Supreme Court Instructs on Nuances of Fiduciary Duties of Disclosure and Loyalty

A recent Delaware Supreme Court decision should be required reading for those interested in the nuances of Delaware law on the fiduciary duties of disclosure and loyalty of a manager or a director in connection with communications with stockholders or others to whom a fiduciary duty is owed.  In Dohmen v. Goodman, Del. Supr., No. 403, 2019 (June 23, 2020), Delaware’s High Court answered a question certified from the U.S. Court of Appeals for the Ninth Circuit.

Key Takeaways:

There is a “per se damages rule” in Delaware that covers only those breaches of the fiduciary duty of disclosure involving requests for stockholder action that impair the economic or voting rights of investors.  Importantly, this per se damages rule only covers nominal damages.  Again, for emphasis:  the per se damages rule does not apply to damages other than nominal damages.  Therefore, in order to recover compensatory damages, one who proves a breach of the fiduciary duty of disclosure must also prove reliance, causation and damages.  See Slip op. at 24.

The court in its en banc opinion provides a useful overview of fiduciary duties in general, and addresses the many nuances–that change depending on the situation presented–of the duty of disclosure in particular as it relates to requests for action by stockholders or others to whom a fiduciary duty is owed.  See Slip op. at 9-10.

Brief Overview of the Case:

The procedural background of the case involved an issue of Delaware law that the U.S. Court of Appeals for the Ninth Circuit certified to the Delaware Supreme Court.  In other words, the Ninth Circuit asked the Delaware Supreme Court to decide an issue of Delaware law that was originally presented to the Ninth Circuit.

This gem of a 24-page opinion, which is relatively short for many Delaware opinions, was decided based on stipulated facts, which in a very simplified way, decided a claim by a limited partner in a hedge fund, who as limited partner in a limited partnership was owed a duty by the fund manager, which was structured as an LLC.  Among the claims by the limited partner was that the general partner of the limited partnership, the LLC manager, breached fiduciary duties by failing to disclose that the general partner was the only investor in the fund other than the suing limited partner, and related omissions or misrepresentations.

Delaware Fiduciary Duty Law:

In connection with its decision, the Delaware Supreme Court recited several useful truisms of Delaware law.  For example, the agreements at issue did not disclaim the fiduciary duty of loyalty, and therefore, the general partner owed fiduciary duties to the limited partners, similar to those owed by directors of Delaware corporations.  See footnotes 15 through 16.

The court recited the very nuanced and multifaceted aspects of the fiduciary duties of care and loyalty that applied to communications with stockholders or limited partners.  Those duties depend on the context of the communication, and whether the communication is to an individual stockholder or to a group of stockholders.  See footnotes 18 through 32 and accompanying text.

The court described several different types of factual situations which impact the application of the duty owed in connection with communications that involve a request for stockholder action, as compared to those that might involve merely periodic financial disclosures.  The per se damages rule does not apply to the latter.

The court discussed the most important Delaware decisions involving the duty of disclosure and how it is applied in various factual circumstances.

Bottom Line:

The court explained that the per se damages rule only applyies when a director seeks stockholder action and breaches their fiduciary duty of disclosure, in which case a stockholder may seek equitable relief or damages.  That is, when directors seek stockholder action, and the directors fail to disclosure material facts bearing on that decision, a beneficiary need not demonstrate other elements of proof, such as reliance, causation or damages.  This rule only applies to nominal damages and does not extend to compensatory damages. See Slip op. at 10 through 11.

Chancery nixes aiding and abetting liability for execs accused of helping set inflated price for NetSuite

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Delaware Court of Chancery recently rejected a creative theory of liability in a shareholder suit that claimed top NetSuite Inc. officers aided a breach of fiduciary duty by agreeing to a conspiracy of silence that caused Oracle Corp. investors to significantly overpay for the smaller technology company in 2016. In re Oracle Corp. Derivative Litig., No. 2017-0337-SG memorandum opinion (Del. Ch. June 22, 2020.)

In his consequential June 22 opinion, Vice Chancellor Sam Glasscock granted NetSuite CEO Zachary Nelson and Chairman of the Board Evan Goldberg’s motion to dismiss because the Oracle plaintiffs could not convince him that those officers knowingly damaged Oracle shareholders by secretly supporting an overvalued price collar.

The Vice Chancellor acknowledged that a fiduciary for an acquired entity could conceivably aid and abet breaches of duty by a fiduciary for the buyer, but although “in the infinite garden of theoretical inequity, such a flower may bloom,” it is unlikely to produce liability when, as here, the sole charge is overpayment, he said.

History

Oracle shareholder plaintiffs charged in a 2017 Chancery Court derivative suit that when Oracle founder Larry Ellison and CEO Safra Catz proposed to acquire NetSuite — which Ellison also founded and controlled — he first verbally agreed with NetSuite executives to a per-share price in the $100-to-$125 range even though that was not in the Oracle investors’ best interests.

Charges that Ellison and Catz breached duties of loyalty and candor in the merger negotiations and disclosures withstood their motion to dismiss and, in an unusual turn for a derivative suit, Oracle’s directors waived their right as the corporation’s managers, to press the claims. In re Oracle Corp. Derivative Litig., 2018 WL 1381331 (Del. Ch. Mar. 19, 2018).

Lawyers for shareholders, lead by the Firemen’s Retirement System of St. Louis pension fund, filed a third amended complaint February 18, 2020.

Meanwhile, Nelson and Goldberg’s separate motion to dismiss claimed they had no fiduciary duty to Oracle’s shareholders and did have a duty to NetSuite investors to get the highest price even though this was a friendly acquisition offer from the company’s founder, who already held 50% of NetSuite.

According to the Vice Chancellor’s June 22 opinion, Oracle agreed to pay $9.3 billion or $109 a-share at a time when NetSuite was selling for $67.36 a share. If not for NetSuite’s silence about early price collar agreements, Oracle shareholders would have realized they were being fleeced so that Ellison could consolidate his software and technology kingdom, the plaintiffs’ 2017 complaint alleged.

How to survive dismissal

Vice Chancellor Glasscock said in order to survive a motion to dismiss aiding and abetting charges against the NetSuite defendants, the plaintiffs would have to show:

(i) the existence of a fiduciary relationship,

(ii) a breach of the fiduciary’s duty,

(iii) knowing participation in that breach by the defendants, and

(iv) damages proximately caused by the breach.”

He found that under the Restatement (Second) of Torts § 876(b) (1979), the NetSuite executives did not render the required “substantive assistance” to Ellison and Catz to qualify for “knowing participation” because even if the early discussions of a price collar and Ellison’s plan to keep NetSuite an independent subsidiary post-merger were disclosed sooner it wouldn’t have doomed the merger.

Silence may be golden

Absent a fiduciary or contractual relationship, “Delaware law generally does not impose a duty to speak,” and “given the general unwillingness of our law to impose a duty to speak, how could mere silence be cognizable as substantial assistance in tortious aiding and abetting?” he asked.

Moreover, even if the NetSuite defendants did breach a duty to disclose, “it is not reasonably conceivable that by their silence they provided substantial assistance to the Oracle fiduciaries’ alleged breaches of fiduciary duty, in light of the actual disclosures of record,” the vice chancellor ruled.

Regarding the price collar agreement, he said “it is not reasonably conceivable that the difference between what was disclosed and what the Lead Plaintiff alleges should have been disclosed constituted substantial assistance to Ellison and Catz’s scheme to cause Oracle to overpay for NetSuite.”

Finally, he said all the information that the plaintiffs said would have alerted the Oracle board and shareholders that they were being fleeced by a conspiracy of silence had in fact been released in securities disclosures while the merger was still pending and could have enabled Oracle to put the kibosh on the deal.

 

Chancery Addresses Adequate Security for Dissolution Pursuant to DGCL Section 280(c)(1)

Due to the relative lack of abundant, comprehensive case law analyzing the criteria the court will use to determine the amount of security deemed sufficient for purposes of satisfying DGCL Section 280 in connection with seeking court approval of a dissolution, and related distributions, the recent Court of Chancery decision in the matter of In Re Swisher Hygiene, Inc., C.A. No. 2018-0080-SG (Del. Ch. June 12, 2020), strikes this litigator as noteworthy, or at least blogworthy.

In particular, in this case the court was called upon to determine, in connection with a motion to approve an interim distribution as part of the petition for dissolution, whether the proposed amount of funds to be held in reserve for a pending lawsuit, and other claims, was sufficient security pursuant to DGCL Section 208(c)(1). Footnote 12 includes a citation to two Orders in other cases that addressed similar Section 280 issues. That the court cited two prior Orders, as opposed to citing to prior formal Opinions, is an indication of the relative paucity of robust decisional law on this topic.

By way of an aside and for context, there are two primary ways to pursue a formal dissolution under the Delaware General Corporation Law, as described in a Chancery decision highlighted on these pages a number of years ago. One method is to seek court approval as a “judicial imprimatur” for how creditors are handled, especially if there are insufficient assets to satisfy all pending claims. Another option is non-judicial, which, as the name implies, does not have the benefit of a judicial blessing. A third option, not recognized in the DGCL, and followed in some instances by those who do not have the money, or prefer not to spend the money, to pursue a formal dissolution process–often because the amount of assets at stake may not be worth the expense–may be referred to colloquially as “turning off the lights; closing the door; and walking away.” Not recommended, however.

 

Chancery Determines Amount of Bond for Injunction

A recent Delaware Court of Chancery letter ruling determined the amount of a bond for an injunction entered in connection with a suit to enforce a non-competition agreement. The matter of Natera, Inc. v. Goddard, C. A. No. 2020-0371-KSJM (Del. Ch. June 15, 2020), deserves mention due to the relative lack of a robust body of decisional law on this topic. See, e.g., only two prior decisions highlighted on these pages that address this issue (which I don’t suggest are the only recent cases on this topic.)

Chancery lets investment firm press claim it was duped into buying I.T. company

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Chancery Court recently green-lighted key parts of an investment company’s suit against officers and owners who allegedly inflated their I.T. and data center services provider’s worth, finding the buyer plaintiff was more likely the victim of fraud and breach of contract rather than mere buyer’s remorse in LightEdge Holdings LLC, et al. v. Anschutz Corporation et al., No. 2019-0710-JRS, memorandum opinion (Del. Ch. June 11, 2020.)

Vice Chancellor Joseph R. Slights’ June 11 ruling denied the seller defendants’ motion to dismiss LightEdge Holdings LLC and parent Anschutz Corporation’s well-plead charges that they concealed bad financial news and doctored the business prospects of Delaware-chartered OnRamp Access, LLC during sale negotiations.

Fraud, contract claims survive

He found that fraud and breach of contract allegations are well-supported and unjust enrichment and some extra-contractual representations claims are not barred by the anti-reliance provision in the sale document. However, he said the buyer failed to state viable aiding and abetting claims, civil conspiracy, conversion and Colorado and Texas state law charges.

In early May 2018, LightEdge Holdings, LLC had been negotiating a $106 million sale with defendants Brown Robin Capital, LLC, a Delaware-chartered Limited Liability Company, OnRamp CEO Lucas Braun, President and Board Chairman Ryan Robinson and CFO Jack D’Angelo when OnRamp disclosed news that literally gave LightEdge and parent Anschutz pause. A major OnRamp client had cancelled its services subscription for a $600,000 revenue loss and OnRamp’s April sales were less than 1/3 of its target.

Falsified financials?

According to the opinion, the buyers were assured of the company’s continued bright prospects and talks resumed because, “under the direction of the OnRamp insiders, company management secretly falsified the product pipeline by adding more than $6 million in illusory projected annual revenue.”

In addition, one of OnRamp’s biggest customers had told its management during the sales negotiations that it planned to cut its business in half but that was concealed from the buyers, as was the un-collectability of numerous client accounts, the September 2019 complaint says.

Defendants moved to dismiss the entire 13-count complaint, but the vice chancellor found the breach of contract claims were not barred by the sales agreement, the fraud claims were not boot-strapped breach of contract claims and the unjust enrichment claims were not duplicative of the breach of contract claims.

Parent helps finance

He found that even though LightEdge was the official buyer, Anschutz, which contributed $62 million toward the purchase, had standing to sue as a defrauded buyer.

The court spent most of the June 11 ruling parsing other claims that defendants argued were duplicative of other charges or barred under Delaware law – including Colorado statutory theft and securities fraud and Texas statutory fraud and securities fra

The vice chancellor said Delaware General Corporation Law applies to both the plaintiffs’ contractual and extra-contractual claims. He said § 2708 “requires courts to presume that, where parties have chosen Delaware law in their contract, the transaction memorialized in the contract has a material relationship with our state.”

Abry is controlling

He says the extra-contractual claims are governed by Delaware law as established by then-Vice Chancellor Leo Strine’s seminal 2006 opinion in Abry P’rs V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1046 (Del. Ch. 2006), which Vice Chancellor Slights quotes:

“To hold that their choice is only effective as to the determination of contract claims, but not as to tort claims seeking to rescind the contract on grounds of misrepresentation, would create uncertainty of precisely the kind that the parties’ choice of law provision sought to avoid.”

Vice Chancellor Slights agreed with that “persuasive” logic, writing that, “To try to parse out what exactly should be decided under Delaware law and what falls under another state’s law … would be a foolhardy endeavor almost certain to result in the kind of confusion contractual choice of law provisions are meant to avoid.”

Relying on anti-reliance?

Regarding defendants’ assertion that various sections of the sale agreement could be read as an anti-reliance statement, the vice chancellor said Delaware courts have consistently held that:

“sophisticated parties to negotiated commercial contracts may not reasonably rely on information that they contractually agreed did not form a part of the basis for their decision to contract.”

But he said anti-reliance language must be explicit and comprehensive, meaning the parties must:

“forthrightly affirm that they are not relying upon any representation or statement of fact not contained [in the contract].”

And although the sale contract contains a standard integration clause, “What is notably absent from these provisions is any disclaimer of reliance by Buyer,” the Court noted.

 

Court of Chancery Announces New Courtroom Protocols

In connection with the Delaware Supreme Court’s recent Order providing for the multi-phased, limited reopening of Delaware Courthouses as of June 8, 2020, while at the same time extending Delaware’s “judicial emergency declaration” for another 30 days, the Delaware Court of Chancery has issued an Order to impose new Courtroom protocols for attorneys and visitors, also effective June 8, 2020, such as installing podiums on counsel tables instead of a common podium in the center of the Courtroom, and limiting the number of people who can enter the Courtroom. It will be the “new normal” for quite some time. The Delaware Judiciary has a webpage with the many Orders and related information regarding its response to the Coronavirus/Covid-19 pandemic.

“Be careful out there.”

Supreme Court Interprets Key Words in Agreement

A recent Delaware Supreme Court decision is noteworthy for the approach it takes in determining the meaning of a word in an agreement, for example, by parsing the syntax and sentence structure where the word appears in the agreement. In Borealis Power Holdings Inc. v. Hunt Strategic Utility Investment, L.L.C., Del. Supr., No. 68, 2020 (May 22, 2020), the Delaware Supreme Court provides useful guidance about how to determine the meaning of a key word in an agreement. In this matter, despite a lengthy definition in the agreement of the word “transfer”, the parties still disputed its meaning.

Background:

The underlying dispute involved a complex constellation of interrelated entities which the court provided a graphic description of by way of a chart. The essential facts on which the dispute was based involved the interpretation of an LLC agreement which imposed restrictions on the transfer of LLC units and provided for the right of first refusal and other provisions triggered by a “transfer.” Several terms were defined in the agreement–with rather lengthy definitions–but the definitions did not provide sufficient clarity. The most consequential definition that was disputed was the meaning in the context of the agreement of the word “transfer.”

The problem presented to the Court of Chancery was whether the sale of an interest triggered either a right of first refusal and/or a right of first offer, and if both applied, which was to be given priority.

The Court of Chancery concluded that a sale by Hunt of its shares to Borealis would be a “transfer.” The Supreme Court had a different view.

The finding by the Court of Chancery that the purchase of Hunt’s shares constituted a transfer, triggered the requirement to offer the shares to Sempra. As a result of other consequences of that holding, the Court of Chancery found that Sempra was the only party with the right to purchase the Hunt shares, and entered judgment in favor of Sempra. This expedited appeal followed an expedited trial. It remains noteworthy that this opinion came only 30 days after the final submission of the appeal to the Supreme Court.

Analysis by the Supreme Court:

The Supreme Court held that the right of first refusal in Section 3.9 of the agreement at issue is only triggered by transfers by the Minority Member and its Permitted Transferees, and that Hunt is neither. Put another way, Delaware’s High Court held that the fact that the right of first refusal is only triggered by transfers by the Minority Member is dispositive in favor of Borealis, regardless of whether the Hunt Sale could be said to effect an indirect transfer.

One of the agreements involved was governed by New York law and one was governed by Delaware law–but the court noted that the law of both states as it relates to contract interpretation in this case is the same. See footnote 22.

Two other footnotes contain important observations of Delaware law that are especially worth remembering:

(1) The management of an LLC is vested in proportion to the then-current percentage or other interest of members in the profits of the LLC owned by all the members, and “the decision of members owning more than 50% of the said percentage or other interest in the profits [is] controlling.” Footnote 27. See Section 18-402 of the Delaware LLC Act.

(2) Also noteworthy is the observation by the Court that an argument that was only raised in a footnote would justify “passing over it” because footnotes, according to Delaware Supreme Court Rules, “shall not be used for argument ordinarily included in the body of a brief.” Footnote 28. See Del. Supr. Ct. R. 14 (d)(iv).

The most noteworthy parts of this pithy 21-page decision are found in the last few pages which include the core of the court’s reasoning.

In particular, the most memorable part of the Court’s reasoning is the parsing by the court of the syntax and sentence structure of the agreement in order to interpret the meaning of a particular word in the agreement. The court focuses on the “subject of the operative sentence” in Section 3.1, of which “the verb phrase ‘may only transfer’ serves as the predicate.” The court further explains that the subject of the operative sentence is neither accidental nor unimportant because it is the same subject for which the verb phrase “intends to transfer” serves as the predicate in section 3.9.

The Court added that the subject, which is stated conjunctively, does not include Hunt. Therefore, the court reasoned that it was unnecessary and inappropriate to parse the definition of transfer, as defined in the agreement, to determine the scope of Section 3.1 and Section 3.9, because: “the subjects of the opening sentences in both of those sections do that for us.” See Slip Op. at 20 – 21.

In sum:

Although the detailed factual background needs to be reviewed more closely in order to fully understand the Court’s reasoning, for anyone who wants to understand Delaware law regarding proper contract interpretation, and interpretation of the meaning of a word, even when it is defined in an agreement, this opinion is must-reading.

 

Chancery Rules on a Controller’s Fiduciary Duty of Loyalty

This post was prepared by Chauna A. Abner, an associate in the Delaware office of Lewis Brisbois.

Invoking the principles articulated in USA Cafes, the Court of Chancery recently held that a controller cannot use its control over an entity to advantage himself at the expense of the controlled entity. 77 Charters, Inc. v. Gould, C.A. No. 2019-0127-JRS (Del. Ch. May 18, 2020).

Background

The plaintiff in this case was an investor with a non-preferred ownership in a mall. Defendant, Jonathan D. Gould also invested in the mall and held a similar non-preferred interest. A non-party, Kimco, possessed preferred interests in the mall. Unbeknownst to 77 Charters, Gould acquired Kimco’s interest. Gould then amended the operating entity’s governing documents to advantage the mall’s preferred investors (i.e., himself) before selling part of Kimco’s interests to a third party for the same price he paid for the whole interest. Gould retained “a slice of the preferred stake for himself.” Id. at *2.

Claims Made

77 Charters filed suit against Gould alleging a multitude of claims, including a claim that Gould breached his fiduciary duties by acquiring Kimco’s interest, amending the operating agreement of the controlling entity and then selling the mall at a time and in such a manner where he derived a personal benefit while 77 Charters was left with nothing. Id. at *3.

Court’s Holding

In a 65-page opinion granting in part and denying in part the defendants’ motion to dismiss, the Court held that “[w]hile the scope of USA Cafes-type liability is limited, ‘it surely entails the duty not to use control over [an entity] to advantage the [controller] at the expense of’ the controlled-entity” and the plaintiff well pled such a circumstance. Id. at *40 (internal citations omitted).

In USA Cafes, L.P. Litigation, 6 A.2d 43 (Del. Ch. 1991), highlighted in many other decisions summarized on these pages, Chancellor Allen held that “remote ‘controllers’ of an alternative entity may owe limited fiduciary duties, the ‘full scope’ of which the court did not ‘delineate.’” 77 Charters, Inc., C.A. No. 2019-0127-JRS, at **3-4 (citing USA Cafes, 6 A.2d at 49).

In 77 Charters, Inc., the plaintiff plead that Gould, the LLC’s ultimate controller: “(i) acquired the Preferred Interest, (ii) executed the Amended CRA to increase the Preferred Interest’s economic value at 77 Charters’ expense and (iii) sold a slice of the augmented Preferred Interest to Eightfold while retaining a piece for himself.” Id. at ** 40-41.

The Court held that Gould, as the LLC’s ultimate controller, conceivably owed “USA Cafes-type” fiduciary duties and that Gould conceivably breached those duties by amending an agreement that governed the LLC’s operating company to enrich himself. Id.  The Court found the plaintiff’s allegations to be well-plead and thus denied the defendants’ motion to dismiss with respect to this count. Id.

In addition to a host of other claims, the Court also analyzed 77 Charters’ aiding and abetting and civil conspiracy claims against Eightfold, an entity that was unaffiliated with the other defendants. Id. at **57-62. In doing so, the Court recited the four basic elements of a claim for aiding and abetting breach of fiduciary duty: “(1) the existence of a fiduciary relationship, (2) a breach of fiduciary duty, (3) defendant’s knowing participation in that breach and (4) damages proximately caused by the breach.”Id. at *57.

After finding that 77 Charters failed to satisfy these elements, the Court dismissed this count of the complaint and turned to 77 Charters’ civil conspiracy claim. The Court held that the conspiracy claim, “as pled, [was] functionally the same as 77 Charters’ aiding and abetting claim.” Id. at *60. After recognizing the “functional identity” of the two claims,” id. at *60, n. 242, the Court iterated “[t]he elements for civil conspiracy under Delaware law . . . (1) a confederation or combination of two or more person[s]; (2) an unlawful act done in furtherance of the conspiracy; and (3) actual damage.” Id. at **60-61. The Court then also dismissed this count of the complaint.

Key Takeaway

Although the decision provides a lengthy analysis on several principles of Delaware corporate law, I highlight the following key takeaway: a controller cannot use its control over an entity to advantage himself at the expense of the controlled entity by, for example, amending an agreement to waive the duty of care. See id. at *40, n. 162. This implicates the fiduciary duty of loyalty and its variant, usurpation of corporate opportunity.

Chancery makes third attempt at stabilizing remnant of failing nursing home chain

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Delaware Court of Chancery recently imposed additional sanctions on the controller of a chain of troubled senior care facilities who had repeatedly flouted orders to give a court-appointed receiver and investors access to the finances of his labyrinth of companies, and who might place vital revenue out of reach in GMF ELCM FUND L.P., et al. v. ELCM HCRE GP LLC et al., No. 2018-0840-SG, memorandum opinion issued, (Del. Ch. May 18, 2020).

In a May 18 opinion, Vice Chancellor Sam Glasscock held that 6 Del. C. § 18-703 of the Delaware Limited Liability Company Act justifies a temporary restraining order and an interim charging order to force defendant controller Andrew White to pay a receiver the court brought in to stabilize his firm.

That section specifically addresses the rights and responsibilities of limited liability company members and the court’s power to use charging orders to satisfy judgment creditors without encroaching on a defendant member’s property rights.

The vice chancellor said that section allows him to effectively impose a lien against the entities through which White receives revenue from his 100% ownership of two limited liability companies that generate income through leases of the senior care facilities properties of East Lake Capital Management LLC.

It was the third ruling within a year in which the Court sought to provide interim relief for a group of investor plaintiffs led by GMF ELCM Fund L.P. who claimed White’s alleged continuing neglect and mismanagement of his senior care facilities hurt the value of their investments and the residents’ quality of life.

Their November 2018 suit claimed White’s multi-state nursing home chain and its residents were in serious trouble, facing litigation and state actions in Vermont, North Carolina and elsewhere and that delivery of food to residents and pay to employees had often been interrupted or delayed.

After a March 29, 2019 rule-to-show cause hearing, the vice chancellor found White did not cooperate with the receiver he had appointed over ELCM HCRE GP LLC, the lead entity through which White controlled the chain and said White repeatedly failed to show for hearings or gave confusing testimony.

The April 4 opinion

In an April 4 memorandum opinion, the Court stated that it had learned that White had repeatedly failed to comply with orders to turn over financial records and other documents to the receiver, ex-Chancellor William Chandler, and that both he and White’s defense counsel petitioned to withdraw from the case. GMF ELCM FUND L.P., et al. v. ELCM HCRE GP LLC et al., No. 2018-0840-SG, letter opinion issued, (Del. Ch. Apr. 4, 2019).

According to the Court, White’s “intransigence” and “obstruction” made it impossible for them to do their jobs.

In that opinion, he found that White had engaged in bad faith litigation, which justified a departure from the normal “American Rule” where each side pays its own legal costs. He said at that point, White had failed to pay more than $350,000 in receiver costs and imposed civil contempt, which he said is remedial, rather than the criminal variety, which is punitive.

The August 7 opinion

That was not enough to effect the change the vice chancellor wanted, and in an August 7 opinion, he granted the plaintiffs’ motion to dissolve and liquidate HCRE because it was not fulfilling the purpose for which it was created. GMF ELCM FUND L.P., et al. v. ELCM HCRE GP LLC et al., No. 2018-0840-SG, memorandum opinion issued, (Del. Ch. Aug. 7, 2019).

The purpose of HCRE was to operate the nursing home chain and invest in new facilities but it has not been able to do either because of White’s “obstruction,” including intercepting and redirecting revenues needed to operate the facilities – most of which are already under state receivership, the Court said.

“The business, therefore, must be liquidated to preserve what value remains,” Vice Chancellor Glasscock said in the August opinion. “In other words, the operation of the business is stymied, and absent liquidation, its remaining value is at risk.”

The May 18 opinion

But that too was not enough, the Court said in its May 18 opinion, because the plaintiffs found through discovery that White was using two limited liability companies, EL FW Leasing LLC and EL FW Intermediary I LLC, to collect sublease payments from senior care facilities in Connecticut, but he did not use the funds to pay any portion of the judgments against him, the vice chancellor said.

The plaintiffs sought a charging order as a lien against the distribution of those funds to the sole member of those FW entities, Andrew White.

Under 6 Del. C. § 18-703, a charging order acts as a lien against White’s membership interest in the FW entities and gives judgment creditors “the right to receive any distribution or distributions to which the judgment debtor would otherwise have been entitled,” the Court said. But it does not grant “any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the limited liability company.”

The vice chancellor found the plaintiffs stated a colorable claim because:

(1) They have outstanding judgments in the Court, arising as sanctions for White’s misconduct, which he claimed to be unable to satisfy;

(2) Plaintiffs faced irreparable harm because, based on this litigation’s history, there was a likelihood that in the absence of injunctive relief, White will act to make the assets unavailable to the plaintiffs;

(3) A balancing of the equities favored the plaintiffs because a charging order on White’s membership interests would not cause a default of the master lease, harming the FW Entities as White claimed.

He ordered a TRO and charging order to remain in effect until a summary judgment decision could permanently resolve the matter.

 

Legal Ethics and Lawyer Mobility

In my latest legal ethics column for The Bencher, the publication of the American Inns of Court, (in which I have been writing an ethics column for over 20 years), I address some of the legal ethics issues that arise when a partner in a law firm laterally moves to another law firm–an increasingly common occurrence in the legal profession today.

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