Julian v. Eastern States Construction Service, Inc., Del. Ch., No. 1892-VCP (May 5, 2009), read opinion here. See prior Chancery Court decisions in this case summarized on this blog here.
Kevin Brady, a highly respected Delaware litigator, provides us with the benefit of his following review of this case.
On May 5, 2009, Vice Chancellor Parsons, in a unique procedural setting, granted a motion in limine based on the doctrines of judicial estoppel and waiver precluding defendants from arguing against the applicability of an amended agreement. The opinion is notable for two reasons — it is a motion in limine, an unlikely procedural posture for a Chancery Court opinion, and second, the motion was made at a unique point in the litigation – the Court had bifurcated the issues for trial, it had already held one trial and a second was about to start.
By way of background, this is a dispute among three Julian brothers, Gene, Francis and Richard, who owned three separate but related businesses, one of which was Eastern States Development Company (“ESDC”). All three companies are governed by stockholder agreements. Eventually the brothers’ relationship soured and Gene resigned but when he did an issue arose as to whether Gene, as an ESDC stockholder, was required to sell his ESDC stock back to ESDC pursuant to the operative ESDC agreement—the First Amendment to Agreement of Stockholders of ESDC (“2005 Amendment”). Gene did not want to sell his stock so he filed suit in January 2006.
In May 2007, Gene filed a motion in limine to bifurcate the proceeding and exclude until the second trial any evidence of the value of the ESDC stock. The Court granted the motion and stayed discovery on those stock valuations until after the first trial. The Court also stated that “an issue for the first portion of this litigation could be if somebody thinks that some provision other than what I just read under the contract [i.e., the 2005 Amendment] or just referred to governs how you determine the price, then we ought to . . . hear what that argument is, because it’s a contract interpretation kind of view.”
After the first trial, the Court determined that Gene was required to sell his ESDC stock to ESDC. The defendants calculated the stock price pursuant to the terms of the 2005 Amendment and on August 1, 2008, ESDC issued a check to Gene for $4,059,500 to purchase his ESDC stock. After the payment, however, a dispute arose as to the proper valuation of the ESDC stock. The parties filed motions to determine the value of the underlying properties of ESDC and the defendants, for the first time argued that three affirmative defenses require them to use the valuation procedure set out in the initial Agreement, not the 2005 Amendment: unclean hands, equitable estoppel, and unjust enrichment. The defendants argued that Gene “knew of his pending retirement during the 2005 Amendment negotiations, he did not disclose that fact to his brothers and, therefore, should not be permitted to benefit from the 2005 Amendment.” Gene filed a second motion in limine to prevent Defendants from raising these defenses at this time.
In his motion, Gene argued that the defendants were attempting to rescind the 2005 Amendment in the second phase of the bifurcated trial and that they should be precluded from raising the defenses of unclean hands, equitable estoppel, and unjust enrichment in the second phase of the bifurcated proceeding. The Court agreed finding that it did not grant final judgment pertaining to Gene’s ESDC stock in the first phase and “retain[ed] jurisdiction to determine the precise value of that ESDC stock if the parties cannot agree on that value.”
Defendants argued that they could rely on the Initial Agreement as opposed to the 2005 Amendment because they “did not take a legal position in the first phase of the bifurcated proceeding that is inconsistent with the[ir] equitable argument.” Gene responded by stating that the defendants expressly relied upon the 2005 Amendment throughout these proceedings and, so they should be judicially estopped from taking a position contrary to their previous position. The Court agreed with Gene, stating that
“[d]efendants’ current position of not applying the 2005 Amendment is clearly inconsistent with their prior position that the 2005 Amendment controls. If I accepted Defendants’ position, it also would mean that [d]efendants, even if unintentionally, misled this Court in the first portion of this litigation as they continuously applied the 2005 Amendment throughout this action and only now seek its rescission.”
The Court went on to state that: “[d]efendants argued in favor of the 2005 Amendment throughout this action, never mentioned, until November 21, 2008, that the 2005 Amendment should not apply, and caused the Court to issue an opinion stating that the 2005 Amendment applies. For all of these reasons, [d]efendants are judicially estopped from arguing that the 2005 Amendment should not apply to the ESDC property valuations based on unclean hands, equitable estoppel, or principles of unjust enrichment.”
Gene argues that Defendants have waived their right to argue for rescission of the 2005 Amendment because “they acquiesced in and affirmed the application of the Amendment before, during, and after the first trial.” In order to succeed, Gene had to prove that the defendants “were aware of the grounds they now advance to avoid the 2005 Amendment, and of the underlying facts, and knowingly relinquished their right to argue that the Amendment should be rescinded on those grounds.” The Court found that because the defendants “knew the relevant facts at the time of the first trial and made no effort to present their challenges to the 2005 Amendment then or even to put Gene or the Court on notice that they intended to assert such a defense at any time, [d]efendants have waived their right to argue that the valuation provisions of the Initial Agreement should be used instead of those in the 2005 Amendment.”