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Chancery Shifts Attorneys’ Fees Under Bad-Faith Exception Based on False Statements in Plaintiff’s Complaint and Obstruction of Discovery

Bay Capital Finance, L.L.C. v. Barnes and Noble Education, Inc., C.A. No. 2019-0539-KSJM (Del. Ch. Mar. 30, 2020).

With some limited exceptions, the American Rule requires parties to pay their own attorneys’ fees in litigation. One exception permitting a court to shift fees is bad-faith litigation conduct. False or misleading statements by parties in their pleadings and abuse or obstruction of the discovery process are two examples of conduct that may support shifting fees.

In Bay Capital Finance, L.L.C., plaintiff sought to nominate a slate of directors for election at the defendant company’s annual stockholder meeting. Plaintiff, however, failed to satisfy the nomination requirement in the company’s advance notice bylaw that a stockholder own its stock in record name by the nomination deadline. After full board consideration and a vote, the company rejected the plaintiff’s nominated slate based on the failure to satisfy the nomination requirement. Plaintiff filed suit, claiming that it had relied on inaccurate language in the company’s proxy regarding computing the nomination deadline. 

The Court of Chancery granted expedited proceedings in connection with a motion for a preliminary injunction to enjoin the annual stockholder meeting based on plaintiff’s allegation that it had in fact relied on inaccurate language in the company’s proxy. Discovery revealed, however, that plaintiff had not relied on the proxy’s inaccurate language, but rather had discovered the language only after having missed the nomination deadline due to its own lack of diligence and urgency. Plaintiff subsequently obstructed discovery, giving evasive answers and unilaterally terminating a deposition. The Court denied plaintiff’s motion to enjoin the annual meeting and granted defendants’ summary judgment on plaintiff’s claim that the board chair had singlehandedly denied plaintiff’s nomination notice in bad faith. The Court further found that plaintiff’s false or misleading statement in its complaint that it relied on the proxy’s inaccurate language and its abuse of the discovery process constituted bad-faith litigation conduct warranting shifting attorneys’ fees. The Court shifted two-thirds of defendants’ attorneys’ fees to plaintiff based on the percentage of its claims that were grounded on meritless positions and misleading statements in the complaint.

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