Coughlin v. South Canaan Cellular Investments LLC, C.A. No. 7202-VCL (Del. Ch. July 6, 2012).
Whether bad faith exception to American Rule applied to impose attorneys’ fees for litigation tactics.
Short Answer: Yes.
In this case, the responding party requested fee shifting under the bad faith exception to the American Rule. The Court explained that because: “The request itself was made in bad faith, I award the petitioner fees and costs of $17,906.” The amount itself is not unusual and the award of fees in Chancery is not unusual. The Court of Chancery awards attorneys’ fees frequently in much higher amounts, even for discovery motions.
Rather, the most noteworthy aspect of this ruling was that the Court imposed attorneys’ fees on the party who requested that fees be shifted to the opposing party.
In essence, the Court determined that the defendant asserted frivolous defenses to the suit. This case involved the dissolution of an LLC. The LLC Agreement provided that a voluntary bankruptcy petition would constitute an event of dissolution, and a member of the LLC filed a petition seeking a declaration that because the LLC filed for bankruptcy voluntarily, that the LLC had therefore been dissolved. The LLC, as a respondent, surprisingly opposed the petition.
The Court of Chancery explained the position of the responding LLC as: “inexplicable” and incoherent.” When asked during oral argument if the LLC would stipulate that it was dissolved pursuant to the terms of the LLC Agreement, the Court described the answer of the attorney for the LLC as “evasive,” and the attorney would not concede that the LLC was dissolved. Only after being asked the question again by the Court, and consulting with his client, did counsel stipulate based on the plain language of the agreement.
The Court recited the familiar American Rule which generally requires that each party is responsible to pay his or her own attorneys’ fees regardless of the outcome of the litigation. However, the bad faith exception to the American Rule applies where the Court finds the litigation: “To have been brought in bad faith or finds that a party conducted the litigation process itself in bad faith, thereby unjustifiably increasing the cost of litigation.”
The Court emphasized that the bad faith exception should not be lightly invoked and that lawyers should think carefully before moving for fees under the bad faith exception.
Importantly for this case, the Court cited in footnote 1 to several decisions that support the statement of Delaware law that: “An unwarranted motion for fee shifting under the bad faith exception can itself justify a finding of bad faith and fee shifting.”
In a pithy manner, the Court found that the request for attorneys’ fees itself was made in bad faith and was unfounded, and that there was no good faith basis for the LLC to deny the determination under the plain terms of the operating agreement that it was dissolved. The Court did not much spend time discussing the amount of fees other than finding them to be reasonable.