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

The United States Supreme Court ruled today that white firefighters who were denied a promotion even though they scored higher on tests than minority counterparts, suffered violations of their civil rights. Though outside the normal scope of this blog, the issues addressed by the U.S. Supreme Court in this decision are so pervasive and so fundamental to the legal foundation on which our society is based, and are of such great concern to all businesses, that I provide below the official synopsis by the court of its opinion,  verbatim, with a link here  to the actual decision (with predictable dissenting opinions): 

RICCI, ET AL. v. DESTEFANO, ET AL.
No. 07–1428. Argued April 22, 2009—Decided June 29, 2009

New Haven, Conn. (City) uses objective examinations to identify thosefirefighters best qualified for promotion. When the results of such an exam to fill vacant lieutenant and captain positions showed thatwhite candidates had outperformed minority candidates, a rancorouspublic debate ensued. Confronted with arguments both for and against certifying the test results—and threats of a lawsuit eitherway—the City threw out the results based on the statistical racial disparity. Petitioners, white and Hispanic firefighters who passedthe exams but were denied a chance at promotions by the City’s re-fusal to certify the test results, sued the City and respondent officials,alleging that discarding the test results discriminated against thembased on their race in violation of, inter alia, Title VII of the Civil Rights Act of 1964. The defendants responded that had they certifiedthe test results, they could have faced Title VII liability for adoptinga practice having a disparate impact on minority firefighters. The District Court granted summary judgment for the defendants, andthe Second Circuit affirmed.

Held: The City’s action in discarding the tests violated Title VII.  Pp. 16–34.

(a) Title VII prohibits intentional acts of employment discrimina-tion based on race, color, religion, sex, and national origin, 42 U. S. C. §2000e–2(a)(1) (disparate treatment), as well as policies or practices that are not intended to discriminate but in fact have a dispropor-tionately adverse effect on minorities, §2000e–2(k)(1)(A)(i) (disparateimpact). Once a plaintiff has established a prima facie case of disparate impact, the employer may defend by demonstrating that itspolicy or practice is “job related for the position in question and con-sistent with business necessity.” Ibid. If the employer meets that burden, the plaintiff may still succeed by showing that the employerrefuses to adopt an available alternative practice that has less dispa-rate impact and serves the employer’s legitimate needs. §§2000e–2(k)(1)(A)(ii) and (C).   Pp. 17–19.

(b) Under Title VII, before an employer can engage in intentionaldiscrimination for the asserted purpose of avoiding or remedying an unintentional, disparate impact, the employer must have a strong basis in evidence to believe it will be subject to disparate-impact li-ability if it fails to take the race-conscious, discriminatory action. The Court’s analysis begins with the premise that the City’s actions would violate Title VII’s disparate-treatment prohibition absent somevalid defense. All the evidence demonstrates that the City rejectedthe test results because the higher scoring candidates were white.Without some other justification, this express, race-based decision-making is prohibited. The question, therefore, is whether the pur-pose to avoid disparate-impact liability excuses what otherwise would be prohibited disparate-treatment discrimination. The Court has considered cases similar to the present litigation, but in the contextof the Fourteenth Amendment’s Equal Protection Clause. Such cases can provide helpful guidance in this statutory context. See Watson v. Fort Worth Bank & Trust, 487 U. S. 977, 993. In those cases, the Court held that certain government actions to remedy past racial dis-crimination—actions that are themselves based on race—are consti-tutional only where there is a “strong basis in evidence” that the re-medial actions were necessary. Richmond v. J. A. Croson Co., 488 U. S. 469, 500; see also Wygant v. Jackson Bd. of Ed., 476 U. S. 267, 277. In announcing the strong-basis-in-evidence standard, the Wy-gant plurality recognized the tension between eliminating segrega-tion and discrimination on the one hand and doing away with all gov-ernmentally imposed discrimination based on race on the other. 476 U. S., at 277. It reasoned that “[e]videntiary support for the conclu-sion that remedial action is warranted becomes crucial when the re-medial program is challenged in court by nonminority employees.” Ibid. The same interests are at work in the interplay between TitleVII’s disparate-treatment and disparate-impact provisions. Apply-ing the strong-basis-in-evidence standard to Title VII gives effect toboth provisions, allowing violations of one in the name of compliance with the other only in certain, narrow circumstances. It also allows the disparate-impact prohibition to work in a manner that is consis-tent with other Title VII provisions, including the prohibition on ad-justing employment-related test scores based on race, see §2000e–2(l), and the section that expressly protects bona fide promotional ex-ams, see §2000e–2(h). Thus, the Court adopts the strong-basis-in-evidence standard as a matter of statutory construction in order to resolve any conflict between Title VII’s disparate-treatment and dis-parate-impact provisions.  Pp. 19–26.

(c) The City’s race-based rejection of the test results cannot satisfy the strong-basis-in-evidence standard. Pp. 26–34.

    (i) The racial adverse impact in this litigation was significant, and petitioners do not dispute that the City was faced with a primafacie case of disparate-impact liability. The problem for respondentsis that such a prima facie case—essentially, a threshold showing of a significant statistical disparity, Connecticut v. Teal, 457 U. S. 440, 446, and nothing more—is far from a strong basis in evidence thatthe City would have been liable under Title VII had it certified thetest results. That is because the City could be liable for disparate-impact discrimination only if the exams at issue were not job relatedand consistent with business necessity, or if there existed an equallyvalid, less discriminatory alternative that served the City’s needs but that the City refused to adopt. §§2000e–2(k)(1)(A), (C). Based on the record the parties developed through discovery, there is no substan-tial basis in evidence that the test was deficient in either respect. Pp. 26–28.
   (ii)The City’s assertions that the exams at issue were not job re-lated and consistent with business necessity are blatantly contra-dicted by the record, which demonstrates the detailed steps taken todevelop and administer the tests and the painstaking analyses of thequestions asked to assure their relevance to the captain and lieuten-ant positions. The testimony also shows that complaints that certainexamination questions were contradictory or did not specifically ap-ply to firefighting practices in the City were fully addressed, and that the City turned a blind eye to evidence supporting the exams’ valid-ity. Pp. 28–29.
    (iii) Respondents also lack a strong basis in evidence showing an equally valid, less discriminatory testing alternative that the City, bycertifying the test results, would necessarily have refused to adopt.Respondents’ three arguments to the contrary all fail. First, respon-dents refer to testimony that a different composite-score calculationwould have allowed the City to consider black candidates for then-open positions, but they have produced no evidence to show that thecandidate weighting actually used was indeed arbitrary, or that thedifferent weighting would be an equally valid way to determinewhether candidates are qualified for promotions. Second, respon-dents argue that the City could have adopted a different interpreta-tion of its charter provision limiting promotions to the highest scoring
applicants, and that the interpretation would have produced less dis-criminatory results; but respondents’ approach would have violated Title VII’s prohibition of race-based adjustment of test results,§2000e–2(l). Third, testimony asserting that the use of an assess-ment center to evaluate candidates’ behavior in typical job tasks would have had less adverse impact than written exams does not aidrespondents, as it is contradicted by other statements in the recordindicating that the City could not have used assessment centers for the exams at issue. Especially when it is noted that the strong-basis-in-evidence standard applies to this case, respondents cannot create a genuine issue of fact based on a few stray (and contradictory) state-ments in the record. Pp. 29–33.
  (iv) Fear of litigation alone cannot justify the City’s reliance on race to the detriment of individuals who passed the examinations andqualified for promotions. Discarding the test results was impermis-sible under Title VII, and summary judgment is appropriate for peti-tioners on their disparate-treatment claim. If, after it certifies the test results, the City faces a disparate-impact suit, then in light of today’s holding the City can avoid disparate-impact liability based onthe strong basis in evidence that, had it not certified the results, it would have been subject to disparate-treatment liability. Pp. 33–34.

530 F. 3d 87, reversed and remanded.

KENNEDY, J., delivered the opinion of the Court, in which ROBERTS, C.J., and SCALIA, THOMAS, and ALITO, JJ., joined. SCALIA, J., filed a concurring opinion. ALITO, J., filed a concurring opinion, in which SCALIA and THOMAS, JJ., joined. GINSBURG, J., filed a dissenting opin-ion, in which STEVENS, SOUTER, and BREYER, JJ., joined.

 

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HLSP Holdings Corp. v. Fortune Management, Inc., Del. Super., C.A. No. 08C-08-175 WCC (March 31, 2009), read opinion here. This Delaware Superior Court decision granted a summary judgment motion to the defendant purchaser in connection with a claim that a merger agreement was breached because the purchaser did not take all necessary actions to cause the stock to be registered and freely tradeable on the stock exchange until a date after the stock price declined sharply. The motion for summary judgment was granted because the court determined that the plaintiff, the selling corporation, did not have standing to bring the suit because the damages suffered were by the individual shareholders, as opposed to the corporation itself--and the individual shareholders were not named as parties. The plaintiff corporation never had the right to sell the stock and thus any alleged injuries would have been suffered by the individual shareholders only. Thus, the court concluded that the failure to promptly register the stock had no economic effect upon the plaintiff corporation which was required to transfer the stock to its individual shareholders.

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Westar Energy, Inc. v. Lake, 552 F.3d 1215 (10th Cir. 2009). See prior post on trial court opinion here.

Danielle Blount, an associate in our Delaware office, provided the following case summary.

In this decision of the U.S. Court of Appeals for the 10th Circuit, the Appellant-Plaintiff Westar Energy, Inc. appealed an interlocutory order requiring it to advance past and future legal fees incurred by Lake. In the underlying case, the District Court ordered retrospective and prospective remedies. In the form of retrospective relief, The court determined that “the appropriate measure of interim relief” was “immediate payment of 50% of the outstanding requests for out-of-state counsel.” For prospective relief, the District Court ordered Westar to promptly pay Lake’s legal fees at each lawyers customary rates. In response to the order, Westar filed a Notice of Appeal arguing that the order was a preliminary injunction.

First, in determining whether the order was a preliminary injunction, the court had to determine if the relief sought was equitable in nature. The Appellate Court determined that the District Court’s order was a preliminary injunction based upon the fact that Westar had to pay certain attorney fees prior to any adjudication on the merits. Specifically, that Westar had to pay a certain dollar figure for accrued unpaid legal expenses and prospectively pay Lake’s future legal expenses. Notably, the District Court explicitly invoked it’s equitable powers in granting the prospective relief. Moreover, Lake requested equitable relief in his supplemental brief, and has attempted to enforce the retrospective award through contempt proceedings, therefore leading to the determination that the order was a preliminary injunction.

Since the District Court did not conclude that its order constituted a preliminary injunction, it failed to weigh all of the equitable factors in issuing the order. The order was mandatory in nature, in that it commanded Westar to immediately pay a specific sum of money to Lake and to pay future amounts as they come due.

Analysis of Equitable Factors

i. Irreparable Injury

Since the retrospective remedy commanded Westar to pay accrued legal fees ordered in this case for services already rendered, it was difficult to conclude that such retrospective relief was necessary. It was held that the District Court abused its discretion in granting that relief. However, the prospective remedy was based on the prevention of an irreparable injury, and further inquiry was needed to review its compliance with the remaining equitable factors.

ii. Balance of Harms

Lake made a “strong showing” which was necessary to justify the issuance of a mandatory preliminary injunction. Lake’s “very liberty is at stake, and such a threatened harm outweighs the mere threat of monetary loss.” The court determined that under the circumstances, the threat to Lake’s liberty strongly outweighed the threat of monetary loss to Westar.

iii. Public Interest

The Court determined, as articulated by the Kansas legislature, that public policy would therefore be served by the issuance of a preliminary injunction protecting Lake’s right to advancement.

iv. Likelihood of Success on the Merits

In its lengthy analysis the court determined that the District Court assignment to Westar the initial burden of going forward with its objections was not erroneous, as long as Lake has the burden of proving the reasonableness of the fees before the magistrate judge.

In sum, the Court determined that the District Court abused its discretion in ordering the retrospective remedy in the absence of proof of irreparable harm. However, the prospective remedy requiring Westar to advance future attorney’s fees in the face of irreparable harm, was not an abuse of discretion.

 

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Jones v. Harris, 537 F.3d 728 and 527 F.3d 627 (7th Cir. 2008). These two citations refer to a majority and dissenting opinion (in the same case) that address the fiduciary duties of advisors to mutual funds based on federal statutes, as well as compensation payable to those advisors. The U.S. Supreme Court has accepted certiorari.

Prof. William Birdthistle has provided extensive commentary on the case that appears on The Conglomerate, e.g., here and here. In addition to the important issues of fiduciary duty and "executive compensation" that make this future decision by the SCOTUS worth monitoring, extra sizzle on this steak is provided by a "clash of intellectual titans" in the form of "dueling opinions" by the well-known  "judical heavyweights" Judge Frank Easterbrook and Judge Richard Posner. Both were academics before they came on the bench and both have written prominent publications on "law and economics".  These two opinions feature their very public split on aspects of these theories, which some have described as "classical v. behavioral" schools of thought on the topic.

Here is the decision of Judge Easterbrook, and here  is the dissenting opinion of Judge Posner, which some have opined was written specifically to attract the attention of the SCOTUS and (successfully, as it turns out) obtain review by the nation's highest court.

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Proctor & Gamble Co. v. S.C. Johnson & Son, Inc., 2009 U.S. Dist. Lexis 13190 (E.D. Tex.), read Order of Court here.

Danielle Blount, an associate in our Wilmington office, prepared this case summary.

Optical Character Recognition (“OCR”), is where static images of text are translated into a format, via computer software program, that can be searched or read electronically. It is used to render documents maintained in hard copy format and scanned into a computer searchable. It is a tool that greatly decreases the time and effort counsel must invest in searching and examining documents. The cost of OCR was the central dispute in this case. The defendants estimated that OCR costs would exceed $200,000. However, the defendant failed to provide estimates or even the total pages on which it expects to perform the process. The defendant suggested that the cost should be shifted to plaintiff to pay for OCR. Although the defendant supplied an estimate of $1,900 per custodian for document conversion, it failed to identify the total number of custodians from whom it anticipates documents will be obtained. The plaintiff provided an estimate of three cents per page. The court reasoned that in the age of electronically stored information, only so much of the requested data is maintained in hard copy format which would require OCR to be searchable.

In determining whether cost shifting is appropriate, other courts have adopted multi-factor tests. In this case the court applied the facts outlined in Zubulake v. U.S. Warbury LLC, 217 F.R.D. 309 (S.D.N.Y. 2003) despite its “slightly different context.” Those factors are:

(1) the extent to which the request was specifically tailored to discover relevant information; (2) the availability of such information from other sources; (3) the total cost of production, when compared to the amount in controversy; (4) the total cost of production, when compared to the resources available to each party; (5) the relative ability of each party to control costs and the incentive to do so; (6) the importance of the issues at stake in the litigation; and (7) the relative benefits to the parties of obtaining the information

In this case an analysis of the seven factors did not favor cost-shifting. Notably, the court mentioned that the defendant failed to show that the documents requested are obtainable from other sources. Further, the court reasoned that the parties’ respective litigation budgets were estimated to be several million dollars a piece, so the defendant had adequate resources in which to conduct an OCR review.

In sum, the court determined that “requiring the parties to incur [OCR costs], when the OCR process is likely to streamline the discovery process and reduce the chance that either side will employ tactics designed to hide relevant information in a mountain of difficult-to-search documents is neither unreasonable nor burdensome.”

 

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Schwartz v. Blum, (U.S. Ct. of App., 4th Cir., Jan. 29, 2009), read opinion here.

We are fortunate to have a review of this case from Kevin Brady, a partner in the Business Law Group at the Wilmington, Delaware, office of Connolly Bove.

In this opinion, the Fourth Circuit addressed on appeal, issues raised by a businessman challenging the fairness of the merger consideration in connection with the merger of Rent-A-Wreck of America, Inc. (“RAWA”) and MBFG, Inc.

Plaintiff Schwartz was the founder and majority shareholder of RAWA. Kenneth Blum (“Blum”) was the CEO and his son, Kenneth Blum II (“Blum II”) served as President. Schwartz alleged that from approximately 1994 through the early 2000s, the Blums mismanaged RAWA and engaged in self-dealing with the acquiescence of William Richter, a Board member and owner of a controlling interest in RAWA’s preferred stock. Schwartz also claimed that because the Blums eventually were concerned that their improper activities might subject them to potential liability under the Sarbanes-Oxley Act “(SOX”), the Blums caused RAWA to delist its shares from the NASDAQ exchange, resulting in a significant drop in the value of RAWA’s common stock. That led to the resignation of Blum II as President.

Schwartz alleged that in an attempt to “extract themselves from the problems [they] created,” Richter and Blum caused RAWA to enter into a merger agreement with MBFG, wherein MBFG agreed to “a waiver and release of all claims arising from the facts contained in the Audit Report.” Richter and Blum rejected a more favorable offer for RAWA because the higher bidder did not provide the same waiver and release. Eventually, Schwartz accepted the merger consideration and redeemed his 400,000 shares of RAWA stock. Schwartz then filed suit alleging breach of fiduciary duty against Richter, Blum and Blum II claiming that RAWA shareholders did not receive a fair price.

In a unique procedural setting, the defendants moved to dismiss the complaint on the grounds that Schwartz was barred from challenging the fairness of the merger consideration since he tendered his shares. Moreover, while the motion to dismiss was pending, the defendants filed a motion for summary judgment arguing that to the extent Schwartz was claiming that the defendants engaged in self-dealing or other wrongdoing as directors, such a claim was barred by Maryland’s three-year statute of limitation. The District Court granted both motions.

In analyzing the issues, the District Court agreed with the defendants and citing Bershad v. Curtiss-Wright Corp., 515 A. 2d 840 (Del. 1987), found that Schwartz had no standing to challenge the fairness of the merger consideration because he had already tendered his shares and accepted the benefits of the merger. The District Court then granted the defendants’ motion for summary judgment on the basis of the three-year statute of limitations. Schwartz appealed both rulings.

The Court of Appeals following Delaware law (the parties agreed that Delaware law applied), agreed with the Delaware Supreme Court’s decision in Bershad, finding that an informed stockholder (Schwartz conceded that he was fully informed) who has tendered his shares and accepted the merger consideration has “acquiesced in the transaction and cannot (subsequently) attack it.” As a result, the Court of Appeals affirmed the district court’s dismissal of the complaint and vacated as moot the order granting summary judgment.

 

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Kevin Brady is a well-respected Delaware litigator and a nationally-recognized e-discovery expert. We are pleased to have his summary of a recent Delaware decision that addresses key issues of great import to all litigators.

In Micron Technology, Inc. v. Rambus, Inc., (D.Del., Jan. 9, 2009), read opinion here, the U.S. District Court for the District of Delaware imposed severe penalties for spoliation of evidence. Kevin's review of the court's opinion follows:

 On January 9, 2009, District Court Judge Sue L. Robinson, in a patent infringement action that was filed in 2000, sanctioned defendant Rambus Inc. for spoliation conduct including the destruction of “innumerable documents relating to all aspects of Rambus’ business” dating back to the late 1990s. The dispute between Micron and Rambus related to Micron’s alleged infringement of multiple Rambus’ patents. After a bench trial on the issue of alleged spoliation of evidence and unclean hands, Judge Robinson declared that the patents in suit were unenforceable against Micron. For Rambus, this is the third decision from three different jurisdictions (Delaware, Virginia and California) where Rambus has been charged with spoliation of evidence based upon its licensing, litigation and record retention plans including its now-infamous “Shred Days.” The Virginia court (Rambus, Inc. v. Infineon Techs. AG, 220 F.R.D. 264 (E.D. Va. 2004) found that Rambus had spoliated evidence, however, a California court (Hynix Semiconductor Inc. v. Rambus, Inc., No. C-00-20905 RMW, 2006 WL 565893 (N.D. Cal. Jan. 5, 2006) found that Rambus did not spoliate evidence.

Background

Rambus develops and licenses technologies to companies that manufacture semiconductor memory devices such as Direct Random Access Memory ("DRAM"). Shortly after Rambus was founded in 1990, the company filed a patent application containing the DRAM inventions. Rambus’ plan was to license its DRAM technology to manufacturers and make it widely compatible so as to achieve industry-wide adoption. As part of its licensing framework, Rambus developed a litigation strategy which included references to a document retention policy. In 1996, Rambus entered into licensing agreements with eleven of the twelve major DRAM manufacturers, including Micron. In May 1998, Rambus implemented a company-wide document retention policy at the same time it was considering potential litigation against targets such as Micron.

In September 1998, Rambus employees participated in “Shred Day” also known as “office clean out” day during which the employees destroyed an estimated 400 banker’s boxes-worth of documents pursuant to the company record retention/destruction policy. No records were kept of what was destroyed but evidence was presented to Judge Robinson that the destroyed documents related to, inter alia, contract and licensing negotiations, patent prosecution, Board meetings and finances. In April 1999, Rambus also instructed its outside counsel to purge its patent files for patents that had already issued. On August 26, 1999, Rambus had another “Shred Day” where its employees destroyed an estimated 300 boxes of documents. However, between the first and second “Shred Day,” one of the patents at issue in the litigation had been issued. In October 1999, Rambus sent a letter to Hitachi about three of Rambus’ patents. In November or December 1999, Rambus instituted a litigation hold and in August 2000, Micron filed the instant suit against Rambus.

Legal Analysis

Spoliation occurs in two ways: (i) the destruction or significant alteration of information which could be used as evidence; or (ii) the failure to properly preserve information for another’s party’s use in pending or reasonably anticipated litigation. With respect to the failure to preserve element and a party’s record retention policy, the court will look to see whether the “policy is reasonable considering the facts and circumstances” or whether it was instituted in bad faith. Lewy v. Remington Arms Co., 836 F. 2d 1104, 1112 (8th Cir. 1988). Under Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 218 (S.D.N.Y. 2003), “[o]nce a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a “litigation hold” to ensure the preservation of relevant documents.” Sanctions, which serve three functions – remedial, punitive and deterrent -- are appropriate where there is evidence that the offending party’s spoliation threatens the integrity of the court. Mosaid Tech. Inc. v. Samsung Elec. Co., 348 F. Supp. 2d 332 (D.N.J. 2004).

Unfortunately, the law in the Third Circuit as to the required proof to establish spoliation is not settled. Under Schmid v. Milwaukee Elec. Tool Corp., 13 F. 3d 76, (3d Cir. 1994) dispositive sanctions such as those requested in this case, are not warranted in the absence of demonstrated bad faith (i.e., the intentional destruction of evidence) and prejudice. In order to prove prejudice under Schmid, “a party need only ‘come forward with plausible, concrete suggestions as to what [the destroyed] evidence might have been.’” In Re Wechsler, 121 F. Supp. 2d at 423 (citing Schmid, 13 F. 3d at 80). However, the court in Gates Rubber Co. v. Bando Chem. Indus. Ltd., 167 F.R.D. 90 (D. Colo. 1996), raised the bar when it came to dispositive sanctions. As that court explained, because dispositive sanctions “contravene the strong public policy [that] favors adjudication of cases on their merits” a higher burden of proof [a clear and convincing standard] may be appropriate.

In analyzing the facts, Judge Robinson found that litigation was “reasonably foreseeable” (i.e., a litigation hold was triggered) “no later than December 1998 when [Rambus] had articulated a time frame and a motive for implementation of the Rambus litigation strategy.” In addition, because Rambus adopted a document retention policy “within the context of Rambus’ litigation strategy” Rambus knew or should have known that the implementation of such a policy would result in the destruction of potentially relevant information.

In following the Schmid standard, Judge Robinson found that Micron had demonstrated prejudice by showing that the documents destroyed during Shred Day and the purging of the patent files were discoverable and that type of information would have been relevant to the case.

As a result, the Court concluded that Micron had been prejudiced by Rambus’ conduct and that the appropriate sanction for Rambus’ conduct would be for the Court to declare the patents in suit unenforceable as against Micron.
 

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Thanks to Mack Sperling of the North Carolina Business Litigation Report, we have a  very recent decision by a New York Court, applying Delaware law, holding that the business judgment rule was satisfied in the "fire sale" [my words] of Bear Stearns to JP Morgan. The decision, here,  was submitted to the court in North Carolina (mentioned below) hearing the Wachovia/Wells Fargo litigation that involved similar issues. 

Recall as noted here the decision of the Delaware Chancery Court a few months ago to stay the Delaware case involving the merger of Bear Stearns, and deferring to the pending related Bear Stearns case in a New York court in what was perhaps a sui generis procedural decision.  Here's how Mack Sperling introduces the New York court's Bear Stearns opinion:

... the Bear Stearns board did not breach its fiduciary duty in its quick approval of the merger with JPMorgan and in agreeing to the deal protection provisions that it did, including selling 39.5% voting control to JPMorgan: "The financial catastrophe confronting Bear Stearns, and the economy generally, justified the inclusion of the various merger protection provisions intended to increase the certainty of the consummation of the transaction with JPMorgan." (slip op. at 32).

Also on Friday, December 5, 2008, as reported by Mack Sperling here, the North Carolina Business Court found that the business judgment rule supported the merger of Wachovia and Wells Fargo that was arranged in similarly unusual circumstances in light of the economic turmoil that in very short order saw some of the country's largest financial institutions "go under" or need "bailouts".

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Lee Thomason is a lawyer-reader of this blog and often comments on my posts. He has authored an article about a recent decision by the U.S. District Court for the District of Delaware on patent-related procedural issues involving Markman hearings and the like, that can be found here.

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Advancement of legal fees under DGCL Section 145 is a quintessentially Delaware legal topic that has been the subject of 39 different posts over the last four years on this blog, (see list of posts here), either based on summarizing Delaware opinions on the issue or referring to discussions by others of recent developments. [This is post number 40.] Among those 39 posts was a highlight of the federal decision in U.S. v. Stein by Judge Kaplan of the Southern District of New York that dismissed claims against certain KPMG partners because the judge reasoned that prosecutors in that case, by "strong-arming" (my word) KPMG into refusing to provide advancement rights to the partners, KPMG in effect, denied the partners' right to effective counsel under the Fifth Amendment of the U.S. Constitution. Here is my blurb on Judge Kaplan's decision of last year. I am not aware of that same issue being addressed directly, in the same way, by courts in Delaware, but Judge Kaplan's decision remains as a milestone to highlight how important the right to advancement is, even in civil cases where the legal fees are so astronomical that most mortals could not afford to advance the legal fees on their own to defend a case brought against them, for example, in their capacity as a director of a company.

 The Wall Street Journal Law Blog writes today here about the prosecution's recent decision not to appeal the Second Circuit's affirmance of Judge  Kaplan's decision. A reading of Judge Kaplan's decision and the appellate court's affirmance should be required reading for anyone who wants a complete understanding of the full ramifications of the importance of the right to advancement and the consequences of that right being denied--where, of course, the right is established. Most Delaware cases address whether the right to advancement has been established and what the contours of that right are.

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In King Construction, Inc. v.  Plaza Four Realty, LLC, (Del. Super., Sept. 29, 2008), read opinion here, the Delaware Superior Court strictly construed the Delaware Mechanic's Lien statute and dismissed the efforts of a subcontractor to file a mechanic's lien based on non-compliance with the statute, such as the following: (i) failure to obtain written consent of the owner of the property before performing work for the tenant on leased premises; and (ii) not waiting until all work was completed before filing the mechanic's lien for amounts due (which date must be asserted in the court pleadings).

The court also recited several other prerequisites in the statute for successfully asserting a mechanic's lien, as well as discussing policy reasons and filing deadlines that is all useful information for anyone who needs to know the details about mechanic's liens in Delaware.

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Peter Mahler on his New York Business Divorce Blog, here, discusses a New York case that involves a claim by an LLC member against the accountant of a Delaware LLC that was the subject of a dissolution proceeding in the Delaware Chancery Court. The Chancery Court case settled but one member later claimed that the LLC's accountant impermissibly help the other member in the dissolution proceeding. Excerpts from the excellent blog post follow:

...  until Anda Management, LLC v. Needlemen & Schacter, LLP, 2008 NY Slip Op 31534(U) (Sup Ct Nassau County May 20, 2008), I'd never heard of spin-off litigation involving charges against a professional for improperly taking sides in the underlying dissolution case.

 

Here's what happened: Anda Management and Wilmington Paper Corp. formed a Delaware LLC called Worldwide Fibers to market paper products overseas. Worldwide retained the defendant accounting firm as its accountant without a written agreement. Three years later, Worldwide's principals had a falling out, prompting Wilmington to file a proceeding for judicial dissolution of Worldwide in Delaware Chancery Court. Wilmington accused Anda's principals of impermissibly withdrawing funds from Worldwide for personal reasons and then falsely booking them as legitimate business expenses.

The Delaware proceeding ultimately settled when Anda acquired Wilmington's interest in Worldwide.

Anda and its principals subsequently brought a New York action against the accountant for breach of fiduciary duty and malpractice arising from its conduct in the Delaware case. The plaintiffs alleged that the accountant consulted with and assisted Wilmington's trial counsel by reviewing a proposed complaint, participating in conference calls with Wilmington's counsel, and submitting affidavits supportive of Worldwide's claims in which the accountant allegedly made false and contradictory statements concerning accounting advice previously given by the accountant to the plaintiffs prior to the dissolution. The plaintiffs also alleged that the accountant was aware that the expenses challenged by Wilmington were proper, and that the accountant had affirmatively counseled the plaintiffs to take some of the disbursements challenged by Wilmington. The plaintiffs further alleged that one of the accountant's employees gave the social security numbers of Anda's principals to Wilmington's counsel in order to perform credit searches on them.

 

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Street v. The End of The Road Trust, et al., (D. Del., Bankr., Sept. 17, 2008), read opinion here. Thanks to Delaware lawyer David Finger for bringing this decision to my attention.

A quote from the court's opinion highlighted the issues addressed:

There are a number of basic propositions in Delaware corporate cases that are helpful in clarifying the distinction between (1) indemnification and advancement, and (2) a mandatory advancement and discretionary advancement, with the former
constituting an enhanced benefit to an indemnitee.

Danielle Blount, an associate in our Wilmington office, prepared the following case summary:

 The United States Bankruptcy Court for the District of Delaware denied Plaintiff’s request for advancement for expenses arising out of acts related to his duties as Trustee. Plaintiff claimed that he incurred fees and expenses in excess of $169,049 prosecuting the petition to recover fees and $1.25 million defending an adversary proceeding.

On January 9, 2007, Plaintiff filed a petition in the Chancery Court asserting claims for advancement and indemnification. Thereafter, an adversary proceeding was filed against the Plaintiff alleging breaches of fiduciary and contractual duties. Subsequently, the Debtor removed the Chancery Court action to the District Court for the District of Delaware, thus bringing it before the Bankruptcy Court for the District of Delaware.

Notably, the court relied on Delaware Chancery Court and Delaware Supreme Court cases which clarify the distinction between (1) indemnification and advancement; and (2) mandatory advancement and discretionary advancement. Among the cases cited ihn this opinion by Bankruptcy Judge Walsh on these issues include the following: Majowski v. American Imaging Management Services, LLC, 913 A.2d 572 (Del. Ch. 2006), Advanced Mining Systems, Inc. v. Frincke, 623 A.2d 82, 84 (Del. Ch. 1992), and Havens v. Ahar, 1997 WL 695579 (Del. Ch. 1997).

 Delaware Court of Chancery decisions were helpful in the court's determination about how to assess an indemnitee’s entitlement under a discretionary advancement provision. In utilizing the precedent from the Court of Chancery, the court here held that in the context of an non-corporate entity that either a successor Trustee or Trust Advisory Committee can exercise the kind of judgment that a board of directors can undertake in a corporate discretionary advancement context. This case involved a trust as opposed to a corporation. 

ASIDE: For those involved in trust litigation, there is a helpful discussion at pages 19 to 20 of this opinion that addresses the factors that should be considered when a trust decides to pay for attorneys' fees that it incurs--out of the trust corpus.
 

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In re Intel Corp. Microprocessor Antitrust Litigation, 2008 WL 2310288 (D.Del. 2008), read opinion here. This is an opinion that should be read by anyone who wants to, or needs to, keep up to date on electronic discovery (EDD) pitfalls (read: all business litigators). The backdrop to this particular dispute in the litigation involved the inadvertent failure to retain data by certain Intel custodians of electronically stored information (ESI) who it seems did not follow instructions given to them regarding a "litigation hold".

Notably, the parties described this case as potentially involving "the largest electronic production in history". However, that did not  justify an exception to the applicable rules and analysis. See generally Fed. R. Civ. P. 37(f) and committee notes (recent amendment that allows for  a safe harbor under certain circumstances if ESI is inadvertently destroyed)

When it was determined that certain custodians had failed to properly preserve ESI, a law firm was engaged to interview those custodians to establish to the court that the error  in failing to preserve data was inadvertent human error. As a result of relying on those interviews to establish that "defense" to spoliation, however, the court adopted the findings of a Special Master that:

• the attorney/client privilege was waived; and
• the "non-core" attorney work product had to be produced. See Fed. R. Civ. P. 26(b)(3)(A)(ii)

The opinion has a helpful discussion of situations where the attorney/client privilege is waived as well as when the "attorney work product" (both core and "non-core") protection will NOT be allowed.

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Steve Jakubowksi's Bankruptcy Litigation Blog here, has a characteristically erudite analysis about the Lehman Brothers bankruptcy filing today, with links to actual documents filed in the case. I have to believe that part of the case will eventually involve claims against the officers and directors for their role in this "epic mess". Steve's post was also picked-up here on The Wall Street Journal's Law Blog.

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It was reported that a federal judge in Allentown, PA, dismissed a case because no reply was filed to a motion to dismiss. According to the article (sorry, no link available), the court sent a filing deadline notice by email, but the lawyer did not receive the notice of the deadline--apparently due to his email spam filter. This was reported in the Delaware County (PA) Sunday Times on Sept. 14, 2008 at page 17.

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In Citizens Bank v. Design-A-Drape, Inc.,  Del. Super., (July 30, 2008), read opinion here, the Delaware Superior Court imposed attorneys' fees as a penalty for naming a co-defendant as a party for whom there was no (apparent) good faith basis to join as a defendant in the suit. ( I am up to date with summaries of the key decisions on business law of the Delaware Chancery Court and Delaware Supreme Court, so I am covering a decision of practical importance to business litigators from the trial court of general jurisdiction in Delaware, known as the Superior Court).

The Court provided the basis for its authority to make an exception to the "American Rule" that each party pays its own attorney's fees, including Rule 11. The Court also noted that Section 3904 of Title 10 of the Delaware Code, referred to as the "common name" statute, allows one to sue an unincorporated association of persons by their "common trade name" without the need to sue each of the members of that group. It was not availing for the plaintiff to argue that because the corporation also sued was defunct and not in good standing, he should have been entitled to sue the wife of the other defendant who had (alone) personally guaranteed the unpaid debt on which the suit was based. 

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This case summary comes to us courtesy of Maura Burke, one of our firm's summer associates.

In Miller v. McCown De Leeuw & Co., Inc. (In re Brown Schools), 386 B.R. 37 (Bankr. D. Del. 2008), the Delaware bankruptcy court held that the theory of deepening insolvency may be used to measure damages in an action for breach of the fiduciary duty of loyalty. This opinion revives the concept of deepening insolvency as a significant bankruptcy issue in Delaware.
In Trenwick Am. Litig. Trust v. Billett, 931 A.2d 438 (Del. 2007), aff’g Trenwick Am. Litig. Trust v. Ernst & Young, LLP, 906 A.2d 168 (Del. Ch. 2006), the Delaware Supreme Court closed the door on deepening insolvency, or the wrongful prolonging of an insolvent company by increasing its debt load, as an independent cause of action in Delaware. The Trenwick court did not address deepening insolvency as a measure of damages. In re Brown Schools confirms the Trenwick court’s holding while providing guidance as to deepening insolvency’s role in measuring damages for specific causes of action.
Brown Schools involved an action by a Chapter 7 trustee against the debtors’ controlling shareholder, McCown De Leeuw & Co. Inc. (“MDC”). In 1997, MDC indirectly acquired more than 65% of the stock of The Brown Schools, Inc. (the “Company”). As part of the Company’s recapitalization, the Company obtained $100 million in loans from various banks, $15 million in capital from Teacher’s Insurance and Annuity Association of America (“TIAA”) and additional loans from MDC. Over the next several years, the Company unsuccessfully attempted to restructure its debt and eventually filed for Chapter 7 relief in 2005. The Company’s appointed Chapter 7 trustee filed suit against MDC and its affiliates (the “Defendants”) claiming among other things deepening insolvency, breach of fiduciary duty, fraudulent and voidable transfers, and civil conspiracy.
The Defendants moved to dismiss the trustee’s claims alleging that (a) Delaware does not recognize deepening insolvency as a valid cause of action and (b) each of the plaintiff’s additional claims were based upon deepening insolvency and therefore were invalid in their own right.

The bankruptcy court, following Trenwick, dismissed the deepening insolvency claim, however the court disagreed that the other causes of actions were merely “disguised deepening insolvency claims.”

The bankruptcy court, narrowly construing the Trenwick decision, found that Trenwick did not bar traditional claims for breach of fiduciary duty. Additionally, the court rejected the argument that In re Radnor Holdings Corp., 353 B.R. 820 (Bankr. D. Del. 2006), mandated dismissal of the claims. In Radnor, the court dismissed a duty of care violation claim because it was merely a “deepening insolvency claim by another name.” In this case, the court distinguished Radnor, holding that breach of fiduciary duty of loyalty related to issues of self-dealing and fairness, not deepening insolvency, therefore the claim was not dismissible.

Finally, the bankruptcy court, relying on Alberts v. Tuft (In re Greater Southeast Cmty. Hosp. Corp. I), 353 B.R. 324 (Bankr. D.C. 2006), found that deepening insolvency may be used as a theory of damages for a claim based on a breach of duty of loyalty. Under this theory, damages are measured by the dissipation of corporate assets and/or the company’s increased debt load. Thus, damages could exceed the amount invested in, or benefits actually received by, the company.
Brown Schools reestablished the concept of deepening insolvency as a consequential bankruptcy issue in Delaware. Although not recognized as a separate cause of action, deepening insolvency may be implemented as a theory of damages for breach of fiduciary duty of loyalty. Accordingly, Brown Schools quashes any hopes previously held by directors and officers of distressed companies that Trenwick eliminated entirely the issue of deepening insolvency in Delaware.

 

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In Kamco Building Supply v. Kearney and Schweitzer, 95 Delaware County (PA) Reports 180 (2007), Pagano, J., read opinion here, the Delaware County (PA) Court of Common Pleas discussed the Pennsylvania Long Arm Statute and refused to find jurisdiction over a New Jersey lawyer in Pennsylvania when that lawyer was not licensed in PA and did not have an office in PA and apparently had no ties to PA other than suing a PA company in New Jersey.

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This is another case summary by associate Carl Neff about another example of the Bankruptcy Court's application of Delaware corporate law. The Harvard Corporate Governance Blog  also published their own summary of the case noted below.
 

In Bridgeport Holdings Inc. Liquidating Trust v. Boyer, et al., Adv. No. 07-51798, 2008 WL 2235330 (Bankr. D.Del. 2008), read opinion here,  a liquidating trust brought an action against the former officers and directors of Bridgeport Holdings, Inc., along with the restructuring professional appointed to the position of chief operating officer.

The liquidating trust asserted claims for breach of fiduciary duty and corporate waste. In granting in part and denying in part Defendants’ Motion to Dismiss, Bankruptcy Judge Peter Walsh held:

(i) Delaware's statute of limitations barred certain claims for breach of fiduciary duty; (ii) the trust stated claims for breach of the duty of loyalty and acting in bad faith under Delaware law; (iii) the exculpatory provision in the certificate of incorporation did not defeat a claim for breach of duty of care by former directors; (iv) complaint failed to state claim for breach of duty of due care and lack of good faith against former officers; (v) complaint stated claim for breach of fiduciary duties against restructuring professional; and (vi) complaint failed to state claim for corporate waste.
In denying the motion as to the duty of loyalty claims, the Court held that the trust properly stated a claim for breach of duty of loyalty and acting in bad faith. The trust properly asserted that the breach of loyalty was premised upon the failure of a fiduciary to act in good faith, consistent with Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006).

 In denying the motion as to the duty of loyalty and acting in bad faith under Delaware law, the Court held that neither the exculpatory provision nor the business judgment rule vitiates this count. The Court relied on the Delaware Supreme Court decision in McMullin which held that a board of directors has a duty under 8 Del. C. § 251(b) to act in an informed and deliberate manner in determining whether to approve an agreement of merger before submitting the proposal to the stockholders.

In the absence of a majority shareholder, the directors “may not abdicate that duty by leaving to the shareholders alone the decision to approve or disapprove the agreement.”
Additionally, the Court granted the Motion to Dismiss as to the duty of care claims against the D&O defendants, as the Complaint is too short on facts regarding the conduct of the officers in pursuing the sale transaction to survive the motion to dismiss with regards to these counts.

Finally, the Court granted the Motion as to waste claims, holding that the Complaint did not allege facts that support the conclusion that no reasonable person would find $28 million adequate for the Assets of a failing entity. The Court added that only “extraordinary circumstances can justify a finding of waste and the Complaint here does not present those circumstances.”
 

 

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Courtesy of associate Carl Neff is a summary of a decision from the U.S. Bankruptcy Court for the District of Delaware in a case styled: In re Troll Communications, LLC , 385 B.R. 110, 113 (2008). This Bankruptcy Court  in Delaware is often called upon to apply Delaware corporate law and frequently applies it in the context of a claim brought by a trustee for a bankrupt corporation against the former directors and officers. This is such a case.

In this Bankruptcy Court decision, a Chapter 7 trustee (the “Trustee”) brought adversary proceedings for breach of fiduciary duty, and fraudulent and preferential transfers. The Trustee filed an amended complaint and the defendants moved to dismiss. The motions to dismiss were granted in part and denied in part.

A. Count One: Claims for Breach of Fiduciary Duty Against Individual Defendants.

Count One of the amended complaint alleged claims for breach of fiduciary duty against Troll Communications directors and officers. See id. at 113. In support of these claims, the Trustee cited: (1) the board and officers’ suspect authorization of the use of proceeds from an equity transaction to pay debts owed by Quad Ventures Partners SBIC (“Quad”); and (2) the board and officers’ failure to prevent Troll’s deepening insolvency. See id. at 117. Supporting their motions to dismiss, the defendants cited: (1) the Trustee’s failure to plead around the business judgment rule; (2) the amended complaint’s lack of specificity regarding the officers’ knowledge and participation; and (3) the invalidity of a “deepening insolvency” cause of action. See id. at 119-122.

First, the court held that the business judgment rule was not a basis for dismissal of a breach of loyalty claim against the board of directors. See id. at 119. Count One alleged that certain members of Troll’s board of directors breached the duty of loyalty when they authorized the use of proceeds from an equity transaction in September 2002 to pay debts owed by Quad. See id. at 117. The complaint alleged that a majority of the directors had a financial interest in both Troll and Quad and one director failed to perform an independent review of the decision. See id. at 119. The defendants argued that the Trustee failed to plead around the business judgment rule and therefore the count should be dismissed. See id. at 118. The court rejected this argument because the complaint sufficiently pled facts questioning the disinterestedness of a majority of the directors. See id. at 119. Accordingly, the motion to dismiss was denied. See id. at 120.

Also under Count One, the court dismissed claims against Troll’s officers for breach of fiduciary duty because the complaint failed to allege specific details about the officers’ knowledge and participation. See id. at 120-21. To state a valid claim for breach of fiduciary duty, the Trustee must demonstrate: “(1) the existence of a fiduciary relationship; (2) a breach of that relationship; and (3) knowing participation by the defendant in the fiduciary’s breach.” See id. at 120. The complaint failed to allege with sufficient detail the officers’ knowing participation in the payments to Quad. See id. at 120. Therefore, the court dismissed the allegations, gave the Trustee leave to amend and directed him to specify which officers breached, or aided and abetted in the breach, of the fiduciary duty. See id. at 120-21.

Finally, the court dismissed Count One’s request for relief based on deepening insolvency, because deepening insolvency is not a valid cause of action under Delaware law. See id. at 121. Count One alleged that by failing to take prompt corrective action in the face of the company’s financial decline, the directors and officers “caused the corporate life of the debtors to be artificially extended beyond the point of economic viability.” See id. at 121. Although the Trustee did not explicitly assert this as an action for deepening insolvency, the court interpreted it as such. See id. Noting that the Delaware Supreme Court had rejected deepening insolvency as a cause of action, the court dismissed Count One’s request for relief based on this theory. See id. at 121 (citing Trenwick Am. Litig. Trust v. Billett, 931 A.2d 438 (Del. 2007), aff’g Trenwick Am. Litig. Trust v. Ernst & Young, LLP, 906 A.2d 168, 204-07 (Del.Ch. 2006)).

B. Counts Two and Three: Avoidance and Recovery of Fraudulent and Preferential Transfers
Both counts Two and Three of the amended complaint sought avoidance and recovery of three specific payments from Troll to Quad. See id. at 122. Count Two sought avoidance and recovery of the payments under the theory that they were fraudulent transfers. See id. Count Three sought avoidance and recovery of the same three transfers under the theory that they were preference payments. See id. at 123. The defendants moved to dismiss these counts arguing that (1) the Trustee did not sufficiently allege facts establishing Troll’s insolvency at the time of the transfers; and (2) the Trustee failed to plead the fraud claim with the requisite specificity. See id. The court denied the motions to dismiss.

The Trustee adequately alleged Troll’s insolvency at the time of the challenged payments. See id. at 124. To state a valid fraudulent transfer claim, the complaint must allege that the debtor was insolvent at the time of transfer. See id. The amended complaint, referencing Troll’s internal financial statements, alleged that at the time of the transfers Troll had “a negative net worth and was unable to meet maturing obligations.” Id. The court accepted the allegations as true and rejected the defendants’ argument that the facts alleged only a “mere suspicion” of insolvency. See id. The Trustee sufficiently alleged Troll’s insolvency, therefore the court denied the defendants’ motion to dismiss. See id. The amended complaint sufficiently pled fraud with the specificity required by Federal Rule of Civil Procedure 9(b). See id. at 125. The defendants argued that the Trustee’s pleading was deficient because it failed to identify a creditor and other factual information. See id. at 124. The court rejected the defendants argument holding that courts do not “require a trustee to plead the existence of an unsecured creditor by name.” See id. at 125. Additionally, the court held that the amended complaint contained sufficient factual information including: (1) the applicable statutory language; (2) the date and amounts of each transfer; (3) a claim that the transferees were insiders; and (4) specifics regarding Troll’s financial status. See id. The amended complaint sufficiently pled fraud with the requisite specificity, therefore the court denied the defendants’ motion to dismiss. See id.

C. Trustee’s Request to Further Amend the Amended Complaint.
The Trustee requested the opportunity to add certain corporate entities to Count One, Two and Three. See id. at 125. The defendants objected to the addition of one business entity to Count One arguing that the Trustee could not meet the requirements for relation back under Federal Rule of Civil Procedure 15(c). See id. The court scheduled a hearing to address the issue of whether the Trustee may further amend the complaint as requested. See id. 




 

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 In Orr v. Travelers Insurance Company, 95  Delaware County (PA) Reports 145 (2008), read opinion here, the Delaware County (PA) Court of Common Pleas discusses the high standard in Pennsylvania that must be met for overturning a binding arbitration decision. The court held that the failure of one of the arbitrators to disclose a prior affiliation with one of the parties was enough to trigger the "irregularity" threshold as a basis to set aside the award.

 

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For those of us who labor in the trenches of business litigation and need to concern ourselves with the quotidian details of long-arm service, this is an important sharp implement for your toolbox: This week the Governor signed legislation that provides for a new procedure to follow for long-arm service. Here is a link to a summary of the Bill--and the complete copy of the Bill. I hope to summarize the new procedures soon (for those who may not prefer to read the actual linked legislation.)

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 In D.C. v. Heller, the United States Supreme Court issued an opinion today interpreting the Second Amendment of the U.S. Constitution to disallow a law in the District of Columbia that prohibited the purchase and possession of handguns. Read opinion here (157 pages, including dissents).

Here is one of  the posts today on the topic at The Wall Street Journal's Law Blog. Here is a take on the case that focuses on the comparison of the dissent by Justice Stevens with the majority opinion written by Justice Scalia, as reported by the Blog of the Legal Times.

Apart from the obvious reasons, this SCOTUS opinion has a big impact on businesses. Just ask any owner of a gun store. Of course, the person who lives in Montana and uses a gun for recreational hunting has a different view of the right to bear arms as would a mayor of a big urban city where mostly illegally obtained guns are part of a serious problem of senseless death and violence. Whatever one's views on the politically charged issues of guns, the opinion could serve as a mini-textbook on constitutional interpretation principles.  This lengthy opinion also offers an insight into the hotly contested views held by members of the nation's highest court who find themselves on opposite sides of big issues like this.

UPDATE: Another post on the WSJ's Law Blog today here quoted a lawyer who filed an amicus brief in the case who described the Heller decision as one of the most important majority opinions by Justice Scalia during his approximately 22 years on the High Court, and also more broadly referred to the opinion thusly:

"It is not hyperbole to describe today’s decision in Heller as the most significant opinion of this century, and likely, of the last two generations.”

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Westmeyer v. Flynn,  2008 WL 2152498 (Ill.App., 1st Dist., May 20, 2008). Courtesy of famed Chicago bankruptcy lawyer Steve Jakubowski, this decision  by the Appellate Court of Illinois, First District, Second Division, read opinion here, determined that Delaware law would recognize the concept of piercing the corporate veil in the context of an LLC. However, the 2 or 3 Delaware cases cited by the court are not directly on point in my view. Curiously, the court relies for its conclusion more heavily on opinions by the courts of other states applying Delaware law.  I think that a more nuanced approach is necessary  before one commences a wholesale application to the LLC context of piercing the corporate veil. As we have discussed on these pages frequently, not all the "conventional corporate analyses are automatically subject to being imposed onto the separate LLC framework."
See generally, Donald Wolfe and Michael Pittenger, Delaware Corporate and Commercial Practice in the Delaware Court of Chancery at Section 2.03[b][1][iii] (2008)(discussing  the concept of piercing the corporate veil generally as applied to corporations).

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 The Delaware Superior Court has adopted a new rule regarding mandatory ADR. One may read a copy of new rule here.

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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.

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In Alderman v. Clean Earth, Inc., et al., (Del. Super., June 26, 2007), read opinion here, the Superior Court denied a motion for reargument and granted a motion in limine to exclude the most critical portions of plaintiffs' expert reports at trial due to the failure of both experts to comply with the Daubert criteria. Congratulations to my partner, Sharon Morgan, who was the prevailing party and who sent me a copy of the opinion.

Daubert is the U.S. Supreme Court decision that, in essence, requires trial judges to be gatekeepers for experts.[See 509 U.S. at 579]. The Delaware Supreme Court has applied the Daubert decision by adopting a 5-part test to determine whether certain scientific expert testimony is admissible pursuant to Delaware Rules of Evidence (DRE)  702; 401;402; and 703. The DRE are based on the federal rules. See here at pages 7 and 8 of the memorandum opinion of the Superior Court, citing the Delaware Supreme Court's decision in Tolson v. State, 900 A.2d 639, 645 (Del. 2006) adopting Daubert. See also Bowen v. E.I. duPont de Nemours & Co., Inc., the Delaware Supreme Court's other 2006 decision that also discussed the 5-factor test formulated by the Delaware Supreme Court to apply Daubert, briefly highlighted here on this blog.

 At page 4 of the opinion denying a motion for reargument on the decision to exclude (largely and for all practical purposes) the expert opinions of the plaintiffs,  Judge Silverman explains in helpful detail the process that an expert should use  in preparing an expert opinion (as opposed to relying too much on facts by others and not making sufficient personal inspections "on site".)

"Under the scientific method, first, the expert gathers information, including empirical observations, to form a hypothesis. Forming a hypothesis, however, is only the first step. The next step requires testing the hypothesis by collecting data and performing experiments. Then, the data is analyzed to prove or disprove the hypothesis." (citations omitted.)

See generally, here for a short summary on this blog (and link to full decision) of another Superior Court decision requiring a Daubert hearing to determine admissiblity of an expert report that also allegedly relied too heavily on "second-hand" information.

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I try to avoid going "off topic" but the decision today by the U.S Supreme Court  on issues of race, is of such wide-ranging importance, I hope my readers will forgive a short diversion. Courtesy of The Wall Street Journal's Law Blog, here is a quick overview with a link to the 185-page opinion in a Q and A format.  The court ruled that race could not be used as a factor in assigning students to certain schools. Here is a money quote: “The way to stop discrimination on the basis of race is to stop discriminating on the basis of race,” said Chief Justice Roberts.

This is a slight variation on the idea that the remedy for past discrimination is not more discrimination. I also think the statement from Justice Thomas' concurring opinion is notable. In reasoning that the U.S. Constitution does not allow race-based decisionmaking, he wrote: “Indeed, if our history has taught us anything, it has taught us to beware of elites bearing racial theories." The formal caption of the case is: Parents Involved in Community Schools v. Seattle School District No. 1.

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In Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955 (2007), read opinion here,  the U.S. Supreme Court recently changed the analysis for federal courts to use in deciding a Motion to Dismiss pursuant to FRCP 12(b)(6) and in light of the notice pleading standard in Rule 8(a)(2). The Delaware Chancery Court  and other Delaware state court rules of civil procedure are based on the federal rules of civil procedure so it will be important to watch to see if any Delaware state court decisions are influenced by this SCOTUS decision.

Thanks to William Jacobs, a summer associate at our firm, for preparing the summary of this case.

This case involved a putative class action suit against Incumbent Local Exchange Carriers (“ILEC’s”) alleging antitrust conspiracy in violation of Section 1 of the Sherman Act .

The United States District Court for the Southern District of New York dismissed the plaintiffs’ complaint for failure to state a claim upon which relief could be granted pursuant to Fed. R. Civ. P. 12(b)(6). The United States Court of Appeals for the Second Circuit reversed and the Supreme Court granted certiorari. 

The U.S. Supreme Court determined that the plaintiffs alleged no facts that made an inappropriate agreement or conspiracy any more plausible than independent business decisions; and since violation of Section 1 requires a “contract, combination, or conspiracy,” the complaint could not survive the motion to dismiss. In making their decision, the Court advanced a new pleading standard. The previous standard, set out in Conley v. Gibson, 355 U.S. 41, 78 (1957), provided that: “a complaint should not be dismissed for failure to state a claim unless it appears beyond a doubt that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief.” Id. 

However, the High Court in Twombly said the “no set of facts” language in the Conley standard has earned its retirement. The Court held that complaints must now state enough facts to make it plausible that the plaintiff is entitled to relief. Put simply, the facts stated in a complaint must make the allegations alleged plausible under  the "new test" announced by the Court as opposed to merely possible as previously would pass muster under Conley. Thus, in this case, the plaintiffs’ complaint needed to allege sufficient facts that, taken as true, suggested that the ILECs conspired to keep upstarts out of their markets. Finding no such facts in the complaint, the Supreme Court reversed the Court of Appeals and dismissed the complaint.   

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Delaware corporate law and bankruptcy law often overlap or intersect, as I have noted in prior posts. (e.g., here).  Steve Jakubowski, the scholarly author of the popular blog of longstanding called  The Bankruptcy Litigation Blog, recently posted here about Delaware and its bankruptcy court, as well as providing a long list of citations to articles as part of his monthly series of "required reading" for those interested in keeping up on the latest developments. Steve's blog itself is must reading for those who need to know about  bankruptcy law.

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Kevin LaCroix of The D & O Diary  has an excellent post here about a decision of June 8 by Judge Kevin Gross of the U.S. Bankruptcy Court for the District of Delaware that denied the trustee's efforts to use the automatic stay to block  the settlement of a class action against directors and officers of the bankrupt company based on the  Court's conclusion that the proceeds of the policy that would be used for the class action settlement were not property of the corporate bankruptcy estate (as opposed to the policy itself which is often seen as an asset of  the corporation's bankruptcy estate.)  Kevin LaCroix's post of June 17 has a thorough discussion of the details of the case and an analysis of the "wasting" policy, with helpful links to the opinion and  collateral sources. This is an excellent treatment of the overlap between bankruptcy and corporate law on this issue--which is not treated uniformly by the various federal circuits. Hat tip to Adam Savett of Securities Litigation Watch.

UPDATE: See further analysis here by Bob Eisenbach of the Business Bankruptcy Blog.

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Courtesy of my bankruptcy partner, Dan Astin, and associate Carl Neff, is a short blurb below about recent decisions in the U.S. District Court for the District of Delaware, and the Bankruptcy Court for the District of Delaware that address claims for "deepening insolvency". It might  be respectfully suggested that one of the decisions is not obviously consistent with the recent Chancery Court decision in Trenwick, that some thought sounded the death knell for deepening insolvency as a cause of action. (See summary and commentary  here and  here on this blog regarding the Trenwick decision). Below is their guest post. Thanks to both of you.

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The United States District Court for the District of Delaware recently rendered a decision in which it denied a motion to dismiss and allowed a claim for deepening insolvency to proceed. Buckley v. O’Hanlon, 2007 WL 956947 (D. Del. 2007), read opinion here.

Although our local federal court cited the Chancery Court's 2006 opinion in Trenwick,  which held that Delaware law does not recognize deepening insolvency as a direct claim against officers and directors, Trenwick America Litigation Trust v. Ernst & Young, L.L.P., 906 A.2d 168 (Del. Ch. 2006), the court in Buckley did not appear to distinguish Trenwick.

Instead, the court in Buckley ruled  that:

The U.S. Bankruptcy Court for the District of Delaware predicted that, in the absence of an opinion by the Delaware Supreme Court and given the Third Circuit's analysis in Official Committee of Unsecured Creditors v. R.F. Lafferty & Co., Delaware law would likely recognize a claim for deepening insolvency. In re Oakwood Homes Corp., 340 B.R. 510, 531 (Bankr.D.Del.2006). Although the elements of such a claim have yet to be enunciated, the Third Circuit acknowledged such a claim when a plaintiff alleges "fraudulent expansion of corporate debt and prolongation of corporate life." Official Committee of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 347 (3d Cir.2001).

Buckley v. O’Hanlon, 2007 WL 956947, at *7 (emphasis added).

By comparison, our local bankruptcy court recently acknowledged in the case of  In Re Radnor Holdings Corp., 335 B.R. 820 (Bankr. D.Del., Nov. 17, 2006)(read opinion here), when explaining why the complaint in that case did not include a count for "deepening insolvency", the  "recent rejection of such a cause of action under Delaware law." Id. at 842 (citing Trenwick and also In re CitX Corp., 448 F.3d 672 (3rd Cir. 2006)(which rejected deepening insolvency as a theory of damages.))

Most of this blog's readers are accustomed to the capacious authority of the Delaware Chancery Court to dispense equitable remedies, but the above cases remind us that the bankruptcy court is also vested with equitable powers. For example, the Radnor case, supra, at 838 to 840,  explains the drastic remedy of equitable subordination (based, for example, on inequitable conduct of a creditor), and how that remedy differs from recharacterization of debt (for example, when debt should be treated as equity.) See generally,  In re American Business Financial Services, Inc., 360 B.R. 74 (Bankr. D.Del., Feb. 13, 2007), read opinion here, which upheld a claim that a fiduciary relationship existed--to the extent it survived a motion to dismiss, where the bankruptcy trustee alleged a fiduciary relationship between the  bankruptcy trustee and the consulting firm--and its principal--whom the trustee thought were acting in his best interests.

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Prof. Bainbridge comments here, with links to the comments of others, on the securities law case of Stoneridge v. Scientific-Atlanta now pending before the U.S. Supreme Court.

( I have been out of town most of this week, but I hope to catch up on my blogging this weekend.)

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Wilmington Hospitality, LLC v. New Castle County, (Del. Super., April 26, 2007) read opinion here.

This case involved a lengthy dispute over the construction of a hotel in Wilmington for which a Certificate of Occupancy was denied due to the failure to comply with the requirements and the conditions on which a building permit was issued. The hotel building was 99% finished but has been unoccupied for many years due to this dispute. This case is a small part of a multifaceted litigation strategy that has been transpiring over many years, including the bankruptcy of the entity that was formed to construct the hotel.

This opinion was based on a Motion for Summary Judgment and a Motion to Exclude Experts. The Motion for Summary Judgment was based on the claim made pursuant to Section 1983 of Title 42 of the United States Code regarding deprivation of property without equal protection, asserting that the developer had been treated differently from others similarly situated in New Castle County. The court concluded that there were too many factual issues to decide that motion. However, the court described in detail the prerequisites in order to establish such a claim and the factual matters that needed to be more thoroughly developed at trial. 

Regarding the Motion to Exclude Expert Testimony based on a claim that the expert relied on reports not conducted by himself, the court determined that a Daubert hearing was required to determine whether experts in the field reasonably rely on such appraisals that were not conducted personally by the expert accountant that was being proffered.

 

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Daystar Sills, Inc. v. Anchor Investments, Inc. ,(Del. Super., April 12, 2007), read opinion here.

This case involved a mechanics’ lien claim based on Chapter 27 of Title 25 of the Delaware Code. The defendant filed a Motion to Dismiss claiming that the owners of the property were not mentioned in the Statement of Claim in violation of Section 2712(b)(2) and that the contractor failed to segregate his claim in accordance with Section 2713 of Title 25 of the Delaware Code. The Motion to Dismiss was also based on the statute of limitations.  Namely, the argument was that the mechanics' lien was not filed within 180 days of the date when the contractor submitted his final invoice to the owner or reputed owner. Apparently the contractor was ejected from the job site due to alleged failure to comply with a material timetable and pursuant to the AIA Document A201-1997 that was used. An issue arose about whether a final bill could have been submitted if the contractor was ejected from the job site. The contractor relied on Section 3507(c) of Title 6 of the Delaware Code which entitles a contractor to submit a final invoice when the agreed upon work is fully completed. At the Motion to Dismiss stage, the court determined there were too many factual issues to grant a Motion to Dismiss, especially when the motion was converted to a Motion for Summary Judgment in light of the court being asked to consider matters outside of the pleadings. 

In addition, there was a claim for quantum meruit which the owner sought to dismiss based on the fact that there was an existing contract. The general rule is that when a relationship is governed by an express contract, quantum meruit claims are barred, however, there is an exception which applies where, for example, provisions of the contract relating the change orders have been waived by the parties such as through course or performance. (See footnotes 18 and 19.) See also footnote 23 for the elements of quantum meruit. The court also noted that quantum meruit might be pursued against the  owners of various condominiums that were the subject of the construction dispute. Lastly, the court determined that the waiver of liens did not apply to either the common areas or to the new owners of the condominiums that were the subject of the construction project.

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Electronic Discovery in the U.S. District Court for the District of Delaware is addressed in the Default Standards for Discovery of Electronically Stored Information. These Default Standards were promulgated by Chief Judge Sue Robinson several years ago and very recently they were updated to reflect the recent amendments to the Federal Rules of Civil Procedure regarding e-discovery.

 Here is an article published this week in The Delaware Law Weekly that Kevin Brady and I co-authored to explain the recent updates to the Default Standards. Kevin was a member of the committee that formulated the original Default Standards several years ago, as well as the committee that most recently updated them.

 Parentheticaly, the Delaware Court of Chancery, at this time, has not amended its rules to specifically address e-discovery issues. Nor does the Delaware Superior Court  have specific rules analogous to the Default Standards at this time, though a committee of that court is studying the issue.

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Kevin LaCroix of The D & O Diary  here pens a thoughtful post, with a link to the recent appellate opinion giving Richard Grasso, the former NYSE head, some hope in the battle to keep his compensation package of almost $190 million that was challenged by former NY Attorney General and now NY Governor Spitzer. Many links are provided to the lower court opinion and other helpful sources. Notable also is a link to a prior post  and other sources about the astronomical amount of legal fees incurred so far. Humorously, a link to  and quote from the Dickens' novel Bleak House gives perspective.

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As reported earlier here, the well-known attorney Willie Gary had requested fees of over $100 million as sanctions against Motorola for their alleged violation of a sequestration order that allegedly was the cause of a mistrial. Recently, a Florida judge awarded him $22.9 million, as reported here by The Wall Street Journal Law Blog. Someone calculated that amount to be over $2,000 per hour based on the fee request. Of course, Motorola is appealing. (The initial link in this blog post includes citations to recent Delaware Chancery Court and Delaware Supreme Court decisions that I prevailed in on behalf of Willie Gary's  business interests.)

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This post has relevance to this blog because it is based on a post from a nationally prominent corporate law professor and it is about a topic so fundamental that it should be of interest to most readers. So, here is a quote, via Professor Bainbridge, with several insights by the scholarly law professor Rick Garnett, regarding this week's U.S. Supreme Court decision, with reference to anti-Catholicism as the "last acceptable prejudice":

A chill wind from Rome . . ."

. . . is what a number of bloggers and commentators perceive in the partial-birth-abortion decision.  I suppose I should not be surprised by this line, but -- I admit -- I'm disappointed.  And then there's this, from the Philadelphia Inquirer (which characterizes as "activist" a decision that declines to invalidate a measure which has always enjoyed broad and bipartisan support or to read broadly a precedent which invalidated an earlier law which also enjoyed broad and bipartisan support):

My point here is not to vent about the "last acceptable prejudice" .  What's irritating, to me, as a lawyer, about the cartoon is the claim that it is as Catholics -- i.e., because they are Catholics, and not because they think, as intelligent and engaged lawyers, that the Constitution does not disable legislatures entirely from regulating what most people (not just Catholics, fideists, and sexists) regard as a particularly gruesome abortion procedure  -- that the five Justices who voted to uphold the ban.

Not only that . . .

More striking, and sad, for me, is what the cartoon suggests, and reveals, about the state and future of debate about moral questions.  Look at the faces of the dissenting Justices -- quizzical, sad, bewildered, as if to say, "what are these guys talking about?" -- while the majority are smug and complacent.  And why shouldn't they be?  They didn't have to think or reason; only to put on their mitres!

It is, increasingly, thought to be enough to discredit an argument or position -- any argument or position -- merely to note that the person who makes it is a religious believer, and to write off any moral argument with which one disagrees as "religious."  (This practice, of course, does not run both ways:  arguments against torture, the death penalty, race discrimination, and income inequality are "secular"; arguments against partial-birth abortion or the creation of embryos for research are "religious.")  It appears, increasingly, that arguments whose trajectory is not in line with the standard liberal / autonomy / choice line are not only rejected, but declared not to be permissible arguments. 

And now, apparently, even words whose use suggests the embrace of certain premises are out of bounds.  In Justice Ginsburg's dissent, she took the time to complain that there was something improper, and threatening, about the majority's use of words like "abortion doctor" and "unborn child"; but, of course, the use of these words represents an argument.  To rule out the words is to rule out, as illegitimate, the argument they reflect.

I have long understood that many (most, probably) of my friends -- decent, intelligent, thoughtful people -- disagree with me about abortion (and constitutional law).  This is true, I understand, of many of my co-bloggers and Prawfsblawg readers.   I don't think, though -- at least, I try hard not to think -- that their disagreement is merely a product of their funny-hat choice.

Here is more.

Continue Reading...

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Courtesy of The Wall Street Journal Law Blog, here is a story about a lawyer who is seeking fees of $11,000 per hour in connection with a mistrial apparently resulting from (or related to) the violation of a sequestration order imposed on witnesses. Relevance to this blog: While we often write here about Chancery Court cases that deal with applications for attorneys fees in class actions or derivative cases, the real reason I include this story, (apart from its entertainment value on a topic that interests all lawyers and their clients), is that the lawyer involved, Willie Gary,  is someone I handled expedited business litigation for last year, which resulted in a reported decision by both the Chancery Court and the Delaware Supreme Court, as summarized here,  in Willie Gary, LLC v. James & Jackson, LLC. (As an aside, I admit that it was fun to meet on his private jet --photos linked in the WSJ  Blog story above--when he flew into Wilmington).

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For those litigators interested in the latest e-discovery  developments (which should be all litigators), I recommend the article appearing today on the E-Discovery Law Blog here about an imbroglio playing out in San Francisco federal court involving the Oracle Corp. securities class action. E-discovery of audio data (think: voicemails) are at the cutting edge of discovery that all good lawyers should learn about.

The dispute involves relevant audio files that appear to have vanished. One of the issues is whether a party to a suit has an obligation to alert non-parties to save evidence. See In re Oracle Securities Litigation, No. C01-988MJJ.  See generally,  In re Oracle Derivative Litigation, 867 A.2d 904 (Del. Ch. 2004).

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Courtesy of the Electronic Discovery Law Blog, is the report of a recent federal court decision that imposed the penalty of an adverse inference instruction against a plaintiff in an employment discrimination case who disposed of her computer that "crashed" , after the case started, even though it had relevant information, and without trying to recover the data.

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The always erudite Steve Jakubowski provides commentary here  on his Bankruptcy Litigation Blog about a recent decision by Judge Scheindlin (of e-discovery fame), regarding her decision to dissolve a stay pending appeal of a plan confirmation in connection with the Adelphia bankruptcy case. It is a useful lesson on several aspects of litigation, including why one should not seek  a stay and/or an appeal if one is not prepared to post the necessary bond.

Here is an excerpt from his post--and from the court's decision:

Judge Scheindlin realized, as she put it, that the bondholders "used the Court to obtain bargaining leverage to extract a better deal for their client with no intention of ever posting a reasonable bond."  "[Their] inconsistent positions," she found, "have had an impact on judicial integrity and have prejudiced Appellees."  "Such behavior," she observed, "is cynical at best and unprincipled at worst."  ACC Bondholder Group v. Adelphia Comm. Corp. (In re Adelphia Comm. Corp.), 07-1172 (S.D.N.Y. 4/2/2007) (pdf at p.14 n.33).

As an aside, Steve's blog is a standard by which other lawyers should measure their blogs. Also, notable is the eulogy about his mother that he posted about here last year, which was one of the most moving and inspirational writings I have ever read. Although it was especially touching for me since it followed my own saintly mother's passing (which I still mourn), I am willing to bet that it will also be an emotional tear-jerker for most thoughtful and sensitive people. I highly recommend it for motivational reading.

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Courtesy of The Wall Street Journal Law Blog is a commentary on the U.S. Supreme Court's decision very recently in Massachusetts v. EPA. In particular the linked blog post quotes Justice Breyer as saying recently that he thought that Justice Scalia was the best writer on the court. As if to provide an example, the WSJ Blog gives us an excerpt from the above decision in what has been referred to as the "flatulence footnote". It is worth a read.

As an aside, these 5-4 decisions from the High Court remind me that if the brightest legal minds in the country cannot agree on the interpretation of a particular statute, and the dissenters write that the majority's view "defies common sense", it gives comfort to mere mortals who might have a reasonable disagreement about legal anlaysis on a particular issue.

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Levy v. Sterling Holding Company LLC, (D.Del., Feb. 23, 2007), read opinion here.  In this decision of the United States District Court for the District of Delaware, the court agreed with the Securities and Exchange Commission that the stock conversion completed as part of a spin off of Fairchild Semiconductor Corp. was not an illegal short-swing trading under federal securities laws.  The court granted summary judgment to National Semiconductor Corp. and Sterling Holding Corp. and dismissed the shareholders suit.

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Courtesy of  The Wall Street Journal Law Blog is a story about the reversal by an appellate court in Florida of a  2005 jury verdict of over $1 billion in damages against Morgan Stanley in connection with its "supporting role" in the purchase of a company. However, most commentators agree that the award, which included punitive damages, was largely a result of the bungling of the electronic discovery issues which resulted in adverse rulings and instructions to the jury that made it almost impossible to avoid a verdict against Morgan Stanley. In several seminars I have given on electronic discovery, I have used the trial court result in this case as a cautionary tale that is a great example of the need for lawyers and clients to have a firm grasp of the electronic discovery aspects of a case.

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A judge in Los Angeles recently denied summary judgment to the American Academy of Motion Picture Arts and Sciences,  in a suit against RAI, the Italian television network, and EchoStar, the satellite company that carries the station in the US, regarding their use of the famous Hollywood "Oscar"  movie award name without permission, as reported here.  It appears that the court was pursuaded by the fact that in Italy, according to the Italian language experts presented, the word "Oscar" is used generically  in Italy to refer to any big award for excellence.

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

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

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

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

In the case of In Re American Pad & Paper Co., -- F.3d. --, 2007 WL 624346, (3rd. Cir. 2007), the court applied strict construction principles in connection with the applicable statute for bringing avoidance (or preference) actions under Section 546(a). Read full opinion here. This is the key quote:

 The fact that appellant's claims, as the section 702 trustee, were already time-barred at the moment of his election in February 2002 does not make the application of the statute as written absurd. “[W]e do not sit to assess the relative merits of different approaches to various bankruptcy problems. It suffices that the natural reading of the text produces the result we announce. Achieving a better policy outcome-if what [appellant] urges is that-is a task for Congress, not the courts.” Hartford Underwriters Ins. Co., 530 U.S. at 13-14.

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

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

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

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

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

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

 

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Courtesy of Prof. Bainbridge's blog, here is commentary on the recent  Redwood  decision by U.S. 7th Circuit Court of Appeals Judge Frank Easterbrook, regarding deposition practice that His Honor found contemptible enough to state that it would have been acceptable for the party who was the subject of abuse to walk out. This is an important observation in my view, because the rules in Delaware, based on the Federal Rules of Civil Procedure, prohibit one from instructing a client not to answer a question except for very limited reasons, such as privilege, and the only other option is to stop the deposition to file a Motion for Protective Order. This case is a concrete example of the need to avoid letting the emotions of clients control the lawyers, as opposed to the following the decorum prescribed by the rules, in a deposition.

It is not always easy to draw the line between what has become part of  the "rough and tumble" of a deposition, as opposed to what abusive behavior rises to the level that justifies someone walking out of the deposition. Now, Judge Easterbrook has given us a concrete example to help business litigators answer that question. We have written before on this blog about litigation practice, and notably Judge Easterbrook refers in his opinion to the high (low?) watermark in deposition practice as discussed by the Delaware Supreme Court in Paramount Communications Inc. v. QVC Network Inc., 637 A.2d 34, 52-57 (Del. 1994). The Redwood decision linked about is useful reading for every litigator that takes or defends depositions.

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In Happ v. Corning, Inc., the U.S. Court of the Appeals for the First Circuit, read opinion here, recently applied Delaware law and interpreted DGCL Section 145, (Section 145 of the Delaware General Corporation Law found in Title 8 of the Delaware Code), to support the summary judgment finding that a director of a company was required to pay back the almost $1 million in legal fees that his company advanced in connection with a civil suit by the SEC. That suit resulted in a verdict that he engaged in insider trading (in the amount of about $40,000.) The director argued that the "undertaking" to pay back the advanced fees demanded by the company as a condition of advancement was signed "under duress" and that it went beyond the undertaking requirement of Section 145. The  U.S. Court of Appeals for the First Circuit, applying Delaware law, disagreed with the argument.  The court reasoned that even if the exact language of 145 was used, it is doubtful that the judgment of insider trading could be consistent with either the "good faith" and/or the "best interests of the company" provisions of 145. Compare generally, DGCL Section 102(b)(7) which allows a provision in a certificate of incorporation that prohibits recovery of monetary damages from directors for a shareholder claim that is exclusively based on a violation of the duty of care. It is in the nature of an affirmative defense and it is the burden of the directors to demonstrate that they are entitled to such a charter provision. It does not, however, prevent injunctive relief from being awarded. See, Malpiede, 780 A.2d at 1095; see generally, In re Walt Disney Company Derivative Litigation, 907 A.2d. 693 (Del. Ch. 2005).

This Happ case involves the less than common situation where there is a  court opinion finding that a company's advancement must be paid back. Most of the case law in Delaware recently on this topic is a clarification of the company's obligation to make the advancement, where applicable. This is a good example of why a party needs advancement, as most people cannot wait until the case is over to finance almost $1 million in legal fees, and then wait for post-trial indemnification (if warranted). It is not clear whether the officer in this case has the wherewithal to make the repayment, however, which highlights the company's conundrum. The Court of Appeals reasoned that the director should have filed a declaratory judgment action if he thought the undertaking was made under duress and/or was beyond that required by Section 145.  ( I will not give in to the temptation to describe the unsuccessful plaintiff in this case as hapless.)

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Courtesy of The Wall Street Journal's Law Blog is a list of the business law cases now pending before the U.S. Supreme Court. Here is the link.

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In Johnson v. Kraft Foods, the U.S. District Court for the District of Kansas recently determined that a request for production of "electronic databases" was not too vague. Courtesy of the Electronic Discovery Law Blog, which also has a link to the full decision, the court reasoned in support of granting a motion to compel e-discovery,  that the requesting party defined the terms, and also noted that definitions were also available from a glossary provided by the Sedona Conference, a working group analogous to a think-tank that has produced much scholary and  forward-thinking work on many aspects of e-discovery. A link to their glossary of terms is also available at the above blog post.

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As I am "current" on my summaries of business law opinions issued by the Delaware Chancery Court and Delaware Supreme Court (the 2 courts whose key corporate and commercial opinions I primarily summarize on this blog, as soon as I can after they are published), I will very briefly summarize,  during this Sunday afternoon break from my preparation for a TRO, a decision from the Delaware Superior Court and one from the Bankruptcy Court for the District of Delaware that should be of interest to those who read this blog for business litigation cases.

In the case of In Re: Alterra Heathcare Corp., (Bankr., D. Del., Oct. 16, 2006), read opinion here , Chief Judge Walrath addressed the issue of what documents can remain under seal when filed with the court. Relying on section 107(a) of the Bankruptcy Code, she ordered documents previously filed under seal to be made public, and discussed the policy reasons, and legal authorities, that supported her decision not to keep private the terms of settlements made in connection with a plan of reorganization. By comparison, see the link here for my blog summary of a Delaware Chancery Court decision from last year addressing a similar issue in the context of a case under DGCL Section 220.( Astute readers may notice that the Chancery Court opinion linked above involved the same parties for which the Delaware Supreme Court recently issued the much-heralded opinion sounding the death knell for a separate, stand-alone duty of good faith in the context of a director's fiduciary duty. See my blog post on Stone v. Ritter, here.)

 In Hettinger v. Board of Trustees of the Delaware Technical and Community College, (Del. Super., Sept. 27, 2006), read opinion here, the Delaware Superior Court summarizes the policy rationale behind the "workplace compromise" that allows employees to make claims against employers within a confined and structured system called "workers compensation" (instead of a regular tort claim),  as opposed to the Dickensian system prevalent for centuries that in most cases prevented an employee injured on the job from collecting any money from his or her employer for that injury. This case involved an employee who was injured while she was walking back to her office at the end of the day after a nearby meeting. The court discusses those instances where it is not always clear if the injury occurred "in the course of employment".

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Shamrock Holdings v. Arenson, 2006 WL 280293 (D.Del., Sept. 29, 2006), read opinion here. Relying on Chancery Court and Delaware Supreme Court precedent, the U.S. District Court for the District of Delaware discussed the distinction between a direct and a derivative claim and particularly the unjust enrichment exception to the analysis described in Tooley v. Donaldson Lufkin & Jenrette, Inc., 845 A.2d 1031,1039 (Del. 2004).  See In Re Cencom Cable Income Partners, 2000 WL 130629 at *5 (Del. Ch., Jan. 27, 2000). (Delaware Court of Chancery held that “the potential inclusion of culpable parties in the class due relief may affect the distinction between the derivative and direct claims.”) See generally DGCL Section 141(a).

In Cencom, then-Vice Chancellor, and now Chief Justice, Steele reasoned that when all the non-defendants constituted the complaining partners, and all the defendants constituted the only remaining partners of the entity, there was no policy reason to require derivative pleading. Id. at *3. He also recognized the need for flexibility when applying corporate precedents to alternative entities. Id. at *2.

 In the Shamrock case, Chief Judge Robinson, cited Cencom, supra, and the recent Delaware Supreme Court decision in Gentile v. Rossette, 2006 WL 2388934 at *1 (Del., Aug. 17, 2006), to conclude that a direct claim could be pursued against the parties who participated in the sale of operating units of the LLC involved.

The Court observed that the LLC at issue had effectively been dissolved. The court also appeared persuaded by the argument that the majority members of the LLC who would be among the beneficiaries of a derivative action would “be unjustly enriched” from any derivative action recovery.  The Court quoted Cencom, supra, as follows “superimposing derivative pleading requirements upon the claims will needlessly delay ultimate substantive resolution and serve no useful or meaningful public policy purpose. Cencom at *3.”

 

The Court  rejected the argument that an exculpation provision in the LLC agreement that did not protect from liability acts done in bad faith could also be used as a basis for a breach of contract claim due to alleged acts of bad faith.

 

 

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In Wyeth v. Impax Labs., Inc., 2006 WL 3091331 (D. Del. Oct. 26, 2006) , the U.S. District Court for the District of Delaware denied a request that a party produce metadata with the original format of data, relying on the court's Default Standards which describe a TIFF image as sufficient. Hat tip to the Electronic Discovery Law Blog which provides a fuller summary of the case and a link to the whole decision, here: Relying on Delaware's Default Standards, Court Holds Production in Native Format with Metadata Not Required : Electronic Discovery Law

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In Huber v. Taylor, (U.S. Ct. App., 3rd Cir., Oct. 31, 2006), read opinion here, the U.S. Court of Appeals for the Third Circuit defines the duty of loyalty that all lawyers, even co-counsel (and local counsel)  from different firms, owe to clients. In startling brusque language, the court describes the burdens of that elevated standard of conduct as the cost of doing business for a lawyer. This is a small sample quote:

 "We are embarrassed to have to explain a matter so elementary to the legal profession that it speaks for itself: All attorneys in a co-counsel relationship individually owe each and every client the duty of loyalty. For it to be otherwise is inconceivable."

The blog called Point of Law has more commentary on the case. Here is the link: PointofLaw.com | PointOfLaw Forum: "3rd Circuit Revives Case Against Asbestos Class Action Lawyers"

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In the case of In re Quintus Corp., 2006 WL 3072982 (Bankr. D. Del. Oct. 27, 2006) , the Bankruptcy Court for the District of Delaware imposed a penalty of summary judgment on a party that the court found intentionally deleted documents, including electronic data, that would have been harmful to its case. The Electronic Discovery Law Blog has a more complete summary and access to the whole case. Here is the link: $1.888 Million Judgment Entered in Favor of Bankruptcy Trustee Based on Adverse Party's Spoliation of Financial Records : Electronic Discovery Law

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A link to the 73-page Grasso decision yesterday in New York is provided by The CorporateCounsel.net Blog. In the summary judgment decision the court found a violation of the duty of due care. Here is the link to the blog: TheCorporateCounsel.net Blog. For Prof. Ribstein's initial view of the decision, see here.

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In  Commonwealth Construction Co. v. Cornerstone Fellowship Baptist Church, Inc., (Del. Super., Oct. 3, 2006), read opinion here, the Superior Court addressed core construction law issues. Every contractor should read this decision that contains extensive analysis of key provisions of a commonly used AIA Agreement.  In the decision, the court determined that the owner waived its right to sue for failing to give the proper notice pursuant to the terms of the Agreement.  Moreover, the court found that the contractor was within its rights to file a mechanics lien, as well as a breach of contract claim (as part of the same lawsuit) because the contractor did follow the procedures set forth in the Agreement.  Although the court’s decision is 44 pages long, and space does not permit me to include all of the extensive details in this short summary, I will try to highlight what I view as some of the key aspects of the decision. 

The court addressed issues arising out of a 1997 version of the Standard Form of Agreement Between Owner and Contractor (“Agreement”) (A101) promulgated by the American Institute of Architects (“AIA”).  Also included in the court’s decision was a discussion of the General Conditions of the Contract, AIA document A201-1997.  Of course, the contract documents included drawings, specifications and other modifications or amendments.  The court gave an extensive analysis of Change Orders (“CO”) which of course initially began as Change Order Proposals (“COP”).  The court noted that the Agreement required that Change Order Proposals were initiated by the contractor by sending a Request For Information (“RFI”) to the design professional, who in this case was a P.E.  The RFI was submitted when the contractor thought that the drawings or the intent of the design were not clear, or where changes to the design were necessary during actual construction.  When the contractor received a response to the RFI that required a change to the scope of work, the contractor drafted a COP which was sent to the design professional for review.  Once the owner approved the COP it became a final Change Order, which would formally modify the Agreement. 

 

            The total contract price involved was approximately $2.3 million and the court observed that there were a total of 181 RFI’s; 155 COP’s which resulted in 119 CO’s.  One witness testified at trial that a project of similar size would generally have only approximately 60 RFI’s; 50 COP’s and perhaps 20 CO’s.

 

            The key procedures required under the Agreement regarding disputes began with Section 4.4.1 of the General Conditions which required that any claims arising under the Agreement should be submitted first to the architect.  The court noted that even though the architect was considered the representative of the owner, there were safeguards in Section 4.2.12 against abuse by the architect.  Section 4.4.1 also provided that an initial decision by the architect was required as a condition precedent to mediation, arbitration or litigation of any claims between the contractor and the owner arising prior to the date final payment was due.  Although the contractor submitted several claims for non-payment, the court noted the special treatment given to mechanics’ liens under Section 4.4.8 which allowed a party to file a mechanics’ lien prior to the resolution of any claims by the architect.

 

            The court noted that Section 9.7.1 allowed the contractor to stop work when it was not being paid if certain provisions were met.  Section 2.2.1 also allowed the contractor to stop work if the owner did not provide reasonable evidence of financial ability to make future payments under the Agreement.  This was key here because the contractor heard that the owner was having financial trouble and the owner was not reassuring.

           

            The court summarized the key requirements under the mechanics’ lien law pursuant to 25 Del. C. Section 2712(b).  The court cited other decisions that recognized some flexibility in the requirements by noting that even though the statute is strictly construed, the court will not “unreasonably interpret” the statute if it was substantially complied with when suit was filed.  (However, in my view, one would not be well-served to rely too heavily on a broad application of that comment.)  The court observed that demolition work is usually not with the scope of a mechanics’ lien, and there also were issues about the proper commencement date for the work, which is a trigger for the timetable when a lien must be filed.  The owner waived these defenses, however, due to the failure of the owner to raise those issues until after the non-jury trial.

 

            One of the most noteworthy aspects of this decision is that the court construed the failure to first submit a claim to the architect pursuant to Section 4.4.1 of the AIA Agreement to be a material breach of the Agreement that, therefore, barred the party failing to comply with that provision from pursuing any remedies in a lawsuit.

 

            The court recited the basic principle of contract law which is that in order for a party to seek damages for breach of contract, that party must first establish its own substantial compliance with the contract.  This is unlike a small or minor breach.  If a breach is material, however, it will excuse a non-breaching party from performance.

 

            There are many more facts and details in the lengthy decision by the court, but in this very small space available I have summarized the key aspects which should be remembered by any contractor who wants to be prepared to collect on a job where it is not paid by the owner.

 

 

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In Premier Parks, Inc. v. TIG Insurance Co., read opinion here, the Delaware Superior Court addressed cross-motions for summary judgment on counterclaims.  The initial claim was a declaratory judgment action by the insurance company to seek a ruling that it was only liable to pay an allocated share of a global settlement entered into by Six Flags Inc. (formerly known as Premier Parks Inc.) in connection with a class action civil rights lawsuit.  Based on a choice of law provision, the court applied the substantive law of Oklahoma, but the procedural law of Delaware. 

 The court found based on Oklahoma law that it was the duty of the insurer to notify its insured regarding the importance of apportioning a settlement.  In this case, the court observed that the insurance company was aware of the negotiations leading to the settlement and was kept updated so that the detrimental reliance of the insured on the silence of the insurer warranted the shifting of the burden from the insured to the insurer to prove an allocation of responsibility for purposes of determining the liability among several parties of a settlement amount. Several key factors were highlighted by the Court:  (1) TIG was aware of the very serious potential damages that could have been suffered by Six Flags if the class action went to trial but despite this, TIG only approved a firm that had little or no experience in class action work and was not even reliable in terms of serving as local counsel. (2) Although TIG was kept informed of the ongoing negotiations and the choice of more experienced counsel, they were either not responsive to requests for their involvement or to the extent that they did respond, they were simply not helpful and did not provide Six Flags with the type of legal defense that it needed to address the serious nature of the pending lawsuit against it. 

Based on Oklahoma law, the Court determined that TIG was equitably estopped from denying Six Flags recovery simply because the settlement failed to apportion between covered and noncovered claims.

In sum, the court found that TIG was estopped from denying Six Flags coverage for the full amount of the settlement and because TIG could not meet their burden of allocating the settlement between covered and noncovered claims, they would be responsible for the total amount of the negotiated settlement.  Six Flags had asked TIG for approval of a settlement amount but the response from TIG was in essence, unreasonable.

The court also required TIG to pay all of the attorneys’ fees incurred by Six Flags and that they would be estopped from asserting any defenses under their “reservation of rights letter” because of the “course of dealing” that had been engaged in for many years between Six Flags and the claims administrator for TIG which regardless of the terms of the policy gave much leeway to Six Flags in choosing counsel especially in large, high value, high exposure cases.  The Court relied on Oklahoma cases that allowed estoppel to prevent enforcement of contractual provisions where there had been a contrary course of dealing (citation omitted).

Despite that “historical” course of dealing which always resulted in consent to Six Flags’ prior choice of counsel and prompt response to inquiries, it was not until more than eight months after the request in this case that TIG responded to the efforts of Six Flags to seek approval for the choice of a large law firm in this matter, and then after that period of eight months they belated said that they would not cover the bills for that law firm.

 The court reasoned that when an insured is a defendant in high stakes litigation and requests specialized counsel, an insurer has the duty to respond in a timely manner and that waiting eight months for a reply was not reasonable.  Moreover, Six Flags was entitled to rely on prior course of dealings in which TIG approved its choice of counsel in high stakes litigation.  The court also noted that the only firm that TIG did approve for this matter was not qualified for the type of case involved and was not even able to serve in a minimal local counsel role. 

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In Sanders v. Cseh, et al., (Del. Super., Sept. 22, 2006), read opinion here, the Delaware Superior Court addressed the standard under Rule 60(b) that needs to be satisfied before a default judgment will be vacated due to "excusable neglect" or related reasons under the rule. The court had no sympathy for the insurance company that missed the deadline by more than 18 months, for an answer to be filed.

This is a useful case to have in the toolbox of a business litigator. Hopefully it would only be needed in order to defend a Rule 60(b) motion instead of filing one.

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This blog focuses on business litigation cases primarily from the Delaware Chancery  Court and Delaware Supreme Court (and my summaries of those cases are fairly up to date), but once in a while I feel compelled to take note of decisions around the country that might be of interest generally to lawyers who handle business litigation cases and their clients. Courtesy of California Employment Lawyer Stephen Hogie, comes a discussion (with links to cases) of the "ministerial exception" which is often used by courts to defer to religious institutions in matters of their internal affairs. For example, he refers to the case of a novice who was preparing to become a nun, but was dismissed from the program--apparently around the time she found out that she had breast cancer. The court did not want to get into the business of second-guessing religious orders when they determine who should or should not become nun, but of course the dividing line for what is a matter of decisionmaking based on the religous beliefs of a particular minister or religion, and what might be an unfair employment practice, is not always clear. Here is the link to the story and the related cases: blog.myspace.com/calif_employee_lawyer

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On Prof. Larry Ribstein's Ideoblog recently, he linked to a comment by Timothy Glynn about the internal affairs doctrine. Here is the link: Ideoblog.

 Larry has written extensively on the topic and has a new article on point in the works. They both refer to the very recent denial by the U.S. Supreme Court of cert to review a California case dealing with whether the internal affairs doctrine applies or whether California blue sky law applies to a dispute involving insiders of a Delaware corporation based in California. The latest pronouncement in Delaware on this issue was the 2005 decision of the Chancery Court, as affirmed by the  Delaware Supreme Court in a case called  Examen, Inc. v. VantagePoint Venture  Partners, summarized  here on this blog.

Also referenced by Glynn is a separate California case on the issue that is now on review by the California Supreme Court. See Glynn's post here: Concurring Opinions.

Last year, Craig Williams posted on his blog called May It Please the Court  about a California case that did follow Delaware's view of the internal affairs doctrine. Here is the link: MayItPleaseTheCourt .

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In Daystar Construction Management, Inc. v. Mitchell v. Crystal Concrete, Inc., et al., read opinion here, a 33 page decision after a non-jury trial, the Delaware Superior Court addressed various issues involving a long-term business relationship gone sour.  This aspect of the dispute involved an effort to enforce rights under a loan guarantee.  One of the more notable aspects of the opinion is that the court determined that the implied duty of good faith and fair dealing could be used as a defense to a contract claim. 

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In Lundeen v. Pricewaterhousecoopers, LLC, read opinion  here , the Delaware Superior Court found a failure to establish  negligent representation by an accounting firm in connection with the sale of a business, and therefore granted summary judgment.  The court reasoned that there must be proof that false data was both provided and that it was material, in order to succeed on a claim for negligent misrepresentation.  The court ruled that neither of those requirements were satisfied here. Moreover, the court did not view the evidence as supporting a claim that the financial statements at issue were materially misrepresented.

UPDATE: The Delaware Supreme Court affirmed  this decision in an Order here. The High Court also upheld the trial court's decision to exclude an expert report that was offered about 6 months late, as well as excluding expert deposition testimony that exceeded the scope of  the expert's report. Reminder: If the opposing side tries to introduce an expert report late, cite the foregoing case. See also related case: Coleman v. PricewaterhouseCoopers, LLC, 902 A.2d 1102 (Del. 2006).

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The Electronic Discovery Blog posts about a recent federal decision that imposed penalties on a party for failure to reasonably investigate the location of electronic data and other discovery deficiencies. Here is the link: Failure to Conduct Reasonable Investigation for Responsive Documents and Other Discovery Abuses Warrant Adverse Inference Instruction : Electronic Discovery Law

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In American Trucking Association, Inc. v. Delaware River Joint Toll Bridge Commission,  read opinion here, the U.S. Court of Appeals for the Third Circuit last month upheld the decision of the trial court which rejected the claims of various trucking companies that were challenging the increase in tolls on certain bridges that traverse the Delaware River between the states of New Jersey and Pennsylvania. The appeals court applied the U.S. Supreme Court cases that determine when a particular statute allows for a private cause of action (which differs in small but important ways from the issue of standing). The court engaged in extensive review of legislative history and had this gem of an insight: The comments of one legislator on the floor of Congress do not necessarily represent the intent of  both houses of the entire legislative body on a particular statute.   Here  is an article that discusses the case.

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The Electronic Discovery Law Blog posts about a decision this month from the Southern District of New York which refused to shift the cost of restoring emails that should have been preserved from the outset of the litigation. The case involves an analysis of the Zubulake factors, as well as discussion about the parameters of search terms requested. Here is the link to a copy of the full decision and insightful case commentary: Party Not Entitled to Shift Costs of Restoring Emails that were Converted to Inaccessible Format After Duty to Preserve was Triggered : Electronic Discovery Law

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The Trade Secrets Blog of the Womble firm posts about a Texas federal court decision that addresses the intersection of fiduciary duty and trade secret law in connection with departing employees. The decision found that fiduciary duties were breached when the employees were planning their departure prior to leaving and included revealing confidential data (trade secrets) to third parties. Here is the link: Trade Secrets Blog: Trade Secrets and Fiduciary Duties (Pacer Req'd)

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The Electronic Discovery Blog by the Preston Gates firm has a post today that informs of its searchable database that it has compiled of over 500 court decisions on various aspects of e-discovery. This is a very valuable resource for any litigator, and it's free. Here is the link. eDiscoverylaw.com's Searchable Case Database Now Contains Over 500 Cases, and Allows You to Search by Jurisdiction : Electronic Discovery Law

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Prof. Glenn Reynolds, famed author of the blog Instapundit.com, posts about a decision from Arizona that appears to have considered and granted a motion filed by one lawyer to have lunch with the opposing lawyer to discuss a pending case. Decide for yourself if it is real. One can see from the "opinion" (at the following link) why jurists might become weary of some issues they need to address. Here is the link: Instapundit.com -

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Monica Bay of the Common Scold blog posts about a recent decision on electronic discovery (EDD to some) in which the court imposed severe monetary penalties on a law firm that did not fulfill its duty to affirmatively locate sources of electronic data requested in discovery. A cautionary tale for all litigators. The case is Phoenix Four, Inc. v. Strategic Resources Corporation, 2006 WL 1409413 (S.D.N.Y.). Here is the link: The Common Scold: ANOTHER UNNERVING EDD RULING

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Prof. Bainbridge blogs about the recent decision of the Bankruptcy Court for the District of Delaware regarding the duties under Delaware law of directors of an insolvent susidiary. In re Scott Acquisition Corp., 2006 WL 1731277 (Bkrtcy. D.Del. 2006). Though he agrees with the result, the good professor cites Delaware Chancery Court decisions and his own prior articles on the topic to explain why the court should have framed the issue differently: "...the bankruptcy court should have concluded that the duties of direcors and officers of an insolvent subsidiary run to the creditors of the subsidiary." Here is the link to the thoughtful analysis with full citations: ProfessorBainbridge.com: Duties of Directors of an Insolvent Corporation

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Electronic discovery issues are of increasing importance and apply to all litigators as I have written about on this blog. From the E-Discovery Blog comes a report about an order granting a Motion to Compel along with fees awarded in excess of $70,000. Here is the link to the story and the actual order: Magistrate Awards Attorneys' Fees and Threatens Adverse Inference Jury Instruction to Force Defendants' Compliance with Outstanding Production Requests and Discovery Orders : Electronic Discovery Law

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A Delaware Chancery Court opinion was cited in a recent New York Supreme Court decision where a dissolution was denied to one of 3 members of a profitable LLC, based on the interpretation of a statute that is very similar to the Delaware LLC Act's provision for allowing an LLC member to petition the court for dissolution "...when it is not reasonably practicable to carry on the business in conformity with the operating agreement". The New York case is Horning v. Horning Construction LLC, download file.
The Delaware Chancery Court case cited was Haley v. Talcott, which was summarized on my blog here; and you can also download the opinion here. The Haley case interpreted Section 18-802 of the Delaware LLC Act which is similar to the New York statute interpreted by the Horning court. The Haley case however, only involved 2 members each of whom owned 50% of the LLC, which allowed the court to apply by analogy a Delaware joint venture statute that would not likely apply to a 3 member LLC.
The New York case cites to several articles and cases that collect sources on the history of the model LLC Act on which the Delaware and New York statutes are based. The NY court explains why it was intended to be harder to dissolve an LLC as opposed to a corporation, and ultimately, noting that there is no absolute right to dissolution.

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This is not new (i.e., it's a few months old), but upon coming across it again it is worth noting a post by Ian Best, a recent law school graduate, who compiled a list of court decisions, including one from the U.S. Supreme Court, that cite to blogs in their opinions--a clear sign that blogs are becoming part of the mainstream of legal literature. Here is the link:
3L Epiphany: Cases Citing Legal Blogs

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Those interested in business litigation should read my friend Steve Jakubowski's post on his Bankruptcy Litigation Blog about the issue of deepening insolvency in the aftermath of the recent Third Circuit decision in: CitX Corp., Inc. v. Detweiler, Hershey & Assocs., P.C., 2006 WL 1453117 (3d Cir. 5/26/06). Here is the link:
Bankruptcy Litigation Blog: More Questions from the 3rd Circuit's Recent "Deepening Insolvency" Decision

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The Wall Street Journal Blog reports on a recent decision by a U.S. District Court judge who ruled that prosecutors violated both the rights to due process and to a fair trial by "pointing a gun to the head" of KPMG in "strongly discouraging" KPMG to indemnify or otherwise pay for the legal bills of certain KPMG partners who were indicted in connection with a tax shelter matter. KPMG arguably had a duty to indemnify but they were concerned about retribution from the prosecutors. The 88-page opinion addresses the controversial U.S. Justice Department's Thompson Memo and related issues.
This issue is important in Delaware because the DGCL and many Delaware Chancery Court and Delaware Supreme Court cases make the statutory and/or contractual right to indemnification and advancement of legal fees almost a sacrosanct aspect of Delaware corporate law. See, e.g., recent Delaware Chancery Court decision summarized at this link.
If prosecutors by subtle, or not so subtle, threats of criminal prosecution against a whole company could nullify that key right of officers and directors then the benefit might be illusory when it is most needed. Here is the link to the WSJ Blog story and the full text of the court decision:
Law Blog: KPMG: Judge Finds Prosecutors Violated Defendants' Constitutional Rights

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The Newsletter of the Business and Corporate Litigation Committee of the American Bar Association's Business Law Section, for which I am the editor, just published its current issue. Here is the link.

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The U.S. Court of Appeals for the Third Circuit includes the State of Delaware in its territory, and a recent case involving the legal issues related to "deepening insolvency", based on state law, is the subject of a scholarly and insightful post by my friend Steve Jakubowski of the Bankruptcy Litigation Blog. Of course this topic is of importance to business litigation lawyers in Delaware. Here is the link:
Bankruptcy Litigation Blog: Deepening Insolvency: The Third Circuit Steps Back from the Breach

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A U.S. District Court has ruled that one who maintains a blog cannot be sued for libel based on an anonymous defamatory posting on his blog. Of course, this is good news for people like me who maintain a blog. (However, the focus of this blog--casenotes on decisions of the Delaware Chancery Court and Delaware Supreme Court--does not lend itself to many opportunities for defamation.)
The case, DiMeo v. Max, involved an ongoing series of rude, obnoxious and arguably defamatory postings about an unsuccessful party organized by the principal of a PR firm.
Judge Stewart Dalzell, in Philadelphia, determined that Congress enacted Section 230 of the Communications Decency Act for two reasons -- to "promote the free exchange of information and ideas over the Internet," and to "encourage service providers to self-regulate the dissemination of offensive material over their services." Dalzell concluded that the purpose of Section 230 was to provide immunity from libel suits for Internet providers -- including bloggers. The federal statute was in response to an earlier decision that found liability based on the ability of an Internet provider to select and edit which postings to publish. The CDA, however, "overrides the traditional treatment of publishers under statutory and common law."
Law.com provides the story at the following link:
Law.com - Libel Laws Don't Prevent Blog 'Mockery'

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Barrett, et al. v. Toroyan, download file , is an Appellate New York State Court decision applying Delaware law. My thanks to David J. Hoffman of New York City for referring this case to me for a short summary on my blog. The New York court, applying Delaware law, found that directors of corporate general partners can be personally liable for self-dealing transactions, even if there is a clause in the Limited Partnership Agreement allowing members to pursue competitive business interests. The court relied on several Delaware cases including the following: Continental Insurance Co. v. Rutledge, 750 A.2d 1219 (Del. 2000); Kahn v. Icahn, 1998 Del. Ch. LEXIS 223 (Del. Ch. 1998); Gotham Partners, LP v. Hallwood Realty Partners LP, 817 A.2d 160 (Del. 2002).

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By coincidence, a pair of recent decisions in unrelated cases from the Federal Court for the Southern District of New York highlight the increasing necessity for lawyers to be conversant with electronic discovery obligations. Because the Delaware Rules of Civil Procedure are based on the federal rules, decision applying the federal rules are persuasive even in state court in Delaware.
Treppel v. Biovail Corp., download file, 2006 WL 278170 (SDNY Feb. 6, 2006). In this defamation action, the defendants were ordered, in response to a Motion to Compel, to preserve both electronic and paper data, to answer questions about their electronic data management practices, and to produce all accessible and responsive data. Before filing the motion, the plaintiff's counsel sent defense counsel a proposed discovery preservation order including provisions for exchanging document retention policy information, identifying a deposition witness with computer system knowledge and preserving all electronic data. The proposed order also declared accessible data would be produced in its native format and inaccessible data would be identified but not immediately produced. Defense counsel opposed the order but the trial court agreed with counsel for plaintiff. Although the court did not impose the preservation order, it ordered the defendants to answer the electronic data management questions as if they were interrogatories and ordered the defendants to search for relevant data and provide the plaintiff with a detailed explanation of the search protocol. The court also found that native production format was appropriate as the defendant failed to offer a substantive basis for a objection to the native format.
Gilliam v. Addicts Rehab. Ctr. Funds, Inc., download file, 2006 WL 228874 (SDNY, Jan. 26, 2006). In this class action lawsuit, the court ordered the defendants to produce to plaintiffs time keeping payroll records, as well as policies and procedures. Defendants failed to produce data contained on 148 compact disks, claiming that it would reveal private employee data and stated that instead they would produce paper records containing the relevant information. Noting that the paper records would comprise 46 boxes, the court declared that it would be more cost efficient to produce the disks for review more quickly and that plaintiffs could make duplicates of the computer disks more easily and inexpensively and they also could be reviewed in a way that would allow the reviewer to skip sensitive information that could be further protected by a confidentiality order.

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Although not a Delaware corporate law decision, I write about yesterday's decision by Judge Posner of the U.S. Court of Appeals for the 7th Circuit due to its wide-ranging applicability that might apply to a dispute in Delaware some day. As reported in the blog of Michael Fox at this link: http://employerslawyer.blogspot.com/2006/04/words-of-gospel-set-to-messiah-or-to-3.html, the court applied a rule that bars a court from determining issues of internal doctrinal disputes within a given religion--preventing it from opining on the age-discrimination claim of a church organist who was fired on the basis of a disagreement with the bishop about the selection of the types of music to be played. The court reviews the historical underpinnings of this "abstention" doctrine that distinguishes us from the courts of England, and along the way rejects the notion that the selection of music by an organist has no religous meaning. Here is the link to the article where I first saw the story.
Law.com - Inside Opinions: Legal Blogs

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The U.S. District Court of the District of Delaware denied a Motion to Dismiss and allowed a derivative claim to proceed after deciding that the pre-suit demand requirements of Rule 23.1 were met and reasoning that claims of fiduciary duty breaches under Delaware law and misleading proxy solicitation under Section 14(a) of the Securities Exchange Act of 1934 should not be dismissed. In the process, the court discussed the business judgment rule under Delaware law and held that the claims made raised questions about the good faith and honesty of the directors under Delaware law in connection with the proxy statements. The court also determined that the Section 14(a) claims should survive a Motion to Dismiss as they raised sufficient issues regarding the truthfulness of proxy statements related to the tax treatment of an executive compensation plan for Intel directors. Seinfeld v. Intel Corp., et al., download file. Even though I am local counsel for the prevailing plaintiff in the case, I still would have reported on this case. Here is an article that describes the case in more detail, download file.

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The latest post by Prof. Ribstein on the recent SCOTUS decision in Dabit
is an insightful analysis and has many useful references to background and related sources as well as his prior posts and the comments of others. Here is the link:
Ideoblog: More on Dabit and federalism

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Friend and fellow blogger Steve Jakubowski of The Bankruptcy Litigation Blog kindly comments on the Delaware Supreme Court decision I posted about (and won), but also, in his erudite and well-written manner, he writes about a recent Third Circuit decision that rendered void an arbitration decision. The debtor in bankruptcy commenced the arbitration, which the debtor lost in light of a counterclaim. Judge (now Justice) Alito reasoned that the automatic stay should have been lifted before the counterclaim was filed. Read the extensive analysis by Steve here.

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Who knows if any courts in Delaware will follow it, but a New Jersey appellate court, applying Delaware law, found that an attorney was entitled to indemnification by a corporation when acting as an agent of that corporation. Vergopia v. Shaker, download file.
UPDATE: A little more detail may put this case in context. The trial court denied indemnification and the appellate court granted indemnification based on a different reading of the same Delaware case: Fasciana v. Elec. Data Sys. Corp., 829 A.2d 160 (Del. Ch. 2003). In Fasciana, the Chancery Court read Section 145 as not endorsing indemnification of a lawyer whose client/corporation sued him for malpractice, but did allow indemnification to the limited extent that the lawyer was sued for misprepresentations to third parties. This last part of Fasciana was what the New Jersey appellate court relied upon because the New Jersey case involved a lawyer who was sued by an employee of the corporation who joined the lawyer in the suit against the corporation because he allegedly "commented on or played a role in preparing" a press release about the fired employee. The question is if a Delaware court would apply the reasoning of the New Jersey court based on the facts of that case.

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In In Re: Chi-Chi's, Inc., et al., a complaint was brought before the United States Bankruptcy Court for the District of Delaware by Sysco Corporation and the SYGMA Network (collectively, "Sysco") seeking to enjoin the Debtor Chi-Chi's, Inc. ("Chi-Chi's") from initiating, continuing, and/or participating in any additional actions, including arbitration, against them in connection with certain hepatitis claims. The Court ruled against Sysco, holding that Sysco had not met its burden of showing that Rule 41(a)(1) should be applied to bar Chi-Chi's arbitration claim, since this case involved separate real parties in interest, represented by separate counsel, prosecuting distinct causes of action.

According to Sysco, Chi-Chi's had already dismissed two actions, in violation of Rule 41(a)(1), commonly known as the two dismissal rule. Under this rule, a "notice of dismissal operates as an adjudication upon the merits when filed by a plaintiff who has once dismissed in any court of the United States or of any state an action based on or including the same claim." On November 12, 2004, Chi-Chi's voluntarily dismissed its action against Sysco (the "Chi-Chi's Action"). On December 7, 2004, Empire Indemnity Insurance Company ("Empire"), a liability insurer of Chi-Chi's, voluntarily dismissed its action against Sysco (the "Empire Action").

Continue Reading...

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In In Re: Ethel Marie Mintze, the United States Court of Appeals for the Third Circuit ruled on the issue of whether the Bankruptcy Court's decision to deny enforcement of an arbitration clause was proper. The Third Circuit reversed the United States District Court for the Eastern District of Pennsylvania that affirmed the Bankruptcy Court's decision to deny enforcement of the arbitration clause, and remanded the case to District Court to remand it to Bankruptcy Court with instructions to order the parties to engage in arbitration in accordance with the terms of the arbitration provision.
In Mintze, the debtor alleged that the Defendant American General Financial Services, Inc. ("AGF") induced her to enter into an illegal and abusive home equity loan. The arbitration clause of the loan agreement stated that "all claims and disputes arising out of, in connection with, or relating to [the] loan" must "be resolved by binding arbitration."
The Circuit Court held that the U.S. Supreme Court decision Shearson/A.M. Exp., Inc. v. McMahon, 482 U.S. 220 (1987), and the Circuit Court decision applying McMahon to a bankruptcy case, Hays & Co. v. Merrill Lynch Pierce, Fenner & Smith, Inc., 885 F.2d 1149 (3rd. Cir. 1989), were controlling. Under McMahon, if a party opposing arbitration can demonstrate that "Congress intended to preclude a waiver of judicial remedies for the statutory rights at issue," the FAA will not compel courts to enforce an otherwise applicable arbitration agreement. To overcome enforcement of arbitration, a party must establish congressional intent to create an exception to the FAA's mandate with respect to the party's statutory claims, which can be discerned in one of three ways: (1) the statute's text, (2) the statute's legislative history, or (3) "an inherent conflict between arbitration and the statute's underlying purposes." See id. Under Hays, the court held that whether the McMahon standard is met determines whether the court has the discretion to deny enforcement of an otherwise applicable arbitration clause.
In reversing judgment, the Circuit Court ruled that the Bankruptcy Court had no discretion to exercise, given that Mintze could not show that "Congress intended to preclude a waiver of judicial remedies for the statutory rights at issue." See McMahon. The two reasons it cited were (1) because Mintze raised no statutory claims created by the Bankruptcy Code, the Circuit court cannot find an inherent conflict between arbitration of Mintze's federal and state consumer protection issues and the underlying purposes of the Bankruptcy Code; and (2) the court perceived no adverse effect on the underlying purposes of the [Bankruptcy] Code from enforcing arbitration.

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In Rohn Industries, Inc. v. Platinum Equity LLC, download file, the Delaware Superior Court applied New York law and ruled that a decision to terminate a contract was neither arbitrary nor capricious, and was made in good faith even though it was based on faulty legal advice and, therefore, did not violate a clause in a contract that allowed termination if "the party determined in good faith that there was a reasonable basis in law and fact to conclude that the transaction could result in material asbestos liability".

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In Bally Total Fitness Holding Corp. v. Liberation Investments, LP. , download file, the U.S. District Court for the District of Delaware, in response to a request for preliminary injunction, entered an order that required plaintiff to provide a letter to defendants setting forth the disclosures it contended that defendants failed to make in violation of Sections 13(d) and 14(a) of the Securities Act of 1934 and which the plaintiff would pursue at a preliminary injunction hearing. The plaintiff complied with that order by sending a letter, and submitted a Revised Preliminary Proxy Statement in which they set forth verbatim all the allegations of insufficient disclosures that plaintiff had listed, and also included their responses to plaintiff's allegations. The court ruled that a preliminary injunctions based on a violation of a disclosure provision of the Securities Exchange Act of 1934 is precluded when defendant cures the alleged defects and disclosure because such a cure would eliminate the necessary showing of irreparable harm. In the context of a Motion for Preliminary Injunction, where there is a good faith dispute as to the facts or an alleged legal violation, disclosure of the dispute is sufficient to cure the alleged defects. The court determined therefore that a preliminary injunction proceeding would not be necessary.

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In Penn Vending Co. v. Ronald D. Savage, Inc., et al., download file,
plaintiff brought counts against defendants for alleged breach of contract and lost profits in the amount of $220,000. Most of the claim was denied based on the defense of illegality. Under the terms of the contract, Penn Vending, Co. was to supply and maintain certain entertainment equipment (coin operated music, pool tables, music, etc.) to Ron's Place, a bar and restaurant operated by defendants, for a period of five years. Gross proceeds resulting from the collection and operation of the equipment were to be shared equally between the parties, and defendants were obligated to pay no monthly rental or service fees to plaintiff. The contract was cancelled in March of 2003 when the defendants established a substitute vendor relationship with Apple Vending, a competitor of Penn Vending, to supply and service the same types of machines.

The main issues in this case were whether the contract was enforceable due to illegality to the extent that some of the machines involved were illegal gambling machines, and whether plaintiff was in breach of the contract at the time Ronald D. Savage, Inc. terminated the contract, due to faulty service. Defendants argued plaintiff breached the contract first due to poor service in that the machines were not kept current, were not functional for several periods of time, and were not serviced in a timely and adequate manner. Based on that alleged breach by plaintiff, the defendants argued that they were entitled not to honor the agreement. The Superior Court, however, held that there was insufficient evidence in the record to demonstrate that defendants were deprived of the benefits for which they reasonably bargained, and instead ruled that plaintiff was in substantial compliance with the contract. The court awarded plaintiff $62,000 (instead of the $220,000 demanded), which represented lost future profits for the balance of the agreement term for all machines provided in the contract, with the exception of the poker machines. The Court held that plaintiff's lost profit calculation with respect to these poker machines was too unreliable and speculative in nature to recover damages. Moreover, the Court held that in any event the poker machines constituted illegal video lottery machines under Delaware law, and therefore the lost profits that plaintiff sought with respect to these machines were unrecoverable.

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Last month a New Jersey appellate court found that despite local counsel being responsible for the course of litigation conducted by pro hac vice counsel, local counsel does not have absolute liability for out-of-state counsel's misdeeds. Masone v. Levine, N.J. Super. Ct., A.D., download file. The Court relied on federal cases in New Jersey that reject a per se rule penalizing local counsel for out-of-state counsel's wrongful behavior. See Maldonado v. State, 225 F.R.D. 120 (D.N.J. 2004).
This issue addressed by the Masone court is especially important in Delaware where the courts require active participation by local counsel to make certain that out-of-state counsel are conforming to the high standards of conduct that the Delaware courts expect of lawyers in Delaware courts.

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In Bally Total Fitness Holding Corp. v. Liberation Investments, L.P., et al., download file, the U.S. District Court for the District of Delaware denied as moot a motion for injunctive relief concerning a proxy statement that was alleged to be misleading and materially false. At a TRO hearing, the plaintiff told the court that it was converting its pleadings into a motion for a preliminary injunction. The court ordered the plaintiff to specify the aspects of the proxy that were allegedly false and/or misleading. Notwithstanding expedited proceedings, the defendant prepared a "revised preliminary proxy statement" that stated verbatim all the alleged disclosure problems and the responses to each. The Court determined that in the context of a motion for preliminary injunction, where there is a good faith factual dispute as to the alleged violations, disclosure of the dispute is sufficient to cure the alleged defects, because it eliminates the element of irreparable harm.

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Although this blog does not generally report on cases in Delaware's trial court of general jurisdiction, the Superior Court, which does not have the equitable jurisdiction of our Chancery Court, a recent opinion from that court is especially noteworthy. The court, sua sponte, determined under Rule 12(f) that statements about the opposing party in a brief were so rude and uncivil that it violated the rule against "impertinent comments", and ordered that part of the brief should be stricken, and resubmitted without the offending parts. Here is the link to the full decision in 395 Associates, LLC v. New Castle County, download file.

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Our friends at the Bankruptcy Litigation Blog have a recent post that provides a an insightful analysis of a recent decision from the U.S. District Court for the District of Delaware, which involves a fraudulent transfer claim that was brought post-bankruptcy, against Campbell Soup, in connection with their spin-off of their Vlasic unit. The post also includes many links to original source materials. Though the transaction at issue was not set aside by the court, it was a very close call, and the decision provides a good case study of fraudulent transfers, and how a relatively small creditor can pursue the claim, even after a plan is confirmed.
UPDATE: Courtesy of Steve Jakubowski from the Bankruptcy Litigation Blog, here is clarification/amplification of the key to the above case:

Remember that a relatively small creditor cannot pursue a fraudulent transfer action once the debtor is in bankruptcy because all avoidance actions are considered derivative type actions that vest exclusively in the debtor's estate. The unfairness of Moore v. Bay, in my view, is that a trustee in bankruptcy who steps into the shoes of this relatively small creditor is like a creditor on steroids who can avoid the entire transaction far beyond the creditor's own relatively insignficant claim. A creditor cannot gain for itself the benefits of Moore v. Bay; those are reserved exclusively for the steroid-enhanced trustee using its "strong-arm" powers.

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This is an update of sorts to a prior post on this blog involving a Delaware court decision that determined Delaware law should apply to a shareholder dispute of a Delaware corporation, whose primary operations were in California, in light of the "internal affairs doctrine". Now, courtesy of the Financial Institution Law Blog, we have a cite to a California decision, admittedly on a slightly different issue, that upheld a Delaware choice of law provision in an agreement. I have a related prior post here.

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