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Showing 112 posts from 2007.

District Court Finds No Ambiguity or Third Party Beneficiary Status, Grants Motion for Summary Judgment

MBIA Ins. Corp. v. Royal Indem. Co., 2007 WL 3125319 (D.Del. Oct. 25, 2007)

In this opinion the District Court resolved cross-motions for summary judgment on the defendant’s counterclaim for breach of contract. The relationship between the plaintiffs and the defendant arose out of the underwriting of student loans. Student Finance Corporation (“SFC”) underwrote loans to students using funds from banks, then allegedly fraudulently issued “forbearance payments” in order to hide delinquent and defaulting loans. SFC transferred the loans to several trusts, which then issued fixed income notes, called Certificates, to investors. Plaintiff #1 was the trustee of trusts holding the securitized student loans. Defendant insured the loans that backed the Certificates with insurance policies that unconditionally guaranteed the students’ repayment of principal plus 90 days interest. Plaintiff #2 guaranteed payment of the Certificates in the event that the Defendant failed to honor its policies on the loans. Plaintiffs sued Defendant seeking to enforce its unconditional guarantee to repay the loans. Defendant counterclaimed against Plaintiff #1 for breach of contract, arguing that Plaintiff #1 did not adequately fulfill its oversight responsibilities under applicable Pool Servicing Agreements (“PSAs”) with respect to the servicing of the loans, and thus did not discover the allegedly fraudulent forebearance payments, resulting in Defendant engaging in continual transactions with SFC. Plaintiffs’ claim for enforcement of Defendant’s guarantee obligation was settled, leaving the Court only Defendant’s counterclaim to resolve.  More ›

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Court of Chancery Explains Limits of Requirements Contract

XO Communications LLC v. Level 3 Communications Inc., C.A. No. 2131-VCL (November 2, 2007).

While the actual terms of a contract will control its meaning, there are occasions when legal rules will determine the result of a contract dispute. Here, the Court of Chancery noted the rule that in the case of a requirements contract, it is bad faith for the buyer to produce for its own use the materials that it committed to buy from the other party  to the contract. The Court held that rule did not apply when at the time the requirements contract was entered into, the buyer had the means of producing the goods it had agreed to buy from the other party as well. In short, the requirement was not to use the producing party exclusively.

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Court of Chancery Explains Fair Summary Rules

Posted In M&A

In re Checkfree Corporation Shareholders Litigation, C.A. No. 3193-CC (November 1, 2007).

Exactly what needs to be included in a proxy statement for a merger vote seems to be a constant subject for debate. Only a "fair summary of the substantive work performed by the investment bankers" need be disclosed, not everything given to them. Moreover, when there is no competing bid, then to enjoin the merger the court must be convinced that a strong showing has been made of disclosure errors.

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"It's Not a Crime Against Nature"--But It's Wrong!

Posted In News

In back-to-back hearings last month, Vice Chancellor Leo E. Strine, Jr., had occasion to stress his—and presumably the entire judiciary’s—intolerance for speaking objections at Delaware depositions. Both cases involved out-of-state attorneys and should thus serve as a reminder to Delaware counsel to inform co-counsel of the judiciary’s strict adherence to this policy. 

In Benton v. Guitar Center, C.A. No. 3075-VCS, Vice Chancellor Strine was so troubled by the defending attorney’s repeated speaking objections, which “unduly lengthened the deposition” and “obstructed the legitimate inquiries of counsel,” that he instructed Delaware counsel and the out-of-state attorney who defended the deposition to draft a letter to disciplinary counsel, enclosing the transcript. And in case that was not enough, he further instructed Delaware counsel to see to it that the out-of-state attorney come to town to chat with disciplinary counsel about the appropriate rules of conduct for a deposition in Delaware. See pages 4-5. 

Court: It's not a crime against nature. But it was -- I can only imagine how patience testing it was for the person taking the deposition, because I read it, and every single question, there were inappropriate speaking objections. It's just ridiculous. And people want to practice that way, they can practice in jurisdictions where inappropriate, ridiculous obstruction of questioning is tolerated. But this ain't one of them.

The attorneys in Benton faced particularly poor timing, though, as Vice Chancellor Strine had encountered a very similar issue the day before in a hearing for SinoMab Bioscience Ltd., et al. v. Immunomedics, Inc., C.A. No. 2471-VCS. There, Vice Chancellor Strine made clear, at pages 62-63 of the transcript, that there was no debate about the impropriety of speaking objections in Delaware:

Court: There’s no wiggle room about whether what your partner did was an inappropriate way to object at a Delaware deposition. Not gray. Clearly wrong.

. . .

It's not a crime against nature. It happens. . . . The best of us do it. But it doesn’t help to come and argue with the basic proposition that it was wrong.

At the hearing, Vice Chancellor Strine awarded costs to the moving party. After the hearing, when he granted the proposed order, Vice Chancellor Strine made clear that the award of costs, which included attorneys’ fees, was partially a remedy for the improper speaking objection. (See the comments section of the order.)

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Court of Chancery Explains Limitations Period

Posted In Fiduciary Duty

In re Coca-Cola Enterprises Inc. Shareholders Litigation, C.A. No. 1927-CC (October 17, 2007).

In breach of fiduciary duty cases, a frequent question is when to apply the three-year statute of limitations that applies to actions at law. Here, the Court again holds that the statute of limitations begins to run in a breach of fiduciary duty case when the parties enter into their contract and not when the harm resulting from that contract occurs.

Thus, when the complaint alleged that Coca-Cola was abusing its bottling company under the  terms of a 1986 contract, the breach ran from 1986, not from when Coca-Cola took certain actions under that contract in 2004. Time and again, the Court has used this approach to reject late claims or claims asserting a so-called continuing wrong theory where the limitations period never expires.

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Court of Chancery Upholds Very Broad Arbitration Clause

Posted In Arbitration

Ornero v. Country Grove Investment Group LLC, C.A. No. 2245-VCS (October 12, 2007).

In this case the contract required arbitration of any dispute between the parties arising from "any other cause", not just from a cause related to their contract. The Court upheld the claim that even a suit on a dispute unrelated to the contract containing the arbitration clause was within this broad arbitration agreement.

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Court of Chancery Interprets Partner Duties

Posted In LP Agreements

Forsythe v. ESC Fund Management Co., C.A. No. 1091-VCL (October 9, 2007).

The duties of a general partner in a Delaware limited partnership are governed by the partnership agreement. But when those duties may be delegated to third parties under the terms of the partnership agreement, the GP duties are less clear. Here, the Court had to decide if the scienter required by the Caremark case applied to hold the GP liable if red flags pointed to abuses by the parties running the show or whether instead the general partnership obligations of a GP to be responsible for its agents was the standard to apply.

Recognizing that in this case the authority to delegate to third party managers with clear conflicts of interest put the GP on notice, the Court held that the GP had more than just Caremark-like duties -there was a duty of more active inquiry.

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District Court Applies Delaware Statute of Limitations Carve Out For Fiduciary Claims, Denies Summary Judgment

Norman v. Elkin, 2007 WL 2822798 (D.Del. Sept. 26, 2007)

In this action the District Court evaluated the application of the statute of limitations to claims that a corporate fiduciary engaged in self-dealing at the corporation’s expense. Plaintiff was a 25% shareholder in a closely-held Delaware corporation with Pennsylvania headquarters, formed to participate in the wireless communications industry. Defendant #1 owned the remaining shares of the corporation, and also served as its President and sole director. Plaintiff alleged that Defendant #1 breached his duties to the corporation when he personally obtained newly-issued communications licenses from the FCC, then sold them along with the corporation’s pre-existing licenses to a third party, keeping the proceeds of the sale himself. Plaintiff further alleged that Defendant #1 took the action without notifying Plaintiff in his capacity as a shareholder, without holding an annual meeting, and without making any disclosure of the sale. Plaintiff sued Defendant #1, along with his wholly owned corporation and another corporate officer, in the Delaware Court of Chancery for breach of contract, unjust enrichment, declaratory relief, and breach of various fiduciary duties. Defendants removed the action to District Court based on diverse citizenship and moved for summary judgment, arguing that all claims were time-barred. More ›

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District Court Grants All Motions to Dismiss in Anti-Trust Class Action

Howard Hess Dental Laboratories Inc. v. Dentsply Int'l, 2007 WL 2807292 (D.Del. Sept. 26, 2007)

This opinion resolved several motions filed in two different antitrust class actions (the “Hess” action and the “Jersey Dental” action). The District Court denied Plaintiffs’ motion for partial summary judgment in the Hess action and granted various Defendants’ motions to dismiss in the Jersey Dental action. Plaintiffs were dental laboratories that purchased dental products from one Defendant, Dentsply, a manufacturer and distributor of dental products. In the Hess action, Plaintiffs sued Dentsply for alleged antitrust violations in connection with an adopted policy providing that dental dealers promoting Dentsply’s product not add competitive product lines. In the Jersey Dental action, Plaintiffs sued Dentsply and twenty six dental dealers alleging antitrust violations arising from the same Dentsply policy.  More ›

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Court of Chancery Holds Arbitrator Decides If Claim Is Arbitrable

Posted In Arbitration

Baypo Limited Partnership v. Technology JV, C.A. No. 2693-VCL (October 10, 2007).

Many arbitration clauses contain provisions that permit a court to grant injunctive relief.  These are used because of a fear that the arbitration panel may not have that power and that sort of relief may be needed, such as to enforce a noncompetition clause. Notwithstanding the presence of such clause, this decision upholds the usual Delaware rule that it is up to the arbitrators to decide if an issue is subject to the arbitration provision. Of course, that does not mean they decide if a court may hear an application for an injunction.

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Court of Chancery Explains The "Some Evidence" Rule In Section 220 Cases

Louisiana Municipal Police Employees Retirement System, C.A. No. 2608-VCN (October 2, 2007).

To obtain inspection of corporate records to investigate allegations of wrongdoing, it has long been held that a stockholder must have "some evidence" that there was indeed wrongdoing to investigate. Otherwise, mere allegations would permit intrusive books and records reviews.

Here, the allegation was that options had been back dated and the Court permitted inspection based on a statistical analysis that showed stock price rises immediately after many option grants. The Court felt this was "some evidence" that warranted inspection. However, the Court was clearly skeptical and cautioned that it was going to continue as the gate keeper to limit inspections that were not justified.

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Court of Chancery Applies Issue Preclusion To Derivative Suit

In re Career Education Corporation Derivative Litigation, C.A. No. 1398-VCP (September 28. 2007).

This decision decides when to give preclusive affect to a prior decision of a federal court that a derivative case should be dismissed under Rule 23.1. Basically, the standard that the Delaware court applied was whether the claims in the prior litigation that had been dismissed for failure to meet Rule 23.1 had a substantial overlap with the claims in the case here in Delaware. Finding that this overlap existed, the Court of Chancery dismissed the Delaware case.

What is unusual about this result is that the Delaware case was brought by a different party than the prior federal litigation. However, as the 'real' party in interest in both cases was the corporate nominal party, the rights litigated in the federal case were the same as those litigated in Delaware-the right to control the litigation.

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Court of Chancery Upholds Use of Merger to Change Partnership Governance

Posted In LP Agreements, M&A

Twin Bridges Limited Partnership v. Draper, C.A. No. 2351-VCP (September 14, 2007).

This decision deals with how to change the governance structure of a limited partnership by using a merger to amend the partnership agreement. At the outset, the Court ruled that the doctrine of independent legal significance would not be applied to a two-step transaction involving an amendment to a limited partnership agreement to permit a merger and then the merger itself. Instead, the Court ruled that the two transactions were integrated and thus, considered as if they were a single event. This may mean that the corporate law concept of treating two transactions separately if they are authorized by two different sections of the corporate law will not apply in the context of a limited partnership that is based on contract law.

In addition, the Court held that using a merger to add an additional, tie-breaking general partner to the partnership governance structure was permissible absent a clear prohibition in the partnership agreement.

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Court of Chancery Permits Option Backdating Case To Proceed

Conrad v. Blank, C.A. No. 2611-VCL (September 7, 2007).

In the latest of the Delaware option cases, the Court of Chancery permits the action to go forward when it appears that the Board considered the option backdating and did nothing about it. It is noteworthy from its decision that this apparent indifference to a wrong served to distinguish this case from others where the backdating appeared to be a simple mistake.  In the case of a simple mistake, the error would not be enough to expose the board to liability and that would excuse demand before the derivative suit was filed.

The Court also declined to apply the "continuing wrong" theory. Under that theory, a plaintiff who acquires her stock during the series of wrongful acts has the right to challenge all the actions including even those that occurred before she acquired her stock. Instead, here the court held that each backdated option was a separate wrong and the plaintiff could only sue for those that had occurred  after she bought her stock.

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Court of Chancery Explains Weight of Evidence

LaPoint v. Amerisourcebergen Corporation, C.A. No. 327-CC (September 7, 2007).

In this otherwise fairly common breach of contact case, the Court of Chancery has once again emphasized the importance of evidence that is contemporaneous with the parties' contract and their conduct. Explanations after the fact are viewed as much less convincing than, as in this case, emails created at the time when litigation was not on everyone's mind.

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