Supreme Court Disallows Award of Fees in the Absence of Final Judgment

Crothall v. Zimmerman, C.A. No. 608, 2013 (Del. Ch. June 9, 2014).

This Delaware Supreme Court decision features a rare reversal of the Court of Chancery, and determined that the award of attorneys’ fees was improvidently granted because there was no corporate benefit in this derivative action.  There was no corporate benefit, the Delaware high court reasoned, because there was no final judgment.  Prior to a final judgment, the derivative plaintiff sold his shares, which led to the dismissal of the case.  This situation should be distinguished from other cases where the defendant took action to make the case moot before a prior judgment.  The Court of Chancery allowed the attorney for the former plaintiff to intervene in order to seek counsel fees.

However, the Supreme Court noted that, although it did not directly rule on the intervention, it was “odd” and “troubling” to permit a lawyer in a representative action to recover from the company in circumstances where the stockholder rendered his claim moot.

The rule announced in this decision that can be applied to future cases is that:  “A plaintiff who generates a favorable trial court decision on a closely contested issue of corporate governance but then abandons his claim, and renders the decision moot before it becomes final, has not created a corporate benefit, he has merely caused uncertainty.”

The reasoning of the court is that no corporate benefit was created because any benefit that might have been possible by continuing the suit to a final, appealable judgment, disappeared when the derivative plaintiff abandoned his lawsuit.  Therefore the former attorney for that plaintiff was not entitled to any fee award.  Nor did that counsel identify any cases in Delaware which held that a plaintiff’s attorneys are entitled to fees for creating a corporate benefit when the plaintiff (as opposed to the defendant) took action that mooted the claims, caused their dismissal, and prevented the entry of a final judgment.

See prior Chancery decisions summarized on this blog in this matter.