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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 16 posts from December 2006.
Effective January 1, 2007, there will be some significant rule changes in the Delaware Court of Chancery. Some of these changes will affect pending actions and are required reading. The most extensive changes are directed at preventing the kick-back abuses that have occurred in other jurisdictions where lawyers have allegedly paid professional plaintiffs to bring class and derivative suits. These changes may be briefly summarized as follows.
First, all complaints must now be "verified". In other words, the plaintiff must swear or affirm that the facts alleged are true or at least that there is a basis to believe they are true.
Second, in class and derivative suits, the plaintiff must file an affidavit stating he will not receive any payment for acting as a representative party, except for damages or fees and costs awarded by the Court. In effect, this means that the plaintiff may not receive any compensation for acting as a plaintiff unless the Court approves that payment. A similar affidavit must be filed when any settlement is presented for approval by the Court.
Third, in pending actions, the "no-kick-back" affidavit must be filed when any person asks to intervene as a representative party or asks to be appointed as a representative party.
There are some other more minor changes to the rules as well.
When there are two competing class or derivative actions, there may arise a conflict between them. This is particularly so when one is settled and the settlement will affect the right to proceed in the other litigation. That conflict may generate a fight among plaintiff's counsel over the fees to be awarded by the Court in the settlement. That is what occurred here.
Such fee split cases are governed by the rules set out in In re Infinity Broad. Corp. Shareholders Litigation, 802 A2d 285 (Del. 2002). In effect, this requires the Court to allocate the fees among the claimants based on the Court's views of their respective contributions to the settlement.
The plaintiff in a related California case that sought some of the fees to be awarded ended up with nothing for failure to justify their claim.
On December 21, 2007, the Delaware Supreme Court reversed, in part, the Court of Chancery decision. The Supreme Court held that there was enough in the record to support a presumption that the plainitff in the California case had contributed to a price rise that benefited the class and remanded for further proceedings .
Commentators sometimes wonder when director inattention will ever be so bad so as to warrant finding directors liable in the absence of self-dealing. This was just such a case. Briefly, the board consisted of a majority owner who picked a relative and an employee to constitute the other members of the board of directors. The Court concluded that the two non-controlling directors basically did nothing to carry out their duties to the entity and just accepted at face value everything they were told by the controlling stockholder. As a result, the Court found all the directors liable when the controlling stockholder looted the entity.
The decision is particularly interesting in that it may be an extension of the Delaware Caremark decision to no longer require a "red flag' to hold directors liable for failure to oversee the corporate entity's operations. That extension would apply when there was especially bad conduct and an utter failure by the board to meet or in any way supervise the management of the entity. More ›
In this opinion denying Defendants’ motion to vacate confessed judgment against them, the Superior Court examined whether the Defendants had satisfied any of the considerations relevant to whether an entry of confessed judgment should be vacated. Defendants guaranteed a loan that Plaintiff made to a Delaware limited liability company for a boat. Plaintiff recorded a mortgage on the boat, and upon the limited liability company’s default, initiated proceedings in Superior Court to confess judgment against Defendants. After Defendants failed to appear to object to the entry of judgments, the Court issued final judgments against them. The mortgaged boat was then sold at a court approved judicial sale for less than the outstanding loan balance, and Plaintiff initiated proceedings to execute upon the confessed judgment to recover the deficiency. Defendants filed an objection to execution and the motion to vacate the confession of judgment under Superior Court Rule 60(b). The Court found that Defendants had received proper notice of the confessed judgment, had no meritorious defense to the confessed judgment, and did not use reasonable diligence in filing the motion to vacate. The motion was therefore denied. More ›
B.F. Rich Co., Inc. v. Gray, C.A. No. 1896-N (Del. Ch. December 15, 2006).
After losing a case involving the right to vote shares that were a controlling block, the loser sought a stay to permit an appeal to the Delaware Supreme Court. The Court of Chancery denied the stay after applying the usual standards for such stays. The decision is interesting because the Court was faced with a change in control of the Delaware entity as a result of its decision and the obvious impact that might have on corporate affairs was carefully considered by the Court. More ›
In this fact intensive decision the Court of Chancery reviewed the Delaware law on contract construction and remedies. It upheld the general rule that the unilateral mistake of one party to a contract that is not known by the other party will not justify the cancellation of the contract on the basis of that mistake.
Superior Court Rejects Counterclaim of Exclusive Distributorship Contract, Awards Contract Damages to Plaintiff
In this breach of contract case, the Superior Court evaluated Defendant’s counterclaim that it had an exclusive distributorship contract with Plaintiff that was breached, thus entitling it to offset the amount of that contract from any amount owed to Plaintiff. Plaintiff, a chemical distributor, sued Defendant, a chemical process developer, alleging that Defendant owed almost $175,000 in past due invoices for orders of Plaintiff’s product. Defendant counterclaimed that Plaintiff owed Defendant $250,000 under the alleged exclusive distributorship contract. After reviewing the testimony and evidence produced at trial, the Superior Court found that there was inadequate support for a finding that the parties had agreed to an exclusive distributorship contract, and therefore awarded Plaintiff its claimed damages for the past due invoices, and dismissed Defendant’s counterclaim with prejudice. More ›
Superior Court Finds Breach Based on Actual and Apparent Authority, Invalidates Liquidated Damages Clause
Tropical Nursing, Inc. v. Accord Health Serv., Inc., 2006 WL 3604783 (Del.Super. Ct. Dec. 7, 2006).
In this breach of contract case, the Superior Court found that Defendant became contractually bound to Plaintiff based on actual and apparent authority it granted to both its permanent and temporary employees, and subsequently breached those contracts. Plaintiff was a provider of temporary nursing staff, and supplied temporary nurses to Defendant’s healthcare facility. Plaintiff’s contract claim was based on the terms provided for on the back of the temporary nurses’ timecards, which stated that Defendant would not interfere with the temporary nurse’s contractual relationship with Plaintiff, and if it did so Defendant would immediately pay a “work release payment”. Plaintiff alleged that Defendant breached these contracts with respect to 14 former employees of Plaintiff’s that Defendant had hired. Defendant argued that the nursing supervisors who signed the timecards did not have the authority to contractually bind Defendant to their terms. The Court found that Defendant had in fact given the supervisors actual and apparent authority to bind Defendant to the terms of the timecards, and Defendant was therefore in breach when it did not honor those terms. More ›
In this opinion granting Defendant’s motion for summary judgment, the Superior Court evaluated the liquidated damages provision contained in Defendant’s contract with Plaintiff. Plaintiff had a non-exclusive agreement with Defendant to provide temporary nursing employment services to Defendant on an “as needed” basis. Timecards that the temporary nurses were required to have signed by Defendant contained a clause that restricted Defendant’s ability to hire the nurses, and provided for a “work release payment” in the event that Defendant breached that was equivalent to 500 times the hourly billing rate for the employee. Defendant sought a ruling from the court that the provision was an unenforceable penalty clause. The Superior Court found that the provision did not meet the standards for an enforceable liquidated damages clause, and therefore granted Defendant’s motion for summary judgment. More ›
Edix Media Group Inc. v. Mahani, C.A. No. 2186-N (Del. Ch. December 12, 2006).
This decision is noteworthy for its careful analysis of what relief is appropriate for a breach of an agreement not to compete. The Court distinguished between the broader duties owed by employees from those more limited duties owed by independent contractors. The relief awarded was the product of a very specific analysis that tailored that relief to the harm proved to have been inflicted.
Remote Solutions Co., Ltd. v. FGH Liquidating Corp., Civil Action No. 06-004-KAJ, 2006 WL 3498657 (D. Del. Dec. 5, 2006).
Plaintiff filed a Motion for Reconsideration and to Amend the Court’s earlier Memorandum Order in which it denied the plaintiff’s motion to vacate or modify an arbitration award for failing to demonstrate a proper basis for subject matter jurisdiction. The plaintiff now sought to have the Court amend its order so it could cure the jurisdictional defect. The Court granted the motion to the extent that the plaintiff could renew its prior motion to vacate or modify the arbitration award by demonstrating proper subject matter jurisdiction.
The Court also permitted the motion to relate back to the date of the original filing. It further permitted the defendant to move independently for confirmation of the arbitration award regardless of the course of action chosen by plaintiff.
By this decision Delaware joins the vast majority of other states in ordering arbitration over the disputes arising out of the State's agreement with tobacco companies.
When seeking to inspect corporate records, the stockholder needs to have a reasonable purpose for doing so. If the stated purpose is to investigate wrongdoing, there must be a real basis to suspect wrongdoing or the demand will be denied. Here the demand was at least partially deficient because allegations of improper conduct seemed to be little more than that the company had not met its predicted financial results. The plaintiff escaped dismissal of its suit on narrow grounds that there were also allegations of a failure to carry out a plan that was more definite than just a prediction, something closer to a promise that was broken.
Cantor v. Perelman, Civil Action No. 97-586-KAJ, 2006 WL 3462596 (D. Del. Nov. 30, 2006).
Plaintiff and defendants filed motions to exclude the testimony and reports of several experts. The Court granted the motions to exclude the entire proposed testimony of one expert from both parties. The motions were denied with respect to all other experts in all other respects.
This action originates from a plan of reorganization in bankruptcy litigation involving Marvel Entertainment Group, Inc. (“Marvel”) and the Trustees of the MAFCO Litigation Trust (“Trust”) created as part of the Reorganization Plan. The Trust was created to pursue breach of fiduciary duty and unjust enrichment claims against defendants comprising Perelman, a controlling stockholder and chairman of Marvel, and other directors of the Marvel companies. The instant opinion is connected to the issue of three tranches of notes (“Notes”) issued in 1993 and 1994 by Marvel, raising $553.5 million by using Marvel stock as collateral. Plaintiffs alleged that the defendants breached their fiduciary duties by using Marvel resources to sell the Notes and including restrictions on the issue of debt or dilution of Perelman’s shareholding in those Notes.
The right to have attorneys fees paid in advance of the final result in litigation is illustrated by this recent decision. The Court held that an agreement to "hold harmless" does not give the right to advancement of legal fees. Instead, "hold harmless" language only confers the right to be indemnified at the end of the litigation. More ›
Delaware law has long held that to qualify for appraisal rights after a merger, a stockholder must follow the statutory rules carefully. Here, many stockholders filed their demand for appraisal too late and the Court barred their claims for failure to file on time. Other stockholders failed to have their demands signed by all the record owners, another fatal defect.