Light Blogging
Blogging may be light for the next 2 weeks, as I will be out of the office with limited Internet access, and when I return I have full days of depositions and then a trial through the week of April 10.
Attorneys' Fees in Trust Litigation
In the case styled: In the Matter of the Unfunded Insurance Trust Agreement of Emilio M. Capaldi, Deceased, download file, an order of the Delaware Supreme Court reviews a Chancery Court opinion and addresses the issue of attorneys' fees in trust litigation.
Judgment Not Appealable Pending Application for Fees
In Wellington Homes, Inc. v. State of Delaware, Ex Rel. M. Jane Brady, download file, the Supreme Court made clear, in an order, that a judgment of the Superior Court was not final and not appealable while a claim for attorneys' fees was still pending. This case involved claims against a developer resulting in a jury verdict against the developer for statutory penalties brought on behalf of the State by the Delaware Attorney General for alleged construction defects and related complaints.
Insider Trading?
The Law Blog posts about an upcoming trial for a former Qwest CEO with the following sound bites by the prosecution and defense:
"The government has a flawed case because, among other things, the information Nacchio possessed didn't need to be disclosed to investors and thus wasn't material. The government counters that insiders can have material information they don't have to disclose, but if they do, they may not trade on it." Here is the link:
Law Blog. A Qwest For a Trial Date, a Motion to Dismiss, and a Settlement Rejection
Company Sued For Selling Email Addresses
As a follow-up to my post of a few minutes ago, Law.com reports about a lawsuit by Eliot Spitzer against an Internet company that was accused of selling email addresses. The New York AG called it the "biggest deliberate breach of Internet privacy ever." Here is the link:
Law.com - Inside Opinions: Legal Blogs
No Such Thing As Privacy
The Wired GC blog posts about an online service called Jigsaw that pays people to provide contact data. I checked and my name and address and email were on their system. Do we have any pure privacy left? Here is the link:
The Wired GC: Hold on to Your Business Card
Afghan Christian Saved From Persecution
In a story that should be of interest to anyone concerned about freedom of religion, CNN reports that an Afghan man who was facing execution for converting to Christianity is now expected to be freed. Here is the link:
CNN.com - Afghan Christian convert may be freed - Mar 24, 2006
Settlement of Derivative Case
Prof. Gordon Smith posts about the 2004 settlement of the Limited case after a decision by Vice Chancellor Noble that denied a motion to dismiss. He is using it in his course to teach about derivative cases. Here is the link:
Conglomerate Blog: Business, Law, Economics & Society
Dabit
The latest post by Prof. Ribstein on the recent SCOTUS decision in Dabit
is an insightful analysis and has many useful references to background and related sources as well as his prior posts and the comments of others. Here is the link:
Ideoblog: More on Dabit and federalism
Update on Debate: Shareholders v. Directors
As mentioned in an earlier post, and as updated by Professor Bainbridge, he and Vice Chancellor Strine have replied in the Harvard Law Review to an article by Lucien Bebchuk about the debate between shareholder v. director power. Now Bebchuk is presenting a rebuttal article. But as Bainbridge notes, one of the benefits of having a blog is that the blogger may get the last word. Here is the link with references to the articles:
ProfessorBainbridge.com: Shareholder Empowerment: Bebchuk Replies to Strine and Bainbridge
Arbitrability Issue Addressed by Supreme Court
The Delaware Supreme Court issued an opinion on March 14 that is must reading for anyone who drafts or needs to interpret an arbitration clause in an agreement governed by Delaware law. In James and Jackson LLC v. Willie Gary LLC, download file, Delaware's highest court affirmed the trial court and with pithy reasoning addressed the issues of: (i) who decides arbitrability if the agreement incorporates the rules of the American Arbitration Association (AAA); and (ii) based on the terms of the specific agreement at issue, whether the claims raised were governed by the arbitration clause. The Court determined that based on the terms of the particular agreement involved, the parties intended that the trial court determine the threshold issue of arbitrability, and that likewise injunctive relief should be decided by the trial court. CAVEAT: If the parties to an agreement simply incorporate the rules of the AAA without more, one should be aware that the AAA will likely be empowered to not only decide the issue of arbitrability, but the AAA will also be the forum to dispense equitable relief. FULL DISCLOSURE: The author of this blog argued the winning side in the expedited appeal and in the trial court--whose decision was summarized here. I would have reported both opinions as important decisions nonetheless, even if I lost (though not with as much cheerfulness.)
UPDATE: Steve Jakubowski of The Bankruptcy Litigation Blog kindly references me and this decision in his post today. Prof. Larry Ribstein also comments on the case here.
Lift Stay Before Arbitrating Against Debtor in Bankruptcy
Friend and fellow blogger Steve Jakubowski of The Bankruptcy Litigation Blog kindly comments on the Delaware Supreme Court decision I posted about (and won), but also, in his erudite and well-written manner, he writes about a recent Third Circuit decision that rendered void an arbitration decision. The debtor in bankruptcy commenced the arbitration, which the debtor lost in light of a counterclaim. Judge (now Justice) Alito reasoned that the automatic stay should have been lifted before the counterclaim was filed. Read the extensive analysis by Steve here.
Specific Performance of Oral Agreement
In Walton v. Beale, download file, the Chancery Court granted a request for specific performance of an oral agreement regarding real estate and found that it was an exception to the statute of frauds because it satisfied the partial performance and estoppel exceptions to the statute. The Court addressed the situation where "a series of acts or words constitute a contract if the parties acted as if they intended to create, and did succeed in creating, rights and duties in themselves that a court would recognize and enforce." The court also listed the four primary elements of an enforceable contract as well as the requirements for specific performance and exceptions to the statute of frauds.
Law Students Make Law Firm Fire Client
A post on the Legal Ethics Forum blog links to a story that strikes a blow against the independence of attorneys or at least the ability of a firm to represent a client whose position may not be politically correct in all circles. The linked story indicates that students at a prestigious law school put so much pressure on a prestigious law firm that recruited at the school, that the law firm declined to do certain work for the client that the students found objectionable. A sad day in academia if you ask me. For a related topic, I refer you to Larry Ribstein's post about whether some schools have a liberal or conservative bias. The story about what law students were up in arms about reminded me of a lecture I attended this week by author Thomas E. Woods, Jr., Ph.D., who wrote, among other books: The Politically Incorrect Guide to American History and How The Catholic Church Built Western Civilization.
UPDATE: More thoughts on this story from the Right Coast blog.
Of Amendments; Fraudulent Conveyance and Dissolution
In The Matter of Transamerica Airlines, Inc., download file, the Chancery Court addresses several substantive areas in the context of a motion to amend under Rule 15(a) as well as Rule 15(aaa). Although the court does not decide the claims in this procedural context, it must determine if the claims would survive a motion to dismiss. The claims so analyzed include fraudulent conveyances (and whether the statute of limitations barred them); the 2 basic statutory forms of corporate dissolution; whether civil conspiracy is possible between a parent and subsidiary; and piercing the corporate veil. The case involved the attempt to collect on a judgment obtained through a court in Nigeria.
Indemnification of Lawyer as Agent for Corporation
Who knows if any courts in Delaware will follow it, but a New Jersey appellate court, applying Delaware law, found that an attorney was entitled to indemnification by a corporation when acting as an agent of that corporation. Vergopia v. Shaker, download file.
UPDATE: A little more detail may put this case in context. The trial court denied indemnification and the appellate court granted indemnification based on a different reading of the same Delaware case: Fasciana v. Elec. Data Sys. Corp., 829 A.2d 160 (Del. Ch. 2003). In Fasciana, the Chancery Court read Section 145 as not endorsing indemnification of a lawyer whose client/corporation sued him for malpractice, but did allow indemnification to the limited extent that the lawyer was sued for misprepresentations to third parties. This last part of Fasciana was what the New Jersey appellate court relied upon because the New Jersey case involved a lawyer who was sued by an employee of the corporation who joined the lawyer in the suit against the corporation because he allegedly "commented on or played a role in preparing" a press release about the fired employee. The question is if a Delaware court would apply the reasoning of the New Jersey court based on the facts of that case.
Construction Funds Held in Trust per Statute
In Richard Y. Johnson & Son, Inc. v. Just-in Construction, Inc., download file, the Chancery Court interpreted Section 3501 of Title 6 of the Delaware Code which provides that a general contractor will be deemed to hold funds in constructive trust and those funds are required to be applied first to the payment of subcontractors and suppliers on a construction project.
Power Debate: Shareholder v. Director
As referenced by Prof. Steve Bainbridge in his recent critique of an article in The Economist, an upcoming issue of the Harvard Law Review features a classic academic debate. The upcoming issue features a law review article by Lucian Bebchuk favoring greater shareholder power, and separate reply articles by Vice Chancellor Leo Strine, Jr. and Prof. Steve Bainbridge. Cutting edge stuff for anyone who follows these topics. Someone circulated a draft of the Vice Chancellor's article to me. download draft.
Legal Ethics
For those interested in legal ethics, the index of articles in the current issue of The Georgetown Journal of Legal Ethics is far-reaching. Here is a link that shows the article topics.
Two Dismissal Rule Did Not Apply in Bankruptcy Case
In In Re: Chi-Chi's, Inc., et al., a complaint was brought before the United States Bankruptcy Court for the District of Delaware by Sysco Corporation and the SYGMA Network (collectively, "Sysco") seeking to enjoin the Debtor Chi-Chi's, Inc. ("Chi-Chi's") from initiating, continuing, and/or participating in any additional actions, including arbitration, against them in connection with certain hepatitis claims. The Court ruled against Sysco, holding that Sysco had not met its burden of showing that Rule 41(a)(1) should be applied to bar Chi-Chi's arbitration claim, since this case involved separate real parties in interest, represented by separate counsel, prosecuting distinct causes of action.
According to Sysco, Chi-Chi's had already dismissed two actions, in violation of Rule 41(a)(1), commonly known as the two dismissal rule. Under this rule, a "notice of dismissal operates as an adjudication upon the merits when filed by a plaintiff who has once dismissed in any court of the United States or of any state an action based on or including the same claim." On November 12, 2004, Chi-Chi's voluntarily dismissed its action against Sysco (the "Chi-Chi's Action"). On December 7, 2004, Empire Indemnity Insurance Company ("Empire"), a liability insurer of Chi-Chi's, voluntarily dismissed its action against Sysco (the "Empire Action").
Continue Reading...Third Circuit Enforces Arbitration Clause in Bankruptcy
In In Re: Ethel Marie Mintze, the United States Court of Appeals for the Third Circuit ruled on the issue of whether the Bankruptcy Court's decision to deny enforcement of an arbitration clause was proper. The Third Circuit reversed the United States District Court for the Eastern District of Pennsylvania that affirmed the Bankruptcy Court's decision to deny enforcement of the arbitration clause, and remanded the case to District Court to remand it to Bankruptcy Court with instructions to order the parties to engage in arbitration in accordance with the terms of the arbitration provision.
In Mintze, the debtor alleged that the Defendant American General Financial Services, Inc. ("AGF") induced her to enter into an illegal and abusive home equity loan. The arbitration clause of the loan agreement stated that "all claims and disputes arising out of, in connection with, or relating to [the] loan" must "be resolved by binding arbitration."
The Circuit Court held that the U.S. Supreme Court decision Shearson/A.M. Exp., Inc. v. McMahon, 482 U.S. 220 (1987), and the Circuit Court decision applying McMahon to a bankruptcy case, Hays & Co. v. Merrill Lynch Pierce, Fenner & Smith, Inc., 885 F.2d 1149 (3rd. Cir. 1989), were controlling. Under McMahon, if a party opposing arbitration can demonstrate that "Congress intended to preclude a waiver of judicial remedies for the statutory rights at issue," the FAA will not compel courts to enforce an otherwise applicable arbitration agreement. To overcome enforcement of arbitration, a party must establish congressional intent to create an exception to the FAA's mandate with respect to the party's statutory claims, which can be discerned in one of three ways: (1) the statute's text, (2) the statute's legislative history, or (3) "an inherent conflict between arbitration and the statute's underlying purposes." See id. Under Hays, the court held that whether the McMahon standard is met determines whether the court has the discretion to deny enforcement of an otherwise applicable arbitration clause.
In reversing judgment, the Circuit Court ruled that the Bankruptcy Court had no discretion to exercise, given that Mintze could not show that "Congress intended to preclude a waiver of judicial remedies for the statutory rights at issue." See McMahon. The two reasons it cited were (1) because Mintze raised no statutory claims created by the Bankruptcy Code, the Circuit court cannot find an inherent conflict between arbitration of Mintze's federal and state consumer protection issues and the underlying purposes of the Bankruptcy Code; and (2) the court perceived no adverse effect on the underlying purposes of the [Bankruptcy] Code from enforcing arbitration.
Shareholder Activism
Prof. Bainbridge takes The Economist to task, in a polite manner, for factual and conceptual errors in its reporting on shareholder activism. Along the way we are treated to his view that the Delaware Supreme Court's Time decision does not endorse a "just say no" defense in an arguably Revlon context, and he explains why he rejects the view that shareholders are "owners" of the corporation in the conventional sense of the term. Here is the link:
ProfessorBainbridge.com: The Economist on Bloggers and Shareholder Activism
Standard for Damages in Disclosure Claims Clarified
The Delaware Supreme Court clarified (a few days ago) several of its prior decisions in connection with what damages are available for a breach by the board of directors of their disclosure obligations, especially in connection with proxies. In the case of In Re J.P. Morgan Chase & Co. Shareholder Litigation, download opinion, the Supreme Court addressed the partial appeal of a trial court decision that rejected disclosure claims due, in part, to the absence of provable damages. The aspect of the Chancery Court opinion that was not appealed from, dismissed claims based on a failure to plead demand futility under Chancery Court Rule 23.1. The case arose from the merger between J.P Morgan Chase and Bank One.
The Chancery Court's decision was summarized last year on my blog here. Plaintiffs argued that violation of the duty of disclosure, without more, automatically entitles the affected shareholders to a damages recovery. They relied on footnote 27 of Malone v. Brincat, 722 A.2d 5,12 (Del. 1998).
The plaintiffs also relied, incorrectly according to the Court, on its prior decisions of In Re Tri-Star Pictures, Inc., 634 A.2d 319 (Del. 1983) and Louden v. Archer-Daniels-Midland Co., 700 A.2d 135, 141 (Del. 1997).
The defining quote in the case is as follows:
Therefore, Tri-Star stands only for the narrow proposition that, where directors have breached their disclosure duties in a corporate transaction that has in turn caused impairment to the economic or voting rights of stockholders, there must at least be an award of nominal damages. Tri-Star should not be read to stand for any broader proposition. (emphasis in original)
This clarifies and in some ways rejects the original, less complete, footnote 27 in Malone v. Brincat that some read as a per se rule requiring at least nominal damages for any violation of disclosure duties. The above quote was a "revision" of footnote 27 in the Malone case, to add more complete language from the Louden case that was referred to in a more terse way in the original footnote, and to make it clear what the Supreme Court intended to say.
Judicial Recusal Standards Addressed
In what I predict will be the benchmark opinion for analyzing motions for judicial recusal in Delaware, the Chancery Court's recent decision in Reeder v. Delaware Dept. of Insurance, download file, provides a scholarly and comprehensive discussion of the topic. Reference was made in the opinion to U.S. Supreme Court Justice Scalia's decision denying a motion for his recusal. That U.S. Supreme Court opinion was summarized in one of my earliest blog entries here.
The Chancery Court opinion also addresses a Freedom of Information Act claim in detail, and the motion for recusal was a "non-motion" to the extent that it was only indirectly suggested by a pro se litigant. But to its credit, once the issue was raised, however improperly and frivolously, it needed to be addressed by the Court. I commend the reader to the text of the decision at the above link, but when reading it myself I could not help feeling how unfortunate it was that the court had to dignify such a baseless claim with a reply, though in doing justice to the issue, we now have a work of art on the topic.
Injunction on Covenant Not To Compete Not Modified
Deloitte & Touche USA LLP and Deloitte Tax LLP v. Lamela , download file, involved a Motion for Reargument under Chancery Court Rule 59(f) regarding the scope of a preliminary injunction entered in October 2005. This case was based on substantive Florida law (though the procedural requirements for injunctive relief were decided on Delaware law), and involved the entry of a TRO and a subsequent preliminary injunction against a former financial consultant and tax advisor who left Deloitte. The court noted that Rule 59(f) does not contemplate a reply to a Motion for Reargument in the typical case. The court refused to change the substance of its original preliminary injunction that excluded from the clients that the former employee was prohibited from soliciting or accepting an engagement with, nine clients that "held out their multistate tax work for competitive bidding".
The court concluded by saying that it would consider setting a final trial date within the next two or three months and ordered the parties to submit a proposed scheduling order within ten days of the date of the opinion.
A prior decision in this case involving the initial TRO and Preliminary Injunction, was summarized by my post found at this link. See also 2005 WL 2810719 (Del. Ch.).
Caremark Claim Dismissed per Rule 23.1 Due to Mere "Bald Assertions"
"Delaware law requires diligence not heroism", is the most memorable quote from the Chancery Court case that I summarize here, in connection with claims against the board, in a decision entitled David B. Shaev Profit Sharing Account v. Armstrong, download file. The court dismissed claims based, in essence, on Caremark, or lack of sufficient oversight by the board. The facts at issue in this case were first sued upon two years ago in the case captioned In Re:Citigroup, Inc. Shareholders Litigation, 2003 Del. Ch. LEXIS 61 (Del. Ch., June 5, 2003); aff'd sub nom. Rabinowitz v. Supero, 839 A.2d 666 (Del. 2003) (TABLE). In that case, the plaintiffs claimed, among other things, that certain directors of Citigroup either knew or should have known about allegedly fraudulent relationships between Citigroup and its clients, Enron and WorldCom, and therefore, breached their fiduciary duties in either approving or recklessly failing to discover those links. The court dismissed those claims as presenting "wholly conclusory" allegations devoid of particularized facts needed to show that the company's Board of Directors was disqualified from considering a demand under Chancery Court Rule 23.1. The court dismissed the action and observed that the plaintiffs failed to use the "tools at hand" including a Section 220 books and records demand, before filing suit.
In dismissing this "second" case, the also court found that this complaint did little more than the prior complaint and there was "literally nothing" to suggest that the defendants willfully or recklessly ignored information that would have led to the discovery of the misconduct at issue. The court found that the directors had erected a full panoply of audit systems designed to detect misconduct but that for some reason the system failed to work. The court reasoned that when "a board rationally makes a decision, its actions are protected by the business judgment rule."
When a board fails to act, under Delaware law, the claims will survive a Motion to Dismiss based on Rule 23.1 only if the plaintiff presents well pleaded facts to suggest a reasonable inference that a majority of the directors consciously disregarded their duties over an extended period of time.
The court also noted that where, as here, a dereliction of duty or Caremark claim is made, the court uses a variation of the Aronson v. Lewis test based on the Rales case to determine demand futility under Rule 23.1. In Rales, the two prong Aronson test is folded into one broader examination. It allows a court to determine both whether a corporate board on which demand might be made is disinterested and independent, and whether a majority of directors faces substantial likelihood of personal liability, because doubt has been created as to whether their actions were products of a legitimate business judgment.
The court provided some instruction to plaintiffs' lawyers on this point as follows: One option for a plaintiff in such a situation is to plead that the directors on which demand would be made are not disinterested or independent. Alternatively, a plaintiff can allege that a board violated its fiduciary duty by utterly failing to exercise oversight of the corporation, such as failing to assure the existence of reasonable information and reporting systems. The latter allegation might take the form of facts that show that the company entirely lacked an audit committee or other important supervisory structures. See Guttman v. Huang, 823 A.2d 492, 507 (Del. Ch. 2003). Without a formally constituted audit committee or one that failed to meet, a plaintiff might also plead that the directors "ignored red flags" indicating misconduct in defiance of their duties.
However a Caremark claim will fail if it is a mere "bald allegation that directors bear liability or a concededly well constituted oversight mechanism, having received no specific indications of misconduct, failed to discovery fraud."
The court concluded by reasoning that "Delaware law requires only diligence, not heroism." Boards are expected to erect mechanisms designed to bring misconduct to their attention, and to investigate in good faith when warnings appear. Because the complaint alleges no failing on the part of Citigroup or the Citigroup Board as to these obligations, the defendants' motions to dismiss must necessarily be granted for failure to make proper demand.
Professional Writer's Blog
The Common Scold blog posts about a new blog by author Malcolm Caldwell, author of the widely acclaimed books Blink and The Tipping Point. When authors who make their living writing and selling books decide to start a blog, it is noteworthy. Here is the link:
The Common Scold: BLINK THIS
Ethics Codes and Culture
The Wired GC blog has a great post about the importance in a company of a "culture" that promotes ethical behavior. He quotes from the GC of GE who observed that Enron had a great code of ethics, but the culture of the company apparently was such that it was not enforced or not regarded as a priority. Here is the link:
The Wired GC
Legal Fees
By comparison, now I might never need to be concerned about the size of a bill sent to a client. Larry Ribstein has a thoughtful post on the $100 million bill Kirkland & Ellis is seeking payment for in connection with their work on the United bankruptcy. Here is the link:
Ideoblog: Some thoughts on bankruptcy fees
Class Requirements Not Met
In WIT Capital Group, Inc. v. Benning, download file, the Delaware Supreme Court determined that under applicable New York law, the plaintiffs did not satisfy the "injury in fact" or "fact of harm" requirement and therefore could not satisfy the predominance of common issues of law or fact requirement under Delaware Superior Court Rule 23(b)(3). Therefore the case could not proceed as a class action.
Termination Not a Violation of Contract Terms
In Rohn Industries, Inc. v. Platinum Equity LLC, download file, the Delaware Superior Court applied New York law and ruled that a decision to terminate a contract was neither arbitrary nor capricious, and was made in good faith even though it was based on faulty legal advice and, therefore, did not violate a clause in a contract that allowed termination if "the party determined in good faith that there was a reasonable basis in law and fact to conclude that the transaction could result in material asbestos liability".
Blackberry Settlement
The Wired GC Blog has good insights on the recent Blackberry settlement. Here is the link:
The Wired GC ? Technology
Blog Statistics
For blog watchers, statistics on blogs are of great interest. For insight on which statistics carry the most weight, see this link:
LexBlog Blog : Which blog statistic is most important?
Shareholder Voting
The prolific Steve Bainbridge has written an article entitled: "The Case for Limited Shareholder Voting Rights". Here is the link:
ProfessorBainbridge.com: Shareholder Voting Rights
Expedited Proceedings Denied
A recent Chancery Court decision recited the familiar standards for granting a motion for expedited proceedings to consider a request for a preliminary injunction regarding a tender offer. The short letter opinion explained why the motion was denied, in the case of Madison Real Estate, et al. v. GENO One Financial Place, et al., download file.
SOX After 3 Years
Prof. Larry Ribstein, who has written extensively on Sarbanes-Oxley, has an article that reviews the experience with SOX since its passage about 3 years ago. Here is the link:
SSRN-Sarbanes-Oxley after Three Years by Larry Ribstein
Ash Wednesday
Thoughts on the beginning of Lent by reknown corporate law professor and blogger Steve Bainbridge. Here is the link:
ProfessorBainbridge.com: Ash Wednesday and Lent
Inspiration
Tip of the hat to Ben Cowgill's Legal Ethics Blog which has a reference to a video clip that has an inspirational story about a challenged student who was given a chance to play in the last 4 minutes of the last game of the season and scored 20 points. It is worth watching for a little lift. Here is the link:
'The Wildcats sure could use this kid' (an article at 'Ben Cowgill on Legal Ethics')
