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

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Courtesy of Mark Saltzburg, a member of the Delaware Bar now working in the northern Virginia office  of the Squire Sanders firm, we have a summary of remarks made by Delaware Supreme Court Chief Justice Myron Steele at the Spring meeting  last week in D.C. of the Business Law Section of the American Bar Association, concerning developments in Delaware corporate law and recent Delaware Supreme Court cases. Here is Mark's summary:

First, Chief Justice Steele noted that the Delaware Supreme Court had just heard argument in the Trenwick America Litigation Trust litigation that may result in a decision on whether creditors may bring a cause of action for violation of fiduciary duty where a company deepens its insolvency in a way that further damages creditors after any residual interest of shareholders is out of the picture.� Typically, fiduciary duties are only owed by directors to shareholders and not to creditors. Steele noted, however, that in an earlier decision by former Delaware Court of Chancery Chancellor William Allen in the Credit Lyonnais case, the court commented that directors may owe creditors a fiduciary duty where a company is in the vicinity of insolvency.

Second, Steele discussed whether the Delaware courts will hold directors to a higher standard of judicial review based on the background and training of a director. He rhetorically asked the question of whether the Delaware courts have moved away from a group analysis of fiduciary duty.� He noted that, in the recent Emerging Communications case, the court appeared to hold a director with an investment banking background to a higher standard and he noted that, in the recent Disney executive compensation litigation, the court examined the conduct of the board on a director by director basis. Steele said that neither case heralds a move away from the traditional Delaware analysis of the board as a whole. He said there is no separate standard based on the training and background of a director. He said, however, that courts would apply conceptual nuance based on the participation of a board member.�

Third, Steele noted that while the Delaware courts provide for different procedural standards in litigation depending on the insider status or outsider status of directors, the Delaware courts take the view that to be an insider is a not a crime, it is a status.� He noted that insiders often bring advantages to a board of strategic advice and familiarity with the business. He said that to take a different view would be to risk leaving a board bereft of those board members with the best expertise and knowledge of the business.

Fourth, Chief Justice Steele noted that, in the stock-option back-dating cases currently before the Delaware Court of Chancery (at the trial court level), the cases will likely involve issues of lack of good faith by board members involved. He noted that past Delaware jurisprudence on the issue of good faith, including the Disney case, indicate that two prongs of analysis will be important in such cases: 1) whether directors intentionally used inside knowledge in such a way as to preclude them from acting loyally and in good faith, and 2) whether directors concealed information. Steele further commented that lack of good faith, while difficult to define with precision, has evolved to mean that a director consciously disregards a known duty.

Finally, Steele noted that, in the case Stone v. Ritter (also referred to as AmSouth), the Delaware courts had embellished the oversight concept of directors' duties first enunciated in the earlier Caremark decision. He noted that the directors in the case were directors of a bank who were alleged to have failed to supervise or develop processes to monitor employee conduct which resulted in the imposition of a $50 million fine on the bank. The court dismissed the case on the grounds that no sufficient claim was plead in the complaint. Steele noted that the complaint was dismissed because it failed to allege that there was an utter failure to install an information monitoring system and because there was no evidence that directors disregarded any red flags that might amount to a conscious disregard of fiduciary duties.

UPDATE: Compare recent comments, by coincidence, just posted here by Prof. Bainbridge on both the Stone v. Ritter and Caremark cases.

UPDATE II: The good professor follows up with insightful commentary here.

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In the case of In Re Netsmart  Technologies, Inc. Shareholders Litigation, (Del. Ch., March 14, 2007),  read 77-page opinion here, Vice Chancellor Strine of the Delaware Chancery Court opines on the substance and procedure of a private equity deal which certain shareholders sought to enjoin.  Thanks to Kurt Heyman, one of the Delaware lawyers on the case, for sending me a copy. My schedule will not allow a more thorough review at this time, but I provide the following introductory summary quote from the court's very recent decision:

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The Chancery Court amended slightly, in a  minor, technical way, paragraph 4(a) of its Administrative Directive that has required eFiling of all pleadings with the Chancery Court since October 2003.

The amendment and the entire Administative Directive, as amended, including an explanatory email from Lexis/Nexis, are provided here.

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In Matria Healthcare, Inc. v. Coral SR, LLC, (Del. Ch., March 1, 2007), read opinion here, the Delaware Chancery Court provided a very instructive primer on fundamental contract interpretation principles under Delaware law. Vice Chancellor Noble provides several gems in particular that are especially "quote worthy" and I predict  they will be referred to often for their insights into Delaware contract law. The case involved several disputes, such as whether a particular "claim" under the agreement was controlled by a provision calling for arbitration with the AAA or by a separate provision calling for arbitration with a private accountant. The court noted that a motion to compel arbitration is governed by  Rule 56 (applicable to summary judgments.) Here are the money quotes:

"In construing contracts, the function of the Court is to ascertain the shared intentions of the contracting parties when they entered into their agreement. The first level of analysis is deceptively simple: give the words chosen by the parties their ordinary meaning. Disputes over a contract negotiated by sophisticated parties typically fall into three broad categories. First, the parties did not anticipate and provide for future events. Thus, the contract fails to address (or to address fully) the responsibilities of the parties in a particular factual setting. Second, the parties (or their lawyers) understand that there are drafting imperfections, perhaps because the parties cannot devise a mutually acceptable resolution to certain issues. The parties do not want what (at that time) are viewed as minor impediments to derail the transaction. They hope that the identified risks will not materialize and trust that, if the unlikely events occur, some judge will fill in the gaps in a way that substantially preserves the benefits of the bargain for each side. Finally, there are disputes like the one now pending. The words, when fairly read and given their ordinary meaning, lead to a result that the Court cannot believe is what reasonable parties would have intended. In a sense, one party’s argument boils down to a plea of: “We couldn’t have been that obtuse (or worse).” The result reached here is, in large part, unpalatable; it is the product, however, of words chosen by sophisticated parties who drafted a complex and comprehensive agreement. More importantly, it is not for some judge to substitute his subjective view of what makes sense for the terms accepted by the parties."

...

" When interpreting a contract, the Court’s function is to “attempt to fulfill, to the extent possible, the reasonable shared expectations of the parties at the time they contracted.”The Court does this by initially looking to the contract’s express terms. If the terms are clear on their face and reasonably susceptible to only one meaning, then the Court gives those terms the meaning that would be ascribed to them by a reasonable third party. If, however, a contract’s language is ambiguous, then the Court will look beyond the “four corners” of the agreement to extrinsic evidence. A contract is not ambiguous merely because the parties disagree as to its proper construction. Instead, ambiguity exists when the terms of a contract are reasonably susceptible to different interpretations or have two or more different meanings. Also, when possible, the Court should attempt to give effect to each term of the agreement and to avoid rendering a provision redundant or illusory (footnotes omitted.)"

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On Friday, March 16, I attended the American Bar Association's Spring Meeting of the Business Law Section in Washington, D.C. One of the presentations was entitled: "Developments in the United States Supreme Court that Every Business Lawyer (and Client) Should Know About." One insightful comment by the panel of appellate lawyers who argue before the U.S. Supreme Court is that the common labels of "conservative" and "liberal" that are often attached to U.S. Supreme Court justices do not often "translate" easily when it comes to business cases. For example, the 3 cases to address punitive damages, from the BMW case to the State Farm case to the Phillip Morris case do not have the predictable alignment of justices often seen in other cases. The panel also noted the increasing number of patent appeals that the court takes for 2 reasons. The Federal Circuit Court of Appeals, which handles these cases, has now been in existence for about 25 years and also because of the increasing importance of these cases to our economy.

 I also attended another presentation on cross-border discovery. Of note is a federal statute that allows one, under certain circumstances, to take discovery in a U.S. federal court, regarding proceedings that are pending in foreign jurisdictions.

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Delaware Supreme Court Chief Justice Myron T. Steele has published an article in The Delaware Journal of Corporate Law,  that I just received in the mail today, entitled: Judicial Scrutiny of  Fiduciary Duties in Delaware Limited Partnerships and Limited Liability Companies, 32 Del. J. Corp. L. 1 (2007). Of course, this is must reading for anyone interested in Delaware Limited Liability Companies and the Delaware cases that construe fiduciary duties as they relate to Delaware LLCs and LPs. ( I have not yet seen an online copy of the article. When I do, I will post it.) It is supposed to be on the SSRN site soon, but in the meantime, I made a copy for my own personal use.

UPDATE: Coincidentally, last night I greeted Chief Justice Steele at a dinner hosted by the 5 Inns of Court in Delaware. It was also attended by Chief Judge Tacha of the U.S. Court of Appeals for the 10th Circuit,  the President of the American Inns of Court. I had the pleasure of being at the same table during dinner as Delaware Chancery Court Vice Chancellor John Noble and Judge Chris Sontchi of the Bankruptcy Court for the District of Delaware,  as well as other distinguished members of the Delaware Bar.

Supplement: This article had its genesis in a 2003 symposium but has been updated since then. There are many important aspects of the article that I do not have space or time to summarize here but there are 2 points in particular that I want to note:

First, His Honor emphasizes the need to distinguish between the "fiduciary duty aspects of good faith" and the separate "contractual implied duty of good faith and fair dealing".

Second, it is noteworthy that, as the article states,  there is no current Delaware case law addressing the implied contractual covenant of good faith and fair dealing in the context of the contractual relationship between partners and limited partners and managers and members. (Although there clearly is case law in Delaware discussing the implied contractual duty of good faith and fair dealing, it is in the context of employment, commercial or insurance contracts, as opposed to the context of allocating power or liability within a governance structure of a business entity.)

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In Openwave Systems, Inc. v. Harbinger Capital Partners Master Fund I, Ltd., (Del. Ch., Mar. 5, 2007), 2007 WL 704943, read opinion here, the Delaware Chancery Court denied a motion for summary judgment in an expedited proceeding under DGCL Section 225 to determine the valid directors holding office after an annual meeting. The complaint was filed in late January and the trial was scheduled to begin today. The decision denying summary judgment was issued last Monday, March 5, with the court explaining that it should "inquire more thoroughly into the facts in order to clarify the application of law to the circumstances."  The corporation and the hedge fund shareholder had competing claims as to why each of their nominees should be properly installed as directors.

Curiously, one of the arguments was that  because the provisions of the bylaws relating to selection of directors were so confusing, therefore they should not be strictly enforced. It takes a certain amount of intellectual confidence to argue that bylaws, in essence, cannot be understood. The court determined that there were too many factual issues to make the decision before trial, while conceding that the bylaws lacked clarity and were confusing.

Money quote: "This court and Delaware law are especially solicitous of the franchise rights of stockholders and "are vigilant in policing fiduciary misconduct that has the effect of impeding or interfering with the effectiveness of a stockholder vote'". (citations omitted.)

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In Wilmington Savings Fund Society v. Kaczmarczyk,  (Del. Ch., March 1, 2007),  2007 WL 704937, read opinion here, the Delaware Chancery Court granted a constructive trust regarding proceeds from the sale of property that the court determined was a fraudulent conveyance of jointly held property by a husband and wife. The husband fraudulently conveyed the property to his wife in order to avoid a claim by the bank--and after the bank had filed suit against him. The court was not persuaded by the argument that the wife used inheritance money as a down payment to buy the house.

This is the first Delaware decision to interpret Section 1305 of Title 6 of the Delaware Code, which is the Uniform Fraudulent Transfer Act ("UFTA"). The UFTA was adopted in Delaware in 1996, and since then no reported decisions have addressed that section. (Though in footnote 35 the court cites to three recent Delaware ases, all summarized on this  blog, that have addressed other sections of the UFTA.)

In addition to a thorough analysis of the UFTA, the court discussed the requirements for a constructive trust, which includes "identifiable proceeds".

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 The Wall Street Journal Law Blog reports here  on a 105-page opinion issued yesterday by the Montana Supreme Court  in Seltzer v. Gibson Dunn (and I thought Chancery Court was the only court that routinely wrote decisions more than 100 pages long). The case started out with a dispute about the authenticity of a painting depicting a western scene called "Lassoing a Longhorn". (The art work at the left is courtesy of the WSJ  Law Blog.)

 In sum, after the law firm withdrew the suit against an expert that questioned the authenticity of a painting that the client wanted to sell at an auction (the voluntary withdrawal of the suit was apparently due to an avalanche of affidavits supporting the position of the defendant), the defendant then sued the law firm for malicious prosecution and abuse of process. The Montana Supreme Court upheld the jury verdict against the law firm, including punitive damages, and described the law firm's use of the court system as a form of "legal thuggery".

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The Wall Street Journal Law Blog here has a post about the debate held yesterday at the American Enterprise Institute in D.C. regarding the issue of whether law firms run afoul of federal civil rights laws by giving preference to certain groups in hiring or promotions. Both sides of the argument were represented at the debate. It's a topic that is important to law firms though it is rare that an objective discussion is held about it, outside the bounds of political correctnes.

One of the panel members at the debate, attorney Curt Levey, has written a paper which argues that that Civil Rights Act of 1964 unequivocally bars law firms--like other employers with more than 15 employees--from giving preference to female or minority attorneys in hiring, promotion or assignments. His paper also makes the argument that corporations that require outside law firms to meet "diversity goals" (and many do), could face liability under the Civil Rights Act of 1866. Wow. You don't see those views expressed in mainstream publications like the The Wall Street Journal  very often, but there it is.

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Courtesy of Professor Bainbridge's blog post, is a link to the 248-page study  by attorney Claudia H. Allen that comprehensively examines recent developments in connection with majority voting in director elections. She describes how in the past, virtually all directors of U.S. public companies were elected by a plurality voting standard. In an uncontested election, this could, in theory, allow a director who received one vote to be validly elected. She discusses the recent changes on this matter at many companies, either by policy statements, or changes to their bylaws and/or charters.

She also describes (e.g., in the introduction at page iv) changes in state statutes, such as Delaware, whose DGCL now allows stockholders to adopt bylaws (not subject to amendment by the board) prescribing voting standards for director elections, and also allowing for resignations to be made effective upon the happening of a future event (such as failure to receive a majority vote), and coupled with the authority to make such tendering of conditional resignations irrevocable.

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Many posts on this blog have discussed court opinions in which a directors' fiduciary duty of loyalty has been breached. This is a fiduciary duty that, when breached, prevents one from enjoying the protections against personal liability afforded by Delaware General Corporate Law Section 102(b)(7) -- no doubt due to the policy judgment by the Legislature that the duty of loyalty (and the need to discourage traitors), is so important that it would not be appropriate to allow it to be breached with impunity.

Being disloyal is synonomous in concept with being a traitor--namely, failing in one's obligation to keep the faith or failing to maintain allegiance to the person or belief or entity to which one owes the full measure of support.

I recently heard a lecture about Dante's Inferno, part of his Divine Comedy,  in which he describes what hell is like. In his famous book, Dante assigns people to 9 different circles in hell, with the 9th level being reserved for those who have committed the most grievous sins. Who gets this less than coveted place in hell? Traitors. Those who have been disloyal to family, friends, country and/or, of course, God. Isn't that what someone who is disloyal can be called? Traitor may seem like too strong a word in our post-Christian culture where we don't want anyone to have hurt feelings and we try to sugar-coat acts that formerly were subject to the harshest opprobrium, but in Dante's world, they did not labor under that form of political correctness. The Inferno is widely accepted as one of the finest examples of Western civilization and according to the above link from Wikipedia, Dante Alighieri's Divine Comedy is regarded by many as one of the finest pieces of literature in the world.

It was worth a short post to think about its connection to court opinions that discuss directors breaching their duty of loyalty as comparable to residents of the 9th circle of hell who were traitors to those to whom they owed a duty. Fortunately for many directors described in recent opinions summarized on this blog, the Delaware courts do not have the power to assign a disloyal director to any of the circles of hell. Here is how the Wikipedia entry describes residents of the 9th circle:

Ninth Circle. Traitors, distinguished from the "merely" fraudulent in that their acts involve betraying one in a special relationship to the betrayer, are frozen in a lake of ice known as Cocytus. Each group of traitors is encased in ice to a different depth, ranging from only the waist down to complete immersion.

As an aside, I am not sure what circle of hell Dante would have assigned a successful businessman who spent enormous sums of money on fast cars and fast women, shortly before forcing his company into bankruptcy. Here is an example of that not uncommon tale.

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Ortsman v. Green, (Del. Ch., Feb. 28, 2007), 2007 WL 702475, read opinion here. In this purported class action, the court granted expedited proceedings in connection with a request for preliminary injunction despite the strong opposition of the defendants.  Although the court noted that expedition is not a right, in this situation there were issues of disclosure problems in the proxy statement and this letter to counsel explains why the better course is to address such disclosure claims in advance of a stockholder vote when appropriate disclosure-based relief is available. The court addressed the factors involved in granting expedited proceedings.

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In Valeant Pharmaceuticals International v. Jerney, (Del. Ch., March 1, 2007), 2007 WL 704935,  read opinion here, the Delaware Chancery Court required a former president  and director to disgorge a $3 million dollar bonus. This opinion answers the question that some have posed as to whether or not the Delaware courts would address claims of allegedly excessive compensation. The topic of executive compensation has been extensively discussed recently in the popular press and the trade press. For example,  Professor Ribstein discusses the topic here, and Professor Bainbridge has a post here about recent testimony before Congress on the issue. Also, here is a post on the ISS Corporate Governance Blog with a link to a paper prepared by Institutional Shareholder Services on the topic of executive compensation.

Essential to an understanding of this case is the procedural context which required the former director and president to prove the entire fairness of the decision of the board which resulted in a bonus being paid to him in the amount of $3 million. He did not successfully carry that burden. It is not the amount, ipso facto, that was a problem, but the context in which the amount was given that was the focus of this case. (Remember that the Delaware courts did not invalidate a severance payment of $140 million to Michael Ovitz after only a year of work--with checkered performance.)

In this Chancery Court decision, the court determined after a thorough analysis that a $3 million bonus was excessive under the circumstances--and the expert compensation consultants called as experts at trial did not pursuade the court very much. Not only did the court order disgorgement of the $3 million bonus, but the court also required a return of attorneys’ fees advanced by the corporation in the amount of $1.875 million, as well as payment of ½ of the special litigation committee fees and costs (which were not quantified, but one can assume a substantial amount.) Thus, on the whole, it was an entirely unprofitable and expensive decision for the director to participate in that board decision that has now exposed him to personal liability. This is a case where the rubber hits the road when it comes to the concrete impact of corporate governance principles. It appears that this director gambled (incorrectly) that he would prevail despite all other defendants (members of the board that made the challenged decision), settling before the court rendered its opinion.

The case started as a derivative action challenging the unanimous decision of directors to pay large cash bonuses to themselves and other employees in connection with a proposed corporate restructuring. All of the other directors settled, leaving Jerney as the only remaining defendant after trial. The court found that Jerney was an interested director and that he did not satisfy his burden to prove both fair process and fair price in the amount of the bonus that was awarded. 

Notable was the absence of independent advisors for the compensation committee, as well as the absence of independent compensation committee members. The court also found that the advisors that were used by the committee relied on incorrect assumptions and the other factual bases for the decision of the advisors were determined by the court to be unreasonable.

Importantly, the court emphasized that its role to review the entire fairness of an interested transaction under DGCL Section 144(a)(3), as here,  cannot be displaced simply because DGCL Section 141(e) allows reliance by directors on experts.

Because the director failed to satisfy his burden of proving the entire fairness of the interested transaction, the court observed that there were two remedies available in such a self-dealing situation: (1) The transaction can be voided, as here, resulting in disgorgement; and (2) Damages resulting from a breach of the fiduciary duty of loyalty would also be appropriate.

This is key: the court reasoned that DGCL Section 144 only refers to avoiding the invalidation of  certain enumerated interested transactions, but it does not address whether the interested transaction violates fiduciary duties, as that determination is left to common law for which compliance with Section 144 does not necessarily suffice. 

The court also noted parenthetically that neither the Delaware Chancery Court nor the Delaware Supreme Court have addressed whether the Uniform Contribution Among Tortfeasors Act, 10 Del. C. Section 6301, et seq.,  applies to damage claims for breach of fiduciary duties, even though the court did not need to decide that issue here. Although it was not necessary for the court’s decision, the court also remarked about situations where issues arise concerning the liability of a director who was absent from a meeting where a challenged decision was made.

In sum, this decision makes it clear that when called upon to analyze the entire fairness of an interested transaction regarding the compensation of directors and officers, the Delaware Chancery Court will address whether the compensation that interested directors awarded themselves was appropriate in the circumstances. 

This decision also emphasizes the importance of independent compensation committees being established and the benefit of those committees using both independent financial advisors and independent counsel. If a truly independent compensation committee recommended the bonus at issue here, and if that recommendation was approved by a majority of independent directors, it is unlikely that the Chancery Court would have been put in the position of examining the entire fairness of the amount of a bonus given to an executive.

UPDATE: By chance, I was speaking with one of the attorneys for the plaintiff, Gary Traynor, who agreed that it was unusual for a corporation to "take over" and pursue a case that started out as a derivative action. He also shared with me that one of the reasons the last remaining defendant may have been so cavalier about settling, is that the sole remaining defendant now lives in Bulgaria, and in addition to openly repudiating his undertaking for advancement of fees, he clearly "suggested "that he does not expect the plaintiff to be able to collect on their judgment in Bulgaria.

UPDATE II:  Prof. Larry Hamermesh provides insightful commentary on the case here.

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This  blog includes summaries of many Delaware Chancery Court and Supreme Court cases as well as commentaries that focus on independent directors. Prof. Usha Rodrigues wrote a recent article that discusses the increasing preference for boards with a majority of independent directors. Her article is entitled: The Fetishization of Independence and  was highlighted by Victor Fleischer  here on the Conglomerate blog.

The sketch below by Charles Fincher of www.lawcomix.com is an example of the approach of a board that lacks independence:

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Dr. Renzo Comolli and 3 of his colleagues at NERA provide an exhaustive and scholarly economic analysis of backdated options in a very recent paper entitled: Options Backdating: The Statistics of Luck.  In particular they point out statistical flaws in an article by The Wall Street Journal and much other mainstream reporting on the topic. Here are the concluding paragraphs of the article, which is replete with charts and graphics that explicate the authors' findings:

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Here is an article that provides a short summary of key Delaware corporate cases from 2006  that I wrote for Bloomberg's new Corporate Law Report publication. I omitted from my summary a few cases that have already seen extensive coverage, such as the Disney case.

Here is a  similar summary I prepared of selected 2005 cases, that also appeared here as an article in the subscription-only publication called the Delaware Corporate Litigation Reporter.

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 Please join me in welcoming to the blogosphere, my newest partner, Dan Astin.   Dan is a highly acclaimed lawyer who focuses his practice on creditors' rights and related matters. Bankruptcy law is part of  "business law" and is of interest to most business litigators and similar readers of this blog. 

This is what I hope will be the first of many "guest posts" by Dan. In this post, Dan highlights a decision of the U.S. Court of Appeals for the Third Circuit, the circuit which includes the District of Delaware.

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 I generally do not cover on this blog the decisions from the Delaware Superior Court,  (Delaware's "workhouse" trial court of general jurisdiction). Although I have summarized on these pages, a few opinions from that court that I thought would be of special interest to business litigators, and I am sure there are many good decisions from that court that I could cover, summarizing on this blog all the key business cases from Delaware's Chancery Court and Supreme Court, and occasional selected decisions from the U.S. District Court  and Bankruptcy Court for the District of Delaware, is about as much as my schedule will allow. The foregoing is my introduction for a case that I think is quite noteworthy (and that I have time this week to cover on this blog.)

In  Boscov's Dept. Store v. Jackson, (Del. Super. Ct., Feb. 12, 2007), read opinion here, the Delaware Superior Court  interpreted Delaware's Equal Accomodation's Statute, 6 Del. C. Section 4504, a state civil rights statute that should be of interest to business litigators and the businesses they represent. The court's opinion upheld an adverse decision, including fines, imposed by Delaware's Human Rights Commission. The court discussed the relative burdens of proof at the Commission level when discrimination is alleged, as well as the relevant standard of review when the Superior Court reviews a decision of the Commission in the court's capacity as an limited appellate court for decisions of certain state agencies and commissions. The case involved the impact from the cancellation of courses that a local department store offered to the community. However, due to circumstances surrounding the store's cancellation of the classes, some of the persons registered for those classes filed a complaint alleging that  despite the stated reason, the real reason that the courses were cancelled was due to a discriminatory purpose.

The opinion examines the federal and state case law applicable to allegations of discrimination claims in general and the requirements for successful claims and defenses. Of course, familiarity with the issues addressed in this case would be helpful for any business litigator whose clients invite members of the public into their businesses. It would also be useful for a business litigator to be aware of the general legal concepts discussed concerning claims of discrimination in general, as all businesses are subject to such allegations (whether or not they are true.)

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In  Ambrogi v. Reber, (Del. Cnty. Comm. Pls. Ct., Nov. 9, 2006), read opinon here, the Delaware County (Pennsylvania) Court of Common Pleas granted a preliminary injunction to prevent the potential dissipation of assets by defendants in a wrongful death action. The court was not persuaded by arguments that no liability had been determined yet, nor was it successfully argued that claims for fraudulent conveyance could be made in the future. Though plaintiffs, in general,  are concerned that the defendants might be "judgment proof" by the time that a trial determines liability,  the facts in this case were compelling. The defendants owned many investment properties. They were sued for wrongful death in connection with a fire in one of their buildings that resulted in the horrific death of a mother and child. The insurance on that building was only $1 million. After they were sued, the defendants sold, and were in the process of selling, many of their extensive holdings.

In order to address the argument that they were making themselves "judgment proof", the court ordered that all proceeds from the sale of any property they sold, or will sell, must be deposited into a court-supervised, interest-bearing account, that required court approval before any withdrawals were made. The court relied on a decision of the Pennsylvania Superior Court called Walter v. Stacy,  837 A.2d 1205 (Pa. Super. 2003). [In Pennsylvania, unlike Delaware, the trial court of general jurisdiction is the Court of Common Pleas and the intermediate appellate court is the Superior Court. For those not familiar with this part of the country, Delaware County, Pennsylvania is the jurisdiction adjacent to Wilmington, Delaware, across the line, and I have had, and do have, cases there.]

I thought this case would be of interest to business litigators who are often concerned about the defendants they are suing being, or becoming,  "judgement proof" or otherwise unable to satisfy a judgment--if one is obtained after trial. In the State of Delaware, the Chancery Court has the ability to enter injunctions such as the one entered in this case, based on principles of Quia Timet and other related equitable doctrines.

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I am certain that the vast majority of readers of this blog are interested in what happens in the world of business--in addition to business law. For the second year in a row I bring you here the annual letter of Warren Buffett to his shareholders. This year it is courtesy of the The D & O Diary.

Buffett's letter this year contains many impressive insights, including his views on executive compensation from the perpsective of someone who has served on 19 boards and who personally oversees the compensation of many executives in the many major businesses within the Berkshire Hathaway portofolio. (Disclosure: I own a small number of "baby Berkshire" shares, though I don't think that impacts my commentary here.)

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Why would a blog like this have commentary on economics and politics? Because this blog summarizes court decisions relating to business law and in order to understand the broader context of those cases, it is helpful to analyze the "big picture".

Thomas Sowell, a prolific and highly regarded economist, is one of my favorite "big picture" scholars and he recently wrote about economics and politics, including recent positions announced by presidential candidate Barack Obama, in an article to be found here. Thanks to  Tom Kirkendall of Houston's Clear Thinker's blog for the link.

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Courtesy of Professor Bainbridge, here  is a scholarly discussion about whether a law firm partnership breaches its duty of loyalty to its partners by firing "less productive" partners in order to increase firm profitability.  The discussion was prompted by the recent wholesale demotion or termination by the Mayer, Brown firm of 45 partners. Below is an excerpt from the post with reference to the classic and timeless prose of Judge Cardozo describing fiduciary duties of partners:

... suppose Mayer, Brown's partnership agreement did not include "guillotine" expulsion provision [allowing for expulsion without cause by a 2/3 vote.] Would terminating or demoting partners for the sole purpose of making the firm more profitable be a breach of the duty of loyalty partners owe one another? Recall that in Meinhard v. Salmon ... Judge Cardozo wrote that:

"Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior."

 Did Mayer, Brown comport itself with "the punctilio of an honor the most sensitive"? Is that really the relevant standard?

 UPDATE: Prof. Larry Ribstein weighs in here with his prior scholarly writings on the topic.

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 I wrote a short article here, in the Feb. 21, 2007  issue of Delaware Law Weekly, summarizing the Chancery Court's decision in Sample v. Morgan, 2007 WL 177856 (Del. Ch. Jan. 23, 2007), regarding the liability that directors exposed themselves to for giving the appearance at least, at the motion to dismiss stage, that they were merely doing the bidding of management, as opposed to exercising independent judgment. Because the directors involved were not regarded, at least initially, as independent, they did not enjoy the protection of the business judgment rule.

 Here is my (much longer than usual) discussion of  the case in my blog post about it, with a link to the whole decision as well as links to commentary by corporate law professors Gordon Smith and Stephen Bainbridge.

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 I have not had to file a Motion to Disqualify a judge, but if I ever did , I might like to take the approach  of the lawyer in the following cartoon by Charles Fincher at www.lawcomix.com:

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