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

Gelof v. Prickett, Jones & Elliott, P.A., No. 4930-VCS (Del. Ch., Feb. 19, 2010), read letter ruling here.

Holding: 

This letter decision from the Delaware Court of Chancery explains why the claims made in this case were not within its limited jurisdiction. That is, despite the claim of a breach of fiduciary duty, there was no equitable jurisdiction.

Rationale

This case describes the nuances of the limitations on the jurisdiction of the Delaware Court of Chancery. The Court determined that despite incantations of terminology that "sounds like" it would fit within the Court's equitable jurisdiction, the claims only sought a legal remedy and were not based on an equitable right. Nor was there a statutory basis for the Court to exercise jurisdiction. Thus, the case was transferred to the Delaware Superior Court, the state's trial court of general jurisdiction. The recent Chancery decision in Sokol reached a similar conclusion, finding a lack of juridisdiction based on similar facts. That case was highlighted on this blog here.

The Court "paints in shades of grey" the reasoning for this decision that clarifies those types of fiduciary duties that are not of the variety that fit within the confines of this specialty Court's jurisdiction. The distinction the Court makes is between the type of fiduciary duty that includes managing the assets of a beneficiary, and the separate form of relationship that "merely" involves trust being placed in another, such as one seeking medical or legal advice, for example.

The stereotypical fiduciary relationship over which the Court of Chancery often exercises its limited jurisdiction is that between a director of a corporation and its shareholders. This case, however, dealt with a claim of professional negligence. Although the lawyer/client relationship does have a fiduciary aspect, it is not the type of fiduciary relationship that fits within the constricted jurisdiction of the Court of Chancery.

Bottom line:

Although other cases summarized on this blog over the years have defined what types of "business" relationships create fiduciary duties, this decision focuses on the more nuanced aspect of what types of fiduciary relationships allow the Court of Chancery to exercise jurisdiction over them due to alleged claims regarding either misfeasance or nonfeasance in that relationship. In this case, the remedy sought was purely legal and the fiduciary claim was identical to the negligence claim. As the Court reasoned:

What equity polices are fiduciaries who actually take control over and make decisions regarding the assets of other persons.

Slip op at 6. The claims in this case did not involve one person taking control over and making decisions regarding the assets of another person.  In further support of its conclusion, the Court  quoted from a law review article as follows:

In any of the[] paradigmatic forms [of the fiduciary relationship], a
beneficiary entrusts a fiduciary with control and management of an asset. Ideally, for the beneficiary, this relationship would be governed by specific rules that dictate how the fiduciary should manage the asset in the beneficiary’s best interests. In fact, however, the fiduciary’s obligations are open-ended. Because asset management necessarily involves risk and uncertainty, the specific behavior of the fiduciary cannot be dictated in advance. Moreover, constant monitoring of the fiduciary’s behavior, which would protect the beneficiary, often is prohibitively costly . . . . The fiduciary relationship exposes a beneficiary/principal to two distinct types of wrongdoing: first, the fiduciary may misappropriate the principal’s asset or some of its value (an act of malfeasance); and second, the fiduciary may neglect the asset’s management (an act of nonfeasance). Each type of wrongdoing is controlled by imposing a legal duty upon the fiduciary.

Slip op. at  7 (citing Robert Cooter & Bradley J. Freedman, The Fiduciary Relationship: Its Economic Character and Legal Consequences, 66 N.Y.U. L. REV. 1045, 1046-47 (1991) (emphasis added)).

UPDATE: Though not referring to this case, a recent post by Professor Ribstein here addresses several types of relationships that are referred to as fiduciary relationships.

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Dutiel v. Tween Brands, Inc., No. 4743-CC and No. 484-CC (Oct. 28, 2009), read letter decision here. Read prior Chancery Court decision in this case highlighted on this blog here. In this most recent ruling, the Chancellor denied a motion for reconsideration of the Court's selection of lead counsel in a consolidated class action.

Overview

This letter decision denies a motion for reargument based on the familiar standards for such a motion. In addition to reciting the high hurdle to satisfy the prerequisites in this procedural setting, citing cases at footnotes 5 through 10, the Court summarized its reasoning by saying that relief pursuant to a motion for reconsideration is available “to prevent injustice” and there was no injustice in this situation. Instead, the Court explained that the motion was based on arguments that were themselves erroneous and, the Court added, also appeared to be based on “Dutiel’s misunderstandings and misapplications of settled Delaware law.”

As explained in more detail in the prior case summary linked above, the primary focus of  the Court's initial decision was the Court’s appointment of Ohio counsel as the lead counsel in this consolidated class action.

The Court used some “Halloween humor” to explain why it disagreed with the characterization by the movant of the Court's prior opinion in connection with describing the level of cooperation among the plaintiffs in this consolidated class action. In footnote 14 the Court explained as follows:

This Court appreciates holiday festiveness and cheer, but even at this time of year, it is best not to dress up or disguise a Court’s legal reasoning.”

Analysis

The Court addressed with a robust analysis the argument that the Court “misapplied a legal precedent” to the extent that it allegedly based its decision on the appointment of lead counsel on the fact that counsel chosen represented plaintiffs that “had a greater economic interest.” The Court addressed the cited cases that referred to “relative economic stakes” as compared to “simply economic stakes.”

The Court referred to other Chancery Court opinions that relied on a determination of economic interest of a plaintiff in “absolute terms not relative ones” and did not favor the plaintiff with the higher economic interest. See Wiehl v. Eon Labs, 2005 WL 696764 at * 3 (Del. Ch. Mar. 22, 2005).

Moreover, the Court noted that it was “baffling” and not understandable why Dutiel would demand an analysis of “relative economic stakes,” when in relative terms the interest of the plaintiffs whose counsel was chosen, was 1100% larger than the interest of Dutiel. The Court also explained that the Wiehl Court did not compare the sizes of the stakes of the different shareholders relative to one another, but noted how similar the stakes were in absolute terms (that is, as a percentage of the overall company). Such an analysis is mislabeled as relative, the Court explained.

The Court, in footnote 27, provided an explanation of the meaning of the word "relative" by the “Father of Relativity himself, Albert Einstein, who is said to have explained: “Put your hand on a hot stove for a minute, and it seems like an hour, sit with a pretty girl for an hour, and it seems like a minute. THAT''s relativity.”

Clarification of Reasoning

The Court went to great lengths to emphasize that it was not advocating a bright-line rule with regard to the factors to apply in determining lead-plaintiff status. For example, the Court explained that it was not basing its decision on the plaintiff with the highest absolute economic stake. It was not setting a specific dollar amount on the stake that a plaintiff must have in order for the Court to be confident that the plaintiff will take an active interest in the outcome of the litigation. Rather, the Court underscored that it considers several factors when deciding which plaintiff the Court will appoint as lead plaintiff. For several of the factors, the race between potential lead plaintiffs was too close to call, but in no way do such close races mean the plaintiffs never even had the opportunity to “lace up their shoes.”

On Incentives and Ethics

The movant argued that the Court’s decision would “invite abuse” to encourage plaintiffs “who routinely file elsewhere to game the system and seek a second bite at the apple when they  are shut out in a competing jurisdiction.” The Court described that argument thusly: "the movant simply created a straw man - - accusing the Court of incentivizing bad behavior - - and then purports to knock it down.”

Rather, the Court emphasized that its decision merely declined to penalize a litigant because his or her counsel filed in another jurisdiction. The Court reasoned that the “initial location of filing cannot be a principled basis for this Court to resolve lead counsel disputes.” The Court also rejected the argument that it gave any weight to the lawyers who “invoke this Court’s name in a ‘fishing’ press release and then file elsewhere, only to return here after determining that their action is going to be stayed or dismissed.”

The Court underscored that the referenced online press release did not bear upon its decision. It also explained that the role of the Court is not to serve as a “professionalism policeman.” The Court concluded with a suggestion to the movant that if the movant believed that “the issuance of online press releases poses an ethical problem, her counsel should report the conduct to the appropriate disciplinary counsel.”

UPDATE: Alison Frankel of The AmLaw Litigation Daily  also reviews this case and links to our summary here.
 

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