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Zimmerman v. Crothall, C.A. No. 6001-VCP (Del. Ch. Jan. 31, 2013)

Issue Presented 

This 74-page opinion addresses the allegations of a minority unitholder in an LLC who asserts claims that the directors breached their fiduciary duties in connection with several financing transactions.

Brief Overview 

Zimmerman claimed that the challenged transactions should be analyzed under the entire fairness standard of review based on the actual control by a majority of the directors interested in the challenged transactions and who received an exclusive benefit, but in any event, Zimmerman argued unsuccessfully that the directors could not demonstrate the fairness of the transactions which were alleged to be a violation of their duty of loyalty.  Zimmerman also claimed that the transactions did not receive the necessary approval from all of the members.  See prior Chancery decision in this matter summarized on these pages here.

The Court concluded after a three-day trial and post-trial briefs that even though a declaratory judgment would be entered that the directors exceeded their authority in engaging in the financing transactions, the Court found that the directors’ breach did not cause any damages.  The Court also ruled that the directors were entitled to both advancement and indemnification, notwithstanding the breach by the directors of the LLC operating agreement.

The Court provided an extensive description of the applicable law for interpreting an ambiguous contract such as the one involved here.  The Court also observed that the applicable statute, the Delaware LLC Act, allows parties wide latitude in crafting an agreement customized to their needs.  See pages 21 and 22.  For example in this case, the LLC Agreement involved the issuance of ownership interests in units as opposed to admitting members, and it also incorporated certain corporate law terms, such as a board of directors.

The Court discusses in extensive detail under what circumstances additional units can be issued under the LLC Agreement.  The Court noted that the LLC Act establishes “no formalities that must be observed for the creation and issuance of limited liability company interests,” as opposed to the analogous situation in a corporate context.  See footnote 100 and accompanying text.

The Court concluded that the board breached the operating agreement in undertaking each of the challenged transactions regarding the issuance of additional units.

The Court explained that in determining the contractual intent of the parties, the “true test is not what the parties to the contract intended it to mean, but what a reasonable person in the position of the parties would have thought it meant.”  See footnote 117.  The Court also applied the rule that construing and ambiguous contract against the drafter is appropriate based on the rule of contra proferentum.

The Court considered the breach of duty of loyalty claims that were based at least in part on the argument that certain unitholders owed fiduciary duties in light of their controlling interest.  The Court described the case law that determines when an interest in an entity will be considered controlling, even if it is less than 50% or when actual control over a board takes place in the course of a particular transaction.  See footnote 129 and accompanying text.

However, the Court found that the parties involved “neither acted together nor were connected in some legally significant way” so that they were not acting in concert in a manner that was sufficient to establish control.  Because the Court concluded that the two unitholders were not acting in concert or otherwise exerting “actual control” over the board, there was no basis for the breach of fiduciary duty claim that rested on the finding of a control group of shareholders.

The Court next considered the fiduciary duties under the terms of the operating agreement and found that the operating agreement did provide that the directors of the LLC were fiduciaries.

Importantly, at footnote 145, the Court of Chancery noted that the Delaware Supreme Court has not yet “definitively determined whether the LLC statute imposes default fiduciary duties,” but also cited a more recent decision of the Court of Chancery that held that “subject to clarification from the Supreme Court, managers and managing members of an LLC do owe fiduciary duties as a default matter.”  (citing Feeley v. NHAOCG, LLC, 2012 WL 5949209, at * 8-10 (Del. Ch. Nov. 28, 2012)).

Moreover, the Court found that the fiduciary duties were restricted pursuant to 6 Del. C. Section 18-1101(c) to the extent that the agreement gave the directors the right to engage in transactions with the company.

The Court interpreted the provision of Section 6.13 of the LLC Agreement requiring the transactions with the company be “fair” as “effectively calling for review under an entire fairness standard.”  See footnote 159 (noting that magic words such as “entire fairness” or “fiduciary duties” are not necessary in order to impose fiduciary standards of conduct as a contractual matter).  However, the Court also found that the entire fairness standard was not shown to have been breached.

The Court also observed that the concepts of Section 144 of the Delaware General Corporation Law were incorporated into the LLC Agreement by reference.  Section 144 allows for self interested transactions with the director’s corporation to survive the common law concept that they are voidable.  Although this concept has no analogue in the LLC context; because it was incorporated into the agreement, the Court had to address it.  See footnotes 153 and 154 and accompanying text.  The Court found in this case that the defendants did comply with at least one of the safe harbors in Section 144 that was incorporated into the LLC Agreement by reference.  Thus, because the Court found that the challenged transactions were approved in good faith by informed disinterested directors, and should receive the benefit of the business judgment rule, the Court found that the burden of proof of entire fairness shifted to Zimmerman.  The Court also found the challenged transactions to be fair.

Remedy 

The Court concluded that Zimmerman was entitled to judgment in his favor on the breach of contract claim but not on the breach of fiduciary duty claim.  The appropriate remedy would be to recover damages resulting from the breach of the agreement but the Court determined that the transactions were fair and therefore there were no such damages.

Zimmerman also asked the Court to order defendants to reimburse the company for over $1 million in legal fees that it advanced to the law firm representing the defendants.  The Court reasoned that:

“Whether a party has the ultimate right to an advancement depends on whether his underlying conduct is indemnifiable.” 

(citing Reddy v. Elec. Data Sys. Corp., 2002 WL 1358761, at * 5 (Del. Ch. June 18, 2002)).  The Court found that the agreement required indemnification for the defendants based on the circumstances of this case.  See footnote 210.

Quoting the applicable parts of the LLC agreement, the court explained that even though the defendants breached the agreement, there was no evidence that the breach was the result of willful misconduct or other disqualifications to indemnification contained in the LLC agreement.  In addition to the LLC agreement, “at least some” of the defendants were also parties to separate agreements that also provided for advancement and indemnification.

The trial having been concluded, and the right to indemnification established, the court observed that Zimmerman could have sought a pre-trial ruling on advancement.  Nonetheless, there was no basis for the court to invalidate the board decision to grant advancement which was consistent, the court reasoned, with the LLC agreement’s requirement that the company indemnify its directors “to the fullest extent permitted by law.” See footnotes 216 and 219.

In this post-trial opinion, the right to advancement was largely moot, but the Court explained that even though the operating agreement “does not explicitly address advancement rights,” the board had the authority to approve the advancement of legal fees based on broad authority to make decisions for the company not otherwise provided for in the LLC Agreement.

POSTSCRIPT: FYI, the Court of Chancery wrote a subsequent opinion involving the parties in this case.

Noteworthy 2012 Corporate and Commercial Decisions from Delaware’s Supreme Court and Court of Chancery.

By: Francis G.X. Pileggi and Kevin F. Brady.

Introduction

This is the eighth year that we are providing an annual review of key Delaware corporate and commercial decisions. During 2012, we reviewed and summarized over 200 decisions from Delaware’s Supreme Court and Court of Chancery on corporate and commercial issues. (We also provided partial lists of key cases throughout 2012.) Among the decisions with the most far-reaching application and importance during 2012 include those that we are highlighting in this short overview. We are providing links below to the more complete blog summaries, and the actual court rulings, for each of the cases that we highlight below. Prior annual summaries are linked in the right margin of this blog. We welcome comments if readers think we missed a decision that should be included.Photo of the Supreme Court Courthouse in Dover (The Supreme Court’s stately building in Dover is featured in the photo from the Court’s website.)

Top 5 Decisions of 2012

We begin with our selection of the Top Five Cases from 2012. In no particular order, we chose the following decisions as especially noteworthy:

Gatz Properties LLC v. Auriga Capital Corp., No. 148, 2012 (Del. Supr. Nov. 7, 2012) (Per Curiam). Issue Addressed: Delaware’s High Court held that the manager of an LLC violated a contracted-for fiduciary duty that adopted the equitable standard of entire fairness in a conflict of interest transaction between the LLC and its manager. The Supreme Court also declared as dicta, any statements by the trial court that Delaware law imposed default fiduciary duties in the LLC context. Summary available here.

In Americas Mining Corp. v. Theriault, No. 29, 2012 (Del. Aug. 27, 2012), in a 110-page opinion, the Delaware Supreme Court upheld the Court of Chancery’s 100-plus page decision awarding over $2 billion in damages based on a breach of fiduciary duty claim in connection with the sale of a company. Delaware’s High Court also upheld an award of attorneys’ fees in the amount of $300 million. Highlights available here. The trial court decision, styled as In re Southern Peru Copper Corporation Shareholder Derivative Litigation, C.A. No. 961-CS (Del. Ch. Oct. 14, 2011), was highlighted on these pages here and here.

South v. Baker, C.A. No. 7294-VCL (Del. Ch. Sept. 25, 2012). Issues Addressed: This decision is a candidate for inclusion in the pantheon of iconic Delaware Court of Chancery opinions addressing the following issues: (1) When derivative plaintiffs and their counsel will be presumptively found to provide inadequate representation resulting in the complaint’s dismissal with prejudice; (2) When dismissal of one derivative suit will not bar another derivative suit involving the same corporation; (3) When a Caremark claim will be dismissed with prejudice if Section 220 is not used beforehand; and (4) How to successfully allege pre-suit demand futility in connection with making a Caremark claim. Summary available here.

In Re: Encore Energy Partners LP Unitholder Litigation, Cons., C.A. No. 6347-VCP (Del. Ch. Aug. 31, 2012). Issue Presented: Whether the terms of an LP Agreement protected the general partner from claims regarding what would otherwise be a self-interested transaction, without breaching any duty owed to its limited partners? Short Answer: Yes. Summary available here.

Soterion Corp. v. Soteria Mezzanine Corp., C.A. No. 6158-VCN (Del. Ch. Oct. 31, 2012). Why This Case is Noteworthy: This decision addresses for the first time in Delaware the applicable standard to determine when the threat of a lawsuit can be tortious interference with prospective business relationships. This opinion also features the rare instance when attorneys’ fees are assessed based on an exception to the American Rule (as compared with Rule 37 for motions to compel). Summary available here.

Honorable Mention goes to the new Practice Guidelines, discussed below, which the Court of Chancery adopted and which provide comprehensive tips and instructions for both procedural matters and substantive discovery obligations that practitioners must follow if they hope to avoid the wrath of the bench.

We also selected the following additional cases from 2012 that deserve special attention:

Supreme Court Decisions

On December 27, 2012, the Delaware Supreme Court overruled in part and remanded a decision of the Court of Chancery which denied a large investor, BVF Partners L.P. (“BVF”), the right to opt-out of a shareholder class action settlement. In the case of In Re Celera Corp. Shareholder Litigation, No. 212, 2012 (Dec. 27, 2012), the Delaware Supreme Court, en banc, addressed the issue raised on appeal by objector-appellant BVF of the Court of Chancery’s certification of plaintiff/appellee New Orleans Employees’ Retirement System (“NOERS”) as class representative in an action challenging the acquisition of Celera Corporation (“Celera”) by Quest Diagnostics, Inc. (“Quest”). BVF also appealed from the Court of Chancery’s approval of a class action settlement without an opt out right for BVF. This decision is likely to have a significant impact on efforts to bring closure to class action settlements of litigation that involve objectors with substantial holdings. Summary available here.

Martin Marietta Materials, Inc. v. Vulcan Materials Co., No. 254, 2012 (Del. Supr., July 12, 2012). Our blurb about the Supreme Court’s Order of May 31, 2012 in this case is available here. Highlights of the 138-page Court of Chancery opinion on these pages is available here. Issue Presented: Whether a violation of a confidentiality agreement can be a basis to preclude a hostile tender offer. Short Answer: Yes. The Delaware Supreme Court affirmed the decision of the Delaware Court of Chancery in this expedited appeal. Summary available here.

EMAK Worldwide, Inc. v. Kurz, No. 512, 2011 (Del. Supr., April 17, 2012). Issue Addressed: Whether the Court of Chancery properly granted an interim fee award in a shareholders’ suit which did not produce an immediate monetary benefit. Short Answer: Yes. Summary available here.Cambium Ltd. v. Trilantic Capital Partners, No. 363, 2011 (Del. Supr., Jan. 20, 2012.) This Order of the Delaware Supreme Court applied the recent decision of Delaware’s High Court in the Central Mortgage case in which it clarified that Delaware has not adopted the federal standard for motions to dismiss under Rule of Civil Procedure 12(b)(6) as described in the U.S. Supreme Court’s Twombly and Iqbal decisions, despite the truism that the Delaware Rules of Civil Procedure are generally based on the Federal Rules of Civil Procedure. Highlights available here. A fuller overview is available here. The recent Delaware Supreme Court decision in Central Mortgage taking this position was highlighted here.
 
Court of Chancery Rulings

Shareholder Litigation

Rich v. Fuqi Int’l, Inc., C.A. No. 5653-VCG (Del. Ch. Nov. 5, 2012). Why this opinion is noteworthy: The Delaware Court of Chancery in this summary proceeding reaffirms in this pithy opinion that the Delaware General Corporation Law’s requirement in Section 211 that a shareholders’ meeting must be held annually, will not be suspended due to arguably conflicting provisions of the federal securities laws. That seems counterintuitive in light of the supremacy clause, but the court explains in a scholarly manner why a corporation will not be relieved of its obligation under DGCL Section 211 simply because of federal securities laws or regulations that may also impose certain prerequisites to holding an annual meeting. Summary available here.

In a transcript ruling in Dent v. Ramtron Int’l Corp., C.A. No. 7950-VCP (Del. Ch., November 19, 2012), the Court denied the plaintiff’s motion for a preliminary injunction to enjoin a shareholder vote on a merger between Ramtron and Cypress Semiconductor Corp. Issue Addressed: Whether the Court should preliminarily enjoin a shareholder vote on a merger on allegations that the company’s proxy statement is false and misleading in that the company failed to provide disclosures of financial projections thereby prohibiting the company’s stockholders from making an informed decision on whether to vote in favor of the merger or seek appraisal. (Transcript rulings are often cited in Delaware briefs as persuasive authority.) Summary available here.

Louisiana Municipal Police Employees’ Retirement System v. Lennar Corp., C.A. No. 7314-VCG (Del. Ch. Oct. 5, 2012). Issue Presented: In this summary proceeding, the Court considered whether newspaper articles announcing a federal investigation of the company, together with prior lawsuits that were settled without an admission of fault, satisfy the requisite threshold of “some evidence” to establish a credible basis of wrongdoing needed to allow a books and records demand under DGCL Section 220 to proceed. Short Answer: Not under the facts of this case. Summary available here.

In re Synthes, Inc. S’holder Litig., C.A. No. 6452-CS (Del. Ch. Aug. 17, 2012). Issue Addressed: Whether the controlling stockholder breached its fiduciary duty by refusing to consider an acquisition offer that would have cashed-out all the minority stockholders of Synthes, Inc., but required the controlling stockholder to remain as an investor in Synthes. Short Answer: No. Summary available here.
 
New Jersey Carpenters Pension Fund v. infoGroup, Inc., C.A. No. 5334-VCN (Del. Ch. Aug. 16, 2012). Issue: Can Plaintiff compel the expert report prepared by the company’s counsel for the board in anticipation of litigation? Short Answer: No, based on the facts of this case. Importantly, the Court of Chancery ruled that Rule 26(b)(3) is the standard that applies to determine if a report for the board must be produced as an exception to the work product doctrine—and not the less strenuous standard for board reports in the context of fiduciary litigation when the attorney-client privilege is at issue, in which case the standard used is often traced to Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970). See also, Ryan v. Gifford, 2007 WL 4259557, at *3 n.4 (Del. Ch. Nov. 30, 2007). The Court did not follow the Garner test even though in dictum from a 1993 case the Delaware Supreme Court suggested that the Garner standard would govern the discovery of work product materials. See footnote 17. Summary available here.
 
Keyser v. Curtis, C.A. No. 7109-VCN (Del. Ch. July 31, 2012). Issues Presented: (i) In this summary proceeding, the Court considered whether plaintiffs are entitled to a declaration, pursuant to 8 Del. C. § 225, that they comprise the board of directors of Ark Financial Services, Inc.; (ii) whether one of the signatories to the 2011 Written Consent actually owned the shares he purported to hold; (iii) whether a December 13, 2011 written consent purporting to elect the plaintiffs to the Board was valid; and (iv) whether a December 2010 issuance of Ark super-voting stock to Ark’s then sole Board member was invalid. Short Answers: Yes to (i) though (iv). Summary available here.
 

Gentili v. L.O.M. Med. Int’l, Inc., C.A. No. 7600-VCG (Del. Ch. Aug. 17, 2012). Issue: Whether non-unanimous written consents of shareholders were sufficient to thwart a challenge to the election of directors at an annual meeting? Short answer: No. Summary available here.

In Re: Appraisal of Orchard Enterprises, Inc., C.A. No. 5713-CS (Del. Ch. July 18, 2012). Issue Addressed: In this post-trial decision in an appraisal action arising out of a merger, the Court determined the fair value of the shares, relying on the discounted cash flow method of valuation. Summary available here.

Shocking Technologies, Inc. v. Michael, C. A. No. 7164-VCN (Del. Ch. April 10, 2012). Issue Addressed: Whether the Court of Chancery has the inherent authority to remove a director for breach of fiduciary duty, other than via DGCL Section 225? Short answer: The issue was not directly decided, but based on the facts of this case, the Court was not inclined to exercise such an inherent power, if such a power exists, prior to the expedited trial. Summary available here.

In re Delphi Financial Group Shareholder Litigation, Cons. C.A. No. 7144 -VCG (Del. Ch. Mar. 6, 2012). This is the third Delaware Court of Chancery decision in as many weeks that denied injunctive relief, in an expedited opinion, in response to a challenged transaction–despite criticism in two of the cases, of the process and the players, but ultimately leaving it up to the shareholders to decide whether to accept offers of a substantial premium to sell their shares. Summary available here. See In Re El Paso, summarized here, and In Re Micromet, summarized here.

In Re El Paso Corporation Shareholder Litigation, Consol. C. A. No. 6949-CS (Del. Ch. Feb. 29, 2012). Chancellor Strine denied the stockholder plaintiffs request for a preliminary injunction to enjoin a merger between El Paso Corporation and Kinder Morgan, Inc. While the Court in a 33-page opinion, severely criticized the actions of a number of the players, in the end the Chancellor decided to give the shareholders of El Paso the opportunity to decide for themselves if they liked the price being offered to them. Summary available here. The Court’s opinion in this matter marks the second time in the span of only a few months that the Delaware Court of Chancery has strongly criticized Goldman Sachs for conflict of interest issues in multi-billion dollar transactions. The most recent high-profile criticism was in the Court of Chancery’s 100-plus page decision in the Southern Peru Copper case highlighted on these pages here. Our LexisNexis videocast on this opinion is available here.

Dweck v. Nasser, C. A. No. 1353-VCL (Del. Ch. Jan. 18, 2012), found that Dweck, the former CEO, a director and 30% stockholder in Kids International Corporation (“Kids”), and Kevin Taxin, Kids’ President, breached their fiduciary duties of loyalty to Kids by establishing competing companies that usurped Kids’ corporate opportunities and converted Kids’ resources. The Court also imposed liability on an officer of the company for approving the reimbursement with company funds of the personal expenses of his superior. Summary available here.

Steinhardt v. Howard-Anderson, C.A. No. 5878-VCL (Del. Ch. Jan. 6, 2012). Issue Addressed: This opinion addressed the issue of whether representative plaintiffs in a putative class action should be in sanctioned for trading on the basis of confidential information obtained in the litigation. The motion was granted. Summary available here.

Paul v. China MediaExpress Holding, Inc., C.A. No. 6570-VCP (Del. Ch. Jan. 5, 2012). Issues Addressed: (1) Whether a Section 220 case should be stayed pending the outcome of a related federal securities suit; and (2) Whether the shareholder in this case established a proper purpose to inspect books and records under DGCL Section 220. Short Answer: (1) Based on a three-part test as applied to the facts of this case, the Court refused to stay this action in favor of a pending related federal securities suit, even though a motion to stay was also pending in the federal court. (2) In this post-trial opinion, the Court determined that the shareholder established a proper purpose and was entitled to the documents necessary to investigate that proper purpose. Summary available here.

LLC and Other Alternative Entity Litigation

In Feeley v. NHAOCG, LLC , C.A. No. 7304-VCL (Del. Ch. Nov. 28, 2012)(“Feeley IV“), the Delaware Court of Chancery addressed–for the first time since the recent Delaware Supreme Court decision in Gatz Properties v. Auriga Capital, highlighted on these pages here, the issue of default fiduciary duties in the LLC context. (This is the fourth Chancery ruling that we have posted about in the Feeley case.) Highlights available here.

New Media Holding Co., LLC v. Brown, C.A. No. 7516-CS (Del. Ch. Nov. 14, 2012). Issue addressed: Does Delaware have jurisdiction over the manager of a limited liability partnership (LLP) accused of breach of fiduciary duty claims, based on acts taken in the course of his work for the LLP, absent acts taken in Delaware in furtherance of the alleged wrongdoing? Short answer: No. Summary available here.

Feeley v. NHAOCG, LLC, (“Feeley II”), C.A. No. 7304-VCL (Del. Ch. Oct. 12, 2012). This is the second of four Chancery rulings in this case that we highlighted on these pages in 2012. What this case is about: This Delaware Court of Chancery opinion addresses a dispute regarding management and control of an LLC based on an interpretation of the LLC agreement, and deserves extra attention because it is the first opinion to apply DGCL Section 144 to the LLC context. Summary available here.

Policemen’s Annuity and Benefit Fund of Chicago v. DV Realty Advisors LLC, C.A. No. 7204-VCN (Del. Ch. Aug. 16, 2012). Issue Addressed: How to define “good faith” for purposes of a limited partnership agreement that required a good faith determination for removal of a general partner. Short Answer: The Court compared the common law definitions of good faith in the fiduciary context as compared to contract law, and also referred to the definition in the Uniform Commercial Code. See Slip op. at 33 and 34, and footnote 101. Summary available here.

In Re K-Sea Transportation Partners LP Unitholders Litigation, C.A. No. 6301-VCP (Del. Ch. April 4, 2012). The prior Chancery decision in this case was highlighted on these pages here. Issues Addressed: The issues addressed by the Court of Chancery in this matter were whether the fiduciary duty claims and the contractual claims were barred by the provisions in the limited partnership agreement, including whether a provision in the agreement that established a presumption of good faith barred claims for breach of the implied covenant of good faith and fair dealing. Summary available here.

Matthew v. Laudamiel, C.A. No. 5957-VCN (Del. Ch. Feb. 21, 2012). Apparently no prior Delaware law directly addressed the issue of whether the dissolution and cancellation of an LLC transformed derivative claims into direct claims held proportionately by the members of the LLC. The Court concluded that, after the filing of the certificate of cancellation, such claims must be brought in the name of the LLC by a trustee or a receiver appointed under 6 Del. C. Section 18-805, or directly by the LLC, or derivatively by its members after reviving the LLC by obtaining a revocation of its certificate of cancellation. Summary available here.

Gerber v. Enterprise Products Holdings, LLC, et al., C.A. No. 5989-VCN (Del. Ch., Jan. 6, 2012). Issue Addressed: This decision speaks to the limitations imposed by 6 Del. C. § 17-1101 on Delaware courts to address sanctionable conduct by partners and members of alternate entities that have contracted away their fiduciary duties. Summary available here.

Rulings Regarding Practice, Procedure and Jurisdictional Issues (including attorneys’ fees as exception to the American Rule)

Duff v. Innovative Discovery LLC, C.A. No. 7599-VCP (Del. Ch. Dec. 7, 2012).

Issues Addressed: The Court of Chancery addressed the following issues in this opinion: (1) Whether a forum selection clause providing for “sole” jurisdiction in California courts should be honored when a conflicting forum selection clause in a related agreement provided for jurisdiction in Delaware courts; (2) Whether 6 Del. C. § 18-111 provided a basis for equitable jurisdiction when the agreement that gave the Court of Chancery jurisdiction only provided for money damages; (3) Whether reformation as a remedy will be allowed when the complaint did not specifically request reformation but provided notice of the elements of that form of relief.

Court of Chancery Announces Rule Changes, New Discovery Guidelines

On December 4, 2012, the Court of Chancery announced (here) that it is updating Rules 26, 30, 34 and 45 regarding discovery effective January 1, 2013, “to account for modern discovery demands” regarding electronically stored information (“ESI”) and to “bring the Court’s rules in line with current practice.” The Court also announced that it is expanding its Guidelines for Practitioners, originally released in January 2012, to include guidelines regarding discovery and in particular, ESI (the “Discovery Guidelines”). The Practice Guidelines published by the Court of Chancery are entitled: “Guidelines to Help Lawyers Practicing in the Court of Chancery“. They are a quite formidable 28 pages (after a 3-page index.) Kevin Brady, a member of the Court’s Rules Committee, provided a helpful overview of the 28-page Guidelines on these pages here.

Bessenyei v. Vermillion, Inc., C.A. No. 7572-VCN (Del. Ch. Nov. 16, 2012). Issues Addressed: (1) Whether a notarized signature signed in the absence of a notary results in an invalid verification; and (2) Whether knowingly presenting an improperly notarized verification is a basis to dismiss the complaint under Delaware Court of Chancery Rule 41(b). Short Answers: (1) Yes; and (2) Under the circumstances, dismissal of the complaint is appropriate. Summary available here.

In another Delaware “first in the nation,” Vice Chancellor Laster of the Court of Chancery on October 15, 2012, in EORHB, Inc. v. HOA Holdings LLC (C.A. No. 7409-VCL) ordered the parties to “show cause” why computer assisted review should not be used for discovery of electronically stored information (“ESI”) in that matter. After a hearing on a motion for partial summary judgment and a motion to dismiss a counterclaim, Vice Chancellor Laster, sua sponte, raised the issue of computer assisted review in discovery for the balance of the case, saying: “[t]his seems to me to be an ideal non-expedited case in which the parties would benefit from using predictive coding. I would like you all, if you do not want to use predictive coding, to show cause why this is not a case where predictive coding is the way to go.” Transcript at 66.

Coughlin v. South Canaan Cellular Investments LLC, C.A. No. 7202-VCL (Del. Ch. July 6, 2012). Issue Addressed: Whether bad faith exception to American Rule applied to impose attorneys’ fees for litigation tactics. Short Answer: Yes. Summary available here.

Manning v. Vellardita, C.A. No. 6812-VCG (Del. Ch. March 28, 2012), is an important decision of the Delaware Court of Chancery on legal ethics as applied to non-Delaware attorneys who appear before the Court pro hac vice. Issues Addressed: Whether lack of complete candor to the Court in a Motion for Admission Pro Hac Vice is a basis to either: (i) disqualify counsel, and/or (ii) revoke the admission pro hac vice. The Court also addressed standards (articulated in this context for the first time), of candor and full disclosure, regarding potential conflicts, that those seeking admission pro hac vice must now follow. Summary available here.

Advancement and Indemnification Claims

Feeley v. NHAOCG, LLC, (“Feeley III“), is a transcript ruling in a pending Chancery case involving issues that relate to a contest for control, and which has thus far generated two opinions, highlighted on these pages here and here. A transcript of an oral argument in this case has recently been made available, regarding a claim in the case that, as of the date of this transcript, had not yet been the subject of an opinion by the court, but the transcript at pages 66 to 79, reveals “practice tips” about the mechanics of submitting bills in connection with a claim for advancement of legal fees for applicable officers or managers. ( We have often explained on these pages that transcripts of rulings in the Delaware Court of Chancery are often cited in briefs as valid authority).

Danenberg v. Fitracks, C.A. No. 6454-VCL (Del. Ch. Mar. 5, 2012), addressed important issues of advancement and indemnification and established a protocol for resolving the amount of fees payable pursuant to the grant of advancement rights. Summary available here.

Hermelin v. K-V Pharmaceutical Company, C.A. No. 6936-VCG (Del. Ch., Feb. 7, 2012). Issues Addressed: The Court of Chancery addressed an issue of first impression in Delaware regarding: “what evidence is relevant to an inquiry into whether an indemnitee acted in good faith for the purposes of permissive indemnification” under DGCL §§145(a) and (b). The Court also addressed: (1) Whether the former CEO is entitled to mandatory indemnification as a matter of law; (2) Whether additional discovery is required to determine whether the former CEO acted in good faith (in which case he would be entitled to statutorily permissive indemnification pursuant to his rights under an indemnification agreement.) Summary available here.

Request for Appointment of Receiver

Badii v. Metropolitan Hospice Inc., C.A. No. 6192-VCP (March 12, 2012), involves a post-trial decision on an action under 8 Del. C. § 291 for the appointment of a receiver for an insolvent, closely held corporation, Metropolitan Hospice, Inc. (“MHI”) which owed, among other things, approximately $2 million to the IRS for back taxes, penalties, and interest. Summary available here.

Bonus: Practitioners’ Guide with Practice Tips for non-Delaware Lawyers using “local counsel” in Delaware

Supplement: Professor Bainbridge graciously describes our annual review as a “must read”. The Columbia Law School’s new blog on corporate law, called The CLS Blue Sky Blog, reprinted our annual summary on the first day of the blog’s unveiling.

In Feeley v. NHAOCG, LLC , C.A. No. 7304-VCL (Del. Ch. Nov. 28, 2012), the Delaware Court of Chancery addressed–for the first time since the recent Delaware Supreme Court decision in Gatz Properties v. Auriga Capital, highlighted on these pages here, the issue of default fiduciary duties in the LLC context. We will have more to say about this later, but for the time-being, a taste of what passes in the corporate legal world as a hot topic, is provided by Professor Larry Hamermesh in his following post:

The November 28, 2012 opinion by Vice Chancellor Laster in Feeley v. NHAOCG, LLC represents the latest round in the ongoing debate about whether those with managerial authority in Delaware LLCs have fiduciary duties as a default matter. We have addressed this issue extensively on this site, most recently in Prof. Luke Scheuer’s post about the Delaware Supreme Court’s (non)decision on this issue in Auriga v. Gatz.

Vice Chancellor Laster’s decision ratchets up one notch the Court of Chancery’s commitment to the proposition that such default duties exist. Although the Chancellor’s opinion to the same effect in Auriga now has no precedential value, Vice Chancellor Laster has now ruled the same way in a case in which the issue was squarely presented. Chancellor Strine’s discounted opinion was relied upon not as precedent, but so as to “afford his views the same weight as a law review article, a form of authority the Delaware Supreme Court often cites.”

Prior Chancery decisions in the Feeley case were highlighted on these pages here.

Feeley v. NHAOCG, LLC, is a pending Chancery case involving issues that relate to a contest for control, and which has thus far generated two opinions, highlighted on these pages here and here. A transcript of an oral argument in this case has recently been made available, regarding a claim in the case that has not yet been the subject of an opinion by the court, but the recent transcript at pages 66 to 79, reveals “practice tips” about the mechanics of submitting bills in connection with a claim for advancement of legal fees for applicable officers or managers. ( We have often explained on these pages that transcripts of rulings in the Delaware Court of Chancery are often cited in briefs as valid authority).

Relatively recent Chancery decisions have provided a detailed procedure for submitting regular monthly bills in connection with an advancement claim, along with a process for dealing with disputes about minutiae or overall amount of those monthly legal bills. See, e.g., Danenberg v. Fitracks, (Del. Ch. March 5, 2012)(“Danenberg II“), highlighted here. See also Fuhlendorf v. Isilon Sytems, Inc., highlighted here.

In the recent Feeley transcript, the Vice Chancellor (who also authored the Danenberg II decision linked above),  provided insights and clarification on the more quotidian aspects of submitting bills for legal fees in connection with an advancement claim. A few bullets points highlighted below should be of practical benefit to practitioners:

  • The Court is not likely to look at a time entry on a bill for drafting a brief and “engage in argument” that it should have been 9 hours instead of 12 hours. See Transcript at 70 (Transcript is linked above).
  • Fairly complete billing statements need to be given to the other side for their review.  Tr. at 70 and 73.
  • The Court is “deeply skeptical” that unredacted billing statements will waive attorney-client privilege. Tr. at 71.
  • The Court will do “spot checks”  of bills submitted with an affidavit of counsel, even though, as stated in Danenberg II, it will not “get into the weeds” and review every billing entry. Tr. at 74.
  • When advancement is only sought for parts of a case, those billing entries for which no adancement is sought should be covered and marked as “redacted”. Then at the end of the bill, the total of all applicable time entries should be provided. Tr. at 76.
  • Only very minimal redactions should be made for billing entries on amounts for which reimbursement is sought, so opposing counsel can review the relevant details. Tr. at 77 and 79.
  • Regarding out of pocket expenses that need to be allocated among matters for which reimbursement is, and is not, sought, the court expects the parties to “work that out” in good faith. Tr. at 78,
  • Indirectly referenced at page 74 is the “pizza principle” applicable to these types of fee disputes, explained in cases highlighted on these pages here and here, which can be summarized thusly: If the opposing party is contesting the amount of fees sought, that objector will be required to provide their own billing records for comparison purposes. If the opposing party’s bills are comparable, there is a slim chance of prevailing on the objection. Even if the opposing party’s fees are less, if there are good reasons why the requesting party’s fees are higher, they are still likely to be upheld in this context.

 

Feeley v. NHAOCG, LLC, C.A. No. 7304-VCL (Del. Ch. Oct. 12, 2012).

What this case is about: This Delaware Court of Chancery opinion addresses a dispute regarding management and control of an LLC based on an interpretation of the LLC agreement.

Why it is noteworthy: This pithy decision also addresses whether the vote of an interested member of an LLC would be disqualified due to lack of disinterestedness. The Court recalled the old common law rule that the vote of an interested director would not count for purposes of a quorum, but DGCL Section 144 and similar statutes superseded that old common law concept to the extent, for example, that a contract will not be invalid for the sole purpose that one of the directors voting on it has an interest in the transaction (assuming one of three safe harbors in Section 144(a) applies). See slip op. at 19-21. The Court explains why it would not be reasonable to expect that the Delaware General Assembly would have rejected Section 144(b)’s specific authorization of voting by interested parties “in favor of the abandoned common law approach.” See generally, article co-authored by R. Franklin Balotti in the Delaware Lawyer magazine in 2008 that addressed the distinction between liability of an interested director and the separate issue of whether an agreement that she voted on is merely valid based on Section 144. An excerpt from that article follows:

 “Unless a court must determine the validity of a self-dealing transaction before it considers a director’s equitable conduct and potential liability, [DGCL Section] 144 should not be considered when determining director liability. Until the General Assembly instructs otherwise, Section 144 should be limited to the purpose expressed by Professor Folk 40 years ago–validation of self-dealing transactions.”

The opinion in this case also provides useful contract interpretation principles which are applied in a very businesslike manner to support a cogent result that leads one to believe that there is only one reasonable interpreation of the relevant terms of the LLC agreement.

A prior Chancery decision in this case addressing the issue of in rem jurisdiction for purposes of contesting the rightful managing member of an LLC, similar to a DGCL Section 225 proceeding, was highlighted on these pages here. The prior decision provides additional background details.

Feeley v. NHAOCG, LLC, C.A. No. 7304-VCL (Del. Ch. March 20, 2012).

Issue Presented

When a managing member of an LLC is “jurisdictionally present” in Delaware, is that party also subject to the jurisdiction of the Delaware Court of Chancery on other related claims as well.

Answer: Yes

Background

This Delaware Court of Chancery opinion involves the challenge to the purported removal of a managing member of an LLC.  A motion to dismiss for lack of personal jurisdiction was filed pursuant to Court of Chancery Rule 12(b)(2).  Although this relatively short 15-page decision describes the multiple parties involved in the affiliated entities, for purposes of highlighting the key legal points addressed in this opinion, it suffices to describe the core facts as involving warring factions whose imbroglio reached a crescendo when one member of an LLC purported to remove the managing member in a manner that was allegedly at odds with the procedures required in the applicable operating agreement.  That member, “NHA,” after purporting to remove the original managing member, represented to many third parties that it was acting as the new managing member of the LLC.

This suit was filed to seek a temporary restraining order against the removal of the original managing member.  In addition to the claim seeking to determine the validity of the purported removal of the managing member, the Court explained that:  “not content with this straight-forward count, the plaintiffs added ten more.”  Two days after this complaint was filed, the Court imposed a status quo order pending resolution of the control dispute.  The next day, the defendants moved to dismiss the complaint for lack of personal jurisdiction.

Legal Analysis

The Court emphasized that the valid exercise of personal jurisdiction turns on the implied consent provisions of the Delaware LLC Act in part because the operating agreement did not have a forum selection clause.

Section 18-110 of the LLC Act grants the Court of Chancery in rem jurisdiction to determine who validly holds office as a manager of a Delaware limited liability company.  This is comparable to the corporate analog at Section 225 of the Delaware General Corporation Law.  In such a proceeding, the defendants appear before the Court “not individually, but rather, as respondents being invited to litigate their claims to the res (here, the disputed corporate office) or forever be barred from doing so.” 

The key point emphasized by the Court is that because a Section 18-110 proceeding affects the Delaware LLC and the office of the managing member, it is not necessary for all claimants to the office to be subject to the Court’s in personam jurisdiction in order for the Court to make an authoritative determination.

The Court also explained that even though it is necessary under both the statute and the constitution to take reasonable steps to notify claimants to the office of the judicial proceedings and that they have an opportunity to be heard, a plaintiff “need not name every known claimant to the office as a party defendant in order to ensure that the party receives actual notice of the claim and that the adjudication is binding.  Nevertheless, it is prudent to do so.”

The Court underscored the point that even if a claimant is not personally subject to the jurisdiction of the Court, they must realize that “their failure to participate in this adjudication will not foreclose the authoritative adjudication in this proceeding of that claim of title.”  See Haft v. Dart Group Corp., 1996 WL 255899, at *2 (Del. Ch. Apr. 26, 1996) (interpreting 8 Del. C. Section 225).

The Court also discussed Section 18-109 of the LLC Act which is an implied consent statute that empowers the Court to exercise personal jurisdiction over persons who serve as managers of an LLC for purposes of adjudicating claims for breaches of duty in that capacity-involving and relating to the business of the LLC.  In addition, the Court reasoned that Section 18-109(a) is satisfied even if one merely purports to act as the managing member of an LLC, as was true in this case.  Service of a complaint under Section 18-109 will be consistent with due process when the action relates to a violation by the manager of a fiduciary duty owed to the limited liability company.  This jurisdictional scope extends, consistent with due process, to include alleged violations by a manager of the express and implied contractual duties owed by the manager under the limited liability company agreement.

Personal Jurisdiction over other Defendants in Addition to Managing Member

The Court discussed the seminal decision of In Re USACafes, L.P. Litig., 600 A.2d 43, 53 (Del. Ch. 1991).  In that case, the Court allowed personal jurisdiction over individuals who control an entity that acts as a fiduciary, for example such as the control that a board of directors exercises over a corporate general partner of a limited partnership.  As an alternative to the jurisdiction based on an analysis used in the USACafes case, the Court referred on page 14 to the caselaw that allows the imposition of jurisdiction over those who have “personally participated in the choice to invoke the laws of the state that govern the internal affairs of the disputed entities and the contractual duties running among the members.”

Related Claims

The Court reasoned that once a defendant is subject to personal jurisdiction under Section 18-109 as to certain claims, the Court may exercise personal jurisdiction over the defendant with respect to other sufficiently related claims.  The Court referred to other cases by analogy that implied similar reasoning to corporate directors who are nonresidents based on the statutory analysis in Section 3114.

Matthew v. Laudamiel, C.A. No. 5957-VCN (Del. Ch. March 20, 2012).  The prior decision by the Delaware Court of Chancery in this matter was highlighted on these pages here. 

Issues Addressed

Whether a final judgment should be entered pursuant to Court of Chancery Rule 54(b) against one co-defendant whose motion to dismiss for lack of personal jurisdiction was granted, while the remainder of the case proceeds against other co-defendants. The Court also addressed an argument that among various Chancery decisions, there is a “majority view” and a “minority view” among members of the Court regarding the interpretation of Rule 12(b)(2) regarding motions to dismiss for lack of personal jurisdiction.

Background

This case involves claims against the members of an LLC that oversaw the dissolution and winding-up of an LLC.  An additional co-defendant was also named as a party based on the civil conspiracy theory of personal jurisdiction.  The Court granted a motion to dismiss previously against that co-defendant, Fläkt Woods, whom the Court determined not to be subject to the personal jurisdiction of the Court.

The plaintiff brought this motion, pursuant to Court of Chancery Rule 54(b), seeking entry of a final judgment “confirming the exit” from the case of Fläkt Woods to allow an  immediate appeal, or in the alternative, asking the Court of Chancery for a certification of an interlocutory appeal, pursuant to Supreme Court Rule 42, of the Order that implemented the opinion dismissing Fläkt Woods.  The theory for asking the Court for a final judgment as it pertained to Fläkt Woods was to avoid the need for the plaintiff to wait for a potentially lengthy period of time until a final disposition against all the other defendants, after trial, before an appeal could be made.  After that waiting period, it might be too late for the plaintiff to sue Fläkt Woods at that time in another jurisdiction if the Delaware Supreme Court upheld the dismissal after appeal.

Legal Analysis

The Court provides a thorough analysis of those situations where it would be appropriate to enter a final judgment against only one co-defendant pursuant to Court of Chancery Rule 54(b), and what standards and reasoning the Court will employ in the analysis of a motion based on Rule 54(b).  A three-part test is applied in the cases construing the federal counterpart to the rule which Delaware finds persuasive because the two rules are substantially identical.  The Court provides a cogent explanation for why it would be a hardship for the plaintiff if a final judgment were not entered now against the co-defendant, Fläkt Woods, in order to allow for an immediate appeal.

Although the grant of the final judgment made the motion for an interlocutory appeal moot, it is noteworthy that the Court still conducted an analysis of the motion for an interlocutory appeal in any event, in part because the Court explained that the plaintiff misconstrued and mischaracterized the trial Court’s original decision.  Thus, the Court conducted an analysis to address the misstatement of the holding of the Court regarding the standard that applied when assessing a motion to dismiss for lack of jurisdiction pursuant to Court of Chancery Rule 12(b)(2).  See generally, separate and unrelated recent Chancery Feeley decision that also addressed a Rule 12(b)(2) motion based on Sections 18-110 and 18-109 of the Delaware LLC statute. 

The misstatement by the plaintiff of the Court’s first decision in this case, linked above – – that this opinion took great pains to correct, was designed to address the third element of Delaware Supreme Court Rule 42 that must be satisfied for an interlocutory appeal. 

Specifically, the plaintiff contended that various decisions of the Court of Chancery involving Rule 12(b)(2) are in conflict regarding the appropriate standard of review applied to motions to dismiss under Court of Chancery Rule 12(b)(2) where the plaintiff, as in this case, “has had an opportunity to take jurisdictional discovery, but no evidentiary hearing was held.” 

According to the plaintiff in his motion, there is a “majority view” and a “minority view” among cases in the Delaware Court of Chancery on this issue involving Rule 12(b)(2).  According to the plaintiff, the majority view maintains that:  “If no evidentiary hearing is held, the plaintiff only needs to make a prima facie showing of personal jurisdiction and the record is construed in the light most favorable to the plaintiff.”  See footnote 41.  

According to the plaintiff, however, a minority of the decisions of the Court of Chancery impose a “more exacting factual standard” when jurisdictional discovery has been taken and require the plaintiff to allege specific facts supporting that position.

Suffice it to say for purposes of this cursory overview of the opinion, that the Court of Chancery (without agreeing that there is either a “majority or a minority standard” on this issue), determined that if there were two different standards, the Court of Chancery in the prior decision in this case linked above did apply the “majority standard” on the issue.  The Court explains its position in the context of the argument of the plaintiff that personal jurisdiction should be imposed based on the civil conspiracy theory of jurisdiction as outlined in the seminal Delaware Supreme Court decision in the case of Istituto Bancario Italiano SpA v. Hunter Engineering Company, Inc., 449 A.2d 210, 225 (Del. 1982).  The Court explained why the prerequisites for that basis of personal jurisdiction were not satisfied.

See generally and compare, very recent Chancery decision in Feeley, which was highlighted on these pages here, by another member of the Court that also addressed a motion to dismiss pursuant to Rule 12(b)(2).