Cartanza v. Cartanza, C.A. No. 7618-VCP (Del. Ch. April 16, 2013).
Issue Addressed: Whether attorneys’ fees should be awarded due to defense counsel obstructing the efforts of opposing counsel to depose his client.
Short Answer: Yes.
This letter ruling is a useful tool for the toolbox of any litigator. In essence, defense counsel obstructed the efforts of the opposing counsel to depose his client. For example, he explained without detail that certain vague medical conditions limited the availability of the defendant. In addition, defense counsel purported to require that plaintiff provide specific reasons for the deposition, but the court found no basis in the rules or applicable case law for requiring a party to justify the request for taking the deposition of a party.
The court explained: “No particularized need standard” exists under Delaware law for a party to explain the need for a deposition, even when a deponent is suffering from a medical ailment. Rather, a party has “a right to take a deposition regarding any matter which is relevant to the subject matter involved in the pending action. The information sought need not be critical . . ..” See footnote 20 (citing Court of Chancery Rule 26(b)(1)). See also footnote 19 and related text.
Therefore, under Court of Chancery Rule 37(a)(4)(A), the court awarded attorneys’ fees.
Of course, in a situation like this, the nuances and the details of the specific factual situation are often determinative, and for that reason this short 12-page letter ruling should be read in its entirety before applying the highlights of the standards referenced.
Edgewater Growth Capital Partners L.P. v. H.I.G. Capital, Inc., C.A. No. 3601-CS (Del. Ch. April 18, 2013). This ruling explains both an issue about attorneys’ fees and the revision of a previous Chancery opinion in this case highlighted on these pages here.
Issue Addressed: The standard that applies to award fees pursuant to the terms of a contract, and the standard that will apply to a challenge regarding the amount of those attorneys’ fees awarded.
This relatively short decision provides a pithy summary of the standard that applies to (i) reviewing the fees awarded pursuant to fee shifting terms in an agreement which provides for fees be awarded to the prevailing party, and (ii) the basis for such an award of fees, and (iii) a challenge to the amount of fees.
One worthwhile aspect of this decision is the re-appearance of what has become known as Delaware’s “pizza principle” which, in essence, makes it very difficult to successfully challenge an award of fees in terms of the amount awarded, when the award is based on either a provision in a contract or a determination by the court that bad faith litigation tactics were employed. In connection with that discussion the court also addresses the relevant factors in Rule 1.5(a) of the Delaware Lawyers Rules of Professional Conduct.
Lastly, the court makes adjustments to the original opinion in this case that was highlighted on these pages at the link above.
Boulden v. Albiorix, Inc., C.A. No. 7051-VCN (Del. Ch. April 10, 2013). See previous Court of Chancery decision in this case highlighted on these pages here.
This case addresses claims against a pre-incorporation promoter in the procedural context of applying the standard under Court of Chancery Rule 15(a) regarding the amendment of a complaint which requires the consent of the court. The court applies the following standard “The decision is a matter of discretion for the court, [and] must be denied, if after assuming the truth of the plaintiff’s allegations, the plaintiff has failed to state a claim upon which relief can be granted.” See footnote 6.
The claims in this case relate to whether a person should be held liable as a pre-incorporation promoter of the company involved. The court discusses the liability of a promoter who purports to act on behalf of a proposed corporation. See footnotes 7 through 10 and accompanying text. This opinion has a useful discussion of the standards that will be applied in connection with potential liability for persons who engage in pre-incorporation promotion and participate in the formation of a corporation on behalf of others.
In re Comverge, Inc., Shareholders Litigation, C.A. No. 7368-VCP (Del. Ch. April 10, 2013).
Issue Presented: Whether the attorney-client privilege was a defense to a motion to compel documents.
Short Answer: Yes, under the circumstances of this case.
Summary of Analysis
The court observed that under Court of Chancery Rule 26(b)(1), the “parties may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action . . .. A party asserting a privilege has the burden of proof to show that the privilege is applicable to the communication.” See footnote 3. Rule 502 of the Delaware Rules of Evidence codifies the lawyer-client privilege and the five elements of that rule.
Communication is confidential if it is not “intended to be disclosed to third persons other than those to whom disclosure is made in furtherance of the rendition of professional legal services to the client or those reasonably necessary for the transmission of the communication.” See footnote 5. The lawyer-client privilege as described in DRE 502 is not absolute and can be restricted or denied entirely when a party places an otherwise privileged communication “at issue” in the litigation. See footnote 7.
This “at issue exception” to the lawyer-client privilege is based on waiver and fairness to prevent a party from using it at both an offensive and defensive weapon.
A party places the lawyer-client communication “at issue” and waives the lawyer-client privilege when:
(1) a party injects the privileged communications themselves into the litigation, or (2) a party injects an issue into the litigation, the truthful resolution of which requires an examination of confidential communications. See footnote 9.
The court reasoned that the examination of privileged communications was not required for the truthful resolution of this litigation because the defendants merely seek to rely on the fact that they sought and obtained legal advice – - rather than arguing that they relied on the substance of the privileged communications to prove that the board was fully informed.
Therefore, the court explained that the defendants: “did not inequitably use attorney-client privilege as a sword or inject a privilege-laden issue into the litigation.” See footnote 21 and related text.
The court referred to cases where the defense was that legal counsel was obtained and that the existence of legal advice was material to the question of whether the board acted with due care, but the substance of that advice was not inquired into. See, e.g., Hollinger International, Inc. v. Black, 844 A.2d 1022 (Del. Ch. 2004), aff’d, 872 A.2d 559 (Del. 2005) (referring to the dismissal of a breach of fiduciary duty claim because the board had adequately informed themselves by seeking the advice of counsel even though the exact content of that advice was not disclosed).
Another reason the court rejected the argument that the attorney-client privilege was waived due to the “at issue” exception, was because the information disclosed regarding any privileged communications was summary in nature and comparable to what would be disclosed in a privilege log.
Redaction of Board Minutes
The court conducted an in camera review of redacted board minutes to determine whether they were protected by the attorney-client privilege.
The court recited the well-settled Delaware law that: “the presence of a lawyer in a business meeting called to consider a problem that has legal implications does not itself shield the communications that occur at that meeting from discovery. Rather, it is communications to a lawyer by or on behalf of a client for the purpose of the rendition of legal services or lawyers’ statements constituting legal service that are protected.” See footnotes 42 and 43. Likewise the attorney-client privilege protects legal advice as opposed to business or personal advice. See footnote 44.
However, communications that contain an inseparable, combination of business and legal advice may be protected by the attorney-client privilege. See footnote 45. Moreover, if it is a “close call” whether a communication reflected in a document contains a mixture of legal and business matters and is more closely related to legal advice as opposed to business advice, the party asserting the privilege will be given the benefit of the doubt. See footnote 46 and related text.
Pyott v. Louisiana Municipal Police Employees’ Retirement System, No. 380, 2012 (Del. Supr., April 4, 2013)
Issues Addressed: (1) Whether or not a prior ruling by a California court dismissing a derivative suit served as a bar to subsequent Delaware derivative suits; and (2) Whether the failure to use Section 220 before filing suit created a presumption that the plaintiff was an inadequate representative.
Short Answers: (1) Collateral estoppel prevented the second derivative suit; and (2) There is no irrebuttable presumption that applies simply because Section 220 was not used before the derivative suit was filed.
This 12-page Delaware Supreme Court decision reversed an 80-page decision by the Court of Chancery. The trial court decision was highlighted on these pages here. This decision also diminishes the impact of a separate decision by the Court of Chancery in South v. Baker, highlighted on these pages here, which had questioned the adequacy of plaintiffs who filed derivative cases with Caremark claims that had not used Section 220 beforehand.
The issue on appeal was whether the Court of Chancery was required to dismiss a Delaware derivative complaint after a California federal court entered a final judgment dismissing essentially the same complaint brought by different stockholders.
The Court of Chancery held that it was not required to give preclusive effect to the California judgment for two reasons. First, the Court of Chancery held as a matter of law that the stockholder plaintiffs in both jurisdictions are not in privity with each other. Next, the Court of Chancery determined that the California stockholders were not adequate representatives of the defendant corporation.
The Delaware Supreme Court ruled that the Court of Chancery was wrong on both points. The High Court of Delaware determined that California law controlled the issue of privity, and that the derivative stockholders were in privity when they acted on behalf of the corporation. In addition, the trial court erred in holding that there was a presumption of inadequacy without any record to support the factual premise on which the presumption was based.
Substantially similar complaints were filed in both California and in the Court of Chancery, although the Court of Chancery allowed the UFCW to intervene after it employed Section 220 to inspect books and records of the company involved, Allergan. Motions to dismiss were filed in both courts and the federal court in California granted the motion to dismiss with prejudice prior to the ruling by the Court of Chancery. The Court of Chancery held that the California judgment did not bar the Delaware action and denied the motion to dismiss the Delaware case. An interlocutory appeal followed.
Short Overview of Reasoning by the Delaware Supreme Court
The Delaware Supreme Court relied on the Full Faith and Credit Clause of the United States Constitution at Article IV, §1, which provides that: “Full Faith and Credit shall be given in each State to the public Acts, Records, and Judicial Proceedings in every other state.” This clause has been understood to encompass the doctrine of res judicata, claim preclusion, and collateral estoppel or issue preclusion. The United States Supreme Court has held that a state court is required to give a federal judgment the same force of effect as it would be given under the preclusion rules of the state in which the federal court is sitting. The Delaware Supreme Court applied this law to require the state of Delaware to give Full Faith and Credit to the California federal judgment.
The Delaware Supreme Court then determined that the Court of Chancery failed to apply this settled law because it “conflated collateral estoppel with demand futility.” The Court reasoned that a motion to dismiss should have been addressed exclusively on the basis of federalism, comity, and finality. The interest that Delaware has in the internal affairs of its corporations: “must yield to the stronger national interests that all state and federal courts have in respecting each other’s judgments.” See footnote 11.
The Supreme Court did not directly address the analysis under Delaware law about whether an individual derivative claim has preclusive effect on derivative claims of other stockholders because the Delaware Supreme Court determined that California law and not Delaware law applied to the preclusive effect issue. The court also noted that “although the Court of Chancery is divided on the privity issue as a matter of law, we cannot address the merits of that issue in this case.” See footnote 20.
Section 220 and Alleged Inadequacy of Representative Plaintiffs
The Delaware Supreme Court rejected the “fast filer” presumption of inadequacy referenced in the trial court, and reasoned that:
“undoubtedly there will be cases where a fast filing stockholder also was an inadequate representative. But, there is no record support for the trial court’s premise that stockholders who file quickly, without bringing a Section 220 books and records action, are a priori acting on behalf of their law firms instead of the corporation. This court understands the trial court’s concerns about fast filers, but remedies for the problems they create should be directed at the lawyers, not the stockholder plaintiffs or their complaints.” See footnotes 23 and 24.
The net result of the foregoing quote is that the trial court decision in Pyott, and the separate Chancery decision in South v. Baker, highlighted on these pages here, will not likely be relied on for the imposition of a prerequisite of using Section 220 before a derivative claim is filed.
Alison Frankel of Thomson Reuters penned an insightful article about the case at this link. Ted Mirvis authored an insider’s viewpoint in a piece published on The Harvard Law School Corporate Governance Blog at this link. Kevin LaCroix provides insightful commentary about the case at this link.
Simplexity, LLC v. Zeinfeld, C.A. No. 8171-VCG (Del. Ch. April 5, 2013) (Redacted Version)
Issue Addressed: This case involves a dispute between two companies over the hiring of the former CEO of Simplexity, Andrew Zeinfeld. (The publication of this opinion was delayed while confidential data was redacted.)
Simplexity contends that Zeinfeld’s employment with Brightstar Corp. would violate the non-competition agreement with Simplexity and that Zeinfeld has divulged confidential information about Simplexity that constitutes a breach of his fiduciary duties.
Brief Overview of Holding
The court found that Simplexity has not shown that it will likely prevail on the breach of contract claim and has not shown that its alleged breach of fiduciary duty or breach of a confidentiality agreement justified enjoining the employment of Zeinfeld at Brightstar, but Simplexity has shown a reasonable probability of success and ultimately shown that the non-competition agreement is enforceable and that Brightstar’s proposed employment of Zeinfeld will violate the non-competition agreement.
Lastly, the court found that plaintiff demonstrated threatened imminent irreparable harm that outweighs the harm to the defendants of an improvidently granted injunction. Therefore the court found that the plaintiff is entitled to preliminary injunction relief. [Notably, this decision was redacted to delete the names of confidential third parties, and this public version was not released publicly until approximately a week or so after it was decided.]
Short Summary of Analysis
Because the central issues in this 38-page decision, which are described in extensive factual detail, do not apply Delaware law for the most part we will give them short billing. Several references to Delaware law in footnotes are noteworthy, however.
For example, in footnote 72 the Court refers to the 2006 decision by the Delaware Supreme Court in the case of In re: Walt Disney Co. Derivative Litigation, 907 A.2d 693, 758 (Del. Ch. 2005) aff’d, 906 A.2d 27 (Del. 2006) for the statement of Delaware law that: “former directors and officers owe no fiduciary duties, and after [he was terminated] Ovitz cannot breach a duty he no longer has.”
Because the non-compete agreement involved in this case was governed by Virginia law, we will not discuss it on this blog devoted to Delaware corporate and commercial litigation.
The Court did apply Delaware law to the standards applied in the context of determining when a preliminary injunction will be granted. For purposes of the elements of irreparable harm and balance of the equities, the court determined that there was ample evidence that the employment of Zeinfeld by Brightstar was in violation of Zeinfeld’s non-compete agreement and would cause Simplexity imminent, irreparable harm.
The Court of Chancery explained that it has
consistently found a threat of irreparable injury in circumstances when a covenant-not-to-compete is breached.
The parties acknowledged in their agreement that any threatened breach of the non-compete clause would be irreparable harm. In Delaware, that contractual stipulation normally suffices to establish irreparable harm for the purposes of establishing the right to a preliminary injunction. Third, the record indicates that a potential screen, to prevent irreparable harm, would be ineffective. See footnotes 115 to 118 and related text.
The court also found that the balance of harms tips heavily in favor of Simplexity, and the harm to Simplexity would be difficult to mitigate absent an injunction. The court explained in great detail why that harm could not be prevented without an injunction.
In sum, the Court granted the motion for preliminary injunction, and required the plaintiff to file a bond in the amount of $350,000.
Charlotte Broadcasting v. Davis Broadcasting of Atlanta, C.A. No. 7793-VCG (Del. Ch. April 2, 2013).
What this case is about: This opinion dismissed a breach of contract claim due to a finding that the claims did not provide a basis for equitable jurisdiction in the Court of Chancery.
Very Short Overview
This short opinion is useful to remind practitioners that a simple breach of contract claim cannot be converted into an equitable matter within the limited jurisdiction of the Court of Chancery. The court will not allow a request for equitable relief to be used as a “kind of formulaic ‘open sesame’ to the Court of Chancery.” See footnote 10. Rather, the court will review the allegations of the complaint as a whole to determine the true nature of the claim. The court also reminds practitioners that unless the record indicates some special, traditional basis for equitable jurisdiction, or a statutory basis, the court generally does not have jurisdiction in a declaratory judgment action.
Another helpful practice note: The Court of Chancery suggested that the plaintiff consider filing this case in, or transferring it to, the Delaware Superior Court, Delaware’s trial court of general jurisdiction (and “law court”), which this opinion observed, also has available expedited proceedings. See footnote 22 and case cited therein. Most practitioners in Delaware might not be aware of that procedural option in that court.
In sum, the court determined that complete relief was available at law. The court found that if it allowed the contractual claim to be converted to an equitable matter, that the Court of Chancery would no longer remain a court of limited jurisdiction and that: “That would be a meal this court cannot digest consistent with its constitutional role as a court of limited jurisdiction.”
Baden-Wurttenberg v. Walton Seattle Mezz Holdings VI-B, LLC, C.A. No. 7933-VCG (Del. Ch. April 1, 2013).
This decision applies the familiar first-filed rule, and on that basis stayed this action in favor of a prior-filed lawsuit in the state of Washington
Very Short Overview
This case involves the growing phenomenon in corporate litigation of multiple suits involving common facts proceeding simultaneously in multiple jurisdictions. Although the Court of Chancery has expressed a strong interest that Delaware has in adjudicating matters involving the internal affairs of corporate citizens, when a first-filed action does not involve Delaware law or the internal governance of a Delaware entity, the Court carefully considers principles of comity and judicial economy that might support deference to the court overseeing the first-filed action, particularly, as here: “Where that court has enjoined a Delaware plaintiff from taking actions that would impinge upon the operation of an order that the court has put in place.” See generally, McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng’g Co., 263 A.2d 281, 283 (Del. 1970).
Because this decision applies a well-settled rule and the facts are not especially noteworthy, and because the agreements involved in this case are governed by New York law, the reader is directed to the 29-page opinion if the latest iteration of the first-filed rule is of interest.
In closing, the court reasoned that “Delaware has no particular interest in this case.” Nonetheless, although the defendants requested a dismissal, the Court exercised its discretion sua sponte in ordering a stay, and retained jurisdiction in the event that the court in Washington refrains from acting on issues that had been presented in Delaware.
Wiggs v. Summit Midstream Partners, LLC, C.A. No. 7801-VCN (Del. Ch. March 28, 2013).
This opinion addresses: claims for breach of fiduciary duty in the context of an LLC agreement, which waived all fiduciary duties, and also addresses a claim based on the implied covenant of good faith and fair dealing, as well as a judicial dissolution claim based on Sections 18-802 and 18-803 of Title 6 of the Delaware Code (the Delaware LLC Act). The court dismissed the entire complaint but the judicial dissolution analysis is the most noteworthy.
Judicial Dissolution Under LLC Act
The court recognized that judicial dissolution is “a limited remedy that Delaware courts grant sparingly.” See footnote 135. The court often looks to the limited partnership dissolution statute in the absence of extensive case law involving Section 18-802 of the LLC Act.
Two situations where the court has ordered dissolution are: “(1) Where there is a deadlock that prevents the corporation from operating; and (2) Where the defined purpose of the entity is fulfilled or impossible to carry out.” See footnote 137 and 138. There was no deadlock in this situation and in evaluating whether the defined purpose of the entity was either fulfilled or impossible to carry out, the court: “must assess whether it is reasonably practicable to carry on the business of the limited partnership, and not whether it is impossible.” See footnote 139.
The court looks to the purpose clause in the governing agreement and determines whether the business can continue in accordance with that stated purpose. See footnotes 141 and 142.
The court quoted from the purpose clause in the LLC agreement which was very broad and essentially allowed for “any lawful activity”. Based on that broad purpose clause, which allowed the entity to engage in any lawful activity, the court determined that the plaintiffs did not plead a “reasonably conceivable” claim that it was “no longer reasonably practicable for [the LLC] to operate in accordance with its broad purpose clause.”
Li v. Standard Fiber LLC, C.A. No. 8191-VCN (Del. Ch. March 28, 2013).
This Court of Chancery opinion addressed a recurring theme in Delaware commercial litigation: substantive arbitrability. That is, whether the court or an arbitrator should determine whether a particular claim is subject to an arbitration clause. This opinion also addresses how multiple agreements, each with an integration clause, interface with each other when some but not all of them have arbitration clauses.
This claim is based on an indemnification agreement which also provided for advancement. The court determined that the advancement claims were subject to arbitration.
The court applied the familiar test of arbitrability in the seminal Delaware Supreme Court decision of James and Jackson LLC v. Willie Gary, LLC, 906 A.2d 76 (Del. 2006), highlighted on these pages here. The threshold question of who decides arbitrability, the court or the arbitrator, was determined in a test set forth in the Willie Gary case.
Although there is a general presumption that the question of substantive arbitrability, i.e., whether the parties agree to arbitrate, is generally one for the courts to decide, that presumption is overcome when there is “clear and unmistakable” evidence that parties agree to arbitrate.
The court in Willie Gary held that “such clear evidence is present when an arbitration clause: (1) generally provides for arbitration of disputes, and (2) incorporates a set of arbitration rules that empower arbitrators to decide arbitrability.” Willie Gary’s progeny have since modified the “clear and unmistakable test” in one important respect. Even when the Willie Gary test is satisfied, a court: “must still make a preliminary evaluation of whether the party seeking to avoid arbitration of arbitrability has made a clear showing that its adversary has made “essentially no non-frivolous argument about substantive arbitrability.” See footnote 45. This additional step was meant to avoid situations in which the Willie Gary test is “technically satisfied but there is no non-frivolous argument that the arbitration clause covers the underlying dispute.”
Although related agreements involved in this case included arbitration clauses that satisfied the two prongs of the Willie Gary test, the indemnification agreement had an integration clause that did not include an arbitration clause. The court determined however, that the arbitration clauses in the related agreements also covered the claims related to the advancement and indemnification issues.
The opinion also includes a helpful discussion of integration clauses in multiple related agreements that also have integration clauses even though they are obviously interfacing with other agreements.