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On August 5, 2009, Wimbledon filed an action seeking a declaration that it had withdrawn from and is a creditor of SV Fund.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.

 

I regard Thomas Sowell as one of the greatest thinkers and writers of our time. He recently wrote about the venerable concept known as the Rule of Law, that is an important aspect of the constitutional basis of our country. Here  is a link, via Professor Bainbridge, to commentary by Sowell on how the recent apparent strong-arming by the government to embarass/coerce/ask  BP to create a huge fund interfaces with the Rule of Law and related concepts. Of course, if the creation of the large fund was all BP’s idea, then the analysis would be much different.

In MassMutual v. Lloyd’s of London, the Court of Chancery heard oral argument on a motion to dismiss claims involving the Madoff debacle. Courtroom View Network provides here a video/audio clip of the hearing that took place this week along with a short blurb about the claims involved in the pending motion.

Cambridge North Point LLC v. Boston and Maine Corp., Del. Ch. (June 17, 2010), read opinion here.

This 47-page opinion from the Delaware Court of Chancery deals with the attempt of one party to be relieved from obligations under a Settlement Agreement based on alleged unilateral mistake or misrepresentation. Because the law of Massachusetts controlled, we will only cursorily highlight this case.

Key Issue
Although there are many factual and legal aspects of this decision, the key issue that we will limit this overview to, is the attempt of one party to use the arguments of unilateral mistake and misrepresentation to be relieved of a provision in an agreement that the party argued was “quietly slipped in” to the final version of the agreement without them noticing the difference from prior drafts. The Court rejected the arguments and required the agreement to be complied with in full.

Overview
On a factual level, this opinion is unpleasant to read because the arguments are based on the apparent omission by well regarded attorneys who did not notice a major new provision in the last version of an agreement. The Court was unsympathetic and in essence rejected the arguments that attempted to rely on misrepresentation or unilateral mistake as an excuse for not being obligated to the terms that were apparently missed in the final version.

The agreement at issue was the second Settlement Agreement to settle litigation between the parties. The first settlement agreement was also the subject of specific performance proceedings and prior to the hearing on that Motion to Enforce, the parties arrived at their second Settlement Agreement. The same party who sought to be relieved of the provisions of the second agreement, acknowledged that if it was enforceable, then they breached it. The Court referred to the reformation and unilateral mistake arguments as “spurious” and in part for that reason, as well as other similar conduct, the Court awarded attorneys’ fees to the prevailing party.
 

Homsey Architects, Inc. v. Nine Ninety Nine, LLC, C.A. No. 4412-VCP (Del. Ch. June 14, 2010), read opinion here.

This 31-page opinion from the Delaware Court of Chancery addressed the definition of “substantial performance” in connection with rejecting a statute of limitations defense relating to an AIA agreement between an architect and a developer.

Key Issues

1) The discussion in this opinion of “substantial performance” as that term is defined in the standard AIA Agreement between architects and owners will be useful for the many parties who use that widely exercised agreement.

2) The Court also addresses the 2009 amendments to the Delaware Uniform Arbitration Act (“DUAA”) which eliminated the provision that formerly gave the Court of Chancery jurisdiction to address the statute of limitations defense to an arbitration claim.

3) The Court addressed the difference between substantive arbitrability and procedural arbitrability in terms of whether those issues are to be addressed by the Court or by the arbitrator.

Overview

This dispute between an architectural firm and a developer addressed whether the developer could proceed with an arbitration claim against the architectural firm in connection with issues that arose regarding design services on a townhome complex.

This opinion will be of interest to anyone who uses or needs to interpret the AIA document: B141-1997 “Standard Form of Agreement Between Owner and Architect.” The AIA refers to the American Institute of Architects and their agreements are the most commonly used in construction contracts. In this case, the architect incorporated by reference into the agreement the proposals of the consultants used by the architect for engineering, mechanical and electrical matters.

The agreement required that all claims and disputes arising out of the agreement be submitted to arbitration pursuant to the Construction Industry Arbitration Rules of the American Arbitration Association. The agreement also included an accrual clause which provided that the statute of limitations defense would not commence to run any later than the date when the services of the architect were substantially completed. See Section 1.3.7.3 of the agreement. The agreement also contained the definition of “substantial completion” at Section 9.8.1.

The Court’s opinion provides complete and detailed descriptions of the factual foundation of the dispute between the parties. On a procedural level, the architect had sued to obtain an injunction to prevent the developer/owner from proceeding with arbitration based on the argument that the statute of limitations of three years had expired prior to the date that the arbitration demand was made. The Court explained all the factual reasons why it determined that the services of the architect were not substantially completed within three years of the arbitration demand being made. The work of the consultants for the architect was not substantially completed until well after the architect’s services were completed. As indicated, the services of the architect were defined to include the services of his consultants which were incorporated by reference into the AIA agreement.

The Court observed that neither party cited to any Court decision that defined when the services of an architect were considered to be “substantially completed,” as those words are used in the AIA agreement. See footnote 68 (referring to the definition in the AIA agreement). See also footnotes 71 to 74 and accompanying text. The conclusion of the Court’s decision was that the owner/developer was allowed to proceed with his arbitration claims against the architect.

 

 

Villare v. Katz, C.A. No. 08C-10-061 PLA (Del. Super. June 9, 2010), read opinion here. The short purpose for referencing this opinion on this blog is for its discussion of Rule 11 which is based on the federal rule. Although this case relies on the version of Rule 11 used in the Delaware Superior Court, the version in the Delaware Court of Chancery is substantially similar and therefore may be of interest to readers of this blog. In particular, this cases involves a Court acting on its own initiative, following the issuance of an order to show cause, and concluding in this decision that it would enter an order directing payment of a penalty pursuant to Rule 11(c)(2), and based on what the Court found was a violation of Rule 11(b)(3) and possibly also a violation of Rule 11(b)(1). See footnote 15.

 

Judy v. Preferred Communications Systems, Inc., C.A. No. 4662-CC (Del. Ch. June 11, 2010), read letter decision here. This short 2-page letter decision is notable for two reasons:

First, it is useful for anyone attempting to object to a motion for the issuance of commissions. In this instance, an objection was made to such a motion which was filed in an effort to take the deposition of an attorney. The Court ruled that the objection, which was based on a claim of privilege, was not supported by a detailed privilege log, but even if it were, the court rejected the objection, reasoning that: “good cause exists for requiring [the information] to be disclosed.” (citations omitted.)

Second, the Court granted a Motion to Compel and ordered the attorneys’ fees of the prevailing party to be paid pursuant to Court of Chancery Rule 37(a)(4). This decision serves as an example of the “not uncommon practice” of the Court of Chancery granting attorneys’ fees to the prevailing party in connection with a Motion to Compel.

The Delaware Supreme Court in Arkansas Teacher Retirement System, Fire & Police Pension Association of Colorado, et al. v. Ciafa et al., No. 530, 2009 (May 21, 2010), read opinion here, issued a unanimous en banc decision affirming the Court of Chancery’s approval of a settlement among a majority of Countrywide stockholders, Countrywide directors, and Bank of America (“BOA”), related to Countrywide’s merger with BOA. Former Countrywide stockholder, Arkansas Teachers Retirement Systems (“TRS”), had objected to the settlement on the basis that the Court of Chancery failed to value TRS’s derivative claim pending in a federal court action.

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

The Court of Chancery had determined that the derivative claim in a pending federal court action had no value and rejected TRS’ argument that the Court should place part of the merger consideration into a constructive trust in order to protect the value of its derivative claims. The Supreme Court agreed noting that “Delaware corporate fiduciary law does not require directors to value or preserve piecemeal assets in a merger setting.” However, the Supreme Court did recognize that TRS had alleged facts that “reflect[ed] conduct wholly inappropriate for Delaware corporate directors.” The Supreme Court was referring to Countrywide’s board settling of insider trading charges, improper stock repurchase, and predatory lending claims “while the company exposed itself to bad loans causing plummeting stock value that allegedly cost Countrywide $848 million to $25 billion.” None of the actions alleged by TRS, however, involved any fraudulent conduct or inadequate merger pricing.

Under Delaware law, other than in instances of fraud or reorganization, a shareholder loses standing to maintain a derivative suit where the corporation in which the shareholder owns stock merges with another company. Here the Supreme Court found that:

[t]he current record does not reflect that the directors prospectively sought and approved a merger, solely to deprive stockholders of standing to bring a derivative action. The extent of the Countrywide directors’ allegedly fraudulent conduct and breach of fiduciary duties by failing loyally to oversee the company’s practices in good faith would have necessitated (a) corporate rescue; and, (b) individual legal protection. A merger was one of few available alternatives that meet both of those objectives after the board’s allegedly fraudulent schemes bankrupted a multibillion-dollar company. Delaware law recognizes a single, inseparable fraud when directors cover massive wrongdoing with an otherwise permissible merger…. [and] [a]n otherwise pristine merger cannot absolve fiduciaries from accountability for fraudulent conduct that necessitated that merger.

The Supreme Court noted that TRS did not present the Court “with the proper vehicle to consider whether TRS meets the fraud exception to maintain a post-merger claim. If the Vice Chancellor had found that TRS had successfully pleaded its fraud claim, then TRS – rather than Countrywide – could recover from the former Countrywide directors. In that case, the injured parties would be the shareholders who would have post-merger standing to recover damages instead of the corporation.” As a result, the Supreme Court affirmed the Court of Chancery’s approval of the settlement finding that the Vice Chancellor did not abuse his discretion.

 

Lingo v. Lingo, No. 713, 2009 (Del. Supr., June 10, 2010), read opinion here. The factual background of this Delaware Supreme Court decision involves a faithless fiduciary who abused the Power of Attorney given to her, but the part of the opinion that will be of interest for readers of this blog is the Court’s more wide-ranging discussion of the appropriate remedies for a breach of fiduciary duty.

Issue on Appeal

The standard of review applicable to equitable remedies awarded by the Court of Chancery is de novo and the issue on appeal in this case is whether the remedy imposed by the Court of Chancery was appropriate for the breach of fiduciary duty involved. The Supreme Court affirmed the trial court’s choice of remedies (which was based on an affirmation of a decision by the Master in Chancery.)

Standard of Review

Delaware’s High Court recited the applicable standard of review as follows:

"Whether or not an equitable remedy exists or is applied using the correct standards is an issue of law and reviewed de novo. Determinations of fact and application of those facts to the correct legal standards, however, are reviewed for an abuse of discretion.” (See footnote 2),

Factual Background

This dispute has its origin in an estate plan that left property in part to a Trust and in part to the surviving widow who had two children, Dinah and Archie. The original plan envisioned the two children inheriting their mother’s estate upon her death. At some point after the father’s death, Dinah moved in with her widowed mother, Eleanor, who later revised her will and disinheritied Archie. Eleanor also gave Dinah a Power of Attorney which Dinah abused in order to transfer, illicitly, large amounts of money and property to herself. The trial court ordered Dinah to return the property she converted and ordered an accounting as well as voiding the transactions entered into by the faithless daughter.

Arguments

Archie suggests that a fairer result would be to require Dinah to return all misappropriated funds to the Trust and not to Eleanor. Archie further contends that in addition to restitution, the Vice Chancellor should have imposed equitable forfeiture and decreased Dinah’s inheritance by the amount she misappropriated. As the sole beneficiary under the revised Will, Dinah did not object to the remedy.

Analysis

The Court recited the well-established duty of one who holds a Power of Attorney as follows:

A person who signs a power of attorney creates a common law fiduciary relationship. To honor that relationship, the attorney-in-fact must observe the duty of loyalty by acting in the best interest of the principal. Failure to do so may result in a breach of trust.

 The Court explained the goal when attempting to remedy the breach of this duty:

 Generally, should a breach occur, it should be remedied with two objectives in mind: (1) to render whole both the beneficiary and the estate; and, (2) to prevent the trustee from profitting from his wrongful conduct.

Restitution was appropriate in this case for the following reasons explained by the Court:

Delaware courts have long recognized that restitution is the appropriate remedy to meet those objectives and to redress a breach of fiduciary duty where a party is unjustly enriched at the expense of another. Apart from reimbursment, restitution also serves to deprive the wrongdoer of any profits made as a result of his or her conscious, wrongful conduct. 

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