In re Dura Medic Consolidation Litigation
N/A (Post-Trial Opinion) (2025)
Rule of Law:
The entire fairness standard of review applies to a controlling stockholder's self-interested financings to its portfolio company, requiring proof of fair dealing and fair price to avoid equitable remedies. Enhanced scrutiny applies to an end-stage asset sale of a distressed company by its controlling stockholder, requiring demonstration of a reasonable process and outcome, even when the controller receives no differential consideration.
Facts:
- Mark Newton co-founded Dura Medic, Inc., a durable medical equipment (DME) supplier, around 2004, which experienced significant revenue growth from 2014-2017 but a declining Gross-to-Net Ratio (collection rate) and increasing regulatory scrutiny from CMS contractors (MACs, ZPICs, RACs).
- In spring 2017, Dura Medic's board explored a sale, and in October 2017, Comvest Partners proposed acquiring the company for $60 million.
- During due diligence (late 2017 - early 2018), Comvest discovered severe issues including extremely high claim error rates (e.g., 80% TPE, 68.8% First Zone 4 ZPIC, 97% Zone 5 ZPIC), precipitous declines in claim submissions and cash collections, and negative customer feedback.
- In April 2018, Comvest revised its offer to $30 million ($18M cash, $12M unsecured subordinated promissory Seller Note issued by Holdings), which Dura Medic's management considered reasonable given the company's struggles.
- On June 6, 2018, Comvest, through its newly formed entities Dura Medic Parent Holdings, LLC (Parent) and Dura Medic Holdings, Inc. (Holdings), acquired Dura Medic via a reverse triangular merger; Newton rolled over $1 million of his proceeds into Parent units.
- Post-merger, Black (Comvest-installed CEO) and Tidd (COO) decided to withhold all Medicare claims until the company's submission process improved to ensure compliance, leading to further financial strain and significant accounts receivable backlog.
- Between April 2019 and March 2020, Comvest affiliates provided over $6 million in 'Mid-Stream Financings' to Dura Medic in the form of secured subordinated promissory notes (15% interest) and Series A Preferred Stock (15% dividend/liquidation preference), which Newton declined to participate in.
- By mid-2020, Dura Medic was in severe financial distress, projected to be unable to meet payroll, had its Medicare provider number revoked by CMS, and failed to secure additional investment from outside parties or existing investors (including a proposal from John Beach requiring a new CEO and a revised offer from Breg for no purchase consideration).
- On October 1, 2020, Dura Medic sold substantially all its assets to AdaptHealth, LLC for $2 million in cash plus potential earnout shares, a transaction in which Comvest and Black (who had personally invested $1.5M) lost their entire investments.
- The closing of the Sale accelerated the Seller Note, but no proceeds flowed up to Holdings to pay the note, as all proceeds went to the Company's creditors.
Procedural Posture:
- On June 21, 2019, Comvest caused Dura Medic and Holdings to sue the Seller Representative and Sellers for indemnification (the "Contract Action") in the Court of Chancery of the State of Delaware.
- On August 27, 2019, the Seller Representative asserted counterclaims and third-party claims in the Contract Action in the Court of Chancery, alleging breach of the Seller Note and intentional sabotage.
- On March 18, 2020, Mark Newton asserted derivative claims on behalf of Parent, Holdings, and Dura Medic (the "Derivative Action") in the Court of Chancery of the State of Delaware against Comvest Investment Partners Holdings, LLC, Marrero, Chawla, and Black, among others.
- Comvest Parties and Callahan moved to dismiss the Derivative Action; on January 11, 2023, the Court of Chancery dismissed the claims as to Callahan and also dismissed certain claims against Comvest (management fees and overpaying Black).
- On February 15, 2021, the Seller Representative filed suit against AdaptHealth, Merger Sub, Holdings, and Dura Medic alleging that the Sale was a fraudulent transfer (the "Fraudulent Transfer Action") in the Court of Chancery of the State of Delaware.
- On April 29, 2022, the Court of Chancery granted summary judgment in the Contract Action on the Seller Representative’s claim for breach of the Seller Note, making Holdings liable for principal plus interest.
- The Court of Chancery consolidated the Contract Action, Derivative Action, and Fraudulent Transfer Action for a five-day trial.
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Issue:
1. Is the entire fairness standard of review applicable to a controlling stockholder's self-interested mid-stream financings to its portfolio company, and if so, must the controller prove the financings were entirely fair in both process and price to avoid equitable remedies and potential breaches of the LLC agreement? 2. Does enhanced scrutiny apply to an end-stage asset sale of a distressed portfolio company by its controlling stockholder, and can fiduciaries satisfy this standard by demonstrating the reasonableness of the sales process and outcome, even when the controller receives no differential consideration?
Opinions:
Majority - Laster, V.C.
No, fiduciaries did not breach their duties regarding post-merger management decisions (withholding claims, terminating employees) because these actions were protected by the business judgment rule. Newton failed to prove an overarching conflict of interest that would elevate the standard of review, such as a desire to maximize indemnification claims or avoid Seller Note payments. The evidence showed that CEO Black and COO Tidd's decision to withhold Medicare claims was a good-faith effort to comply with CMS regulations, justifiable given the extremely high rate of non-compliant claims and the risk of severe penalties. Similarly, Black's decisions to terminate employees, including Newton, were supported by valid business reasons like poor performance, HR issues, and necessary cost-cutting in a distressed company, and Black was not self-interested in these personnel decisions. Yes, the entire fairness standard applies to the self-interested Mid-Stream Financings (the Second Debt Issuance, First Preferred Equity Issuance, and Second Preferred Equity Issuance), and the fiduciaries failed to prove they were entirely fair. These transactions were interested as they involved Comvest, the controlling stockholder, and the board lacked a disinterested and independent majority. The Comvest Parties failed to demonstrate procedural fairness, as there were no actual negotiations over terms, market canvassing, or independent committee involvement. While an opportunity to participate was offered to other unitholders, this alone was insufficient to establish fairness given the strained relationship and the controller's leverage. The Comvest Parties also failed to prove substantive fairness; their reliance on internal deliberations and unconvincing comparisons to the secured CIBC loan did not justify the 15% interest/dividend rates. Consequently, as a remedy for the equitable violation, these financings are equitably subordinated to the Seller Note. Furthermore, the Second Debt Issuance legally breached Parent’s LLC Agreement (Section 6.6 read with Section 12.2) because the written notice provided to members did not identify the material term of the interest rate. No, fiduciaries did not breach their duties in conducting the end-stage asset sale. Enhanced scrutiny, not entire fairness, applies to the Sale because it was a final-stage transaction for all stockholders that fundamentally altered their investment, consistent with Revlon and McMullin v. Beran. The court rejected the argument for entire fairness, noting that enhanced scrutiny already incorporates considerations of care and potential bad faith, and Comvest, as the controller, did not extract any differential consideration from the sale. Under enhanced scrutiny, the fiduciaries satisfied their burden by proving the process and outcome were within a range of reasonableness. Despite the sales process not being ideal (e.g., lack of outside advisors or fairness opinion), the Company was a distressed asset and Black’s negotiations with AdaptHealth CEO McGee, who held significant leverage, were conducted at arm’s length. Black’s minor personal benefits (a transition consulting agreement) were not shown to have conflicted with maximizing stockholder value. The outcome (price) was also reasonable: the only other actionable offer for the company was worse than AdaptHealth’s, and the Company’s distressed state (not a going concern) and the defense expert’s valuation supported the reasonableness of the Sale price. The claim for fraudulent transfer also failed because the Sale was an arm's-length transaction where the Company received reasonably equivalent value for its assets.
Analysis:
This case provides a critical application of Delaware's standards of review in the complex realm of private equity portfolio company management, particularly where a controlling stockholder engages in self-interested transactions and ultimately sells a distressed asset. It firmly reiterates that entire fairness is the default standard for controller-led financings, especially without robust procedural safeguards like independent committees, and that courts will rigorously scrutinize both fair dealing and fair price. The opinion clarifies the applicability of enhanced scrutiny (Revlon) to end-stage asset sales even when a controlling stockholder receives no differential benefit, emphasizing that the focus is on the reasonableness of the process and outcome, rather than automatically elevating to entire fairness due to alleged duty of care breaches. The equitable subordination remedy serves as a potent tool for courts to re-order priorities for investors harmed by unfair, interested transactions.
