Enhabit, Inc. v. Nautic Partners IX, L.P.
Unreported (Memorandum Opinion, December 2, 2024) (2024)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Corporate officers owe an uncompromising duty of loyalty to their entity, prohibiting them from self-dealing, competing with the corporation, or diverting corporate opportunities. Third parties who knowingly participate in or aid and abet such breaches are jointly and severally liable, and equitable remedies like constructive trusts may be imposed on future profits to prevent unjust enrichment from disloyal acts, even if current profits are nonexistent.
Facts:
- In 1998, April Anthony founded Encompass Home Health & Hospice ("Encompass Home Health"), which grew into a significant home healthcare provider.
- In 2015, Anthony sold Encompass Home Health to HealthSouth Corporation (later Encompass Health Corporation or "EHC"), but she, Luke James (President), and Chris Walker (CFO) remained as key executives for Encompass Home Health, an EHC subsidiary.
- By mid-2020, Anthony and James became discontent with EHC and, after selling their remaining rollover equity, began planning to leave EHC and potentially reacquire Encompass Home Health or start a new venture.
- Chris Corey (Nautic Partners) and David Schuppan (The Vistria Group) separately approached Anthony, and she, James, and Walker subsequently partnered with Nautic and Vistria (the "PE Defendants") to explore either buying out Encompass Home Health or forming a new competing company.
- Anthony and James provided Nautic with non-public financial information about Encompass Home Health and concealed the PE Defendants' involvement when presenting a non-binding buyout proposal for Encompass Home Health to EHC in January 2021.
- While still employed by Encompass Home Health and after their buyout proposal expired without EHC's response, Anthony, James, and Walker secretly worked with the PE Defendants to identify, diligence, and secure three platform acquisition targets (Homecare Holdings, Vital Health Care Group, and Kare-in-Home, Inc. – the "Original Acquisitions") for their new competing venture, TVG NP Homecare Topco, LP ("Topco").
- Anthony, who was still CEO of Encompass Home Health, actively recruited key Encompass employees, including James, Walker, and Janice Riggins, to join Topco, using a spreadsheet showing multi-million-dollar equity allocations to lure them.
- Anthony, James, and Walker engaged in extensive efforts to conceal their activities from Encompass, including using personal emails, codenames like "Voldemort" for Anthony, screen-sharing to avoid paper trails, and a "sham" recruitment process involving a third-party firm.
- After Anthony's and Walker's employment ended with Encompass in June 2021, and James's in August 2021, the three officially joined Topco (which was later renamed VitalCaring Group) as CEO, President, and CFO, respectively, and Anthony purchased equity to become a one-third equal partner.
- In October 2021, Encompass sued Anthony in Texas state court for breaching her employment agreement's restrictive covenants, where that court found Anthony had breached covenants by soliciting employees and affirmatively engaging in competition, and that Nautic and Vistria had concealed her involvement.
Procedural Posture:
- September 9, 2022: Enhabit, Inc., Advanced Homecare Management, LLC, and Encompass Health Corporation (Plaintiffs, referred to collectively as "Encompass") filed a complaint in the Delaware Court of Chancery against Nautic Partners IX, L.P., Nautic Partners, LLC, Christopher Corey, Vistria Fund III, LP, The Vistria Group, LP, David Schuppan, TVG NP Homecare Topco, LP, and Chris A. Walker (Defendants).
- The Defendants moved to dismiss the initial complaint.
- Encompass filed an amended complaint.
- March 9, 2023: The Defendants moved to dismiss the amended complaint.
- May 31, 2023: The Delaware Court of Chancery granted Chris Walker's partial motion to dismiss Count IV (breach of contract) but otherwise denied the motions to dismiss.
- December 11 to December 19, 2023: A seven-day trial was held in the Delaware Court of Chancery.
- May 3, 2024: Post-trial briefing was completed.
- May 16, 2024: A post-trial oral argument was held.
- August 23, 2024: After the parties submitted letters regarding ongoing acquisition activities, the matter was submitted for decision by the Delaware Court of Chancery.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does an executive team (CEO, President, CFO) breach its fiduciary duty of loyalty by secretly planning and forming a competing business, usurping corporate acquisition opportunities, soliciting key employees, and misusing confidential company information for personal gain, and are private equity firms that actively encourage, facilitate, and conceal these actions liable for aiding and abetting such breaches, warranting an equitable payment stream from the future profits of the competing venture?
Opinions:
Majority - Vice Chancellor WILL
Yes, the executive team of Anthony, James, and Walker breached their fiduciary duties of loyalty to Encompass by secretly planning and forming a competing business, usurping corporate acquisition opportunities, soliciting key employees, and misusing confidential company information for personal gain. Furthermore, the private equity firms Nautic and Vistria, along with Topco, are liable for aiding and abetting these breaches, warranting an equitable payment stream from the future profits of the competing venture. The court found that Anthony, James, and Walker (as CEO, President, and CFO of Encompass Home Health, respectively) owed fiduciary duties to Encompass and violated them in three interrelated ways: usurpation of corporate opportunities, solicitation of key employees, and misappropriation of confidential information, which together formed an overarching disloyal scheme. Applying the Broz v. Cellular Information Systems, Inc. corporate opportunity doctrine, the court determined that the "Original Acquisitions" (Homecare Holdings, Vital, and Kare) met all four factors: Encompass was financially able to exploit the opportunities (having significant liquidity and credit lines); the opportunities were within Encompass’s line of business (home health and hospice, which was one of EHC’s two main business segments and relied on acquisitions for growth); Encompass had an interest or expectancy in the opportunities (actively seeking such targets, with Anthony and James tasked with sourcing them); and taking the opportunities placed the fiduciaries in a position inimical to their duties. The court rejected defenses that opportunities were personal, relied on third-party resources, were sourced by non-fiduciaries, or fell under "preparing to compete," noting the latter does not excuse active competition or usurpation. The court also found Anthony disloyally solicited key Encompass employees (Jolley, Riggins, Walker) using promises of lucrative equity, and that all three fiduciaries misused Encompass's confidential information (e.g., financial metrics, strategic review plans, internal operational data) to benefit their new venture. The PE Defendants (Nautic and Vistria, through Corey and Schuppan) and Topco were found liable for aiding and abetting these breaches. They had knowledge of the breaches, stemming from prior litigation experiences and explicit legal advice from Ropes & Gray LLP on how to "mitigate potential risks" and avoid aiding and abetting liability. Their participation was active, including working with fiduciaries to identify targets, sharing diligence materials, establishing a "sham" recruitment process, and driving efforts to obtain confidential information. Their "stunning efforts to conceal their actions," such as using codenames ("Voldemort"), filtering communications through counsel, scrubbing records, and deleting text messages, were strong evidence of their knowing participation and illicit state of mind. For remedies, the court found rescissory damages and lost profits speculative due to VitalCaring's lack of profits and declining performance. Instead, it imposed a constructive trust, establishing an "equitable payment stream" from VitalCaring’s future profits. This unique vertical split ensures Encompass receives 43% of all future profits after the PE Defendants' capital contributions are accounted for, while allowing the PE Defendants to recover 57% of every dollar of VitalCaring profits. The court also awarded specific mitigation damages for retention packages paid to Encompass employees ($1,400,353.92 in restricted stock awards and $221,092.49 in increased compensation) but declined to award attorneys' fees from the Texas litigation. Attorneys' fees for this Delaware litigation were awarded due to the defendants' egregious pre-litigation bad faith and concealment tactics.
Analysis:
This case significantly reinforces the rigorous application of the duty of loyalty in Delaware, particularly for senior corporate officers involved in strategic M&A. It clarifies that active, concealed preparation to compete, coupled with the diversion of corporate opportunities and misuse of confidential information, constitutes egregious breaches that cannot be excused by "preparing to compete" defenses or by claiming opportunities were presented personally. Crucially, the ruling demonstrates how third-party private equity firms can be held liable for aiding and abetting if they knowingly participate in and facilitate such disloyal acts, especially when engaging in concealment. The novel equitable remedy of a constructive trust on future profits provides a flexible solution for loyalty breaches where immediate profits are speculative, setting a precedent for addressing complex, long-term corporate misconduct and ensuring wrongdoers cannot ultimately profit from their disloyalty, even if their venture initially falters.
