Background
Pathway Genomics Corporation fell into financial distress after defendant Vadim Shulman, its largest outside investor, took control of its management and board. Shulman purportedly loaned the company millions of dollars through convertible notes and caused officers to execute security agreements covering substantially all of Pathway’s assets without board approval, leaving the debt unauthorized and unenforceable.
Shulman later orchestrated an Article 9 foreclosure sale in which his entity acquired Pathway’s assets through a credit bid of the invalid debt, eliminating the plaintiffs’ contractual liquidation preferences. Following trial, the Court of Chancery rejected ten derivative claims because Pathway’s void charter deprived the plaintiffs of derivative standing, but found for the plaintiffs on a direct claim for breach of their liquidation preference. The court awarded $1,849,437.93 in equitable restitution and found that Shulman caused the breach through bad-faith disloyal conduct.
The plaintiffs then sought $3,530,230.80 in attorneys’ fees, costs, and expenses under the bad-faith exception to the American Rule. Shulman disputed both their entitlement to fee shifting and the reasonableness of the requested amount.
The Court’s Holding
The court held that clear evidence established an extraordinary pattern of subjective bad faith warranting fee shifting. Shulman’s conduct went beyond an ordinary contractual breach: he orchestrated a sham foreclosure, manufactured corporate approvals, forged stockholder letters, and bypassed the board through clandestine security agreements. His misconduct also infected the litigation because he resisted discovery, warranted sanctions, and forced the plaintiffs to incur substantial costs uncovering the fabricated record.
The court declined to award the full amount requested. Although the successful direct claim and failed derivative claims arose from a common factual predicate and could not be cleanly separated, ten of the thirteen claims failed because the plaintiffs overlooked a threshold standing defect caused by Pathway’s void charter. Balancing Shulman’s severe misconduct against the plaintiffs’ limited success, standing oversight, staffing concerns, and monetary recovery, the court awarded 33% of the requested fees and expenses, or $1,164,976.16.
Key Takeaways
- The bad-faith exception applied because Shulman’s fabrication and obstruction infected the litigation process and forced the plaintiffs to incur substantial costs uncovering the truth.
- Interrelated successful and unsuccessful claims need not be separated time entry by time entry when they share a common factual predicate.
- A court may reduce a fee award by a flat percentage to account for limited success, threshold defects, staffing inefficiencies, and proportionality to the recovery.
Why It Matters
The decision illustrates that Delaware courts may shift fees when pre-litigation deception carries into the judicial process, even if some misconduct also relates to the underlying substantive dispute. Fabricated corporate records, discovery obstruction, and efforts to preserve a false narrative can collectively satisfy the demanding clear-evidence standard for subjective bad faith.
It also shows that entitlement to fee shifting does not guarantee reimbursement of every dollar incurred. Where claims overlap but the plaintiff achieves only partial success, the court may use a percentage reduction instead of conducting a line-by-line billing audit.