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

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Showing 11 posts from August 2011.

Court Of Chancery Explains Books And Records Rights In An LLC

DFG Wire Company LLC v. Eight Estates Wine Holdings LLC, C.A. 6110-VCN (August 31, 2011)

Inspection rights in LLCs are different from those in corporations.  The statute is different and the relationship between the owners is different.  This decision does a good job of explaining inspection rights in an LLC, including when those rights may reach the records of a subsidiary.

17 Morris James Attorneys Named In Best Lawyers in America® 2012 in 20 Practice Areas

Posted In Case Summaries, News

Seventeen Morris James attorneys are listed as being among the most elite lawyers in their practices in The Best Lawyers in America® 2012.

The Best Lawyers in America® has become universally regarded as the definitive guide to legal excellence. Their rigorous research is based on an exhaustive peer-review where leading attorneys cast votes on the legal abilities of other lawyers in their practice areas.

The Morris James attorneys listed in the 18th edition of the guide and the areas of law in which they are recognized include:

Richard P. Beck
Litigation – Real Estate (1983)
Real Estate Law (1983)

John M. Bloxom IV
Real Estate Law (2010)

P. Clarkson Collins, Jr.
Corporate Law (2005)
Litigation – Mergers and Acquisitions (2005)

Mary M. Culley
Elder Law (2008)

Keith E. Donovan
Personal Injury Litigation (2009)

Dennis D. Ferri
Medical Malpractice Law (2007)
Personal Injury Litigation – Defendants (2007)

Richard Galperin
Personal Injury Litigation – Defendants (2005)

Richard K. Herrmann
Information Technology Law (2003)
Technology Law (2003)

Francis J. Jones, Jr.
Personal Injury Litigation – Defendants (2008)
Personal Injury Litigation – Plaintiffs (2008)

Gretchen S. Knight
Family Law (2007)

Lewis H. Lazarus
Commercial Litigation (2006)
Corporate Law (2006)
Litigation – Mergers and Acquisitions (2006)

Mary B. Matterer
Litigation – Intellectual Property (2009)

Edward M. McNally
Corporate Law (2005)
Litigation – Mergers and Acquisitions (2005)

Mark D. Olson
Tax Law (2011)

James W. Semple
Commercial Litigation (2009)

Bruce W. Tigani
Tax Law (2011)

David H. Williams
Education Law (2007)
Employment Law – Management (2007)
Labor Law – Management (2007)
Litigation – Labor and Employment (2007)

(Year indicates first year listed in practice area)

17 Morris James Attorneys Named In Best Lawyers in America® 2012 in 20 Practice Areas

Posted In Case Summaries, News

Seventeen Morris James attorneys are listed as being among the most elite lawyers in their practices in The Best Lawyers in America® 2012.

The Best Lawyers in America® has become universally regarded as the definitive guide to legal excellence. Their rigorous research is based on an exhaustive peer-review where leading attorneys cast votes on the legal abilities of other lawyers in their practice areas.

The Morris James attorneys listed in the 18th edition of the guide and the areas of law in which they are recognized include:

Richard P. Beck

Litigation – Real Estate (1983)

Real Estate Law (1983)

John M. Bloxom IV

Real Estate Law (2010)

P. Clarkson Collins, Jr.

Corporate Law (2005)

Litigation – Mergers and Acquisitions (2005)

Mary M. Culley

Elder Law (2008)

Keith E. Donovan

Personal Injury Litigation (2009)

Dennis D. Ferri

Medical Malpractice Law (2007)

Personal Injury Litigation – Defendants (2007)

Richard Galperin

Personal Injury Litigation – Defendants (2005)

Richard K. Herrmann

Information Technology Law (2003)

Technology Law (2003)

Francis J. Jones, Jr.

Personal Injury Litigation – Defendants (2008)

Personal Injury Litigation – Plaintiffs (2008)

Gretchen S. Knight

Family Law (2007)

Lewis H. Lazarus

Commercial Litigation (2006)

Corporate Law (2006)

Litigation – Mergers and Acquisitions (2006)

Mary B. Matterer

Litigation – Intellectual Property (2009)

Edward M. McNally

Corporate Law (2005)

Litigation – Mergers and Acquisitions (2005)

Mark D. Olson

Tax Law (2011)

Bruce W. Tigani

Tax Law (2011)

David H. Williams

Education Law (2007)

Employment Law – Management (2007)

Labor Law – Management (2007)

Litigation – Labor and Employment (2007)

(Year indicates first year listed in practice area)

Court Of Chancery Denies Interim Fee Application

In re Novell Inc. Shareholder Litigation, C.A. 6032-VCN (August 30, 2011)

Once again, the Court of Chancery has denied an application for interim fees in a shareholder litigation.  The application was based on so-called curative disclosures made as a result of the plantiff's efforts.  While such applications are certainly disfavored as premature, that is perhaps all the more so when they are based on just additional disclosures.  Several other recent decisions have reached the same conclusion.

Court Of Chancery Upholds Attorney Lien

Judy v. Preferred Communications Systems, Inc., C.A. 4662-VCL (August 19, 2011)

This is the first decision in Delaware to uphold an attorney's lien for unpaid legal fees.  Hence it is welcome news to us all.  The Court conditioned the release of the documents subject to the lien on the client posting security to cover the disputed fees pending an arbitration.

The opinion is particularly noteworthy for its exhaustive scholarship and its modification of the old rule that such a lien might only be justified to prevent a client fraud.

Supreme Court Clarifies Test Of Pleadings

Central Mortgage Company v. Morgan Stanley Mortgage Capital Holdings LLC, No. 595, 2010 (August 18, 2011)

This important decision clarifies that Delaware courts should apply the "conceivability" test to determine if a complaint states adequate facts to state a claim.  Previously, Delaware's trial courts had applied the "plausibility" test from the United States Supreme Court's Twombly decision.  As the Delaware Supreme Court makes clear, the "conceivability" test is the more liberal test and will result in sustaining more complaints in response to motions to dismiss.

For years, the Chief Justice has cautioned in public statements that Twombly was not Delaware law.  While his opinion in this case may leave that open for a later review,  for now he has the last word.

The decision also significantly liberalizes the scope of a "good faith and fair dealing" claim.  So long as such a claim does not depend on an actual breach of the contract involved, it may survive a motion to dismiss as well.

Court Of Chancery Permits Innovative Use Of Declaratory Judgment

K&K Screw Products LLC v. Emerick Capital Investments Inc., C.A. 5633-VCP (August 9, 2011)

Sometimes a lingering contract dispute causes problems in obtaining financing or just getting on with a company's business.  Here the Court upheld the use of a declaratory judgment action to establish the parties rights in such a dispute.

Court Of Chancery Permits Full Transfer Of Membership

Posted In LLC Agreements

Achaian Inc. v. Leemon Family LLC, C.A. 6261-CS (August 9, 2011)

It is often unclear when a member of an LLC may transfer not just her financial interests but her voting rights as well.  The LLC Act leaves that issue to be determined by the LLC operating agreement.  Here the Court closely examines this issue and an LLC agreement and decides that a member's full interest may be transferred by her without the other members' consent.

Court Of Chancery Upholds Fiduciary Duty In An Alternative entity

Posted In LLC Agreements

Paige Capital Management LLC. v. Lerner Master Fund LLC, C.A. 5502-CS (August 8, 2011)

This is an important decision and a lot of fun to read to boot.  The fun is in the all-too-human story it tells of personal ambition frustrated and what happens then.

There are 3 key points in its holding.  First, those who control an LLC owe fiduciary duties to the members unless the LLC Agreement clearly cancels those duties. This may be contrary to the views of at least 1 Supreme Court Justice who favors requiring those duties be spelled out in the agreement.

Second, vesting in a manager the "sole discretion" to decide a matter only means she is the only one who gets to vote on it.  It does not mean she can vote anyway she likes even if that is unfair. Here better drafting is needed.

Third, the Court will decide cases on their legal merits even if the winning party is a jerk.  Of course, here there was a bit of a contest to see who could be the biggest jerk.  Nonetheless, it is reassuring that the Court saw though all that to get to the real merits.

CCLD Explains Pleading Rules For Fraud

Posted In Business Torts

Brevet Capital Special Opportunities Funds L.P. v. Fourth Third LLC, C.A. N10C-12-071 JRS (CCLD)

The Superior Court's Complex Commercial Civil Division is issuing more and more opinions in the various matters that are now becoming ripe for decision.  Here the Court explains when both fraud and breach of contract claims may be filed in the same case and how to adequately plead the fraud count under the particularity standard required.

Paying for Your Opponent's Lawyer: A Common Dilemma

By Edward M. McNally
This article originally appeared in the Delaware Business Court Insider | August 03, 2011

How would you like to advance your opponent's legal fees as you fight out your dispute in court? That is bad enough when you are the plaintiff. It is even worse when you have been sued and you find your company paying the plaintiff's attorney fees and expenses to prosecute his or her claims against you. Yet all that can and does happen in suits involving directors and officers in litigation with their former company. How can this happen?

First, some background helps. The American "rule" is that litigants pay their own legal fees, even if they win the case. "Loser pays" is rarely true in the United States in business litigation. Because of that rule, companies have sought to attract good directors and high-level employees by providing them with the employment benefit of indemnification against litigation costs at the end of a trial and advancement of their costs throughout the trial. Indeed, in Delaware and most states, directors have a statutory right to be indemnified in most business litigation. That seems reasonable enough, in the abstract.

But consider what happens when a dispute arises between the company and a former director or officer. Frequently, those former company officials have been given contracts that require they be indemnified against loss in any litigation they win and have their litigation expenses advanced to them throughout the litigation. In those circumstances, the courts have repeatedly upheld the right to have expenses advanced, subject to the company's right to recover those advances later if it wins the litigation. Still, that does not seem so bad. It is just another cost of doing business.

However, the reality may be far more onerous. When the company is paying the lawyer bills without any right to pick the lawyer or even to review his or her statements, there is little restraint on fees. Millions of dollars then are spent, cases settled just to stop the cash drain and rarely is there ever a recovery of expenses advanced to the former official, who is then cash poor. Perhaps even more surprising, there is little the courts can do to control this result.

Companies do object to paying what they see as unreasonable legal expenses. But when their former officials sue to compel payment of those fees, the courts are not able to effectively determine the reasonableness of any bills. After all, it is an abuse of the courts' resources to expect a judge to sit down each month to review a party's legal bills, which often are dozens of pages of minute detail. Solving this problem has proved elusive.

Various remedies have been tried. Courts have appointed special masters to review the legal bills, with the parties sharing the master's fees for his or her services. Under the so-called "Duthie" rules used in the Delaware Court of Chancery, uncontested fees are to be promptly paid, counsel are required to certify their good faith in any dispute, and guidelines are provided as to what may be disputed.

Even those limited remedies to prevent abuses have been undermined, often by the very contracts the company agreed to without much thought. For example, in a decision just last month, the Court of Chancery held that the company must pay all of the fees of the special master because it had promised its former official to advance all of her "expenses" in litigation. Considering that the legal fees in dispute exceeded $5.5 million, paying the special master's fees as well must have felt like the last straw.

What then can be done about this problem? To begin with, companies must recognize that the problem arises out of the indemnification and advancement contracts they sign. No one is forcing them to give overly generous benefits, and no one should expect the courts to change their contracts just because they have become burdensome. Proper contract drafting helps here.

Several examples come to mind and should be acceptable even to the potential new officials the company seeks to retain. These include: limitations on advancement rights when the official is acting as a plaintiff; approval rights on the counsel to be selected; forum choices for any disputes; and fee caps on advancements. Until some of these or more creative terms are used, the problem will remain.

The real problem is not indemnification, but advancement. Delaware law limits the right to be indemnified, even by contract. It is against Delaware law to indemnify a director for wrongful acts, and a contract that attempts to do so is not enforceable. Advancement, on the other hand, is virtually unlimited if the contract is drafted that way. Yet, there is no reason why companies should have to agree to pay unlimited sums to attract talent. To do so is to let some lawyer charge without any restraint. Future articles will show how to avoid that problem.