The focus of this blog is Delaware corporate and commercial law, primarily from the Delaware Court of Chancery and Delaware Supreme Court. Also included periodically are similar cases of import from other courts in Delaware, as well as related commentary and decisions of interest to business litigators.

 My practice here is to summarize the above described key Delaware cases as they are published. Althought the following cases from the last month or so were worth summarizing, they were not important enough to post earlier. Also, in order to "catch up", due to the recent press of business for paying clients, I am summarizing the following 3 cases together for convenience only.

Crescent-Mach I Partnership, L.P. v. Turner, 2007 WL 1342263 (Del. Ch. May 2, 2007), read opinion here. This is an appraisal action that also included fiduciary duty claims regarding a merger. Both cases were tried together. Especially noteworthy is footnote 64 of the Court’s opinion where the court makes an honest assessment of its limitations in appraisal actions. The court dismissed the fiduciary duty claims and after careful and thorough analysis determined the appraised value to be $32.31 per share compared with the $25.00 per share merger price.

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MBKS Company Limited v. Reddy, 2007 WL 1310185 (Del. Ch., April 30, 2007), read opinion here. This case dealt with the difference between “void” and “voidable” stock in connection with problems that arose regarding the issuance of stock. See DGCL Sections 152, 153 and 242. The Court also addressed the requirement of written amendments to the Certificate of Incorporation in order to “cancel” existing shares.

UPDATE: This Reddy case discusses the 2004 amendment to DGCL Section 152 that expands the definition of adequate consideration for the issuance of shares to include "any benefit to the corporation".  However, the court did not directly address, and I am not aware of any cases that have yet directly addressed, the adequacy of consideration that was formerly described as infirm under the old version of the statute, but that is not prohibited under the current version of the statute.

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NAMA Holdings LLC v. Related World Market Center LLC, 2007 WL  1500027 (Del. Ch. April 27, 2007), read opinion here.This case dealt with a Delaware Limited Liability Company that was a third-party beneficiary to, and sued to enforce terms in, an Operating Agreement which was for its benefit but to which it was not a party. The Court determined that because the disputes at issue did not come with ambit of the arbitration language of the applicable agreement and because the LLC could not be equitably bound to the arbitration provisions, the LLC was permitted to press its contractual claims in the Chancery Court. See also footnote 15: motion to dismiss based on an arbitration clause goes to the court’s subject matter jurisdiction and is properly reviewed under Court of Chancery Rule 12(b)(1).

 

In Breakaway Solutions, Inc. v. Morgan Stanley & Co., 2007 WL 1532325 (Del. Ch., May 23, 2007), read decision here, the Chancery Court  issued a one-page letter ruling that allowed an amendment to a complaint that was originally filed as a class action, to delete any reference to class action claims. The court applied both Chancery Court Rules 15(a) and 23(e). The class had not yet been certified and there had not yet been an attempt to certify the class. They court also determined that no notice would need to be given to the class and that the withdrawal of class action status was without prejudice. 

In the Matter of Transamerica Airlines, 2007 WL 1555734 (Del. Ch., May 25, 2007), read opinion here. This Chancery Court opinion involves the analysis and enforceability,  pursuant to Delaware’s Uniform Foreign Money-Judgments Recognition Act , of a judgment obtained in the country of Nigeria.  The court conducted a thorough review of the issues in this litigation that started in Nigeria more than a generation ago, and found the judgment enforceable.

 A very useful tip for the Delaware Chancery Court practitioner that can be taken from this opinion is the discussion of Chancery Court Rule 56(e) which addresses the prerequisites for affidavits that are submitted in support of a summary judgment motion. Here there were two cross-motions for summary judgment pursuant to Rule 56(h), however the court struck portions of one of the affidavits that was not based on personal knowledge, and portions of which would not be admissible in evidence as required by Rule 56(e).

Here  is a summary on this blog of a prior procedural decision by the Chancery Court in this case that also discusses the extensive factual and procedural background in more detail.

The Delaware Supreme Court, in two opinions published this month, addressed issues of attorney conduct that should be of broad interest.

In the case of In Re Abbott, read opinion here, the Delaware Supreme Court addressed the propriety of rhetorical extremes contained in a brief, that the trial court had stricken sua sponte, after concluding that the arguments crossed the line of acceptable conduct.  The Supreme Court affirmed. Delaware’s high court quoted verbatim from some of the language it found objectionable and reasoned that certain conduct is so unprofessional that it becomes unethical as well, in this case violating Rule 8.4(d) which prohibits professional misconduct that is prejudicial to the administration of justice. (An issue not addressed by the court, but which most lawyers should ask, is whether such conduct  among lawyers as occurred in this case, outside the context of litigation, could also violate the ethical rules.)

 The  high court found that the arguments in the brief went beyond “merely” unprofessional, and that the rules were violated because the pleadings filed with the court contained “unnecessary invective and rhetoric, and were obnoxious [as well as] unnecessarily sarcastic and strident in tone.” The court noted that the duty to the tribunal takes precedence over the interests of a client. Former U.S. Supreme Court Justice Sandra Day O’Connor was quoted in the opinion saying that “incivility disserves the client because it wastes time and energy – – time that is billed to the client at hundreds of dollars an hour, and energy that is better spent working on the case than working over the opponent.” The Supreme Court cited a prior opinion of 15 years ago when it stated that “simply put, insulting conduct toward opposing counsel, and disparaging a court’s integrity are unacceptable by any standard.” The court further reasoned that “zealous advocacy never requires disruptive, disrespectful, degrading or disparaging rhetoric. The use of such rhetoric crosses the line from acceptable forceful advocacy into unethical conduct that violates the Delaware Lawyers’ Rules of Professional Conduct.” Thus, the Delaware Supreme Court is now on record as ruling that disrespectful, degrading or disparaging rhetoric  violates the ethical rules that apply to lawyers. Although beyond the scope of the opinion, I mention as an aside, the truism incorporated in the rules that the assistants of lawyers are not permitted to violate the rules that the lawyers themselves are required to uphold.

Separately, this month the Delaware Supreme Court found that a Pennsylvania lawyer who did not have an office in Delaware, was still improperly "practicing law in Delaware" when she provided advice to Delaware clients and  engaged in other patterns of behavior that  "established a systematic and continuous presence in Delaware for the practice of law in violation of Rule 5.5(b)". In Re Tonwe, read opinion here. The court’s penalties included a permanent prohibition against being admitted pro hac vice in any Delaware proceeding.

Wilmington Hospitality, LLC v. New Castle County, (Del. Super., April 26, 2007) read opinion here.

This case involved a lengthy dispute over the construction of a hotel in Wilmington for which a Certificate of Occupancy was denied due to the failure to comply with the requirements and the conditions on which a building permit was issued. The hotel building was 99% finished but has been unoccupied for many years due to this dispute. This case is a small part of a multifaceted litigation strategy that has been transpiring over many years, including the bankruptcy of the entity that was formed to construct the hotel.

This opinion was based on a Motion for Summary Judgment and a Motion to Exclude Experts. The Motion for Summary Judgment was based on the claim made pursuant to Section 1983 of Title 42 of the United States Code regarding deprivation of property without equal protection, asserting that the developer had been treated differently from others similarly situated in New Castle County. The court concluded that there were too many factual issues to decide that motion. However, the court described in detail the prerequisites in order to establish such a claim and the factual matters that needed to be more thoroughly developed at trial. 

Regarding the Motion to Exclude Expert Testimony based on a claim that the expert relied on reports not conducted by himself, the court determined that a Daubert hearing was required to determine whether experts in the field reasonably rely on such appraisals that were not conducted personally by the expert accountant that was being proffered.

 

Daystar Sills, Inc. v. Anchor Investments, Inc. ,(Del. Super., April 12, 2007), read opinion here.

This case involved a mechanics’ lien claim based on Chapter 27 of Title 25 of the Delaware Code. The defendant filed a Motion to Dismiss claiming that the owners of the property were not mentioned in the Statement of Claim in violation of Section 2712(b)(2) and that the contractor failed to segregate his claim in accordance with Section 2713 of Title 25 of the Delaware Code. The Motion to Dismiss was also based on the statute of limitations.  Namely, the argument was that the mechanics’ lien was not filed within 180 days of the date when the contractor submitted his final invoice to the owner or reputed owner. Apparently the contractor was ejected from the job site due to alleged failure to comply with a material timetable and pursuant to the AIA Document A201-1997 that was used. An issue arose about whether a final bill could have been submitted if the contractor was ejected from the job site. The contractor relied on Section 3507(c) of Title 6 of the Delaware Code which entitles a contractor to submit a final invoice when the agreed upon work is fully completed. At the Motion to Dismiss stage, the court determined there were too many factual issues to grant a Motion to Dismiss, especially when the motion was converted to a Motion for Summary Judgment in light of the court being asked to consider matters outside of the pleadings. 

In addition, there was a claim for quantum meruit which the owner sought to dismiss based on the fact that there was an existing contract. The general rule is that when a relationship is governed by an express contract, quantum meruit claims are barred, however, there is an exception which applies where, for example, provisions of the contract relating the change orders have been waived by the parties such as through course or performance. (See footnotes 18 and 19.) See also footnote 23 for the elements of quantum meruit. The court also noted that quantum meruit might be pursued against the  owners of various condominiums that were the subject of the construction dispute. Lastly, the court determined that the waiver of liens did not apply to either the common areas or to the new owners of the condominiums that were the subject of the construction project.

Prof. Larry Ribstein has a post here about an issue that Sunrise Senior Living is confronting (as reported by the New York Times), regarding tension between a Delaware statute requiring annual meetings and the apparent inability, currently, of Sunrise to comply  with a federal requirement that it have audited financial statements completed and included in its proxy materials before holding an annual meeting.

The  good professor has a link  here to his discussion of a prior Delaware Chancery Court decision that decided that issue in favor of enforcing the Delaware statutory shareholder right to require annual meetings even if to do so might violate a federal prerequisite that the company cannot satisfy.