Posted on February 10, 2010 by Francis G.X. Pileggi

Delaware Court of Chancery Rules on Contested Board Elections in Expedited Section 225 Suit; Addresses Issues of First Impression on Reduction in Board Size, and Voting Rights; Re: Street Name v. Stock Ledger

Kurz v. Holbrook, No. 5019-VCL (Del. Ch., Feb. 9, 2010), read opinion here. This 80-page Delaware Court of Chancery opinion decided an expedited claim based on DGCL Section 225, challenging the election of board members.

Important Groundbreaking Issues Addressed.

This opinion is must reading for anyone who would seek to remove a sitting director or try to reduce the number of directors on a board. This decision addresses for the first time whether a bylaw amendment can reduce the size of a board. See, e.g., Slip op. at 24. This decision is also required reading due to its treatment of the issues that arise in connection with the right to vote shares that are held in street name, some of which are addressed authoritatively by a Delaware court for the first time. See, e.g., Slip op. at 60. The "underdeveloped" topic of "third-party vote buying" in connection with corporate elections is also addressed in a scholarly fashion, noting that the analysis is different than what might apply in the political arena. See, e.g., Slip op. at 64-65.

One of the best ways to highlight an opinion of "law review article length" for purposes of a blog, is to use the overview of the case provided by the Court itself in the opinion. The Court's introduction to the case follows verbatim:

This post-trial opinion resolves competing requests for relief under Section 225 of the Delaware General Corporation Law (the “DGCL”). 8 Del. C. § 225. At stake is control of the board of directors (the “Board”) of EMAK Worldwide, Inc. (“EMAK” or the “Company”).

Prior to December 18, 2009, the Board had six directors and one vacancy. On December 18, one director resigned, creating a second vacancy. The plaintiffs contend that on December 20 and 21, Take Back EMAK, LLC (“TBE”) delivered sufficient consents (the “TBE Consents”) to remove two additional directors without cause and fill three of the vacancies with Philip Kleweno, Michael Konig, and Lloyd Sems. Incumbent director Donald Kurz is a member of TBE. The TBE Consents, if valid, would establish a new Board majority.

The defendants contend that on December 18, 2009, Crown EMAK Partners, LLC (“Crown”) delivered sufficient consents (the “Crown Consents”) to amend EMAK’s bylaws in two important ways. First, the Crown Consents purportedly amended Section 3.1 of the bylaws (“New Section 3.1”) to reduce the size of the Board to three directors. Because Crown has the right to appoint two directors under the terms of EMAK’s Series AA Preferred Stock, reducing the board to three, if valid, would give Crown a Board majority. Second, the Crown Consents purportedly added a new Section 3.1.1 to the bylaws (“New Section 3.1.1”) providing that if the number of sitting directors exceeds three, then the EMAK CEO will call a special meeting of stockholders to elect the third director, who will take office as the singular successor to his multiple predecessors. The defendants contend that the bylaw amendments are valid and that the next step is for the EMAK CEO to call a special meeting.

I hold that the bylaw amendments adopted through the Crown Consents conflict with the DGCL and are void. They were therefore ineffective to shrink the Board or to require the calling of a special meeting. I hold that the TBE Consents validly effected corporate action. The Board therefore consists of incumbent directors Kurz, Jeffrey Deutschman, and Jason Ackerman, and newly elected directors Kleweno, Konig, and Sems. One vacancy remains.

In addition to seeking relief under Section 225, the parties have asserted a panoply of claims, cross-claims, and third-party claims, and they have amassed an extensive record relating to those claims. My decision addresses only the requests for relief under Section 225, and I have sought to avoid resolving factual disputes that could have collateral implications if the other claims proceed. Contemporaneously with the issuance of this opinion, I am entering a partial final judgment under Rule 54(b) to implement my decision, thereby facilitating a prompt appeal should the defendants wish to pursue it. 

Of course, there is much more to commend this decision and it deserves more extended treatment than the time and space limitations of this blog allow. For example, the Court provides helpful definitions of terms that are often used but rarely explained in any detail. The Court refers to a treatise to explain exactly what it means, from a technical, legal viewpoint, to state that shares in a company are held in "street name".

A quote from the opinion with these definitions follows:

The vast majority of publicly traded shares in the United States are registered on the companies’ books not in the name of beneficial owners—i.e., those investors who paid for, and have the right to vote and dispose of, the shares—but rather in the name of “Cede & Co.,” the name used by The Depository Trust Company (“DTC”).

Shares registered in this manner are commonly referred to as being held in “street name.” . . . DTC holds the shares on behalf of banks and brokers, which in turn hold on behalf of their clients (who are the underlying beneficial owners or other intermediaries).

John C. Wilcox, John J. Purcell III, & Hye-Won Choi, “Street Name” Registration & The Proxy Solicitation Process, at 10-3 in Amy Goodman, et al., A Practical Guide to SEC Proxy and Compensation Rules (4th Ed. 2007 & 2008 Supp.) (hereinafter “Street Name”).

DTC figures prominently in this case. So does the Investor Communications Solutions Division of Broadridge Financial Services, Inc. (“Broadridge”). Although Broadridge’s role is also likely familiar to many readers, I again offer a quick summary:


For many years, banks and brokers maintained their own proxy departments to handle the back-office administrative processes of distributing proxy materials and tabulating voting instructions from their clients. Today, however, the overwhelming majority have eliminated their proxy departments and subcontracted these processes out to [Broadridge]. For many years, these proxy processing services were provided by Automatic Data Processing, Inc. (“ADP”), but on March 31, 2007, ADP spun off its Brokerage Services Group into a new independent company,
Broadridge, which now provides these services to most banks and brokers. To make these arrangements work, Broadridge’s bank and broker clients formally transfer to Broadridge the proxy authority they receive from DTC (via the [DTC] Omnibus Proxy) via written powers of attorney. On behalf of the brokers and banks, Broadridge delivers directly to each beneficial owner a proxy statement and, importantly, a voting instruction form (referred to as a “VIF”) rather than a proxy card. Beneficial owners do not receive proxy cards because they are not vested with the right to vote shares or to grant proxy authority—those rights belong only to the legal owners (or their designees). Beneficial owners merely have the right to instruct
how their shares are to be voted by Broadridge (attorney-in-fact of the DTC participants), which they accomplish by returning a VIF.

Id. at 10-14

Slip op. at 6-7.  The Court emphasized that there is NO legal authority on the issue of who has the authority or obligation to obtain the Omnibus Proxy.

As the Court  explained it: " DTC is generally understood to be the entity with the power under Delaware law to vote the shares that it holds on deposit for the banks and brokers who are members of DTC. Through the DTC omnibus proxy, DTC transfers its voting authority to the banks and brokers. The banks and brokers then transfer the voting authority to Broadridge, which votes the shares held at DTC by each bank and broker in proportion to the aggregate instructions received from the ultimate beneficial owners." Slip op. at 7.

Also described is the important concept known as a "Cede breakdown", referred to as follows: "If DTC holds shares of a corporation on behalf of banks and brokers, then the corporation can ask DTC to provide what is technically known as a participant listing and informally referred to as a “Cede breakdown.” The Cede breakdown for a particular date identifies by name each bank or
broker that holds shares with DTC as of that date and the number of shares held. In contrast to the DTC omnibus proxy, which is not governed by any legal authority, federal regulations require DTC to furnish a Cede breakdown promptly when a corporation requests it." Slip op. at 16.

Issue of First Impression: Reduction in Board Size via Bylaw Amendment

The Court observed that no Delaware decision has addressed the reduction of the size of the board via bylaw amendment. As the Court wrote: "Our law has not addressed what happens when a bylaw amendment would shrink the number of board seats below the number of sitting directors. The DGCL does not address it. No Delaware court has considered it. None of the leading treatises on Delaware law mention it.  Indeed, no one seems to have contemplated it." (footnote omitted.) Slip op. at 20.

The Court observed three ways that a director's term may end:

New [proposed bylaw] Section 3.1 would shrink the Board to three directorships at a time when five directors are in office. There are two possible consequences for the suddenly surplus directors. One is that their terms would end. The other is that they would continue to
serve, albeit without official seats, until their terms were ended by a statutorily recognized means. I find that both possibilities conflict with the DGCL.

The notion that the terms of the extra directors would end conflicts with Section 141(b)’s mandate that “[e]ach director shall hold office until such director’s successor is selected and qualified or until such director’s earlier resignation or removal.” 8 Del. C. §141(b). Section 141(b) thus recognizes three procedural means by which the term of a sitting director can be brought to a close: (1) when the director’s successor is elected and qualified, (2) if the director resigns, or (3) if the director is removed. Section 141(b) does not contemplate that a director’s term could end through board shrinkage. A bylaw that seeks to achieve this result conflicts with Section 141(b) and is void.

Slip op. at 21.

DGCL Section 141(k) supports the general rule that a director or the entire board may be removed  with or without cause by a majority of the shareholders entitled to vote. Slip op. at 23. Although it was observed that directors may, in certain instances, fill vacancies on the board, directors cannot remove a fellow director. Slip op. at 25.

Further reasoning by the Court supported its holding that the bylaw amendment at issue was in violation of the DGCL:

In light of the three procedural means for ending a director’s term in Section 141(b), I do not believe a bylaw could impose a requirement that would disqualify a director and terminate his service. Rohe v. Reliance Training Network, Inc., 2000 WL 1038190, at *12 (Del. Ch. July 21, 2000). Section 141(b)’s recognition of the bylaws as a locus for director qualifications instead contemplates reasonable qualifications to be applied at the front end, before a director’s term commences, when the director is “elected and qualified.” 8 Del. C. § 141(b); see Triplex Shoe Co. v. Rice & Hutchins, Inc., 152 A. 342, 375 (Del. 1930).

Slip op. at 24.

UPDATE: Professor Bainbridge highlights the case here.  The Harvard Law School Corporate Governance Blog discusses the case here.
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Posted on January 19, 2010 by Francis G.X. Pileggi

Delaware Court of Chancery Explains Procedural Prerequisites to Rebut Business Judgment Rule Protection for Board of Directors; Defines "Interested" Director and Lack of Director "Independence"

Robotti & Co. LLC v. Liddell, No. 3128-VCN (Del. Ch., Jan. 14, 2010), read opinion here. See summary of Court of Chancery's prior Section 220 decision involving these parties here.

This 43-page Delaware Court of Chancery decision could serve as a “mini-law review article” that explains the current Delaware law on a wide range of issues important to those involved in corporate derivative litigation, and directors who want to understand the standards by which their conduct will be reviewed by the courts.

Background

The factual and procedural background of this matter is that it is a class and derivative action challenging a stockholder rights offering ("Offering"). The shareholder plaintiff alleges that the directors of the company set the Offering at a deliberately and inadequately low price that would trigger anti-dilution provisions in the agreements governing the stock options and warrants of the controlling shareholder. The shareholder plaintiffs argued that the triggering of the anti-dilution provisions resulted in a benefit being enjoyed by the directors that was not shared by the other shareholders and therefore, was a self-dealing transaction. The Court found, however, that the complaint failed to state a claim because the anti-dilution provisions did not change or challenge the pre-existing contractual rights of the directors which left them in substantially the same position they were in before the rights Offering. Thus, the shareholder did not sufficiently allege disloyal conduct by, for example, showing that the directors acquiesced  to the wishes of the controlling shareholder.

This cursory review will simply highlight key aspects of the Court’s opinion so that the interested reader can decide to review the full text of the decision on their own at the above link.

Court’s Summary of Issues in Case and Its Four-Part Holding

The Court described this case as one that “ultimately boils down to an alleged breach of the duty of loyalty and whether or not the defendants obtained a personal benefit through the Offering.” The Court’s reasoning and analysis can be summarized in four parts: (1) The Court cannot draw a reasonable inference from the facts that the Offering’s trigger of the anti-dilution provisions and their effect upon the options worked a material personal gain to the directors at the expense of the public stockholders. Nor did the plaintiff plead sufficient facts to support a claim that the directors acted in bad faith by consciously disregarding their fiduciary duties. (2) Because the court cannot reasonably infer from the facts that the directors received a personal gain by way of the collateral consequences of the Offering or consciously disregarded their duties, their decision to consummate the Offering is protected by the business judgment rule. (3) Of equal importance, the plaintiff has not duly alleged that the controlling shareholder dominated the board as it approved the Offering. (4) The derivative claims were barred because the plaintiff failed to plead that the board of directors were either interested or under the control or domination of an interested party as of the time it asserted the derivative claims.

Court Declines to Convert Motion to Dismiss into Motion for Summary Judgment

Robotti requested that the Court treat the motion to dismiss by the defendants as one for summary judgment because the defendants relied upon documents that were neither integral to, nor incorporated within, the complaint. The Court declined the invitation to treat the motion as one under Rule 56 as opposed to Rule 12(b)(6), which would have given the parties a reasonable opportunity to present all material relevant to a summary judgment motion. The Court observed that matters beyond the complaint may generally not be considered in a ruling on a motion to dismiss except in the following instances: “(1) When such documents are integral to, and incorporated within, the plaintiff’s complaint; or (2) When the documents are not being relied upon for the truth of their contents.” See footnote 49.

Direct v. Derivative Claims 

The opinion contains a thorough discussion and analysis of the differences between a direct as compared to a derivative claim. Referring to recent Delaware Supreme Court opinions on the topic, the Court explained that an initial inquiry in determining between a direct and derivative claim requires the following two questions to be addressed: “(1) Who suffered the alleged harm - - the corporation or the shareholders individually; and (2) Who would receive the benefit of the recovery or other remedy?” See footnotes 55 and 56.

The Court discussed the recent cases that have analyzed whether a dilution in the value of corporate stock and overpayment by fiduciaries is direct or derivative. The recent decision in Gentile v. Rossette, 906 A.2d 91 (Del. 2006) was described as involving a controlling shareholder who caused the company to issue the controlling shareholder’s stock in return for debt forgiveness. The Supreme Court in Gentile held that both the corporation and the shareholders were harmed by the overpayment and due to the dual nature of the harm, the claims in that class were both derivative and direct.

Analysis of Bad Faith and Breach of Duty of Loyalty Claims

The Court described a methodology for analyzing allegations of bad faith within the context of a duty of loyalty claim as being recently clarified by the Delaware Supreme Court in Lyondell Chemical Co. v. Ryan, 970 A.2d 235 (Del. 2009). The Court of Chancery explained as follows:

“Mere gross negligence, which includes the failure to inform oneself of available material facts, cannot constitute bad faith. Bad faith, and thus a breach of the duty of loyalty, can arise only when a fiduciary consciously disregards his or her responsibilities. The Court in Lyondell imposed a high standard on any plaintiff advancing such a claim, and recognized a “vast difference between an inadequate or flawed effort to carry our fiduciary duties and a conscious disregard of those duties.” It concluded that fiduciaries in this context breached their duty of loyalty only if they “knowingly and completely fail to undertake their responsibilities.”

In this case, the Court found that Robotti never claimed that the defendants “knowingly and completely” failed to undertake their responsibilities, nor may any such inference be drawn from the complaint.

Business Judgment Rule Applies

This opinion provides a robust discussion of the business judgment rule, its applicability, and the pleading requirements under Rule 23.1.

Notably, this is the first Delaware decision that cites to the current version of the highly regarded four volume treatise on the business judgment rule recently published by Stephen A Radin and which is cited at footnote 89 by the Court as follows: 1 Stephen A. Radin, et al., The Business Judgment Rule: Fiduciary Duties for Corporate Directors 110 (6th ed. 2009).

Referring to the Radin treatise, the Court defines the business judgment rule as follows:

“The business judgment rule, as a general matter, protects directors from liability for their decisions so long as there exists a ‘business decision, disinterestedness and independence, due care, good faith and no abuse of discretion and a challenged decision does not constitute fraud, illegality, ultra vires conduct or waste.’ There is a presumption that directors have acted in accordance with each of these elements, and this presumption cannot be overcome unless the complaint pleads specific facts demonstrating otherwise. Put another way, under the business judgment rule, the Court will not invalidate a board’s decision or question its reasonableness, so long as its decision can be attributed to a rational business purpose.” See footnote 91.

The Court found that Robotti had been unable to allege that defendants were interested in the transaction and it also failed to allege bad faith or conscious disregard of fiduciary duty. Moreover, although Robotti may have plead a failure to act with due care and on an informed basis regarding the transaction, such a conclusion would be unhelpful in light of the provision in the charter pursuant to Section 102(b)(7) which would preclude a claim for damages on that ground.

Demand Excusal

The Court also conducted an analysis under Rule 23.1 and found that the derivative claims did not satisfy that rule. Footnote 95 and 96 made it clear that the applicable time period to determine whether the pre-suit demand requirement was futile was when the first derivative claim was presented--which was in the second amended complaint. The composition of the Board at that time when the first derivative claim was filed made the Rales v. Blasband case applicable. See 634 A.2d 927, 933-34 (Del. 1993). Under Rales, the Court explained that the relevant inquiry is only whether the board can exercise its independent and disinterested judgment in responding to a demand, where, as here, the majority of the directors responsible for that decision have since been replaced.

Definitions to Determine "Interested" or "Independent" Directors

The Court provides a helpful discussion and definition of the term “interested” for purposes of pre-suit demand upon the board. Likewise for pre-suit demand purposes, the Court provides a useful definition to determine whether a director is "independent" for purposes of a pre-suit demand analysis. See footnote 98: “The mere fact that a director receives some benefit that was not shared generally by all shareholders is insufficient; the benefit must be material.”

For purposes of demand excusal analysis, rather, the plaintiff must show that the alleged benefit was “significant enough in the context of the director’s economic circumstances, as to have made it improbable that the director could perform her fiduciary duties to the . . . shareholders without being influenced by her overriding personal interest.” See footnote 99.

Regarding the independence of a director, the Court emphasized the contextual aspect of the inquiry, which requires a Court to ask “whether the directors are so ‘beholden’ to an interested director or interested controlling shareholder, that ‘their discretion would be sterilized.’ Motivations such as friendship may influence the inquiry, but in order for friendship alone to neutralize the independence of a director, the ‘relationship must be of a bias-producing nature.’” See footnote 101.

The Delaware Supreme Court has required that a complaint identify a relationship between a disinterested director and the interested director or controlling shareholder “that is so close that one could infer that the ‘non-interested director would be more willing to risk his or her reputation than risk the relationship with the interested director.’” See footnote 103.

The Court analyzed the factual situation as it related to each board member at the time the derivative claim was made in the second amended complaint, and found that the complaint did not adequately justify excusal of a pre-suit demand.

Conclusion

Thus, because the Court found that a majority of the board at the time of the derivative claim was both independent and disinterested, Robotti did not sufficiently plead demand futility and to that extent his derivative claims were dismissed. In addition, the claim for self-dealing by interested fiduciaries failed as a matter of law and the facts did not support an inference that the directors consciously disregarded their fiduciary duties or entirely abdicated their responsibilities. Therefore, the complaint was dismissed.

 

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Posted on October 27, 2009 by Francis G.X. Pileggi

Chancery Court Discusses Fiduciary Duty of Director to Disclose Information While Negotiating Release with Corporation and Whether Lack of Disclosure Could Invalidate the Release

 Xu  v. Heckmann Corporation,  No. 4673-CC (Del. Ch. October 26, 2009), read opinion here.

The Chancellor of the Delaware Court of Chancery in this opinion decides a Motion to Dismiss Counterclaims involving issues related to fraud allegations against a director. The founder of a selling company, based in China, became a director of a U.S. corporate buyer as part of the deal. It was in this context that claims against the director were made post-closing by the purchaser. Similarly, the purchaser claimed that the fraud of the seller should relieve it of any duty to fulfill the payment obligations of the deal.

(The Court of Chancery Courthouse in Georgetown, Delaware, is featured in the photo).

Background
The factual background involved a purchase via merger by the Heckmann Corporation of a bottled water producer and distributor in China, founded by Xu Hong Bin, a citizen of the People’s Republic of China. The purchase price included $15 million in cash, the right to contingent payments of an additional $15 million, as well as restricted shares in the Heckmann Corporation. The merger also included Xu continuing as the president of China Water and also becoming a director of Heckmann. As a result of post-closing issues that developed, the parties entered into an Escrow Resolution and Transition Agreement (“ERTA”) which required the restricted shares that were part of the Merger Agreement to be returned to Heckmann at a substantially discounted price. The ERTA included a broadly worded mutual release of claims between Xu and Heckmann, as well as an integration clause.

Overview of Claims and Counterclaims
Xu sued for specific performance of the ERTA. Heckmann filed counterclaims claiming that Xu breached fiduciary duties he owed to Heckmann as a director and that he also breached the ERTA. Heckmann also asserted that Xu is not entitled to certain payments already made to him. The Court noted that Heckmann asserted that it was fraudulently induced into signing the ERTA by Xu’s failure to disclose fraudulent conduct, which was technically not a counterclaim, but rather was an affirmative defense to enforcement of the ERTA.

There are many detailed factual allegations that are beyond the scope of this short blog overview, but in essence, they involve what Heckmann alleges to be substantial fraud that it only discovered after the closing. The broad release language in the ERTA (which was entered into after the merger agreement), was the principle basis for the Plaintiffs’ Motion to Dismiss the Counterclaims filed by Heckmann. The choice of law provision in the ERTA provided that “except to the extent that the corporate laws of the State of Delaware apply to a party, this Agreement shall be governed by the laws of the State of New York." Thus the fiduciary duties owed by Xu to Heckmann were governed by Delaware law while general contract duties were governed by New York law.

Discussion of Scope and Validity of Release

The general release language in the ERTA covered claims being released between Xu and Heckmann and also included those  claims: “whether known to Heckmann or China Water at the time of execution of this Agreement or not . . ..”

Heckmann argued that the general release language was not valid because the transaction was “self interested” to the extent that it would purport to protect Xu from claims by Heckmann after Heckmann discovered the fraudulent conduct of Xu. See cases cited in footnotes 15 through 18.
The Court agreed that if Heckmann was unaware of the fraud committed by Xu when he negotiated the ERTA, while Xu was a director, then Xu “clearly had a fiduciary duty to inform Heckmann that the release would cover his alleged fraudulent conduct because the information would have been material to Heckmann’s decision to enter into the ERTA.” See footnote 20. The Court reasoned that such a rule:

“simply follows general principles of Delaware law that require a director to make full disclosure of his interest in the transaction before engaging in that transaction with the corporation. If the corporation is unaware that it is releasing a director of potentially fraudulent conduct then it is unaware of the director’s existing personal interest in the release.”

However, the Court highlighted an important distinction in a situation where a director negotiates a general release with his corporation made amidst corporate “suspicions or allegations that the director committed fraud” and where the mutual release is intended to settle those fraud claims, "even if the full scope of those claims is unknown when the release is signed.”

In such circumstances, the director accused of fraud does not have a fiduciary duty to disclose all his wrongful acts prior to signing a release. In such a situation, if the corporation already suspects fraud has occurred, and it settles the claims against the director with a general release, it cannot be said that the corporation was deprived of material information it needed to evaluate the settling of its claims. This is so because the corporation would be aware that a director has an existing personal interest in the transaction (i.e., the release agreement), and is aware that fraud may be greater than it suspects. See footnotes 21 through 24.

The Court recognized that the distinction makes sense because requiring a director accused of fraud by his corporation to disclose all prior wrongdoing before negotiating a settlement would make the settlement of fiduciary claims arising out of fraudulent conduct impossible. Requiring a full confession, especially as to disputed claims, would remove any incentive to settle and would remove any assurance that upon hearing of additional wrongdoing, that the corporation would still settle.

There was a factual issue here about whether Heckmann was aware of fraud or of potential fraud committed by Xu when it entered into the release and that factual issue could not be resolved at this early procedural stage.

The Court related the foregoing analysis to the fraudulent inducement arguments which were considered as an affirmative defense and not regarded by the Court as a counterclaim. That affirmative defense to the formation of a contract was controlled by agreement pursuant to New York law.

Breach of Contract Claim Dismissed

There was an issue about whether Xu had the authority to enter into the ERTA. The Court observed that

“all contracts include the inherent representation that the party entering into the contract has the authority to do so. This inherent representation is important because, if it is false, the contract may fail or be unenforceable as a matter of law. Thus, if a person signing a contract misrepresents that he has the necessary authority to do so, the legal questions that are triggered have to do with contract formation or enforceability, not breach of contract.”

The Court explained why this makes sense as a matter of logic. In this case, Heckmann wanted to prove that Xu lacked authority to enter the ERTA. If Xu lacked the authority to enter into the ERTA, then that lack of authority was not a breach of contract, because the contract would not exist or would not be enforceable by virtue of that lack of authority. Thus, the Motion to Dismiss the Counterclaim for Breach of Contract was granted.

Claim for Conversion Rejected

In Delaware, “an action in conversion will not lie to enforce a claim for the payment of money.” See footnote 44. No exception to that rule applied here because Heckmann was suing for a return of money pursuant to a disputed contract and those claims would be based on contract principles. Thus, the Motion to Dismiss the Counterclaim for Conversion was granted. See also footnote 47. (In order to assert a tort claim along with a contract claim, the plaintiff must generally allege that defendant violated an independent legal duty, apart from the duty imposed by contract.)

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