Chancery Provides Comprehensive Explanation of the Broad Scope and Flexibility of its Equitable Remedial Powers

By Francis Pileggi on August 8, 2018 Posted in Chancery Court Updates

The most comprehensive description in a Delaware decision in several decades of the broad and flexible authority of the Court of Chancery to fashion an appropriate customized equitable remedy was provided, with bountiful citations to authority and treatises, in the recent decision styled In Re Oxbow Carbon LLC Unitholder Litigation, C.A. No. 12447-VCL (Del. Ch. Aug. 1, 2018). Several of the prior decisions in this case providing more detailed factual background were highlighted on these pages previously.

This opinion contains the type of all-inclusive coverage of a topic that deserves to be treated with the same reverence one would afford a frequently-consulted reference book that should be readily accessible in the “tool box” of those involved in corporate or commercial litigation who might need to quote authority for the capacious scope of the Court of Chancery’s flexible and customized equitable remedial powers.

The most important parts of the opinion, with the broadest potential applicability for corporate and commercial litigation, include the following:

The decision includes the most encyclopedic description in a Delaware opinion, with the most citations to authority and other scholarly sources, about which this writer is aware, of the doctrinal underpinning and public policy reasons, as well as historical origin, of the copious and flexible authority of the Court of Chancery to fashion appropriate equitable remedies customized to the circumstances of each case. See pages 4 through 8. Compare a relatively recent Chancery decision addressing the same general topic in a much more abbreviated fashion, highlighted on these pages.
The court describes the prerequisites for the discretionary remedy of specific performance. See pages 8 and 9.
The court explains how its flexibility to fashion an appropriate remedy is available to modify the typical limitations of the remedy of specific performance–to the extent that the court is not constrained to order performance of a contract exactly as the contract is written, but instead may provide a more customized type of specific performance. See page 13.
In connection with its authority to both fashion a customized remedy and to monitor enforcement or execution of the court’s judgment and remedial decision, the court provides an extensive analysis, with plentiful citations to authority, of its power to appoint an independent monitor to oversee the implementation of its judgment (as opposed to a receiver). See pages 16 to 21.

Chancery Instructs on Anti-Reliance Clauses that Bar Extra-Contractual Fraud Claims

By Francis Pileggi on August 8, 2018 Posted in Chancery Court Updates

The Delaware Court of Chancery recent provided explicit guidance to drafters of M&A agreements and those that litigate such agreements, to the extent that it provides clarion instruction on the prerequisites for contractual clauses that will bar extra-contractual claims for fraud. In the case styled ChyronHego Corporation v. Wight, C.A. No. 2017-0548-SG (Del. Ch. July 31, 2018), the court dealt with the familiar claims of fraud arising from a corporate acquisition–and how such claims may be avoided.

The opinion provides many important articulations of Delaware law relating to misrepresentations alleged to have been made in connection with the purchase or sale of a company. The most noteworthy iterations of Delaware law include the following:

Delaware law allows parties to identify the specific information on which a party has relied, and forecloses reliance on other information. See footnote 51 and accompanying text (citing Prairie Capital III, L.P. v. Double E Holding Corp., 131 A.3d 35, 50 (Del. Ch. 2015)(highlighted on these pages)).
In order for an anti-reliance provision to be effective, it must be unequivocally clear. By contrast, “Standard Integration Clauses” without explicit anti-reliance representations, will not relieve a party of its oral and extra-contractual fraudulent representations. Slip op. at 12 (citing Abry Partners V, L.P. v. F&W Acquisition LLC, 891 A.2d 1032, 1050 (Del. Ch. 2006) (highlighted on these pages)).
The court emphasized that in order for anti-reliance language to be enforceable, “the contract must contain language that, when read together, can be said to add up to a clear anti-reliance clause by which the plaintiff has contractually promised that it did not rely upon statements outside the contract’s four corners in deciding to sign the contract.” See footnote 55 and accompanying text (citing Kronenberg v. Katz, 872 A.2d 568, 593 (Del. Ch. 2004)).
Regarding the particular facts of this case, the court reviewed the entirety of the contract in context, and in particular analyzed in combination the following clauses: (i) a standard integration clause; together with (ii) an exclusive remedies clause; (iii) a clause defining excluded liabilities; (iv) an indemnification provision; and, significantly (v) an expressly articulated anti-reliance clause–that the court quoted on page 13 of the opinion.
The court also relied on the reasoning of the Prairie Capital case, linked above, which involved similar contract language that included express anti-reliance provisions. See Slip op. at pages 14 and 15.
The court also quoted the reasoning in the Abry Partners case, linked above, that defines the limits, based on Delaware public policy, of an anti-reliance provision. Delaware courts will not condone an anti-reliance provision that one attempts to use in order to: (1) protect a seller from liability for making false representations in a contract; or (2) avoid liability for knowledge that representations in a contract are false. See page 25. See also footnote 100 which noted the truism that knowledge or false statements by a corporate agent can be imputed to the corporation itself.

Supreme Court Limits Application of Corwin Doctrine

By Francis Pileggi on August 6, 2018 Posted in Delaware Supreme Court Updates

The recent decision of the Delaware Supreme Court in Morrison v. Berry, et al., Del. Supr., C.A. No. 445, 2017, July 9, 2018 (revised July 27, 2018), limited the application of the Corwin doctrine and prohibited the cleansing effect of stockholder approval, in part due to inadequate disclosures. See Corwin v. KKR Fin. Holdings LLC, 125 A.3d 305, 312 (Del. 2015). See also Appel v. Berkman, 180 A.3d 1055, 1064 (Del. 2018).

The court began the opinion with “. . . a cautionary reminder to directors and the attorneys who help them draft their disclosures: partial and elliptical disclosures cannot facilitate the protection of the business judgment rule under the Corwin doctrine.” See footnote 1.

Key Principles Articulated by Delaware’s High Court:

The court explained that under the Corwin doctrine: “The business judgment rule is invoked as the appropriate standard of review for a post-closing damages action when a merger that is not subject to the entire fairness standard of review has been approved by a fully informed, uncoerced majority of the disinterested stockholders.”
The Corwin doctrine is premised on the view that “when the real parties in interest–the disinterested equity owners–can easily protect themselves at the ballot box by simply voting no, the utility of a litigation-intrusive standard of review promises more costs to the stockholders in the form of litigation rents and inhibitions on risk-taking than it promises in terms of benefits to them.” See footnotes 13 and 14.
The Corwin doctrine has been extended to stockholders deciding whether to tender their shares. See footnote 15.
A condition to the applicability of the Corwin doctrine is disclosure of material information. That is, the vote of the stockholders must be fully informed. To the contrary, in this case the Supreme Court found that there was materially incomplete and misleading information and a failure to disclose troubling facts regarding director behavior that would have been material to a voting stockholder. Therefore, the court refused to apply the business judgment rule standard of review. See footnotes 18 and 19.

Delaware’s high court provided many other important principles of corporate law with wide application, including the following bullet points:

The court explained the various nuances of the board’s duty of disclosure to stockholders. See page 28 and footnote 101.
The duty of candor owed by directors to each other was also described. See page 22 and footnote 77.
The opinion provides a definition of materiality and explains when an omitted fact is material. See page 19.

Chancery Explains Limitations on Right of Directors to Corporate Information

By Francis Pileggi on July 31, 2018 Posted in Chancery Court Updates

In the latest iteration of the ongoing litigation involving CBS Corporation and its controlling stockholder, the Court of Chancery recently provided a textbook summary of the general rule that directors have the right to unfettered access to corporate data, with three general exceptions. In the case styled In re CBS Corporation Litigation, Consol. C.A. No. 2018-0342-AGB (Del. Ch. July 13, 2018), the Delaware Court of Chancery explained that one of those exceptions to the general rule applied to prevent directors who were adverse to a Special Committee from obtaining communications with counsel for the Special Committee. This quintessential Delaware corporate litigation case has garnered extensive coverage in the trade press and most major media outlets.

The directors of CBS affiliated with the controller of CBS were prevented from obtaining the privileged communications between the CBS Board’s Special Committee and its counsel. The court found that other records requested fit in the category of the general rule that entitled the directors to communications between the company and its corporate counsel. Still other document requests would require further factual development before a decision could be made on whether or not they should be produced. A prior decision in this case was highlighted on these pages.

Three Exceptions to Directors’ Right to Corporate Data:

The three general exceptions to the rule that directors have unfettered access to corporate data are as follows: (1) based on an ex ante agreement among the contracting parties; (2) a board can act pursuant to DGCL § 141(c) and “openly with the knowledge of the excluded director to appoint a Special Committee.” That committee would be free to retain separate legal counsel and its communications with that counsel would be protected; and (3) a board or a committee can withhold privileged information when sufficient adversity exists between the director and the corporation such that the director could no longer have a reasonable expectation that he was a client of the board’s counsel. See Kalisman v. Freidman, 2013 WL 1668205 (Del. Ch. Apr. 17, 2013). See also SBC Interactive, Inc. v. Corporate Media Partners, 1997 WL 770715, at *6 (Del. Ch. Dec. 9, 1997).

Chancery Describes Broad Powers to Remedy Breach of Fiduciary Duty

By Francis Pileggi on July 31, 2018 Posted in Chancery Court Updates

A recent decision of the Delaware Court of Chancery provides a mini-treatise on the capacious capacity of the court to fashion creative and customized remedies when a breach of fiduciary duty is found. The 126-page opinion in the matter of Basho Technologies Holdco B, LLC v. Georgetown Basho Investors, LLC, C.A. No. 11802-VCL (Del. Ch., July 6, 2018), involved an investor who gained control of a company as part of a bad-faith campaign to profit from the sale of the company, and in the process of solidifying its control, caused the company’s failure.

The court found that the controller had a plan to force a near term exit and positioned itself as the point person for any efforts to raise capital. It used its blocking rights to veto any financing that did not conform to its grand scheme. The court ordered substantial damages against the controlling stockholder for breach of fiduciary duty involving self-dealing that resulted in the downfall of the business.

In this lengthy opinion, there are many key principles of Delaware corporate law, and a description of different types of remedies, that are noteworthy and which have wide applicability. Those include the following:

The court explained that mere blocking rights alone (e.g., to veto new financing), will typically not suffice to support a finding of control. See footnote 315 and accompanying text. The court cited, however, to several sources that supported the view that one can be found to be a controlling stockholder for purposes of a single transaction. See footnote 309 and accompanying text.
The court provided a list of factors that might contribute to a finding of actual control although it would be “impossible to identify or foresee all of the possible sources of influence that could contribute to a finding of control over a particular decision.” See pages 66 to 70 and supporting footnotes.
The court provides a comprehensive textbook-style recitation of the elements of a breach of fiduciary duty claim, as well as the definition of a fiduciary relationship. See pages 58 and 59 and footnotes 291 to 293.
The court instructs how the governing standard of review will impact the analysis for reviewing a claim for breach of fiduciary duty, and how the analysis will be guided by whether the business judgment rule applies or the entire fairness test applies. See pages 60 to 61.
The court reiterated the truism that one who has majority voting power owes fiduciary duties. See footnote 63. But, importantly, even one without majority voting power can be found to owe fiduciary duties if that person “exercised control over the business and affairs of the corporation.” See footnote 305. The court explains how that requisite degree of control might be shown to exist. Id. The court noted that despite some who might think otherwise, even though the entire fairness standard is the most onerous standard of review, that standard does not always result in a win for the plaintiff and “scholarly research establishes that only exceptional entire fairness cases result in meaningful damage awards.” See footnote 399.
The court reasoned that when there is a breach of the duty of loyalty as long as there is a connection between the harm and the award, “the law does not require certainty in the award of damages.” See page 123. The court added that: “Responsible estimates that lack mathematical certainty are permissible so long as the court has a basis to make a responsible estimate of damages. Once a breach of duty is established, uncertainties in awarding damages are generally resolved against the wrongdoer.” See page 124 and footnotes 520 and 521.
The court observed that: “In determining damages, the powers of the Court of Chancery are very broad in fashioning equitable and monetary relief under the entire fairness standard as may be appropriate . . . .” See page 107 and footnotes 456 and 457.
The court provided an extensive recitation of the wide scope of its authority to fashion equitable remedies for breach of fiduciary duty. For example, the court explained that when the entire fairness test applies and there has been a breach of the duty of loyalty, the stockholders may demand rescission of a transaction or, if that is impractical, the payment of rescissory damages. See footnote 13.
The court defined rescissory damages as the monetary equivalent of rescission and the Delaware courts have awarded those damages in cases where a fiduciary has selfishly appropriated the property of a beneficiary. These damages differ from compensatory damages in that the loss can be measured at the time of the judgment rather than at the time of the injury. See footnotes 514 through 517.

Court of Chancery Explains the Phrase “Sound Business Practices” in L.P. Agreement

By Francis Pileggi on July 30, 2018 Posted in Chancery Court Updates

A recent Delaware Court of Chancery opinion explained the meaning of undefined terms in a limited partnership agreement which required the general partner in the Limited Partnership to use “best efforts” and “sound business practices.” In connection with claims that the general partner breached the agreement, the court in Wenske v. Blue Bell Creameries, Inc., C.A. No. 2017-0699-JRS (Del. Ch. July 6, 2018), explained that it would use dictionary definitions to help illustrate the meaning of those undefined terms. See page 25 and footnotes 91 to 93.

The court did not refer to the more common standard of “commercially reasonably efforts”, but that somewhat related contractual standard has been discussed in cases highlighted on these pages. Instead, the court’s application of dictionary definitions of the terms “best efforts” and “sound business practices” were applied to deny the motion to dismiss for breach of contract.The court also provided helpful contract interpretation principles in connection with how to define terms not defined in an agreement. See footnote 25.

Additional Noteworthy Principles Applicable to Commercial Litigation:

The court reiterated the well-known Delaware principle that unless expressly disclaimed, alternate entities such as limited partnerships will be subject to default fiduciary duties. See footnote 3.
The court explained that when fiduciary duties are disclaimed, and a new contractual standard is inserted to replace default fiduciary standards, the appropriate nomenclature for a claim for breach of that standard is a simple breach of contract, and not a breach of a “contractual fiduciary duty.” See pages 35 and 36.
The court observed in passing what the elements of a claim for piercing the corporate veil are, and even though the plaintiffs did not use that terminology, that is how the court interpreted their claim. The court described why the elements for such a claim were not met. See pages 37 and 38.
In connection with granting the motion to dismiss the claim for breach of fiduciary duties, the court discussed the well-recognized concept in Delaware that the controllers of a corporate general partner of a limited partnership may owe fiduciary duties to the limited partnership, if such persons exercise control over the limited partnership’s property—but that claim cannot be made if the limited partnership disclaims all fiduciary duties. See pages 42 and 43 and accompanying footnotes. The Delaware decision that articulated that cause of action against controllers of a corporate general partner of an L.P.is known as In re USA Cafes, L.P. Litigation, 6 A.2d 43 (Del. Ch. 1991).

Delaware Supreme Court Issues Order to Improve Work/Life Balance

By Francis Pileggi on July 24, 2018 Posted in Delaware Supreme Court Updates

The Chief Justice of the Delaware Supreme Court issued an Order recently that seeks to improve work/life balance of both practicing lawyers and their staff. Among the most important aspects of the Order include the requirement that Delaware courts amend their rules and electronic filing policies to require all court filings in non-expedited matters, except for initial pleadings and notices of appeal, to be completed by 5:00 p.m. Eastern Time in order to be considered timely filed that day. All initial pleadings, notices of appeal and electronic filings in expedited matters must be completed before midnight Eastern Time in order to be considered timely filed that day, except for expedited matters where the parties have agreed upon, or the court has ordered, a different filing deadline. This requirement shall become effective on September 14, 2018. Scales, work and life

Practitioners in the Delaware Court of Chancery have often included already in many Scheduling Orders, either by mutual consent or by direction of the court, a requirement that filings be made by 4:00 p.m. Eastern on the filing deadline.

Also, the new Order requires trial courts to “consider adopting” practices and policies that disfavor: (i) filing due dates on Mondays or the day after a holiday in non-expedited matters; (ii) the issuance of non-expedited opinions addressing dispositive motions or post-trial relief after 4:00 p.m. as a general matter, and afternoons on Fridays; and (iii) the scheduling of oral arguments and trials in August, except in expedited matters or if there is an important reason for proceeding at that time.

The Delaware Law Weekly article on this topic quoted yours truly regarding the impact of the Order. The Supreme Court’s Order dated July 18, 2018, also included several pages of preambles which provide background information and the recommendations of a committee on the topic that was unable to reach a consensus, but whose report is available on the website of the Delaware state courts at: https://courts.delaware.gov/rules/

The new rules will be of special importance to the many lawyers from different time zones who work with Delaware counsel on Delaware cases. For example, lawyers in California will need to complete any work on filings to be submitted in Delaware courts several hours before the normal end of the work day for their staff. This Order will be of particular benefit to the staff who help lawyers with their filings because most staff, unless they volunteer for the extra money from overtime, do not want to be forced to work overtime. Of course, staff for lawyers did not “sign up” for the long hours that lawyers expect to work and most staff are not paid commensurately.

The court is to be commended for attempting to improve the quality of life for practicing lawyers–and their staff–in Delaware and those in other states who practice with them in the litigation trenches. In the same vein, a recent article noted that the enlightened country of New Zealand is experimenting with a 4-day work week.

Chancery Considers Permissive v. Exclusive Forum Selection Clauses

By Francis Pileggi on July 17, 2018 Posted in Chancery Court Updates

The Delaware Court of Chancery found that a forum selection clause that was merely permissive rather than exclusive, did not justify enforcing one forum only. In the case styled In re Bay Hills Emerging Partners, I, L.P., C.A. No. 2018-0234- JRS (Del. Ch. July 2, 2018), the court was presented with a case challenging the removal of general partners of a Delaware limited partnership. Many prior decisions upholding (mostly) exclusive forum selection clauses have been highlighted on these pages over the last 13 years.

Brief Background Facts:

Shortly after the Delaware action was filed, the limited partner initiated litigation in the Commonwealth of Kentucky in which it sought judicial declarations that its removal of the general partners was proper, along with other legal and equitable relief.

The defendants in Delaware moved to dismiss the action primarily on the basis of the forum selection clause in the relevant agreements that required the plaintiff in the Delaware case to litigate the dispute in Kentucky. The court disagreed, primarily because the applicable forum selection clause was only permissive, and not a mandatory, exclusive forum selection clause. This is recurring issue in corporate and commercial litigation.

The applicable clause stated that Franklin County Circuit Court in Kentucky is “a proper venue” but it did not designate that court as the “exclusive” forum.

Procedural Posture:

Even though the Kentucky action was filed eight days after the Delaware action, and the claims were nearly identical, the court sua sponte decided to stay the Delaware action in favor of the Kentucky action.

The court reviewed the motion under Rule 12(b)(3), which does not limit the court to the complaint but allows the court to consider extrinsic evidence. In addition to the forum selection clause, the motion to dismiss the Delaware action was based on forum non conveniens as well as “the interests of comity” and the doctrine of sovereign immunity because the Commonwealth of Kentucky was one of the interested parties.

Analysis of the Court:

One of the more interesting aspects of this decision was the analysis of 6 Del. C. § 17-109(d) which prohibits limited partners from waiving the right to litigate matters relating to the internal affairs of the limited partnership in the courts of Delaware.

Forum Selection Clauses:

The court recognized the well-settled rule in Delaware that courts generally should give effect to the selection in a private agreement to resolve disputes in a particular forum.

The Delaware courts often grant motions to dismiss where the parties use express language clearly indicating that the forum selection clause excludes the court where a party improperly filed an action. See footnotes 33 and 34.

Choice of Law Clauses:

There was a choice of law provision in this agreement which provided that the laws of the Commonwealth of Kentucky apply regardless of choice of law principles.

Delaware courts generally honor contractually-designated choice of law provisions, as long as the jurisdiction bears some material relationship to the transaction. See footnote 36. In this case there is little doubt about the material relationship to Kentucky because the limited partner in each of the limited partnerships involved was a statutorily created entity that manages the retirement systems for the Commonwealth of Kentucky.

Notably, the court referred to the cases where there is a “false conflict” meaning that there is no material difference between the laws of competing jurisdictions–in which case the “court should avoid the choice of law analysis all together.” See footnote 38. The court applied that principle in this case to decline to undertake a choice of law analysis.

Key Takeaways:

The key rulings with the most widespread applicability that can be gleaned from this case are the following:

1) Where two cases are filed within a short time of each other, the court will treat them as being filed contemporaneously, and a forum non conveniens analysis will apply. In this case it applied to favor a stay of the Delaware case and an application of Kentucky law because there were no unique issues of Delaware law presented.

2) The court recognized the general enforceability of forum selection clauses, as well as choice of law provisions. Many forum selection clause cases have been highlighted on these pages.

3) The court observed that both the Delaware LLC Act and the Delaware LP Act prevent non-managers of LLCs and non-general partners of LPs from waiving their right to litigate internal affairs issues in Delaware, but those provisions do not require them to litigate in Delaware; nor do those provisions require LLC managers or general partners of limited partnerships to litigate in Delaware.

Chancery Disregards Corporate Entity to Allow Debt Collection

By Francis Pileggi on July 17, 2018 Posted in Chancery Court Updates

The Court of Chancery recently allowed, after trial, a claimant to disregard the corporate entity, which the court found was involved in a fraudulent conveyance. The case styled: Fringer v. Kersey Homes, Inc., C.A. No. 9780-VCG (Del. Ch. June 25, 2018), begins with the following three sentences: “The great advantage of the corporate form is that it permits investment and ownership without risk of personal liability for entity debt. This advantage has its limits, obviously. One such limitation is involved here.” (FYI: There is no typo in the Plaintiff’s name in the above case caption.)

For those interested in the topic of “piercing the corporate veil,” friend of the blog, Professor Stephen Bainbridge, has co-authored a book that includes an in-depth scholarly analysis of the topic. The good professor has published a lengthy list of books and articles on corporate law that are often cited by the Delaware courts.

Although the net result is the same, this decision does not undertake a “conventional analysis” that directly addresses piercing the corporate veil, and the facts of this case are not likely to be repeated, but a number of more traditional “piercing the corporate veil” cases have been highlighted on these pages over the last 13 years.

Brief Background:

The corporation involved, Kelsey Homes, Inc., was a defendant in a prior lawsuit based on allegations of fraud in connection with an agreement to sell a modular home. At the time of that agreement, Kelsey Homes, Inc. was “moribund.” By the time trial approached in the prior fraud suit, its only asset was the modular home at issue in the litigation. Kersey Homes, Inc. had transferred its only asset in a back-dated bill of sale to a relative of one of the stockholders, and then defaulted on the fraud action.

The court found that the stockholders of the corporate defendant were wrong when they thought that a judgment against the now-insolvent Kersey Homes, Inc. would be beyond the reach of the resulting judgment creditors.

The court held that the “sale” of the only corporate asset to a related party was a “sham” and the transfer was fraudulent under Delaware’s Uniform Fraudulent Transfer Act. The court granted the plaintiff in this case a levy on the property, to receive the sales proceeds in an amount sufficient to satisfy the judgment.

Procedural History:

The prior fraud suit against Kersey Homes, Inc. regarding the sale of the modular home, resulted in a judgment being entered by the Superior Court. Although Kersey Homes, Inc. had initially defended the Superior Court action, shortly before trial they informed the court that they would not defend it. The modular home that was the subject of the Superior Court lawsuit, was transferred by Kersey Homes, Inc. to an affiliated party in exchange for discharging a prior debt of Kersey Homes, Inc. This transfer of the only asset of Kersey Homes, Inc. was made about one year into the litigation over the home that was the subject of the transfer and about two months prior to judgment being entered shortly before the trial date.

The instant litigation in the Court of Chancery was commenced about two weeks after the judgment was obtained in the Superior Court. The Chancery complaint sought relief against Kersey Homes, Inc. (which filed a certificate of dissolution several months after the Chancery complaint was filed), as well as the principal stockholder of Kersey Homes, Inc. and the related party that had received the fraudulent transfer. Kersey Homes, Inc. did not defend the Chancery litigation.

The court did not believe the testimony of the principal stockholder in part because the transfers were not documented and the only person available to testify about the transfer was the transferor.

The court determined that a more likely explanation for what happened was that the principals of Kersey Homes, Inc. realized they might be liable for a judgment and decided to take steps to evade any judgment that might be obtained. At the time of the fraudulent transfer, Kersey Homes, Inc. was already out of business and insolvent, without assets to satisfy a judgment. But about a year earlier, the only asset of Kersey Homes, Inc. had been transferred for no consideration. In an effort to defend a potential fraudulent conveyance claim, the principals of Kersey Homes, Inc. attempted to cover their tracks and create a story about a backdated transfer one year earlier. The court found that those transfers were intended to avoid execution on a judgment.

Key Legal Principles:

The court reviewed the elements of a claim under the Delaware Uniform Fraudulent Transfer Act (“DUFTA”) whose purpose the court described as providing a remedy to creditors who were defrauded by debtors who transfer assets or incur obligations with the intent to hinder, delay or defraud any creditor or, without receiving reasonably equivalent value. The court described the elements of a claim as recited in Section 1304(a) of Title 6 of the Delaware Code.

There are eleven factors that the statute lists as non-exclusive factors to consider in determining whether there was actual intent to defraud. It is not necessary that all the factors support a finding of intent. In this case, the court found that seven of the factors supported a finding of actual intent to defraud.

The court also found that Kersey Homes, Inc. violated Section 1305(a) which provides that a transfer is fraudulent as to a creditor whose claim arose before the transfer was made, if the debtor made the transfer without receiving a reasonably equivalent value or the debtor became insolvent as a result of the transfer. See footnote 117.

The opinion also discussed the broad latitude that a court has to craft a remedy subject to applicable principles of equity. Even though the original judgment was against a defunct corporation, the court traced the fraudulently transferred assets of the corporation to its current owner who was a stockholder in that corporation.

In sum, the court allowed the plaintiff to levy execution on the home involved in order to satisfy the judgment obtained in the Superior Court. The court also required the defendants to account for rental receipts on the house, and to the extent the sale of the property is insufficient to satisfy the judgment, the shortfall shall be made up from the rental receipts.

Because of a statute that applied in the Superior Court to grant treble damages for consumer fraud on senior citizens, the court found it inequitable to depart from the American Rule on fees.

Chancery Addresses Indemnification Claim

By Francis Pileggi on July 17, 2018 Posted in Chancery Court Updates

The Delaware Court of Chancery in Daugherty v. Highland Capital Management, L.P., C.A. No. 2017-0488-SG (Del. Ch. June 29, 2018), primarily addressed the issue of laches and equitable tolling that constituted the majority of the 29-page decision, but the last two pages relating to indemnification are the most memorable aspects of the opinion. The procedural history of the case is relatively lengthy and somewhat involved.

The most noteworthy aspect of this case is the indemnification claim. The parties in this case were involved in lengthy litigation in Texas after which the party seeking indemnification brought suit in Delaware. One of the issues was whether it too long to proceed in Delaware. The indemnification claim was not barred by laches based on an extensive analysis by the court of the facts of the case.

The most widely applicable bullet points from this case regarding indemnification are the following:

“A cause of action for indemnification accrues when the officer or director entitled to indemnification can be confident any claims against him have been resolved with certainty.” See footnote 120 (quotations omitted).
The court explained that the “certainty” required as a prerequisite for indemnification “requires the resolution of any appellate review.”
As a general matter, “adjudicating indemnification claims piecemeal is highly inefficient.” See footnote 122.
The court also rejected the defense that the indemnification claims related to personal contractual obligations as opposed to acts performed in the name of the entity against whom indemnification was sought, but the court found at the early pleading stage it was reasonably conceivable that the claimant was acting in his position as an employee of the entity with respect to at least some of the claims defended in the Texas litigation for which he is seeking indemnification.