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

Fisk Ventures, LLC v. Segal, 2008 WL 1961156 (Del. Ch., May 7, 2008), read opinion here. This Chancery Court opinion, I predict, will be cited often by scholars and practitioners alike as part of the ongoing discussion about the difference between applying fiduciary duty concepts to LLCs--or not--as compared with the conventional application of those duties in the corporate context.

This case began as an action to dissolve an LLC pursuant to 6 Del. C. Sections 18-801 and 802 but this decision does not address those issues. Rather, the court grants motions to dismiss filed by the Third-party Respondents based on a personal jurisdiction argument and failure to state a claim. (Thus, the court was not called upon yet to address the dissolution issues.)

The third-party claims that the court addressed alleged that  the third-party defendants: (i) breached the LLC Agreement; (ii) breached the implied covenant of good faith and fair dealing; and (iii) breached fiduciary duties, among other allegations. 

[Although the court granted a motion to dismiss based on lack of personal jurisdiction pursuant to 10 Del. C. Section 3104 and 6 Del C. Section 18-109, because the other issues decided have much more far-reaching importance, I won't spend any time on the personal jurisdiction discussion, which otherwise is noteworthy in its own right.]

Though clearly separated in the structure of the opinion, the court's discussion of the breach of contract claim and the breach of fiduciary duty and implied duty claims was somewhat, of necessity, interwoven. The court began its analysis with basic contract principles and the truism that LLCs are creatures of contract, and that a prerequisite to any breach of contract analysis, is to determine if there is a duty  in the document that has been breached.

In this regard, the court cites in footnote 34 to Delaware Supreme Court Chief Justice Myron Steele's article entitled: Judicial Scrutiny of Fiduciary Duties in Delaware Limited Partnerships and Limited Liability Companies, 32 Del. J. Corp. L. 1, 4 (2007)("Courts should recognize the parties' freedom of choice exercised by contract and should not superimpose an overlay of common law fiduciary duties...")  See here  for overview of  that article on this blog and a link to it.

Prof. Larry Ribstein, one of the country's leading experts on LLCs, was cited twice in footnote 35 of the court's opinion, on the topics addressed in this case that he has written about extensively, such as the "freedom of contract" principles underlying LLC Agreements.

Importantly, the court found no provision in the LLC Agreement at issue that:  "create[d] a code of conduct for all members; on the contrary, most of those sections expressly claim to limit or waive liability."

Here is the money quote:

"There is no basis in the language of the LLC Agreement for Segal's contention that all members were bound by a code of conduct, but, even if there were, this Court could not enforce such a code because there is no limit whatsoever to its applicability".

The "implied covenant of good faith and fair dealing" claim was carefully examined and dispatched with one of the more lucid and cogent treatments I can recall of this amorphous cause of action.

Finally, the breach of fiduciary duty claim was confronted by first reciting the provisions of the Delaware LLC Act  at Section 18-1101(c) that allow for complete elimination of all fiduciary duties as part of an LLC Agreement. The court read the parties' LLC Agreement in this case to eliminate fiduciary duties because it flatly stated that:

"...members have no duties other than those expressly articulated in the Agreement. Because the Agreement does not expressly articulate fiduciary obligations, they are eliminated."

Query: If the parties' LLC Agreement was completely silent on the issue of whether any fiduciary duties were eliminated, would the court have reached the same result? Comments are welcome.

UPDATE: Here is the analysis of the case by Prof. Ribstein, who answers my above query thusly:

So what result here without an express elimination of duties?

As discussed in my article linked above [The Uncorporation and Corporate Indeterminacy] and in other writings, the Delaware cases have made it clear that the parties must contract carefully to waive fiduciary duties, as the parties did in Fisk. In other words, courts will add fiduciary duties to the express contract if the parties don't negate them. This can be reconciled with CJ Steele's admonition in this way: in the absence of contrary agreement, the fiduciary duties are part of the Delaware standard form contract, consisting of statutory and common law default rules. This seems sensibly consistent with the parties' usual expectations.

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Nelson v. Emerson, 2008 WL 1961150 (Del. Ch., May 6, 2008), read opinion here. This Chancery Court decision provides a cornucopia of useful  and important statements of Delaware law for those lawyers whose practice overlaps corporate governance and creditors' rights, including bankruptcy proceedings. Although one could appropriately write a lengthy article about this case, the constraints of time and paying-clients compel me to highlight just a few key points from the opinion, with copious quotations from the court's decision.

The essential claims made were that the directors and majority stockholders of a company breached their fiduciary duties to the only secured creditor by causing the company to file for bankruptcy and by paying themselves "excessive compensation" during the time that the creditor was insolvent, both before and after the bankruptcy.

In sum, the court determined that Nelson, the creditor/plaintiff,  had made the same arguments before, and they were rejected in the bankruptcy court. Or, as the court expressed it: "The problem with Nelson's claims is that he is seeking a second chance to win the same game." The court nonetheless explained its reasoning in great detail. Along the way, there are several statements of Delaware law that are eminently quotable and worth "having handy for future reference", such as the following quote:

Nelson also argues that the bad faith standard used
in bankruptcy law is not the same as the standards
used to determine breaches of fiduciary duty under
Delaware law. In making that argument, Nelson
misunderstands the applicable Delaware law. It is
settled Delaware law that an insolvent company is
not required to turn off the lights and liquidate when
that company's directors believe that continuing
operations will maximize the value of the company.
Federal bankruptcy law shares this belief and
provides procedures that enable an insolvent
company to continue its operations while at the same
time balancing the interests of the affected corporate
constituencies.

Here is another money quote:

The directors of an insolvent company who, in good faith, undertake a strategy to benefit the company's equity holders cannot be held liable just because the strategy failed. The Bankruptcy Court has already determined that Repository's bankruptcy filing was a non-frivolous strategy and that it was partially successful. That precludes any finding that the Emersons breached their fiduciary duties by causing the Company to undertake that strategy.

Even if Nelson was not precluded from bringing his claims due to the prior rulings of the bankrupcty court, the Chancery Court explained why he still had an uphill battle ahead of him in order to prevail on his claims:

Alternatively, I note that even if Nelson were not precluded from making his fiduciary duty claim, his pleadings fail to state a claim that the Emersons breached their fiduciary duties. Repository's charter contains a § 102(b)(7) clause that exculpates its directors from liability for breaches of their duty of care. Nelson must, therefore, plead facts supporting a viable claim for a breach of the duty of loyalty to survive the Emersons' motion to dismiss. Nelson's assertion that the Emersons caused Repository to pay them excessive compensation while the Company was insolvent does not support a duty of loyalty
claim because the complaint neither quantifies the amount of the allegedly excessive compensation nor describes which directors approved that compensation or suggests that those unknown directors were not independent. Likewise, Nelson's contention that the Emersons caused Repository to file for bankruptcy in bad faith for the purpose of
frustrating Nelson's efforts to collect the debt owed to him by Repository does not support a duty of loyalty claim.

At footnote 13 and accompanying text, the Chancery Court discusses two causes of action that may be familiar to bankruptcy lawyers, but are not commonly seen in Chancery Court opinions. Namely, "recharacterization of loans from debt to equity" and "equitable subordination". These were claims that the company pursued against the creditor in response to the creditor's efforts to have the bankruptcy dismissed--which he was successful in doing, but not  because of the mismanagement basis and the bad faith reasons he wanted the court to rely on.

The Chancery Court extensively discusses each of the elements of the doctrine of collateral estoppel and applies them to the facts to explain why that doctrine bars the claims presented in this case.

Here are a few other instructive quotes that reiterate important statements of Delaware law and that, I suggest, are of great interest to business litigators:

It is settled Delaware law that “[e]ven when the company is insolvent, the board may pursue, in good faith, strategies to maximize the value of the firm.”FN54  Filing a Chapter 11 bankruptcy petition is a federally-sanctioned strategy for maximizing the value of an insolvent company.FN55  Here, after a full trial, the Bankruptcy Court determined that
Repository used that strategy in good faith.FN56 Directors of a Delaware corporation do not commit a breach of fiduciary duty against the corporation if they, in good faith, seek to benefit the equity holders by bringing a bankruptcy, in order to recharacterize certain debt as equity.FN57  So long as that action is not frivolous, such an exercise of business judgment to advance the interests of the equity holders is not a breach of fiduciary duty simply because the directors do not achieve ultimate success.FN58

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FN54.Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P., 906 A.2d 168, 204 (Del. Ch.2006), aff'd, 931 A.2d 438 (Del.2007).

FN55. See, e.g., Trenwick, 906 A.2d at 204 (“Chapter 11 of the Bankruptcy Code expresses a societal recognition that an insolvent corporation's creditors (and society as a whole) may benefit if the corporation continues to conduct operations in the hope of turning things around.”); Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772, 793 n. 66 (Del. Ch.2004) (“[I]n most instances when a firm is insolvent but believes itself to have a
prospect for viability, the firm will seek out the protections of the Bankruptcy Code and
attempt to restructure its affairs through the well-articulated body of federal law specifically designed for that purpose.”); see also Trenwick, 906 A.2d at 204 n. 103 (citing numerous federal decisions explaining the purpose of federal bankruptcy protection and the discretion afforded to directors in deciding whether to take advantage of the bankruptcy process).

FN56. Nelson's argument that good faith in bankruptcy law only considers objective
factors whereas good faith in Delaware fiduciary duty law considers subjective
intent is misguided. The very decision that Nelson cites to support that proposition
explains that in determining whether the debtor filed for bankruptcy in bad faith a court “may consider any factors which evidence an intent to abuse the judicial process and the purposes of the reorganization provisions.”In re McCormick Road Associates, 127 B.R. at 413 (quoting In re Phoenix Piccadilly Ltd., 849 F.2d 1393, 1394 (11th Cir.1988) (emphasis
added); see also id. at 415 (“[O]nce a court has properly found that the debtor has failed
to satisfy the court's objective good faith inquiry-i.e., whether reorganization is the
proper course of action in a particular debtor's case-it may properly dismiss the debtor's petition without considering the debtor's subjective good faith. In other words, a finding of subjective bad faith-i.e., intentional abuse of the bankruptcy laws-is not a necessary prerequisite to dismissal for bad faith filing.”) (internal quotation and citations omitted). Moreover, the use of objective factors as a proxy for subjective intent makes sense. See Production Resources, 863 A.2d at 793 n. 85 (“Because it is impossible for non-divine judges to peer into the hearts and souls of directors, this court has recognized the importance of considering relevant circumstantial facts that bear on scienter, which include the substance and effects of the defendants' conduct.”). The reality is that Nelson
received a trial on, among other issues, whether Repository's bankruptcy filing was
made in subjective bad faith. That he failed to prevail on that contention does not mean
his argument was not fairly considered.

FN57.See Gheewalla, 930 A.2d at 103 (explaining that its rationale for not recognizing direct fiduciary duty claims by creditors was that “[d]irectors of insolvent corporations must retain the freedom to engage in vigorous, good faith negotiations with individual creditors for the benefit of the corporation”) (citing Production Resources, 863 A.2d. at 797).

FN58 See id.(“Recognizing that directors of an insolvent corporation owe direct fiduciary duties to creditors, would create uncertainty for directors who have a fiduciary duty to exercise their business judgment in the best interest of the insolvent corporation.”).

Regarding the claim that the defendant directors paid themselves "excessive compensation", the court's opinion provides a tutorial about the necessary elements of that claim:

To state a claim for excessive compensation, a plaintiff “must either plead facts from which it may reasonably be inferred that the board or the relevant committee that awarded the compensation lacked independence (e.g., was dominated or controlled by the individual receiving the compensation), in which event proof of such allegations would cast upon the
officer the burden to prove that the compensation paid was objectively reasonable in the circumstances or plead facts from which it may reasonably be inferred that the board, while independent, nevertheless lacked good faith (i.e., lacked an actual intention to advance corporate welfare) in making the award.”FN60

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FN60.Gagliardi v. TriFoods Intern., Inc., 683 A.2d 1049, 1051 (Del. Ch.1996).

The court went on to example why Nelson woefully fell short of these prerequisites. For example, the court observed that:

Second and even more fatally to Nelson's claim, his complaint provides no information about the amount or specific instances of the alleged excessive compensation.FN64  By no facts, I mean none that quantify what compensation the Emersons received and when, much less any that support an inference that the non-pled amounts exceeded what was
rational and proper. As explained above, Nelson has no excuse for the lack information about the alleged excessive compensation. Therefore, “[i]n the absence of [pled] facts casting a legitimate shadow over the exercise of business judgment reflected in
compensation decisions,” this claim must be dismissed.” FN65

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FN64.See id. ¶ 2 (alleging that the Emersons enriched “themselves and members of their
family through the payment of exorbitant salaries, benefits and expenses); id. ¶ 13
(alleging that “Mrs. Emerson received excessive commissions in that commissions
were paid for customer service, rather than sales activities); id. ¶ 14 (alleging that the
Emersons “both dined frequently at [Repository's] expense, charging meals to
the company American Express Card”); id. ¶ 20 (alleging that the “continued payment of
excessive salaries and commissions further diminished [Repository's] cash reserves”).
Nelson's contention that amounts and specifics are not necessary because the
payment of “any compensation during insolvency was exorbitant” is absurd and
illustrates why conclusory pleading that compensation is “excessive” has been held
to be not sufficient to state a claim. Nelson Ans. Br. at 18 n. 9 (emphasis in original).

FN65.Gagliardi, 683 A.2d at 1051.

UPDATE: Here is an insightul analysis of the case from a bankruptcy expert's perspective by Steve Jakubowski on his Bankruptcy Litigation Blog.

Supplement: Although it is not directly on point, a somewhat related recent decision I came across in the current issue of the ABA/BNA Lawyers' Manual on Professional Conduct, might be worth a "see generally" type of closing footnote. The Virginia Supreme Court on April 18 ruled in the case of McNally v. Rae , (VA, No. 070522), that an attorney has no duty to warn an adversary that the attorney's client is considering a filing for bankruptcy. The Virginia Supreme Court in this case reversed a trial court's imposition of attorneys' fees on an attorney for the costs of trial preparation due to the attorney not announcing to his opponent until the day that trial started that his client, the defendant, had filed bankruptcy the night before, though the client had been contemplating it for some time. Part of the reasoning would be that the client had a right to file bankruptcy, and requiring an attorney to disclose his client's deliberations prior to making the decision would have a chilling impact on the attorney/client relationship.

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Sutherland v. Sutherland, 2008 WL 1932374 (Del. Ch., May 5, 2008), read opinion here.

[This is one of four opinions issued on May 5 by the Chancery Court, two of which were written by the same vice-chancellor. I hope to post on the other 3 opinions issued on May 5 by tomorrow.]

Factual background details can be obtained from the three prior decisions by the Chancery Court involving these parties, and summarized on this blog here, here and here. This latest opinion in this ongoing internecine Sutherland family squabble denied a motion to dismiss, despite the great weight often given to the recommendation of the Special Litigation Committee (SLC), on which the defendant companies relied for their motion to dismiss. The reason for rejecting the SLC's conclusions: After having considered the briefs, affidavits, limited discovery and arguments of the parties, the Chancery Court reasoned that:

"the special litigation committee [consisting of one man] has not satisfied the court that it acted in good faith and conducted a reasonable investigation."

The opinion also discusses the issue of independence, the third requirement that the SLC needs to satisfy pursuant to the decision in Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981), as well as closely scrutinizing whether the SLC satisfied the other requirements of good faith and reasonable investigation.

One lesson from this opinion that can be learned by "negative example" is how "not to constitute"" an SLC (if one wants to have maximum "protection") , and how "not to conduct an SLC investigation" (if one wants to increase the odds of not  having the court disregard the SLC's conclusions.)

The court noted that the SLC has the burden of establishing its good faith, reasonable investigation and independence, based on Rule 56 standards, although the review has some aspects of a Rule 12(b)(6) motion. The court also referred to the decision in Kaplan v. Wyatt , 484 A.2d 501, (Del. Ch. 1984), that requires the SLC's conclusions to be supported by a "thorough record". The court may also apply its own business judgement to the conclusion of the SLC even if the SLC satisfied all other prerequisites.

A central theme in the complaint was that the directors were allegedly using the company's assets for their own personal benefit via such things as personal use of the corporate jet, lavish personal expenses charged to the company for chartered private railroad cars, private parties, club memberships, expensive hotels, rental cars, and other examples of opulence not required by their position at the company.

The court provided reasoning and examples of why the one-man committee's investigation was not adequate. He only spent  less than one full-day at the company's office reviewing records. He arrived at 8:30 and then met with various accounting and management personnel before reviewing records. He took a one-hour lunch and then left at 3:30. The following quote from the opinion provides more details:

Perhaps more notable than what Jeffrey did is what Jeffrey [the one-man committee] did not do. Jeffrey testified at his deposition that, although he is a certified public accountant, he did not arrive at the companies' offices with a plan for how he was going to conduct the review. He did not take any notes. Thus, there is no written record of what he did. Jeffrey testified that he did not review a statistically significant number of invoices when testing whether the accounting records were accurate. He did not verify that the vendor number he asked the accounting department to run was Perry's only vendor number. And he conducted no search for payments the companies may have made to third parties on Perry's behalf. For instance, if Perry used Maysville and Maysville then invoiced the companies rather than Perry, Jeffrey's investigation would not have found the check sent to Maysville on Perry's behalf.FN33  Nor, as Jeffrey testified, would he have found checks the companies made to credit card issuers on Perry's behalf. Indeed, Jeffrey testified that his review of the ledgers would have failed to capture the two large payments made to King on Perry's behalf.

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Personnel Decisions, Inc. v. Business Planning Systems, Inc., 2008 WL 1932404 (Del. Ch., May 5, 2008), read opinion here. This Chancery Court decision is 15 pages long in the Westlaw format which usually is the equivalent of over 40 pages in the original slip opinion format. This opinion contains precious iterations of Delaware law on contract principles, and  explains civil procedure rulings that deserve thorough review, but  in this post I will only highlight 5 key points that I have extracted:

1) Parties may consent to be governed by the Delaware Uniform Arbitration Act (DUAA) even if the Federal Arbitration Act (FAA) would otherwise apply absent specific provision in the agreement of the parties. (See, e.g., footnote 29),

2) The DUAA differs from the FAA and most other state arbitration acts in several respects. For example, a distinction is made in the DUAA between "notice" of the arbitration given to the opposing party--separate from the "demand" for  arbitration. After a thorough analysis, the court determined that this distinction could not be inequitably  leveraged to defeat the legislative intent of DUAA sections 5702 and 5703 which was to give the defending party an opportunity to seek an injunction in Chancery Court  to have the arbitration enjoined. (See, e.g., footnote 63).

3) Filing a complaint alone to initiate a lawsuit in a particular forum, without service of the complaint, in the nature of a placeholder, will not carry the customary weight of a "first-filed" suit for purposes of the familiar McWane analysis. (See footnote 58).

4) "Quasi-Estoppel" is a rarely applied doctrine that can be a useful arrow in a litigator's quiver. It can be used to prevent a party from changing its position "in mid-stream" during litigation--to another party's disadvantage, e.g., by asserting a right inconsistent with a previous position taken. (See footnotes 38 and 39).

5) "Course of Performance" is the second best means to employ in the interpretation of a contract, after first trying to determine the "plain meaning". Course of  performance may also be evidence of a party's intent to modify or waive certain terms of  the agreement. (See footnotes 21 and 22).

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In the Matter of Burnbrae Maintenance Association, 2008 WL 1952166 (Del. Ch., May 5, 2008), read opinion here. This is an example of the broad variety of cases that the Chancery Court handles on occasion. This case involves a custodian that was appointed to oversee a condominium association and who now seeks to be discharged and have his fees paid, relying on Section 226 of Title 8 of the Delaware Code.

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Del-Chapel Associates v. Conectiv, 2008 WL 1934503 (Del. Ch., May 5, 2008), read opinion here.

The Chancery Court decided issues of adverse possession and those instances where trespass occurs when the scope of a license is exceeded by one's actions. 

This is one of 4 cases promulgated by Chancery Court on May 5, and one of about 10 published this week, many of which were over 40 pages long in original format. That's my excuse for not making this a long summary, in addition to the fact that the topic not being one that most readers would expect extensive treatment of on these pages.

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Madison Real Estate Immobilien-Anlagegesellschaft Beschrankt Haftende Kg v. Kanam USA XIX Ltd. Partnership, 2008 WL 1913237 (Del.Ch., May 01, 2008), read opinion here. (Yes, that is the correct spelling of the unusual and long case name.) Before I address the substantive parts of the opinion, allow me three brief introductory comments about this recent Chancery Court decision involving the denial, after trial, of a demand by a limited partner for books and records of a limited partnership. ( This opinion may not have the type of sexy issues that makes headlines like the recent Yahoo and Microsoft dance, but this case provides answers to the type of quotidian issues that most business litigators need to have in their toolbox.)

First, unlike most cases under DGCL Section 220, an added dimension of "books and records demands" involving alternative entities, as in this case, is the separate governing agreement that often provides a separate basis to demand documents--separate from any statutory right. Delaware cases have established that those agreements may appropriately either expand or expressly limit statutory rights to books and records, but here is the burning question for inquiring minds:

If the claim is based entirely on an agreement, and not the statute, must the requesting party still have a "proper purpose" which is a requirement of the statute, even if it is not stated as a prerequisite in the agreement? In this case, the court presented both sides of the argument thusly:

 Here, the Partnership Agreement does not impose a proper purpose requirement on a limited partner's inspection right. Therefore, Madison generally need not state a proper purpose to enforce its contractual inspection right.

However, the Chancery Court in this case goes on to allow that:

Under the “improper purpose defense,” however, a court may deny a partner's request for access to a partnership's records when:

(i) neither the explicit contractual provision in a partnership agreement nor statutory language negate the notion that a partner must have a proper purpose, and (ii) the partner denying another partner access to partnership business records can show that the partner seeking access is doing so for a purpose personal to that partner and adverse to the interests of the partnership considered jointly. FN96
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FN96. Bond Purchase, L.L.C. v. Patriot Tax Credit Props., L.P., 746 A.2d 842, 857 (Del. Ch.1992).

See also footnote 36 and related text in this opinion for the court's reliance on Section 220 cases by analogy in order to determine proper purpose. Accord,  Donald Wolfe and Michael Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery, at 8-107, Section 8-6[a][2] (2007).

Second, as was mentioned in a recent Chancery opinion here, there are not as many Delaware decisions regarding "books and records demands" involving alternative entities, as compared with those under Section 220 for corporations. Thus, this opinion should be noted for its membership among a relatively sparse population. Professor Larry Ribstein, one of the nation's leading scholars on alternative entities, has written extensively on the topic of "uncorporations" in general and comparisons with the corporate form in particular. See, e.g., here.

Third, it is notable that after a trial and extensive briefing (read: considerable expense), the request for books and records in this case was denied. As has been mentioned on these pages frequently, one should not assume that a request for books and records will be either inexpensive or easy. See generally, Professor Bainbridge's comments here about recent proposed legislation in the U.S. Congress that would require states to make more information publicly available about the ownership of all entities.

 Now, onward to more specifics of this case with apologies if my introductory remarks dwarf my discussion of the details of the opinion. This demand for books and records in this case was based on both Section 17-305 of the Delaware Revised Uniform Limited Partnership Act as well as the terms of the Partnership Agreement itself.

The court relied extensively on two prior cases to address the issue of whether the plaintiff in this case had a "proper purpose" for requesting the documents. Madison Ave. Inv. Partners, LLC v. Am. First Real Estate Inv. Partners, L. P. (Madison I ), 806 A.2d 165 (Del. Ch.2002) and BBC Acquisition Corp. v. Durr-Fillauer Medical, Inc., 623 A.2d 85 (Del. Ch.1992).

One of the issues in this case was whether the primary purpose for the records was to prepare for a tender offer. The court found the BBC case, supra, to be closer to the facts of this case and determinative of the outcome. The plaintiff in this case was an investment vehicle comprised mostly of German nationals who invested in retail real estate, often for the purpose of making tender offers. The prior Chancery Court decision in Madison I, supra, ruled that the simple fact that a limited partner is in the business of making tenders offers, does not , ipso facto, disqualify that party from establishing a proper purpose.

Contrariwise, however, the prior Chancery Court decision in BBC, supra, held that where the primary purpose was not to value one's own current interest, but rather to determine whether to increase an offering price to buy the whole company, and if so, by how much--that primary purpose was not reasonably related to one's interest as a shareholder, and thus, was not a "proper purpose" as is required in order to successfully pursue a books and records claim.

So too, in this case, the court concluded that the evidence demonstrated that the primary purpose for seeking books and records was for the purpose of making a tender offer, which was not a proper purpose, based on the BBC case, supra.

The court also relied on the defenses available at Section 17-305(b) which allows documents to be withheld if they are trade secrets and/or if they are the subject of confidentiality agreements with third-parties (even if, as here, they are oral agreements).

As for the strictly contract claim discussed above, the court determined that the language relied upon was not ambiguous enough to resolve doubts against the drafter, but that the language in the document  providing for "books and accounts" did not include the documents sought by the plaintiff--even if a "proper purpose" requirement was not superimposed on the contract claim.

 In any event, some classic contract interpretation principles were reiterated and warrant quotation:

Limited partnership agreements are contracts the courts construe like any other contract.FN80 Under Delaware law, contract construction is a question of law.FN81 When interpreting a contact, the court strives to determine the parties' shared intent, “looking first at the relevant document, read as a whole, in order to divine that intent.”FN82 As part of that review, the court interprets the words “using their common or ordinary meaning, unless the contract clearly shows that the parties' intent was otherwise.”FN83 If the contractual language is “clear and unambiguous,” the ordinary meaning of the language generally will establish the parties' intent.FN84 A contract is ambiguous, however, when the language “in controversy [is] reasonably or fairly susceptible of different interpretations or may have two or more different meanings.”FN85 Under the doctrine of contra proferentem, ambiguities in a contract will be resolved against the drafter. FN86
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FN80.See Arbor Place, 2002 WL 205681, at *3. The court in Arbor Place cited Elf Atochem N. Am., Inc. v. Jaffari, 727 A .2d 286, 290-91 (Del.1999), for the proposition that: “ ‘The policy of freedom to contract underlies both the [LLC] Act and the LP Act.... The basic approach of the [LLC] Act is to provide members with broad discretion in drafting the Agreement and to furnish default provisions when the members' agreement is silent.’ “ Id.

FN81.Rhone-Poulenc Basic Chems. Co. v. Amer. Motorists Ins. Co., 616 A.2d 1192, 1195 (Del.1992).

FN82.Matulich v. Aegis Comm'ns Group, Inc., 2007 WL 1662667, at *4 (Del. Ch. May 31, 2007) (citing Kaiser Aluminum Corp. v. Matheson, 681 A.2d 392, 395 (Del.1996)); Brandywine River Prop., Inc. v. Maffet, 2007 WL 4327780, at *3 (Del. Ch. Dec. 5, 2007).

FN83.Cove on Herring Creek Homeowners' Ass'n v. Riggs, 2005 WL 1252399, at *1 (Del. Ch. May 19, 2005) (quoting Paxson Commc'ns Corp. v. NBC Universal, Inc., 2005 WL 1038997, at *9 (Del. Ch. Apr. 29, 2005)).

FN84.Brandywine River, 2007 WL 4327780, at *3.

FN85.Rhone-Poulenc, 616 A.2d at 1196. Ambiguity does not exist simply because the parties do not agree on a contract's proper construction. United Rentals, Inc. v. Ram Holdings, Inc., 2007 WL 4496338, at *15 (Del. Ch. Dec. 21, 2007).

FN86.See Twin City Fire Ins. Co. v. Delaware Racing Ass'n, 840 A.2d 624, 630 (Del.2003); Bond Purchase, L.L.C. v. Patriot Tax Credit Props., L.P., 1999 WL 669358, at *3 (Del. Ch. Aug. 16, 1999).

UPDATE: Here is a scholarly analysis of the case and related commentary by Professor Larry Ribstein, one of the leading experts in the country on LLCs and other "uncorporations".

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Weichert Co. of PA v. Young, 2008 WL 1914309 (Del. Ch., May 1, 2008), read opinion here.  In this Chancery Court decision the court reviews objections to a fee application pursuant to a fee shifting provision in an agreement. The pro se defendant lost the argument that he violated his covenant not to compete. Even though the monetary award was only about $7,500, the fee request was about $90,000. The court awarded the whole amount requested, finding it reasonable under the applicable case law (see footnote 7), as well as under Rule 1.5 of the Delaware Lawyers' Rules of Professional Conduct.

 The underlying facts of the case can be found in the court's prior decision that was summarized here.

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Here is the formal policy announced today for public access to administrative records of the Delaware Court of Chancery.

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In Young v. Klaassan, (Del. Ch., April 25, 2008), read opinion here, the Chancery Court granted a motion to compel discovery of the documents that a special litigation committee relied on, and because the defendant referred to the committee's finding in its motion to dismiss. The court did not accept the argument that the references to the committee's findings were "not relied on for the truth of the matter asserted".

 By referencing the committee's findings, the underlying Motion to Dismiss under Rule 12(b)(6) was converted to a Motion for Summary Judgment under Rule 56--for which limited discovery is often allowed prior to the opposing party being required to reply. The court noted the similarity between the facts and the law of this case and the recent Chancery Court decision in Fleischman v. Huang, 2007 WL 2410386 (Del. Ch., Aug. 22, 2007), that was summarized on this blog here.

The Delaware Business Litigation Report has a summary of Young v. Klassan here.

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In re Kent County Adequate Public Facilities Ordinances Litigation Consolidated, (Del. Ch., April 18, 2008),  read opinion here.

The purpose of this post is to provide excerpts on discovery issues listed in the title above that every  business litigator will encounter from time to time, and in those instances this decision will be a useful reference.

Here are a few practical quotes from this Chancery Court opinion:

An inadvertent disclosure of privileged communications will not necessarily
operate to waive the attorney-client privilege.28  In order to determine whether the
inadvertently disclosed documents have lost their privileged status, the Court must
consider the following factors: (1) the reasonableness of the precautions taken to
prevent inadvertent disclosure; (2) the time taken to rectify the error; (3) the scope
of discovery and extent of disclosure; and (4) the overall fairness, judged against
the care or negligence with which the privilege is guarded. 29
The Court is satisfied that Respondents have not waived the attorney-client
privilege with respect to the “inadvertently disclosed” documents.30  First, it
appears that Respondents instituted reasonable precautions to prevent the
disclosure of privileged materials—e.g., their outside litigation counsel reviewed
the documents prior to producing them to Petitioners. Given the volume of
discovery in this case, however, it is not inconceivable that Respondents’ counsel,
even with a diligent review of the documents, could inadvertently have produced
privileged materials to Petitioners.

-------------------------------------------------------
28.  WOLFE & PITTENGER, supra note 16, § 7-2[c][1], at 7-26.
29.  Id. at 7-27; Monsanto Co. v. Aetna Cas. & Sur. Co., 1994 WL 315238, at *6 (Del. Super.
May 31, 1994) (quoting Lois Sportswear, U.S.A., Inc. v. Levi Strauss & Co., 104 F.R.D. 103, 105 (S.D.N.Y. 1985))

-----------------

The following footnote provides excellent insight into why most courts abhor discovery disputes and why they should be avoided if possible. Although in some cases they are unavoidable, I tell younger associates in our firm that if the lawyer(s) on the other side are being childish and boorish, especially if they are out-of-town lawyers, "somebody needs to be the adult" and/or "somebody needs to be the Delaware lawyer" and if it is not a matter that will determine the outcome of the case or is a minor issue, it is more productive to focus on more substantive matters, and swallow one's pride, and pick a battle on a more outcome-determinative issue.

             FOOTNOTE 10:

The Court’s admonition to the parties in Amirsaleh v. Bd. of Trade of City of New York, Inc.,
2008 WL 241616 (Del. Ch. Jan. 17, 2008), regarding the conduct of discovery has considerable force in this case as well, particularly in light of the gratuitous barbed comments and pointed tone in the parties’ recent series of filings (and other communications between counsel submitted into evidence in connection with those filings):

The Rules of this Court are primarily based on the Federal Rules of Civil
Procedure, which were originally crafted in their modern form in 1938. The
framers of the federal rules intended the discovery process to be managed with
little judicial oversight by the parties, and intended that the process be cooperative
and self-regulating. Today, with far more complex cases and discovery processes
that are extraordinarily voluminous and complicated, cooperation and
communication among the parties and their counsel are even more important.
Such communication and cooperation were clearly absent in this case.
Defendants protest at length in their answering brief about [plaintiff’s counsel’s]
failure to discuss this discovery dispute. Such behavior is inappropriate. The
Court does not relish the opportunity to resolve discovery spats that likely could
have been resolved by the parties on their own. If defendants did not understand
[the Court’s prior discovery decision], they should have asked for clarification. If
plaintiff took issue with defendants’ response to discovery request, he should have
reached out to defense counsel to express his concerns. Plaintiff’s counsel should
certainly not refuse to articulate such concerns when explicitly asked to do so by
the other side. Both sides are reminded to treat one another with respect and
civility throughout the discovery process.
Id. at *3 (emphasis added) (citations omitted).

The Court, of course, does not intend to discourage the parties (or litigants generally) from
bringing to the Court’s attention legitimate discovery disputes, which, undoubtedly, will arise from time to time. Moreover, the Court acknowledges that counsel for both parties did, in fact, attempt to communicate regarding the present discovery issues, at least in the latter part of February and in early March. The lack of communication to resolve this dispute following the Court’s March 19 letter opinion, however, is inexplicable. The more acute problem in this case would seem to be the parties’ tendency to adopt intractable positions instead of seeking out pragmatic solutions to move the discovery process along.

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Levitt Corp. v. Office Depot, Inc., 2008 WL 1724244 ( Del. Ch., April 14, 2008), read opinion here. The Delaware Chancery Court was presented in this case with differing interpretations of an "advance notice bylaw" and the argument by Office Depot that Levitt did not comply with the requirements of the bylaw related to Levitt's attempt to nominate new directors to the board in connection with a self-funded proxy contest.

 One of the issues addressed in the court's opinion was the interface between the concepts of "electing" directors as compared with "nominating" directors. The money quote follows:

The remaining question is whether the business of electing directors includes the nomination of directors. Of course, nominating candidates and voting for preferred candidates are separate steps. Levitt has recognized as much. Notwithstanding this difference, nomination is a critical part of the election process-in the absence of other nominations, the stockholder constituency has no electoral choice as between candidates; instead, the shareholders are left with only an “up or down” vote on the company sponsored candidates. Despite the role of nominations in giving substance to elections, i.e., providing shareholders with a selection of candidates, neither Subchapter VII of the Delaware General Corporation Law, FN41,  nor any provision of Office Depot's Bylaws discusses or imposes limitations on the nomination process.FN42  Perhaps the best explanation for this silence is that the concept of nominations is included within the broader category of elections. Typically, the election process is understood as spanning from nomination to voting to vote tabulation to announcement and certification of the results. Given that the Notice speaks generally of “elect[ing] ... Directors,” an item of business that contemplates putting forth individuals for stockholder consideration, the Court can discern no persuasive reason why the business of electing directors should not include the subsidiary business of nominating directors for election, especially where no guidance on the nomination process is found in Office Depot's Bylaws or in the Delaware General Corporation Law.FN43

FN41. Subchapter VII addresses shareholder meetings, elections, voting, and notice.
FN42. See 8 Del. C. §§ 211-233.

Although it was not necessary to the court's conclusion, the issue arose as to the interplay between the federal securities regulations and the disputed corporate bylaw provisions, a point that was addressed in a recent Chancery Court opinion in JANA Master Fund Ltd. v. CNET Networks, Inc., 2008 WL 660556 (Del. Ch. Mar. 13, 2008), expedited appeal granted, No. 141, 2008 (Del., Mar. 19, 2008) , summarized here on this blog.

Nor did the court need to address what impact the longstanding tradition in Delaware law of being solicitous about the sacrosanct shareholder franchise, would have on an interpretation of the bylaw in terms of the right to nominate directors. Nonetheless, in footnote 44 of the opinion, the Court made the following observation:

 Accordingly, the Court need not pass on Levitt's arguments that Section 14 [of the Bylaws at issue], does not apply to shareholder-funded proposals or that its advance notice period is unreasonably long.

Another way of viewing the outcome is to recognize that Office Depot's description of the business to come before the Annual Meeting (i.e., whether “election” subsumes nomination) was not clear and unambiguous. With that, the protection afforded the shareholder franchise, see, e.g., Openwave Sys., 924 A.2d at 239, [ Openwave Sys., Inc. v. Harbinger Capital P'ners Master Fund I, Ltd., 924 A.2d 228, 239 (Del.2007)], which includes the right to nominate competing board candidates, is properly implemented in this instance.

UPDATE: Steve Haas provides a summary here  via the Harvard Corporate Governance Blog.

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 Liberty Property Limited Partnership  v. 25 Massachusetts Avenue  Property LLC, (Del. Ch., April 7, 2008), read opinion here. Even though the focus of this blog is on business litigation cases that apply Delaware law, I include this recent decision that applies the law of the District of Columbia because this 50-page opinion provides insight into how the Chancery Court might approach a similar type of issue under Delaware law. The court's introductory summary of the issues addressed is much more pithy than I could provide, so I include it here verbatim:

This case presents an unusual question for the Delaware Court of Chancery to
answer: Does the contract law of the District of Columbia require the owner of a
building to accept a lease that no reasonable lessor would ever sign simply to facilitate
the lessee’s exercise of a contractual option to purchase the building?
This bizarre question arises because an option holder’s right to purchase a building
was subject to the prior condition that 85% of the building be under leases meeting
certain contractually specified conditions. When the option holder faced the expiration of
its option — an expiration that began a period when the owner could sell the building free
and clear of any option possessed by the option holder — the option holder tendered up a
last-minute “master lease” whereby it purported to lease the required space itself. As the
option holder has been forced to admit, no reasonable lessor would have ever accepted
the lease, because its terms would have been unpalatable to any actual lessor. The only
purpose of the so-called lease was to permit the option holder to exercise the purchase
option.
Indeed, the plain terms of the supposed lease permitted the option holder to
terminate the lease after a mere twelve days if a sale of the building to the option holder
was not closed for any reason, even if the reason for the failure in the closing was
conduct by the option holder. The lease also contained other commercially suspect
provisions, such as the absence of any security deposit, the requirement that a large
commission be paid to the option holder for securing the lease it itself was proposing, and
a holdback of nearly $10 million premised on the speculative costs that might be required
to improve parts of the building. This holdback would be used to meet the needs of
actual tenants who might someday arise to sublease and occupy (for purposes that would
not be known until then) the vast quantities of space the option holder was supposedly
promising to lease. For these and other reasons, even the option holder’s own testimonial
expert on commercial leases suggested that no reasonable landlord would enter into a
lease of this kind and that the only purpose of the lease was not to act as a lease, but as an
artificial fulfillment of the contractual condition to exercise the option.
District of Columbia contract law imposes no obligation on a party to a contract to
engage in an act of charity by waiving a condition precedent to enable an option holder to
obtain its wishes. In this case, the building owner had the freedom to sell the building to
the highest bidder if the condition to the option exercise was not fulfilled. To require the
building owner to excuse the failure of that condition by accepting a sham lease that no
reasonable landlord would accept would rewrite the parties’ agreement and undercut the
narrow reading given to option contracts. Therefore, I reject the option holder’s demand
that I grant it an order of specific performance permitting it to purchase the building at
the price it set in its purported exercise of the option.

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Helaba Invest Kapitalanlagegesellschaft mbH v. Fialkow, 2008 WL 1128721 (Del. Ch., April 11, 2008), read opinion here. [Yes, that is a long and unusual case name. No, it is not a typo.] The Delaware Chancery Court decided an issue in this case that is usually of great interest to both lawyers and clients alike: attorneys' fees awarded by the court. As the court summarized it:

At a hearing held on March 13, 2008, this court approved the settlement of this action as fair and reasonable, but withheld decision on the award of attorneys' fees. This opinion considers the $1,500,000 fee application. The attorneys contend that they are entitled to this fee because they secured a $3,760,000 benefit to the stockholders and a substantial therapeutic benefit through several purportedly material disclosures. For the reasons set forth below, the application for attorneys' fees and expenses is granted in the amount of $500,000, plus expenses [of over $125,000.]

 Instead of the 26.4% of the monetary benefit that the plaintiff's counsel sought, the defendants only would agree to pay them 5% or less--roughly $244,000. In this case, there was no issue that the plaintiff's counsel were entitled to fees, the only issue was how much.

The court recited the familar 5 factors in the Delaware Supreme Court's Sugarland case, cited more recently in the Chancery Court's decision of In Re Plains Resources, 2005 WL 33281, at *3 (Del. Ch. 2005).

 In addition to emphasizing that the benefit to the corporation must be caused by the litigation and not merely  "post hoc ergo procter hoc" (the Latin phrase used by the court is a logical fallacy that means literally: "after this, therefore, because of this");  the court observed that as an alternative to the "common fund doctrine", attorneys'  fees can be awarded pursuant to the "corporate benefit doctrine" when a "tangible monetary benefit has not been conferred, but some other valuable benefit is realized by the corproate enterprise or the stockholders as a group." (footnote omitted.)

The court based its analysis partially on the common fund doctrine and partially on the corporate benefit theory, but notably, the court allowed in footnote 16 that the fee:

 "would not be paid from a common fund itself since the funds have already been paid to the class and the defendants agreed, in the stipulation of settlement, themselves to pay the fee and the expenses awarded by the court. Nevertheless, the court will determine this aspect of the fee petition by applying the same principles that guide the court where an actual common fund still exists."

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In Corporate Property Associates 14 Inc. v. CHR Holding Corp., 2008 WL 963048 (Del.Ch., April 10, 2008), read opinion here, the court denied a Motion to Dismiss fraud and negligent misrepresentation claims against a company for disclosing misleadingly incomplete information to warrantholders that discouraged them from exercising their warrants just prior to a transaction that devalued them--even though the court held that they were not owed fiduciary duties.

The purpose of this blog is to summarize key decision from Delaware courts on corporate and commercial topics. Not infrequently the use of the English language in the courts' opinions is so exemplary that it bears quoting verbatim instead of trying to summarize it, in order to get the full flavor. This is such opinion. It may be on the longer side as far as overviews go, but stick with it because it is worth the wait. The court introduces its opinion with a sketch of the factual and legal issues as well as its holding--with a memorable adage along the way.

The maxim silence is golden is not simply a goad to good manners at the local movie theater, it is good advice in many realms of life. For example, those are truly words of wisdom when you are not under a duty to speak and someone asks you a question that
potentially touches upon information that you would rather not divulge. Here, plaintiffs Corporate Property Associates 14 and Corporate Property Associates 15 (collectively “Corporate Property Associates”) held warrants in defendant CHR Holding Corporation, a wholly owned subsidiary of defendant “Platinum.” FN1  Those warrants did not require CHR to give Corporate Property Associates advance notice of cash dividends and did not protect the value of the warrants from being diluted through the payment of cash dividends. As such, CHR and Platinum had both the ability and the incentive to reduce the value of Corporate Property Associates' warrants by issuing large cash dividends from CHR to Platinum. In 2006 and 2007, CHR recapitalized by undertaking two large debt issuances and using the proceeds of those debt issuances to pay two large cash dividends.

The court summarized its holding on the various issues as follows:

Corporate Property Associates asserts that CHR, Platinum, Kotzubei, and Eva M. Kalawski, CHR's sole director, breached their fiduciary duties to Corporate Property Associates by not providing advance disclosure of the cash dividends. I dismiss those claims because warrantholders are not owed fiduciary duties. Likewise, I dismiss the claim that CHR breached its implied obligation of good faith and fair dealing in the warrants. It would be an error to imply an advance notice of cash dividends term in the warrant contracts because the sophisticated parties who negotiated those contracts included terms addressing similar issues and chose not to include a term addressing advance notice of cash dividends. On the other hand, I do not dismiss Corporate Property Associates' fraud and negligent misrepresentation claims against CHR and Platinum to the extent those claims relate to the second dividend. At the motion to dismiss stage, viewing the facts alleged in the complaint in the light most favorable to Corporate Property Associates, CHR's response to Corporate Property Associates' question about “any significant changes/developments” was misleadingly incomplete. I do, however, dismiss the fraud and negligent misrepresentation claims against Kotzubei because I have dismissed the fiduciary duty claim and therefore this court cannot exercise personal jurisdiction over Kotzubei under Delaware's director and officer consent statute, 10 Del. C. § 3114. (emphasis added).

For a helpful discussion of the implied duty of good faith and fair dealing, see page 6 of the Westlaw format of the opinion.

For a thorough analysis of the court's finding of  "fraud by silence in the face of a duty to speak", see page 8 of the Westlaw format and the related bountiful footnotes.

Negligent misrepresentation (also known as equitable fraud or innocent misprepresentation) was addressed in detail starting at page 9, including the necessary elements to establish a claim, such as the first requirement that  "defendant had a pecuniary duty to provide accurate information..." That requirement limits the reach of the cause of action to "situations where the defandant makes a 'representation in the course of a business or a transaction in which the defendant has a pecuniary interest.'" (copious citations in footnotes omitted, in which, inter alia,  recent Chancery Court opinions in H-M Wexford v. Encorp and Vague v. Bank One are distinguished to the extent they refer to the pecuniary interest requirement in dicta).

Finally, an essential insight into Section 3114 of Title 10 of the Delaware Code, regarding the imposition of Delaware jurisdiction over officers and directors of Delaware corporations, is discussed at page 14.  Section 3114 has been interpreted over the last 25 years by Delaware courts, to be limited to imposing jurisdiction only for claims involving violations of the DGCL; corporate charter or bylaws; and breaches of fiduciary duties owed to the company or to stockholders  (regardless of whether the statute potentially can be read to mean something else.) Thus,  because the only remaining claims were for fraud and negligent misrepresentation, Section 3114 could not be used to impose personal jurisdiction over the officer.

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Smartmatic Corp. v. SVS Holdings, Inc. and Sequoia Voting Systems, Inc.,(Del. Ch., April 4, 2008), read opinion here. This letter opinion involved the application of New York law to multiple disputes surrounding a stock purchase agreement. Because this blog focuses on Delaware law, the only point I want to highlight in this 24-page decision is a footnote that reiterates basic Delaware law to the effect that forum clauses are generally upheld, but even as here where the law of another state is applied to the substantive dispute, Delaware procedural and remedial law will still govern. That was key here because there were cross-motions for summary judgment filed along with motions for expedited proceedings and injunctive relief--and summary judgment was granted less than 3 weeks after the complaint was filed. Here is the money quote from footnote 21:

“As a general proposition, Delaware courts will recognize and enforce contractual choice-of law provisions if the selected jurisdiction has a material connection with the transaction.”
Trilogy Dev. Group, Inc. v. Teknowledge Corp., 1996 WL 527325, at *3 (Del. Super. 1996)
(citing Falcon Tankers, Inc. v. Litton Systems, Inc., 300 A.2d 231, 235 (Del. Super. 1972)). The current dispute involves interpretation of several agreements providing that New York law governs disputes resulting therefrom. The parties conduct business in New York. New York law thus governs interpretation of this contract. Procedural matters, however, are determined by Delaware law. See, e.g., Taylor v. LSI Logic Corp., 1998 WL 51742, at *4 n.19 (Del. Ch. Feb. 3, 1998); Lutz v. Boas, 176 A.2d 853, 857 (Del. Ch. 1961) (“It is well established that the law of  the forum governs questions of remedial or procedural law.”).

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Nicastro v. Rudegeair, 2008 WL 979677 (Del. Ch., April 1, 2008), read opinion here. This is a one-page letter decision (with several footnote citations to cases law), which includes a helpful reference to the procedure necessary to remove a Notice of lis pendens  filed pursuant to Section 1608 of Title 25 of the Delaware Code. Namely, once a motion is filed, the "court must  determine that there is not a probability that final judgment will be entered in favor of the party recording the notice of pendency."

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In Re The Bear Stearns Companies, Inc. Shareholder Litigation, (Del. Ch., April 9, 2008), read opinion here, (Hat Tip to Prof. Steve Davidoff). Yesterday the Delaware Chancery Court stayed the litigation in Delaware over the Bear Stearns imbroglio in favor of pending litigation in New York involving substantially the same issues and parties. The quote from the opinion highlighted by Prof. Davidoff follows:

 In this case, considering that the New York court has scheduled an expedited preliminary injunction hearing, the issues presented involve application of established precedents of Delaware corporate law to an unusual set of facts, which is unlikely to recur, and the persuasive practical reasons against embarking unnecessarily on a collision course with our sister court in New York in these extraordinary circumstances, I find Defendants have shown that failing to stay this action would result in overwhelming hardship.

 

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This case summary is provided courtesy of Carl Neff, a distinguished lawyer in the Wilmington, Delaware, office of our firm.

 In Asphalt Paving Systems, Inc. v. Department of Transportation, 2008 WL 852817 (Del. Ch., Mar. 20, 2008), read opinion here, the Delaware Chancery Court granted summary judgment in favor of the Delaware Department of Transportation (“DelDOT”). DelDOT solicited bids for the microsurfacing of certain roads in Sussex County, Delaware (the “Project”). Plaintiff Asphalt Paving Systems (“APS”) submitted the lowest bid of $524,444.44. DelDOT, after reviewing the bids, determined that APS’s bid was not on the bid bond form issued by DelDOT with the bid package, but instead was on a bid bond form issued by the American Institute of Architects. DelDOT interpreted its contract documents and the applicable provision of Delaware’s public works law, 29 Del. C. § 6962(d)(8)(a) to require rejection of APS’s bid given that it failed to use the precise, identical DelDOT form required (even though it was substantially similar in all material parts).

APS initially sought an order compelling DelDOT to award the contract to APS, along with interim injunctive relief against an award of the contract to the second lowest bidder, Dosch-King Company, Inc. (“D-K”), and an injunction against an award to D-K. Alternatively, APS sought an order requiring DelDot to rebid the Project. APS’s support for the latter argument was that DelDOT’s instructions relating to the delivery of a bid bond were misleading. Given that there were no material facts were in dispute, the Court was able to treat this matter as if submitted for summary judgment by all parties.

The Court held that under 29 Del. C. § 6962(d)(8)(a), DelDOT was required to reject APS’s bid, given that the bid bond form used by APS was not pre-approved by DelDOT. While there was a dispute over the fact that the Office of Management and Budget (“OMB”) never formally “issued” a bid bond form for DelDOT to use (as is required by the statute), the Court held that because the bid bond used by DelDOT was pre-approved by DelDOT (as is also required by the statute), and that it would be unreasonable to conclude that the legislative intent would be to interfere with DelDOT’s ongoing bidding procedures because of the absence of the OMB standard bid bond form, the Court agreed with DelDOT’s assertion that DelDOT approved bid bonds must be submitted with all potential bids. Further, the Court declined to require DelDOT to rebid the Project, given that APS’s Amended Complaint or its brief failed to argue that it was, in fact, misled by the instructions. For these reasons, the Court granted summary judgment in favor of DelDOT.

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In TravelCenters of America, LLC. v. Brog,  the Delaware Chancery Court, on April 4, 2008,  issued a ruling from the bench, available here (HT  Prof. Davidoff), after a short trial, that a notice of intent to nominate new members of the board of managers of the LLC did not comply with a provision of the LLC agreement, and was in violation of several U.S. securities laws applicable to proxy contests.

On April 3, 2008, the Court also issued a pre-trial letter decision here, that allowed Professor Randall Thomas to provide expert testimony at trial on the issues of materiality and U.S. securities laws, but the good professor was prohibited from opining on matters of Delaware law (as prior decisions by Chancellor Chandler have made clear.) Here is a prior summary of a decision of about a week ago in the same case by the Chancery Court involving a books and records counterclaim.

Professor Steven Davidoff here, (who also writes on The New York Times DealBook blog), and Professor Larry Ribstein here, have today already provided thoughtful commentary on the case. Professor Ribstein cites to articles he has written on the topic of LLCs not being subject to the same corporate governance structure as corporations--including materials he presented at an symposium at which the author of the instant Chancery Court decision was also participating.

Here is a money quote from the  letter decision of April 3:

Delaware does not impose a legal requirement on LLCs to draft their bylaws to be consistent with some abstract notion of “good corporate governance.” On the contrary, limited liability companies are creatures of contract, “designed to afford the maximum amount of freedom of contract, private ordering and flexibility to the parties involved.”

I predict that this decision will be cited often to distinguish between the governance of an LLC compared to a corporation. However, curiously, in the opinion of about 10 days ago in this case that was summarized here, involving a demand for books and records, the court said that it might refer by analogy to the corporate statute to analyze such a demand. Of course, a demand for books and records  is a type of issue does not directly impact corporate governance and is perhaps simply a practical approach to deciding a books and records demand in the LLC context.

Having recently returned from a two-day seminar on corporate governance, and cognizant of the many trees that have been killed over the last few decades alone in connection with publishing bookshelves full of treatises and articles and opinions written about corporate governance (and now the terabytes of space on computers taken up by writings about corporate governance), it is notable and worth repeating the truism that in the LLC context, all those high-falutin'  corporate governance ruminations and ideals can be "contracted away".

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In Concord Steel, Inc. v. Wilmington Steel Processing Co., Inc., 2008 WL 902406 (Del. Ch., April 3, 2008), read opinion here, the Chancery Court upheld the portion of an Asset Purchase Agreement (ASA) that prevented the seller from competing against the business it sold for 4 years. In the context of a preliminary injunction motion, the court found:  (i) a probability of success on the merits of the claim that the covenant of noncompetition was violated. The court also found that (ii) an imminent threat of irreparable injury was shown, and that (iii) the balance of equities tipped slightly in favor of the plaintiff.

 Procedurally, it is notable that, while not done at the lightening speed of a TRO motion, this PI motion was still decided quite expeditiously. Argument was heard in March 2008 after suit was filed in November 2007 and extensive discovery was taken and pre-trial briefs were submitted over the end of year holiday season.

 The standard for granting a preliminary judgment motion was carefully recited a pages 3 and 4 of the Westlaw version of  the 15 page opinion (that would be about 45 pages in the slip op. format.) The court reviewed the extensive factual background including what it referred to as:  "The ASA ... a complicated, 53 page agreement, and the nonsolicitation and noncompetition covenants are particularly convoluted."

 The court also reiterated basic contract interpretation principles. Although these principles are well-known and often summarized on these pages, a few gems are worth repeating:

 " A contract is not rendered ambiguous solely because parties do not agree as to its construction." Also, "extrinsic, parol evidence cannot be used to manufacture an ambiguity in a contract that facially has only one reasonable meaning." However, under the parol evidence rule, "where the language of a written integration is susceptible to more than one reasonable interpretation, the court will consider profferred admissible evidence bearing upon the objective circumstances relating to the background of the contract".

 The opinion also includes at page 5 the essential elements of an enforeceable contract. Basic stuff but I find it helpful to periodically review fundamental principles.

At page 6 and footnotes 42 and 43, the court lists the prerequisites for enforceability of a covenant not to compete, and cites to several Delaware decisions upholding such agreements, the elements for which must be  proven by "clear and convincing evidence." See also footnote 52.

Several cases are cited at footnote 86 in which the Delaware courts have found the irreparabale harm necessary for a PI where a covenant not to compete is breached, in light of the "loss (or foreseeable loss) of client goodwill..." At footnote 89, the court collects cases that recognized, as here, a stipulation of the parties that irreparable harm would be suffered in the event of  a breach.

Finally, on an issue of apparent first impression in Delaware, the court observed that even  though Chancery Court Rule 65 requires that a bond be posted when an injunction is granted, in the agreement involved in this case, the parties agreed that the bond requirement would be waived, and the court enforced that provision--especially as the agreement was the result of protracted negotiations between sophisticated, well-represented parties.

However, the court cautioned in footnote 92 that: " I do not intend the absence of a bond requirement ... to diminish in any way Concord's potential liability for any damages Defendants incur, if the preliminary injunction proves to have been granted improvidently."

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In TravelCenters of America, LLC  v. Brog,  2008 WL 868107 (Del.Ch., March 31, 2008) , read opinion here, the  Delaware Chancery Court addressed  issues relating to a demand for books and records of an LLC. The books and records claim was presented as a counterclaim in a suit that involved the issue of an advance bylaw notice. In dismissing the counterclaim without prejudice, the court emphasized the long line of Delaware cases that stand for the position that a books and records claim is a summary proceeding that should be handled distinct from other ancillary issues. Thus, the court determined that in light of the first, main complaint that was already filed and given expedited treatment, the books and records counterclaim could not be addressed distinct and apart from other issues in the primary action.

 Notable also was the court's observation that due to the fewer number of reported decisions involving books and records demands in the LLC context, compared to the corporate context,  the court looks to the plethora of opinions concerning demands for books and records in the corporate context under Section 220. Note, however, that the provisions of the Delaware LLC Act regarding a books and records demand are far different than the analogous provisions in Section 220 of the DGCL. Here is the money quote on the general point from footnote 2 in the instant decision:

 "Because of a lack of reported decisions in the LLC context, the Court may look to cases interpreting similar Delaware statutes concerning corporations and partnerships.” (citing Somerville S Trust v. USV Partners, LLC., No. 19446-NC, 2002 WL1832830, at *5 n. 4 (Del. Ch. Aug. 2, 2002)).

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This post is only of practical value for those of us who file complaints in Chancery Court and need to have them served. The current practice is for the Court to grant a Motion to Appoint a Special Process Server, which often is one of the local messenger companies, which allows for quicker timing for the formal process of hand delivering a complaint to someone who has not agreed to accept "service of the complaint" without the formal procedure.

Now, in a move towards greater efficiency, the court has issued an Order, available here, and effective as of May 1,  that dispenses with the process of filing a Motion for Special Process Servers in place of a system that allows for Special Process Servers to be registered with the court on an annual basis. (Perhaps this is akin to having a stable of pre-approved horses in one's stable, although I know the messengers to be much more valuable and much smarter than any horse could ever be.)

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 In Reinhard & Kreinberg v. The Dow Chemical Co., 2008 WL 868108 (Del. Ch., Mar. 28, 2008), read opinion here, the Chancery Court addressed the issue of advancement in the context of a counterclaim. The court determined that only compulsory counterclaims and not permissive counterclaims would be subject to advancement. The court left for another day the determination about whether the counterclaim involved was permissive or compulsory.

 Here is a money quote from the court's opinion, that may be applicable to many cases:

Advancement agreements require a hefty dose of
good faith on the part of both sides in order to work.
Given the context in which advancement often arises
(i.e., a dispute between the company and its former
directors/officers), good faith cooperation is
undoubtedly difficult to muster. Nevertheless, this
Court does not relish and will not perform the task of
playground monitor, refereeing needless and
inefficient skirmishes in the sandbox. FN31.   As this
Court has stated before, “a balance of fairness and
efficiency concerns would seem to counsel deferring
fights about details until a final indemnification
proceeding.” FN32

FN31. Cf.  Fasciana v. Electronic Data Sys.
Corp., 829 A.2d 160, 177 (Del. Ch.2003)
(“[T]he function of a § 145(k) advancement
case is not to inject this court as a monthly
monitor of the precision and integrity of
advancement requests.”).
FN32.  Id.

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In the Matter of Transamerica Airlines, Inc. v Akande, 2008 WL 509817, (Del.Ch., Feb. 2008), read opinion here.  A prior decision in this case that provides more factual background was summarized here. This Chancery Court decision is ripe for a law school exam on civil procedure. In essence, the court recognized a judgment from a court in Nigeria but an open matter remaining for further proceedings related to the exact amount of damages, and thus the Chancery Court requested that the parties submit expert testimony on issues of Nigerian law.

 

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