Wimbledon Fund LP-Absolute Return Fund Series v. SV Special Situations Fund, LP, Del. Supr., No. 430, 2010 (Dec. 20, 2010), read Order here. In this short ruling the Delaware Supreme Court remanded this case to the Delaware Court of Chancery so that: "… the record can be supplemented with the evidence proferred to this Court by Wimbledon." Delaware’s High Court instructed the trial court as follows: "After considering the supplemented record, the Court of Chancery should report its findings of fact and conclusions of law to the Court. Jurisdiction is retained." (footnote omitted). Read highlights of Court of Chancery opinion here in which the trial court ruled that premature withdrawal of an investment was not permitted based on the terms of the limited partnership agreement.
Wimbledon Fund LP – Absolute Return Fund Series v. SV Special Situations Fund LP, C.A. No. 4780-CS (Del. Ch., Dec. 22, 2011), read letter ruling here. Read summaries of prior Delaware decisions in this matter here.
This is the latest iteration of several prior Delaware decisions in this case involving a hedge fund that sought to withdraw its investment in an LP. In sum and substance, this latest installment addresses the reasons why the Court decided to shift fees, and make the plaintiff hedge fund responsible for the fees of the defendant based on, primarily, the litigation tactic of the hedge fund not to seek discovery after a cross-motion for summary judgment was filed, and to appeal the loss of a summary judgment motion without referring to additional evidence that the plaintiff had in its file. The Supreme Court remanded and required the trial court to allow the record to be supplemented and directed the trial court to conduct an additional hearing based on that new evidence.
There are many other background details and nuances as well as copious citations to caselaw that provided the theoretical underpinning for the award of attorneys’ fees in this ruling that expresses the displeasure of the Court of Chancery with certain litigation tactics employed in connection with the summary judgment motions.
This letter is educational for litigators who are faced with either a summary judgment motion or a cross-motion for summary judgment, and who have to make a decision about whether they want to seek additional discovery before responding to the motion, or before asking the court to rule on the motion.
Clean Harbors Inc. v. Safety-Kleen, Inc., C.A. No. 6117-VCP (Del. Ch. Dec. 9, 2011), read opinion here.
What this Case is about: This case involves a challenge to a decision by the board of directors of a company to call certain of its outstanding shares.
The issue addressed by the Court is whether the company acted too cleverly and thereby breached certain contractual obligations or the implied covenant of good faith and fair dealing.
The Court denied the motion to dismiss in this matter finding that the purchaser of the shares alleged facts that conceivably could support a conclusion that the call price was set below fair market value and that the company acted in bad faith by setting the call price at that value. The applicable documents required fair market value to be paid. The facts involve employee-shareholders of Safety-Kleen selling shares of Safety-Kleen to a competitor, Clean Harbors, for $7.50 per share. The employees who sold those shares did so pursuant to an agreement they signed as employees of Safety-Kleen which gave them stock options to purchase those shares at between $2 and $4 per share. The stock option agreement also allowed Safety-Kleen to buy back the shares at “the fair market value of the share as determined by the committee in its good faith discretion, taking into account such factors as it deems appropriate.” Committee is defined in the plan agreement as any committee or subcommittee of the board of directors. After Clean Harbors purchased those shares from the former employees of Safety-Kleen, Safety-Kleen called all of the shares acquired by Clean Harbors at the same price that Clean Harbors had paid for the shares just hours before.
Clean Harbors filed a complaint with 3 counts: (1) The first count sought a declaration that the determination by the board of Safety-Kleen that $7.50 was the fair market value for the shares, was not made in good faith, and additionally that the shares had a substantially higher value at the time they were called. (2) The second count alleged that Safety-Kleen breached its contractual obligation to determine in good faith the fair market value of the shares. (3) The allegation was also made that Safety-Kleen breached the implied covenant of good faith and fair dealing by calling the shares at a below-market price in order to benefit the remaining shareholders of Safety-Kleen at the expense of Clear Harbors.
The Court applied the procedural standard for a motion to dismiss under Court of Chancery Rule 12(b)(6) as recently reiterated by the Delaware Supreme Court in Central Mortgage Co. v. Morgan Stanley Mortgage Capital Holdings, LLC, 27 A.3d 531, 537 (Del. Aug. 18, 2011), which is notably different than the U.S. Supreme Court’s interpretation of the counterpart Federal Rule of Civil Procedure 12(b)(6).
The Court of Chancery provided an extensive factual background history and then as a prelude to its discussion of the fair market value issue, it cited to a decision of the United States Supreme Court for a definition of fair market value. See footnote 13. There was an ambiguity in the terms of the applicable agreement regarding whether Safety-Kleen could discount the call price based on the fact that the shares were burdened with an embedded call option which allowed Safety-Kleen to buy back the shares at the fair market value regardless of the price paid by the holder of the shares. It the fair market value should have been determined based on an unencumbered share, then Clean Harbors could succeed in proving that the call price it received was less than fair market value.
The Court determined that $7.50 may have been a submarket value for the shares and that Clean Harbors also alleged sufficient facts that conceivably could support a conclusion that Safety-Kleen acted in bad faith by calling the shares at that price.
Pleadings Standard for Contractual “Bad Faith” Claims
The Court clarified the standard for pleading bad faith claims in contractual cases. The Court explained that to allege a breach of a contractual duty to act in good faith, a complaint need only allege “facts related to the alleged act taken in bad faith, and a plausible motivation for it.” See footnote 31. This is a minimal standard, the purpose of which is to give the defendant notice of the claim being made against it. See footnotes 32 and 33.
Cf. two recent decisions authored by the same jurist who wrote this opinion, highlighted here, in which the Court awarded damages for breach of a contractual duty to negotiate in good faith.
The Court also relied on a decision in the corporate context which found that the plaintiff had sufficiently pled bad faith by asserting “that the directors had a conflicting self-interested motivation to redeem the preferred for an inadequately low price.” See Gale v. Bershad, 1998 WL 118022 (Del. Ch. Mar. 4, 1998). The Court also cited a decision which found bad faith based on a pleading that a company acted in bad faith in valuing its stock, and choosing an interested party to perform its valuation, which benefited its controlling shareholders by that bad faith action. See Winston v. Mandor, 710 A.2d 835, 844 (Del. Ch. 1997).
The Court also explained the definition and contours of a claim based on the implied covenant of good faith and fair dealing, and refused to dismiss that claim as well. Cf. very recent Chancery decision in the Wimbledon case, highlighted on these pages here. That case described bad faith in the context of litigation tactics–a different animal than the absence of good faith in the context of contract negotiations discussed in the instant matter.
This is a decision after remand from the Delaware Supreme Court in which Delaware’s High Court ordered the trial court to reopen the case and to allow “supplemental evidence” to be introduced into the record and thereafter to consider whether the trial court still would have granted summary judgment after considering that additional evidence. On remand, the trial court also suggested that instead of an appeal to the Delaware Supreme Court that a preferred procedure would have been to file a motion under Court of Chancery Rule 60(b) to obtain relief from a final judgment. The trial court in this opinion on the first page of its decision disclosed that: “To be candid, the Supreme Court’s Order is unclear to me.” (See link to Supreme Court decision above.) Nonetheless, the trial court complied with the order of the Supreme Court to consider supplemental evidence.
Summary of Court’s Conclusion upon Remand
The trial court explained that after conducting an analysis of the supplemental evidence, it did decide the case differently and determined for the reasons explained in the 26-page decision that “the parties’ cross-motions for summary judgment should be denied on the basis of genuine issues of material fact that emerge because of the addition to the record of the Supplemental Evidence.”
Nonetheless, the trial court explained its concern for the unhappy incentives that this decision may give future litigants who receive an adverse result and fail to make a timely Rule 59 or Rule 60 motion and are permitted to reopen a judgment by submitting to an appellate court evidence “from its [the losing party’s] own files that it chose not to present to the trial court [.In this manner], the fairness, reliability and efficiency of our litigation process will be undermined, as every losing party can think of different ways in which it could have argued or presented its case to the trial court.”
The Final Word
The trial court nonetheless applied a final stinging penalty as the cost of compliance with the remand ordered by the Supreme Court, via the following closing sentence of its opinion on remand: “. . . any alteration of the final judgment dated June 16, 2010 should be conditioned on Wimbledon paying all fees and costs incurred by SV Fund and prosecuting this action after January 11, 2010, plus an appropriate award of interest.” It’s not clear whether the amount of those fees may reduce the victory in the Supreme Court to a Pyrrhic one.
Supplement: The Delaware Supreme Court by Order dated August 23, 2011, available here, acknowledged that the issue of fees awarded was not yet ripe, but agreed with the decision of the trial court after remand to deny the motions for summary judgment, and then formally reversed the prior judgment granting the motions–and then again remanding this matter for “further proceedings consistent with this Order.”
In Wimbledon Fund LP-Absolute Return Fund Series v. SV Special Situations Fund LP, C.A. No. 4780-VCS (Del. Ch. June 14, 2010), read opnion here, the Court of Chancery held that a member of an limited partnership was precluded from prematurely withdrawing its investment based on a plain language reading of the limited partnership agreement. This summary was prepared by Kevin F. Brady and Ryan P. Newell of Connolly Bove Lodge & Hutz LLP.
Plaintiff Invests In Defendant, but Seeks Premature Withdrawal
On October 1, 2007, plaintiff Wimbledon Fund LP-Absolute Return Series invested $2 million with defendant SV Special Situations Fund LP in exchange for partnership in SV Fund. In so doing, Wimbledon agreed to be bound by SV Fund’s limited partnership agreement. The LP Agreement restricted members from withdrawing their membership until one year after their initial investment. Further, withdrawals could only occur on June 30 and December 31. In addition, the General Partner of SV Fund had the authority under the LP Agreement to suspend withdrawals to all members of SV Fund. Finally, the members could agree in writing to a waiver of the LP Agreement’s terms.
On February 21, 2008, approximately four months after its initial investment, Wimbledon submitted its request to withdraw its entire investment effective June 30, 2008. By June 30, 2008, SV Fund had not consented or objected to Wimbledon’s request. Rather, in a short letter dated September 30, 2008, SV Fund acknowledged that it had received Wimbledon’s request, but did not specifically address the issue of whether Wimbledon could prematurely withdraw its funds prior to the one year requirement in the LP Agreement. However, on October 31, 2008, SV Fund notified all members that it was suspending all withdrawal requests.
On August 5, 2009, Wimbledon filed an action seeking a declaration that it had withdrawn from and is a creditor of SV Fund. The two issues before the Court were whether: (i) SV Fund consented in the September 2008 Letter to Wimbledon’s premature redemption request; and (ii) SV Fund’s decision to suspend withdrawals, as communicated in its October 2008 letter, applied to Wimbledon’s redemption request. Wimbledon moved for summary judgment and SV Fund filed a cross-motion for summary judgment.
SV Fund Did Not Consent to Withdrawal
The Court held that Wimbledon failed to identify evidence supporting its claim that SV Fund consented to Wimbledon’s request for withdrawal. SV Fund’s only response to Wimbledon’s February 2008 letter was SV Fund’s September 2008 letter – a letter sent after the June 30, 2008 date on which Wimbledon sought to withdraw. Wimbledon’s argument that the September 2008 letter amounted to a retroactive consent was unpersuasive because as the Court noted the letter did not include a clear representation that SV Fund consented to the early withdrawal. Indeed, there was no language in the letter to address the reality of the situation that SV Fund was responding three months after the date on which Wimbledon requested the withdrawal. As the Court said “[a]t best, the language is ambiguous, and ambiguous acts cannot form the basis of a waiver.” The only plausible interpretation, according to the Court, was that SV Fund was forward-looking in its letter to December 31, 2008, the first date on which Wimbledon would be eligible to withdraw. Accordingly, the Court found that Wimbledon had failed to prove that SV Fund had waived the one year requirement for withdrawal.
Wimbledon’s Withdrawal Right Was Suspended
Having ruled that Wimbledon’s effort to withdraw as of June 30, 2008 had failed, the Court next addressed the issue of whether Wimbledon’s request to withdraw was suspended by the October 31, 2008 notice. Wimbledon argued that the suspension applied prospectively and did not affect pending withdrawal requests. However, the LP Agreement plainly provided that “the General Partner shall have the right, it its sole discretion, to suspend all capital withdrawals to Partners” – language that does not preclude an application to pending requests. The Court noted that to construe the language otherwise would render that section of the LP Agreement meaningless. The Court found that SV Fund had the authority to suspend pending withdrawal request and therefore the suspension was effective as to Wimbledon when SV Fund issued its October 2008 letter.