Claims By Receiver for Corporation Proceed Against Directors

Stewart v. Wilmington Trust SP Services, al., C.A. No. 9306-VCP (Del. Ch. Mar. 26, 2015). This opinion from the Delaware Court of Chancery should be required reading for anyone who wants to know the latest iteration of Delaware law on the doctrine of in pari delicto and its exceptions. This opinion involves the Delaware Insurance Commissioner acting as a receiver for captive insurance companies, and addresses claims by a corporation against directors, the company’s auditor and a management company. Those involved in corporate litigation will be interested in the “fiduciary duty exception” and the “adverse interest exception” to the in pari delicto doctrine as well as the court’s application in this 94-page opinion of those exceptions to claims for aiding and abetting breaches of fiduciary duty. The procedural context of this decision is a ruling on motions to dismiss.

Large Defamation Damage Award Upheld Against Hewlett-Packard

The opinion in Professional Investigating & Consulting Agency, Inc. v. Hewlett-Packard Co., C.A. No. N12C-06-196 MMJ CCLD (Del. Super. Mar. 23, 2015), applies the Delaware law of defamation in the context of a claim by one business vendor against a large iconic company. The fascinating and scholarly opinion uses the word “humiliation” in the context of upholding a multi-million dollar jury verdict in the Complex Commercial Litigation Division of the Delaware Superior Court, which is the trial court of general jurisdiction, as compared to the Delaware Court of Chancery which handles claims limited to its equitable jurisdiction or a selected number of matters for which it has statutory based jurisdiction.

Also useful for those engaged in commercial litigation, is the opinion’s discussion of claims based on the statutory definition of trade secrets and their misappropriation, as well as the helpful reminder of the well-established law that if one is maligned in connection with one’s trade or profession, special damages do not need to be proven.

Delaware Supreme Court’s Latest Iteration of Implied Covenant of Good Faith and Fair Dealing

Nationwide Emerging Managers, LLC v. Northpointe Holdings, LLC, No. 441, 2014 (Del. Supr., Mar. 18, 2015). This Delaware Supreme Court opinion is notable for at least the following reasons:

(i) it provides the latest iteration of Delaware law on the amorphous but important contract provision imposed by law on every Delaware contract: the implied covenant of good faith and fair dealing. This 32-page opinion reversed the trial court’s finding that the implied covenant did apply to the contract at issue in this case. The Supreme Court’s reversal is another reminder of how challenging it is to make a successful claim based on the implied covenant;

(ii) many basic contract interpretation principles are explained in this opinion, but one that I found especially notable is that before the court can “fix a typographical error” in a contract, it must first satisfy the exacting prerequisites that would entitle one to the remedy of reformation of a contract, just as if it were a material term apparently.

There is much more to commend this opinion for its scholarly analysis and interesting facts, including the backstory of the buyer of an investment advisory firm who thought it was entitled to millions of dollars in damages because it did not think the seller gave it everything that it thought it was buying. That is not an uncommon complaint, but I still find it interesting that it remains such a common allegation.

Chancery Rejects Forum Non Conveniens Argument

Wilmington Savings Fund Society, FSB v. Caesars Entertainment Corp., C.A. No. 10004-VCG (Del. Ch., Mar. 18, 2015).

This Court of Chancery decision is noteworthy for two main points that should be of interest to those engaged in corporate and commercial litigation in Delaware:

(i)  the court found that a forum selection clause was not broadly worded enough, even if it were incorporated by reference, to cover the claims involved; and

(ii) this opinion serves as a useful example of how typically unsuccessful in Delaware is an argument that a case should not remain in Delaware based on forum non conveniens. The court applied the Cryo-Maid factors after declining to apply the first-filed McWane doctrine due to the two cases involved being filed close enough in time so that one was not regarded as being first-filed. The other case was filed in New York.

This case is related to the Caesars bankruptcy and there are many facts that serve as important background. But two other points in particular caught my eye: The court observes that it often is called upon to apply the law of New York in commercial disputes, so that was not a prevailing factor. Also, as part of its analysis, the court referred to the proximity of New York City and Wilmington, Delaware, and that excerpt deserves to be quoted for its masterful description:

 I take judicial notice, however, that the Courthouse in Wilmington is separated from Pennsylvania Station in Manhattan by a five-minute walk and 125 miles of shiny steel rails, which may be traversed in the comfort of the business section of an Acela train in an hour and a half. In that light, litigation in Delaware is less manifest hardship than inconvenience.

Chancery Denies Preliminary Injunction Request

Theravectys SA v. Immune Design Corp., C.A. No. 9950-VCN (Del. Ch. Mar. 8, 2015), is a Delaware Chancery opinion that may be useful for its application of the well-worn prerequisites that must be satisfied for obtaining preliminary injunctive relief.

The following three points from this 30-page decision, (the first 20 of which are mostly a recitation of complicated facts involving the manufacture of experimental vaccines), likely have the widest application to those practicing commercial and corporate litigation:

  • although in some instances the difficulty in quantifying damages may be a helpful factor in establishing the irreparable harm requirement for injunctive relief, the court will not assume the existence of irreparable harm simply because it is difficult to quantify;
  • the court describes those circumstances in which it may be permissible to interfere with and therefore defend successfully, a claim for tortious interference with contractual relations;
  • it seems basic, but the court addresses the statutory definition of a trade secret–which naturally must be satisfied before a claim for misappropriation of a trade secret can be established, and if one can reverse-engineer a product from publicly available information, then it may not be a trade secret.

Default Judgment Entered Against Non-Appearing Defendant Directors

In re Puda Coal Inc. Stockholders Litigation, No. 6476, 2015 WL 935322 (Del. Ch. Mar. 4, 2015). This Delaware Chancery ruling imposed a default judgment against director defendants who reside in China. One decision in the several prior proceedings in this case was highlighted on these pages, and featured duties of directors of Delaware companies with foreign operations.

Frank Reynolds of Thomson Reuters writes in Westlaw Journal Delaware Corporate about recent efforts to obtain a default judgment against the non-appearing directors, and the challenge of collecting on that judgment.

Notice and Hearing Procedure In Mooted Actions

The Court of Chancery recently issued a short letter ruling in Swomley v. Schlecht, C.A. No. 9355-VCL (Del. Ch., March 12, 2015), summarizing the notice and hearing procedure requirements set forth in In re Advanced Mammography Sys., Inc. S’holders Litig., 1996 WL 633509 (Del. Ch. Oct. 30, 1996) and In re Zalicus, Inc. S’holders Litig., 2015WL 226109 (Del. Ch. Jan 16, 2015).

The opinion provides an instructive summary of the process involved and reasoning behind the notice and hearing required when a settlement is reached in a class or derivative action and (i) the parties agree that the defendants have taken action sufficient to render the action moot and (ii) plaintiffs’ counsel receives a fee in light of the benefits conferred by contributing to the action taken by the defendants.

Compound v. Simple Post-Judgment Interest

In a recent letter decision, the Court of Chancery in ReCor Medical, Inc. v. Warnking, C.A. No. 7387-VCN (Del. Ch., Jan. 30, 2015), discussed the equitable considerations involved in determining whether an award of post-judgment interest should be simple or compound:

 There is no clear-cut exit from the conundrum posed by the parties. Compound interest is not a default answer because the question is committed to the Court’s discretion. Yet, on balance, the reasons cited for simple interest do not outweigh the reality that compound interest is a more accurate means of measuring the time value of money owed by Defendants to ReCor. Accordingly, interest on the fee and expense award will be compounded quarterly.

Third Circuit Binds Non-Signatory to Forum Selection Clause

The Third Circuit, applying Delaware law in Carlyle Investment Management LLC v. Moonmouth Company SA, No. 13-3526 (3rd Cir. Feb. 25, 2015), recently bound a non-signatory to a forum selection clause found in a subscription agreement.  The court applied a three part test to determine whether the non-signatory should be bound by the forum selection clause: (1) is the forum selection clause valid, (2) is the non-signatory a third-party beneficiary or closely related to the agreement, and (3) does the claim at hand arise from the non-signatory’s status related to the agreement?  This opinion provides a contrast to a recent decision of the Court of Chancery, as discussed here.

Chancery Court Declines to Apply Fee-Shifting Bylaw Based on Timing of its Adoption

Today the Delaware Court of Chancery issued an opinion in Strougo v. Hollander, C.A. No. 9770-CB (Del. Ch. Mar. 16, 2015), on an issue of first impression.  The Court did not decide the merits of the underlying complaint; the only issue before the Court on the narrow motion for partial judgment on the pleadings was whether a fee-shifting bylaw could apply to the plaintiff stockholder when it was adopted after the challenged reverse stock split that extinguished the stockholder’s interest, but before the stockholder brought suit.

The Court did not discuss the merits of the fee-shifting bylaw, but held that only the bylaws in effect at the time of the transaction extinguishing his interest could be applied the plaintiff based on principles of conventional contract law, and its interpretation of DGCL section 109 as only applying to current stockholders.  The Court did not address equitable considerations.  Although it did not decide the issue of fee-shifting bylaws on the merits, the Court, in dicta, was critical of them in the context of this case.

As discussed previously on these pages, legislation is currently under consideration that would prohibit fee-shifting bylaws in stock corporations.