Tooley v. AXA Financial, Inc., et al., No. 18414-CC (Del. Ch., April 29, 2009), read opinion here .
Kevin Brady, a highly respected Delaware litigator, provides us with the benefit of his following analysis of this recent ruling.
In this Chancery Court decision, Chancellor Chandler denied (but just barely) defendants’ motion to dismiss for failure to prosecute pursuant to Court of Chancery Rules 41(b) and (e). In so doing, His Honor had some harsh words for the plaintiff.
In 2002, Plaintiff, Patrick Tooley, a former shareholder of Donaldson, Lufkin & Jenrette, Inc. (“DLJ”), brought this class action on behalf of minority shareholders who tendered their shares in a tender offer to Credit Suisse Group for $90 per share. In short, the complaint “rests upon the assertion not that the merger consideration was unfair, but that it was received 22 days later than initially agreed because of a wrongfully granted extension."See Tooley v. Donaldson, Lufkin & Jenrette, Inc., 2003 WL 203060 (Del. Ch. Jan. 21, 2003).
From 2002 through mid-2005, the case bounced back and forth between filings of complaints and amended complaints and motions to dismiss. On May 13, 2005, in denying defendants’ motion to dismiss the amended complaint, the Court held that:
“although plaintiff did not have an enforceable expectancy interest in sale proceeds, plaintiff had ‘overcome the presumption of the business judgment rule’ by presenting ‘facts suggesting (barely) that the defendants received an unjustified benefit to the exclusion and detriment of plaintiffs.’”
From mid-2005, other that some modest discovery from defendants, nothing of any significance happened until January 2009 when the Chancellor sent a letter to counsel requesting an update on the status of the case. In his response, Plaintiff apologized for the delay and said that his co-counsel changed firms and he was not aware that the defendants had not fulfilled their discovery responsibilities. Plaintiff moved to compel in February and in March defendants moved to dismiss.
Court of Chancery Rule 41(b) authorizes a defendant to move for dismissal of an action “[f]or failure of the plaintiff to prosecute.” Rule 41(e) provides that the Court may, upon its own motion or that of any party, and after reasonable notice, dismiss a case “wherein no action has been taken for a period of 1 year, unless good reason for the inaction is given.” While the Court was comfortable that the inactivity has covered over a year, and that the lack of prosecution of the case “pushed the limit,” Chancellor Chandler was not comfortable dismissing the case. He stated:
I therefore decline to dismiss this case, for substantially the same reasons as this Court articulated in In re Cencom Cable Income Partners, L.P., namely “(1) a preference for resolving decisions on the merits; (2) a desire to proceed cautiously in light of the due process issues that are unique to a class action; and (3) deference to the fact that, while their efforts may have been dilatory in the past, at the time of the Rule 41 motion, the Plaintiffs appear to have resumed diligent prosecution of their claims.” While I am convinced that the factors on which the Court based its decision in Cencom also warrant denying the motion to dismiss in this case, I must note that the circumstances of this case push the limit of the Court’s willingness to decline to exercise its discretion to dismiss under Rule 41. Indeed, the Court’s decision today and the Court’s decision in Cencom should not be seen as creating a “safe harbor” that would allow class action plaintiffs to fail to diligently prosecute actions and then avoid dismissal under Rule 41. To the contrary, if the requirements of Rules 41(b) or (e) are met, it is within the discretion of the Court to order dismissal.
Court Imposed Penalties on Plaintiff’s Attorneys
In an unusual move, the Chancellor also sanctioned plaintiff’s counsel personally because:
plaintiff’s dilatory conduct occasioned this motion to dismiss and result[ing] in the unnecessary imposition of costs on defendants. Plaintiff and his attorneys have failed to provide any good reason for their dilatory conduct. Accordingly, and in light of the fiduciary nature of class actions and the unique responsibility of class action counsel, I conclude that it is appropriate that plaintiff’s attorneys personally pay to defendants the costs (including attorneys’ fees) that defendants incurred in pursuing this motion to dismiss. If plaintiff’s attorneys are not willing to pay these costs, the Court will revisit the question of whether plaintiff’s attorneys are qualified to represent the class.