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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.

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Showing 18 posts from March 2006.

District Court Denies Defendants' Motions to Dismiss Derivative Action for Failure to Comply with Demand Requirement and Lack of Subject Matter Jurisdiction and Denies Plaintiff's Motion for Summary Judgment.

Seinfeld v. Barrett, C.A. No. 05-298-JJF, 2006 WL 890909 (D. Del. Mar. 31, 2006). Plaintiff filed a derivative action against defendants, alleging that they violated Section 14(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 14a-8 and breached their fiduciary duties under Delaware law by making false and misleading statements in connection with a proxy statement issued by the defendants in March 2005. Plaintiff moved for summary judgment, and defendants moved to dismiss for lack of subject matter jurisdiction and for failure to comply with Rule 23.1. More ›

First Annual Mid-Atlantic Super eLaw Technology Conference

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The Corporate Counsel Technology Institute (CCTI) at the Widener University School of Law along with the Delaware State Bar Association and other organizations will be sponsoring the First Annual Mid-Atlantic Super eLaw Technology Conference at Widener University School of Law in Wilmington, DE. The Chair of the conference and one of the featured speakers will be Richard K. Herrmann, a partner in Morris James' IP Practice Group. When he is not in the courtroom, Mr. Herrmann teaches Electronic Discovery and technology related courses at William & Mary Law School, Widener University School of Law, and the National Judicial College. He is also the Director of Widener's Technology and Law Center. The conference will take place from 8:30 am to 5:00 pm, on Friday, April 21, 2006. 

Superior Court Denies Defendant's Motion to Dismiss and Motion for a More Definite Statement in Breach of Contract Case

Spanish Tiles, Ltd. v. Hensey, C.A. No. 05C-07-025 RFS, 2005 WL 3981740 (Del. Super. Ct. March 30, 2006). Plaintiff Spantis Tiles, Ltd. D/b/a Terra Tile and Marble ("Terra Tiles") and Plaintiff Steel Buildings, Inc. d/b/a Northern Steel buildings, Inc. ("NSB") brought an action against Kurt and Ken Hensey (the "Henseys") for breach of contract, tortious interference with contracts and prospective contracts, violation of the Deceptive Trade Practices Act, common law fraud, unlawful practice and defamation. The defendant moved to dismiss for failure to state a claim and moved for a more definite statement. The court denied both motions. More ›

Court of Chancery Awards Attorneys' Fees Only for Work Devoted to Meritorious Claims

In re Triarc Companies, Inc. S'holders Litig., C.A. No. 16700, 2006 WL 903338 (Del. Ch. Mar. 29, 2006). After the voluntary dismissal of a class action, plaintiffs petitioned the Court of Chancery for attorneys' fees and expenses. The court found that plaintiffs' counsel was entitled to fees for the preparation of the amended complaint and litigation efforts undertaken before the action that caused the voluntary dismissal. Plaintiffs' counsel was not entitled to fees for their work in connection with the original complaint nor for their work performed after the claims in the amended complaint were mooted. More ›

Court of Chancery Dismisses Complaint Because a Creditor Erroneously Asserted Derivative Claims as Direct in the Hope of Escaping Bankruptcy Court Jurisdiction

Big Lot Stores, Inc. v. Bain Capital Fund VII, LLC, C.A. No. 1081-N, 2006 WL 846121 (Del. Ch. Mar. 28, 2006). In 2000, in a sponsored management buyout, a corporation sold a subsidiary business that operated a chain of toy stores (KB Toys) in exchange for $257.1 million in cash and a $45 million note due in 2010. In 2002, the new owners refinanced the business and distributed approximately $120 million to the buyout sponsor, affiliates, two officers and directors of the subsidiary that invested in the buyout, and others. In 2004, the KB Toys filed for Chapter 11 bankruptcy. Plaintiff Big Lots, Inc, an unsecured creditor and holder of the $45 million note, brought this action asserting direct claims of breach of fiduciary duties, fraud, and civil conspiracy. The plaintiff sought recovery for the amount due on the note and restitution for alleged unjust enrichment. The Court of Chancery dismissed the complaint namely because the claims were derivative in nature, not direct, and thus belong to the bankruptcy estate. More ›

Superior Court Enters Judgment in Favor of Defendant on Grounds that Defendant did not Breach Contract Where Plaintiff Waived Express and Implied Warranty that Material was Fit for Intended Use.

Freudenberg Spunweb Company v. Fibervisions L.P., C.A. No. 04C-03-073 (FSS), 2006 WL 1064173 (Del. Super. Ct. Mar. 27, 2006) Plaintiff sued Defendant for breach of contract claiming raw materials provided by Defendant to Plaintiff's customers were defective. Defendant agreed to provide polypropylene staple fiber for Plaintiff's state-of-the-art factory, but the raw materials routinely clogged the machinery. Plaintiff sought more than $10 million in damages. More ›

Superior Court Denied Defendant's Motion to Dismiss for Failure to Join Indispensable Parties and Improperly Joined Claims

Sonitrol Corp. v. Signature Flight Support Corp., C.A. No. 05C-07-302, 2006 WL 1134775 (Del. Super. March 24, 2006) Signature entered into multiple contracts with Sonitrol pursuant to which Sonitrol would install electronic security equipment and provide security services at various locations. Signature accepted the services and equipment, but failed to pay approximately $491,523.59 for certain equipment and services. More ›

District Court Enjoins Plaintiff from Initiating Third-Party Proceedings Against Defendants and from Pursuing Global Settlement Strategy in Pending Asbestos Cases

Flowserve Corp. v. Burns Int'l Servs. Corp., C.A. No. 04-1294-JJF, 2006 WL 739886 (D. Del. Mar. 22, 2006). Plaintiff filed a complaint seeking a declaratory judgment of its right to indemnification in asbestos litigation under the terms of a stock purchase agreement executed by its predecessor-in-interest, which had acquired a subsidiary of Borg-Warner Corp. ("BWC"). Defendant Burns International Services Corp. ("Burns"), which had purchased BWC's insurance assets at a liquidation sale, filed a counterclaim alleging that its indemnification obligations to plaintiff only arose out of a later letter agreement, and that once BWC's insurance was exhausted, plaintiff had to pay the costs of defending and resolving the asbestos claims. During the pendency of the instant case, plaintiff informed Burns that (i) it had terminated the counsel chosen by Burns to defend the asbestos claims; (ii) it was choosing its own counsel; and (iii) it was directing its new counsel to file third-party complaints against defendants and to pursue global settlements in the underlying asbestos cases (together, the "threatened actions"). Burns then sought a temporary restraining order and preliminary injunction to enjoin plaintiffs from taking the threatened actions. More ›

Court of Chancery Finds Breach of Oral Contract Regarding Executive Compensation and Breach of Fiduciary Duty for Failure of Such Compensation to Satisfy Entire Fairness Test

Carlson v. Hallinan, C.A. Nos. 19808, 19466, 2006 WL 771722 (Del. Ch. Mar. 21, 2006). This case involved a direct and derivative action arising out of a dispute between two men engaged in the business of making short term, unsecured loans. Plaintiffs asserted direct claims for breach of contract and derivative claims for breach of fiduciary duties. Specifically, plaintiffs alleged that defendant Hallinan breached an oral contract with plaintiffs by paying himself and another defendant executive compensation. Plaintiffs also asserted that the defendants breached fiduciary duties they owed nominal defendant CR Services Corp. by paying themselves an excessive amount of executive compensation. The Court of Chancery found, among other things, that Hallinan breached the oral contract with plaintiffs and defendants committed multiple breaches of their fiduciary duties to CR because they failed to meet the entire fairness standard regarding their compensation. More ›

Court of Chancery Dismisses Derivative Action for Failure to Establish Demand Futility

Highland Legacy Ltd. v. Singer, C.A. No. 1566-N, 2006 WL 741939 (Del. Ch. Mar. 17, 2006). A large shareholder brought a derivative action alleging that the directors committed corporate waste by approving exorbitant fees to unqualified financial advisers. The defendants moved to dismiss the complaint under Court of Chancery Rule 23.1 for failure to allege with particularity facts establishing demand futility. The court's review of the complaint revealed that plaintiff did not allege with particularity facts from which the court could reasonably conclude that the majority of the directors were disabled from impartially considering a demand. The court therefore granted defendants' motion to dismiss under Rule 23.1. More ›

Court of Chancery Finds Violation of GAAP Claim Subject to Arbitration Because Claim was Actually Breach of Warranty and Representation

OSI Systems, Inc. v. Instrumentarium Corp., C.A. No. 1374-N, 2006 WL 656993 (Del. Ch. Mar. 14, 2006). In this case, plaintiff buyer and defendant seller in the sale of a business argued over the type of contractual arbitration that should be used to solve a disagreement over the form of arbitration each preferred. The Court of Chancery granted seller's motion on the pleadings because buyer's claims were for breaches of representations and warranties, which fell under the indemnity provisions of the contract and the form of arbitration set forth in those provisions must be used by buyer. More ›

District Court Denies Motion to Dismiss Declaratory Judgment Action for Lack of Jurisdiction and Failure to Allege a Controversy of Sufficient Immediacy

Shamrock Holdings of Ca., Inc. v. Arenson, C.A. No. 04-1335-SLR, 2006 U.S. Dist. LEXIS 9835 (D. Del. Mar. 14, 2006). Plaintiff Shamrock Holdings of Ca., Inc. ("Shamrock") was a Class A member of ALH Holdings, Inc. ("ALH"), a Delaware limited liability company, and the other plaintiffs were employees and/or members of ALH's Supervisory Board (the "Board"). In connection with the failure of ALH's business, and its investors' subsequent loss of their investments, plaintiffs filed an action in the Court of Chancery seeking a declaration that (i) they did not breach ALH's operating agreement; (ii) they did not breach their fiduciary duties as ALH employees, members or Board members; (iii) they had relied in good faith on the advice of experts and professionals in making their decisions; (iv) they were not liable to the defendants under the terms of a consulting agreement; and (v) they were entitled to advan More ›

The Court of Chancery Determines the Membership and Future of a LLC Using a "Substance over Form" Approach

In re Grupo Dos Chiles, LLC, C.A. No. 1447-N, 2006 WL 668443 (Del. Ch. Mar. 10, 2006). This case involved a dispute over the membership and future of a Delaware limited liability company. Petitioner sought a reformation of the LLC's certificate of formation to the effect that he and Respondent were members of the LLC. Applying a "substance over form" approach, the Court of Chancery concluded that the petitioners were members of the LLC by interpreting the LLC agreement and turning to documentary evidence regarding the parties' portrayal of their relationship. More ›

Court of Chancery Dismisses De Facto Dividend Claim Because Disguised as Improperly Pled Claim of Self-Dealing

Horbal v. Three Rivers Holdings, Inc., C.A. No. 1273-N, 2006 WL 668542 (Del. Ch. Mar. 10, 2006). Plaintiffs, founders of a Health Management Organization, alleged that their co-investors abused their positions by siphoning off tens of millions of dollars from the HMO in the form of disguised salaries and corporate perquisites; plaintiffs call these "de facto dividends." The Court of Chancery granted defendants' motion to dismiss because plaintiffs did not adequately allege self-dealing, the center of a de facto dividend claim. More ›

Court of Chancery Uses Contract Interpretation Principles to Determine Rights of Bondholder Against Borrower

Cypress Associates, LLC v. Sunnyside Congregation Associates Project, C.A. No. 1607-N, 2006 WL 668441 (Del. Ch. Mar. 8, 2006). This case involved a dispute between a bondholder and the borrower that succeeded to most of the issuer's duties and rights. The parties argued over the extent to which the borrower could amend certain contracts without approval from the bondholders. Plaintiff bondholder refused to provide its assent to an amendment the borrower desired because it believed that the amendment would lower the value of its bonds. The other bondholders supported the amendment. The Court of Chancery denied in part and granted in part the borrower's motion to dismiss. More ›

District Court Dismisses Class Action Alleging Federal Securities Laws Violations and State Breach of Fiduciary Duty Claim

Hartman v. Pathmark Stores, Inc., C.A. No. 05-403-JJF, 2006 U.S. Dist. LEXIS 9349 (D. Del. Mar. 8, 2006). Plaintiff filed a class action complaint against defendants, alleging violations of Section 14(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and breach of the fiduciary duty of loyalty by the directors of Pathmark Stores, Inc. ("Pathmark") in connection with a transaction between Pathmark and The Yucaipa Companies, LLC ("Yucaipa"). Plaintiff also moved for appointment as lead plaintiff, with his counsel as lead counsel. Defendants moved to dismiss the complaint. More ›

Director Liability and Its Effect on Corporate Governance Reform

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ABA Section of Business Law, Spring Meeting - Tampa, FL4/7/2006 2:30 PM Lewis H. Lazarus, a partner in the Corporate and Fiduciary and Business Litigation Practice Groups, will participate in a round table discussion by prominent practitioners on Friday, April 7, from 2:30 to 4:30 p.m. regarding the relationship between director liability and corporate governance reform. The panel discussion is part of the ABA Section of Business Law Spring Meeting being held on April 6-9, 2006.

District Court Denies Dismissal of Breach of Contract and Fraud Claims, But Dismisses Deceptive Trade Practices Claim

HSMY, Inc. v. Getty Petroleum Mktg., Inc., C.A. No. 05-818-JJF, 2006 U.S. Dist. LEXIS 8268 (D. Del. Mar. 2, 2006). Plaintiff filed a complaint for breach of contract, breach of the covenant of good faith and fair dealing, fraud, and violations of Article 2 of the Uniform Commercial Code, the Delaware Retail Gasoline Sales Law ("DRGSL") and the Delaware Deceptive Trade Practices Act ("DDTPA") in the Delaware Superior Court. Defendant removed the case to the U.S. District Court for the District of Delaware and moved to dismiss the complaint. Plaintiff subsequently amended its complaint. More ›