Therapy Chain Gets Win Against Ex-Directors Who Kept Legal Award

Former OptimisCorp board members are on the hook for trying to keep millions in damages they won on the physical therapy company’s behalf, a Delaware judge ruled Thursday.

Vice Chancellor Morgan T. Zurn granted summary judgment for Optimis, saying the three ex-directors—who are still stockholders, despite founding a rival business—had no right to hold on to the arbitration award with the aim of giving the money to themselves and others they deemed “innocent” of any wrongdoing, such as their relatives.

Zurn stressed that the arbitration proceedings against the company’s former lawyer were brought derivatively, on behalf of Optimis. Investors pursuing derivative claims aren’t entitled to the same relatively forgiving court scrutiny as board members overseeing a corporation, who have more “breathing room,” she said.

“As agents of the company, they were duty-bound to return that award to the board’s managerial authority,” the judge wrote for Delaware’s Chancery Court. “By withholding the award with designs of distributing it to themselves, their friends, and their family, the stockholders breached their duty of loyalty.”

But Zurn declined to determine the precise damages, citing disputes about the amount that can only be resolved at trial. The arbitration award totaled around $8.7 million, according to the court opinion.

‘No Shelter’

The ruling closes one of the final chapters in a legal saga that began when a faction of the Optimis board tried to remove its CEO. The maneuver backfired, and the now-former directors brought derivative claims against the board at the time. That case is ongoing.

They also initiated arbitration over legal malpractice claims against an attorney who advised them on the bungled firing. They went on to win that case, as well as an employment lawsuit challenging their own ouster. California-based Optimis, which does business through subsidiary Rancho Physical Therapy Inc., sued for the derivative award.

Zurn partially resolved the dispute in the company’s favor in 2020 and let the rest of the case move forward in 2021. Her 58-page ruling Thursday addressed claims that the former board members breached their fiduciary duties by “intercepting” the arbitration award. They did, she said.

The judge rejected the idea that the former board members had made a reasonable business decision when they strove to distribute the arbitration award only to investors not involved as defendants in the ongoing derivative case, which is on hold for now.

“While boards need insulation from stockholders’ second-guessing to function properly, derivative stockholder plaintiffs rightly answer to their fellow stockholders and the court,” she wrote. “Defendants can find no shelter in categorizing their actions as good faith business decisions.”

Zurn also dismissed the argument that no Delaware judge had ever found derivative plaintiffs liable for fiduciary breaches under similar circumstances. That may be “because no representative plaintiffs have tried to keep a derivative award for themselves, their friends, and their family,” the judge wrote.

Optimis is represented by Halloran Farkas & Kittila LLP. The former board members are represented by Bayard PA.

The case is OptimisCorp v. Atkins, Del. Ch., No. 2020-0183, 6/1/23.