact term sheet of the financing and the letter of intent sent by the
Company to lmind, which outlined all the proposed terms, including the relative
valuations of the companies andthe conditionthat lMind come free of debts, liens, and
encumbrances. See Duggal Aff. Ex. B, at 68.
7 . The allegation in I67 that the Company is "publicly held" is knowingly false.
8. It is knowingly false of Duggal to allege in fl 139 that "Duggal Dimensions invested more
than eight hundred thousand dollars into PeekAnalytics, and its equity stake is being
reduced to approximately zero." As Duggal admits in fl 18 of the Amended Complaint,
Duggal has not invested a penny in the Company, and its equity stake is not being
reduced to zero. See also'Wrobel Aff. Ex. F at flfl 91-94 and Ex. H at fl 36.
Topping off its thoroughly frivolous and vexatious conduct throughout..this action,
Duggal cravenly asks the Court to impose Rule 130 sanctions on the Individual Defendants "sza
sponte," despite demonstrating by its failure to cross-move for this relief that it knows there is no
basis whatsoever for doing so. Plaintiff's request must be denied, and Defendants should be
awarded the attorneys' fees and costs they incurred defending this frivolous and vexatious action.
C. Defendants Are Entitled to an Award of Attorneys'
Fees and Costs under the Stockholderst Asreement
1. The Dismissed Claims Are for Alleged
Breaches of the olderst Asreement
There is no merit to Duggal's contention that it is not seeking to enforce the covenants of
the Stockholders' Agreement, and therefore that Defendants are not entitled to recover their fees
and costs pursuant to $ 7.13 Duggal has repeatedly admitîed that it is seeking to remedy
alleged breaches of the Stockholders' Agreement and vindicate its alleged rights thereunder. See
6
Affirmation of Emergency, dated November 3,2014, T 9 (if consummated, the merger "violates
Section 2.01 of the Stockholder's AgreemenÍ"); Affidavit of Baldev Duggal, sworn to Nov. 3,
2074, fl 8 ("ft]n violation of the Stockholders Agreement and the bylaws, defendants Dodge and
Hussey have taken action to plunder PeekAnalytics' assets under the guise of an illusory
'merger' with lMind, Inc.").6
These admissions, and the fact that the duties allegedly breached exist only by virtue of
the relationships created by the Stockholders' Agreement, bring this case squarely within the
ambit of $ 7.13 of the Stockholders' Agreement, regardless of how Duggal may have styled its
claims purposely to avoid it.7 The Court should reject Duggal's transparent attempt to subvert
the true (admitted) nature of its claims with window dressing, and should award Defendants their
reasonable attorneys' fees and costs.
2. Defendants Are the "Prevailing Party"
Insisting that this action was dismissed "without prejudice," Duggal argues that the
Defendants are not the "prevailing party" because this action has not reached its "ultimate
outcome." These arguments are fatally flawed
First, there is no indication that the Court dismissed this action "without prejudice." The
Court checked "Case Disposed" on the grey-sheet Order. The words "without prejudice" do not
appear anywhere in the Decision and Order. The court did not grant leave to replead and,
indeed, Duggal did not even seek it. Duggal has not appealed and, unless Defendants serve
6
A copy of the Nov. 3, 2014 Affidavit of Baldev Duggal is attached to the Kaye Reply Aff. as
Ex. D.
7
Duggal's outright admissions that its claims implicate rights and obligations provided for in the
Stockholders' Agreement distinguishes this case from the authorities cited in Duggal's
opposition papers.
7
notice of entry, its time to do so has expired. See CPLR $ 5513(a) ("when the appellant has
served a copy of the judgment or order and written notice of its entry, the appeal must be taken
within thirty days thereof").
Second, this case has reached its "ultimate outcome," even if the words "without
prejudice" had been incanted, and even if dismissal was not "on the medts." Although Duggal
deliberately tries to mislead the Court by omitting relevant language from its quotation of the
Couft's holding in Roxborough Apt. Corp. v. Becker,l77 Misc. 2d 408,409 (Civ. Ct. Kings Co.
1998), the rule stated in that very case is that a controversy reaches its "ultimate outcome" when
a court disposes of it on the merits "or when it becomes clear that the action, although not
disposed of on the merits, cannot or will not be commenced again on the same grounds."
(emphasis added) (dismissal of holdover proceeding based on landlord's inability to proceed at
.tlq"gf,sg hearing was
"ultimate ou.tqome');4 Commercial Litigation in New York State Courts, $
52:4, at 1245-46 (3d ed. 2010). Se¿ Plaintiff s Opposition to Defendants' Motion for Costs and
Attorneys' Fees ("Duggal Opp. Mem."), atn.72 and n.18.
Dismissal of the Amended Complaint ls the "ultimate outcome" of this action - with
Defendants as the prevailing pafty - because Duggal is precluded as a matter of Delaware law
from repleading or recommencing this action. See Del. Ch. Ct. Rule 15(aaa) (dismissal of
derivative complaint for failure to adequately plead in accordance with Rule 23.1 "shall be with
prejudice . . . unless the Court, for good cause shown, shall find that dismissal with prejudice
would not be just under all the circumstances"); Brehm v. Eisner, 746 A2d 244 (DeI. 2000)
(dismissal of derivative complaint for failure to create reasonable doubt as to disinterest or
independence of directors - required to adequately allege demand futility - was with prejudice
and "operates as an adjudication on the merits"); Grimes v. Donald,673 A.2d 1207,1218-19
8
(Del. 1996) (dismissal of complaint alleging demand futility bars shareholder from filing second
complaint with different set of demand futility allegations); Louisiana Mun. Police v. Pyott, 46
A.3d 313,333 (Del. Ch. 2012) (Rule 23.1 dismissal [for failure to adequately allege demand
futilityl precludes plaintiff from attempting to file second complaint); lVest Coast Mgmt. & Cap.,
LLC v. Carrier Access Corp., gI4 A.2d 636, 644-45 (Del Ch. Oct. 2006) (where shareholder
derivative action was dismissed based on inadequate pleading of demand futility, plaintiff barred
by res judicatu from relitigating - and thus necessarily from repleading - derivative claims based
on demand futility; absent ability to bring derivative action, plaintiff did not have proper purpose
for $ 220 books and records demand). New York courts are in accord. See, e.g., David Shaev
Profit Sharing Account v. Riggio,2014 N.Y. Slip Op. 37776,Index No. 65433912013 (July 3,
2014) (Schweitzer, J.) ("Because the amçnded complaint marks Plaintiff s second futile effort at
pleading dgma4d excusal with the requisite degree of factual particularity and Plaintiff failed to
take advantage of a books and records request pursuant to Delaware General Corporation Law $
220, the court finds that the amended complaint should be dismissed with prejudice."); Levin v.
Kozlowski, 13 Misc. 3d 1236, aff'd,45 A.D.3d 387 (lst Dep't 2007) (plaintiffs collaterally
stopped from relitigating issue of board independence/interest where the issue was determined in
dismissing prior federal action); Canoll v. McKinnell,2008 N.Y. Slip Op. 50567, Index No.
601879106 (Sup. Ct. N.Y. Co. l|;4.ar.17,2008) (Fried, J.) (dismissal of derivative complaint based
on failure to adequately allege director interest/lack of independence precluded plaintiff from
relitigating claim, as well as claim of wrongful refusal of demand based on alleged interestedness
of directors) (attached to the Kaye Reply Aff. as Ex. E); Henrik v. LaBranche, 433 F. Supp. 2d
372 (S.D.N.Y. 2006) (plaintiffs barred from relitigating demand futility based on director
interest/independence where the issue was determined question in dismissing previous action);
9
see also In re Sonus Networks, Inc., 499 F .3d 47 ,64 ( I st Cir. 2007) (dismissal of prior state court
derivative complaint precluded plaintiff from relitigating the issue of disinterest and
independence as "defendants have already been put to the trouble of litigating the very question
at issue, and the policy of repose strongly militates in favor of preclusion").
3. Duggal Is Factually Precluded
from Relitieating Its CIaims
In addition, following the dismissal of this action, Duggal made demand upon the
Company to investigate its claims and commence litigation against the Board. In so doing,
Duggal conceded the independence of the Board, thereby precluding it from asserting its
derivative claims based on demand futility. See, e.g., Speigel v. Buntrock,577 A.2d767,777
(Del. 1990). Accordingly, even if dismissal had been without prejudice, and even if the action
had not otherwise reached its "ultimate outcome" as a matter of law, Duggal's own actions have
closed the book on this case.
D. Standard Practice Is to Submit Evidence Regarding the
Amount of Reasonable Fees After a Decision as to Entitlement
It is standard practice in this Court for a party seeking an award of attorneys' fees to
submit evidence regarding the amount claimed after there has been a determination as to
entitlement. Accordingly, the Courl should reject Duggal's contention that this motion should
be denied because such evidence has not yet been submitted.
10
CONCLUSION
For the foregoing reasons, and based on all ofthe papers and proceedings heretofore had
on this motion, the Individual Defendants respectfully request that the Court grant the motion for
an Order awarding Defendants the reasonable attomeys' fees and costs incurred defending
against his action and such other and further relief as this Court deems just and proper.
Dated: New York, New York
February 4,2015
S FO LLP
By:
Luisa M. Kaye
Kristin Marlowe
1040 Avenue of the Americas, Suite 1101
New York, New York 10018
(2t2) 421-8100
lkaye@wsfny.com
1l
Preview
FILED: NEW YORK COUNTY CLERK 02/04/2015 06:37 PM INDEX NO. 653358/2014 NYSCEF DOC. NO. 84 RECEIVED NYSCEF: 02/04/2015 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YO DUGGAL DIMENSIONS LLC, Individually as Plaintiff, and Derivatively on behalf of Nominal Defendant PeekAnalytics, Inc. PIaintffi Index No. 65335812014 -against- Motion Sequence 003 (Bransten, J.) MICHAEL HUSSEY, DONALD DODGE, JOSEPH SAVIANO, BRETT SCHNITTLICH AND MARK ROSENBLATT, Defendants, and PEEKANALYTICS, INC. d/b/a StatSocial, a Delaware Corporation, Nominal Defendant X REPLY MEMORANDUM OF LA\ry IN FURTHER SUPPORT OF MOTION FOR ATTORNEYS' FEES AND COSTS V/ROBEL SCHATZ & FOX LLP 1040 Avenue of the Americas, Suite 1101 New York, New York 10018 (2r2) 42r-8t00 Attorneys þr the Individual Defendants TABLE OF CONTENTS TABLE OF AUTHORITIES PRELIMINARY STATEMENT 1 ARGUMENT. 2 A. The Court Has Expressly Granted Defendants Leave to Make this Motion ...................2 B. Defendants Are Entitled to an Award of Attomeys' Fees and Costs Pursuant to 22 NYCRR $ 130-1.1................... 2 C. Defendants Are Entitled to an Award of Attorneys' Fees and Costs Under the Stockholders' Agreement 6 1. The Dismissed Claims Are for Alleged Breaches of the Stockholders' Agreement ............ 6 2. Defendants Are the "Prevailing Party". 7 3. Duggal Is Factually Precluded from Relitigating Its Claims 1'0 D. Standard Practice Is to Submit Evidence of the Amount of Reasonable Attorneys' Fees After a Decision as to Entitlement. 10 CONCLUSION.. 11 TABLB OF AUTHORITIES CASES Brehm v. Eìsner, 7 46 A.2d 244 (Del. 2000) 8 Carroll v. McKinnell,2008 N.Y. Slip Op. 50567, Index No. 601879106 (Sup. Ct. N.Y. Co. Mar. 17,2008) (Fried, J.)............. 9 David Shaev Profit Sharing Account v. Riggio,2014 N.Y. Slip Op. 31776,lndex No. 654339 1201 3 (July 3, 20 I 4) (Schweitzer, J.) ................ 9 Grimes v. Donald,673 A.2d 1207 (DeLl996)........ 8 Guttman v. Huang,823 A.2d 492 (Del Ch. 2003) 4 Henrikv. LaBranche,433 F. Supp. 2d372 (S.D.N.Y. 2006)........., 9 In re Citigroup Inc. Shareholders Litig.,2003 WL 21384599 (Del Ch June 5, 2003).. 4 In re Menill Lynch & Co., Inc., Sec., Derivative & Erisa Litig., 773 F . Supp. 2d 330 (S.D.N.Y. 20 1 1 )............. 4 trn re Sonus lVetworks, Inc., 499 F .3d 47 (1st Cir. 2007) .10 Levin v. Kozlowski, 13 Misc. 3d 1236, aff'd,45 A.D.3d 387 (lst Dep't 2007).... .10 Louisiana Mun. Police v. Pyott, 46 A3d 313 (Del. Ch.2012).. 9 Roxborough Apt. Corp. v. Becker,l 77 Misc. 2d, 408 (Civ. Ct. Kings Co. 1 998) . 8 South v. Baker,62 A.3d 1 (Del. Ch.2012) 4 Speigel v. Buntrock,5Tl A.2d767 (DeL.1990) .10 West Coast Mgmt. & Cap., LLC v. Carrier Access Corp., 914 A.2d 636 (Del Ch. Oct. 2006)........ 9 STATUTES 11 22 NYCRR 5 130-1.1 . l-J CPLR $ 5513(a) .............:. 8 DGCL ç220......... 4 Del. Ch. Ct. Rule l5(aaa) 8 Del. Ch. Ct. Rule 23.1...... 8 OTHER AUTHORITIES 4 Commercial Litigation in New York State Courts, $ 52:4 (3d ed. 2010) 8 This Individual Defendants,l by their attorneys, Wrobel Schatz & Fox LLP, respectfully submit this reply memorandum of law in further support of the motion for an Order awarding Defendants their attorneys'fees and costs in this action pursuant to $ 7.13 of the Company's Stockholder's Agreement and 22 NYCRR $ 130-1.1, together with such other and further relief as this Court deems just and proper. PRELIMINARY STATEMBNT Defendants are entitled to an award of attorneys' fees and costs incurred defending this action both contractually as the "prevailing party," and pursuantto22 NYCRR 5 130-1.1, based on Plaintiffls frivolous and vexatious conduct. Plaintiffls opposition asks the Court to ignore reality. Trying to escape liability under 5 7.l3,it contends that its claims do not seek to enforce the Stockholders'Agreement. But it has repeatedly argued that they do. Insisting that Defendants are not the "prevailing party," it argues that this case was dismissed "without prejudice" and has not reached its "ultimate outcome.": But the Decision and Order suggest only that dismissal was with prejudice and, in any event, Duggal is precluded under black-letter Delaware law from repleading or recommencing this action, so the outcome is as ultimate as it gets, and Defendants prevailed. The frivolous and vexatious nature of this action and Plaintiffs conduct are equally undeniable. It filed a half-baked Complaint without bothering to investigate the facts necessary to maintain this action, with the sole purpose of leveraging a settlement in an unrelated Arbitration, and with no regard whatsoever for the interests of the Company. It continued litigating over the Court's express suggestion that it withdraw this action. And then it filed an I Capitalized terms herein have the meanings ascribed to them in the Affirmation of David C. 'Wrobel, ("Wrobel Aff."). dated January 13,2015 Amended Complaint that, in addition to having no more basis in law or fact than its concededly deficient Complaint, is full of knowingly false allegations (that are still ineffective). Rule 130 is the appropriate mechanism for punishing Duggal's exploitation of the litigation process to furlher ìts improper agenda. ARGUMENT A. The Court Has Expressly Granted Defendants Leave to Make this Motion The Court expressly granted leave to make this motion for an award of attorneys' fees and costs, thus negating Duggal's contention that the Court implicitly disposed of the application adversely andlor failed to retain jurisdiction over this case for purposes of ruling on this motion. See Affirmation of Justin Kelton in Opposition to Defendants' Motion for Attomeys' Fees, dated Jan.2l,2015 ("Kelton Opp. Aff.") Ex. D. B. Defendants Are Entitled to an Award of Attorneys' Fees and Costs Pursuant to 22 NYCRR E I3O.I.1 This lawsuit and Plaintiff s conduct have been frivolous from start to finish. , Not only is this action so patently devoid of merit that itcannot even get past the starting gate, but Duggal underlook and continued to prosecute it with conscious disregard for that fact, without any interest in the Company or protecting or furthering its interests (or even Duggal's own interests as a shareholder), and with the sole purpose of putting the Company and the Individual Defendants at risk in order to cause the Individual Defendants to exefi pressure on Hussey to settle the unrelated Arbitration with Duggal. Duggal's counsel all but admitted that this was Duggal's purely frivolous and vexatious purpose when she advised Company counsel that Duggal's threats against the Company would 2 "go away" if Hussey capitulated in the Arbitration. See Affidavit of Michael Yang, sworn to Nov.24, 2C14.2 True to its word, when Hussey failed to capitulate, Duggal upped the ante by precipitously moving for drastic temporary and preliminary injunctive relief itknew would put the Company out of business (initially without any notice to any of the Defendants),3 based on a Complaint for which it knew it did not have, and had not even attempted to acquire, a sufficient factual basis. Indeed, a central theme of Duggal's Complaint and other submissions is its admitted lack of facts, including the facts necessary to assert derivative claims. See, e.9., Affidavit of Baldev Duggal, swom to Dec. 1,2014 ("Duggal Reply Aff."), at \fl 2 ("This action was filed because of the Defendants' chronic refusal to provide me with the information to which I am entitled:'),4,6,24,25 ("such disclosure will allow me to evaluate and pursue my claims"), 26.4 That problem was entirely of Duggal's own making. One of the key factors a court should consider in determining whether conduct was frivolous is "[t]he circumstances under which the conduct took place, including the time available for investigating the legal or factual basis of the conduct." 22 NYCRR $ 130-1.1(c)(1). Here, Delaware General Corporation Law ("DGCL") 5 220 provided Duggal with a specific mechanism for investigating its claims, 2 A true and correct copy of the Nov. 24, 2014 Affidavit of Michael Yang is attached as Ex. A to the accompanying Reply Aff,rrmation of Luisa M. Kaye, dated February 4,2015 (the "Kaye Reply Aff."). 3 Exposing the vexatiousness of Duggal's emergency motion for a TRO/preliminary injunction , including its allegation that it would suffer irreparable harm as a result of the actions it challenged, Duggal ultimately requested that the Court stay this action and refer it to mediation. See Duggal Reply Aff.n26. o A t.ue and correct copy of the Duggal Reply Aff. is attached as Ex. B to Kaye Reply Aff. J including whether it could sue derivatively, which Delaware courts adamantly hold shareholders must do employ before suing, not afterwards to cure defective pleading. See e.g. South v. Baker, 62 A.3d 1 (Del. Ch.2012); Guttman v. Huang, 823 A.2d 492 (Del Ch. 2003); In re Cftigroup Inc. Shareholders Litig.,2003 WL 21384599 (Del. Ch. June 5, 2003); see also In re Merrill Lynch & Co., Inc., Sec., Derivative & Erisa Litig.,l73F. Supp.2d330,350 (S.D.N.Y.2011). But Duggal's purpose in bringing this litigation was to ter¡orize the Individual Defendants into doing its bidding with Hussey, which it planned on happening relatively quickly. The facts were therefore of little to no concern. Duggal's lack of any sincere interest in the facts was readily apparent, even when it did get around to serving a demand for documents on the Company pursuant to DGCL $ 220, eight days after commencing this action and moving for drastic injunctive relief. Duggal waited an entire month after serving its demand just to follow up on the Company's pronlpt agreement to make almost everything it had asked for available for its inspection, and Duggal would not actually inspect the documents until January 9,2015. Meanwhile, even before making its appointment to inspect the documents being produced by the Company in response to its S 220 demand, and disregarding the Court's express suggestion that Duggal withdraw the action,'Wrobel Aff. Ex. B at 5:77-23, Duggal hastily filed an Amended Complaint that had no further factual underpinning than the Complaint, did nothing to cure the fatal defects of the Complaint identified in detail in Defendants' motion to dismiss, and is a study in sloppiness. A case in point is fl 85 of the Amended Complaint, in which Duggal alleges that each Individual Defendant is not "independent" because each Individual Defendant "has a direct and substantial interest in the merger that is not shared will [sic] all shareholders, i.e., Hussey will retain his current ownership position after the merger through the grant of stock 4 option." See Verified Complaint fl 85(a)(i)-(v). Of course, whether or not Hussey retains his curent ownership position (he will not) is completely irrelevant to each of the other Individual Defendants' independence. The Amended Complaint also contained a host of allegations made (and verified) by Duggal that are either knowingly false or made with reckless disregard for the truth. Among them are: 1. Duggal has no basis for alleging in flfl 3 and 58 that the proposed merger with lMind would "cause the Company to take on signif,rcant debt" or that lMind is "burdened with debt and Defendant Dodge may be the sole guarantor on that debt." The term sheet supplied to Duggal (which Duggal submitted to this Court in support of his motion for preliminary injunction), provides that the Company imposed as a condition of the merger that lMind be completely free of debt and liabilities. See Affirmation of Emergency, dated Nov. 3, 2014 Ex.B, aL 4.s Duggal has no information to the contrary, and indeed there is none. 2. There is no reasonable basis for Duggal's allegation in fl 4 that the merger will proht Saviano, Schnittlich.and Rosenblatt. _The sworn-affidavits submitted in oppositign tg Duggal's motion for preliminary injunction establish the contrary. See Wrobel Aff. Ex. G atl66, Ex. H, atl22, Ex. I at fl 39, and Ex. J at fl 9. 3. It is knowingly false of Duggal to allege in fl 8 that it has been deprived of access to corporate books. As explained above, Duggal did not make a request for corporate books prior to hling the Complaint. 4. There is no basis for the allegation in flfl 36 and 39 that "the other Director Defendants were also [in addition to Hussey] granted stock options allowing them to retain or raise their ownership stakes." The sworn affidavits negate the allegation that any conlemplated stock options would allow anyone, including Hussey, to "retain or raise" their ownership stakes. S¿e Wrobel Aff. Ex. G atll63-64, Ex. F atll9l-92, and Ex. H at fl36. 5. It is knowingly false of Duggal to allege in fl 3 8 that "no explanation was ever provided for why stock options were granted to Defendant Hussey and/or other members of the Board, to the exclusion of other shareholders (including Plaintiff)," Duggal admits in fl 50 that the October 24, 2014 letter from the Company advised that the Company "intends to grant additional stock options to members of the management team and employees of both the Company and lMind Inc. in order to properly incentivize such t A copy of the Affìrmation of Emergency is attached to the Kaye Reply Aff. as Ex. C 5 management, employees and consultants to integrate the two companies and implement the combined companies' business plan." 6. It is knowingly false of Duggal to allege in\47 that the Company "addressed the issues relating to the financing and the merger in only a cursory fashion, and did not identify the purporled beneht to PeekAnalytics, or deal in any way with the valuation issues involved in the merger." The referenced October 24,2074 letler from the Company's counsel, which Duggal submitted as Ex. B to his affìdavit in support of Plaintiffs motion for preliminary injunction, sets forth all of the details of the proposed merger and financing, even annexing the exact term sheet of the financing and the letter of intent sent by the Company to lmind, which outlined all the proposed terms, including the relative valuations of the companies andthe conditionthat lMind come free of debts, liens, and encumbrances. See Duggal Aff. Ex. B, at 68. 7 . The allegation in I67 that the Company is "publicly held" is knowingly false. 8. It is knowingly false of Duggal to allege in fl 139 that "Duggal Dimensions invested more than eight hundred thousand dollars into PeekAnalytics, and its equity stake is being reduced to approximately zero." As Duggal admits in fl 18 of the Amended Complaint, Duggal has not invested a penny in the Company, and its equity stake is not being reduced to zero. See also'Wrobel Aff. Ex. F at flfl 91-94 and Ex. H at fl 36. Topping off its thoroughly frivolous and vexatious conduct throughout..this action, Duggal cravenly asks the Court to impose Rule 130 sanctions on the Individual Defendants "sza sponte," despite demonstrating by its failure to cross-move for this relief that it knows there is no basis whatsoever for doing so. Plaintiff's request must be denied, and Defendants should be awarded the attorneys' fees and costs they incurred defending this frivolous and vexatious action. C. Defendants Are Entitled to an Award of Attorneys' Fees and Costs under the Stockholderst Asreement 1. The Dismissed Claims Are for Alleged Breaches of the olderst Asreement There is no merit to Duggal's contention that it is not seeking to enforce the covenants of the Stockholders' Agreement, and therefore that Defendants are not entitled to recover their fees and costs pursuant to $ 7.13 Duggal has repeatedly admitîed that it is seeking to remedy alleged breaches of the Stockholders' Agreement and vindicate its alleged rights thereunder. See 6 Affirmation of Emergency, dated November 3,2014, T 9 (if consummated, the merger "violates Section 2.01 of the Stockholder's AgreemenÍ"); Affidavit of Baldev Duggal, sworn to Nov. 3, 2074, fl 8 ("ft]n violation of the Stockholders Agreement and the bylaws, defendants Dodge and Hussey have taken action to plunder PeekAnalytics' assets under the guise of an illusory 'merger' with lMind, Inc.").6 These admissions, and the fact that the duties allegedly breached exist only by virtue of the relationships created by the Stockholders' Agreement, bring this case squarely within the ambit of $ 7.13 of the Stockholders' Agreement, regardless of how Duggal may have styled its claims purposely to avoid it.7 The Court should reject Duggal's transparent attempt to subvert the true (admitted) nature of its claims with window dressing, and should award Defendants their reasonable attorneys' fees and costs. 2. Defendants Are the "Prevailing Party" Insisting that this action was dismissed "without prejudice," Duggal argues that the Defendants are not the "prevailing party" because this action has not reached its "ultimate outcome." These arguments are fatally flawed First, there is no indication that the Court dismissed this action "without prejudice." The Court checked "Case Disposed" on the grey-sheet Order. The words "without prejudice" do not appear anywhere in the Decision and Order. The court did not grant leave to replead and, indeed, Duggal did not even seek it. Duggal has not appealed and, unless Defendants serve 6 A copy of the Nov. 3, 2014 Affidavit of Baldev Duggal is attached to the Kaye Reply Aff. as Ex. D. 7 Duggal's outright admissions that its claims implicate rights and obligations provided for in the Stockholders' Agreement distinguishes this case from the authorities cited in Duggal's opposition papers. 7 notice of entry, its time to do so has expired. See CPLR $ 5513(a) ("when the appellant has served a copy of the judgment or order and written notice of its entry, the appeal must be taken within thirty days thereof"). Second, this case has reached its "ultimate outcome," even if the words "without prejudice" had been incanted, and even if dismissal was not "on the medts." Although Duggal deliberately tries to mislead the Court by omitting relevant language from its quotation of the Couft's holding in Roxborough Apt. Corp. v. Becker,l77 Misc. 2d 408,409 (Civ. Ct. Kings Co. 1998), the rule stated in that very case is that a controversy reaches its "ultimate outcome" when a court disposes of it on the merits "or when it becomes clear that the action, although not disposed of on the merits, cannot or will not be commenced again on the same grounds." (emphasis added) (dismissal of holdover proceeding based on landlord's inability to proceed at .tlq"gf,sg hearing was "ultimate ou.tqome');4 Commercial Litigation in New York State Courts, $ 52:4, at 1245-46 (3d ed. 2010). Se¿ Plaintiff s Opposition to Defendants' Motion for Costs and Attorneys' Fees ("Duggal Opp. Mem."), atn.72 and n.18. Dismissal of the Amended Complaint ls the "ultimate outcome" of this action - with Defendants as the prevailing pafty - because Duggal is precluded as a matter of Delaware law from repleading or recommencing this action. See Del. Ch. Ct. Rule 15(aaa) (dismissal of derivative complaint for failure to adequately plead in accordance with Rule 23.1 "shall be with prejudice . . . unless the Court, for good cause shown, shall find that dismissal with prejudice would not be just under all the circumstances"); Brehm v. Eisner, 746 A2d 244 (DeI. 2000) (dismissal of derivative complaint for failure to create reasonable doubt as to disinterest or independence of directors - required to adequately allege demand futility - was with prejudice and "operates as an adjudication on the merits"); Grimes v. Donald,673 A.2d 1207,1218-19 8 (Del. 1996) (dismissal of complaint alleging demand futility bars shareholder from filing second complaint with different set of demand futility allegations); Louisiana Mun. Police v. Pyott, 46 A.3d 313,333 (Del. Ch. 2012) (Rule 23.1 dismissal [for failure to adequately allege demand futilityl precludes plaintiff from attempting to file second complaint); lVest Coast Mgmt. & Cap., LLC v. Carrier Access Corp., gI4 A.2d 636, 644-45 (Del Ch. Oct. 2006) (where shareholder derivative action was dismissed based on inadequate pleading of demand futility, plaintiff barred by res judicatu from relitigating - and thus necessarily from repleading - derivative claims based on demand futility; absent ability to bring derivative action, plaintiff did not have proper purpose for $ 220 books and records demand). New York courts are in accord. See, e.g., David Shaev Profit Sharing Account v. Riggio,2014 N.Y. Slip Op. 37776,Index No. 65433912013 (July 3, 2014) (Schweitzer, J.) ("Because the amçnded complaint marks Plaintiff s second futile effort at pleading dgma4d excusal with the requisite degree of factual particularity and Plaintiff failed to take advantage of a books and records request pursuant to Delaware General Corporation Law $ 220, the court finds that the amended complaint should be dismissed with prejudice."); Levin v. Kozlowski, 13 Misc. 3d 1236, aff'd,45 A.D.3d 387 (lst Dep't 2007) (plaintiffs collaterally stopped from relitigating issue of board independence/interest where the issue was determined in dismissing prior federal action); Canoll v. McKinnell,2008 N.Y. Slip Op. 50567, Index No. 601879106 (Sup. Ct. N.Y. Co. l|;4.ar.17,2008) (Fried, J.) (dismissal of derivative complaint based on failure to adequately allege director interest/lack of independence precluded plaintiff from relitigating claim, as well as claim of wrongful refusal of demand based on alleged interestedness of directors) (attached to the Kaye Reply Aff. as Ex. E); Henrik v. LaBranche, 433 F. Supp. 2d 372 (S.D.N.Y. 2006) (plaintiffs barred from relitigating demand futility based on director interest/independence where the issue was determined question in dismissing previous action); 9 see also In re Sonus Networks, Inc., 499 F .3d 47 ,64 ( I st Cir. 2007) (dismissal of prior state court derivative complaint precluded plaintiff from relitigating the issue of disinterest and independence as "defendants have already been put to the trouble of litigating the very question at issue, and the policy of repose strongly militates in favor of preclusion"). 3. Duggal Is Factually Precluded from Relitieating Its CIaims In addition, following the dismissal of this action, Duggal made demand upon the Company to investigate its claims and commence litigation against the Board. In so doing, Duggal conceded the independence of the Board, thereby precluding it from asserting its derivative claims based on demand futility. See, e.g., Speigel v. Buntrock,577 A.2d767,777 (Del. 1990). Accordingly, even if dismissal had been without prejudice, and even if the action had not otherwise reached its "ultimate outcome" as a matter of law, Duggal's own actions have closed the book on this case. D. Standard Practice Is to Submit Evidence Regarding the Amount of Reasonable Fees After a Decision as to Entitlement It is standard practice in this Court for a party seeking an award of attorneys' fees to submit evidence regarding the amount claimed after there has been a determination as to entitlement. Accordingly, the Courl should reject Duggal's contention that this motion should be denied because such evidence has not yet been submitted. 10 CONCLUSION For the foregoing reasons, and based on all ofthe papers and proceedings heretofore had on this motion, the Individual Defendants respectfully request that the Court grant the motion for an Order awarding Defendants the reasonable attomeys' fees and costs incurred defending against his action and such other and further relief as this Court deems just and proper. Dated: New York, New York February 4,2015 S FO LLP By: Luisa M. Kaye Kristin Marlowe 1040 Avenue of the Americas, Suite 1101 New York, New York 10018 (2t2) 421-8100 lkaye@wsfny.com 1l