Posts from 2006

District Court Follows Reasoning Of Recent Court of Chancery Opinion On Whether Choice-of-Law Provision Governs Related Tort Claim

Millett v. Truelink, Inc., C.A. No. 05-599, 2006 WL 2583100 (D. Del. Sept. 7, 2006). The plaintiffs in this case were several individuals who brought suit for breach of contract and violations of the Delaware Consumer Fraud Act ("DCFA") and Credit Reporting Agencies Act ("CRAA"), among other claims, after purchasing credit-monitoring services from defendant Truelink. Truelink filed a motion to dismiss the DCFA and CRAA claims under 12(b)(6). And plaintiffs brought a motion to amend their complaint to substitute a claim under the California Consumer Legal Remedies Act ("CCLRA"). The District Court denied Truelink's motion to dismiss and plaintiffs' motion to amend the complaint to add a CCLRA claim, but did grant plaintiffs leave to amend their complaint to add a claim under the Kansas Consumer Protection Act. More ›

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Supreme Court Upholds Application of Daubert Rules

Bowen v. E.I. DuPont de Nemours & Co. Inc. C.A. No. 580, 2005 (Del. Supr. September 15, 2006). The Supreme Court has upheld the decision of the Delaware Superior Court that rejected the testimony of an expert for the plaintiffs in a major toxic tort suit arising out of Benlate exposure to humans. The plaintiffs claimed that as a result of exposure to benlate while pregnant that their children had suffered serious birth defects. The plaintiffs' theory depended on the testimony of an "expert" that skin exposure would cause the fetus in turn to be exposed to benlate. The Superior Court after an exhaustive hearing ruled that the plaintiffs' expert testimony failed to meet the standards set for by the United States Daubert decision. It was this ruling that the Supreme Court affirmed. More › Share

Court of Chancery Grants Ten Year Injunction

W.L. Gore & Associates, Inc. v. Wu, C.A. No. 263-N (Del. Ch. September 15, 2006). The extent to which a court will enjoin the violation of a confidentiality agreement covering trade secrets is often questioned. In this decision, the Court of Chancery issued an injunction that for ten years barred the defendant from working in a business that might permit him to use the trade secrets he had stolen from his employer. In part, the remedy was based on the useful life of the stolen materials. More › Share

Supreme Court Adopts "Validly In Litigation" Rule

Braddock v. Zimmerman, C.A. No. 489 (Del. Sup. September 12, 2006). The Delaware Supreme Court has clarifed the rules as to when a plaintiff in a derivative suit must make a demand upon filing an amended complaint. The Court holds that if the derivative litigation has been properly instituted an amendment to the complaint does not need to be the subject of a demand on the board of directors as to those claims already "validly in litigation". Thus, even if the majority of the board has changed and is now independent under Rule 23.1 standards, no demand need be made in those circumstances. More › Share

Court of Chancery Awards Interest On Advancement

Citrin v. International Airport Centers LLC, C.A. No. 2005-N (Del. Ch. September 7, 2006). This decision awards interest on the fees due to a corporate officer who was wrongly denied advancement of those fees. While this award of interest is the normal rule, the decision is interesting because it dealt with an instance where the corporate defendant had discouraged the plaintiff from even submitting the fees in dispute and then argued that failure to submit a bill precluded interest when the plaintiff prevailed. Not surprising, this effort to avoid interest failed for want of any equity. Share

Court of Chancery Limits Creditor Fiduciary Duty Claims

North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, C.A. No. 1456-N (Del. Ch. September 1, 2006). This is another in a series of Court of Chancery decisions that limit the claims that creditors may make based on the theory the directors owe the creditors a duty when their corporation is insolvent or in the vicinity of insolvency. Ever since the famous footnote in Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp., 1991 WL 277613 (Del. Ch. Dec. 30, 1991), creditors have argued that directors should owe them a fiduciary duty to take their interests into account when the creditors are the residual interest holders in a corporation that is insolvent or nearly so. A series of recent decisions have limited those creditor arguments. See e.g. Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772 (Del. Ch. 2004) [holding most creditor claims must be brought as derivative claims]. This new decision further limits creditor claims by holding that creditors may not bring a direct claim for breach of fiduciary duty based on the theory the entity is in the vicinity of insolvency. Further, the decision holds that for clearly insolvent companies, only creditors whose claims are beyond fair dispute may claim the directors owe them a duty. More › Share

Court of Chancery Holds Dividends May Not Be Forced

Superior Vision Services, Inc. v. Reliastar Life Insurance Company, C.A. No. 1668-N (Del. Ch. August 25, 2006). This decision answers the question of when a minority shareholder may block a dividend payment pursuant to the authority to do so in the company's certificate of incorporation. The Superior Vision charter provided that a dividend could not be paid absent the consent of 2/3 of the shareholders. As a 44% owner, the defendant refused to consent to the dividend. The company sued alleging that the defendant had violated a fiduciary duty to consent to the dividend and its duty of good faith and fair dealing. The Court first held that absent actual control over the board of directors, a minority shareholder would not be deemed to be in control of the board just because it can block a board decision to pay a dividend. As a result, the Court concluded that the defendant did not owe a fiduciary duty to the company or its shareholders. In addition, the Court held that when, as here, the certificate of incorporation confers a power to veto a transaction and does not condition the exercise of that right, then there is no duty to act reasonably in that regard. Hence, the duty of good faith and fair dealing was not implicated and the Court dismissed the complaint. More › Share

Superior Court Dismisses Suit by Corporation Representing Former Shareholder for Lack of Standing

Appriva Shareholder Litigation Co. v. ev3, Inc., C.A. No. 05C-11-208 JOH, 2006 WL 2555348 (Del. Super. Ct. Aug. 24, 2006). Plaintiff entity controlled by certain former stockholders of acquired corporation sued acquirer alleging breach of merger agreement and fraud. Upon motion by defendant acquirer, the court dismissed the action on ground that plaintiff lacked standing. The court noted that the merger agreement appointed two individuals as shareholder representatives who were required to act in concert, one of whom the complaint reflected was not affiliated with plaintiff in any way. The court also noted that the merger agreement did not permit assignment of the shareholder representatives' rights without defendants' consent, which was never given. Finally, the court rejected plaintiff's argument that it be permitted to bring the action as a third-party beneficiary as inconsistent with the merger agreement's express terms. Share

Supreme Court Clarifies Tooley

<a href="http://www.delawarebusinesslitigation.com/archives/gentile.pdf" Gentile v. Rossette, C.A. No. 573, 2005 (Del. Supr. August 17, 2006). This Delaware Supreme Court decision significantly clarifies the Court's Tooley decision that governs when a claim is a derivative claim. Because a derivative claim must meet significant pleading requirements under Court of Chancery Rule 23.1, this decision affects much of the corporate litigation in the Delaware Court of Chancery and merits careful reading. More › Share

Delaware Supreme Court Affirms Chancery Court Ruling that Preferred Stock Was Properly Issued

Benihana of Tokyo, Inc. v. Benihana, Inc., No. 36, 2006, 2006 WL 2465412 (Del. Aug. 24, 2006). The Delaware Supreme Court affirmed post-trial ruling by Court of Chancery that $20 million issuance of preferred stock to a third-party holding company was authorized by the corporate charter and that the directors acted properly in approving that transaction. More › Share

Court of Chancery Interprets DRULPA

Hillman v. Hillman, C.A. No. 1557-N (Del. Ch. August 23, 2006, modified,November 16, 2006).

When a general partner is dismissed as the limited partnership's general partner, the DRULPA is not clear on what happens to the interest of that former general partner. After a close reading of the statute and its legislative history, the Court of Chancery concluded that the former general partner is entitled to be paid back his partnership interest, but otherwise has no continuing interest in the limited partnership. The decision affects partnerships that have not provided for the result of a general partner dismissal in the partnership agreement. Note also, this decision deals solely with a general partner who is dismissed, not one who withdraws and is then subject to other sections of the statute.

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Superior Court Resolves Contract Dispute Arising Out of Separated Ophthalmology Practice

Moore v. O'Conner, C.A. No. 01C-02-103 MJB, 2006 WL 2442027 (Del. Super. Ct. Aug. 23, 2006). Doctor sued former colleague for money allegedly owed pursuant to agreements the parties entered into upon the separation of their ophthalmology practice. Defendant counterclaimed for various alleged breaches of those same agreements, including (1) plaintiff's alleged misfiling or changing the labels on defendant's patients charts to reflect plaintiff as the treating physician; (2) plaintiff's alleged promise not to operate under the parties' prior trade name; (3) plaintiff's failure to return to defendant any of the amounts he paid to join the practice; (4) plaintiff's failure to list defendant as a Medicare provider; and (5) plaintiff's failure to include an agreed-upon automated telephone message on her office telephone. After trial and post-trial briefing, the court held that defendant was bound by the parties' agreement even though he was not aware of several of the terms at issue, including a provision requiring defendant to pay plaintiff a $30,000 "good will payment." The court also rejected most of defendant's counterclaim, finding no evidence of much of the alleged misconduct. The court did find, however, that plaintiff's failure to include an agreed-upon automated telephone message on her office telephone was a breach of the parties' agreement and that defendant's loss of patients was directly attributable to that breach. The court awarded defendant $128,102 in actual damages on this basis. Share

Court of Chancery Interprets Charter For Preferred Stock

Blue Chip Capital Fund II Limited Partnership v. Tuberger, C.A. No. 1611-N (Del. Ch. August 22, 2006). The Court of Chancery frequently is called upon to interpret a corporate certificate of incorporation. In this decision, the Court held that a certificate provision permitting a corporation to withhold a reserve for contingent liabilities in connection with calculating the liquidation preference for preferred shareholders did not automatically authorize the board to hold back the highest possible amount, even if doing so was unreasonable based on objective factors. The Court also held that the authority granted by 8 Del C. §281 to hold back a reserve for continent liabilities did not authorize the board to do so under the charter. Instead, the terms of the certificate need be interpreted on its own terms. More › Share

Superior Court Holds Alleged Oral Employment Agreement Unenforceable Under Statute of Frauds

Aurigemma v. New Castle Care LLC, C.A. No. 05C-04-113 MJB, 2006 WL 2441978 (Del. Super. Ct. Aug. 22, 2006). Plaintiff sued defendant medical facility for breach of an alleged oral agreement under which plaintiff was to serve as defendant's medical director from October 1, 2003, until October 1, 2004. Plaintiff claimed that this oral agreement was made on September 4, 2003. The court granted defendant's motion for summary judgment on the ground that, even if it had reached an oral agreement with plaintiff, such agreement would be unenforceable under the statute of frauds because it could not be performed within a year. More › Share

Court of Chancery Awards Both Appraisal And Equitable Relief

In re PNB Holding Co. Shareholders Litigation, C.A. No. 28-N (Del. Ch. August 18, 2006). As it has several times in recent years, the Court of Chancery has decided a case combining appraisal rights and a class claim for inequitable treatment in a merger. The Court held that when directors get together to freeze out the other stockholders the entire fairness test applies even when they do not own a majority of the stock. This follows because the interests of those directors in remaining shareholders differs from the other shareholders who will be frozen out. Absent some insulating procedure such a majority of the minority vote, the directors then have the burden of proving the merger was entirely fair. More › Share