Posts tagged Case Summaries

Court of Chancery Explains Scope of Exculpation Clause

Addy v. Piedmonte, C.A. 3571-VCP (Del. Ch. March 18, 2009)

It is now common to include a clause in contracts asserting that a buyer has not relied on anything she was told and instead has only relied on her own investigation and the promises contained in her written contract. Sellers then seek to defeat fraud claims by arguing that the buyer is barred from showing reliance on anything not exactly in the contract between the parties. Courts do enforce these provisions as they have a legitimate place in private ordering.

Here, the Court explains the limits of these exculpation clauses. Even sophisticated parties dealing with a purely commercial matter with the time to investigate may be able to state a claim for fraud despite such an exculpation clause. Briefly, it depends on how bad the lying seems to the court. This case reeks of a scheme to defraud an investor, and the Court was concerned that it would further the scheme if it dismissed the claim because of the exculpation clause. Note, however, that the plaintiff still has to prove he relied on what he claims was a false statement in the face of language in the contract that he was not relying on matters outside the contract itself. Somehow it seems, if he got past the motion to dismiss, he has a good shot at prevailing.

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District Court Denies Partial Summary Judgment on Breach of Implied Covenant of Good Faith and Fair Dealing Claim

Zwanenberg Food Group (USA) Inc. v. Tyson Refrigerated Processed Meats, Inc., Civ. No. 08-329-LPS (D. Del. Feb. 27, 2009).

United States Magistrate Judge Leonard P. Stark denied Tyson Refrigerated Processed Meats, Inc.’s (“Tyson”) motion for partial summary judgment of Zwanenberg Food Group (USA) Inc.’s (“ZFG”) contract-based claim that Tyson breached the implied covenant of good faith and fair dealing.

Both Tyson and ZFG are producers and manufacturers of canned meats and other food products. Pursuant to the contract at issue, ZFG purchased from Tyson inventory and equipment used to manufacture canned luncheon meat for private label customers. Wal-Mart Stores, Inc. (“Wal-Mart”) was Tyson’s largest customer for the goods it produced using the assets that were sold to ZFG. Tyson and ZFG, without the involvement of Wal-Mart, executed an Asset Purchase Agreement (“APA”) and the deal closed. More ›

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Court of Chancery Awards Fees Based on Intangible Benefit

In re Yahoo! Shareholders Litigation, C.A. 3561-CC (Del. Ch. Mar. 6, 2009)

This is another in a line of cases where substantial attorney fees ($8,400,000) are awarded to a stockholder whose complaint achieves an intangible benefit for the corporation. Here the benefit was the end of Yahoo's employee severance plan that made it harder to sell Yahoo.

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Court of Chancery Denies Buy Out Claim Based on Change of Control

BASF Corp. v. POSM II Properties Partnership L.P., C.A. 3608-VCS (Del. Ch. Mar. 3, 2009)

The plaintiff in this case argued it was entitled to be bought out of the partnership because the partnership agreement provided buy out rights when control of the partnership changed. The Court held that a change in ownership of the partnership managing entity was not a change in control of the partnership itself. Instead, only control of the manager had changed.

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Court of Chancery Denies Request for Reformation of Merger Agreement

Metcap Securities LLC v. Pearl Senior Care Inc., C.A. 2129-VCN (Del. Ch. Feb. 27, 2009)

 

In this decision the Court explains when it will grant reformation of a contract based on mistake. Most importantly, it held that an attorney was authorized to agree to the amendment to a contract that his client later argued was a mistake. The circumstances were very unusual, but the key point remains that reformation will not be granted when in hindsight a concession is later regretted.

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Court of Chancery Approves Master Report on Fees

Kosseff v. Ciocia, C.A. 188-MG (Del. Ch. Feb. 26, 2009)

 

This decision points to a new method of handling attorney fee requests following a settlement. The Court referred the request to one of its Masters for a report, reviewed the report, and upheld the Master's award.

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Court of Chancery Explains Interaction with PSLRA

Beiser v. PMC-Sierra Inc., C.A. 3893-VCL (Del. Ch. Feb. 26, 2009)

 

Under the federal PSLRA, discovery may be stayed while a motion to dismiss is pending. Parties have tried to get around this stay by filling a books and records complaint in the Court of Chancery. This decision explains when you can get away with that, and holds, not very often.

 

Briefly, a books and records action may only proceed when the plaintiff is not already involved in a federal case over the same issues, when the plaintiff's attorney is also not involved in a pending federal case, and where the plaintiff agrees not to use the materials produced in the Delaware case to prosecute a pending federal case.

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Court of Chancery Calculates Reasonable Attorney Fees

Lillis v. AT&T Corp., C.A. 717-VCL (Del. Ch. Feb. 25, 2009)

 

In what surely must have been a boring use of judicial time, in this case the Court of Chancery was required to decide what fees were reasonable in a complex indemnification case. The decision is helpful in showing how the Court went about a task that the parties should have been able to do for themselves. In any event, the Court carefully went over the fee request and did what it had to do under the circumstances.

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Court of Chancery Reaffirms The Business Judgment Rule

In re Citigroup Inc. Shareholder Derivative Litig., C.A. 3338-CC (Del. Ch. Feb. 24, 2009)

 

After the recent decision in the AIG case denying a motion to dismiss a complaint, there was some concern that perhaps the Court of Chancery was loosening the pleading requirements to state a claim under the Caremark line of case law. Caremark, of course, suggested that directors might be liable for failing to properly supervise management even when the directors did not receive any personal benefit as a result.

 

In this latest decision, the Chancellor has put those fears to rest. He distinguished the AIG decision and strongly affirmed that the business judgment rule protects directors when they make business decisions, even those that involve risk to the entity.

 

Thus, it is important to read the AIG decision and this decision together to get a full picture of how the Court is reacting to the calls to assign blame in the current financial crisis.

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Court of Chancery Decides Formula for Fee Advancement

Underbrink v. Warrior Energy Services Corp., C.A. 2982-VCP (Del. Ch. Feb. 24, 2009)

 

When a party is entitled to have her attorney fees advanced while litigation is pending, the Court of Chancery is faced with the possible task of reviewing each monthly bill to decide what is reasonable. At the end of the case, of course, a final accounting will occur, but that is too late and would defeat the whole purpose of a right to advancement.

 

To avoid the onerous task of acting like an attorney fee audit firm, the Court of Chancery has explored using formulas to decide how much of each month's bills should be paid. That way the bills are paid at least at a level that provides enough compensation to obtain representation, while not awarding so much as to encourage a complete lack of restraint. For example, the Court may decide that 65% of the bills should be paid promptly and the balance left to a final accounting. That is what it did here.

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Court of Chancery Awards Attorney Fees in Contract Case

West Willow-Bay Court LLC v. Robino-Bay Court Plaza LLC, C.A. 2741-VCN (Del. Ch. Feb. 23, 2009)

 

When attorney fees are awarded under the terms of a contract, the question sometimes comes up on how to calculate the fees when there was only partial success by the prevailing party. This decision answers that question. Basically, if you win, then you win your fees when the contractual right to fees does not say otherwise and even if you are only partially successful.

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Court of Chancery Denies Request for a Receiver

Banet v. Fonds de Regulation et de Controle Cafe Cacao, C.A. 3742-CC (Del. Ch. Feb. 18, 2009)

 

This is an excellent summary of the law governing when the Court of Chancery will appoint a receiver for either an insolvent or a solvent corporation. For example, only when there is a grave risk of serious harm to the entity will the Court appoint a receiver for a solvent Delaware corporation.

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Court of Chancery Denies Redundant Inspection

Norfolk Country Retirement System v. Jos. A. Bank Clothiers, Inc., C.A. 3443-VCP (Del. Ch. Feb. 12, 2009)

 

Repeated books and records demands by different stockholders should be viewed favorably. When, as here, a special litigation committee (SLC) has reviewed the conduct sought to be investigated by the plaintiff, and the independence and diligence of the SLC cannot be fairly questioned, then a stockholder who demands inspection may receive the SLC report and some backup materials, but no more absent a stronger showing of real justification to think the SLC did not do its job.

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Court of Chancery Explains how To Infer Scienter

American International Group Consolidated Derivative Litigation, C.A. 769 (Del. Ch. Feb. 10, 2009)

 

The Court of Chancery is often faced with the difficult task of deciding when a complaint has enough factual allegations to survive a motion to dismiss, particularly when there is no self dealing by directors and the business judgment rule is raised as a defense. This detailed 102-page decision illustrates the thought process that the Court uses.

 

The basic question presented was whether the plaintiff, could at the pleading stage, state sufficient facts to show that the case should go forward. As is typical, the defendants argued that all the complaint really alleged is that they made some bad decisions or that others below them in the corporate entity were the parties at fault. The Court denied the motion to dismiss because there was enough in the complaint to warrant an inference that the defendants must have known of the corporate wrongdoing. The keys to this result were: (1) the defendants were in position to know of the wrongs that had been committed; (2) they had practiced tight control over the entity so that they generally were aware of all that was going on; and (3) the bad acts were massive in scale and unusual in nature so as to have been unlikely to have been done without the defendants' knowledge. More ›

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Court of Chancery Upholds LLC Dissolution Provision

Spellman v. Katz, C.A. 1838-VCN (Del. Ch. Feb. 6, 2009)

 

In drafting an LLC operating agreement, the key point to remember is that you get what you agreed to even if you later come to regret it. Here, the operating agreement included a provision that the LLC would be dissolved when certain events occurred. When those events occurred, one of the members claimed that he never intended the LLC would then be dissolved. Too bad said the Court and ordered dissolution and winding up.

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