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

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Photo of Delaware Business Litigation Report Meghan A. Adams
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Meghan Adams has left Morris James for a judicial appointment.  If you need assistance or legal counsel, please contact Patricia Winston at pwinston@morrisjames.com or 302-888-5840.  …

Showing 31 posts by Meghan A. Adams.

Delaware Superior Court CCLD Dismisses Breach of Contract Action for Failure to State a Claim

P&TI Acquisition Co. v. Morgenthaler Partners VII, LP, C.A. No. N18C-08-059 AML CCLD (Del. Super. May 9, 2019).

Plaintiff P&TI Acquisition Co. brought a breach of contract action asserting that Defendants violated a 2012 stock purchase agreement (“SPA”). The SPA governed various assets Defendants, including PhilTem Holdings, Inc. and a PhilTem subsidiary (collectively “PhilTem”), sold to the Plaintiff. It prohibited Defendants and their “Affiliates” from soliciting or employing any PhilTem employees before February 2017. The SPA defined “Affiliate” as a party that controls, is controlled by, or is under common control with any defendant, and “Control” was defined as the power to direct or cause the direction of the management and policies of an Affiliate.  Plaintiff alleged that the Defendants caused an affiliate to solicit for employment a PhilTem CEO and a CFO as early as 2014. More ›

Superior Court Complex Commercial Litigation Division Holds Settlements Arising out of Dole Stockholder Litigations Constitute “Loss” Under Insurance Policies  

Arch Insurance Co. v. Murdock, C.A. No. N16C-01-104 (EMD)(CCLD) (Del. Super. May 7, 2019).

Image Business InsuranceAfter trial and an adverse judgment in the amount for $148 million for breach of the duty of loyalty in a going private merger In re Dole Food Co., Inc. S’holder Litig., C.A. No. 8703-VCL (Del. Ch.), the liable defendants David Murdock, Dole Food Company, Inc. and DFC Holdings, LLC settled the claims by having Murdock pay the full award plus interest. The defendants then were sued by six of their excess insurance carriers, seeking a declaratory judgment that they did not have to fund the settlement. Among other reasons, the insurers asserted that the settlement payment representing the actual fair value of the merger consideration did not constitute a “Loss” under the policy. Defendants counterclaimed seeking declaratory judgment that the insurers breached the policies by refusing to pay for the Court of Chancery settlement as well as the settlement in San Antonio Fire & Police Pension Fund v. Dole Food Co., Inc., No. 1:15-CV-01140 (D. Del.).  This decision grants in part and denies in part the parties’ cross-motions for summary judgment.  Applying the rules of interpretation applicable to insurance policies, a unique and complex type of contract, the Court determined the settlement payments constituted a “Loss” covered within the policies but genuine issues of material fact remained as to whether the insureds breached a written consent provision and a cooperation clause in the policies.

Delaware Superior Court Ruling Provides Guidance for Pre-Trial Motion Practice and Trial Preparation

In re Bracket Holding Corp. Litig., Consol. C.A. No. N15C-02-233 WCC CCLD.

In this decision arising out of the Defendants’ Motions in Limine, the Superior Court’s Complex Commercial Litigation Division provides useful insight regarding pre-trial motion practice and trial preparation.  By way of brief background, in 2013, plaintiff purchased a pharmaceutical services provider from defendants.  The securities purchase agreement (SPA) included express representations and warranties related to financial statements.  Over the course of several months after purchase, plaintiff discovered what it alleges were improper accounting practices that constituted fraud and that had caused it to overpay for the provider to the tune of $50 million. More ›

Superior Court CCLD Denies Bad Faith Counterclaim Against Insurance Companies

Posted In CCLD

Arch Insurance Co. v. Murdock, C.A. No. N16C-01-104 (EMD) (CCLD) (Del. Super. May 1, 2019).

 In this matter between Dole Food Company and its Insurers, Dole sought coverage under their D&O policies for two underlying cases in the Court of Chancery and the District Court for the District of Delaware.  The Insurers refused coverage and filed this declaratory judgment action.  The Complex Commercial Litigation Division of Delaware’s Superior Court granted summary judgment in favor of the Insurers as to Dole’s counterclaim that the Insurers had breached the implied covenant of good faith and fair dealing in denying coverage.  Despite disputed facts, the Court held that it should not submit the question of bad faith refusal to pay Dole’s claims to a jury because the Insurers had reasonable grounds for relying on their defenses to liability.  The Court found that the Insurers had several well-reasoned arguments for denying coverage based on various clauses contained in the insurance policies, including the Fraud Exclusion, the Written Consent Provision, and the Cooperation Clause.

Superior Court CCLD Holds that Contract Defenses Can Be Applied to a Declaratory Judgment Action

Posted In CCLD

Bobcat North America, LLC v. Inland Waste Holdings, LLC, C.A. No. N17C-06-170 (PRW) (CCLD) (Del. Super. Apr. 26, 2019).

Under Delaware law, contract defenses can apply to a declaratory judgment action when the action is one based on legal rather than equitable claims.  In this matter, the Complex Commercial Litigation Division of Delaware’s Superior Court partially granted Bobcat’s partial motion for summary judgment stemming from its acquisition of a waste management business from Inland.  Bobcat sought a declaratory judgment that it was entitled to claw-back / redeem an equity payment under the parties’ purchase agreement (the “UPA”) because the necessary condition to prevent the claw-back did not occur.  Inland countered with the affirmative contract based defenses of impossibility/impracticability and prevention of performance.

Because Bobcat’s claim was based solely on a contract provision, which made it a legal claim, Inland’s contract defenses of prevention of performance and impossibility were applicable to the claim.  Nonetheless, the Court found that the UPA was unambiguous in its terms.  Inland knowingly assumed the risk that the condition preventing the claw-back might not occur and the terms of the UPA stated that if the condition did not occur, Bobcat could automatically redeem the equity.  Therefore, the Court rejected Inland’s affirmative defenses as a matter of law and granted Bobcat’s motion for summary judgment on its claim to redeem the equity payment.

The Delaware Superior Court CCLD Dismisses Insurance Coverage Claims Against Non-Resident Defendants but Declines to Stay Litigation Against Delaware Insurers in Favor of Contemporaneously Filed New York Action

Posted In CCLD

AR Capital, LLC et al. v. XL Specialty Insurance Company, et al., C.A. No. N19C-01-024 (MMJ) (CCLD).

CCLDIt is axiomatic that in order for a Delaware court to exercise general personal jurisdiction over a defendant, that defendant must either be incorporated or have their principal place of business in Delaware.  If there is no general personal jurisdiction, then there must be specific personal jurisdiction.  Moreover, under Delaware’s familiar standard in governing whether an action should be stayed in favor of a first-filed action, the Court will review the competing actions to determine whether the actions were contemporaneously filed (and will apply traditional forum non conveniens factors pursuant to General Food Corp. v. Cryo-Maid, Inc., 198 A.2d 681, 684 (Del. 1964)) or whether the foreign action is truly first-filed (thereby applying the standard set forth in McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng’g Co., 263 A.2d 281 (Del. 1970)).  The “contemporaneous” determination is important because if the actions are filed contemporaneously, the movant seeking dismissal has the burden to prove that litigating in Delaware would cause “overwhelming hardship.”  More ›

Chancery Enjoins Unfair Merger Orchestrated by Controlling Stockholder Pending Corrective Disclosures

Under Delaware law, majority or controlling stockholders owe fiduciary duties to the company and its minority stockholders. Under certain circumstances, however, a stockholder that owns less than 50 percent of the company’s outstanding stock can be deemed a controlling stockholder and therefore subject to the same fiduciary obligations. This determination involves a fact-intensive analysis regarding the alleged controller’s dominance of the board generally, or dominance of the corporation, board or the deciding committee with respect to a challenged transaction.

The Delaware Court of Chancery recently addressed this issue in FrontFour Capital Group v. Taube, C.A. No. 2019-0100-KSJM (March 11, 2019), where the court issued a post-trial decision on the plaintiffs’ claims to enjoin a proposed combination of Medley Management (a publicly traded asset management firm) with two corporations it advised, Medley Capital Corp. and Sierra Income Corp. (the proposed transactions). In FrontFour, the court held that twin brothers Brook and Seth Taube, who collectively owned less than 15 percent of Medley Capital’s stock, were nonetheless controlling stockholders because they exercised de facto control over the Medley Capital special committee negotiating the proposed transactions, thereby triggering entire fairness review. Although the defendants failed to show that the proposed transactions were entirely fair, the court could not order the most equitable result—a sales process free from influence and onerous deal protections—because plaintiffs failed to prove that Sierra aided and abetted the breaches of fiduciary duty. Therefore, pursuant to the Supreme Court’s decision in C & J Energy Services v. City of Miami General Employees’ and Sanitation Employees’ Retirement Trust, 107 A.3d 1049 (Del. 2014), the court could not “strip an innocent third party of its contractual rights” under a merger agreement. However, the court did enjoin the stockholder vote pending corrective disclosures regarding the conflicted sales process. More ›

Chancery Declines to Find Personal Jurisdiction Over LLC Officers

CelestialRX Investments, LLC v. Krivulka, C.A. No. 11733-VCG (Del. Ch. Mar. 27, 2019).

Section 109 of the Delaware Limited Liability Company Act is an “implied consent” statute. It provides for personal jurisdiction in Delaware over (i) “managers” named in the governing LLC agreement, and (ii) persons who otherwise “participate materially” in the LLC’s management.  6 Del. C. § 18-109(a).  This recent decision is notable for holding that, based on the allegations, certain officers who performed important tasks for the LLC did not “participate materially” in its management for Section 109 purposes.  The Court pointed to precedent holding that “material participation” for Section 109 purposes requires actual control or a decision making role.  Here, one defendant was alleged to be a former manager who retained a “vice chairman” title and engaged a financial advisor on the LLC’s behalf.  The other defendant at-issue served as the company’s President and CEO and had important day-to-day responsibilities.  Such allegations fell short, however, in the circumstances alleged, where the plaintiffs’ complaint and arguments emphasized that, another defendant, who was designated as the “manager” in the governing LLC agreement, exercised “absolute control and discretion” and acted as “emperor, supreme leader and dictator for life.”  The Court reasoned such contentions precluded a finding that the two officers possessed decision making authority of their own.  Accordingly, they were not subject to personal jurisdiction under Section 109. 

Superior Court CCLD Holds that Anti-Reliance Clause Clearly Disclaimed Reliance on Extra-Contractual Representations or Implied Warranties

Affy Tapple, LLC v. ShopVisible, LLC, C.A. No. N18C-07-216 (MMJ) (CCLD) (Del. Super Mar. 7, 2019).

In agreements governed by Delaware law, a standard integration or merger clause will not bar claims for misrepresentations made to induce entry into the contract.  In order to bar such claims, the agreement must include language expressly disclaiming any reliance upon extra-contractual statements.  While there are no “magic words” that are required, the language at issue must add up to a clear disclaimer.  Here, the Complex Commercial Litigation Division of Delaware’s Superior Court considered a clause stating the plaintiff agreed “that the limited express warranties set forth in this section … are exclusive” and that the defendant “specifically disclaimed all other representations and warranties, express or implied[.]”  The Court stated this was “more than a standard integration clause.”  Reasoning that “[l]anguage indicating a clear understanding of the parties’ intent is all that is required[,]” the Court concluded this section was “drafted with sufficient clarity to establish that there was an understanding that [the claimant] could not rely upon any implied warranties, or any express warranties outside of the [agreement].”  Therefore, the Court dismissed the plaintiff’s claim for fraud in the inducement based on alleged extra-contractual representations. 

Delaware Superior Court’s Complex Commercial Litigation Division Declines to Dismiss Delaware Attorney General’s Claims Against Opioid Makers

State of Delaware ex rel. Jennings v. Purdue Pharma L.P., et al., C.A. No. N18C-01-223 MMJ CCLD (Del. Super. Feb. 4, 2019). 

In January 2018, Delaware’s Attorney General filed an action against certain opioid makers and distributors, along with pharmacy chains CVS Health Corp. and Walgreens Boots Alliance Inc.  The State alleged that the drug manufacturers lied to prescribers and patients, and encouraged high doses of the painkillers while failing to disclose accurately the risks of addiction and overdose.  As to the distributors and pharmacies, the State alleged they had duties to actively prevent opioid diversion and to report any suspicious orders.  The Court held that the State stated prima facie claims of consumer fraud and negligence against the manufacturers, reasoning that allegations that they labeled drugs in a manner inconsistent with FDA-approved uses were sufficient to survive dismissal.  The Court also held that the State met its pleading requirements for negligence and consumer fraud against the distributors, including by adequately alleging a prima facie case of reasonable foreseeability and proximate cause.  The State did not state a claim against the pharmacies, however, because the State’s comprehensive pharmacy regulatory scheme and enforcement procedures preempted the claims in the complaint. 

Court of Chancery Grants Preliminary Injunction Based on Insider’s Stock Issuances to Himself

Applied Energetics, Inc. v. Farley, C.A. No. 2018-0489-TMR (Del. Ch. Jan. 23, 2019).

This opinion addresses two bedrock issues of Delaware corporate law, specifically, proper board authorization under 8 Del. C. § 141 and directors’ fiduciary duty of loyalty.  Following other directors’ resignations, defendant George Farley was the only director as of February 2016 of plaintiff Applied Energetics (the “Company”).  Shortly after becoming the sole director, Farley executed a written consent to issue himself twenty million shares of Applied Energetics stock for $.001 per share.  No contemporaneous valuation was performed, and Farley made no attempts to ensure a fair process.  Faced with a request to enjoin Farley from selling the shares at issue, the Court of Chancery held that it was reasonably probable that Farley could not cause the Company to validly issue stock, because he was the only remaining director of a three-person board.  The Court also held it was reasonably probable that Farley will be unable to meet his burden at trial of proving the share issuances were entirely fair.  Accordingly, the Court enjoined Farley from trading the shares pending a final adjudication of their validity.  This decision also provides helpful analysis, as did prior decisions in this matter, regarding how the Court will determine the amount of bond when granting preliminary injunctive relief.

Delaware Superior Court Explains When Mutual Mistake Voids A Contract

659 Chestnut LLC v. Parke Bancorp Inc., C.A. N17-05-114 MMJ (December 6, 2018)

This is an interesting decision because it deals with the rare instance when a party can prove a mutual mistake as to a contract’s terms so as to avoid having to comply with those terms. Here both a borrower and a loan officer clearly agreed a loan could be repaid without penalty. The actual loan documents had a prepayment penalty that the borrower did not read before signing. The Court held the borrower was excused from catching that penalty clause given the assurance he had there was no prepayment penalty.

Delaware Superior Court Applies “But For” Test To Decide In What Capacity A Director Acted

Posted In CCLD

Goggin v. National Union Fire Insurance Company Of Pittsburgh, PA., C.A.. N17C-10-083-PRW-CCLD (November 30, 2018)

D & O insurance covers actions taken by a director. However, when a director acts on behalf of another entity in dealing with the insured company, it is not always easy to decide if the claim against him arises out of his role as a company director. This decision applies a “but for” test in this way. If the claim would not exist “but for” the conduct on behalf of the other, non-insured entity, then the claim is not based on the director’s conduct as a director of the insured entity and the "capacity” exclusion applies to deny coverage.  This result turns in part on the specific language of the policy that insured against conduct “solely” taken as a director.

Superior Court Holds that Judgment Creditors Required to Renew Judgments Every Five Years Under 10 Del. C. § 5072

Mergenthaler v. Triumph Mortgage Corp., C.A. No. 09C-09-203-AML (November 26, 2018)

This case with a tortured history presented an interesting issue regarding when a creditor is required to renew a judgment in the Superior Court.  The Court held that plaintiff (the judgment creditor) was required to renew the judgment after five years pursuant to 10 Del. C. § 5072.  Although the creditor did not renew its judgment within five years, the Court granted the creditor’s motion to renew the judgment retroactively because of the prior practice of not requiring such motions until ten years after a judgment’s entry, and the creditor’s failure was not attributable to his negligence because of intervening events, including a Supreme Court ruling, that occurred.

Delaware Superior Court Explains Privity Rule For Claim Preclusion

Posted In CCLD

The Washington House Condominium Association Of Owners v. Daystar Sills Inc., C.A. N15C-01-108 WCC CCLD (November 13, 2018)

This is an interesting decision because it explains when there is privity between parties so as to preclude a claim that one party has resolved previously. Briefly, there needs to be a common interest between the parties without any conflicting interest that would make the settling party an improper representative of the other party.  In this action, the Court held that because of newly discovered evidence, the Court could no longer find that the parties were in privity, and it reversed its prior decision dismissing plaintiffs’ claims against one of the defendants on res judicata grounds.