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

In re Morgan Stanley Derivative Litigation, No. 05 Civ. 6515 (S.D.N.Y. Mar. 27, 2008). The U.S. District Court for the Southern District of New York applied Delaware law to dismiss a derivative suit in this case based on the failure to establish that pre-suit demand was excused. One of the claims was that disclosures to the SEC were not made quickly enough. The Wachtell Lipton firm highlights the opinion here on the Harvard Corporate Governance Blog, through which they also provide a link to the text of the decision and their own memorandum providing a fuller summary of the case.

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In Miller v. McDonald, et al., ( D. Del., Bankr., April 9, 2008), read opinion here, the Bankruptcy Court for the District of Delaware decided an issue of great importance to those who follow corporate governance issues related to the fiduciary duties of officers and directors. In this opinion on a motion to dismiss claims against an officer of a company,  the Bankruptcy Court relied on decisions of the Delaware Chancery Court and the Delaware Supreme Court to deny a motion to dismiss in the course of ruling that Caremark duties would be imposed on an officer (who was not a director), that was on the management team when the President of the company committed fraud and other actions and omissions that ultimately led to the bankruptcy filing of the company.  This is notable in part because there are not as many decisions that address the fiduciary duties of officers, as opposed to directors of a corporation.

 Here is a summary  on this blog of a Delaware Chancery Court decision of a few weeks ago that also imposed fiduciary duties on a corporate officer, (with a link to other similar cases and to a recent article on the topic by Professor Lyman Johnson).

No, this is not a "deepening insolvency case". This case involves a fiduciary duty claim that alleged that even if the defendant did not commit any of the fraud and other abuses that led to the downfall of the company, he breached his fiduciary duty to make an effort to put monitoring systems in place that would have increased the likelihood that the fraud perpetrated by the company President could have been detected sooner and/or could have been prevented sooner. (see page 29 of opinion linked above). Here is a key quote from the opinion:

To date, the fiduciary duties of officers have been assumed to be identical to those of directors. With respect to directors, those duties include the duty of
care and the duty of loyalty. There has also been much discussion regarding a duty of good faith, which may or may not be subsumed under the duty of loyalty. Ovitz became an officer of Disney on October 1, 1995 when he
became President of the corporation, and he became a director on January 22, 1996. Therefore, upon becoming an officer on October 1, 1995, Ovitz owed fiduciary duties to Disney and its shareholders. 
In re Walt Disney Co. Derivative Litigation, No.15452, 2004 WL 2050138, at *3 (Del. Ch. Sept. 10, 2004),  (internal citation omitted).

Other courts have also applied the Delaware law and recognized that officers owe fiduciary duties to the corporation. In Stanziale v. Nachtomi (In re Tower Air, Inc.), the Third Circuit Court of Appeals upheld the bankruptcy trustee’s claims against
Tower Air’s directors and officers. Count two alleged that Tower Air’s officers breached their fiduciary duty to act in good faith, inter alia, by failing to tell the directors about maintenance problems, and by failing to address the maintenance problems. 416 F.3d 229, 234 (3d Cir. 2005). The Third Circuit held that “[t]he
officers’ passivity in the face of negative maintenance reports seems so far beyond the bounds of reasonable business judgement that its only explanation is bad faith.” See id. at 234, 239.

The same part of the above 2004 Disney decision was relied on for a similar reason in a 2007 Chancery Court decision. See Ryan v. Gifford, 935 A.2d 258, 269 [n.27] (Del. Ch.2007).

Also notable about this case is that the Bankruptcy Court relied on Section 307 of the Sarbanes Oxley Act because this was a publicly-held company--and because that section applies to lawyers such as the officer in this case. The background (at pages 24 to 26) in the opinion, to the above quote from the 2004 Disney case, is important enough to provide below verbatim:

The basis for the Trustee’s claim is that [defendant officer] breached his duty of care by failing to implement an adequate monitoring system and/or the failure to utilize such system to safeguard against corporate wrongdoing. See In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 967-71 (Del. Ch. 1996); Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006). Even though Florida law governs this claim, Delaware law is still relevant because “[t]he Florida courts have relied upon Delaware corporate law to establish their own corporate doctrines.” Connolly v. Agostino’s Ristorante, Inc., 775 So.2d 387, 388 n.1 (Fla. Dist. Ct. App. 2000) (citing Int’l Ins. Co. v. Johns, 874 F.2d 1447, 1459 n.22 (11th Cir. 1989)). 

The Trustee relies on ATR-Kim Eng Fin. Corp. v. Araneta, No. 489-N, 2006 WL 3783520 (Del. Ch., Dec. 21, 2006) for his position. In Araneta, the court found two defendants who were directors and officers of the company liable for not stopping the company’s majority shareholders and fellow director from transferring the company’s assets to members of his family, a violation of his fiduciary duties. See id. at *1, 19, 23-25. The court cited the Delaware Supreme Court’s Stone decision for directors’ liability:

Caremark articulates the necessary conditions predicated for director oversight liability: (a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or control, consciously failed monitor or oversee its operation thus disabling themselves from being informed of risks or problems requiring their attention.
Id. at *24 (citing Stone, 911 A.2d at 370).

The court reasoned that:

One of the most important duties of a corporate director is to monitor the potential that others within the organization will violate their duties. Thus, a “director’s obligation includes a duty to attempt in good faith to assure that a corporate information and reporting system, which the board considers to be adequate, exists.” Obviously, such a reporting system will not remove the possibility of illegal or improper acts, but it is the directors’ charge to “exercise a good faith judgement that the corporation’s information and reporting system is in concept and design adequate to assure the board that appropriate information will come
to its attention in a timely manner as a matter of ordinary questions, so that it may satisfy its responsibility.”
Id. at * 23-24 (quoting Caremark, 698 A.2d at 970).

The Trustee alleges that as the vice president of operation and in-house general counsel to World Health, [defendant officer] was responsible for failing to implement any internal monitoring system and/or failing to utilize such system as is required by Caremark and Araneta. The material misrepresentations contained in World Health’s SEC filings are examples of such failure. Since the SEC adopted a final rule pursuant to § 307 of the Sarbanes-Oxley Act, effective August 5, 2003, a general counsel has an affirmative duty to inspect the truthfulness of the SEC filings. 17 C.F.R. Part 205 (Jan. 29, 2007).

Section 307 addresses the professional responsibilities of attorneys. It directs the SEC to issue rules that “set[] forth minimum standards of professional conduct for
attorneys appearing and practicing before the Commission in any way in the representation of issuers.” Sarbanes-Oxley Act § 307, 15 U.S.C. § 7245 (2005). The standards must contain a rule requiring “an attorney to report evidence of a material violation of securities law or breach of fiduciary duty or similar violation by the issuer up-the-ladder within the company.” Id. Therefore, the Trustee appropriately asserts that [defendant officer] as the in-house general counsel and the only lawyer in top management of World Health during the relevant period, had a duty to know or should have known of these corporate wrong doings and reported such
breaches of fiduciary duties by the management.

UPDATE:  Here is a discussion of the case (and more) from Steve Jakubowski,  Chicago's preeminent bankruptcy lawyer, the Justice Cardozo of the blogosphere, and a paradigm of a good man, on his Bankruptcy Litigation Blog. He also amazingly catalogued, with links, the last 27 or so cases that I have summarized on this blog with bankruptcy related issues. I am humbled by the kind words in his post.

UPDATE II : Here is another discussion of the case from Sean McAffity on his Property Of The Estate blog, and here is further reference to the case by Scott Riddle on his Georgia Bankruptcy Law Blog.

UPDATE III: Here is a post by Professor Bainbridge, who also adds relevant commentary from his book on the Sarbanes Oxley Act.

UPDATE IV:  Here on The Harvard Corporate Governance Blog is another version of my post  on this case.

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In GMAC Bank v. HTFC, Corp., (E.D., Pa., 2008), read opinion here, a federal judge in neighboring Philadelphia imposed financial penalties on both the deponent and his lawyer for abusive conduct during a deposition. The blog called Above the Law highlights key factual aspects of the case here, such as the deponent "using the "F-bomb" and its variants 73 times". It makes the deposition abuses outlawed by the Delaware Supreme Court in Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d 34 (1994), mentioned here, seem like child's play.

 I have no interest in embarrassing anyone, so I will not use any individual names in connection with this post on the above GMAC case, but for those of us who are required to work in the trenches of depositions, it is helpful to have a court opinion that can be cited to as guidance and which can be used in response to those who abuse the deposition process but often are not called to task by busy judges who (understandably) do not enjoy "playing schoolyard monitor" when lawyers cannot "play nice". Of course, even if only one party is at fault, much like the schoolyard monitor, the court does not always have time to determine "who started the fight" and gets disgusted with all counsel. This 44-page opinion is a good example of a judge who took the time to spell out the infractions to carefully excoriate those responsible. ( I understand that the penalty imposed on the lawyer is on appeal.)  

 Let me also be clear that there are many opinions in Delaware that have drawn a clear line in the sand to define and condemn violations of the rules applicable to depositions, and many have been highlighted on this blog, but by necessity not every discovery abuse can be the subject of a formal written opinion, so when those opinions surface, as here, they need to be highlighted.

 For prior posts on this blog on the topic of Delaware deposition practice, (in addition to the above link to the Paramount decision), including cites to court decisions condemning violations, see, e.g., here and here and here.

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In New Jersey v. Delaware, case No. 134, (Orig.), the United States Supreme Court decided today, (read opinion here), that Delaware has the right, in essence, to veto a plan approved by New Jersey,  for a company to build a liquefied natural gas (LNG) terminal that starts on the New Jersey side of the Delaware River (that forms the boundary between the two states), but which terminal proceeded over the boundary line, into Delaware State. Admittedly, this case does not involve--directly--Delaware corporate or commercial law, but this blog provides this blurb on the decision due to its importance as one of the rare cases that invokes the "original jurisdiction" of the U.S. Supreme Court (where the parties (two states) filed their lawsuit directly with SCOTUS). Also, at least tangentially, because the dispute at its core involves a proposed multi-million dollar project of a major company (whose plans are now dashed), it has "business relevance".

As an aside, regardless of the result, Justice Scalia provides an example of the best that the English language has to offer in the following excerpt of his dissent, as highlighted by Carolyn Elefant on law.com:

 But for Scalia, this decision wasn't just about Delaware and New Jersey. It was also about... bean sprouts and tofu. Here's Scalia's "money" quote:

   After all, our environmentally sensitive Court concedes that if New Jersey had approved a wharf of equivalent dimensions, to accommodate tankers of equivalent size, carrying tofu and bean sprouts, Delaware could not have interfered.

On the serious side, Scalia pointed out the economic impacts that Delaware's denial of authorization of the facility would have on New Jersey's economy and the nation's energy supply. As such, Scalia emphasized that the Court owed New Jersey and the nation much more than casual statements that the wharf is an "extraordinary" type of facility that would justify allowing Delaware to veto it under the Compact.

P.S. My friend and fellow Delaware lawyer, Matthew Boyer, was one of the winning attorneys for the State of Delaware on the case. Congrats, Matt.

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Courtesy of The Wall Street Journal Law Blog here is a story about the recent decision from a federal court that allows the outside attorrneys for Qualcomm to be freed from the constraints of the attorney/client privilege, based on the self-defense exception, in connection with the ongoing imbroglio about who was responsible for the failure to produce relevant emails during discovery (which omission was not uncovered until the last part of the trial). Here is the most recent of several prior blog posts I have written on the mess.

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Courtesy of Fox lawyer Carl Neff, here is a summary of a recent decision by the U.S. District Court for the District of Delaware, granting summary judgment in favor of an employer against a plaintiff that made claims based on the ADA and FMLA.

In Pagonakis v. Express, LLC a/k/a Limited Brands, Inc., No. 06-027, slip. op. (D. Del. Feb. 14, 2008), read opinion here, the United States District Court for the District of Delaware granted Defendant Express, LLC’s motion for summary judgment in connection with the complaint filed by Plaintiff Paula Pagonakis which alleged three counts: (i) discrimination under the Americans with Disabilities Act of 1990 (“ADA”); (ii) retaliation under the ADA; and (iii) retaliation under the Family and Medical Leave Act (“FMLA”). Plaintiff was involved in a car accident in 1995 which left her with several mental and physical impairments which impeded her processing of auditory and visual information, ultimately restricting her ability to work. Plaintiff alleged in her Complaint, among other things, that Defendant failed to reasonably accommodate for her disabilities and further that Defendant created a hostile work environment.
The Court held that Plaintiff failed to satisfy her burden of showing that there is any genuine issue of any material fact with respect to each of the three counts set forth in the Complaint. With regards to the first count alleged, discrimination under the ADA, the Court held that Plaintiff failed to establish two required elements of this claim: (i) that she is otherwise qualified to perform the essential functions of the job, with or without reasonable accommodations by the employer; and (ii) she has suffered an otherwise adverse employment decision as a result of discrimination. The Plaintiff’s inability to work forty-hour work weeks, her inability to work long enough hours to open or close the store, along with the lack of evidence suggesting that Plaintiff would be able to perform these essential functions with reasonable accommodations, all weighed heavily in the Court’s decision to grant summary judgment in favor of Defendant with respect to the first count Plaintiff alleged in her Complaint.
Further, the Court held that Plaintiff failed to establish a prima facie case of retaliation under the ADA and the FMLA. To establish such a claim under the ADA, a plaintiff must show: (i) protected employee activity; (ii) adverse action by the employer either after or contemporaneous with the employee’s protected activity; and (iii) a causal connection between the employee’s protected activity and the employer’s action. The Court found that Plaintiff failed to present questions of material fact on her adverse employment action claims, and the actions of Defendant towards Plaintiff, which may have included offhand comments, isolated incidents of chastisement of other employees for speaking with her, and the abdication of her authority, are not sufficient for a reasonable jury to find discrimination or harassment. Therefore, the Court granted summary judgment in favor of Defendant with respect to each count set forth in Plaintiff’s Complaint.

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Prof. Larry Ribstein, the nation's leading authority on "alternative entiies" such as LLCs and LPs, flags a recent decision by a bankruptcy court in New York that misses the mark on an issue of liability of a limited partner in the context of a bankruptcy claim. Here is the introductory quote:

In re Adelphia Communications Corp., 376 B.R. 87(Bkrtcy.S.D.N.Y., 2007), involv[es] a creditor's (Lucent) $45 million claim against a limited partner for liability for the debts of a Delaware limited partnership.

As most lawyers know, limited partners in most states are generally protected from vicarious liability by provisions based on Revised Uniform Limited Partnership Act Section 303

Here  is the whole post that should be read by anyone interested in the risk of bankruptcy courts interpreting state law in a way that may not be consistent with enforcing the limited liability concepts of most state law in this area.

Prof. Ribstein summarizes the gist of the opinion and his problem with it thusly:

The limited partner argued in Adelphia that the plaintiff had actual knowledge of its status as a limited partner. But even accepting this, the court denied summary judgment because the relevant creditor belief under the statute has to be "based on the limited partner's conduct" and "material issues of fact exist as to whether the conduct of ACC would support a reasonable belief that ACC was a general partner."

Yikes! It seems that while the court was focusing on the "based on the . . . " language, it forgot about the "reasonable" belief part. How can the plaintiff have a reasonable belief in the limited partner's status as a general partner when it actually knows the limited partner is a limited partner?

 However, the good professor provides solace for those fearing this decision may be a sign of more to come:

I doubt any state courts will follow the Adelphia case because they would not want to frustrate the protection their legislatures clearly intended to provide. But Adelphia suggests that limited partners may not have limited liability precisely when they need it most – in bankruptcy, at least in the important Southern District of NY

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Grosset v. Wenaas is the name of a very recent California Supreme Court decision that followed Delaware law. Read the opinion here. This West Coast jurisprudence comes to us courtesy of  Justin Myer Lichterman, a lawyer in the San Francisco office of the Orrick firm who was kind enough to forward the case to me with the following introductory summary:

 Though the real issue in the case was whether CA requires continuous ownership, as well as contemporaneous, the Court brought CA into line with Delaware on the contemporaneous and continuous ownership requirements for standing in derivative actions. The Court punted on the potential 2115 and internal affairs issues that it could have addressed in deciding the case.

Money quote: "Not only does a requirement for continuous ownership further the statutory purpose to minimize abuse of the derivative suit, but the basic legal principles pertaining to corporations and shareholder litigation all but compel it." (pg. 16 )

UPDATE: Prof. Larry Ribstein comments here on the case. In addition to being the nation's leading expert on LLCs and alternative entities, he has an extensive amount of scholarship on the issue of "choice of law" and the internal affairs doctrine such as was addressed (dodged?) in this case.

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Here  is a post by Prof. Bainbridge which refers to recent scholarship by his fellow UCLAW professor Lynn Stout, as well as an article by  Prof. Gordon Smith on the seminal 1919 Michigan Supreme Court decision in Dodge v. Ford Motor Co. and whether it should still be taught by corporate law professors.  Prof. Bainbridge also provides excerpts from his own writings--with citations to Delaware Chancery Court decisions, that address the same concept most often identifed with the case, which is: whether the primary goal of the corporate enterprise is to maximize shareholder value.

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We previously noted here a recent decision in the Qualcomm case by a Federal Magistrate Judge in California that delivered a living nightmare to a group of lawyers who found themselves on the wrong side of an electronic discovery problem on the last day of a long trial (read: witness revealed that large numbers of emails had not been produced).  

Here is a recent online article by John Tredennick that extracts five (5) lessons that he believes every lawyer (especially litigators) should learn from the case. He explains them in detail but I will just list the "lessons" below along with selected excerpts from the longer explanations under each of the 5 points he makes. The court order is as painful to examine as a horrific train wreck, as it is every litigator's nightmare. Here are the lessons from the case as explained in the article:

1. You Better Check Your Witnesses’ Computer Before Allowing Him/Her to Testify. 
Were the lawyers required to audit Qualcomm’s collection work or supervise it. According to the court, the answer is yes.
Opinion at 27 lines 3-9. 

2. It Doesn’t Help to be a Lowly Associate
The team working on this phase of discovery included a senior partner, a senior associate and an associate. The associate's attorney argued that he raised concerns about the thoroughness of the production to his superiors. The court cut him no slack.
Opinion at 27 note 10.

3. Whatever You Do, Don’t Be Cutesy When You Question Your Witnesses.
This case unraveled on the last day of trial. That’s when Qualcomm witness Viji Raveendran admitted on cross that there were relevant emails showing Qualcomm participation in the JVT. Patch asked Raveendran whether “she had ‘any knowledge of having read’ any emails” from the JVT mailing list. Opinion at 9, line 25-26. She conveniently answered “no,” maybe because she did not call actually reading them. However, she clearly had received them, which was more than enough to kill the case for legal purposes.

On cross, and maybe with a lucky shot, opposing counsel asked her whether she had ever received emails of this type. That’s when the bottom fell out. She admitted truthfully that she had. She also noted that they were pulled from her production by the attorneys and all heck broke out. Patch was nailed for “carefully [tailoring] his questions to ensure that Raveendran did not testify about the unproduced emails.” Opinion at 30, line 10-12.

What do you make of this? Arguably Patch asked Raveendran a question that she could answer honestly in a way that helped his case. He did not go further and have her clarify the limits of her answer; he left that work for opposing counsel to do or not do. 

The lesson is this: Don’t be cute with testimony but if you get caught don’t try to bull your way out of it. When the game’s up, stop playing.

4. The Smarter They Are, The Harder They Fall
The warning here is that the big firm pedigree can cut both ways. Although there was no evidence that any of the lawyers were aware of the Qualcomm documents until the end, that didn’t stop the court. Laying out each attorney’s work and educational background, the court essentially said they were too smart to allow discovery violations of this magnitude to happen.

5. The Legal Team May Be Responsible for Your Client’s Collection Efforts.
In naming individual attorneys to be sanctioned, the Magistrate repeatedly voiced the theme that the attorneys are responsible to supervise their clients collection and production of documents. I guess that fits with the notion that attorneys are officers of the court but it should make you think.

As is often the case with big corporations, outside counsel worked with a number of internal counsel, all of whom were members of the bar and likely had excellent credentials. Undaunted, Magistrate Major created a new rule of conduct for the attorneys, one which may give you pause:

[T]he Court believes the federal rules impose a duty of good faith and reasonable inquiry on all attorneys involved in litigation who rely on discovery responses executed by another attorney. … Attorneys may not utilize inadequate or misleading discovery responses to present false and unsupported legal arguments and sanctions are warranted for those who do so. … The facts of this case also justify the imposition of sanctions against these attorneys pursuant to the Court’s inherent power.

Opinion at 26 note 9.

 

Continue Reading...

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Here is a post from the Delaware Business Litigation Report that flags a recent decision from the U.S. District Court for the District of Delaware which found personal jurisdiction based on aspects of a transaction that created ties to Delaware.  See G & G LLC v. White. Read opinion here. The post included the following summary:

Plaintiff pointed to numerous instances where the Utah corporation, the Delaware corporation, their counsel, the directors/officers of the Delaware corporation (who were appointed by the investor defendants), and the investor defendants failed to notify Plaintiff of the merger and/or made misrepresentations regarding the continuing status of the corporation as a Utah corporation. Taking the allegations as true, the Court found that the actions of the investor defendants and the directors they appointed was sufficient to confer specific jurisdiction over them.

The opinion discusses the application of the Delaware long-arm statute in the context of both general and specific jurisdiction and cites to the many federal decisions in Delaware that have applied the statute. Interestingly, the opinion does not cite to the recent Chancery Court opinion that  found personal jurisdiction based on the actions of an outside attorney of a corporation in connection with aspects of a transaction that created ties to Delaware. See Sample v. Morgan summarized here.

Notably,  however, the District Court  did cite to the recent Troy Corp. v. Schoon Chancery decision, summarized here, that also dealt with a forum selection clause that was not artfully drafted. In particular, even though one of the clauses quoted by the court gave exclusive jurisdiction to the Delaware Chancery Court, the District Court for the District of Delaware could not rely of that provision to impose jurisdiction in federal court simply because it was also in Delaware.

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Kasten v. Doral Dental USA, LLC, 733 N.W.2d 300 (Wisc. 2007), read opinion here. This decision of the Wisconsin Supreme Court dealt with a demand for books and records from an LLC. Although this may seem outside the scope of this blog on Delaware business litigation, it is relevant to the focus of this site because the decision includes a survey of the history of the parts of LLC statutes across the country that deal with demands for books and records, and the interface of those provisions with the terms of an operating agreement providing for demand of books and records. The court's survey of the LLC statutes across the country includes reliance in part on the leading treatise in the area by Professor Larry Ribstein and Robert R. Keatinge. Due to the relative paucity of cases on this specific topic (compared with the analog for corporations), this case is a useful reference.

 Many cases on this blog address the demand for books and records of a corporation under DGCL 220, but the analysis for demand from an LLC is different for several reasons. For example, in a case involving a demand for records from an LLC, the focus is usually on interpreting the terms of the Operating Agreement provisions that touch on the topic, as opposed to the statute. The statutory provisions in the Delaware LLC Act about what books and records an LLC member are entitled to, are parsimonious in this regard.

Wisconsin's Hight Court determined that the provisions of the LLC Operating Agreement  allowing for inspection of "company documents and records" were much broader than what was required under the LLC statute pursuant to the term "record" used in the statute. Thus, the Wisconsin Supreme Court reversed the lower court, and determined that the member was entitled to e-mails and drafts of documents even though such data was broader than the definition of "records" in the LLC statute. The court declined to decide, however, whether the member was entitled to other electronic data that was stored elsewhere, off-premises, as that issue was not before it.

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The U.S. Supreme Court decided the Stoneridge case today. Here is what you need to know about the most important High Court securities decision in a generation, as highlighted by  Professor Bainbridge. Fraud claims were rejected against third-parties who did not directly mislead investors even though their business partners did. Stoneridge Investment Partners v. Scientific-Atlanta.

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Here is a post from the Electronic Discovery Law Blog that describes a very recent Order from the U.S. District Court for the Southern District of California  that imposed a penalty of more than  $8.5 million in attorneys' fees on Qualcomm for what that court determined was the failure of both in-house and outside counsel to produce tens of thousands of documents that had been requested in discovery--which failure was not revealed until  the middle of trial. It gets worse. The court also ordered that the attorneys send a copy of the Order to the California State Bar for investigation of possible ethical violations. Ouch.

There is still more. The court also ordered the attorneys involved to participate in a customized program with the goal of developing a protocol to avoid such problems in the future. Specifically, the court described it as the Case Review and Enforcement of Discovery Obligations (“CREDO”) program, and the

protocol must include a detailed analysis (1) identifying the factors that contributed to the discovery violation (e.g., insufficient communication (including between client and retained counsel, among retained lawyers and law firms, and between junior lawyers conducting discovery and senior lawyers asserting legal arguments); inadequate case management (within Qualcomm, between Qualcomm and the retained lawyers, and by the retained lawyers); inadequate discovery plans (within Qualcomm and between Qualcomm and its retained attorneys); etc.), (2) creating and evaluating proposals, procedures, and processes that will correct the deficiencies identified in subsection (1), (3) developing and finalizing a comprehensive protocol that will prevent future discovery violations (e.g., determining the depth and breadth of case management and discovery plans that should be adopted; identifying by experience or authority the attorney from the retained counsel’s office who should interface with the corporate counsel and on which issues; describing the frequency the attorneys should meet and whether other individuals should participate in the communications; identifying who should participate in the development of the case management and discovery plans; describing and evaluating various methods of resolving conflicts and disputes between the client and retained counsel, especially relating to the adequacy of discovery searches; describing the type, nature, frequency, and participants in case management and discovery meetings; and, suggesting required ethical and discovery training; etc.), (4) applying the protocol that was developed in subsection (3) to other factual situations, such as when the client does not have corporate counsel, when the client has a single in-house lawyer, when the client has a large legal staff, and when there are two law firms representing one client, (5) identifying and evaluating data tracking systems, software, or procedures that corporations could implement to better enable inside and outside counsel to identify potential sources of discoverable documents (e.g. the correct databases, archives, etc.), and (6) any other information or suggestions that will help prevent discovery violations.

The blog post summarizing the case, linked above, noted that the court was not done yet. The court wanted to follow-up. Specifically:

To facilitate development of the CREDO program, the court ordered the attorneys to meet in the court’s chambers at 9 a.m. on January 29, 2008. The court further ordered that, at the conclusion of the process, the participating attorneys will be required to submit their proposed protocol to the court for approval, at which time the court may require further revisions. Once the protocol is approved by the court, each of the attorneys will be required file a declaration under penalty of perjury affirming that they personally participated in the entire process that led to the CREDO protocol and specifying the amount of time they spent working on it.

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Here is a survey, courtesy of Kroll, of the reported decisions around the country in 2007 that dealt with e-discovery issues, along with a "top 5" list of the most notable. Hat tip: Monica Bay.

Bonus: Courtesy of EDD Update blog, here is a summary of a case that addressed the issue of email production that did not include attachments, as well as the  difference between the estimate by the requesting party that it would cost $26,000 to produce and the estimate of the producing party that it would cost over $200,000  to produce about 3,000 emails.

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Kevin LaCroix posts here on The D & O Diary  a list he prepared of stock option lawsuits, such as those claiming backdating, that have been settled, dismissed and the like over the recent past. This is a very useful, unparalleled compilation and analysis, and must reading for anyone interested in this area.

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Prof. Larry Ribstein posts here about a dispute between the founder of Facebook and the founders of another start-up, and the procedural entanglements that arose in the lawsuit that was filed in federal court in Massachusetts, against the backdrop of the failure at the time of formation of the Delaware LLC to have any formally appointed members and the absence of any operating agreement at that time. The good professor refers to several of his articles and one of his casebooks that address the myriad procedural and substantive issues that this messy set of facts create. The post  is must reading for anyone who litigates related LLC issues or who is interested in avoiding problems that are generated by forming LLCs without the formal appointment of members and/or without an operating agreement in place.

Here is a post by Prof. Gordon Smith that previously highlighted the case in the context of a discussion about the duties that founders of entities owe each other. An excerpt from Prof. Ribstein's post follows:

...  right now, as Gordon says, the case is "procedurally muddled." But there is much of interest in that muddle. In ConnectU LLC v. Zuckerberg, 482 F.Supp.2d 3 (D.Mass., 2007), the court dismissed the initial complaint in this case, which was brought by a Delaware LLC that had been formed with no members and no substantive agreement. Members were admitted pursuant to a later operating agreement dated retroactively to the time of formation, as permitted by the applicable Delaware statute (Del. Code Ann. Section 18-201).

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In Tracinda Corp. v. DaimlerChrysler AG,  2007 WL 2701965 (3rd Cir., Del.), read opinion here, the U.S. Court of Appeals for the Third Circuit affirmed a decision of the U.S. District Court for the District of Delaware, after a bench trial,  and found no misrepresentation under the securities laws based on statements by the former CEO that allegedly refuted the initial description of the merger of DaimlerChrysler as a "merger of equals". Of course now that Chrysler is a separate entity owned by a private equity group, this case may only be a historical footnote, but it is still useful as a pronouncement of the Third Circuit's views on misrepresentation claims.

The Third Circuit also affirmed (with a dissenting opinion) the trial court's award of over $500,000 in costs against the defendants due to late production of documents. In addition, parenthetically,  it should be noted that the trial court had written a somewhat "sympathetic" opinion early in the case that denied a motion to dismiss--which of course was not in any way a harbinger of the final post-trial opinion. Also notable is that many of the shareholders in the case took a prescient settlement prior to the trial.

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In  The Island Farm, Inc. v. Master, Sidlow and Associates, P.A., Del. Super. (Sept. 20, 2007), read opinion here, the Delaware Superior Court denied a motion for summary judgment filed by an accounting firm, and determined that the applicable three year statute of limitations was tolled by the discovery exception in light of the issues raised in connection with a tax return not coming to light until many years later, when the returns were reviewed by a new accountant. In addition, the court reasoned that the genuine issues of material fact about the allegations were too numerous to grant the motion at this stage.

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Although I only occasionally summarize on this blog decisions of the Delaware Superior Court,  the trial court of general jurisdiction in Delaware,  for example, when they are of special commercial import or they apply generally to business litigators, this is such an instance. 
In Dunlap v. State Farm Fire and Casualty Co., 2007 WL 2390682 (Del. Super. 2007),  read opinion here, the Delaware Superior Court granted a Motion to Disqualify filed by one party, based on Rule of Professional Conduct 3.7 which prohibits attorneys advocating in a trial to also serve as witnesses, but then, sua sponte, (which for the non-Latin lovers among my readers, means "on its own"), the Court also disqualified the opposing attorney who filed the motion. The Court reasoned that: both attorneys  "... used some very strong language about positions the other side has taken....[and] it is beyond proper  vigorous advocacy. Both counsel have lost too much professional detachment in their "vigorous" advocacy.The Court, therefore, believes that both sides need new counsel."

Far be it from me to  pontificate, as there but for the grace of God go I, though it is easy to observe that litigation should not be about the lawyers, and as hard as it is to do, even if the other attorney is insulting and boorish, the goal is to focus on the issues in the case. Here and here are two separate follow-up opinions denying a motion for reargument and denying a motion for "clarification" of the ruling.

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When I am up to date on my summaries of  court decisions from Delaware's Chancery Court and Supreme Court, I often refer to interesting cases in other Delaware courts or the courts of neighboring jurisdictions, such as the Delaware County (PA) Court of Common Pleas, which is the trial court of general jurisdiction just across the state line from Wilmington.

Here is a case that I thought was notable simply for a passing observation about personal jurisdiction over businesses (such as hospitals) that serve residents of neighboring states.

In Glick v. Christiana Health Care Services, et al., Del. Cty. Ct. Cm. Pl., (PA), 94 Del. Rep. 285 (July 2007), read opinion here, Judge George Pagano ruled on post-trial motions regarding a malpractice claim against a Delaware hospital and Delaware doctors who treated someone who resided in Pennsylvania  The court dismissed a doctor on jurisdictional grounds but the opinion appears to reflect that the parties conceded the court's jurisdiction over the Delaware hospital.

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In the case of In Re Fruehauf Trailer Corp., 369 B.R. 817 (Bankr. Del., June 2007), read opinion here, the Bankruptcy Court for the District of Delaware, based on Delaware state law, denied a motion to dismiss a fiduciary duty claim that the defendant argued was duplicative of contract claims. The Bankruptcy Court provides a very educational discussion of Delaware state court decisions that have addressed the issue in gerneral, but found that none of  those cases were applicable to the facts of this case, involving a claim by a successor  trustee against the original trustee of a liquidating trust. The court concluded that at this early stage it would premature to dismiss the claims on that basis and that there was clearly a fiduciary duty imposed on the trustee.

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Doe v. Norwalk Community College, 2007 WL 2066497 (D. Conn., July 2007), read opinion here. This case is a good reminder of the importance, especially  under the new e-discovery rules, to preserve electronic discovery.  In order to avail oneself of the new safe harbor provision of Federal Rule of Civil Procedure 37(f), a routine system of data management must be in place and some affirmative action must be taken  to prevent that routine system from destroying or altering information once awareness of a claim is presumed. In this case, the defendant utterly failed to preserve the hard drives of key witnesses. Moreover, instead of preserving them, those hard drives had been scrubbed or completely wiped of data and the expert of the plaintiff, who was allowed to inspect certain computers of the defendant, found other suspicious inconsistencies in the PST or Outlook e-mail files. 

 Due to their failure to suspend the routine document destruction policy and to “put a litigation hold in place,” the court rejected any safe harbor arguments under Rule 37(f). Rather, the court found that the plaintiff was entitled to an adverse inference jury instruction with respect to the destroyed evidence, as well as awarding the plaintiff reasonable attorneys’ fees and costs in connection with the motion, as well as expert fees incurred with respect to the forensic investigation of the defending computers. Here is a more detailed summary on the E-discovery Law blog. 

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 U.S. v. BDO Seidman, LLP, (7th Cir., July 2007), read opinion here.

 This case addresses the “common interest doctrine” which is often confused with the attorney/client privilege, but is an essential concept to grasp especially for multi-party litigation. It is, in effect, an exception to the rule that no attorney/client privilege attaches to communications between a client and an attorney in the presence of a third person. In effect, the common interest doctrine extends the attorney/client privilege to otherwise non-confidential communications in limited circumstances. The common interest doctrine will apply only “where the parties undertake a joint effort with respect to a common legal interest, and the doctrine is limited strictly to those communications made to further an ongoing enterprise. Moreover, communications need not be made in anticipation of litigation to fall within the common interest doctrine. (See footnote 6.) The court found that a memorandum that two joint venturers, BDO and Jenkens & Gilchrist, who consulted with their respective in house counsel, and also the outside counsel BDO  hired with respect to the legality of a proposed financial course of action they would recommend to their common clients-- was within the scope of the common interest doctrine. Moreover, the common interest doctrine cannot be waived without the consent of all the parties and the voluntary disclosure by one member of a joint venture does not waive it with respect to the other member of the joint venture.

Delaware has addressed the topic, e.g.,  in American Legacy Foundation v. Lorillard Tobacco Co.,  2004 WL 2521289 (Del. Ch. 2004) (discussing attorney/client privilege waiver and common interest doctrine--also called "joint defense doctrine"). See generally, Jenkins v. Bartlett, (7th Cir. U.S. Ct. App., April 23, 2007), read opinion here, which explained that :

"... there is an exception to the general rule that the presence of a third party will defeat a claim of privilege when that third party is present to assist the attorney in rendering legal services. (citation omitted)."

"... This exception applies both to agents of the attorney, such as paralegals, investigators, secretaries and members of the office staff responsible for transmitting messages between the attorney and client, and to outside experts engaged 'to assist the attorney in providing legal services to the client', such as accountants, interpreters.... Additionally, this exception reaches retained experts, other than those hired to testify, when the expert assists the attorney by transmitting or interpreting client communications to the attorney or formulating opinions for the lawyer based on the client's communications. (citation omitted)."

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I am on vacation the week of August 13, so I will use some posts which I have compiled and that may not be as time-sensitive--as I am fairly up to date with my summaries of  key opinions issued by the Delaware Chancery Court and Delaware Supreme Court on corporate and commercial law topics of interest to the business litigation lawyer.

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Courtesy of The Wall Street Journal Law Blog, here is a story about the recent decision in Boston awarding $101 million for what is a low-water mark in the annals of the American criminal justice system. I am accustomed to the heft of the Chancery Court and Delaware Supreme Court decisions I summarize on this blog, but the 223-page opinion linked by the WSJ Blog above might give one an indication of the momentous nature of this attempt by the court to give justice to the truly unfortunate victims of prosecutorial misconduct. This story makes the recent Duke lacrosse case seem like a mere pecadillo. Here is a summary from the WSJ Blog:

For sheer dramatic value, it’s hard to beat yesterday’s ruling in a Boston wrongful-conviction case that accused the FBI of framing four men for the 1965 murder of Edward Deegan. The men all served decades in prison for the murder; two died behind bars.

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In Re RNI Wind Down Corp., 2007 WL 1970850, 369 B.R. 174 (Bankr. D. Del., July 2007). This blog often discusses Chancery Court and  Delaware Supreme Court decisions on the issue of advancement and indemnification. This case involved a claim by a former officer of RNI, a debtor with a Chapter 11 case pending, who filed a proof of claim for advancement and indemnification of legal expenses incurred in connection with the SEC investigation of the RNI  and certain officers and directors. The Bankruptcy Court in Delaware found that the advancement and indemnification claims should proceed and  were not subject to disallowance under Bankruptcy Code Section 502(e)(1)(B). A more detailed summary of this overlapping of corporate law principles and bankruptcy principles is available at the Delaware Business Bankruptcy Report here. 

UPDATE: Thanks to Tom Horan of Morris James for the updated citation to the B.R. above.

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 O’Connell v. Radwyn Apartments, L.P. (Delaware County, Pennsylvania, Court of Common Pleas, June 7, 2007)(Pagano, J.), read opinion here.. This decision by the trial court in Pennsylvania of general jurisdiction is a practical summary of the standards of liability for landlords in Pennsylvania. The general rule in Pennsylvania is that a landlord is liable for a tenant’s injuries only if the landlord knew or should have known of a dangerous condition of the property or if the landlord could have discovered it with reasonable care. Summary judgment was granted in this case because the court found that the defendants had neither constructive knowledge of any dangerous condition nor did they have actual notice of any dangerous condition. There was no violation of a duty to warn nor was there a violation of a duty to conduct inspections. Thus the court found that there could be no liability based on the facts of the case.

  

 

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In Sun-Times Media Group, Inc., et al. v. Royal & Sunalliance Ins. Co. of Canada, et al., (Del. Super., June 20, 2007), read opinion here, the Delaware Superior Court ordered the D & O carrier to advance defense costs in connection with litigation related to the multi-faceted Hollinger saga that has been widely covered in the press most recently with Lord Black's conviction in Chicago. Here is a detailed and scholarly analysis of the case provided today by  Kevin LaCroix  of  The D & O Diary. His insightful commentary does much more justice to the case than I could do in this space, and he also provides a broader industry perspective. This is the insurance side of the advancement issue about which much has been written on this blog.

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 Courtesy of my esteemed bankruptcy partner, Daniel K. Astin, here is a summary of a recent decision of the U.S. Court of Appeals for the Third Circuit dealing with an issue of importance to all litigators: statutes of limitations. 

Lafferty v. St. Riel, 2007 WL 2019537 (3rd Cir., July 13, 2007), read opinion here. This decision addressed the issue of "which filing date applies for statute of limitations purposes when a federal district court transfers venue to another district under 28 U.S.C. § 1406(a)." (For those readers out of the area, the Third Circuit covers Delaware, Pennsylvania and New Jersey.)

 

The federal district court in New Jersey transferred, rather than dismissed, a personal injury claim filed within the limitations statutes of both New Jersey and Pennsylvania to another federal district court in Pennsylvania due to improper venue. The lower court held that recovery was barred, stating that the transfer occurred after the running of Pennsylvania's limitations period.   The Third Circuit Court of Appeals reviewing the District Court's ruling,  held "[T]hat response in this uncertain area is well-reasoned, but we disagree." 

 

In a scholarly and well reasoned opinion the Court of Appeals reviewed the District Court's reliance on Erie and its progeny,  indicating that "[f]or this case the issue is not so much whose statute of limitations applies; both are the same (two years).  It is whether the first-filed complaint, which was timely but in an improper forum, may be heard when the case is transferred-- rather than dismissed-- to a proper venue where the action would have been timely if filed there initially."  The lower court presumed "that the impropriety of filing an action in an incorrect forum is a prejudicial factor that bars transferee courts from hearing claims when § 1406(a) transfers are not completed within the transferee state's statute of limitations and according to that state's filing procedures"   but the Court of Appeals disagreed with "this focus of impropriety as a prejudicial bar." 

 

The appellate court held that:  "When a district court transfers venue to another district under § 1406(a), for the purpose of calculating the limitations period of the transferee forum the initial filing date in the transferor forum applies." In this case, the plaintiff's action was timely when initially filed in the District of New Jersey, thus obviating a review of  the limitations statute of the forum where the case was transferred under § 1406(a). "

 

 

 

 

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Courtesy of The Wall Street Journal Law Blog, here is a post about the recent decision by Judge Kaplan in the KPMG case in federal court in New York, dismissing charges against most of the accused KPMG executives due to the failure of KPMG to fulfill their advancement obligations and the resulting inability of most of the defendants to  properly defend themselves. Why am I writing about it on this blog? Because it directly relates to the many cases summarized on this blog, under Delaware law, in connection with the important (and in the KPMG case, indispensable) right to advancement of legal fees that many corporations owe to their executives pursuant to either an agreement or bylaws and the provisions of the Delaware General Corporation Law. See, e.g., here for my summary of a recent decision enforcing such a right and discussing other Delaware cases addressing the corporate obligation of advancement.

The KPMG case is an current, "real life" example of why the right of advancment is so important. If one, by contrast, merely had the right of indemnification (i.e., being forced to wait until the lawsuit and appeals were concluded before being entitled to reimbursement of fees paid), then in most cases it would be a hollow and perhaps useless benefit, as most people could not "finance" in the meantime the millions of dollars often required to pay for an adequate defense of serious litigation. Of course, this topic also raises the issue of "how much justice can you afford" and how more advantageous--and necessary--it is to have copious resources when doing battle in the courtroom. Here is a more detailed analysis of the KPMG case by Kevin LaCroix of The D & O Diary.

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In Campbell v. Robinson, (Del Super., June 19, 2007), read opinion here, the Delaware Superior Court provides a helpful overview of the law of  "joint and several liability" in Delaware. Although the facts of this case stray beyond the scope of this blog (a default judgment entered against 2 defendants in a dog bite case), the analysis in this case of the law of joint and several liability is of great importance to business litigators in cases involving multiple defendants. Here are the money quotes, without the ample footnotes provided in the opinion by Judge Peggy Ableman:

"Delaware has long recognized that 'when the acts of two or more persons concur in producing a single indivisible injury, such persons are jointly and severally liable, though there is no common duty, common design, or concerted action. The joint and several liability of two codefendants entitles the plaintiff to seek recovery from either or both of the defendants....'" (citations omitted).

The court also noted that when granting a judgment for plaintiff against two defendants, the court does not apportion damages. Rather,

"[i]n an action for contribution, joint tortfeasors may seek an apportionment of fault in order to determine their pro rata share of a judgment, but contribution actions arise after the plaintiff has sought damages from whichever defendant or defendants she chooses and a joint tortfeaser has paid the common liability or more than his or her pro rata share of the common liability." (emphasis in original)(citing 10 Del C. Section 6302).

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In Westar Energy, Inc. v. Lake, (D. Kans., June 28, 2007), read opinion here , the U.S. District Court for the District of Kansas relied almost entirely on the Delaware advancement statute, Section 145(e) of the DGCL, and the Delaware cases that interpret it, in order to resolve an issue with the Kansas advancement statute (that was modeled on the Delaware statute). The thoroughly reasoned 38-page opinion concluded that the "reasonableness" of  the amount of legal fees sought to be advanced, can be considered in connection with an advancement claim, but that the officer of Westar who sought advancement in this case (Lake), would not be limited by the rates customarily charged in Kansas. The court noted that senior partners at major firms in Kansas often charge not more than $190 per hour, compared to the New York City and Washington, D.C. firms hired by the claimant, Lake, who often charge upwards of $700 per hour. (Hat tip to Peter Lattman of The Wall Street Journal Law Blog for referencing the opinion).

The Kansas court ordered a partial payment of the advancement due, acknowledging the need expressed by the Delaware courts for a speedy decision on these issues, but reserved for a later determination the ultimate issue of reasonableness. To the Kansas court's credit, however, it concluded that if the corporation wanted to limit the right to advancement to "local" Kansas rates, or  if it wanted the right to choose the cheapest lawyer, it should have so provided in the advancement provisions. See Chamison v. Healthtrust, Inc., 735 A.2d. 912, 916, aff'd 748 A.2d 407 (Del. 2000)(addressing corporation's selection of counsel as condition of right to advancement).

Judge Julie Robinson of the U.S. District Court for the District of Kansas (not to be confused with Judge Sue Robinson of the U.S. District Court for the District of Delaware), quoted extensively from Delaware Chancery Court and Supreme Court decisions to support her reasoning. For example, she noted that none of the parties cited to any case supporting an absolute refusal to advance fees due to allegedly excessive rates. However, the Kansas court cited to a Chancery Court decision to the effect that Delaware law has rejected  the argument that 

 " an inquiry into the reasonableness of the fees is not appropriate at the advancement stage", but rather, that: "all contracts for advancement and indemnification are subject to an implied reasonableness term ... even if the indemnifcation agreement does not expressly condition advancement on the reasonableness of the request."

(citing Kaung v. Cole National Corp. ("Kaung I"), 2004 WL 1921249  at *4 (Del. Ch. 2004) rev'd in part on other grounds 884 A.2d 500 (Del. 2005)("Kaung II")). Here is a summary on this blog of the Supreme Court's decision and a link to the full opinion. The Supreme Court's opinion in Kaung, however, did not directly decide or address the reasonableness issue, but the Kansas court provides the following citation for the view that the Delaware Supreme Court reads an implied reasonableness requirement in both the advancement and indemnification statutes: Reddy v. Elec. Data Sys. Corp., 2002 WL 1358761 at *5 (Del. Ch.) (citing Citadel, 603 A.2d at 823). [Citadel Holding Corp. v. Roven, 603 A.2d 818 (Del. Supr. 1992)].This is the language that the Chancery Court in Reddy quoted from the Supreme Court's Citadel opinion:

 "Under both the statute [Section 145(e)] and the [advancement] Agreement, the corporation's obligation to pay expenses is subject to a reasonableness requirement."

Revised last paragraph: I invite reader commentary on whether the Kansas court properly applied Delaware law. Namely, was it correct to deny full payment of advancement rights based on an issue of reasonableness, to be decided later, in light of the more recent Supreme Court decision in Homestore, Inc. v. Tafeen, 886 A.2d 502, 505 (Del. 2005), summarized here on my blog, which made it explicit that the limited scope of summary proceedings for determining advancement rights is not the appropriate forum to address defenses that might ultimately prevail in the later and separate analysis of indemnification rights. Here also is an earlier decision in the same case by the Supreme Court denying a Motion to Stay the judgment of the Chancery Court awarding advancement, pending appeal, based in part on the same reasoning that supports prompt payment of advancement obligations. The Supreme Court in Homestore expressly endorsed the implied requirement of reasonableness as an implied condition of advancement of fees, and in footnote 30 cited with approval to the same holding in the Citadel decision. Also in Homestore, the Special Master appointed by the Chancery Court to review the fees, slightly reduced the amount requested, though not nearly as much as the corporation wanted the fees to be reduced. Thus, it appears that the Kansas court was on the mark, but does the Kansas decision make it easier for a corporation to withhold fees after making "minimum" payments, thereafter claiming that the amounts requested are unreasonable?

SUPPLEMENT: Courtesy of the WSJ Law Blog, below is an excerpt from a July 11 post about the KPMG case that Judge Kaplan is deciding, which has figures on the very high cost incurred by officers and directors who are defending a white collar crime case--and which underscores the importance to have clarity about all aspects of the advancement obligation:

The government, however, cites some other sources in its footnotes for the defense tabs involving some recent high-profile cases: Former Enron chief executive Jeff Skilling spent $70 million on a trial that lasted four months; former Tyco chief executive Dennis Kozlowski spent around $26 million for two trials; and former HealthSouth CEO Richard Scrushy spent about $21 million to attorneys billing at around $800 an hour.

Here is Judge Kaplan's decision dismissing the cases against the KPMG execs.