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

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Showing 19 posts from July 2007.

Court of Chancery Permits Security For Advancement

Thompson v. The Williams Companies, Inc., C.A. No. 2716-VCS (July 31, 2007).

Companies often find that they are required to provide advancement of attorney fees to former directors or others when the company really does not want to do so because of the conduct involved. Here, in a case involving an employee with an advancement  right, the Court held that requiring security for the amounts advanced is appropriate to insure repayment.

Note, however, that this discretion to require security was based on the terms of the provisions providing for advancement. Without that language in a mandatory advancement provision, it is doubtful that a company might require more than the usual and customary undertaking to repay.

District Court Denies Motion to Dismiss Fiduciary Duty Claims Under ERISA

Cannon v. MBNA Corp., 2007 WL 2009672 (D. Del. July 6, 2007)

In this class action lawsuit brought by former MBNA employees, Plaintiffs asserted various breaches of fiduciary duty arising under ERISA in connection with administration of their 401(k) plan. Plaintiffs’ claims arose out of MBNA’s 2005 announcement of expected 10% annual growth for several years. Plaintiffs’ 401(k) plan contained MBNA stock. Several months later MBNA announced lower-than-expected earnings and MBNA stock fell nearly 35%. Plaintiffs alleged that the Defendants breached various fiduciary duties that resulted in this loss. Defendants were MBNA, the former CEO of MBNA, the committee responsible for the administration of the 401(k), and the individual committee members. Defendants moved to dismiss the various claims under F.R.C.P. 12(b)(6). The District Court found that dismissal as to all counts in the complaint was inappropriate at the pleading stage, and denied the motion. More ›

District Court Grants in Part, Denies in Part Motion to Dismiss Exchange Act Claims

Baker v. MBNA Corp., 2007 WL 2009673 (D. Del. July 6, 2007)

This case is a consolidated class action against MBNA and certain officers for violations of §§ 10(b) and 20(a) of the Exchange Act, as wells as regulations promulgated thereunder. Plaintiffs alleged that the Defendants violated the Act in connection with allegedly false statements made in announcements and public filings regarding restructuring charges incurred and anticipated growth. Plaintiffs further alleged that the Defendants engaged in insider trading. Defendants moved to dismiss the complaint under F.R.C.P. Rules 9(b) and 12(b)(6). The District Court granted the motion with respect to the 10(b) claims again two of the officers, but denied it in all other respects. More ›

District Court Grants Canadian Corporation's Motion to Dismiss for Lack of Jurisdiction

Alcoa Inc. v. Alcan Inc., C.A. No. 06-451-SLR (D.Del. July 17, 2007)

 

In this action for declaratory judgment, Plaintiff sought a ruling that it was not liable to various Defendants for the clean-up costs associated with environmental contamination on a property Plaintiff formerly owned. Plaintiff sold the contaminated property to Defendant 1 pursuant to an acquisition agreement that provided for a 12 year indemnification for certain environmental liabilities. Defendant 1 then sold the property to Defendant 2 with a separate indemnification agreement. Defendant 3 later acquired Defendant 2 and its subsidiary. When Defendant 3 sought to sell the contaminated property, the contamination was detected. Defendant 3 sought indemnification from Defendant 1, which then sought indemnification from Plaintiff. Plaintiff rejected the indemnification demand under the argument that it was outside the scope of the acquisition agreement, and sought declaratory judgment that it was not liable to any of the Defendants. Defendant 3, a Canadian corporation, moved to dismiss for lack of personal jurisdiction. More ›

District Court Denies Motion to Dismiss For Failure to Join Indispensable Party

Alcoa Inc. v. Alcan Inc., 2007 WL 2083813 (D.Del. July 17, 2007)

In this action for declaratory judgment, Plaintiff sought a ruling that it was not liable to various Defendants for the clean-up costs associated with environmental contamination on a property Plaintiff formerly owned. Plaintiff sold the contaminated property to Defendant 1 pursuant to an acquisition agreement that provided for a 12 year indemnification for certain environmental liabilities. Defendant 1 then sold the property to Defendant 2 with a separate indemnification agreement. Defendant 3 later acquired Defendant 2 and its subsidiary. When Defendant 3 sought to sell the contaminated property to the city in which the property was located, the city first required, both as part of the purchase agreement and through a letter to Plaintiff, that the contamination be sufficiently remedied. Defendant 3 sought indemnification from Defendant 1, which then sought indemnification from Plaintiff. Plaintiff responded to the city’s letter that Defendant 3 was responsible for the clean up, and rejected Defendant 1’s indemnification demand under the argument that it was outside the scope of the acquisition agreement. Plaintiff sought declaratory judgment that it was not liable to any of the Defendants. Defendant 1 moved to dismiss under F.R.C.P. Rule 12(b)(7) for failure to join an indispensable party, arguing that Plaintiff should have joined the city. More ›

District Court Allows Estoppel, Breach of Contract, Fraud Claims Against LLC Member, Dismisses Other Defendants

Christ v. Cormick, 2007 WL 2022053 (D.Del. Jul 10, 2007)

In this action for damages based on promissory estoppel, breach of contract, fraud and civil conspiracy, Plaintiff sued the founding member of a Delaware LLC (“Member Defendant”), as well as various foreign individuals and entities (“other Defendants”) associated with the Member Defendant. Plaintiff’s claim arose out of an alleged agreement with the Member Defendant to invest $350,000 in exchange for a 50% equity interest in a South African investment management corporation and a Delaware LLC which owned certain intellectual property rights. Plaintiff claimed that the Member Defendant accepted $250,000 from Plaintiff, but diverted the money to another entity he was affiliated with. Plaintiff further alleged that the Member Defendant promised to repay Plaintiff the $250,000 that was invested, but did not do so. The Defendants moved to dismiss the action under F.R.C.P. Rule 12(b)(2) for lack of personal jurisdiction. The Defendants also moved for dismissal of the conspiracy claim under F.R.C.P. Rule 12(b)(6) for failure to state a claim, and dismissal of both the fraud and conspiracy claims as being outside the statute of limitations. Finally, the Defendants moved for a stay of the action under principles of comity in favor of Plaintiff’s earlier filed action in South Africa. More ›

Court of Chancery Stays Suit In Favor of Arbitration

Friendly Ghost Enterprises LLC v. McWilliams, C.A. No. 2935-VCN (July 27, 2007). Sometimes fiduciary duty claims are mixed in with claims that are subject to an arbitration provision. The issue then is whether the nonarbitration claims for breach of fiduciary duty are to be stayed in favor of arbitrating the other claims first. Here, the Court granted a stay because the resolution of the fiduciary duty claims and the claims for dissolution and a receiver would be illuminated by the resolution of the claims to be arbitrated.

Court of Chancery Sets Standards For Injunction During Appeal

Posted In Case Summaries

Gradient OC Master Ltd. v. NBC Universal, C.A. No. 3021 (July 20,2007).

This decision sets out the principles that govern when an injunction will issue after an appeal from a decision in the Court of Chancery denying a request for an injunction.

Court of Chancery Denies Stay In Backdating Case

Brand v. Deason, C.A. No. 2123-VCL (July 20, 2007).

When the Court is interested in the issues presented by a case and those issues are important to Delaware law, it will rarely grant an application for a stay of the proceedings in favor of another jurisdiction. When the application only comes after discovery has begun a stay is even less likely.

Here, the Court pointed out that option backdating law is still emerging in Delaware with only three decisions in this interesting area. Hence, there was good reason for a Delaware court to decide what is the law of Delaware and not stay its hand.

Court of Chancery Limits Inspection Rights

NAMA Holdings LLC v. World Market Center Venture LLC, C.A. No. 2756-VCL (July 20, 2007).

Frequently the rights of a member of an LLC or LP to inspect the entity's records is limited by the governing instrument. Thus, permitting only "reasonable access" is common. In this decision, the Court defines what "reasonable access" means, particularly when confidential information is involved.

Court of Chancey Upholds Fraud Claim In Company Sale

Cobalt Operating LLC v. James Crystal Enterprises LLC, C.A. No. 714-VCS (July 20, 2007).

This factually intense case is interesting for its example of the careful analysis of detail that is typical of the Court of Chancery. The opinion is a good outline of the proper remedies for fraud and breach of contract in the sale of a company.

Court of Chancery Rejects Class Action Settlement

In Re: TD Banknorth Shareholders Litigation, C.A. No. 2557-VCL (July 19, 2007).

It is a mistake to take for granted that the Court of Chancery will approve any class action settlement. Here, the Court rejected a settlement because it appeared that a valid theory of recovery had been overlooked by the plaintiff and the settlement gave very little to the class.

Also of interest was the Court's interpretation of a standstill term in the stock acquisition agreement that limited the acquirer from seeking to obtain even more stock in the target. The Court implied that asking the target board to initiate merger discussions was an invalid attempt to get around that standstill provision.

Court of Chancery Expands Right To Bring Direct Claims

Rhodes v. Silkroad Equity LLC, C.A. No. 2133-VCN (July 7, 2007).

The line between what is a direct claim and a derivative claim is frequently critical. Derivative claims can only be brought by stockholders and have other procedural hurdles to jump to survive a motion to dismiss. In this decision, the Court permitted what appeared to be a derivative claim to go forward as a direct claim by a former stockholder. Thus, the Court has expanded the type of claim that may be brought as a direct claim. While the facts of this case may seem unusual, the claims made in this case have come up before and now will certainly take on new life.

Briefly, the plaintiff alleged that the majority stockholder had run down the business of the company to force out the plaintiffs as minority owners at a reduced price under a stockholders' agreement. The damage to the company from their actions would seem to be a classic derivative claim for it was the company that suffered the injury and to whom damages would seem to flow for such a claim. However, the Court held that this conduct also would support a direct claim because the conduct in effect permitted the majority to increase its interest in the company while diluting the interest of the minority stockholders. In that sense, the claim of the minority interest was also a direct claim suffered by them alone.

Court of Chancery Defines Coercion

Gradient OC Master Ltd. v. NBC Universal Inc., C.A. No. 3021-VCP (July 12, 2007).

A line of Delaware decisions recognizes that it is improper to coerce stockholders into accepting a transaction. What exactly is coercive, however, is not well defined. After all, almost any transaction that offers a choice has incentives built into it to induce taking the deal, but that cannot be improperly coercive. Here the Court of Chancery summarizes the prior decisions and articulates helpful standards to determine when there is actionable coercion.

While the decision is complex, the bottom line appears to be whether the Court is convinced the terms offered make economic sense. Thus, in this case it made sense to ask stockholders to give up some of the restrictive covenants that went with their preferred stock to achieve a successful restructuring. In contrast, when in another case a self-tender was seen as an unjustified attempt to fight off a competing offer, the Court held the too high tender price was an unlawful attempt to coerce stockholders to take the offer or be left with an over-leveraged company in the hands of the same directors.

Court of Chancery Rejects Late Acceptance

Centreville Veterinary Hospital Inc. v. Butler-Baird, C.A. No. 1552-VCP (July 6, 2007).

Second thoughts sometimes reach the right conclusion. The problem, however, is that they may get there too late. This decision holds that once a contract offer is made, the rejection of that offer revokes the power to change your mind and later accept the offer. Based on the reasoning of the Restatement of Contracts (2nd) Section 38, the Court noted that rule works both ways and is grounded on the need to have a bright line test in such matters.

Superior Court Acts as "Gatekeeper," Excludes Experts' Testimony on Damages

Posted In Case Summaries

Empire Financial Services, Inc. v. Bank of New York (Delaware), C.A. 00C-09-235 SCD, 2007 WL 1677580 (Del. Super. Ct. June 8, 2007).

The Delaware courts have adopted the United States Supreme Court’s holdings in Daubert and Kumho Tire and apply these precedents along with DRE 702 when deciding the admissibility of expert testimony. Daubert established a “gatekeeper” role for the trial judge to play in determining whether expert testimony is both relevant and reliable. And Kumho Tire extended this role to all types of expert testimony, not just the sort based on scientific knowledge.

Here, the Superior Court performed its “gatekeeper” function by excluding the testimony of two of the plaintiff’s damages experts. Plaintiff Empire won on liability, proving that one of Defendant Bank of New York’s employees reached an unlawful agreement with one of Empire’s former employees to transfer active accounts to a new debt collection business started by the departing employee. But Empire still had to prove its damages and sought to do so through the expert testimony of Zelenovskiy and Landrum. Defendant Bank of New York filed motions in limine. More ›

Superior Court Orders Insurers to Pay Defense Costs to Sun-Times Media Group, Denies Insurers' Motion to Dismiss or Stay

Sun-Times Media Group, Inc. v. Royal & SunAlliance Ins. Co., C.A. No. 06C-11-108 RRC, 2007 WL 1811265 (Del. Super. Ct. June 20, 2007).

Sun-Times Media Group, Inc. v. Royal & SunAlliance Ins. Co., C.A. No. 06C-11-108 RRC, 2007 WL 1811266 (Del. Super. Ct. June 20, 2007).

This insurance coverage action is an offshoot of the highly publicized, allegedly fraudulent scheme devised by Lord Conrad Black and other inside directors of Plaintiff Sun-Times Media Group (formerly “Hollinger International”) to deceive the corporation and misappropriate hundreds of millions of dollars.

The plaintiffs claim to have incurred over $20 million in defense costs—and allege that they will incur nearly $20 million more—to defend themselves and their agents in multiple lawsuits resulting from this conduct, including a securities class action filed in Illinois (“Illinois Class Action”). Specifically, Plaintiff Sun-Times Media brought this action, seeking a declaration of coverage under its excess D&O insurance policies issued by the defendants. The plaintiffs argued that the defendants were obligated to pay those defense costs and had wrongfully refused to do so.

To this end, early in the litigation, Plaintiff Sun-Times Media moved for partial summary judgment, seeking a declaratory judgment that certain insurer defendants had a duty under applicable policies to pay past and future defense costs incurred in the Illinois Class Action. The defendants countered by moving to dismiss or stay the plaintiffs’ entire complaint, citing McWane and forum non conveniens. The court ruled on both motions, issuing separate opinions. More ›

Court of Chancery Permits Inspection In Rights Offering

Robotti & Company LLC v. Gulfport Energy Corporation, C.A. No. 1811-VCN (July 3, 2007).

Applying standard books and records inspection law, this decision permitted inspection into the reasons why a subscription rights offering was structured so as to seemingly benefit insiders. This illustrates the reasoning process that the Court goes through to decide if there is enough basis to support a claim of possible wrongdoing that justifies granting a books and records inspection.

Court of Chancery Broadens Discovery of Single Member Special Committee

Sutherland v. Sutherland, C.A. No. 2399-VCL (July 2, 2007).

On several occasions, the Delaware courts have questioned why only a single member is appointed to a special committee. However, the practice continues.This decision illustrates the price to be paid by such a bad practice.

Normally, Zapata Corp. v. Maldonado, 430 A2d 779 (Del. 1981) limits discovery of a special committee to materials that reflect on the independence and diligence of the committee. Discovery into the merits of the committee's conclusions is limited. The theory behind this limitation is that to permit broad discovery into the allegations that lead to the committee's creation would effectively undermine the reasons the committee was appointed in the first place.

This decision permitted much broader discovery into the merits of the one person committee's conclusions because of the special circumstances involved in this battle between family members and the limited disclosures given about the reasons for selecting the single member of the committee. The rationale behind the decision still applies to increase discovery of other single member special committees.