Global Link Logistics, Inc. v. Olympus Growth Fund III, L.P., No. 4444-VCP (Del. Ch. Jan. 29, 2010), read opinion here.
David Felice, of Ballard Spahr, represented one of the parties in this matter, and prepared this synopsis.
In a summary proceeding to confirm an arbitration award, the Court of Chancery dismissed with prejudice a cross-claim for adjudication of proportionate fault among co-defendants to an arbitration proceeding, holding that the moving co-defendants should have first raised the issue at arbitration and, by failing to have done so, were barred from seeking to hold their co-defendant disproportionately liable for a $7 million fraud award. In addition, the Court dismissed without prejudice defendants’ cross-claims for pro rata contribution and to pierce the corporate veil as not ripe. This decision is noteworthy for litigators who agree to resolve disputes through binding arbitration because the issue of proportionate fault as between and among co-defendants must be resolved in the arbitration proceeding or the parties risk exposure to a potentially disproportionate share of the damages award.
The dispute presented itself in the form of a complaint to confirm an arbitration award and how payment of the arbitration panel’s $7 million damage award for fraud should be allocated among the three defendants who were found to be jointly and severally liable for fraud. Through a Stock Purchase Agreement (“SPA”) executed in 2006, Plaintiffs acquired Global Link Logistics, Inc. (“Global Link”) from Olympus Growth Fund III, L.P., Olympus Executive Fund, L.P. (collectively, “Olympus”) and CJR World Enterprises, Inc. (“CJR”). Global Link, based in Atlanta, Georgia, “engages in the international shipping business as a non-vessel operating common carrier under licenses from the Federal Maritime Commission.” Plaintiffs claimed that sometime after the SPA closed, they received notice that Global Link was engaged in split-routing – a practice where Global Link requested that trucking companies deliver cargo to a location different from the information provided to the ocean carrier. Plaintiffs also claimed that this practice was a violation of the Shipping Act. Alleging ignorance of the practice of split-routing, Plaintiffs initiated an arbitration proceeding to recoup the entire purchase price, more than $128 million, claiming: (i) that defendants breached the representations contained in the SPA and (ii) fraud through the intentional concealment of the split-routing practice. Defendants argued that the practice had been disclosed during due diligence and, in any event, is not a violation of the Shipping Act.
Following arbitration, the panel awarded Plaintiffs approximately $6 million for breach of the representations contained in the SPA – with each of the sellers being held responsible for paying an amount proportionate to their share in Global Link at the time of the sale. On the fraud claim, the panel found Olympus and CJR jointly and severally liable and awarded Plaintiffs approximately $7 million (the “Fraud Award”). The panel was not asked to nor did it render a finding of proportionate fault for the Fraud Award.
Plaintiffs filed a complaint to confirm the award in accordance with the Delaware Uniform Arbitration Act. Through an Amended Answer, Olympus asserted cross-claims against CJR: (i) for contribution toward the Fraud Award for the full amount based on CJR’s proportionate fault in accordance with 10 Del. C. § 6302(d); (ii) for contribution of CJR’s pro rata share of the Fraud Award; and (iii) to pierce CJR’s corporate veil and to hold its sole stockholder liable for any amount CJR may owe. CJR and its sole stockholder filed separate motions to dismiss the cross-claims, arguing that 10 Del. C. § 6306(d) barred Olympus from pursing a claim for contribution for any amount greater than CJR’s pro rata share of the Fraud Award and that any claims for pro rata contribution and to pierce the corporate veil were not ripe.
The Court held that an arbitration award constitutes a judgment under the Delaware Uniform Contribution Among Tort-Feasors Law (“DUCATL”) and that Olympus’ failure to raise the issue of proportionate fault by way of a cross-claim in the arbitration precluded Olympus from attempting to litigate the issue in court. Through its cross-claim, Olympus attempted to hold CJR liable for more than its proportionate share of the Fraud Award under 10 Del. C. § 6302(d), which states: “[w]hen there is such a disproportion of fault among joint tort-feasors as to render inequitable an equal distribution among them of the common liability by contribution, the relative degrees of fault of the joint tort-feasors shall be considered in determining their pro rata shares.” CJR moved to dismiss the cross-claim as being barred by the requirements of 10 Del. C. § 6306(d). Section 6306(d) states: “[a]s among joint tort-feasors against whom a judgment has been entered in a single action, subsection (d) of § 6302 of this title applies only if the issue of proportionate fault is litigated between them by cross-complaint in that action.”
Noting that there was no Delaware case law addressing the interplay between the Delaware Uniform Arbitration Act and the DUCATL, the Court concluded that “an arbitration award should be deemed a judgment for purposes of the DUCATL at least in the circumstances of this case.” (Op. at 10). The Court reasoned that the very limited grounds upon which an arbitration award could be modified or vacated “suggest that such awards have sufficient finality to warrant affording them the status of a judgment.” Id. In addition, the Court noted “perhaps most importantly, if I were to accept the Olympus Parties’ argument, it would open the door to duplicative litigation and seriously undermine the judicial efficiency and cost and time savings afforded by arbitration.” Id. Based on this rationale, the Court concluded that the cross-claim “clearly exemplifies the type of duplicative litigation and inefficient use of judicial resources that § 6306(d) was designed to prevent.” Id. at 11. However, the Court did limit its holding as being applicable “only to the situation before me, namely, that in which the cross-claim defendant (here, CJR) in a later-filed proportionate fault cross-claim under 10 Del. C. § 6302(d) was a party to the arbitration and could have been named in a cross-claim by the cross-claim plaintiff in the arbitration proceeding.” Id. at 13-14.
Based on the fact that neither Olympus nor CJR had paid any portion of the Fraud Award, the Court concluded that the cross-claim for pro rata contribution from CJR was not ripe. Similarly, because the contribution claim was not ripe, the Court found that the veil-piercing cross-claim would not be ripe, if ever, until CJR failed to pay its apportioned pro rata share of the Fraud Award. Accordingly, the two remaining cross-claims were dismissed without prejudice.