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

In Concord Steel, Inc. v. Wilmington Steel Processing, Co., Inc., et al., No 3369-VCP (Del. Ch. February 5, 2010), read decision here, the Delaware Court of Chancery awarded attorneys' fees based on a provision in an asset purchase agreement that afforded reasonable attorneys' fees to the prevailing party. Our blog summary of the post-trial decision in this case, granting damages and affirming a prior injunction on a covenant not to compete, can be found here.

Issues Addressed

1. Was the amount of fees sought reasonable based on Rule 1.5?
2. Did the statutory limit of 20% collected on a debt instrument, based on Section 3912 of Title 10 of the Delaware Code, apply to the fee request pursuant to the provision of an asset purchase agreement?

Analysis

1. The Court applied the factors in Delaware Lawyers' Rule of Professional Conduct 1.5 to assess the reasonableness of fees. The factors in the rule include the following:

• the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal services properly;
• the fee customarily charged in the locality for similar legal services;
• the amount involved and the results obtained;
• the experience, reputation, and ability of the lawyer or lawyers performing the services; and
• whether the fee is fixed or contingent.

Several relatively recent Chancery decisions were referred to by the Court in connection with a review of issues such as the percentage of time spent by senior partners, whether the number of attorneys working on the matter amounted to overstaffing, and the hours spent in comparison to the complexity or simplicity of the litigation. See., e.g., footnotes 15, 17, 21 and 23.

Notable was the Court's observation that no Delaware case has found "block-billing" to be objectionable per se. The Court also concluded that it was not unreasonable to bill for two attorneys conferring with each other, or for an attorney who did not examine witnesses to bill for time spent at trial. Nor did the Court find it unreasonable to use two attorneys from outside counsel and two attorneys from local counsel for most of the work on the case over about two years. However, the Court found that there was an overuse of senior partners based on the percentage of hours charged by senior partners being 98 percent of total hours billed. The assumption, one might infer, is that the Court expects associates to do most of the work, perhaps, at least in terms of the percentage of total hours charged.

2. Section 3912 of Title 10 of the Delaware Code governs the total amount of attorneys' fees that can be collected in suits brought to enforce notes, mortgages, invoices or "other instrument of writing."  This last catch-all phrase was interpreted to refer to evidence of a debt. The Court reasonsed that the asset purchase agreement in this case was not an instrument of debt, but  rather the suit in this case was initiated to enforce a covenant not to compete. The Court distinguished other cases that involved collection on an invoice or a suit for collection of an amount certain, which was dissimilar to the facts in this matter.

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Aveta, Inc. v. Bengoa, No. 3598-VCL (Del. Ch., Dec. 24, 2009), read opinion here. This Court of Chancery opinion issued on Christmas Eve was no present to the defendant. In essence, the Court imposed severe penalties on a party for failing to comply with a prior Order of the Court to commence arbitration proceedings pursuant to the parties' agreement. The Court's prior decision was highlighted on this blog here. In reply to a motion to enforce file by the plaintiff, the Court,  sua  sponte,  issued a Rule to Show Cause why the defendant should not be held in contempt due to his violation of a prior court order.  

The facts of this case are somewhat sui generis, thus I will only highlight the legal issues raised instead of dwelling on the factual background that is not likely to be repeated often.

•  The Court discussed the standard applicable for civil contempt proceedings as well as its reasoning for applying that standard in this case. Slip op. at 23-24.
•  Also relied on was the Court's inherent power to enforce its rulings. Id. at 28.
•  Defenses of novation and res judicata were soundly rejected. Id. at 32-33.
•  The contract interpretation principle of using subsequent conduct of the parties to determine "intent to be bound by a contract" was discusssed. Id. at 35
• The stiff penalty imposed as a result of the Court's conclusion that the defendant wilfully violated the Court's prior Order was a fine of $20,000 for each day that the arbitration proceedings were not commenced (starting 30 days from the day of this decision), as well as attorneys' fees.

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In re William Lyon Homes Shareholder Litigation Consolidated, C.A. No. 2015-VCN (April2, 2009), read letter decision here. See prior Delaware decisions in this case here and here.

Kevin Brady, a highly respected Delaware litigator, provides us with this case summary.

On April 2, 2009, Vice Chancellor Noble denied for the second time a fee application for an award of attorneys’ fees in  this Chancery Court decision after remand from the Delaware Supreme Court. The Court found that the presumption that the party seeking the fee and its attorneys were the cause of the price increase in question had been rebutted. The earlier award of December 21, 2006 was therefore reconfirmed (See In re William Lyon Homes S’holder Litig., 2006 WL 3860916 (Del. Ch. Dec. 21, 2006)).

Background Facts – Delaware and California Actions

This case involved a going private transaction with William Lyon Homes (“Lyon Homes”), which generated litigation in Delaware and California. A settlement was reached in the Delaware Action but not the California action. As a result of a negotiated settlement in the Delaware action, the original tender price was increased from $93 per share to $100 per share. After the Delaware action settled, the California litigation continued. An increase in the share price to $109 per share resulted following negotiations between representatives of General William Lyon (“General Lyon”), Lyon Homes’ controlling stockholder, and Chesapeake Partners (“Chesapeake”) which held a sizeable interest (approximately 3.5%), in Lyon Homes.

Alaska Electrical Pension Fund (“Alaska”), the plaintiff in the California litigation, intervened in the Delaware Action to file a petition seeking attorneys fees’ for the increase from $93 to $100 per share and the increase from $100 to $109 per share. Vice Chancellor Noble denied Alaska’s fee application with respect to the initial increase (which was affirmed on appeal) and with respect to the second increase.” The Court found that the second increase would not have occurred but for the efforts of Chesapeake (not Alaska) and that “there was no evidence establishing a causal connection between Alaska’s efforts and the increase.”

The Delaware Supreme Court Reverses the Denial

The Supreme Court, in reversing and remanding the decision to the Court of Chancery determined that the Court of Chancery’s analysis was flawed because it required Alaska “to demonstrate some causal connection under Infinity Broadcasting (see In re Infinity Broad. Corp. S’holders Litig., 802 A.2d 285 (Del. 2002)) between its efforts and the second increase. The Supreme Court stated that “Alaska enjoys the benefit of a presumption that its efforts bore a causal connection to the second increase by virtue of its position as the plaintiff in the only litigation pending at the time of the second increase.”

The Court of Chancery on Remand

On remand, Vice Chancellor Noble acknowledged that he would be required to again consider Alaska’s fee request but this time he would recognize that, “unless and until proven otherwise, Alaska’s efforts are presumed to be a cause of the second increase.” The Vice Chancellor was quick to note that he would evaluate the evidence and the presumptions related thereto “[e]ven though Alaska has conceded it was not a direct cause of the second increase.” .

No Causation Between Fee Petitioner and Price Increase

The parties engaged in additional discovery and with an expanded record upon which to evaluate Alaska’s request, Vice Chancellor Noble found that: “the parties opposing Alaska’s fee application have rebutted the presumption that benefits Alaska in its application. In other words, they have demonstrated that Alaska and its attorneys were in no way a cause of the second tender offer price increase.” In particular, Vice Chancellor Noble found that after the first increase, sufficient shares had not been tendered to meet General Lyon’s needs and that for the tender offer to be successful, General Lyon needed Chesapeake to tender its shares. Thus, it was the negotiations between Chesapeake and General Lyon (or his representatives) and not Alaska (or its counsel) that resulted in the second price increase.

As a result, Vice Chancellor Noble found that the presumption that Alaska was the cause of the second price increase had been rebutted and its fee petition was denied again.

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West Willow-Bay Court, LLC v. Robino-Bay Court Plaza, LLC,  Del. Ch., No. 2742-VCN (Feb. 23, 2009), read opinion here.

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

In this post-trial opinion, the Delaware Court of Chancery determined the appropriate damage award where Defendant breached a purchase agreement by its failure to secure a third party’s consent.

West Willow Bay Court, LLC (“West Willow”) entered into a Purchase Agreement with Robino-Bay Court Plaza, LLC and Robino-Bay Court, LLC (collectively “Robino”) to acquire a pad site in the Bay Court Plaza Shopping center in Dover, Delaware (the “Property”). West Willow’s only interest in the Property was to develop and lease the Property to Wawa. West Willow entered into a lease agreement with Wawa for the use of the Property (the “Wawa lease”). The Wawa lease was structured as a triple net ground lease, assuring a long term and predictable cash flow. West Willow’s plan upon the Purchase Agreement proceeding to closing was to sell the Property, subject to the Wawa lease, on the Section 1031 exchange market. However, a tenant in the shopping center, Value City, withheld it’s consent to any development of the Property for the purposes proposed by West Willow. Value City’s lease with Robino allowed it to reasonably withhold it’s consent to the proposed development although third party consents were not explicitly addressed in the Wawa lease. Notably, the Wawa lease was amended three times in an attempt to give West Willow and Wawa more time to secure municipal approvals.

During this time, Robino continued to ask for Value City’s consent to develop the site pursuant to the Wawa lease. Although Value City was open to negotiations, these talks faltered. On August 23, 2006, Robino’s counsel sent a letter to West Willow stating that the consent was not obtained. In addition, the letter stated that if West Willow proceeded to closing “it must do so in light of the non-consent” and “provide an indemnification and hold harmless from any claim made or action commenced” by Value City. In response, West Willow refused to agree to any of the conditions outlined by Robino. Once again, Robino commenced negotiations with Value City. West Willow offered to assist Robino in meeting the cost of the tenant’s requested concessions, but the negotiations failed.

Upon Value City’s termination of negotiations with Robino, West Willow was notified that Value City’s consent would not be obtained. Thereafter, West Willow learned that WaWa remained interested in leasing the property. There was evidence that Robino proposed to deal directly with Wawa. Based upon these facts, the Court determined that Robino failed to secure Value City’s consent in breach of the Purchase Agreement. This failure frustrated West Willow’s expectation and effectively precluded consummation of the transaction.

Damage Phase

During the damage phase of the trial, the Court determined that three issues predominated:

1) Date of Breach; 2) Fair Market Value of Damages and 3) Award of Attorney’s Fees Under the Purchase Agreement.

In Delaware, the standard remedy for Breach of Contract is based upon the reasonable expectations of the partie ex ante. Because contract damages are based on the injured party’s expectation interest, the extent of the loss is determined is reference to the plaintiff’s particular circumstances.

I. The Breach Date

The Court determined that Robino repudiated its obligation to secure Value City’s consent on two occasions. The first repudiation occurred on August 23, 2006 when West Willow offered to share some of the cost of the potential concessions to Value City. “As a consequence, West Willow cannot be said to have accepted this first repudiation or materially change its position by relying upon it.”

After learning of the second repudiation on November 6, 2006, West Willow chose not to respond and choose to file suit on February 21, 2007. Since Robino conceded that if a breach occurred, it would have occurred with the commencement of the action. The Court was relieved from considering what effect, if any, West Willows forms of relief (specific performance and damages) may have had in determining the date of breach.

II. The Property’s Fair Market Value

Four experts offered opinions regarding valuation and damages. While various methodologies were submitted for the Court’s review, Vice Chancellor Noble, was “tasked with weighing the experts’ testimony” and determined that the lease fee interest analysis was the most appropriate measure of value. The Court reasoned that West Willow intended to lease the property to WaWa and even negotiated a lease agreement with rent schedules. Further, the Court reasoned that West Willow aimed to close on the property, lease it pursuant to the Wawa lease and sell it quickly on the Section 1031 exchange market.

The Court used the January 2007 valuation of the property of $1,408,450 with a discounted cash flow analysis rate of 9.0% based upon a third quarter 2007 average discount rate of 9.55%.

In sum, the Court determined that the fair market value of the property as it was intended to be used by West Willow was $1,350,000. as of the date of the breach minus the purchase price established by the Purchase Agreement of $725,000 thus totaling $625,000. Although Robino attempted to argue that West Willow failed to mitigate losses, the Court determined that reasonable, although unsuccessful, steps to mitigate were taken.

Attorney’s Fees

Delaware generally follows the American rule where each party is obligated to pay their own attorney’s fees regardless of the outcome. “However, where the parties have determined the allocation of fees by private ordering, departure from this general rule and difference to their agreement are warranted.” Additionally “considerations of justice and equity may inform the analysis.”

Relying on paragraph 22 of the Purchase Agreement which provided “[i]n the event legal action is instituted…the prevailing party will be entitled…reasonable attorney’s fees” the court determined that West Willow prevailed on the substantive breach of contract claim.

Relying on Comrie v. Enterasys Networks, Inc., 2004 WL 936505 at *2-3, the Court determined that whether a party prevailed in a case is determined by reference to substantive issues, not damages. “The crux of the case was the Court’s conclusion that Robino was unconditionally obligated to secure the consent; the form and extent of the remedy were important but decidedly secondary issues.” “Thus, because West Willow prevailed on the litigation’s chief issue the proper interpretation of the Purchase Agreement . . entitled [West Willow] to its reasonable [attorney’s fees] fees.”

 

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In Re Yahoo! Shareholders Litigation, (Del. Ch., March 6, 2009), read opinion here.

Kevin Brady, a highly respected Wilmington litigator, prepared this review of the short letter decision.

Chancellor Chandler issued a letter opinion today approving the In Re Yahoo! Shareholders Litigation class action and derivative action settlement, awarding plaintiffs $8.4 million in attorneys' fees plus expenses. The Court found that the plaintiffs had met the Sugarland factors (plaintiffs spent 5,500 attorney hours in a hotly contested litigation that they took on a contingent fee basis.) The settlement resulted in "the elimination of the dead-hand provision that would have prevented a new slate of directors from changing the severance plan and effectively curtailed the employee severance plan, significantly lowering the cost to acquire Yahoo of any potential buyer." The plaintiffs had asked for $12 million in fees; defendants argued that the plaintiffs' fee should be $1 million. The Court found that the plaintiffs had bestowed a sufficient benefit to Yahoo's shareholders in a case that "substantially parallels" the facts in Minneapolis Firefighters' Relief Ass'n v. Ceridan, C.A. No. 2996-CC, tr. at 27 (Del. Ch. Feb. 25, 2008).
 

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 Schultz v. Ginsburg and Philadelphia Stock Exchange, (Del. Supr., Feb. 3, 2009), read opinion here. The Delaware Supreme Court affirmed the Chancery Court's decision in connection with the allocation of  proceeds from a settlement that ended a class action against the Philadelphia Stock Exchange. The settlement and the allocation were separately approved by the Chancery Court. 

Highlights of five (5) prior decisions in this case, which provide more background, are available here.

This appeal of the allocation of the settlement proceeds raised the following arguments (all of which were rejected):

1. Monetary relief should be available only to those who suffered actual damage (although nonmonetary relief should be given to remedy a violation of charter provisions).
2. The Chancellor should have created subclasses to take cognizance of competing economic interests.
3. The Chancellor erred by not granting a larger allocation of the proceeds to the Objectors.
4. If a larger allocation is awarded, the Objectors' counsel should be entitled to a larger portion of the attorneys' fees awarded.

Class counsel defended the allocation plan by arguing that the allocation plan appropriately valued the charter violation more than the economic dilution claims.

The appellate standard of review for these types of issues is abuse of discretion. None was found.

Initially, Delaware's High Court observed that the Chancellor appropriately considered the merits of the various claims in terms of which had a better chance of success. Also, the Supreme Court held that as a matter of law, the charter violation claims transfer to a later purchaser because the injury is to the stock and not the holder. By contrast, the economic dilution claim was personal.

Thus, the violation of the charter, a contract between the stockholders and the corporation, was a direct claim. Conversely, the dilution claim, based on the facts of this case, was likely to be considered derivative. If considered derivative, the shareholders would not be entitled to a money recovery resulting from a successful derivative action and the corporation (in which they no longer held stock) would receive the relief. There was also a concern about the barrier to relief posed by DGCL Section 102(b)(7). It was also observed by the trial court that demutualization claims, as other actions have demonstrated, "have little or no chance of succeeding".

The Court acknowledged Delaware policy that opposed the "buying of a lawsuit" but did not find that to have taken place here. Moreover, the Court distinguished the argument that "actual damages are required in order to recover money from a settlement fund". Distinguishing the case of Wit Capital Group v. Benning, 897 A2d. 172 (Del. 2006), a Rule 23(b)(3) opt out case based on New York law, the Court noted that the Wit case involved a prima facie requirement of injury under New York law. In contrast, the instant case was requesting equitable relief.

Moreover, the Court held the the Chancellor did not abuse his discretion by certifying the class without subclasses and it was appropriate under the circumstances to rely on the thorough and unconflicted process of the unbiased class representative.

Delaware's High Court also explained that the allocation to class members with a demutualization claims was appropriate. Therefore, the Court rejected any change in the share of attorneys' fees, acknowledging also that "an objector to a class action settlement is not entitled to attorneys' fees unless his efforts improved the final settlement or he conferred a benefit on the class".

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In General Video Corp. v. Kertesz, (Del. Ch., Jan. 13, 2009), read opinion here, the Delaware Chancery Court refused to apply the "bad faith" exception to the Americal Rule and thus rejected a request by the victor for fee-shifting to the losing party in a case whose post-trial opinion was highlighted here.

This case dealt with a long-list of claims between ex-partners whose business venture failed and one partner started a new business without the other.

The Court reasoned that despite noting in its post-trial opinion that a key document was not authentic, that does not equate with the subjective perspective that the plaintiff believed and knew it was not authentic but relied on it anyway.

That is, the standard to be satisfied to establish the level of bad faith necessary to award attorneys’ fees as an exception to the American Rule, is not the same as, and is not satisfied by, failing to carry the burden of proof to win on a claim.

Chancery Court Rule 21 was also addressed. The Court refused to apply this rule, as requested, to add a shareholder as an indispensable party so that the party seeking attorneys’ fees could pierce the corporate veil. The Court explained that simply because it referred to the shareholder as the real party in interest for analytical purposes, does not make him an indispensable party for purposes of Rule 21.
 

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In Julian v. Eastern States Constr. Co., (Del. Ch., Jan. 14, 2009), read opinion here, the Chancery Court awarded fees to the victorious party in a derivative case involving a corporation that only had a few shareholders. The claims in this case challenged bonuses of  the key executives .

The analysis of a fee award in this context is somewhat different than in a large, publicly-held corporation. The prior opinion in this case in which the court agreed with the plaintiff that the challenged executive compensation should be returned, was summarized here.

This is a very important decision for anyone seeking fees in a derivative case that involves a closely-held company with a very small number of shareholders.

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In Postorivo v. AG Paintball Holdings, Inc., 2008 Del. Ch. LEXIS 165 (Nov. 13, 2008), the Delaware Chancery Court denied reargument of a prior award of attorneys' fees that limited the total amount payable. For more factual background, I refer you to my summaries of the three (3) prior decisions in this case that are available here.

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