Hite Hedge LP v. El Paso Corp., C. A. No. 7117-VCG (Del. Ch. Oct. 9, 2012).

This pithy 12-page opinion is proof that small things can have value. The key issue in this case was whether a controlling party, who controlled the general partner of a limited partnership, was liable for breaches of fiduciary duties. Two key takeaways from this decision are noteworthy:

(i) The court upheld provisions in the applicable agreement that included an “explicit waiver of any fiduciary duties owed by the controlling and general partners to the limited partners…”; and

(ii) a controller (e.g., a majority owner) “cannot be liable for breaching fiduciary duties owed to minority holders unless it uses its control to direct the actions of the entity it controls against the interests of that minority”. That is the key premise of controller/majority liability. See footnote 28. In this case, the harm alleged was “completely divorced” from the defendant’s role as a controller.

Thus, the motion to dismiss was granted.

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.

 

In NuVasive v. Lanx, Inc., No. 7266-VCG (Del. Ch. Oct. 12, 2012), the Delaware Court of Chancery granted a motion to compel discovery in the context of a suit that seeks redress for the defendant company allegedly luring the employees of NuVasive.  NuVasive seeks to compel the identity of NuVasive employees, both past and present, that Lanx has communicated with in the past year about possible employment. The  court also allowed the direct exam on those persons notwithstanding the potential chilling effect on any potential future recruitment of those persons. This ruling will be helpful for anyone attempting to enforce a covenant not to compete, sometimes referred to as a non-competition agreement, or when a company seeks to restrict employees from going to work for a competitor.

A prior Chancery decision that provides more background was highlighted on these pages here.

Miller v. Kirkland & Ellis LLP, Adv. No. 12-50713 (PJW) (Bankr. D. Del. Oct. 2, 2012).

Tara Lattomus of Eckert Seamans prepared this case summary.

Issue Addressed

Whether the two year statute of limitations or the equitable doctrine of laches applied to claims against attorneys who allegedly conspired with corporate fiduciaries to defraud their client?

Short Answer: The Bankruptcy Court held that the attorneys, as alleged co-conspirators, were subject to the same principles with respect to the merits of the complaint so they should also be subject to the same principles governing the application of the statute of limitations.  Accordingly, as the claims against the fiduciaries would be subject to the doctrine of laches, so were the claims against the attorneys.

Background

On February 2, 2006, Kirkland & Ellis LLP (“K&E”), a law firm, issued a retention letter to Indalex Holdings Finance, Inc. (“Indalex”) for legal services.  At the time, a number of partners at K&E were invested in certain investment funds owned by Sun Capital Partners, Inc. (“Sun”), an existing K&E client.  The investment funds were in turn invested in Sun Indalex, Inc. which was a controlling insider of Indalex.  The Trustee alleged that K&E’s interest in Indalex was deliberately concealed from Indalex until April 12, 2012.

Prior to the disclosure of interest, Indalex paid K&E for legal advice relating to the issuance of a dividend on June 1, 2007.  The Trustee alleged that the advice provided by K&E was negligent and that K&E prepared false documents to ensure that the dividend was paid, resulting in a  financial benefit to the K&E partners, Sun and certain other insiders.  The Trustee further alleged that the false documents were also drafted to protect Sun and other insiders from liability under Delaware corporate law.  In addition, Indalex retained FTI Capital Services to render an opinion on Indalex’s ability to issue the dividend.  The Trustee alleged that K&E failed to ensure that FTI was competent, insisted that FTI’s opinion include language to protect Sun, but not Indalex from liability and failed to advise Indalex that a K&E partner was on FTI’s board of directors and held a financial interest in FTI.  Finally, the Trustee alleged that K&E conspired with Indalex’s controlling insiders and received proceeds from the dividend.  Due to the close relationship between K&E and Sun, and K&E’s financial interest in Indalex, the Trustee asserted that K&E was an insider of Indalex. 

The Trustee commenced the action against K&E for aiding and abetting breach of fiduciary duty and professional negligence.  Pending before the Court was K&E’s motion to dismiss for failure to state a claim due to the expiration of the relevant statute of limitations.

Summary of Court’s Reasoning

The Bankruptcy Court began by stating that the facts of this case were “squarely within the Delaware Supreme Court’s ruling in Laventhol, Krekstein, Horwath & Horwath v. Tuckman, 372 A.2d 168 (Del.Supr. 1976).”  For purposes of drawing the comparison, the Court listed a number of factual statements from the Trustee’s complaint and then quoted the relevant sections of the Laventhol decision. 

In Laventhol, two public accounting firms were accused of conspiring with the directors of a corporation to defraud its shareholders.  The accounting firms moved to dismiss the complaint due to the expiration of the statute of limitations.  The Court of Chancery denied the motion and applied the equitable doctrine of laches.

In Laventhol, the Supreme Court stated that actions in Chancery Court for damages are usually subject to the statute of limitations rather than the doctrine of laches, but noted that an exception exists when corporate fiduciaries engage in fraudulent self dealing.  Accordingly, the question before the Laventhol court was whether the Chancery Court had correctly extended the exception to professionals who conspire with corporate fiduciaries.  Agreeing with the Chancellor in that case, the Supreme Court recognized that the accountants, as alleged co-conspirators, were jointly and severally liable with the fiduciaries and were therefore, in the same position under applicable law.  Accordingly, the extension of the exception to the accountants was both logical and proper.  Although the court acknowledged the difficulty of making the decision in the context of a motion to dismiss, the reliance on such professionals, such as lawyers in this case, by people with no other choice, led the court to affirm the reasoning of the Chancery Court. 

As the K&E disclosure occurred on April 12, 2012 and the Trustee filed the complaint twenty seven days later, the Bankruptcy Court held that the complaint with filed within a reasonable time under the equitable doctrine of laches and denied the motion to dismiss.

Greenmont Capital Partners, I, L.P. v. Mary’s Gone Crackers, Inc., C.A. No. 7265-VCP (Del. Ch. Sept. 28, 2012).

This opinion addresses the interpretation of the rights of the holders of preferred shares as well as the terms of a certificate of incorporation. The opinion also provides drafting tips for those who craft corporate charters. (For purposes of a typical Chancery decision, this 23-page opinion is a short one.)

In the context of competing cross-motions for judgment on the pleadings, the following useful nuggets can be gleaned from this ruling:

  • general principles of contract construction apply to the interpretation of a corporate charter.
  • the certificate of incorporation, or corporate charter, “must expressly and clearly state any rights, preferences, and limitations of the preferred stock” that distinguish it from common stock. The same is true in connection with the rights of holders of different series of preferred stock. Slip op. at 7-8. See also footnote 27 and accompanying text.
  • Drafting tips for those who draft certificates of incorporation were provided in the Delaware Supreme Court decision of Elliott Associates, L.P v. Avatex Corp., 715 A.2d 843 (Del. 1998), which is referenced in this opinion. The Avatex court instructed that in order to grant the right to vote on an “amendment, alteration, or repeal”, a drafter must “additionally indicate that the class vote applies when a merger results in an amendment, alteration or repeal.” Slip op. at 10. One way to accomplish this is to include the words “whether by merger, consolidation, or otherwise” in the appropriate provision in the certificate. See footnotes 17-18 and accompanying text. That was not enough to save the day in the instant case, however.
  • Relying on the “bedrock doctrine of independent legal significance“, the court noted that satisfaction of the merger requirements of DGCL Section 251  was independent of the automatic conversion under the charter–and occured before the charter amendment. Thus, DGCL Section 242(b)(2) does not require a class vote on the charter amendment

Legend Natural Gas II Holdings, LP v. Hargis, C.A. No. 7213-VCP (Del. Ch. Sept. 28, 2012).

This decision addresses the well-worn issue of arbitrability. Because this issue is so frequently the subject of Chancery decisions highlighted on these pages, I will point out only a few bullet points that are noteworthy for future reference:

  • The court also addresses the power of the court to stay a case pending arbitration.
  • The risk of forcing a party to submit the issue of arbitrability to an arbitrator–when the argument is clearly frivolous, in light of the analytical approach required by the applicable standard, is discussed at length by the court.
  • The two-prong test to determine arbitrability as announced by the 2006 Delaware Supreme Court decision in Willie Gary is reiterated.

Dias v. Purches, C.A. No. 7199-VCG (Del. Ch. Oct. 1, 2012).

Issue Addressed: This case discussed the award of counsel fees in connection with a class action settlement. The court discounted the amount that would otherwise be awarded due to the majority of boilerplate claims that were added to the single meritorious one.

Brief Overview

In applying the standards for fee awards in class actions announced in the 1980 Delaware Supreme Court decision in Sugarland Indus., Inc. v. Thomas, the court also relied on the Chancery decision in the matter of In Re Sauer-Danfoss Inc. Shareholder Litigation, C.A. No. 5162-VCL (Del. Ch. Apr. 29, 2011), which catalogued a series of cases, with a comparison of the benefit/disclosure in those cases, and the fee awarded for the supplemental corrective disclosure.

The court in this matter found that $400,000 was on the low end of that Sauer-Danfoss scale. Because the court found in this case that there was only one  good claim and 64 “poor” claims, in order to incentivize attorneys to eschew “larding a complaint with obviously meritless claims” the court discounted the fee award in this case to two-thirds of the low under of $400,000, for a total award of $266, 667. The court also rejected an unusual claim by the defendants for attorneys fees based on Rule 11 or an exception to the American Rule for bad faith.

A prior Chancery decision highlighted on these pages here provides more background detail.

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.

Hockessin Community Center, Inc. v. Swift, C.A. No. 7789-VCL (Del. Ch. Oct. 5, 2012).

This decision is most useful for its treatment of nonstock corporations and de facto directors, although it also features enlightening historical anecdotes about important civil rights struggles in Delaware during the early 1950s.

Delaware does not have a separate statute for nonstock corporations. Rather, the DGCL applies to nonstock provisions via Section 114, a “translator provision setting forth which provisions of the DGCL apply to all nonstock corporations and which of those provisions apply to nonprofit nonstock corporations.” Slip op. at 32. A nonstock corporation is defined in Section 114(d)(4) as any corporation not authorized to issue capital stock. A “non-profit nonstock corporation is a nonstock corporation that does not have membership interests.” A “charitable nonstock corporation is any nonprofit nonstock corporation that is exempt from taxation under Section 501(c)(3) of the U.S. Internal Revenue Code.” See DGCL Section 114(d)(1).

A “de facto director” is a title that can apply to a director who was purportedly put in place without the necessary corporate formalities being followed. The status of such a director does not “evaporate”, and has been defined as:

“… one who is in possession of and exercising the powers of that office under claim and color of an election, although he is not a director de jure and may be removed by proper proceedings. Where a director assumes office pursuant to an irregular election in violation of the provisions of the corporate charter, he achieves only de facto status which may be successfully attacked by stockholders.”

Slip op. at 40 (internal citations omitted). This opinion also is noteworthy for its scholarly analysis of the legal issues involved in a contest pursuant to Section 225 for control of a nonprofit board, and a reasoned explanation to support its conclusion regarding which board members were validly seated after a tumultuous series of events marked by failure to follow proper corporate procedures and dysfunctional relationships.

Carlyle Investment Management L.L.C. v. National Industries Group (Holding), C.A. No. 5527-CS (Del. Ch. Oct. 11, 2012).

Issue Presented: Whether a default judgment should be opened when the defendant Kuwaiti company agreed to a forum selection clause in Delaware and willfully ignored multiple opportunities to participate in the lawsuit.

Short Answer: No.

Brief Background: This case involves the Carlyle Group, which the Court described as one of the largest private equity firms in the world, and National Industries Group, which is described as a multi-national, multi-billion dollar conglomerate based in Kuwait. (Note Kuwaiti flag above.)  The parties entered into various agreements involving the investment by National in various closed-end investment funds of Carlyle which were unsuccessful.  The agreements between the parties included a forum selection clause requiring that any disputes to be litigated exclusively in the Delaware Court of Chancery.  Carlyle filed suit in the Court of Chancery to enjoin National from litigating a dispute regarding the agreements in Kuwait.  Despite multiple attempts to encourage National to participate, National continued to ignore the Delaware lawsuit and continued to litigate in Kuwait.  The Delaware Court of Chancery issued a default judgment which included an anti-suit injunction preventing National from litigating in Kuwait.  After many months of ignoring Delaware proceedings, and in connection with a motion by Carlyle to have National held in contempt for violation of the injunction, National filed a motion to vacate the default judgment under Court of Chancery Rule 60(b)(4) and Rule 60(b)(6).  The Court denied the motion to vacate the judgment.

Analysis

Although most businesses do not intentionally permit a default judgment to be entered against them, this case is still notable for its robust analysis of the enforceability of forum selection clauses and the policy underpinning the enforceability of those clauses.  This opinion is also helpful to explain why it is a gamble not worth taking, to allow a default judgment to be entered and thereafter to seek to have that judgment vacated under Rule 60.  The Court rejected arguments based on alleged lack of personal jurisdiction and based on an alleged lack of subject matter jurisdiction, as well as rejecting arguments about the non-enforceability of the forum selection clause.  Highlights from this relatively short 33-page opinion include the following:

●          A Rule 60(b) motion is “not an opportunity for a do-over or an appeal.”

●          At a Rule 60(b) hearing, a party does not have the privilege of contesting whether the injunction should have issued.  Rather, one must show that the judgment is void under Rule 60(b)(4) or that “extraordinary circumstances” warrant vacating it under Rule 60(b)(6).

●          Decisions from the Supreme Court of the United States and of Delaware’s Supreme Court were cited to support the general enforceability of forum selection clauses.  See, e.g., footnote 54.

●          A party may use a Rule 60(b)(4) motion only to attack the jurisdiction of the Court and not to attack the resolution of a case on the merits.

●          Delaware courts prevent a party from “making an end-run around an otherwise enforceable forum selection provision through an argument about the enforceability of other terms in the contract.”  See footnote 87.

●          The recent Delaware Supreme Court decision in Ingres Corp. v. CA, Inc. ruled that the Court of Chancery did not err in granting an anti-suit injunction in order to enforce a forum selection clause and prevent a party from litigating in another forum.  See footnote 99, and highlights of that case on these pages available here.  See also Malouf decision by the Court of Chancery, highlighted here.

●          Although Rule 60(b)(6) may be seen as a catch-all provision, and the Court may grant relief “for any other reason,” the standard is stringent and the moving party must show “extraordinary circumstances.”  A strategy by National in this case not to appear and to allow a default judgment may have been unwise, but it does not constitute extraordinary circumstances relieving it of the consequences of its own tactical choice.