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

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Showing 10 posts from April 2007.

Court of Chancery Decides When Stock Is Void

MBKS Company Limited v. Reddy, C.A. 1853-VCL (May 1, 2007).

It is occasionally important to distinguish between stock that is voidable and stock that is void. One reason is that voidable stock may be voted while it is still outstanding. In this decision, the Court of Chancery did an exhaustive review of the case law, applied the new statutory standard for consideration of  "any benefit to the corporation" and concluded the stock in question was void.

On MArch 3, 2008, the Delaware Supreme Court affirmed this decision in an opinion that is worth reading as well.

Court of Chancery Explains Third Party Obligation To Arbitrate

NAMA Holdings, LLC v. Related World Market Center LLC, C.A. No. 2755 (Del. Ch. April 27, 2007).

The rights and obligations of a third party beneficiary to a contract are not clear. This decision illustrates that uncertainty and resolves the issues of when a third party beneficiary may be compelled to arbitrate a dispute.

The Court held that a third party beneficiary may be compelled to arbitrate a dispute when the agreement provides that the right the third party seeks to enforce is subject to the arbitration provisions of the agreement. In addition, the theory of equitable estoppel will compel a third party to arbitrate if it has received a direct benefit from the contracts' performance such that it would be inequitable to refuse to comply with the general intent of the agreement that disputes are to be arbitrated. More ›

District Court Rejects Federal Jurisdiction Over Breach Claims, Remands to Superior Court

CIT Commc’ns Fin. Corp. v. Level 3 Commc’ns, LLC, 2007 WL 951799 (D.Del. Mar. 29, 2007).

In this suit alleging breach of contract, unjust enrichment and conversion, Plaintiff moved for the District Court to remand the case to Delaware Superior Court, asserting that the District Court did not have subject matter jurisdiction. Plaintiff leased a telephone system to a company that later filed for bankruptcy. Through that bankruptcy, Defendants acquired the telephone system lease from the debtor, and the debtor was later liquidated pursuant to the Bankruptcy Court’s Confirmation Order. After the dissolution, Plaintiff filed several claims in the bankruptcy proceedings related to lease payments due by the debtor prior to Defendants’ acquisition of the lease. Plaintiff later filed the breach of contract, unjust enrichment and conversion claims against Defendants in the Delaware Superior Court, based on non-payment of Defendants’ non-payment of obligations under the acquired lease. Defendant filed notice of removal of the suit to federal court, alleging that the claims were pending in, and therefore related to, the bankruptcy proceedings, such that the District Court had subject matter jurisdiction over the claims. In seeking remand, Plaintiff argued that the claims against Defendants existed independent of the bankruptcy, such that the federal court did not have subject matter jurisdiction. More ›

Supreme Court Explains Its Rossette Decision

Gatz v. Ponsoldt, C.A. No. 298 (Del. Supr., April 16, 2007).

The dividing line between what is a derivative suit and what claims may be filed directly on behalf of stockholders is undergoing a rapid development in Delaware. This decision is the latest in that recent line of decisions.

This decision makes it clear that under the recent Rossette decision, claims for dilution may be filed by a class of stockholders whose interest in the entity have been diluted by the issuance of stock to "a significant or controlling stockholder'" in a dilutive transaction.  Before Rossette, it was generally thought those claims belonged to the entity that did not get fair consideration for its stock and thus, were derivative claims only. More ›

Builders Sued After Construction Delayed, Move for Summary Judgment; Superior Court Denies Motion as to Contract Claims, Grants Motion as to Tort Claims Under Economic Loss Doctrine

Brasby v. Morris, No. 05C-10-022-RFS, 2007 WL 949485 (Del. Super. Ct. Mar. 29, 2007).

A homebuyer brought this suit for breach of contract, negligence, and fraud after the builders delayed construction of his new modular home. The initial sales contract did not set a date for completion, but the parties entered into a subsequent, separate agreement setting a specific deadline. The defendants assured plaintiff they would finish by this date, but the buyer became concerned upon learning that no physical structure had been erected. So he demanded written assurance of timely performance or return of his deposit. The defendants responded, but informed the buyer that construction was 30 days behind schedule. 

The plaintiff, then, filed a complaint with the Delaware State Police seeking return of his deposit. And, the builders returned most of it. Soon thereafter, the buyer brought this action in Superior Court, and the builders moved for summary judgment.     

More ›

Superior Court Upholds Grant of Summary Judgment to Homebuyer Who Exercised Unambiguous Termination Provision in Sales Contract

Wilmoth v. Kuhn, No. 06A-10-002-JEB, 2007 WL 925616 (Del. Super. Ct. Mar. 28, 2007).

Homebuyer entered into contract with defendant builder for purchase of a lot and construction of a home. The contract provided that the buyer’s obligations were contingent on being able to install an in-ground pool according to the buyer’s specifications. If such a pool could not be installed, the buyer could terminate and the seller had to return the deposit. 

A month after the buyers signed the contract, they informed the seller that they were unable to build a pool of their choice and thus were terminating the agreement. They asked the seller to return their $50,000 deposit. The seller rejected the termination and refused to turnover the funds.  More ›

Superior Court Dismisses Claim for Tortious Interference With Contract Because Complaint Failed to Allege a Breach of Contract

Luscavage v. Dominion Dental USA, Inc., No. 06C-07-219 RRC, 2007 WL 901641 (Del. Super. Ct. Mar. 20, 2007). 

Two dentists brought a claim for tortious interference with contract against their former employer after they each lost their new consulting contracts with Blue Cross/Blue Shield of Delaware. Both plaintiffs had worked for defendant Dominion Dental USA for several years, and both were subject to agreements with the company: (1) one plaintiff had signed a one-year employment agreement several years before, which contained a six-month non-compete; (2) the other had signed an independent contractor agreement, which also prohibited soliciting or otherwise interfering with defendant’s employees. Both plaintiffs terminated these agreements when they resigned.

Upon leaving, the two dentists obtained consulting contracts with Blue Cross in Delaware, but the agreements were quickly and unexpectedly terminated. The plaintiffs allege that Dominion Dental USA caused Blue Cross to terminate their agreements and consequently tortiously interfered with their contracts.

More ›

Superior Court Grants Motion to Dismiss Claims Raised in Arbitration, Denies Motion to Dismiss Separate Breach of Contract

Mehiel v. Solo Cup Company, No. 06C-01-169-JEB, 2007 WL 901637 (Del. Super. Ct. Mar. 26, 2007).

This case arose from defendant’s acquisition of SF Holdings and relates to disagreements over the amount of SF Holdings’ working capital adjustments and, by extension, its purchase price. The plaintiff, chairman and CEO of SF Holdings, brought this action in his capacity as the shareholders’ representative for fraud in the inducement, breach of contract, and unjust enrichment. 

Shortly after the parties entered into the merger agreement—and days before closing—they found themselves deadlocked and unable to reach an agreement on the working capital adjustments. To resolve their differences, the parties appointed a neutral auditor as provided in the merger agreement, which further stated that the auditor’s decision would be final, binding, and conclusive, making no mention of appeal or reconsideration. The auditor resolved several issues in favor of the purchasing company (defendant), and plaintiffs’ action followed. More ›

Court of Chancery Extends Noncompete Period

Deloitte & Touche USA LLP v. Lamela, C.A. No. 1542-VCP (Del. Ch. April 6, 2007).

Contracts not to compete upon termination of employment must contain a limit on how long they last. A "reasonable" time is permitted. However, what happens if the contract is violated? Should the time limit then be extended to make up for the violation? This decision holds that the period should be extended so that the former employer gets the full benefit of the time limit on competition.

Court of Chancery Uses Parties' Actions To Decide Their Contract Rights

Viking Pump, Inc .v Liberty Mutual Insurance Company, C.A. No. 1465-VCS (Del. Ch. April 2, 2007).

Perhaps no rule of contract construction is more often applied to ambiguous contracts than the rule that the parties' actions show their intent. This decision applies that maxim with full force to decide the parties' obligations over a 20 year old dispute on insurance coverage.

While this decision turns on its unique facts, the Court's reasoning illustrates a method of proceeding that has implications for all contract disputes. First, the Court carefully considered the business problems faced by the parties at the time they entered into their contract. Next it considered how a rational business would have resolved those problems to fit the business needs. Then the Court reviewed what the parties actually did as evidence of what they intended their contract to mean.