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

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Showing 10 posts from January 2007.

Court of Chancery Gives Arbitration Award Finality

Country Life Homes Inc. v. Shaffer, C.A. No. 2288-S (Del. Ch. January 31, 2007).

It is sometimes asked if an arbitration award really has the finality of res judicata. This decision holds that the first arbitration award in a dispute is a final award that bars any later arbitration award by another tribunal.  The Court did permit the party opposing the first award to contest the jurisdiction of that arbitrator. When that challenge failed, so did that party's case. More ›

District Court Grants One Motion for Summary Judgment, Denies Other Motion

Creedon Controls, Inc. v. Banc One Bldg. Corp., 2007 WL 149002 (D.Del. Jan. 22, 2007)

In this opinion, the District Court granted one co-defendant’s motion for summary judgment while denying the other’s. Defendant Banc One was involved in construction of two data centers, and contracted with Defendant Forest to coordinate all electrical power and data connections work on the project. Forest then contracted with Plaintiff as an electrical subcontractor on the project. Plaintiff later filed suit against both defendants, alleging that their inefficiency and improper behavior resulted in significant delays and cost increases.  Banc One moved for summary judgment as to Banc One because it had no contractual relationship with Plaintiff and no agency relationship with Forest could be established, and therefore it was not liable for damages to Plaintiff. Forest moved for partial summary judgment, arguing that its contract with Plaintiff expressly precluded damages for delay, and that it was merely an agent of Banc One and therefore could not be held liable for damages. The court granted Banc One’s motion, finding that there was no contractual relationship with Plaintiff and no jury could reasonably find that Forest served as Banc One’s agent. The court denied Forest’s motion, however, finding that there were genuine issues of material fact as to how the alleged delays arose and whether the contract provision precluding delay damages was enforceable. More ›

Court of Chancery Enforces Non-Compete Agreement

Hough Associates Inc. v. Hall, C.A. No. 2385-N (Del. Ch. January 17, 2007).

While it is common for the courts to enforce non-compete agreements against the signatories to those agreements, it is less common for third parties to get dragged into the enforcement as well. Here, when a non-party to the agreement knew of its terms, actively assisted in the violation of the agreement and would itself have profited from that violation, the Court of Chancery had little pause in holding the agreement should be enforced against that third party.

District Court Grants Motion for Judgment on the Pleadings

Magten Asset Mgmt. Corp. v. Paul Hastings Janofsky & Walker LLP, No. 04-1256-JJF (D.Del. Jan. 12, 2007)

In this opinion, the District Court of Delaware found that both Montana’s substantive fraudulent transfer law and Plaintiff’s inability to establish standing warranted granting Defendant’s motion for judgment on the pleadings. Plaintiff, a creditor of a Montana limited liability company by virtue of an indenture agreement, sued Defendant, alleging that Defendant assisted the LLC in transferring assets to its parent corporation in order to defraud the LLC’s creditors. Defendant moved for judgment on the pleadings, arguing that as a non-transferee of the assets, it could not be held liable for any alleged fraudulent transfer under Montana’s fraudulent transfer act, and that as a creditor of the LLC, Plaintiff did not have standing to bring its derivative claims against Defendant on behalf of the LLC. The court agreed with Defendant, and granted the motion for judgment on the pleadings. More ›

Court of Chancery Finds Waste Claim Valid

Sample v. Morgan, C.A. No. 1214-N (Del. Ch. January 23, 2007).

It is a rare case where the Court of Chancery finds grounds for a claim of waste. The standard to be met is very strict. This is such a case. Here the Inside Directors caused their corporation to issue  them rights for 200,000 shares for the grand total of $200, all while knowing that the shares had a value of over $5 per share if not more. To make matters worse, the Inside Directors tried to implement this scheme by asking the stockholders to approve it through seriously misleading disclosures and then used a conflicted process to have the actual issuance of the shares approved at the board level. It is hard to see how they could have done a worse job in trying to secure their option rights.

The decision notes that even informed stockholder approval of an option plan does not give management a blank check to issue options under any circumstances. There still must be an informed process that takes due care in the decision to actually issue the options. More ›

Court of Chancery Limits Fee Request In Section 225 Case

Posted In Case Summaries

FGC Holdings Limited v. Teltronics, C.A. No. 883-N (Del. Ch. Jan. 22, 2007).

In this precedent setting decision, the Court of Chancery held that a party prevailing in a Section 225 proceeding to compel his recognition as a director was not entitled to his attorney fees as a matter of right. The Court noted that no prior decision had dealt with the circumstance where the plaintiff seeking fees in a Section 225 case was not already a director at the time the suit was filed. In that situation, the Court held that Section 145 indemnification of fees did not apply because Section 145  requires the party seeking indemnification to be or have been a "director". That the plaintiff won recognition of his right to be a director did not make him a director automatically for purposes of indemnification under Section 145.

This case involves some odd facts that may distinguish it from other Section 225 litigation. Here, the corporation was limited to five directors by its charter and had five sitting directors when the plaintiff was elected by the preferred stockholder. Perhaps for that reason the Court concluded that his election alone was not enough to make him a director. More ›

District Court Denies Motion to Transfer

Rimmax Wheels LLC v. RC Components, 2007 WL 81829 (D.Del. Jan. 9, 2007)

In this order denying Defendant’s motion to transfer venue, the District Court reviewed the applicable standards and guidelines employed to evaluate motions to transfer. Plaintiff, a Delaware limited liability company holding patents for motorcycle rims, sued Defendant, a Kentucky corporation engaged in the manufacturing of motorcycle rims, for breach of contract, fraud, and intentional interference with contractual relations. Defendant moved for transfer of venue to the Western District of Kentucky, contending that it was the locale of the parties’ contractual negotiations, Defendant’s business, and two essential witnesses who refused to appear in Delaware to testify. After reviewing the standards developed by the U.S. Supreme Court, Third Circuit Court of Appeals, and District Court of Delaware, the court denied Defendant’s motion to transfer, finding that Delaware had a substantial connection to the case. More ›

Court of Chancery Denies Reformation

Psilos Group Partners, L.P. v. Towerbrook Investors L.P., C.A. No. 1479-N (Del. Ch. January 17, 2007).

When the terms of a contract do not quite cover what one party, in retrospect, wished was included, there is a great temptation to argue the court should rewrite the deal to include what the disappointed party wants. Naturally, the courts reject such attempts, as in this case, when the other party to the contract objects to its rights being altered after the fact. This case illustrates this scenario. The court's method of analysis included not just reviewing the contract terms, but understanding the economics behind the deal. These facts show that the "reformation" the plaintiff sought would not have been agreed to had the parties thought about it when the contract was signed. That is important in denying the claim to change the contract terms, absent fraud or mistake. More ›

Court of Chancery Clarifies Pleading Rules

Cypress Associates LLC v. Sunnyside Cogeneration Associates Project C.A. No. 1607-N (Del. Ch. January 17, 2007).

It is often plead that a party to a contract has acted unreasonably in withholding consent if the contract requires for the other party to take certain action. This decision holds that such a pleading, even as an affirmative defense where vagueness is a tradition, must state facts that support the claim. The opinion is also enlightening in applying long settled corporate law principles that a party to a contract has the right to act in its own self-interest in exercising its contractual rights. More ›

Court of Chancery Limits Tortious Interference Claims

Tenneco Automotive Inc. v. El Paso Corporation, C.A. No. 18810-NC (Del. Ch. January 8, 2007).

When all else fails, claims of tortious interference with contact and fraudulent inducement seem to be the last resort to remedy a seeming inequity in how a contract has worked out. This case is an example of a plaintiff with a wrong in search of a remedy and having a hard time finding one.

The Court again limits the scope of a claim for tortious interference with contract by holding that a defendant cannot be charged with interfering with its own contract. Hence, the claims against that defendant were dismissed. More ›