The Delaware Supreme Court, in North River Ins. Co. v. Mine Safety Appliance Co., — A.3d –, 2014 WL 5784588 (Del. Nov. 6, 2014), addressed a failed attempt to control multi-forum litigation. Delaware’s high court affirmed the Court of Chancery’s denial of a permanent injunction barring Mine Safety from prospectively assigning its rights under North River’s insurance policies to tort plaintiffs.
Mine Safety first filed suit against North River in Pennsylvania. While that case was progressing, Mine Safety also filed suit against North River in Delaware. Then, apparently dissatisfied with the progression of the Delaware suit, Mine Safety “engineered” additional actions in West Virginia by entering into settlements with tort plaintiffs and assigning its rights under the North River insurance policies to those plaintiffs, who then brought declaratory judgment proceedings against North River pursuant to West Virginia statute.
North River sought to stay the West Virginia actions, but that motion was denied. Seeking relief from the multiplicity of actions, North River sought a permanent injunction from the Delaware Court of Chancery preventing Mine Safety from prosecuting its later-filed West Virginia claims and from further assignments of Mine Safety’s rights under the North River insurance policies to prospective tort plaintiffs.
The Chancery Court denied the injunction, finding that, even assuming North River satisfied the first two prongs of the test for a permanent injunction, 1) actual, rather than probable, success on the merits and 2) irreparable harm, it had failed to satisfy the final prong, 3) showing the equities weighed in its favor. Reasoning that North Star was seeking a remedy that would ultimately be ineffective at protecting it from the risk of inconsistent judgments, the Chancery Court denied the injunction because “equity will not do a useless thing.” Further, the court found it would be inequitable to grant an injunction that would prevent Mine Safety from participating in North River’s continued litigation that would define Mine Safety’s rights as an insured.
North River appealed. During the pendency of the appeal, the West Virginia Supreme Court of Appeals affirmed the denial of North River’s motion to stay the later-filed West Virginia actions on forum non-conveniens grounds. Accordingly, North River withdrew its first argument, but continued to press its argument before the Delaware Supreme Court concerning the assignment of rights to prospective tort plaintiffs.
Supreme Court’s Holding
The Delaware Supreme Court affirmed the denial of a permanent injunction barring Mine Safety from assigning its rights under North River’s insurance policies to prospective tort plaintiffs. Reviewing the factual findings of the Chancery Court based on an abuse of discretion standard of review, the Court addressed three issues: 1) whether the Chancery Court erred in concluding that claimants would assert claims against North River even without an assignment of rights to them by Mine Safety; 2) whether the Chancery Court erred in denying permanent injunctive relief because it would be futile or useless; and 3) whether the Chancery Court abused its discretion in determining that an injunction would impede Mine Safety’s ability to settle cases with tort claimants.
As to the first argument, the Court found little evidence in the record to support North River’s assertion that, without Mine Safety’s “engineering” of suits by assigning its rights to tort plaintiffs, claimants would not directly bring suit against North River. Even though such an injunction might reduce the number of claims, it would not provide complete relief. Because the standard for a permanent injunction requires “actual, rather than probable success on the merits,” and the tort plaintiffs could bring suit independent of any assignment of rights, Chancery could not completely remedy the harm. Although there is no requirement that an injunction completely remedy the harm, because of the deferential standard of review, the Supreme Court did not find that the Chancery Court had abused its discretion in refusing to issue a permanent injunction.
Second, the Chancery Court correctly determined that generally, equity will not do a useless thing. Because under West Virginia law, tort plaintiffs have a statutory right, even absent an assignment of rights under an insurance contract, to bring a declaratory judgment action against an insurer, issuing a permanent injunction barring Mine Safety from assigning its rights would not provide complete relief. Although the Court recognized that there was some merit to the contention that Mine Safety had acted inequitably, there was not a full enough record to merit a finding that the Vice Chancellor had abused his discretion in denying injunctive relief.
Third, the Court found that the Vice Chancellor had not abused his discretion in determining that permanent injunctive relief would impede Mine Safety’s ability to settle cases with tort claimants. Again, because of a scant record below, the Court was not able to determine that an abuse of discretion had occurred.
 Previous decisions in this case addressed whether the Delaware action should be stayed in favor of the Pennsylvania suits. One of these decisions granting a stay of the Delaware action is Mine Safety Appliance Co. v. AIU Ins. Co., 2011 WL 300252 (Del. Super. Jan. 24, 2011), interlocutory appeal refused, 2011 WL 743050 (Del. Mar. 3, 2011). Other opinions were later issued lifting portions of the stay.
James v. National Financial LLC, C.A. No. 8931-VCL (Del. Ch. Dec. 5, 2014).
Why This Decision is Noteworthy: This Delaware Court of Chancery opinion reiterates the important practice guideline that the Court of Chancery does not recognize the concept of “local counsel”. That is, Chancery will require Delaware counsel serving with out-of-state counsel to have full responsibility for any filings with the court, and also to take an active role in all aspects of discovery. This is the polar opposite of the view that some have of using local counsel as a mere mail drop or to use local counsel to merely sign whatever out-of-state counsel would like to file. See, e.g., summary of related standards in an article that we published on this blog.
This decision also features other notable observations about Delaware discovery practice in general.
This case is a class action filed by a person who obtained a payday loan and was charged an interest rate of over 800%. The initial loan was for $200 and the cost of the credit was $1,420. This opinion focuses on discovery issues and failure to comply with discovery orders resulting in the grant of a motion for sanctions.
After an exhaustive description of the multiple failures to comply with prior orders of the court granting motions to compel, as well as inconsistent answers to the same questions and conflicting explanations for failure to comply, the court reviewed the basis for the award of sanctions for discovery abuses pursuant to Court of Chancery Rule 37, including the types of sanctions that a court can impose for violating a discovery order under Rule 37(b)(2).
Highlights of Key Principles:
The court recited several basic discovery ”first principles” as announced in Delaware decisions over the years. For example, a fundamental first principle recited by the court was that: “Candor and fair-dealing are, or should be, the hallmark of litigation and required attributes of those who resort to the judicial process. The rules of discovery demand no less.” (citation omitted.) See generally, Rule 1 of the Delaware Rules of Professional Conduct.
Among the problems with the discovery responses by the defendant in this case, was the admission that a notarization was provided even though the signatory did not personally appear before the notary. The court explained that the failure to appear in person before a notary when a signature is notarized makes the notarization invalid. It also exposes the persons involved to various penalties. See Slip op. at 24 and footnotes 3 and 4.
Also noteworthy is that the court referred to the recent amendment to Rule 1.1 of the Delaware Rules of Professional Conduct, and Comment 8 thereto, which address the requirement that attorneys maintain familiarity with technological developments in order to maintain technological competence in connection with the practice of law. The court confirmed that: “Technological incompetence is not an excuse for discovery misconduct.”
Role of Local Counsel Not Recognized in Court of Chancery:
The court also explained that when forwarding (out-of-state) counsel has been admitted pro hac vice and is taking a lead role in the case, “the Court of Chancery does not recognize the role of purely ‘local counsel.’” See State Line Ventures, LLC v. RBS Citizens, 2009 WL 4723372, at *1 (Del. Ch. Dec. 2, 2009). Relying on Rule 170 of the Delaware Court of Chancery Rules, the court also emphasized that: “The admission of an attorney pro hac vice shall not relieve the moving attorney from responsibility to comply with any Rule or order of the Court.”
The court also made clear that Delaware lawyers are “ultimately responsible for the documents they file with the court and serve on the opposing party” and that “our Rules make clear that the Delaware lawyer who appears in an action always remains responsible to the Court for the case and its presentation. (citing State Line Ventures.)
The court also explained that Delaware counsel “are expected to police the behavior of their out-of-state colleagues and insure that that out-of-state counsel understand the standards expected by Delaware courts. (This standard is in full recognition of the large number of out-of-state counsel who routinely engage in corporate litigation in Chancery.) See generally recent Delaware Supreme Court decision publicly reprimanding an attorney admitted pro hac vice for failing to comply with a court order.
Delaware Counsel Must Be Involved in Discovery:
Moreover, the court explained that:
“the court expects Delaware counsel to play an active role in the discovery process, including in the collection, review and production of documents. If Delaware counsel does not directly participate in the collection, review and production of documents, then at a minimum Delaware counsel should discuss with co-counsel the court’s expectations.”
Slip op. at 27.
In granting the motion for sanctions the court ruled that it will be deemed established for purposes of trial that the interest rates charged on the loans were outside of the tolerances set forth in the Federal Truth in Lending Act. In addition, the court awarded attorneys’ fees for Defendant’s failure to comply with prior court orders.
In Re TransPerfect Global, Inc., C.A. No. 9700-CB (Del. Ch. Dec. 3, 2014). This Delaware Court of Chancery decision denied a request for an interim custodian for a deadlocked board of two persons, in a company that was also deadlocked at the stockholder level. Even though this was an interim decision prior to trial, it demonstrates that even when a deadlock is present, the appointment of a custodian under DGCL Section 226 is not without challenges. The Court explained the statutory basis and applicable case law that establishes the prerequisites for this summary proceeding form of corporate litigation as follows:
Section 226(a)(2) of the Delaware General Corporation Law provides for the appointment of a custodian to resolve a deadlock when:
The business of the corporation is suffering or is threatened with irreparable injury because the directors are so divided respecting the management of the affairs of the corporation that the required vote for action by the board of directors cannot be obtained and the stockholders are unable to terminate this division . . . . 8
Elting acknowledges that, because she seeks the appointment of an interim custodian until a trial can be held, she also must demonstrate that the “appointment is urgently needed for the immediate protection of the corporation.”
Moore v. C.H.M. Enters., Inc., 1983 WL 102620, at *2 (Del. Ch. Nov. 9, 1983)(emphasis added).
See generally Millien v. Popescu, C.A. No. 8670-VCN (Del. Ch. Feb. 19, 2014) at n.17 (appointment of a custodian is discretionary despite a deadlock, and court would have rejected appointment of custodian after trial, even if it had found a deadlock, based on the court’s finding, in essence, of mere stubbornness on the part of one of the two directors).
A free graphic of a different kind of custodian is provided for your entertainment.
Two recent letter rulings serve as practical reminders that even though the grant of a motion for expedited proceedings in the Delaware Court of Chancery is common for corporate and commercial litigation, there remains a standard that must be satisfied before such expedition will be granted: irreparable harm must be shown as both imminent and non-speculative in order to impose on parties and the court abbreviated deadlines and a quick timetable for hearings and trial. Threatened financial insolvency must also be demonstrated with some detail and substantiation. See Smollar v. Potarazu, C. A. No 10287-VCN (Del. Ch. Nov. 19, 2014) and Platinum Partners Value Arbitrage Fund L.P. v. Echo Therapeutics, Inc., C.A. No. 10303-VCN (Del. Ch. Nov. 14, 2014).
Professor Stephen Bainbridge‘s corporate law scholarship is often cited by Delaware’s Supreme Court and Court of Chancery in their corporate law opinions. The good professor is a friend of this blog and one of the most prolific corporate law experts in the country. He has recently published an article that argues in favor of fee-shifting bylaws. This adds to the burgeoning literature on this cutting edge issue in corporate litigation, and is must reading for anyone interested in this topic. See generally, recent law review article by Justice Ridgely of the Delaware Supreme Court, appearing on these pages. See also, recent article from Bloomberg BNA about pending Chancery case involving fee-shifting bylaws.
Supplement: Professor Bainbridge penned a follow-up article to the above piece that addresses the “public choice” issues regarding fee-shifting bylaws. More commentary, linked by the good professor, available from others here and here.
Lee v. Pincus, C.A. No. 8458-CB (Del. Ch. Nov. 14, 2014).
Why This Chancery Opinion is Noteworthy: The Chancellor provides in this Court of Chancery decision a useful overview of several key statements of Delaware law with widespread applicability in corporate litigation. For example: (i) the standard of review for a breach of fiduciary duty claim, and when self-dealing will require the entire fairness standard instead of the business judgment rule to apply; (ii) the difference between a direct and derivative claim is also examined; (iii) the court’s classic description of the duty of loyalty is helpful to have handy for this fundamental component of fiduciary duty; (iv) an explanation of those instances where a fiduciary duty claim will be permitted notwithstanding arguably affiliated claims based on breach of contract; (v) providing for liquidity of stock only to selected stockholders may form the basis of a claim and damages. (See footnote 29 and text accompanying both footnotes 24 and 34); and (vi) the investment bankers were not held liable for aiding and abetting even though they provided their consent to the waiver. (Cf. In re Rural/Metro).
The facts of this case involve Zynga, the “social gaming” company that is publicly traded on NASDAQ and is best known for online games such as FarmVille. It raised $1 billion in an IPO. The allegations in this case are that half of the directors waived a restriction that otherwise required them, and others, not to sell their shares until a certain number of days after the IPO. The waiver provided “earlier liquidity” to only selected members of the board and other pre-IPO stockholders. Because the waiver allowed them to sell their shares at higher prices than most other stockholders, who had to wait a longer period before they could sell, resulting in them selling their stock at a lower price, damages were claimed to exceed $200 million for the putative class.
I subjectively selected the following excerpt for my loyal readers:
The obligation Lee seeks to enforce is for the Director Defendants to not receive personal benefits inconsistent with the standard of conduct of fiduciaries under Delaware law.52 She alleges that the Director Defendants gave themselves an improper benefit inconsistent with their duty of loyalty to Lee and the putative class.53 In my view, this is quintessentially a fiduciary duty claim.
52 See, e.g., Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939) (“Corporate officers and directors are not permitted to use their position of trust and confidence to further their private interests. . . . The rule that requires an undivided and unselfish loyalty to the corporation demands that there shall be no conflict between duty and self-interest.”).
C. Count I States a Claim for Breach of Fiduciary Duty
A motion to dismiss under Rule 12(b)(6) for failure to state a claim for relief must be denied unless, assuming the well-pled allegations to be true and viewing all reasonable inferences from those allegations in the plaintiff’s favor, there is no “reasonably conceivable set of circumstances susceptible of proof” in which the plaintiff could recover.54 Although “conclusory allegations that are unsupported by specific facts” are not accepted as true, and “unreasonable inferences [are not drawn] in the plaintiff’s favor,”55 the pleadings required to satisfy the reasonable conceivability standard are “minimal.”56 “[I]t may, as a factual matter, ultimately prove impossible for the plaintiff to prove his claims at a later stage of a proceeding, but that is not the test to survive a motion to dismiss.”57 (emphasis added)(some citations and footnotes omitted)
In re Allergan Inc. Stockholder Litigation, No. 9609, 2014 WL 5791350 (Del. Ch. Nov. 7, 2014). This opinion of the Delaware Court of Chancery addresses issues related to director’s duties of disclosure as well as ripeness in the context of corporate litigation. But as Frank Reynolds of Thomson Reuters writes, in an article that he has graciously shared with us, this decision is also the latest iteration of a long-running dispute for control of Allergan, the maker of Botox, that has generated several lawsuits in at least two states.
The court’s opinion quoted from the complaint which referred to a duty of candor, which the court referred to as the duty of disclosure, without criticizing the synonymous reference. Specifically, the court explained:
Although Count II is captioned in the consolidated complaint as a claim for breach of the “fiduciary duty of candor,” there is no independent duty of disclosure under Delaware law. Instead, the duty of disclosure derives from the duty of care and the duty of loyalty.
The court further added that:
As Vice Chancellor Laster recently explained:
Directors of a Delaware corporation owe two fiduciary duties: care and loyalty. The “duty of disclosure is not an independent duty, but derives from the duties of care and loyalty.” The duty of disclosure arises because of “the application in a specific context of the board’s fiduciary duties . . . .” Its scope and requirements depend on context; the duty “does not exist in a vacuum.” When confronting a disclosure claim, a court therefore must engage in a contextual specific analysis to determine the source of the duty, its requirements, and any remedies for breach. (citations omitted).
The court raised the issue of ripeness sua sponte, in the context of a claim for a declaratory judgment regarding written consents of shareholders, and concluded that it would not give an advisory opinion.
Justice Henry duPont Ridgely of the Delaware Supreme Court recently authored an article on one of the most timely issues in corporate litigation today: bylaw amendments that include fee-shifting and forum selection clauses.
His Honor prepared the article based on a speech he presented last month at the SMU Corporate Counsel Symposium, and we are grateful that he has allowed us to share a link to his article. In addition, it remains important to add that the SMU Law Review also consented to this posting of Justice Ridgely’s article with the following acknowledgement about the article: Posted with permission from the SMU Law Review and the Southern Methodist University Dedman School of Law. The article will appear in an upcoming issue of the SMU Law Review. The formal title of the article is: ”The Evolving Role of Bylaws in Corporate Governance.”
Much has been written in trade publications and in the blogosphere about recent developments involving bylaw amendments, some of which we have linked to on these pages.
Justice Ridgely announced a few days ago that, after 30 years as a member of the Delaware Judiciary, he will be retiring from the bench in January 2015. He has been one of the brightest stars in the constellation of Delaware jurists, which counts many shining lights among its number. Still, the Delaware Bench will be less stellar in his absence. His public service through his exemplary contributions to the administration of justice will remain a standard by which others should be measured.
My article entitled: Directors Given More Authority to Limit Multi-Forum Litigation, appeared in the November/December issue of NACD Directorship, a publication of the National Association of Corporate Directors. This regular short column discusses the recent Court of Chancery decision in City of Providence v. First Citizens Bancshares, Inc., also highlighted on these pages, which addresses one of the leading issues in Delaware corporate litigation today: forum selection bylaws.
Theravectys SA v. Immune Design Corp., C.A. No. 9950-VCN (Del. Ch. Oct. 31, 2014). This Court of Chancery opinion is useful for those engaged in Delaware corporate litigation to the extent that it clarifies when a subpoena served on a subsidiary can be used to obtain documents from the corporate parent of that subsidiary.
This letter decision involves a non-party that moved for a protective order under Court of Chancery Rule 26(c). The motion arises in the context of litigation against Immune Design Corp. (“IDC”) based on claims by Theravectys SA (“TVS”) that non-party Henogen manufactured products for IDC in violation of a contract between Henogen and TVS. In order to obtain discovery to establish its case, TVS served a subpoena on Novasep US, a corporate affiliate of Henogen. Novasep US and Henogen, neither of which is a party to this litigation, share a corporate parent headquartered in France. Novasep US is based in Pennsylvania.
Court of Chancery Rule 34(a) provides that a party may only request documents “which are in the possession, custody or control of the party upon whom the request is served.”
In this context, control has been defined to include “the legal right to obtain the documents requested upon demand. Thus, the key inquiry is whether the company has the power, unaided by the court, to force production of the documents.” See footnotes 4 and 5. In these instances, separate corporate identities are generally respected except in rare circumstances justifying the application of the alter ego doctrine to pierce the corporate veil of a subsidiary. The courts in Delaware decline to broaden the scope of control to include an inquiry into the practical ability of the subpoenaed to a party to obtain the documents.
The court did not address the arguments that the attempt to obtain these documents violated the applicable law in the foreign countries where the parent corporation and an affiliate were based.
The court found that Novasep US was not required to produce documents that were not in its possession, custody or control. The court allowed TVS discovery to allow it to attempt to demonstrate that the corporate structure of Novasep US and its relationships with its affiliates would allow it to determine whether the requested documents were within its control.