Pulieri v. Boardwalk Properties, LLC, C.A. No. 9886-CB (Del. Ch. Feb. 18, 2015).

This Court of Chancery decision provides a primer on specific performance, unjust enrichment, laches and the rule against perpetuities, and also provides another reminder, as if any reminder was needed, that oral agreements are difficult to enforce, especially when the transfer involves real estate valued at several million dollars.  Compare generally, Grunstein v. Silva, 2014 WL 4473641 (Del. Ch. Sept. 5, 2014).

Similar to the indeterminacy in corporate litigation often described by corporate law scholars when referring to Delaware, this case is an example of the indeterminacy in commercial litigation, to the extent that the result of applying the law to a specific set of facts is not always predictable with any degree of certainty.

The prerequisites for specific performance are listed at pages 11 and 12 of the slip opinion, but in my view, the application of the law of specific performance to particular circumstances cannot always be easily predicted because, in my view, Chancery will either grant or deny this specific type of equitable relief based on the personal belief of the particular jurist in terms of the opinion of that jurist regarding which side is more able to tug at the equitable heartstrings of the court.

Rule of Evidence 202 regarding judicial notice of pleadings in courts of this state is discussed to the extent of its limited scope.  See footnote 24.

The elements of unjust enrichment were discussed but notable is the discussion about why the exception for “inherently unknowable injuries” did not apply to toll the three-year statute of limitations for this claim, which was several years past the statute.

Also noteworthy is the aspect of laches that may require a claim for breach of contract to be brought before the three-year limitation especially when the claim includes a request for specific performance.

Lastly, the always popular “rule against perpetuities” was discussed and applied to bar the enforcement of an agreement for the transfer of real estate that had no end date and could conceivably extend beyond several centuries for its exercise of a particular term.  Because of that bar, the court did not address the Statute of Frauds argument.

Grunstein v. Silva, C. A. No. 3932-VCN (Del. Ch. Mar. 2, 2011), read letter ruling here. Reviews of the four prior decisions by the Court of Chancery in this matter are available here. At least in part, the genesis of this case is the attempt by the plaintiff to enforce a billion dollar oral agreement.

The Delaware Court of Chancery explains in this letter decision why it rejected the effort to seek certification of an interlocutory appeal of the Court’s recent denial of defendants’ motion for summary judgment on all of the plaintiff’s claims as barred by res judicata or, more precisely, that doctrine’s application to "claim splitting".

This six-page opinion is a useful tool for the toolbox of most litigators for two reasons:

1) It provides a practical overview of Supreme Court Rule 42(b) regarding certification by the trial court of an interlocutory appeal to the Delaware Supreme Court. [N.B. Even when the trial court denies the request, the applicant can still try their luck with a direct application to  Delaware’s High Court.]

2) It summarized the much lengthier explanation in the opinion linked above, regarding the proper application of the transactional view of the res judicata doctrine. The privity aspect of that doctrine was addressed in footnotes 9 and 10 in a manner that may have broad applicability.  For example, Section 59 of the Restatement (Second) of Judgments was cited, among other cases, in connection with the Court’s explication that something more than mere ownership in a closely held entity, such as day-to-day control, needs to be demonstrated before it will be deemed fair for claim preclusion to apply. It was also noted that because the word privity is "so amorphous, it often operates as a conclusion instead of an explanation."

In sum, after describing some of the finer points of res judicata, the Court concludes that the prerequisites for an interlocutory appeal were not satisfied.

Grunstein v. Silva, C.A. No. 3932-VCN (Del. Ch. Jan. 31, 2011). The several prior decisions in this matter where highlighted on this blog here. 

Issue Presented:  This 40-page Court of Chancery decision addressed whether defendant’s motion for summary judgment on the alleged breach of oral partnership agreement regarding a $2.2. billion acquisition of a company, as amended, should be granted. The motion was denied.

Legal Principles Addressed: 

Res judicata.  The Delaware Supreme Court recognizes “the transactional view” of res judicata which prohibits litigation between the same parties “if the claims in the later litigation arose from the same transaction that formed the basis for the prior adjudication”.  See footnote 72.  Res Judicata is related to the public policy against “claim splitting” which may bar a subsequent claim “if a Plaintiff was able to present it, in its entirety, in the prior forum.” See footnote 73.

The Court rejected argument that unclean hands barred claims for promissory estoppel or unjust enrichment.  That is, claims that Plaintiff, as a New York attorney, violated legal ethics rules by not getting a waiver before taking an interest in a client transaction, was not a basis for the trial court to impose a penalty.  Only the Delaware Supreme Court has power to enforce legal ethics rules unless, unlike this case, “the challenged conduct prejudices the fairness of the proceedings, such that it adversely affects the fair and efficient administration of justice.”  See footnote 81. This holding is consistent with many Chancery decisions that reject efforts to inject claims for a breach of legal ethics into a case as a means of impacting the substantive legal analysis or as a means to influence the result of a case, unless a rather high threshold is met as referenced above.

The Court also discussed the amorphous standard that allows for the creation of a partnership under DRUPA without any written agreements; and based on, for example, the parties’ actions, dealings, conduct and admissions. See footnote 87. But, there must be material terms to have enforceable partnership agreement.  See footnote 89. Multiple unsigned draft agreements do not prevent a finding of an oral agreement.  Due to issues of material facts, summary judgment motion was denied. In essence, this allowed the claims to proceed to trial

The motion was also denied on the promissory estoppel claim due to issues of material fact.  Notably, the Court previously denied a motion to dismiss this same claim.  See footnotes 100 to 104.  Compare the doctrine of “Sham Affidavit” that conflicts with prior sworn testimony.  See footnotes 97 and 98 and 110.

Moreover, a fraud claim was allowed to proceed due to the same factual issues that led to denial of motion to dismiss this claim. An unjust enrichment claim was allowed to proceed despite an alleged contract, due to factual issues and based on the validity of the contract being in doubt.  See footnote 130.

In Grunstein v. Silva, C.A. No. 3932-VCN (Del. Ch. April 13, 2010), read letter decision here,  the Court granted Plaintiffs’ motion to compel production of post-acquisition financial documents but denied Plaintiffs motion to compel the production of six emails between the Defendant and his attorneys at Dechert LLP for which the Defendants claimed the attorney-client privilege.

Kevin Brady, a Delaware litigator, prepared this synopsis.

Background

On December 8, 2009, the Court denied the defendants motion to dismiss. That decision was highlighted on this blog here.

This dispute arose out of an alleged breach of an oral partnership agreement which was formed to carry out an acquisition. Plaintiffs Grunstein and Dwyer alleged that they orally agreed to form a partnership with Defendant Silva for the purpose of acquiring a nursing home services company. Plaintiffs alleged that they agreed to share profits and losses resulting from the acquisition and that “each partner would share in all the economic benefits received by any of them (or any entities controlled by them) resulting from the [acquisition].” Grunstein, Dwyer and Silva entered into a merger agreement with Beverly Enterprises Inc. and during the negotiations, Silva replaced the original acquiring entities with companies he controlled. As a result, after the merger, Beverly was owned solely by Silva’s companies.

Plaintiffs’ Motion to Compel Privileged Emails

Plaintiffs attempted to establish the existence of a business relationship through emails and deposition testimony by W. Brinkley Dickerson, Jr., Grunstein’s law partner at Troutman Sanders LLP describing a conversation with Silva in which Silva allegedly acknowledged that Grunstein had a “carried interest” in the transaction. Troutman Sanders, as transactional counsel, represented the acquiring entities that included Silva and his related entities. While Plaintiffs were not certain that the nature of the relationship was being discussed in emails between Silva and Grunstein, they had “cause to believe” that Silva made similar assertions regarding the nature of his business relationship with Grunstein in emails to his attorneys at Dechert.

The Privileged Emails Are Protected from Discovery

Plaintiffs claim that these emails are not privileged because they were originally designated in Defendants’ privilege logs as involving either attorneys’ fees or the Troutman Sanders engagement letter which does not fall within the scope of the attorney-client privilege. The Court noted that while communications regarding fee arrangements are typically discoverable “because fee arrangements are considered incidental to the attorney-client relationship and do not usually involve the disclosure of confidential communications arising in the context of the professional relationship….this exception only applies to communications between an attorney and client with respect to their particular professional arrangement.” Here, Plaintiffs wanted access to legal advice that Dechert provided to Silva with respect to fee dispute between Silva and Troutman Sanders. The Court found that the privilege exception did not extend that far.

In the alternative, Plaintiffs argued that any privilege with respect to the subject of Silva and Grunstein’s business relationship had been waived because it had been disclosed to third parties. Troutman Sanders (and Dickerson) represented Silva only through their representation of the acquiring entities in the acquisition of Beverly, not regarding the underlying legal structure governing the acquiring entities. Furthermore, in the attorney-client privilege context the client must have a reasonable expectation of confidentiality in the matters discussed with counsel. Here, Silva had no reasonable expectation that Dickerson would keep their conversations with respect to the nature of his alleged business relationship with Grunstein confidential. Dickerson expressly informed Silva that he was not representing him as to that topic. Because the communications between Silva and Dickerson concerned matters outside of the scope of their attorney-client relationship, they were not privileged communications. As such, waiver was not an issue.

Court Allows Discovery of Financial Information

Plaintiffs also sought the production of financial information for the purpose of quantifying their damages. Defendants argued that the Court should wait to decide this issue until it considered Defendants’ recently filed motion for summary judgment. The Court disagreed stating that :         “[a]lthough these documents are relevant only as to damages, Plaintiffs deserve adequate time to allow their experts to properly analyze and extrapolate the relevant damages due under each of the theories that they have put forward.” Accordingly, Plaintiffs’ motion to compel production of the relevant financial information was granted.

 

Grunstein v. Silva, 2009 WL 4698541 (Dec. 8, 2009, Del. Ch.), read opinion here.

An associate in our Wilmington office prepared this synopsis.

The conflict in this Court of Chancery matter arose from the alleged breach of an oral partnership agreement which was formed to carry out the acquisition of a company. See id. at *1.  Compare generally, Olson v. Halverson, summarized here. (Delaware Supreme Court decision of December 2009 applying the statute of frauds to an oral LLC agreement.) Plaintiffs Grunstein and Dwyer alleged that they, together with Defendant Silva (the “Partners”), orally agreed to form a partnership for the purpose of acquiring a nursing home services company. See id.

Background

Plaintiffs alleged that they agreed to share profits and losses resulting from the acquisition and that “each partner would share in all the economic benefits received by any of them (or any entities controlled by them) resulting from the [acquisition].” See id. None of the terms, however, were ever memorialized in a written agreement signed by the parties. See id. at *2.

The Partners, initially through three business entities that were specifically created for the acquisition (“Acquiring Entities”), entered into a merger agreement with the target company. See id. Several amendments were made to the merger agreement, the third of which replaced the original Acquiring Entities with companies controlled by Defendant Silva (“Third Amendment”). See id. at *1. When the merger finally closed, the target company was owned solely by Silva’s companies. See id. at *4.

Central Focus of Claims

Plaintiffs asserted that Silva violated the partnership agreement by refusing to share the economic benefits of the acquisition with the Partners. See id. at *4. Silva maintained that no such partnership agreement existed and therefore he was not obligated to share distribution of the acquisition proceeds. See id. at *1.

Issues Addressed

The Plaintiffs asserted nine claims against Defendants. Defendants, in a motion to dismiss, challenged six of the causes of action including: breach of contract, breach of fiduciary duty, promissory estoppel, fraud, negligent misrepresentation, and tortious interference with contractual relations and business advantage. See id. at *5.

The following is a brief recap of the Court’s findings regarding Defendants’ motion to dismiss.

(a) Fiduciary duty: The Court dismissed the breach of fiduciary duty claims because Delaware law generally prohibits plaintiffs from asserting both a breach of contract and a breach of fiduciary duty claim under the same facts. See id. at *6. Plaintiffs argued that the claims should survive the motion to dismiss because they fell within the exception which allows assertion of fiduciary duty claims where “they depend on additional facts . . . are broader in scope, and involve different considerations in terms of a potential remedy.” See id. (quoting Schuss v. Pennfield Partners, L.P., 2008 WL 2433842 (Del Ch. 2008)). Rejecting Plaintiffs’ position, the Court held that the fiduciary duty claims were duplicative of the breach of contract claim because the establishment of any fiduciary relationship among the Partners was created by the partnership agreement which was also the source of the breach of contract claim.

(b) Promissory estoppel: The Court denied Defendants’ motion to dismiss the promissory estoppel claims. First, the Court held that the Third Amendment to the merger agreement, which assigned the rights of the original Acquiring Entities to the Silva-controlled companies, did not preclude a claim for promissory estoppel. See id. at *8. The Court acknowledged that the existence of a valid contract between the parties may, in some instances, preclude promissory estoppel claims. In this case, the Court found that the Third Amendment did not bar promissory estoppel because it did not directly involve the parties, nor did it relate to the agreement at issue in the pending litigation. See id. Second, the Court held that Plaintiffs’ failure to plead lack of consideration was not fatal to their claim for promissory estoppel. See id. at *10. Although recognizing that promissory estoppel historically functioned as a consideration substitute, the Court instead focused on the Delaware courts unwillingness to “apply strict contractual interpretation on what is, at base, an equitable remedy.” See id.

Finally, the Court held that Plaintiffs adequately pleaded reasonable reliance. See id. at *11. Invoking New York law, Defendants argued that, as a matter of law, Plaintiffs cannot reasonably rely on oral promises that directly conflict the terms of a written agreement, in this case the Third Amendment to the merger agreement. See id. at *10. Examining the case law, the Court found reliance was not precluded as a matter of law in this instance because the rule only applies where the oral promises flatly contradict the contractual terms. See id. The Court also held that the sophistication of the parties does not necessarily preclude reasonable reliance on oral promises where the parties had a pre-existing working relationship and repeatedly affirmed their business relationship. See id. at 12.

(c) Fraud: Defendants argued that Plaintiffs were improperly bootstrapping a fraud claim to a breach of contract claim by asserting that Defendants never intended to honor their agreement. See id. The Court found that Plaintiffs’ complaint adequately established “an intentionally false representation on which the Plaintiffs relied to their detriment” and denied Defendants’ motion to dismiss. See id. at *13. The Court noted, however, that in order to prevail on this issue Plaintiffs would have to rebut facts that contradict their theory that Silva intended to breach their partnership agreement from its inception. See id.

(d) Negligent Misrepresentation: The court dismissed the negligent misrepresentation claim based upon Defendants’ repudiation of the partnership agreement because “the promise to honor an agreement is only a misrepresentation if the promisor knows at the time of the promise that he will ultimately breach; such a misrepresentation cannot occur unknowingly or negligently.” See id. at *14.

(e) Breach of Contract: Asserting the statute of frauds, Defendants moved to dismiss the breach of contract claims regarding an underwriting contract related to the partnership’s acquisition of the nursing home company. See id. at *15. The Court held that the Plaintiffs’ obligations under the contract, which was for underwriting services with option to lend funding, fell outside Delaware’s statute of frauds. Denying the motion to dismiss, the Court refused to consider whether statute of fraud deficiencies could be cured by part performance or existence of a related writing. See id.

(f) Tortious Interference: The Court dismissed the claim for tortious interference because the non-Silva Defendants (Silva-controlled entities) were protected by the affiliate privilege. See id. at *17. Delaware law recognizes that a party to a contract cannot tortiuously interfere with that same contract. This “interference privilege” protects affiliates or entities under the control of that party as well. See id. at *16. Even nonparties to a contract may be protected so long as they “share a commonality of economic interests with one of the parties and act in furtherance of their share legitimate business interests.” See id. at *16 (quoting Sherin v. E.F. Hutton Group, Inc., 652 A.2d 578, 591 n14 (Del. Ch. 1994) (internal quotes omitted). Accordingly, the Court found that certain non-Silva Defendants were agents of Silva with regard to the partnership agreement and therefore fell within the scope of the interference privilege. See id. at *17.

(g) Claims against non-Silva Defendants: Defendants moved to dismiss all counts against non-Silva Defendants arguing inter alia that companies creates after the alleged partnership agreement cannot be bound by that agreement. See id. at *18. The Court recognized, however, under Delaware law a subsequently-formed entity may be subject to a pre-formation agreement by accepting the benefits of the agreement with knowledge of its terms. See id. (citations omitted). Further, corporations may be found to have imputed knowledge and to have implicitly adopted its agents contract where the agent is for all intents and purposes the alter ego of the corporation. See id. (citation omitted). The Court found that the complaint sufficiently alleged that Defendant business entities had knowledge of the partnership agreement, through Silva, and reaped the benefits of that agreement; and therefore was bound by the agreement. The motion to dismiss was denied. See id.