James v. National Financial LLC, C.A. No. 8931-VCL (Del. Ch. Dec. 5, 2014).
Why This Decision is Noteworthy: This Delaware Court of Chancery opinion reiterates the important practice guideline that the Court of Chancery does not recognize the concept of “local counsel”. That is, Chancery will require Delaware counsel serving with out-of-state counsel to have full responsibility for any filings with the court, and also to take an active role in all aspects of discovery. This is the polar opposite of the view that some have of using local counsel as a mere mail drop or to use local counsel to merely sign whatever out-of-state counsel would like to file. See, e.g., summary of related standards in an article that we published on this blog. See also Practice Guidelines for Chancery promulgated by the Court.
This decision also features other notable observations about Delaware discovery practice in general.
This case is a class action filed by a person who obtained a payday loan and was charged an interest rate of over 800%. The initial loan was for $200 and the cost of the credit was $1,420. This opinion focuses on discovery issues and failure to comply with discovery orders resulting in the grant of a motion for sanctions.
After an exhaustive description of the multiple failures to comply with prior orders of the court granting motions to compel, as well as inconsistent answers to the same questions and conflicting explanations for failure to comply, the court reviewed the basis for the award of sanctions for discovery abuses pursuant to Court of Chancery Rule 37, including the types of sanctions that a court can impose for violating a discovery order under Rule 37(b)(2).
Highlights of Key Principles:
The court recited several basic discovery “first principles” as announced in Delaware decisions over the years. For example, a fundamental first principle recited by the court was that: “Candor and fair-dealing are, or should be, the hallmark of litigation and required attributes of those who resort to the judicial process. The rules of discovery demand no less.” (citation omitted.) See generally, Rule 1 of the Delaware Rules of Professional Conduct.
Among the problems with the discovery responses by the defendant in this case, was the admission that a notarization was provided even though the signatory did not personally appear before the notary. The court explained that the failure to appear in person before a notary when a signature is notarized makes the notarization invalid. It also exposes the persons involved to various penalties. See Slip op. at 24 and footnotes 3 and 4.
Also noteworthy is that the court referred to the recent amendment to Rule 1.1 of the Delaware Rules of Professional Conduct, and Comment 8 thereto, which address the requirement that attorneys maintain familiarity with technological developments in order to maintain technological competence in connection with the practice of law. The court confirmed that: “Technological incompetence is not an excuse for discovery misconduct.”
Role of Local Counsel Not Recognized in Court of Chancery:
The court also explained that when forwarding (out-of-state) counsel has been admitted pro hac vice and is taking a lead role in the case, “the Court of Chancery does not recognize the role of purely ‘local counsel.’” See State Line Ventures, LLC v. RBS Citizens, 2009 WL 4723372, at *1 (Del. Ch. Dec. 2, 2009). Relying on Rule 170 of the Delaware Court of Chancery Rules, the court also emphasized that: “The admission of an attorney pro hac vice shall not relieve the moving attorney from responsibility to comply with any Rule or order of the Court.”
The court also made clear that Delaware lawyers are “ultimately responsible for the documents they file with the court and serve on the opposing party” and that “our Rules make clear that the Delaware lawyer who appears in an action always remains responsible to the Court for the case and its presentation. (citing State Line Ventures.)
The court also explained that Delaware counsel “are expected to police the behavior of their out-of-state colleagues and insure that that out-of-state counsel understand the standards expected by Delaware courts. (This standard is in full recognition of the large number of out-of-state counsel who routinely engage in corporate litigation in Chancery.) See generally recent Delaware Supreme Court decision publicly reprimanding an attorney admitted pro hac vice for failing to comply with a court order.
Delaware Counsel Must Be Involved in Discovery:
Moreover, the court explained that:
“the court expects Delaware counsel to play an active role in the discovery process, including in the collection, review and production of documents. If Delaware counsel does not directly participate in the collection, review and production of documents, then at a minimum Delaware counsel should discuss with co-counsel the court’s expectations.”
Slip op. at 27.
In granting the motion for sanctions the court ruled that it will be deemed established for purposes of trial that the interest rates charged on the loans were outside of the tolerances set forth in the Federal Truth in Lending Act. In addition, the court awarded attorneys’ fees for Defendant’s failure to comply with prior court orders.