Posts from 2007

Supreme Court Upholds Contract Based Fee Award

Mahani v. EDIX Media Group, Inc., Del. Sup. C.A. No. 91, 2007 (September 4, 2007).

In this decision upholding a fee award by the Court of Chancery, the Delaware Supreme Court held that a fee based on a contract right to recover fees is not limited by the results in the case. That limitation, the Court held, is more appropriate in fee shifting pursuant to a statute. Instead, the fees awarded under a contract should take into account the 8 factors set out in Rule of Professional Conduct 1.5(a)(1). The results obtained are among those factors but not the driving force to a decision.

This case had an odd set of facts involving a misbehaving litigant - never a good idea in a Delaware court. Hence, the fee award of a multiple of the actual recovery is not often to be repeated.

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Superior Court Holds Measure of Damages in Quasi-Contract Action is Value of Services Provided, Not Benefit Received

Hynansky v. 1492 Hospitality Group, Inc., C.A. No. 06C-03-200, 2007 WL 2319191 (Del. Super. Ct. Aug. 15, 2007).

This case sets forth the appropriate measure of damages under a quasi-contract theory (in this instance quantum meruit): the value of the services provided, not the value of the benefit received. 

The plaintiff made a typical business loan to the defendant to be paid back with interest, but also agreed to provide additional services to help the defendant avoid foreclosure on other loans, reduce the businesses debt load, and restore profitability. In return for these services, the defendant offered the plaintiff a partnership interest in the business. 

But when the business improved, the defendant allegedly stopped working with the plaintiff—and eventually sold the business for a profit.  More ›

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Court of Chancery Adopts New Approach For Insurance Company Appraisal

Highfields Capital LTD. v. AXA Financial Inc., C.A. No. 804-VCL (August 17, 2007).

This decision illustrates the point that in an appraisal proceeding the  type of business involved may lead to a different approach to valuation. Typically, Delaware courts use the discounted cash flow method to set an appraisal value. Here, however, the Court held that a combined sum of the parts and shared synergies analysis was more appropriate for an insurance company valuation.

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Court of Chancery Adopts New Standard of Review

Mercier v. Inter-Tel (Delaware) Incorporated, C.A. No. 2226-VCS (August 14, 2007).

In a precedent setting opinion, the Court of Chancery has recast the standard of review that applies when determining if a board has acted to affect a stockholder vote. Under the previous Blasius standard, the board had to prove a "compelling justification" before taking any action, such as postponing a stockholder meeting, that affected the stockholders' right to vote.

This opinion recasts the standard closer to the familiar Unocal test where director action that affected a proposed takeover had to be a reasonable response to a perceived threat to corporate policy or interests. Now, in the case of board action that may affect the stockholders' vote, the board must show its actions were: (1) designed to achieve a legitimate corporate objective; (2) taken for a proper motive in good faith; and (3) were reasonable means to their proper objective. This test should be substantially easier to meet than the "compelling justification" standard.

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District Court Allows Breach of Fiduciary Duty Claim Under ERISA, Dismisses State Contract Claim

Roarty v. Tyco Int'l Ltd. Group, 2007 WL 2248086 (D. Del. Aug. 2, 2007)

In this action alleging violations of ERISA and state contract law, Defendants moved to dismiss two of the claims under F.R.C.P. Rule 12(b)(6). Plaintiff’s husband was employed by one of the defendants. Plaintiff brought the action against the employer and its insurance company, alleging that Defendants wrongfully denied her claim under an employee welfare benefit plan after her husband was killed while on a business trip. She alleged that defendants wrongfully denied benefits under ERISA, breached fiduciary duties owed under ERISA, and violated state contract law. Defendants moved to dismiss the fiduciary breach and state contract claims. The Court allowed the breach of fiduciary duties claim, but dismissed the state contract claim.
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Court of Chancery Interprets Change of Control Provision

Law Debenture  Trust Company of New York v. Petrohawk Energy Corp., C.A. No. 2422-VCS (August 1, 2007).

Change of control provisions are common in employment contracts and other contexts. Here the provision was in a debenture. While primarily focusing on the specific language involved, this opinion is useful to others to see how to avoid triggering a change in control provision while at the same time implementing a merger.

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Superior Court Holds Punitive Damages Are Not Precluded Where Separate Tort Claim Exists Alongside Contract Claims

Data Mgmt. Int’l v. Saraga, C.A. No. 05C-05-108, 2007 WL 2142848 (Del. Super. Ct. July 25, 2007).

Generally, a plaintiff bringing a claim based entirely upon the breach of a contract must sue in contract and is limited to contract remedies. No tort exists merely because a party breaches a contract—even if intentionally. But, the same conduct upon which the breach of contract claim is grounded may give rise to a tort claim if the conduct independently amounts to the breach of such an independent duty imposed by law. And with a tort claim comes the availability of punitive damages. More ›

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District Court Rejects Dismissal of Bad Faith Breach of Contract and Fraud Claims Against Insurer

Homsey v. Vigilant Ins. Co., C.A. No. 07-338-JJF (D. Del. July 31, 2007)

 

In this action alleging, inter alia, bad faith breach of contract and consumer fraud, the defendant insurance company sought dismissal of those counts pursuant to F.R.C.P. Rule 12(b)(6) for failure to state a claim for which relief could be granted. Plaintiffs held an insurance policy with Defendant that contained provisions covering credit card fraud and check forgery. Plaintiffs submitted a claim pursuant to those provisions for over $250,000 in allegedly fraudulent credit card charges and forged checks. Nearly one year later, Defendant tendered payment of $10,000 for the claim, contending that this amount represented the maximum amount due under the policy. Plaintiffs argued that the policy provided broader coverage, and alleged that Defendant denied or delayed payment on Plaintiffs’ claim without reasonable justification.   Defendants argued that there was a bona fide dispute as to the policy’s language, such that Defendant could not be found to have acted unreasonably. Defendant also argued that Plaintiffs did not plead consumer fraud with particularity. The Court denied Defendant’s motion, finding that Plaintiffs pled sufficient facts to state both the bad faith and consumer fraud claims. More ›

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Court of Chancery Limits Dilution Claims

Feldman v. Cutaia, C.A. No. 1656-VCL (August 1, 2007), affrimed, Del Supr. (May 30, 2008).

Classifying a claim as derivative has big consequences. Among those is that the claim is then subject to the continuous ownership rule that requires the plaintiff to hold his shares throughout the litigation to maintain his standing. A merger that eliminates the plaintiff's ownership thus also eliminates his ability to proceed with a derivative suit.

In an effort to avoid this problem, plaintiffs that bring dilution claims asserting their interests have been wrongfully diminished need to fit into an exception to the general rule that dilution claims are derivative. This decision illustrates the limits on such claims. Basically, a dilution claim is derivative unless the claim is that a controlling stockholder has wrongly diluted the interests of the minority stockholders. For this purpose, "control" means having a greater than 50% interest or active domination of a board. Moreover, it is not possible to aggregate the stock holdings of a group of stockholders to get over the 50% threshold.

This opinion also discusses the exceptions to the general rule that a merger deprives a stockholder of standing, such as when the merger itself is an attempt to fraudulently end the derivative suit. It also notes that aiding and abetting claims based on derivative claims are themselves also derivative and subject to the same standing rules.

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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.

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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 ›

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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 ›

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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 ›

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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 ›

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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 ›

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