Buddenhagen v. Clifford

Date Submitted: October 24, 2023

Richard L. Renck, Tracey E. Timlin, Michael B. Gonen, Duane Morris LLP, Wilmington, Delaware; Counsel for Plaintiff Paul S. Buddenhagen.

Samuel T. Hirzel, II, Gillian L. Andrews, Heyman Enerio Gattuso & Hirzel LLP, Wilmington, Delaware; Counsel for Defendants Barry L. Clifford and The Estate of Robert T. Lazier.

Peter B. Ladig, Bayard, P.A., Wilmington, Delaware; Counsel for Nominal Defendant Maritime Explorations, Inc.

POST-TRIAL MEMORANDUM OPINION

COOK, V.C.

The plaintiff is a sophisticated business consultant, the former director of a publicly traded corporation, and a stockholder of Maritime Explorations, Inc. ("MEI"). MEI holds significant rights in the only identified pirate shipwreck ever discovered—the Whydah Galley—and has worked to excavate the wreckage with varying levels of success.

The plaintiff brings this action to challenge (1) specific incidents of alleged fiduciary misconduct by MEI's two directors (the defendants) over the past three decades and (2) an allegedly unfair 2018 merger (the "Merger") that the defendants caused MEI to enter and for which the plaintiff seeks rescission.

Despite being on inquiry notice of his potential non-Merger claims many years prior, the plaintiff did not act. And for 23 years, while roosting atop his claims, the plaintiff continued his slumber. In that time, the defendants have become severely prejudiced in their ability to mount a defense. Indeed, among other things, two individuals who would have been key witnesses died. This includes one of the two defendants in this action. Likewise, a flood destroyed many of MEI's documents and records several years before the plaintiff initiated this action.

It would undermine the equitable principles embodied in the doctrine of laches to find for the plaintiff on the claims challenging acts that took place decades ago. Among other things, those principles are concerned with the natural decay of evidence over time and a defendant's ability to mount a defense with available evidence. That is, with the passage of time comes the increasing risk that evidence that may have once been available to prove a defendant's case has succumbed to the destructive forces of nature. Indeed, under circumstances like these, such delayed claims pose a substantial risk of unjust outcomes. There is a serious risk that a defendant will be held liable either because he bears the burden of proof and can no longer obtain exonerating evidence or, more perniciously, because only the evidence damning him was, by chance alone, not the subject of decay. Delaware law thus compels me to reject the plaintiff's delayed claims.

The plaintiff awoke to raise these claims only after learning that the defendants caused MEI to merge with an entity the defendants owned. The defendants undertook the Merger in anticipation of a significant payout and their belief they were close to uncovering the "mother [l]ode." Lacking any semblance of fair process and no reasonable metric for evaluating the fairness of the price, the defendants used the Merger to grant themselves additional equity and to extract rights to a substantially greater share of the Whydah assets, all to the detriment of the minority stockholders. Under the facts

presented here, the plaintiff prevails on this timely Merger claim, and rescission is the appropriate remedy.

I. FACTUAL BACKGROUND

The preponderance of the evidence supports the following findings of fact.^[1]

A. Parties

Plaintiff Paul S. Buddenhagen held 1,450,000 shares of stock in nominal defendant MEI.^[2]

Defendant Barry L. Clifford is MEI's founder and only current director.^[3] At all relevant times, Clifford has served as a director on MEI's board (the "Board") and has been MEI's largest stockholder.^[4]

Former defendant Robert T. Lazier (together with Clifford, "Defendants") also held stock in MEI and served as a director on the Board from MEI's founding until his death during the pendency of this action in

April 2020.^[5] Following Lazier's death, his estate replaced him as a defendant in this action.^[6]

B. MEI's Formation

Clifford is an explorer. His exploration—specifically of the Whydah Galley^[7] pirate ship—has led to this litigation. The Whydah sank off the coast of Cape Cod in 1717 while under the command of the pirate Sam Bellamy.^[8]Aboard, so it is rumored, were chests of money and treasure from at least 53 other vessels the Whydah's crew had robbed.^[9] The Whydah lay on the ocean floor for over 250 years until 1982, when Clifford discovered debris off the coast of Massachusetts while operating his company Maritime Underwater Surveys, Inc. ("MUS").^[10] Believing the debris to be from the Whydah's wreckage, Clifford, through MUS, initiated and succeeded in a federal

admiralty action in which he sought sole title to the Whydah.^[11] In May 1983, while the admiralty litigation was ongoing, Clifford formed MEI to facilitate his excavation of the Whydah wreckage.^[12]

After forming MEI, Clifford and MUS assigned their rights in the Whydah to MEI.^[13] Then, Clifford sought equity financing through MEI to fund the Whydah's costly excavation. As a result of these efforts, MEI raised over $1 million in financing through two private placements between 1983 and 1986.^[14] In addition to the stock issued through the private placements, MEI also issued stock to compensate those involved in its excavation and business operations.^[15] MEI continued this practice for many years. These individuals—the participants in the private placements and those MEI compensated with stock for their services—are MEI's minority stockholders.^[16]

Since its inception, MEI has recovered roughly 15,000 coins.^[17] Although Defendants "haven't found the mother lode yet," the coins they have recovered remain the "world's only pirate treasure."^[18] Along with the coins, Defendants have recovered many other artifacts, including cannons, guns, and the Whydah's bell.

C. The Whydah Joint Venture

The financing from the private placements did not last long, and Clifford soon found himself, again, in need of funding to facilitate his dives on the Whydah site. Shortly after the 1986 placement, Clifford met investors Tom Bernstein and Roland Betts.^[19] After learning of the Whydah project, Bernstein and Betts expressed interest in participating in the treasure hunt. They suggested creating an investment vehicle through which they could

invest in MEI. Ultimately, the parties decided to create a joint venture (the "Whydah Joint Venture") between MEI and its wholly owned subsidiary Maritime Financing Co., Inc. ("MFC") on the one hand and Bernstein and Betts' company Whydah Partners Limited Partnership ("WPLP") on the other.^[20]

The Whydah Joint Venture consisted of two agreements, the Joint Venture Agreement (the "JVA") and the Operations Agreement (the "OA").^[21]Under these contracts, MEI assigned its rights in the Whydah to MFC, and MFC assigned those rights to the Whydah Joint Venture. The parties to the JVA and OA executed both agreements in February 1987.^[22] Under the OA, the Whydah Joint Venture made certain distributions to MEI to finance its continued excavation operations. But the Whydah Joint Venture was primarily formed between MFC and WPLP.

The parties agreed that a management committee (the "Management Committee") would govern the Whydah Joint Venture.^[23] This committee consisted of six members. MFC and WPLP would each appoint three

members.^[24] But the three members WPLP appointed had veto power and thus final decision-making authority over the Whydah Joint Venture.^[25] In the JVA, WPLP agreed to raise up to $6 million to finance the excavation and conservation of Whydah artifacts.^[26]

Four provisions in the JVA are relevant. The first deals with the division of revenues. Section 6 provides that proceeds from any "sale or other disposition" of Whydah artifacts and the Whydah Joint Venture's "share of revenues from the exploitation of Ancillary Rights" (collectively referred to in the JVA as "Net Proceeds") are distributed according to a sliding scale (the "Sliding Scale").^[27] Under the Sliding Scale, proceeds are apportioned between MEI/MFC and WPLP in accordance with a tiered formula operating on $6 million increments.^[28] Under this formulation, WPLP would receive 80% of the first $6 million in Net Proceeds from the sale or lease of Whydah

artifacts and incrementally less of the marginal dollar at each rung of the ladder.^[29] The Sliding Scale is set forth below:^[30]

Column A	Column B	Column C	Column D
Level of Proceeds	Operations Fee to Explorations	Maritime	Partnership
$ -6,000,000	20 %	0 %	80 %
6,000,001 - 12,000,000	0 %	30 %	70 %
12,000,001 - 18,000,000	0 %	40 %	60 %
18,000,001 - 24,000,000	0 %	50 %	50 %
24,000,001 - 30,000,000	0 %	55 %	45 %
30,000,001 - 36,000,000	0 %	60 %	40 %
36,000,001 - 42,000,000	0 %	65 %	35 %
42,000,001 - 48,000,000	0 %	70 %	30 %
48,000,001 - 54,000,000	0 %	75 %	25 %
54,000,001 - and up	0 %	80 %	20 %

Second, Section 9 of the JVA sets forth the durational term over which the Whydah Joint Venture remains in effect. Section...