Delaware Litigation Lawyer & Attorney : Francis G. X. Pileggi : Corporate, Business, Commercial, Delaware Chancery Court

In  Hillman v. Hillman, 2006 WL 2434231 (Del.Ch., Aug 23, 2006), read revised opinion of November 2006  here, the Delaware Chancery Court addressed many issues related to the status of a former general partner who claimed that he had an option to retain a 1% limited partnership interest. After a thorough analysis of the facts and the multi-faceted legal issues, the Court concluded that he did not have the right to retain an L.P. interest but that his remaining 1% of capital would be liquidated.  The court concluded also that he did not have standing to assert claims against the remaining members. In support of the right to liquidate his interest, the court also referred to the equitable maxim that: "equity abhors a forfeiture".

Much more could be written about this opinion and I may write more later, but other pressing business will limit this to a short highlight of the key issue.

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Prof. McGowen of the Legal Ethics Forum blog, provides a list of "5 Rules of Survival for Lawyers"   to students in his legal ethics class. They are useful for practicing Delaware lawyers too, even those engaged in business litigation. Here they are:

The best way to avoid trouble in the real world is to follow these rules of thumb:

1.     Never create a duty you don’t want to create
2.     Always be prepared to walk away
3.     Assume everything you do or say will become publicly known
4.     Never mistake the client’s problem for your own
5.     Never do as a lawyer anything you find repugnant as a person

Here is the link to his additional commentary on the rules: Legal Ethics Forum: 5 Rules of Survival

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Prof. Bainbridge posts about a new site from Mark Cuban that is intended to expose misleading accounting and analyze other shenanigans of those companies and their directors not followed closely by analysts or the popular press--which includes the majority of the 13,000 or more publicly traded companies, and others. Of course, many issues are raised by the existence of the site. Here is the link: ProfessorBainbridge.com: Cuban's Short Selling and Insider Trading

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Everyone can benefit from inspiration and my friend Steve Jakubowski of the Bankruptcy Litigation Blog provides inspiration in large amounts with his very moving eulogy for his mother. Here is the link: Bankruptcy Litigation Blog: May It Please the [Heavenly] Court - A Eulogy Delivered in Mom's Honor

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Prof. Larry Ribstein has a characteristically insightful and scholarly post on a very recent Chancery Court opinion that announces that there is no separate cause of action in Delaware called "deepening insolvency", just as there is no cause of action recognized in Delaware called "shallowing profitability". This is one of those opinions that grabs an issue by the lapels, stares it in the face, and does not let go until the issue is squarely and clearly addressed. The good professor also provides links to his related writings and those of Prof. Bainbridge. I don't recall the last time I quoted an entire post verbatim in its entirety, but this one is a classic that is hard to summarize. In his email to me, Ribstein called the title of the post:  "Ribstein on Strine on Bainbridge". I highly recommend it for business litigators. Read the whole post here. It is also quoted in full below:

In Trenwick America Litigation Trust v. Ernst & Young, L.L.P.,  [2006  WL 2333201 ( Del. Ch.)], C.A. No. 1571-N,  August 10, 2006, read online  here, in a typically insightful opinion, Delaware’s VC Strine held, among other things, that the directors of a subsidiary did not breach a fiduciary duty to its creditors for taking on debt for the benefit of its parent corporation, which owned 100% of its stock, although the parent and the sub eventually became insolvent.

VC Strine basically applied the business judgment rule and refused to find a special duty by the board to the creditors to avoid “deepening insolvency.” In other words, the subsidiary’s board continues to have a duty to the corporation, with the discretion under the business judgment rule to enter into transactions that benefit its sole shareholder, even if these transactions eventually leave its creditors worse off.

Here’s a colorful excerpt:

Delaware law does not recognize this catchy term ["deepening insolvency"] as a cause of action, because catchy though the term may be, it does not express a coherent concept. Even when a firm is insolvent, its directors may, in the appropriate exercise of their business judgment, take action that might, if it does not pan out, result in the firm being painted in a deeper hue of red. The fact that the residual claimants of the firm at that time are creditors does not mean that the directors cannot choose to continue the firm’s operations in the hope that they can expand the inadequate pie such that the firm’s creditors get a greater recovery. By doing so, the directors do not become a guarantor of success. Put simply, under Delaware law, “deepening insolvency” is no more of a cause of action when a firm is insolvent than a cause of action for “shallowing profitability” would be when a firm is solvent. Existing equitable causes of action for breach of fiduciary duty, and existing legal causes of action for fraud, fraudulent conveyance, and breach of contract are the appropriate means by which to challenge the actions of boards of insolvent corporations.

Of particular interest (to me, anyway) is Footnote 75 to the opinion, in which VC Strine responds to Steve Bainbridge’s idea in Much Ado about Little that directors cannot owe duties to the corporate entity, because the entity doesn't really exist:

The judicial decisions indicating that directors owe fiduciary duties to the firm when it is insolvent are not, in my view, at odds with Bainbridge’s fundamental perspective; indeed, they seem to me more a judicial method of attempting to reinforce the idea that the business judgment rule protects the directors of solvent, barely solvent, and insolvent corporations, and that the creditors of an insolvent firm have no greater right to challenge a disinterested, good faith business decision than the stockholders of a solvent firm.

This is interesting to me, because it is exactly the approach that I take (with my co-author Kelli Alces) in Directors’ Duties in Failing Firms:

The legal quandary of who should be owed duties in the insolvency scenario disappears . . . in the face of the business judgment rule. It is no more appropriate for courts to interfere with directors’ judgment in the insolvency scenario than at other times. The courts still lack expertise, and liability could still make directors too timid. Indeed, the business judgment rule is arguably more important as the courts face uncertainty as to not only the appropriate course of action but whose interests are paramount. . .

[T]he language about maximizing the “corporate” interest merely confirms the absence of judicial interference in any decision the directors choose to make as long as they avoid conflicts or deliberate harm.

This idea is based more fundamentally on my reasoning in Accountability and Responsibility in Corporate Governance, that directors’ discretion to make decisions on behalf of non-shareholder constituencies, including creditors, is defined by the business judgment rule.

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Prof. Ribstein discusses a recent analysis by Eisenberg and Miller with "interesting data on the relationship between choice of incorporating state and choice of law and forum in merger agreements." He also refers to his own extensive writings on the topic. Many references are included to Delaware. Here is the link: Ideoblog: Eisenberg & Miller on choice of law and forum

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In Lorillard  Tobacco Co. v. American Legacy Foundation, read opinion here, the Delaware Supreme Court affirmed the Chancery Court's reading of a contract that memorialized the settlement between the nation's largest tobacco companies and 46 states. The Chancery Court's decision was summarized on this blog here (with links to the original opinion and the denial of a motion for reargument). As in the trial court, a key issue  on appeal was whether "vilification" and "personal attacks" took place in violation of the agreement. Both courts cited to many court decisions for discussion of those terms in the context of contract interpretation to support the finding no violation of the settlement agreement.

Importantly, Delaware's High Court also affirmed the Chancery Court's application of the "doctine of preincorporation agreements". This doctrine allows the promoter of a corporation to enter into agreements that bind the nascent corporation. If the corporation accepts the benefits of those contracts,  they will be enforceable against the corporation. This gave standing to the tobacco companies to enforce the agreement against the non-profit foundation established in connection with the settlement agreement despite the foundation not being a signatory to the agreement.

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In Falconi v. Coombs & Coombs, Inc., read opinion here, the Delaware Supreme Court addressed an issue of interest to many business lawyers--including business litigators: When is a worker an independent contractor as opposed to an employee. This decision was made in the context of a worker's compensation claim but the analysis, including a discussion of the Restatement (Second) of Agency, Section 220, arguably has wide application in many other contexts. Among other notable aspects of this case was that "employee status" was found, despite the employer's use of an IRS Form 1099 for the worker's pay, which is commonly used as a factor in favor of independent contractor status.

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In Gomi Investors, LLC v. Schimmell Holdings, Inc., read opinion  here, Chancellor Chandler denied a motion to expedite proceedings in light of the absence of irreparable harm. In this Chancery Court letter opinion, the Court also found that the real goal of the motion was to speed up a related suit in Calfornia, and that the court in California was the appropriate forum to address those concerns.

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In General Video Corp. v. Kertesz, read opinion here,  the Chancery Court applied the familiar McWane [263 A.2d 281,283 (Del. 1970)], standard to stay this Delaware action in favor of  Texas actions that were first-filed and involve sufficiently similar issues, thus warranting the exercise of the court's discretion to grant a motion to stay.

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Courtesy of the Electronic Discovery Law Blog  is a link here to an article by Martha Dawson with practical tips for lawyers regarding the new federal rules of civil procedure that are expected to become effective as of December 1, 2006 and are designed to address directly issues with electronically stored information (ESI) and electronic discovery (EDD). Readers of this blog know that my not infrequent posts about e-data and e-discovery are indications of my efforts at self-education to keep updated on the  latest developments on the topic due to my view that not just business litigators, but all litigators and non-litigators alike must be aware of this all-encompassing  cutting-edge topic that in many ways creates a "whole new world" about how we deal with data in litigation. The new rules and developing case law in this area impacts businesses and their lawyers in the most intense way even if they do not litigate for a living.

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I am on vacation this week with limited Internet access, though I will still try to post case summaries that I have "stored up" for this eventuality.

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In Minnesota Invco of RSA, #7, Inc. v. MidWest Wireless Holdings, LLC,  read opinion here,  the Chancery Court interpreted an LLC Agreement  and reviewed the prerequisites of specific performance as well as basic contract interpretation principles. Describing the grant of specific performance as a "matter of grace that rests within the sound discretion of the court", it was also noted that there must not be an adequate remedy at law and the enforceability of the contract must be proven by clear and convincing evidence. Among the basic contract principles observed was this classic: simply  because the parties disagree on the interpretation of a contract does not make it ambiguous. Rather, in order to be ambiguous such that parol evidence is admissible, the provisions in controversy must be "reasonably or fairly susceptible to" different interpretations, or  it must be determined that they may have two or more different meanings.

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In Nutzz.com, LLC. v. Vertrue Inc., (read opinion here), the Chancery Court ruled on several procedural issues that are important, practical summaries of Delaware law for a litigator to have handy in his or her "toolbox". A prior summary of a decision last year in this case, in which a preliminary injunction request was denied, was posted here.

Initially, the Court viewed an attempt to block an arbitration as a request for a permanent injunction, and recited the 3 basic prerequisites for that relief. Also addressed were the following issues:

(i)  arbitrability (who decides and what issues are subject to arbitration. The Court and the parties relied heavily on the recent decision in  the Willie Gary case, summarized here );

(ii) Delaware's version of the Uniform Arbitration Act and procedural defenses, requirements and related issues;

(iii) waiver of right to arbitrate  based on participation in litigation and discovery; and

(iv) judicial estoppel based on a party's prior arguments in the same case.

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Augenbaum v. Forman , ( read opinion here). In this letter opinion, the Chancery Court reviews an application for attorneys’ fees after a memorandum of understanding was signed as part of a settlement of a complaint that contested a merger. The complaint was filed nine days after a Merger Agreement was signed. An amended complaint was filed alleging disclosure violations. During discovery the plaintiff  became convinced that the merger price was fair and negotiated a settlement to correct materially misleading disclosures. A Memorandum of Understanding (“MOU”) allowed for a payment of up to $450,000 in attorneys’ fees but the defendants argued that they should not be paid more than $75,000. 

The Court applied the Sugarland factors for determining the amount of attorneys’ fees to award. In this case, the Court was satisfied that the supplemental disclosures that resulted from the complaint included useful information and that permitted the stockholders to view the final price term from a materially different perspective. This holding was despite no fiduciary misconduct being revealed. The Court ultimately awarded $225,000 in attorneys’ fees in light of the entirely therapeutic nature of the benefit conveyed which was also admittedly modest.

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I have posted quite a few times here on court decisions and recent developments in e-discovery (referred to by some as EDD), and the need for litigators to be up to date on the topic. Often it is necessary or advisable to use an e-discovery vendor to retrieve, compile and sort e-data for distribution to parties in a case. Monica Bay posts on her blog about such an outside vendor who seems to have erased (at least temporarily) data that it was storing. There are so many issues in e-discovery that are hard enough to grapple with, but to add to those the problems of what to do if your outside vendor destroys data, is frightening. Here is the link to Monica Bay's post on the story: The Common Scold: BREAKING NEWS: EDD SNAFU

UPDATE: I was told on August 11 by the vendor involved  that no data was lost in the foregoing matter, but rather it was only a matter of how the data could be viewed.  I am also told that a software patch has addressed the problem. Here is a link to a letter from the vendor with more details.

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Prof. Ribstein posts about his trip to China where he was invited to assist that country with the development of a new partnership law, and he observes that in his view their efforts are an indication of the rise of U.S. partnership law as a world standard. Of course, Delaware caselaw on partnership law is prominent in the U.S. and thus the relevance to this blog. Here is the link. Ideoblog: Partnerships in China and elsewhere

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The Electronic Discovery Blog by the Preston Gates firm has a post today that informs of its searchable database that it has compiled of over 500 court decisions on various aspects of e-discovery. This is a very valuable resource for any litigator, and it's free. Here is the link. eDiscoverylaw.com's Searchable Case Database Now Contains Over 500 Cases, and Allows You to Search by Jurisdiction : Electronic Discovery Law

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Acierno v. New Castle County,  ( read opinion here). This Chancery Court letter opinion addressed the Delaware statute of repose at Section 8126(b) of Title 10 of the Delaware Code and determined that it divested the Chancery Court of jurisdiction because suit was filed well beyond the 60 day deadline provided for in the statute regarding attempts to contest the decision of the Department of Land Use in New Castle County. Thus, the suit was dismissed.

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Kevin O'Keefe posts, with hat tips to Ian Best and Denise Howell, about an update Ian did of 27 court opinions that include 32 cites to blogs. This is another example of blogs as part of the mainstream of the legal profession. Here is the link: LexBlog Blog : 32 court cases cite blogs

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In LaPoint v. AmerisourceBergen Corp., read opinion  here, Chancellor Chandler addressed what he described as an apparently  novel issue in Delaware, i.e.,  "whether a plaintiff may have ex parte  communications with a former manager of a defendant corporation who, during her employment, was exposed to extensive privileged information while working with counsel in formulating the corporations's defense"?

The Court interpreted Rule 4.2 of the Delaware Lawyers' Rules of Professional Conduct, and cases and commentary that have construed the restrictions on communication with a party represented by an attorney unless counsel consents, including opinions of the ABA  Committee on Ethics and Professional Responsibility. In this Chancery Court letter decision, the Chancellor followed the reasoning of the majority of states and the ABA, and ruled that "one party's attorney may contact a former manager of an adverse party ex parte, even if the  former employee was privy to extensive privileged communications, as long as the attorney is seeking only key non-privileged facts, and makes the former employee aware that she cannot divulge any communications that she may have had with the adverse party's attorneys, or any other privileged information." (emphasis added).

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In Schoon v. Troy Corp., a decision on Section 220 of the DGCL, previously summarized here,  the  Chancery Court granted in part a motion for reconsideration based on the settlement of the parties after trial but before the opinion was issued, thereby making the opinion moot and importantly, preventing the post-trial opinion from having res judicata  effect. Read letter decision on motion for reconsideration  here.

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Prof. Glenn Reynolds, famed author of the blog Instapundit.com, posts about a decision from Arizona that appears to have considered and granted a motion filed by one lawyer to have lunch with the opposing lawyer to discuss a pending case. Decide for yourself if it is real. One can see from the "opinion" (at the following link) why jurists might become weary of some issues they need to address. Here is the link: Instapundit.com -

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Williams v. White Oak Builders, Inc., (read opinion here.)  In this Chancery Court case, a homeowner sought specific performance of an alleged covenant, or alternatively rescission of a contract for the sale of a townhouse. The claims also included intentional misrepresentation, negligent misrepresentation or alternatively, mutual mistake. With the consent of the parties, the Vice Chancellor actually visited the premises for a visual inspection of the basement of the home that the plaintiff claimed had a serious water infiltration problem which the builder refused to fix. 

 In the course of finding in favor of the builder, the court noted that equitable fraud, unlike common law fraud, does not require that the person making the statement knew that it was false at the time it was made. However, the false fact must be material.

 The court also found that the plaintiff did not prove damages with a reasonable degree of precision. The court observed that reasonable estimates that lack mathematical certainty are permissible so long as the court has a basis to make a reasonable estimate of damages (citing In Re: Fuqua Industries, Inc., 2005 WL 1138744, at *8 (Del. Ch. 2005)).

Another important aspect of the opinion dealt with the remedy of rescission. Rescission must be based on fraud, misrepresentation or mistake but it is a remedy rarely granted and requires that the court be given a “high degree of confidence in order to employ this extreme remedy that returns the parties to the status quo.” The court also noted that intentional misrepresentation need not be overt-- and deliberate concealment of material facts or silence in the face of a duty to speak also may constitute intentional misrepresentation.

Importantly, the Chancery Court also ruled that in its role as a fact finder, the vice chancellor (or chancellor) is free to reject expert testimony even if it is uncontradicted.

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Monica Bay of the Common Scold blog posts about a recent decision on electronic discovery (EDD to some) in which the court imposed severe monetary penalties on a law firm that did not fulfill its duty to affirmatively locate sources of electronic data requested in discovery. A cautionary tale for all litigators. The case is Phoenix Four, Inc. v. Strategic Resources Corporation, 2006 WL 1409413 (S.D.N.Y.). Here is the link: The Common Scold: ANOTHER UNNERVING EDD RULING

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Kevin O'Keefe, via Denise Howell, posts about a dissenting opinion of the U.S. Court of Appeals for the 9th Circuit that quotes extensively from the blog of Prof. Eugene Volokh. This is yet another indication that blogs are part of the mainstream in legal literature, and becoming more and more so all the time. This is just one of many instances of courts relying on blogs in their opinions. Here is the link: LexBlog Blog : Law blog credibility grows : US Court of Appeals cites blog at length

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Robert Ambrogi posts at law.com about the new book called Anonymous Lawyer , derived from a blog by the same name authored by law student Jeremy Blachman. The book is about a fictional hiring partner of a fictional law firm and it is a satire of many of the less flattering aspects of lawyers and life in a large law firm. The post has links to both the blog and a review of the book in USA Today. Here is the link: Law.com - Inside Opinions: Legal Blogs

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