Ross Holding and Management Company v. Advance Realty Group LLC, C.A. No. 4113-VCN (Del. Ch. Sept. 29, 2011). Read opinion here.

Issue Addressed: This short letter ruling granted in part a motion to compel unredacted tax returns and related documents.  The requested documents related to a claim by the plaintiff that the defendants liquidated, or will liquidate, certain interests that may cause negative tax consequences, although the Court described it as a “not-well defined claim” for increased tax liability allegedly attributable to the conduct of defendants.

Background: The defendants sought the tax returns of the plaintiffs, partners and shareholders, in unredacted format, and various additional related documents for the period 2001 through 2010.  The parties previously entered into a confidentiality stipulation.

Discussion and Holding: The challenge presented to the Court was how to define or describe the information which was necessary and relevant as compared to information in the tax returns that was not related to the claims and defenses in the case (in the absence of clarity from the parties on that point).  The Court regarded it as unfortunate that the parties did not provide a workable standard to limit the information or to allow for redaction of the tax returns.  The Court resolved the issue by limiting the grant of the motion to tax returns, subject to the confidentiality stipulation. After those returns were produced, the Court acknowledged the possibility that additional information would be sought.

Practical Postscript: This motion to compel was adjudicated in a balanced, businesslike and benign manner. Motions to compel in corporate or commercial litigation are one of the least enjoyable parts of the job for the bench and bar. Some jurists approach them with a view akin to “a pox on both your houses”, while others “choose sides” and impose fees against the party losing the motion–though it is often not clear which party is responsible for the impasse. In this decision, neither party appears to have suffered an unhappy fate (beyond the merits of the motion), and the Court appears to have calmly dispatched justice in this discovery dustup.

Bessemer Trust Co. v. Wilson, C.A. No. 6148-MA (Del. Ch. Sept. 28, 2011), read opinion here.

Issue Addressed

Whether this Delaware proceeding should be stayed in favor of a Florida action involving the effort to obtain information about the accessibility of trust funds.

Very Brief Overview

For purposes of this blog, this very brief overview will be limited to referencing the standard of review of a decision by a Master in Chancery, which under Court of Chancery Rule 144 is de novo as to findings of fact and conclusions of law. The focus in this case was whether certain persons were entitled to discovery of confidential financial information from the trustee concerning access to the corpus or interest of the trust. The Master in Chancery had stayed the proceedings in this Court in favor of a Florida action involving similar issues.

The issue on appeal from the report of the Master was whether this Court should continue the stay imposed by the Master, sua sponte, in favor of the Florida action. The Court of Chancery reasoned that the first-filed rule under the McWane doctrine does not support a stay because the parties in the Florida action and this action are not the same. In addition, the issues in this action and the Florida action are not the same. The main issue in this case was whether a beneficiary had an interest in the trust that was established for the benefit of his children. The main issue before the Florida Court was whether the beneficiary was liable for the death of a decedent and if so, the amount of damages.

Showell v. Pusey, C.A. No. 3970-VCG (Del. Ch. Sept. 1, 2011).

Issue Addressed

This opinion interprets an LLC Agreement in order to determine what value, if any, a member is due for his interest in an accounting firm, formed as an LLC, in connection with his departure from the firm.  The Court determined that the member was entitled to receive the liquidation value of his ownership interest as of the date of his “retirement” from the LLC.

Brief Background

The LLC at issue was an accounting firm operating in southern Delaware.  The petition in this case was filed in order to determine the value of the interest of the departing member in the LLC.  However, the LLC Operating Agreement does not provide for the withdrawal or resignation of its members but does allow for the transfer of membership interests, as well as for the “dissociation” of a member in certain situations.  It specifically provides that other than the transfer of an interest, “no member shall be entitled to withdraw or resign.”  See footnote 12, referring to Section 18-603 of the Delaware LLC Act which provides that when an LLC Agreement is silent as to withdrawal, it is construed as prohibiting withdrawal. The Operating Agreement was subsequently amended to provide for the “retirement” of a member but that is a defined term that did not encompass the retirement by plaintiff, Showell.

The Court found, based on trial testimony and the actions of the parties, that the parties agreed that the LLC would pay Showell for his interest in the LLC.  However, the parties did not reach an agreement on the exact amount that Showell would receive for surrendering his membership.

Showell argues that his “retirement” should entitle him to the value of his interest in the LLC as a “going concern” based on his argument that Section 18-604 provides for the “fair value” of an interest in an LLC if an LLC Agreement allows resignation of a member without specifying the right to reimbursement upon resignation.  The Operating Agreement originally did not allow for retirement or resignation.  However, the majority of the members agreed to modify the agreement to allow for the retirement.

A supplement to the agreement provided for a retiring member to receive an amount for his membership interest equal to the “net equity” as defined in the supplemental agreement.  That equity was defined in the supplemental agreement as the amount to be distributed to a member upon the liquidation of the LLC.

Discussion

The Court began with “first principles” that LLC agreements are contracts whose provisions are to be interpreted using the basic rules of contract law.  See footnote 25.  The Court next proceeded with the interpretation of the Operating Agreement that led to the holding that the agreement did not allow for the voluntary withdrawal or retirement of a member, however, the members had agreed to modify that provision to allow for the retirement of the petitioner.  The Court reasoned that the value to be paid for the departing member’s interest should be as defined in the supplemental agreement in connection with a retiring member, which is based on the liquidation value of the LLC.  The experts for each party at trial were in general agreement as to the liquidation value of the membership interest involved.

SUPPLEMENT: Peter Mahler provides his characteristically insightful analysis here, while comparing this case to a similar New York decision on his New York Business Divorce Blog.

In ASDC Holdings, LLC, et al. v. The Richard J. Malouf 2008 All Smiles Grantor Retained Annuity Trust, et al., C.A. No. 6562-VCP (Del. Ch. Sept. 14, 2011), read opinion here, the Court of Chancery held that where a forum selection clause is enforceable in a Delaware court, the Court will enforce it even if Delaware, based on McWane Cast Iron Pipe Corp. v. McDowell-Wellman Engineering Co., would otherwise default to the first-filed forum.  Accordingly, the Court enforced the forum selection clause and enjoined the first-filed action.

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

Background

Plaintiffs included a dental practice (“All Smiles”), a private equity firm and its management firm (“Valor”), a limited liability company formed by Valor to invest in All Smiles (“ASDC”), the CEO and director of the private equity firm, and some directors and officers of the dental group and private equity firm.  Defendants are Dr. Richard J. Malouf, the founder and controlling shareholder of the dental practice, as well as a trust Malouf established and controls (collectively, “Defendants” or “Malouf”).

In a 2010 contract with Malouf, ASDC agreed to invest $65 million in All Smiles, receiving in return 71% of its stock.  At the same time, some of the Plaintiffs entered into various side agreements (the “Agreements”) with the Defendants.  In the Agreements, they agreed to the exclusive jurisdiction in Delaware for “any claim or cause of action arising under or relating to t[he] Agreement[s] . . . .”  In February 2011, Malouf and three other parties filed suit in Texas against a number of the Plaintiffs.  The Plaintiffs who were sued in the Texas action moved to dismiss on the grounds that the forum selection clause in the Agreements conferred jurisdiction only in Delaware.

The Plaintiffs then brought suit in Delaware in June 2011.  Plaintiffs sought specific performance under the Agreements, a declaratory judgment that Defendants must litigate exclusively in Delaware, and a preliminary injunction to enjoin the Texas action.  Defendants moved to dismiss, challenging the Court’s subject matter jurisdiction on the basis that Plaintiffs had an adequate remedy at law as they could have raised the forum selection clause as an affirmative defense in Texas.  They also claim that Plaintiffs cannot satisfy the standard for a preliminary injunction.  Specifically, Defendants contend Plaintiffs have not shown (1) a reasonable probability of success and (2) that they would suffer imminent and irreparable harm if the Texas court determined whether the forum selection clause applied.

Broad vs. Narrow Forum Selection Clauses

In Malouf’s motion to dismiss, he relied upon El Paso Natural Gas Co. v. TransAmerican Natural Gas Corp. where the Delaware Supreme Court affirmed the holding that the Court of Chancery lacked subject matter jurisdiction to enjoin a proceeding in Texas even though the parties had agreed to exclusive jurisdiction in the Court of Chancery.

The Court pointed to two key distinctions between El Paso and this matter.  First, in El Paso the parties contracted to confer subject matter jurisdiction specifically on the Court of Chancery for both legal and equitable claims between the parties.  Because the underlying claims in Texas were legal in nature, the Court of Chancery could not exercise jurisdiction.  Contrary to El Paso, in this case the forum selection clause was broader than the one in the El Paso case and enforceable as to legal and equitable claims because the parties submitted “‘to the exclusive jurisdiction of any state court within New Castle County, Delaware or, if it can obtain jurisdiction, the United States District Court for the District of Delaware sitting in Wilmington, Delaware . . . with respect to any claim or cause of action arising under or relating to th[e] Agreement[s] . . . .’”

Second, the forum selection clause in El Paso was narrower than the one in this case.  The El Paso clause was limited to “ALL ACTIONS TO ENFORCE OR SEEK DAMAGES, SPECIFIC PERFORMANCE . . . FOR THE ALLEGED BREACH OF THIS AGREEMENT . . . .” Such “narrow forum selection clauses only cover claims dealing directly with rights embodied in the relevant contract.”   Because it was so narrow, even if there was subject matter jurisdiction, it was unlikely that the clause could have applied to the claims.  The clause in this case, rather, concerned “any claim or cause of action arising under or relating to th[e] Agreement[s].”  Such broad clauses “apply not only to claims dealing directly with the terms of the contract itself, but also to ‘any issues that touch on contract rights or contract performance.’”  The Court concluded that where such a clause is enforceable the parties’ contract should be honored even if the McWane first-filed analysis would suggest otherwise.

Texas Action Should Be Enjoined

The Court found that Plaintiffs satisfied the three elements for a preliminary injunction.  On the first element, the Court held that even though some of the Delaware plaintiffs in Texas were not signatories to the Agreements “‘officers and directors . . . have standing to invoke [a] Forum Selection Provision as parties closely related to one of the signatories such that the non-party’s enforcement of the clause is foreseeable by virtue of the relationship between the signatory and the party sought to be bound.’” It also held that there is a colorable argument that the breach of fiduciary, breach of contract, and unjust enrichment claims arise out of the Agreements, given their broad scope.

On the second element, the Court held that “the procession of a claim in an unwarranted forum poses a threat of irreparable harm warranting a preliminary injunction.” Accordingly, if Plaintiffs are forced to litigate in Texas, they would be deprived of what they bargained for in the forum selection clause.  As to the final element, because the parties agreed to litigate in Delaware, the balance of equities weighed in favor of Plaintiffs and what they bargained for, as opposed to Malouf and his choice of Texas as a forum.

The Delaware Court of Chancery announced today that a new Master in Chancery has been appointed. Abigail Myers LeGrow comes to the Court of Chancery from her position as a corporate litigation associate at Potter Anderson & Corroon. Chancellor Leo E. Strine, Jr. commented in a press release issued by the Court that:

The Court was pleased to have many highly qualified applicants for the position of Master. Although the choice was difficult, Abby LeGrow stood out as having the intellectual capacity, work ethic, and ability to make timely decisions that is required for this important position…. The members of the Court are confident that Abby will distinguish herself as a Master of the Court.

Ms. LeGrow also clerked for The Honorable Jack B. Jacobs, Delaware Supreme Court Justice and former member of the Court of Chancery, who added:

For any Delaware lawyer, it is a tribute to be appointed as Master of the highly acclaimed Court of Chancery, particularly given the level of talent and accomplishment required to be considered for that position. The appointment of Abby LeGrow is well-deserved. She graduated first in her law school class, and as a private practitioner, quickly developed a reputation for excellence in her chosen fields, including business law cases litigated in that Court. I am confident that the honor bestowed on Abby will be returned multifold, to the benefit of the Court on which she will serve, the members of the Bar, and the citizens of this State.

The Court also announced today that Karlis Johnson will become the Court of Chancery’s Court Administrator and Register in Chancery. Ms. Johnson formerly served as a Judicial Assistant to Chancellor Strine and an Executive Assistant to the Chief of Staff for Delaware Governor Jack Markell.

In PHL Variable Insurance Co. v. Price Dawe 2006 Insurance Trust (Del. Sept. 20, 2011), and The Lincoln National Life Insurance Co. v. Joseph Schlanger 2006 Insurance Trust (Del. Sept. 20, 2011), Delaware’s highest court addressed somewhat esoteric issues involving hedge funds and others who buy life insurance policies from people, and assume the duty to pay premiums, in order to collect the proceeds when they die. The Delaware Supreme Court ruled that insurers can challenge the legitimacy of the policy that changed hands even after the two-year window that would otherwise apply to policy payouts. Other issues were also addressed in these cases that were presented to the Court based on certified questions from the U.S. District Court for the District of Delaware.

The specific topic of this pair of cases is outside the normal scope of the more conventional corporate and commercial litigation focus of this blog, but we commend you to a thorough article about these cases that appeared in The Wall Street Journal on September 26, 2011, at page C2.

Phillips v. Hove, C.A. No. 3644-VCL (Del. Ch. Sept. 22, 2011). Read opinion here.

Issues Addressed

This 52-page post-trial opinion addressed a score of issues related to the fiduciary duties owed by member-managers and the dissolution of an LLC based on a deadlock.  The opinion also determined the voting membership of an LLC that lacked an operating agreement.  A nuanced issue was also addressed regarding whether a member was merely an assignee or whether the member had voting rights.

Highlights

The Court was required to sort out a mess of factual ambiguities and conflicting documentation that was occasioned in part by what the Court described as a term sheet that took the place of the controlling document in the absence of an LLC operating agreement.

The Court addressed very important provisions of the Delaware LLC Act such as Section 18-301 (admission of members) and 18-702 (assignment of LLC interests), as well as the dissolution provisions.

The determination about whether a member held the interests in the LLC personally or via an entity impacted whether the transfer of those interests made the transferee a mere assignee that lacked voting rights, which would be the result if the membership interest was personally owned- -or if it was determined that the member controlled his interest through an entity, then the assignment of an interest in that entity would allow the entity member to remain as an original voting member.

The Court found that the ambiguous documents allowed one of the two original members to invest either individually or through an entity.

Key Legal Principles

The Court acknowledged the truism of Delaware LLC law that a member-manager of a Delaware limited liability company owes traditional fiduciary duties to the LLC and its members unless limited by the LLC operating agreement. In this case there was no such agreement.  The Court also determined that the evidence presented at trial established  – – despite the absence of any formal title, that one of the parties who took control over the cash and inventory of the LLC and sold products from the inventory of the LLC was subject to the jurisdiction of the Court, and based on that exercise of control, owed a duty of loyalty.

The Court determined that because there were two 50-50 owners who were also the two managers of the LLC whose agreement was required for the LLC to take any action, and due to the animosity between the parties and their inability to agree on basic issues, the Court found a deadlock.  The fact that the LLC continued to operate marginally was irrelevant to the deadlock.

The Court referred to the Delaware cases on dissolution of an LLC based on either a deadlock or the lack of any procedure or mechanism in the operating agreement to otherwise address a deadlock or deal with a dissolution effectively.

The Court reasoned that it would be both inequitable and ineffective to leave the parties to their contractual dispute resolution mechanism (if there was any), because it was not sufficient to break the deadlock.

In light of the history of the disputes between the parties, the Court determined that its members would not be able to wind down the LLC in an orderly or timely manner and therefore the Court appointed a liquidating trustee to dissolve the LLC and wind up its affairs.  The Court provided explicit authority in the opinion for the role of the liquidating trustee.

Court’s Analysis of Conflicting Documents and Electronic “Footprint”

A noteworthy aspect of the Court’s efforts to sort out the conflicting testimony and conflicting interpretation of the documents was to analyze the numerical sequences of the identification numbers on each page from the document management system of the firm that prepared the various organizational documents.  Based on the sequence of the identification number printed on the documents as generated by the document management system (e.g., lower assigned numbers were likely created earlier), the Court deduced certain likely dates of origination or dates of creation of certain documents that were sometimes at odds with the date on which the parties referred to the document as being effective.

The Court also refused to shift fees because it found both parties to have unclean hands.

PharmAthene, Inc. v. SIGA Technologies, Inc., C.A. No. 2627-VCP (Del. Ch. Sept. 22, 2011) read opinion here.  See prior Chancery decisions in this case highlighted on these pages here. Bloomberg/Businessweek posted an article about the case, available here.

Issues Addressed

This 117-page decision addressed the remedy for breaching a duty to negotiate in good faith, and other legal claims and remedies, including those for both breach of contract and the doctrine of promissory estoppel, which the Court observed as often overlapping.  The Court recognized that promissory estoppel may entitle a party to a recovery of its expectation interest.  See footnote 165.

The Court also addressed the equitable remedy of specific performance which, it reminded readers, is subject to the sound discretion of the Court and dependent on the circumstances of each case.

Certainty of Damages

Regarding the certainty with which damages must be proven, the Court observed that no recovery can be given for the loss of profits which are either uncertain, contingent, conjectural or speculative, but nevertheless, damages are “not speculative merely because they are difficult to calculate.  Rather than mathematical precision, the law requires only that there be a sufficient evidentiary basis for making a fair and reasonable estimate of damages . . ..”  See footnotes 181 and 182.

Damages for Breach of an Express Obligation to Negotiate in Good Faith

The Court acknowledged that there was little precedent to aid the Court in fashioning an appropriate remedy for breach of the obligation to negotiate in good faith, and relied on the maxim of equity that “equity will not suffer a wrong without a remedy.”  The Court discussed the equitable remedy of establishing “an equitable lien” which may be appropriate to recognize the equitable ownership of a plaintiff in only part of specific property.  See footnote 204.

The Court determined that the duty to negotiate in good faith was breached in part because of the insistence on unreasonable terms. The Court held that the breach of the obligations involved a “glaringly egregious instance of overreaching sufficient to warrant an award of attorneys fees under the bad faith exception to the American Rule.”  See footnote 260.

Award of Expert Witness Fees is Discretionary

Also useful as a practical tip was the Court’s reference to its discretionary authority to tax expert witness fees as among the costs generally borne by the non-prevailing party.  The Court observed that it had the discretion to decline to tax expert witness fees as costs if the testimony of the expert was not helpful. See footnotes 263 and 264 (citing 10 Del. C. Sections 5106 and 8906, as well as Ct. Ch. R. 54(d)).

Form of Remedy

The Court explained that the remedy it awarded was to be in the form of a judgment for “an equitable payment stream or equitable lien on profits or other qualifying proceeds associated with the commercial sale of ST-246 or products derived from it in accordance with the terms specified in part II.A.1.c. of this opinion.”  The Court also awarded PharmAthene one-third of its reasonable attorneys’ fees and expert witness costs, as well as its other costs under Rule 54(d).  The Court also specified that the form of final judgment should include a request for both attorneys’ fees and expenses in accordance with the procedures provided for in Court of Chancery Rule 88.

The Bank of New York Mellon Trust Company v. Liberty Media Corp., No. 284, 2011 (Del. Supr. Sept. 21, 2011), read opinion here. Bloomberg‘s article on the decision is available here. A summary of the Chancery opinion, affirmed by Delaware’s High Court, was highlighted on these pages here.

This case addresses the issue of whether a series of transactions should be aggregated for purposes of determining whether a sale of all or “substantially all” of a corporation’s assets have been sold. Specifically, the trustee under the indenture argued that Liberty Media’s most recent spinoff, when viewed together with other transactions, breached a “successor obligor provision” of the relevant documents, even though by itself, the latest transaction did not constitute a sale of substantially all assets. The trustee based its argument in large part on what it viewed as the plain language of the documents, and New York law, which governed the issue. Both the Court of Chancery and the Delaware Supreme Court rejected those arguments in two thoroughly explained decisions.

Though it remains an important case, we will not provide an extended discussion of this opinion due to its reliance on New York law–typically beyond the scope of this blog that focuses on Delaware corporate and commercial litigation.