In rare decision, cannabis investor must pay $2 mln in defense fees - Del. judge

6 minute read

The seal of the Court of Chancery for the State of Delaware is seen on a wall in Georgetown, Delaware, U.S., June 9, 2021. REUTERS/Andrew Kelly

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(Reuters) - It is not easy to irk a Delaware Chancery Court judge so thoroughly that she will order you to pay the other side’s legal fees and costs.

The default rule in Chancery Court litigation, as in most cases in the U.S., is that litigants pay their own way, win or lose. Delaware has developed an exception that shifts fees to losers who have litigated in bad faith, but the bar is exceedingly high.

In case after case, Chancery Court judges have used adjectives such as “stringent,” “arduous” and “egregious” to describe the standard for fee-shifting. It’s not enough to show merely that one side filed a questionable case or litigated aggressively. You have to show, in essence, that the losing side engaged in intentional misconduct.

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Enter cannabis investor Jeff Menashe and his investment vehicle, DG BF LLC.

According to a ruling on Monday from Vice Chancellor Morgan Zurn, Menashe and his investment company filed a fraudulent inducement suit against cannabis company American General Resources LLC in Chancery Court even though Menashe was not actually duped by the company’s alleged misrepresentations — and even though plaintiffs told a New York State Supreme Court judge that New York has exclusive jurisdiction over the fraud claim. Menashe “knowingly and in bad faith” pursued his “frivolous” fraud allegation, Zurn concluded.

I sent an email query on the decision to Menashe's firm, Demeter Advisory Group, and did not immediately hear back. Menashe counsel from Gerard Fox Law did not respond to my query on their client's conduct, although, as you'll see below, attorney Gerard Fox took issue with Zurn's criticism of Fox.

The Delaware judge's fee-shifting decision had lots more to say about plaintiffs' demonstration of bad faith. Zurn said Menashe had defied a series of court orders on discovery, citing an opinion last November in which she dismissed his entire case as a sanction for the alleged mishandling of crucial evidence. In the November decision, Zurn said Menashe had actively deleted relevant text messages while the litigation was underway; had “donated” laptops containing evidence related to his fraud allegations; and had repeatedly failed to provide the other side with imaging of data from his cell phone and laptop. (In one instance, Menashe said no one in his home state of Montana could execute the imaging.)

Instead of complying with discovery orders, Zurn said in Monday’s order, Menashe and his counsel filed unwarranted motions that served only to delay a reckoning for their own “utter failure to properly collect, produce and log discovery, in knowing and brash contempt.”

The icing on the cake? According to Zurn, Menashe made “demonstrably false” statements in testimony and briefing, claiming that none of his deleted text messages involved business matters and that he had never been involved in litigation before this case.

Zurn ruled that the $2 million request for fees and costs by American General Resources’ counsel from Benesch, Friedlander, Coplan & Aronoff and Berger Harris was reasonable, given the “extraordinarily contentious and time consuming” course of the case.

Nor did the judge spare Menashe’s counsel. Although she did not criticize Fox or his firm in Monday’s opinion, Zurn’s November decision dismissing Menashe’s case accused his counsel of “compounding” problems in the case by “prioritizing bluster over substance.” Last year, in an order directing Menashe to sit for depositions probing his conduct during discovery, Zurn said Fox had engaged in “abusive tactics for tactical gain,” and that he had “a tendency to interrupt opposing counsel’s presentation and the court, and to insult opposing counsel.”

In an email, Fox fired right back at the Delaware judge. He said Zurn formed an opinion based on two telephone hearings with a faulty connection that made it difficult for him to know when someone was done speaking. “The judge does not know me,” Fox said. “I’m respected and admired by judges throughout this country and her attack on my person was uncalled for, not accurately stated and non-judicial. Her rulings were not supported by the law or facts.”

Fox said Zurn’s behavior was disappointing: “Just because you’re given a robe does not mean you can engage in unwarranted character assassination of a lawyer you do not even know and who has appeared on just two remote phone conferences with you for less than a half hour total.”

I should point out that Zurn did not regard this case as frivolous for the first 10 months of the expedited litigation. Menashe, who had invested $5 million in American General Resources, sued in June 2020 to block the company from raising another round of capital. He obtained a temporary restraining order, although Zurn later lifted the order. In March 2021, the judge issued an opinion dismissing several of Menashe’s claims but allowing him to proceed with allegations that he had been fraudulently induced to sink money into the venture.

Menashe claimed that he had been given false data about the company’s past performance and projected future revenue and that no one told him the company’s CFO was under criminal investigation for defrauding investors in an unrelated $1 billion Ponzi scheme. Zurn concluded in the March 2021 dismissal decision that it was reasonable to infer the company’s intention of deceiving Menashe about its prospects. (American General counsel Sean Meluney and Matthew Beebe of Benesch Friedlander did not respond to a query.)

Menashe’s brief opposing fee-shifting highlighted last year's opinion from Zurn, arguing that it would be inconsistent for the Delaware judge to conclude that the entire lawsuit was frivolous given her own previous holding that the complaint adequately alleged fraud. Menashe’s lawyers also disputed the significance of the purportedly contradictory evidence that emerged in discovery, which suggested that the investor did not, in fact, rely on the allegedly flawed projections. Even if Menashe did create his own revenue projections, the brief said, that didn’t undercut his claim to have been duped by falsified financial data about American General’s past performance.

Menashe's brief opposing fee-shifting moreover challenged Zurn's previous account of his conduct during discovery. He was not “pursuing any kind of improper agenda,” the brief said, but was simply struggling to keep up with demands from defense firms.

Clearly, those arguments carried no weight whatsoever with Zurn. Menashe’s parallel fraud case in Manhattan state court is still alive, for now, pending a decision on American General’s motion to dismiss. We’ll see if New York’s courts are more sympathetic to the investor than Delaware’s.

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Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A Dartmouth college graduate, she has worked as a journalist in New York covering the legal industry and the law for more than three decades. Before joining Reuters, she was a writer and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin.