The Court of Chancery, in First American Financial Management Company v. Royal Sovereign Group, LLC, et al., C.A. No. 5501-VCN (July 9, 2010), read letter decision here, entered a default judgment and awarded attorneys’ fees after a finding of bad faith.

This summary was prepared by Kevin F. Brady of Connolly Bove Lodge & Hutz LLP.

The Court held a hearing on June 22, 2010 on Plaintiff’s Motion for Entry of a Default Judgment against Defendant RPG, LLC. No one purporting to represent RPG appeared at that hearing. As a result, the Court said that “it would enter a default judgment against RPG if, by July 6, 2010, RPG had not retained Delaware counsel and filed the papers necessary to challenge the sufficiency of service of process upon it.” Even though representatives purporting to act on behalf of RPG had told the Court previously that it was going to challenge the sufficiency of service of process, no such challenge was presented. Indeed no Delaware counsel purporting to represent RPG entered their appearance. Instead, RPG through its principal, Mr. Gray, informed the Court that just a few days after the June 22, 2010 hearing, RPG was merged into a Spanish entity.

The Verified Complaint included as an exhibit, the Subscription Agreement at issue which showed that RPG had agreed to contribute $5,000,000 toward a proposed acquisition by the plaintiff and to resolve any disputes arising under the Subscription Agreement in the Delaware Court of Chancery. Because no question existed as to personal jurisdiction over RPG, the Court concluded that the requirements of Court of Chancery Rule 55(b) had been satisfied and that no good reason existed as to why judgment should not be entered against RPG. This judgment would be binding against any entity that is a successor to RPG by merger, because under Court of Chancery Rule 25(c), which governs the substitution of parties, where there has been a transfer of interest, that an “action may be continued by or against the original party, unless the Court upon motion directs the person to whom the interest is transferred to be substituted in the action or joined with the original party.”

Moreover, the Court found that individuals purporting to speak for RPG “have engaged in a pattern of conduct designed to delay this proceeding and to obfuscate important factual considerations” and that their behavior constituted bad faith within the meaning of the exception to the American Rule regarding attorneys’ fees.